Tag Archives: Bank of America

More Misrepresentations, More Litigation

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Judge Pfaelzer (C.D. Cal.) issued an order in American International Group Inc. v. Bank of America Corp., No. 2:11-CV-10549 (May 6, 2013), which allowed AIG to proceed with its claim that it was fraudulently induced to buy MBS by Countrywide (now a part of BoA). This case joins a long list of cases where judges have allowed fraud and misrepresentation allegations to proceed in the context of MBS issuances (for instance, here, here and here).  AIG claims that the deal documents for the MBS “fraudulently misrepresented and concealed the actual credit quality of the mortgages by providing false quantitative data about the loans, thus masking the true credit risk of AIG’s investments.” (5, quoting the Amended Complaint)

in allowing some of the claims to proceed, the Court notes that  AIG “plausibly alleges that the underwriting guidelines stated in the Offering Documents were false. The Amended Complaint describes a company-wide culture of abandonment of underwriting standards and wholesale use of ‘exceptions’ to the normal standards. This raises an inference, however strong, that the loans in AIG’s RMBS deviated from the underwriting standards.” (28, citations omitted)

Judge Pfaelzer notes that she has repeatedly issued similar rulings regarding Countrywide’s behavior in other cases, so this comes as no surprise.  But once all of these MBS cases alleging fraud misrepresentation are decided, it will be interesting to see just what the contours of this body of law will look like.  Clearly, issuers can’t avoid liability by means of general disclaimers in the offering documents.  Will they provide clearer, more explicit disclaimers and carve-outs in the hopes of  avoiding liability in future deals or will they ensure that future deals hew more closely to the deal documents?  Time will tell.

BoA Claws Back Clawback

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New York County Supreme Court Justice Bransten held, in U.S. Bank National v. Countrywide Home Loans, Inc., no. 652388-2011 (May 29, 2013), that a trustee cannot succeed in getting the defendants (Countrywide entities among others) to repurchase all of the mortgages in a securities pool based on a theory of “pervasive breach.” Rather, she holds that the repurchase obligations are determined by the terms of the agreements governing this MBS transaction.

The trustee asserted that the loans breached the reps and warranties.  The deal documents, however, limited the trustee’s remedy for such a breach to repurchase. The Court writes that

Plaintiff invites this Court to look past the absence of contractual language supporting its claim, asserting that it is entitled to the  benefit of every inference on a motion to dismiss.  While the Trustee is entitled to all favorable inferences with regard to its factual claims on a motion to dismiss, its bare legal conclusion that the Servicing Agreement accommodates its pervasive breach theory is not entitled to deference. (8)

Justice Bransten has ruled on a number of MBS cases involving alleged breaches of reps and warranties and is developing a coherent body of law on this topic. In the Bransten Trio of cases, she rejects the idea that vague disclosures are sufficient to immunize securitizers from liability for endemic misrepresentation. And here, she rejects the idea that vague theories of liability can replace the clear language agreed to by the parties.  In good judicial fashion, she is letting parties know that they should pay attention to the text of their agreements and be ready to face the consequences of those agreements.

National Mortgage Settlement: Not Too Compliant

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The Summary of Compliance: A Report from the Monitor of the National Mortgage Settlement
documents just how hard it is for the big five mortgage servicers (ResCap parties (formerly Ally/GMAC), Bank of America, Citi, JPMorgan Chase and Wells Fargo) to comply with a settlement that they themselves had agreed to.
The report tracks, among other things, complaints by professionals who work for borrowers.  The top ten are
  1. Bank failed to offer loan modification/loss mitigation opportunity.
  2. Bank failed to provide single point of contact.
  3. Bank failed to make a determination on the borrower’s loan modification no later than 30 days after receiving the complete application.
  4. Bank foreclosed while a loan modification/loss mitigation was pending.
  5. Single point of contact failed to carry out responsibilities of working with borrower on loan modification/loss mitigation activities.
  6. Bank failed to notify borrower of any known deficiency in initial submission of information no later than 5 days of receipt.
  7. Bank failed to communicate with borrower’s authorized representatives.
  8. Bank failed to keep the same single point of contact assigned until all the borrower’s needs were met.
  9. Bank failed to provide one or more direct means of communication with the single point of contact.
  10. Bank failed to acknowledge receipt of first lien loan modification application within 3 business days. (8)

I assume that the servicers are not willfully flouting the settlement because of the negative publicity they would receive for doing so as well as the millions of dollars of fines that they could thereby accrue. So these complaints must reflect some kind of systemic incompetence.  Servicers must either continue to be dramatically under-resourced to handle their work or they are bloated bureaucracies that cannot consistently disseminate key information internally or externally. Taking just the most extreme example, it is shocking (if true) that in 2013 banks are still foreclosing while loan modifications are pending with homeowners.

The Monitor, Joseph A. Smith, Jr., concludes, “It is clear to me that the servicers have additional work to do both in their efforts to fully comply with the NMS and to regain their customers’ trust. There continue to be issues with the loan modification process, single point of contact, and customer records.” (9) Amen to that.

