- Beyond Disparate Impact: How the Fair Housing Movement Can Move On, by Rigel Christine Oliveri, Washburn Law Journal, Forthcoming,
- Crowding Out Effects of Refinancing on New Purchase Mortgages, by Steven A. Sharpe & Shane M. Sherlund, FEDS Working Paper No. 2015-017.
- Have Distressed Neighborhoods Recovered? Evidence from the Neighborhood Stabilization Program, by Jenny Schuetz, Jonathan S. Spader & Alvaro Cortes, FEDS Working Paper No. 2015-016.
- A Standing Question: Mortgages, Assignment, and Foreclosure, by Eric A. Zacks & Dustin A. Zacks, Journal of Corporation Law, Vol. 40, 2015, Forthcoming.
- Socioeconomic and Racial Disparities in the Financing Returns to Homeownership, by Tom Mayock & Rachel Spritzer.
- REIT Spinoffs: Passive REITs, Active Businesses, by Richard Nugent, Tax Notes, pg. 1513 & 1635, March 23 & 30, 2015.
- Asset-Level Risk and Return in Real Estate Investments, by Jacob S. Sagi, April 19, 2015.
Tag Archives: assignments
Arizona’s “Unholy” Foreclosure Mess
Professor Dale Whitman posted a commentary about Steinberger v. McVey ex rel. County of Maricopa, 2014 WL 333575 (Ariz. Court of Appeals, Jan. 30, 2014) on the Dirt listserv:
A defaulting borrower may defend against foreclosure on ground that the chain of assignments of the deed of trust is defective, and also on a variety of other theories.
The residential mortgage loan in this case was originally made in 2005 to Steinberger’s 87-year-old father, who died two years later, leaving her the property. By 2008, she was having difficulty making the payments, and asked IndyMac FSB to consider a loan modification. She was advised that she must first default, and she did so. There followed a period of more than two years during which she was “jerked around” by IndyMac, with successive promises to consider a loan modification, the setting of (and then vacating of) foreclosure dates, and assertions by IndyMac that she had not properly submitted all of the paperwork required for a modification.
In November 2010 she filed an action seeking a declaratory judgment that IndyMac had no authority to foreclose on the house, and upon filing a $7,000 bond, she obtained a TRO against foreclosure. The following summarizes the theories on which she obtained a favorable result.
1. Lack of a proper chain of title to the deed of trust. The Court of Appeals seems to have assumed that no foreclosure would be permissible without the foreclosing party having a chain of assignments from the originator of the loan. If one accepts this assumption, IndyMac was in trouble. The first assignment, made in 2009, was from MERS, acting as nominee of IndyMac Bank, to IndyMac Federal FSB, but it was made before IndyMac Federal FSB even existed!
A second assignment was made in 2010 by IndyMac Federal FSB to DBNTC, the trustee of a securitized trust. But Steinberger alleged that by this date, IndyMac Federal FSB no longer existed, so this assignment was void as well. She also made the familiar allegation that this assignment was too late to comply with the 90-day transfer period required by the trust’s Pooling and Servicing Agreement, but the court did not pursue this theory.
The court’s opinion is significant for its treatment of Hogan v. Wash. Mut. Sav. Bank, the 2012 case in which the Arizona Supreme Court held that “Arizona’s non-judicial foreclosure statutes do not require the beneficiary [of a deed of trust] to prove its authority.² The Court of Appeals, in Steinberger, read this statement to mean that the beneficiary need not prove its authority unless the borrower alleges a lack of authority in her complaint. There was no such allegation in Hogan, but there was in Steinberger. Hence, the Court of Appeals concluded that Steinberger could contest IndyMac’s right to foreclose. And it felt that Steinberger’s allegations about the defects in the chain of title to the deed of trust, if proven, could constitute a successful attack on IndyMac’s authority to foreclose.
It’s important to realize what the Court of Appeals did not do. It did not disagree with Hogan’s holding that the beneficiary need not show possession of the promissory note in order to foreclose. Several commentators (including me) have criticized Hogan for this holding, but the Steinberger opinion leaves it intact. Indeed, in Steinberger, the borrower raised no issue as to whether IndyMac had the note, and seems to have conceded that it did. The discussion focuses on the legitimacy of the chain of title to the deed of trust, not on possession of the note.
