January 11, 2013
Before The Next Crisis: Now’s The Time to Rethink The Martin Act
The Martin Act, New York State’s far-reaching securities fraud statute, has been a powerful tool for New York law enforcement officials to pursue wrongdoing by financial institutions. It has a broad definition of fraud and a long statute of limitations. NY Attorneys General like Spitzer, Cuomo and Schneiderman have used it to bring whole industries in line.
The act has faced criticism from the financial sector for being farther reaching than federal securities laws and comparable statutes in other states. Because it is such a powerful too, various groups have promoted various amendments to increase its potency. The financial sector has opposed these attempts (and here) over the last few years to expand its reach by, for instance, creating a private right of action. Manhattan District Attorney Vance has also called for the Martin Act’s statute of limitations (currently six years or two years from when the injured party discovered or could have reasonably discovered fraudulent behavior) to be extended. The financial sector would not welcome such a move either, of course.
With the six year statute of limitations soon to run out on actions from the Subprime Boom, we should ask ourselves — how broad should the Martin Act be? On the one hand, New York must treat businesses fairly for fairness’ sake but also to maintain its dominant position as a global capital of capital. On the other hand, fairness demands that wrongdoers be punished and fraud be deterred by vigorous enforcement.
Now that we are about to have a breather between the last crisis and the next, we should try to come up with a principled balance between those two goals. That balance should be struck while our cooler heads are prevailing.
January 11, 2013 | Permalink | No Comments
New York Supreme Court, Appellate Division Holds that Assignee Bank Lacks Standing to Foreclose for Failure to Provide Evidence of Valid Note Assignment
In Bank of New York v Silverberg, 86 A.D.3d 274 (2d Dept. 2011), the court stated, “[t]he principal issue ripe for determination by this Court . . . is whether MERS, as nominee and mortgagee for purposes of recording, can assign the right to foreclose upon a mortgage to a [bank] in a foreclosure action absent MERS’s right to, or possession of, the actual underlying promissory note.” In making this determination, the court outlined the following rules regarding standing in foreclosure proceedings: “[i]n a mortgage foreclosure action, a [bank] has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced. . . . [A]n assignment of a note and mortgage need not be in writing and can be effectuated by physical delivery.”
The court found that in this case, “as ‘nominee,’ MERS’s authority was limited to only those powers which were specifically conferred to it and authorized by the [original mortgagee]. Hence, although . . . MERS [had] the right to assign the mortgages themselves, it did not specifically [have] the right to assign the underlying notes, and the assignment of the notes was thus beyond MERS’s authority.” Based on these findings, the court concluded, “MERS was never the lawful holder or assignee of the notes described and identified in the consolidation agreement, the corrected assignment of mortgage is a nullity, and MERS was without authority to assign the power to foreclose to the [bank]. Consequently, the [bank] failed to show that it had standing to foreclose.”
January 11, 2013 | Permalink | No Comments
New York Times Criticizes $8.5b Foreclosure Settlement
The New York Times published a story announcing an $8.5 billion settlement with 10 major banks to settle about four million foreclosure actions. The money will be split in two, with $3.3 billion going directly to 3.8 million homeowners, and the rest going towards lowering interest payments and loan amounts. The settlement is controversial, however, because in addition to the payout the settlement will also end the federal government’s review of those foreclosures, and the money is going to be split evenly amongst consumers regardless of whether harm was actually determined. Some believe that the settlement is the result of a flawed and incompetent review process, which became so costly and slow that the government decided to give up on the review. Others think that the rough justice achieved by the settlement is the closest that regulators can come to making victims of unlawful foreclosures whole again. Former FDIC chairwoman Sheila Bair was quoted in the article stating that the government is “mak[ing] the best out of a very bad situation.”
January 11, 2013 | Permalink | No Comments
January 10, 2013
Alabama District Court Continues to Uphold Enforceability of Mortgages Despite Split of Note and Mortgage
In Brooks v. Freddie Mac, 2011 WL 3794683 (AL District Court, 2011), the court held that once a mortgage is assigned to another, foreclosure action is not attributed to the assignor. Therefore, when MERS assigned its interest to another party, the foreclosure was not initiated or undertaken by MERS. The court also agreed with a number of Alabama cases that held that mortgages could still be enforceable even if the note and mortgage had originally been split. Therefore, MERS can serve as the mortgagee as nominee for a lender without invalidating the mortgage.