Shaky South Carolina Opinion Finds That Bank Owned Note in Foreclosure Action

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The South Carolina Court of Appeals held in Bank of America v. Draper et al., no. 5140 (June 5, 2013) that Bank of America had standing in a foreclosure action and had proved that it owned the mortgage note.  The Court stated that under South Carolina law, a mortgagee who has the note and the mortgage can elect to bring an action on either. The Court also stated that under South Carolina law, the servicer has standing to bring an action on behalf of the beneficial owner. Because Draper admitted that Bank of America was the servicer, the Court held that Bank of America had standing in this foreclosure action.

Draper also argued that Bank of America failed to prove that it was the owner or holder of the mortgage note. Relying on South Carolina UCC section 301, the Court found that the bank was a “person entitled to enforce.” (8) The Court reached this result because Draper did not contest the Bank’s evidence that it owned the note through a series of “transfer and mergers.” (8) The bank considered as relevant evidence of the Bank’s ownership a “ledger of payments” that showed “all transactions on the account.” (8)

One does not have a sense that this case was well briefed because the Court seems to take a lot of shortcuts.  For instance, the Court apparently assumed that the mortgage note was negotiable and thus subject to Article 3 of the UCC. There is a fair amount of controversy relating to this assumption, something that I will blog about soon.

 

(HT April Charney)

Oregon District Court Dismisses Borrower’s Suit to Invalidate Foreclosure in Favor of BOA and MERS, Stating Lack of Merit

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In Moreno v. Bank of America., N.A., 3:11-CV-1265-HZ, (D. Or. Apr. 27, 2012) the U.S. District Court of Oregon, granted the defendant’s motion to dismiss for failure to state a claim. Plaintiff had alleged violations under several federal and state Acts, each of which the Judge rejected based on lack of merit.

The plaintiff brought action to invalidate a foreclosure sale, which, although dated earlier than the filed complaint, had not yet occurred. On March 29th, 2007, Moreno borrowed $220,000 from Aegis Wholesale Corporation. A promissory note in favor of Aegis was secured by a Deed of Trust (DOT) against the plaintiff’s real property and identified Fidelity National Title Insurance Company of Oregon (Fidelity) as trustee, and Mortgage Electronic Registration Systems, Inc. (MERS) as the “beneficiary under this Security Instrument.” MERS later assigned the DOT to BAC Home Loans Servicing (BACHLS) in June of 2010. On the same day, BACHLS appointed ReconTrust Co. as successor trustee to Fidelity. Fidelity filed a Notice of Default and Election to Sell (NODES), initiating foreclosure proceedings against Moreno, who had been in default since July, 2009.

The Court dismissed each of the plaintiff’s complaints in turn, starting with his first two claims of relief based on violations of the Oregon Trust Deed Act (OTDA). The plaintiff claimed that under the DOT, MERS lacked authority to assign beneficial interests to BACHLS, who in turn, lacked power to appoint ReconTrust as successor trustee. The Judge, Marco A. Hernandez, stated that he had previously held that “naming MERS as a beneficiary in a DOT does not violate the OTDA,” and while other judges in the district have found otherwise, he would continue to uphold this ruling. The plaintiff alleged that a 3-year gap between the execution of the DOT and MERS’s assignment to BACHLS  showed there “must have” been unrecorded assignments (in violation of ORS 86.735(1)). The Court found that allegation was both speculative and based on an erroneous assertion of fact (the Complaint mistakenly names Bank of America as the original lender, whereas the DOT names Aegis, and subsequent documents state Bank of America was assigned interest only in 2010). The second OTDA based claim was that the defective notice was invalid for failure to include a correct statement of the amount in default. The Court dismissed it because the plaintiff had not “plead his ability to cure the default, that his damages resulted from the lost opportunity to cure the default, and that he requested information from the trustee under O.R.S. § 86.757 and O.R.S. § 86.759.”

care because

Next, the Court dismissed the plaintiff’s claim brought under the Truth in Lending Act (TILA) for both the failure to meet the 1-year statute of limitations and for having incorrectly brought the action against Bank of America rather than Aegis, the original lender. Under TILA a claim may only be brought against the Creditor, who is the person who “regularly extends… consumer credit” and “to whom the debt arising from the consumer credit transaction is initially payable.” 15 U.S.C. Sect. 1602(g). The plaintiff further argued that he is Hispanic and “as a result” did not understand the nature of the loan documents. He therefore requested equitable tolling, which suspends the “limitation period until the borrower discovers or had reasonable opportunity to discover the fraud or nondisclosure that form the basis of the TILA action,” which he stated was in 2011 after having spoken to a translator who explained his loan audit. The Court found this unconvincing on several accounts. First, since the complaint brought no allegations in support of equitable tolling, it failed to state a TILA violation. Second, the plaintiff never alleged he did not speak English. Third, equitable tolling is applied when the 1-year period would be “unjust” or “frustrate the purpose” of the TILA. Fourth,  the plaintiff must bring allegations “that the defendant had fraudulently concealed information that would have allowed plaintiff to discover his claim,” engaged in action to prevent plaintiff from discovering a claim, or encountered “some other extraordinary circumstance would have made it reasonable for Plaintiff not to discover his claim within the limitations period.” Garcia v Wachovia Mortg. Corp. 676 F. Supp.2d 895, 905 (C.D. Cal. 2009).