Is the court correct that a valid chain of title to the deed of trust is necessary to foreclose under Arizona law? As a general proposition, one would think not. Arizona not only has adopted the common law rule that the mortgage follows the note, but even has a statute saying so: Ariz. Rev. Stat.§ 33 817: “The transfer of any contract or contracts secured by a trust deed shall operate as a transfer of the security for such contract or contracts.” So if the note is transferred, no separate assignment of the deed of trust would be needed at all. And a recent unreported Court of Appeals case, Varbel v. Bank of America Nat. Ass’n, 2013 WL 817290 (Ariz. App. 2013), quotes the Bankruptcy Court as reaching the same conclusion: In re Weisband, 427 B.R. 13, 22 (Bankr. D. Ariz. 2010) (“Arizona’s deed of trust statute does not require a beneficiary of a deed of trust to produce the underlying note (or its chain of assignment) in order to conduct a Trustee’s Sale.”).
By the way, that’s the rule with respect to mortgages in virtually every state. A chain of assignments, recorded or not, is completely unnecessary to proof of the right to foreclose. The power to foreclose comes from having the right to enforce the note, not from having a chain of assignments of the mortgage or deed of trust.
However, since Hogan has told us that no showing of holding the note is necessary in order to foreclose, what is necessary? It defies common sense to suppose that a party can foreclose a deed of trust in Arizona without at least alleging some connection to the original loan documents. If that allegation is not that one holds the note, perhaps it must be the allegation that one has a chain of assignments of the deed of trust. If this is true, then the opinion in Steinberger, written on the assumption that the assignments must be valid ones, makes sense.
The ultimate problem here is the weakness of the foreclosure statute itself. Ariz. Stat. 33-807 provides, “The beneficiary or trustee shall constitute the proper and complete party plaintiff in any action to foreclose a deed of trust.” Fine, but when the loan has been sold on the secondary market, who is the “beneficiary?” The statute simply doesn’t say. The normal answer would be the party to whom the right to enforce the note has been transferred, but Hogan seems to have deprived us of that answer. An alternative answer (though one that forces us to disregard the theory that the mortgage follows the note) is to say that the “beneficiary” is now the party to whom the deed of trust has been assigned. But the Arizona courts don’t seem to be willing to come out and say that forthrightly, either. Instead, as in the Steinberger opinion, it’s an unstated assumption.
As Wilson Freyermuth put it, after graciously reading an earlier version of this comment, “The Steinberger court couldn’t accept the fact that a lender could literally foreclose with no connection to the loan documents — so if Hogan says the note is irrelevant, well then it has to be the deed of trust (which would presumably then require proof of a chain of assignments). It’s totally backwards — right through the looking glass. And totally inconsistent with Ariz. Stat. 33-817.”
To say that this is an unsatisfactory situation is an understatement; it’s an unholy mess. The statute was written with no recognition that any such thing as the secondary mortgage market exists, and the Arizona courts have utterly failed to reinterpret the statute in a way that makes sense. It’s sad, indeed.
There are a number of other theories in the Steinberger opinion on which the borrower prevailed. Some of these are quite striking, and should give a good deal of comfort to foreclosure defense counsel. In quick summary form, they are:
2. The tort of negligent performance of an undertaking (the “Good Samaritan” tort). This applies, apparently, to IndyMac’s incompetent and vacillating administration of its loan modification program.
3. Negligence per se, in IndyMac’s recording of defective assignments of the deed of trust in violation of the Arizona statute criminalizing the recording of a false or forged legal instrument.
4. Breach of contract, in IndyMac’s failure to follow the procedures set out in the deed of trust in pursuing its foreclosure.
5. Procedural unconscionability, in IndyMac’s making the original loan to her elderly father without explaining its unusual and onerous terms, particularly in light of his failing mental health.
6. Substantive unconscionability, based on the terms of the loan itself. It was an ARM with an initial interest rate of 1%, but which could be (and apparently was) adjusted upward in each succeeding month. This resulted in an initial period of negative amortization, and once the amortization cap was reached, a large and rapid increase in monthly payments. At the same time, some of Steinberger’s other theories were rejected, including an argument that, because IndyMac had intentionally destroyed the note, it had cancelled the debt. The court concluded that, in the absence of proof of intent to cancel the debt, it remained collectible.