January 10, 2013 | Permalink | No Comments
Alabama District Court Finds that MERS had Standing to Foreclose Absent Showing of Fraud and Breach of Good Faith
In Mortensen v. MERS, 2010 WL 5376332 (AL Distr. Ct, 2010), the court did not find that refusal to modify a mortgage obligation constituted a breach of good faith and dealing. The court also held that that there was no fraud or deception in telling the mortgagee that “he had to be in default in order to negotiate the mortgage loan modification” because it was not a false statement per se. Therefore, MERS had standing to foreclose.
January 10, 2013 | Permalink | No Comments
New York Supreme Court Holds that Assignee Bank Lacks Standing to Foreclose for Failure to Validate MERS’s Authority to Assign and Condemns Frivolous Conduct Relating to “Robosigning”
In HSBC Bank v Taher, 32 Misc. 3d 1208(A) (Sup. Ct. 2011), the New York Supreme Court of Kings County held that an assignee bank conducting a foreclosure action must submit proof of the assignor’s authority to assign the mortgage, including the underlying note, on behalf of the original mortgagee in order for the assignee to lawfully conduct a foreclosure.
In this case, the court found that the assignee bank, HSBC, did not have standing to foreclose on Taher, the homeowner. The court stated, “the instant action must be dismissed because plaintiff HSBC lacks standing to bring this action. MERS lacked the authority to assign the subject Taher mortgage to HSBC and there is no evidence that MERS physically possessed the Taher notes.”
The court went on to explain that MERS must have authority to assign both the mortgage and the underlying note in order for an assignee to lawfully conduct a foreclosure. The court stated, “even if MERS had authority to transfer the mortgage to HSBC… MERS [was not] the note holder. . . . MERS cannot transfer something it never proved it possessed. . . . [Thus,] MERS was never the lawful holder or assignee of the notes described and identified in the consolidation agreement, the . . . assignment of mortgage is a nullity, and MERS was without authority to assign the power to foreclose to [HSBC]. Consequently, [HSBC] failed to show that it had standing to foreclose.”
In addition to finding that the assignee bank lacked standing, the court also took the opportunity in this case to highlight its intention to prevent the degradation of the foreclosure process, particularly concerning the practice of “robosigning.” Citing the need to “protect the integrity of the foreclosure process and prevent wrongful foreclosures,” the court announced its institution of a new filing requirement in any foreclosure action. This requirement is that assignees must “file an affirmation certifying that counsel has taken reasonable steps—including inquiry to banks and lenders and careful review of the papers filed in the case—to verify the accuracy of documents filed in support of residential foreclosures.” The court scrutinized HSBC’s foreclosure filing practices, which included instances where the court believed robosigning occurred, and reprimanded the bank and its counsel for its conduct. The court concluded that the conduct bordered on frivolous, and determined that further inquiry, by way of a hearing, was necessary.
January 10, 2013 | Permalink | No Comments
Texas Case Distinguishes Between a Holder and an Owner of Promissory Notes
In Martin v. New Century Mortgage Company, et al., 2012 Tex. App. Lexis 4705 (Houston 1st Court of Appeals, June 14, 2012), the plaintiffs executed a deed of trust and promissory note with New Century Mortgage Corporation. The deed of trust contained a provision allowing, “the note (together with [the deed of trust]) can be sold one or more times without prior notice to the borrower.” The deed of trust was assigned to Wells Fargo after the plaintiffs defaulted and acceleration of the loan occurred. The plaintiffs filed suit on the day before the foreclosure sale by Wells Fargo alleging a lack of standing.
The plaintiffs argued that Wells Fargo failed to prove they were the holder or owner of the note, which is required to have standing to foreclose on the property. Specifically, they argued that there was no written endorsement from New Century showing an assignment to Wells Fargo. The Court agreed with the plaintiffs that Wells Fargo is not considered a “holder” of the promissory note under Texas commercial law. Without the written endorsement from New Century that showed negotiation (which is defined as the “transfer of possession … of an instrument by a person other than the issuer to a person who thereby becomes its holder”) (Tex. Bus. & Com. Code Ann. § 3.201(a) (West 2002)), Wells Fargo cannot be the holder of the note.
However, under Texas common law, it is still possible to assign ownership of the note without a written endorsement as required under Texas commercial law. With a proper assignment, Wells Fargo could acquire the rights associated with the note, even without the status as a “holder” of the note. Wells Fargo has the burden of proving the transfer of ownership and any gap in the chain of title may result in a question of ownership.
In this case, Wells Fargo proved the transfer of ownership through an executed document assigning the deed of trust and promissory note along with their respective rights. As a result, the Court found Wells Fargo had standing to continue the foreclosure process.
January 10, 2013 | Permalink | No Comments