The Court dismissed the plaintiff’s claim under the Real Estate Settlement Procedures Act (RESPA) for failure to meet the statute of limitations since his claim arose out of the origination of the loan in 2007, and his arguments for equitable tolling “are unavailing.”  Plaintiff also failed to allege that a RESPA violation resulted in actual damage, a requirement of a RESPA claim.

The plaintiff’s claim under Oregon’s Unfair Trade Practices Act (UTPA) was dismissed because at the time of the loan, in 2007, UTPA had not yet been amended to include “loans and extensions of credit,” O.R.S. 646.605(6) (2010), therefore plaintiff’s loan was not covered by the Act. Additionally, UTPA claims must be brought within a year from the discovery of the “unlawful method, act or practice,” but the plaintiff failed to assert that the discovery of a UTPA violation could not have been made at the time of the loan

FIRREA Flies

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Law360 interviewed me about the federal government’s continuing reliance on FIRREA in Prosecutors Get Last Laugh In $1B BofA Fraud Case (behind a paywall):

A controversial legal theory at the heart of a $1 billion mortgage fraud suit against Bank of America Corp. could become a go-to enforcement tool for civil prosecutors in the wake of a New York federal judge’s surprise ruling Wednesday, experts say.

U.S. District Judge Jed Rakoff pared the suit in a two-page order, granting BofA’s motion to dismiss False Claims Act allegations but keeping alive claims under the Financial Institutions Reform Recovery Enforcement Act, an anti-fraud law passed in the wake of the 1980s savings-and-loan crisis.

FIRREA allows civil prosecutors to sue entities that negatively “affect” the stability of federally insured banks. Seizing on a broad interpretation of that term, prosecutors have launched several suits in recent years accusing firms of affecting themselves, prompting an outcry from Wall Street and the defense bar.

Judge Rakoff said during an April 29 hearing that he was “troubled” by the government’s use of FIRREA to sue BofA, prompting many in the securities bar to be taken by surprise by Wednesday’s ruling. It comes two weeks after U.S. District Judge Lewis Kaplan refused to dismiss FIRREA claims against Bank of New York Mellon Corp. in a suit alleging the bank defrauded forex customers.

The rulings by Judges Kaplan and Rakoff suggest a consensus is beginning to form within the judiciary that FIRREA may be interpreted broadly, according to David Reiss, a professor at Brooklyn Law School. That could pose challenges for financial institutions, he said.

“There seems to be a greater interest now in pursuing financial wrongdoing,” he said. “With FIRREA, it’s a whole new game.”

And the law’s generous 10-year statute of limitations could give new life to allegations of misconduct during the financial meltdown, Reiss said.

“If FIRREA continues to be interpreted broadly, it ensures the government will still have a tool to bring claims,” he said.

Reiss on FIRREA!

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Law360 quoted me in a story, Rakoff Ruling In $1B BofA Case May Halt DOJ Hot Streak, that reflects some judicial skepticism about the federal government’s broad reading of FIRREA:

Prosecutors have seized on an obscure 1989 law to launch a series of splashy cases against banks in recent years, but a prominent New York federal judge with a penchant for scrutinizing government actions could soon reverse the trend in a $1 billion mortgage fraud suit against Bank of America Corp.

The Financial Institutions Reform Recovery Enforcement Act, enacted in the wake of the savings and loan crisis, allows the government to sue entities that negatively “affect” the stability of federally insured banks. The law was used sparingly for decades, but it has been dusted off in a series of recent complaints that seek to hold firms liable for hurting their own stability. In the BofA case, for example, the bank is accused of putting its health at risk by selling shoddy loans that were later packaged into securities.

U.S. District Judge Jed Rakoff is threatening to stem the tide. He said at an April 29 hearing that he was “troubled” by the government’s novel interpretation of FIRREA and vowed to issue a formal ruling on the issue by May 13.

*  *  *

“The federal government is searching for different theories of liability, and FIRREA is incredibly attractive right now,” said David Reiss, a professor at Brooklyn Law School. “I have no doubt this issue will rise in the court of appeals, and potentially make its way to the U.S. Supreme Court.”

Judge Rakoff’s call is expected to have a ripple effect either way. A decision allowing the government to sue banks for self-inflicted wounds may embolden prosecutors to launch even more cases, experts say.

A ruling in favor of BofA would be a coup for financial institutions as they seek to limit legal exposure from the crisis, according to Reiss.

But if the government loses FIRREA as a fraud enforcement tool, it won’t be out of options. The BofA case and some other FIRREA actions also include claims under the federal False Claims Act, which allows prosecutors to collect treble damages and penalties.

“As Judge Rakoff seems to say, I don’t think this issue has been settled,” Reiss said.