Bernhardt on Dangerous Assignments
Roger Bernhardt gave me permission to repost this analysis, which has appeared on Dirt and elsewhere:
Heritage Pac. Fin. v Monroy
The same appellate panel that delivered a terrifying punch to the residential lending industry a few months ago in Jolley v Chase Home Fin., LLC (2013) 213 CA4th 872, reported at 36 CEB RPLR 46 (Mar. 2013) (which is now official, since the supreme court declined to review it), has now given another branch of that industry an equally frightening setback in Heritage Pac. Fin., LLC v Monroy (2013) 215 CA4th 972. More fully described on p 84 of this issue, the case concerned a financial institution (Heritage) whose business model involved buying up defaulted junior mortgages that had already been rendered worthless by senior foreclosures, and then attempting to collect whatever it could from the former mortgagors, even when-as in this case-those mortgages were purchase money loans, and therefore uncollectible because of CCP §580b’s one-action rule.
After acquiring Ms. Monroy’s mortgage and sending three demand letters to her, Heritage discovered that she had apparently falsified her income on her original loan application and had wrongly represented the purchase as an arm’s-length transaction when, in fact, she was buying the house from her son. Emboldened by these discoveries, Heritage wrote Monroy again and also filed a complaint against her for fraud. She responded by cross-complaining that Heritage was violating the California and federal Fair Debt Collection Practices Acts.
After a lot of procedural skirmishing, the trial court sustained Monroy’s demurrer to Heritage’s complaint and granted summary judgment to her on her cross-complaint, awarding her $1 in damages but also $90,000 in attorney fees and costs. All of this was affirmed on appeal.
The published and lengthy appellate decision, although sometimes surprising in its reasoning, gives a good deal of guidance to practitioners-especially those who represent creditors and their collection arms or cohorts-as to the many dangers lurking in attempts to collect residential debt obligations too energetically.
Careless Handling of Assignments
The main reason that Heritage lost, and the ground that undermined and defeated all of its other theories, was that it was not a proper holder of whatever fraud claims Monroy’s original lender (WMC) had against her, because it could not show that those claims had been truly assigned to it by WMC. Even if this were a real liar’s loan (i.e., when the borrower had truly, and voluntarily, lied in her loan application), the original lender might well have had a cause of action for fraud, but not the successor holder of the mortgage, to whom no such lies had been told. Heritage’s standing was as an assignee, not as a victim.
Heritage had alleged that WMC had also assigned its cause of action for fraud to it, but both the trial court and the court of appeal ruled that its pleading on that issue was insufficient to withstand Monroy’s demurrer. Its allegations that WMC had intended to and had in fact “sold the loans and assigned any and all rights … including [the] fraud claim” action to it were too conclusory to be sufficient. The sale agreement between WMC and Heritage transferring “all right, title and interest in the loan” was no better at demonstrating assignment of a cause of action for fraud. Nor was the endorsement on the note (not quoted in the opinion) apparently any clearer. Heritage had tried to plead its way around the courts’ ungenerous reading of the transfer documents by making reference to custom and practice, as well as to language in Monroy’s loan application (which said that both the lender and its assigns would be relying on her truthfulness), but those considerations were also held to fail to cure the pleading deficiencies. Even a declaration from an officer of WMC that when it sold loans it also “assigned all of its legal rights in tort as well as contract … including the right to recover against a borrower for fraud” was not enough to rehabilitate Heritage’s incomplete complaint. Finally, the principle underlying CC §1084-that an assignment of a right generally also transfers all other rights incident to it-was held not to connect claims based on fraud in an earlier loan application with claims based on nonpayment of the later assigned promissory note that resulted from the loan application. Therefore, the most that could be said was that Heritage, as an assignee of WMC’s claims against Monroy on her note, was not the assignee of its cause of action for fraud allegedly committed by her in obtaining the funds that she owed under the note; those claims apparently still lay with WMC.
Readers may find a lot of this reasoning rather fishy, but displeasure with a judicial rule doesn’t entitle the bar to ignore it. The judges may have viewed Heritage Financial as the kind of character who gives the whole industry a bad name, but their holding set forth a rule of law that everyone else must also take into account. Under this new principle of construction, the most generous language imaginable in a blanket assignment or endorsement will not necessarily transfer all other rights-and those untransferred may be the particular ones that the transferee may find it needs most.
Sometimes, an imperfect transfer can be redeemed by a simple expedient, such as getting another transfer document executed or having the original holder join in the existing proceeding. But more costs are often incurred, even if one is only required to start all over, e.g., the right person is no longer available or will not agree (except for a price) to take the extra steps required, or some deadline has since passed. In some fussier judicial foreclosure jurisdictions, successor lenders who initiated their foreclosures before they had properly crossed all the “t’s” of their previous secondary market transactions were forced to go back to square one and redo every step, rather than being allowed to simply amend their previous work product to correct the slips.
