Tag Archives: BoA

Washington Court Holds That the Language of the Security Instrument Gave MERS Both the Authority to Foreclose and Assign the Deed of Trust

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The court Salmon v. Bank of America, MERS et al., No. 10-446 (D. Wash. May 25, 2011) dismissed claims against Bank of America and MERS. The plaintiffs argued that MERS was a “ghost-beneficiary” and as such could not be the beneficiary of a deed of trust under Washington law, as it did not have an interest in the note. The court rejected this argument, and noted that the beneficiary of a deed of trust is not required to be the note holder

The court, in their holding, noted that MERS had both the authority to foreclose and the authority to assign the deed of trust, based on the language of the security instrument.

Bank of America and MERS Motion for Dismissal Granted Against Homeowner-Plaintiff in Reconsideration of Order Denying Preliminary Injunction in Foreclosure Proceeding

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In Harris v. Americas Wholesale Lender, No. 2011-659-CH (Macomb Cty. Cir. Ct. June 8, 2011) the court granted the defendant’s motion for dismissal of all the homeowner-plaintiff’s claims in foreclosure proceeding.

Defendants Countrywide, Bank of America, and MERS moved for summary disposition against plaintiff-homeowner under MCR 2.116(C)(7) and (C)(8). Plaintiff moved for reconsideration of the lower court’s denial for preliminary injunction and another motion for entry of default judgment.

Plaintiff alleged five counts; [1] fraud, [2] breach of contract, [3] collusion, [4] conversion, and finally [5] unjust enrichment. In assessing these claims the court found that they were all without merit.

In regards to the plaintiff’s alleged fraud claim the court dismissed it as frivolous as plaintiff could not, and had not, produced any evidence to support the allegation. Upon considering the second count, the court likewise dismissed as the plaintiff failed to show any cognizable allegation of a breach of contract.

The claim of collusion was also dismissed as the court found that the plaintiff failed to plead the claim with particularity. Accordingly, the claim of conversion was also dismissed as the plaintiff failed to explain, to the court’s satisfaction, how a claim of conversion could be supported. Finally, the claim of unjust enrichment was found to be without merit, as the court found that the plaintiff failed to show how an unjust enrichment took place.

BofA No Worm Ouroboros

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The Worm Ouroboros of myth was a gigantic serpent that encircled the earth only to bite its own tail. Judge Sweet (SDNY) has ruled that Bank of America is no modern-day Ouroboros that is so enormous that it must sue itself. In BNP Paribas Mortgage Corporation et al. v. Bank of America, N..A., No. 1:09-CV-09783 (June 6, 2013), Judge Sweet granted Bank of America’s motion to dismiss in its entirety (although this did not do away with all of the plaintiffs’ claims).

The Court noted that Bank of America served “in several distinct but related capacities for” what was a type of warehouse credit facility for Taylor, Bean & Whitaker Mortgage Corp. subsidiary, Ocala. (8) In particular, BoA served “as Indenture Trustee, Collateral Agent, Depositary and Custodian” for the transaction. (8) You may remember that the chairman of TBW was sentenced to 30 years in jail for running a massive fraud, from which this case ultimately springs.

The Plaintiffs “allege that BoA had contractual duties as Collateral Agent (under the Security Agreement) and as Indenture Trustee (under the Base Indenture) to sue itself in its other capacities for breaches of the  Custodial and Depositary Agreements,  respectively, and that it breached those duties by failing to bring suit against itself for these alleged cIaims.” (15, citations omitted)

Relying on well-settled law, the Court held that the transaction documents did not require BoA to sue itself. While this case does not really cover new legal terrain, its logic brings to mind S&P’s motion to dismiss DoJ’s FIRREA case.  In that case, S&P argued that “the Complaint fails to allege that S&P possessed the requisite intent to defraud the investors in the CDOs at issue. It is more than ironic that two of the supposed ‘victims,’ Citibank and Bank of America—investors allegedly misled into buying securities by S&P’s fraudulent ratings—were the same huge financial institutions that were creating and selling the very CDOs at issue.” (3) The aftermath of the financial crisis laid much bare about the securitization process, but the utter incestuousness of it can still shock.

This is not to say that this complexity and self-dealing are per se bad. Just that it seems that the sophisticated business people who put the deals together did not think through at all what would happen if deals went south.  Will they during the next boom?  Probably not.

So what does that mean for regulators?

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.

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.