So, if your client is a potential transferee of any right, you had better employ every conceivable noun, verb, and adjective in the transfer documents that you generate to make sure that no obscure or trivial little interest is left behind, even if that ends up making the documents 50 pages rather than 5 pages long.
That strategy may not be necessary if your client is the assignor instead, since an incomplete transfer may be in her best interests, thereby leaving her with some rights that might be valuable or available for a later windfall sale or enforcement. On the other hand, as her lawyer, you might worry whether any reps or warranties she is making in the documents will later require her to put in further (expensive) efforts or pay indemnities when it is discovered that only 99 percent rather than 100 percent was transferred.
If you represent the obligor underlying the assigned transfer, your client is likely not only to be uninvolved in the transfer, but to not even know of it-there aren’t any significant attornment doctrines in mortgage law, so there is probably little precaution to consider at that stage. Maybe your client can even hope that he can successfully claim some kind of third party beneficiary rights enabling him to capitalize on the other side’s mistakes. “Show me the note” may not be entirely dead.
Other Consequences
The failure to effectively transfer the fraud cause of action was only the beginning, not the end, of the story in this case. While Heritage might yet be able to prevail on a fraud claim if it corrects the assignment issue, not having done so when it first asserted its claims against Monroy made it liable to her for violating the federal Fair Debt Collection Practices Act (which apparently would not have been the case if it had taken a proper assignment).
Mortgage foreclosure proceedings are often-although not always-not regarded as debt collection activities, since they seek to enforce a security interest instead, but post-foreclosure proceedings are clearly different, since the property has been sold and only money remains at issue. Since Heritage was attempting to collect money rather than to realize upon now worthless security, it was acting as a debt collector. If Heritage had no right to collect any money from Monroy-because the cause of action on her mortgage note was barred by the antideficiency rules and the cause of action for fraud had not properly been assigned to it-then its wrongful attempts to recover could violate the debt collection acts.
Do such statutes apply to Heritage? Was this residential mortgage a personal, family, or household obligation, since Monroy had claimed in her loan application that she was intending to live in the house (although that may have been another lie)? Was Heritage’s complaint exempt because it was a legal document (a complaint) rather than a communication, if it was based on a false claim (because of CCP §580b and the rules regarding assignments)? Was the claim exempt because it was a tort claim, which many cases have held do not fall under the debt collection statutes, or was it still covered because the alleged fraud arose out a consumer transaction? The court’s treatment of these issues was as inhospitable to Heritage as its treatment of the assignment issue (and perhaps as dubious), but the lessons to be drawn and the avoidance procedures to follow are not as apparent. Debt collection is dangerous activity and courts are not motivated to be very forgiving. So don’t make mistakes. (How is that for helpful advice?)
Heritage Pac. Fin., LLC v Monroy (2013) 215 CA4th 972
Assignee of a promissory note sued Borrower for fraud based on alleged misrepresentations made in Borrower’s loan application. Borrower cross-complained against Assignee, alleging violation of the Fair Debt Collection Practices Act (FDCPA) (15 USC §§1692-1692p). The trial court sustained without leave to amend a demurrer against the complaint on the grounds that it failed to state a cause of action for fraud based on assignment. The trial court granted Borrower’s motion for summary adjudication on the FDCPA claim. Assignee appealed.
The court of appeal affirmed. The trial court properly sustained the demurrer. The transfer of the promissory note provided Assignee with contract rights; it did not carry with it a transfer of the lender’s tort rights. Fraud rights are not, as a matter of law, incidental to the transfer of a promissory note. The complaint did not allege that the assignment transferred the ancillary right of a tort claim, nor did the attached documents support any claim of such an assignment. The transfer of the promissory note did not show a clear intent to assign the assignor’s fraud claim.
The allegations also did not show an assignment of the tort claims based on custom and practice. Alleging general custom and practice did not expand the assignment agreement to include ancillary rights not specified. The assignment was silent regarding any tort claim and nothing suggested that it included any rights other than those incidental to the contract rights.
The trial court properly granted Borrower’s motion for summary adjudication on the FDCPA claim. Assignee violated the FDCPA when it stated in a letter to Borrower that it had the right to sue her for any misinformation in her loan application.
