Tag Archives: Declaratory Judgment

S&P Must Face The Orchestra on Rating Failure

Posted on by

After many state Attorneys General brought suit against S&P over the objectivity of their ratings, S&P sought to consolidate the cases in federal court. Judge Furman (SDNY) has issued an Opinion and Order in In Re:  Standard & Poor’s Rating Agency Litigation, 1:13-md-02446 (June 3, 2014) that remanded the cases back to state courts because “they arise solely under state law, not federal law.” (3) Explaining the issue in a bit greater depth, the Court stated,

there is no dispute that the States’ Complaints exclusively assert state-law causes of action — for fraud, deceptive business practices, violations of state consumer-protection statutes, and the like.The crux of those claims is that S&P made false representations, in its Code of  Conduct and otherwise, and that those representations harmed the citizens of the relevant State. (20, citation omitted)

The Court notes that in “the final analysis, the States assert in these cases that S&P failed to adhere to its own promises, not that S&P violated” federal law. (28) The Court concludes that it does not reach this result “lightly:”

Putting aside the natural “tempt[ation] to find federal jurisdiction every time a multi-billion dollar case with national  implications arrives at the doorstep of a federal court,” the federal courts undoubtedly have advantages over their state counterparts when it comes to managing a set of substantial cases filed in jurisdictions throughout the country. Through the MDL process, federal cases can be consolidated for pretrial purposes or more, promoting efficiency and minimizing the risks of inconsistent rulings and unnecessary duplication of efforts. (51, citation omitted)

S&P knew that it would have to face the music regarding the allegations that its ratings were flawed. But it hoped that it could face a soloist, one federal judge. That way, it could keep its litigation costs down, engage in one set of settlement talks and get an up or down result on its liability. The remand means that S&P will face many, many judges, a veritable judicial orchestra. In addition to all of the other problems this entails, it is also almost certain that S&P will face inconsistent verdicts if these cases were to go to trial. This is a significant tactical setback for S&P. From a policy perspective though, the remand means that we should get a better understanding of the issuer-pays model of rating agencies.

Texas Court Dismisses Claims of Texas Debt Collection Act and Texas Property Code Violations

Posted on by

The court in deciding Katz v. JP Morgan Chase Bank N.A., 2013 U.S. Dist., (S.D. Tex. Dec. 18, 2013) granted the motion to dismiss put forth by the defendant.

Plaintiff Katz alleged that defendant JP Morgan: (1) violated the Texas Property Code by failing to give proper notice because all transfers of the lien were not recorded timely; (2) was unjustly enriched because Katz may have been paying the wrong lender or account and that foreclosure would yield value above the amount owed; (3) violated or will violate the Texas Business and Commerce Code because defendants had failed to produce the original note with all transfers and assignments, thus the defendant could not enforce the mortgage without the promissory note; and that the defendant (4) violated the Texas Debt Collection Act by taking actions to collect on the note despite having no authority to collect on the note.

After methodically considering the plaintiff’s assertions, the court categorically dismissed them.

Court Dismissed Minn. Stat. § 559.01 Claims

Posted on by

The court in deciding Lubbers v. Deutsche Bank Nat’l Trust Co., 2013 U.S. Dist. (D. Minn., 2013) dismissed plaintiff’s claims.

Plaintiffs sought to invalidate the foreclosure of the mortgage on their home. Plaintiffs asserted three claims against defendant: (1) quiet-title, to determine adverse claims under Minn. Stat. § 559.01; (2) declaratory judgment; and (3) slander of title.

Plaintiffs alleged the following causes of action:

In count I, plaintiffs asserted a quiet title action pursuant to Minn. Stat. § 559.01, and sought a determination regarding Deutsche Bank’s adverse interest in the Property. According to plaintiffs, in a quiet title action, the burden of proof was on the mortgagee asserting an adverse interest in the property to show that both record title and legal title concur and co-exist at the same time and in the same entity to foreclose by advertisement.

In count II, plaintiffs sought a declaratory judgment under Minn. Stat. § 555.02 that the various assignments of mortgage, notices of pendency, and powers of attorney were all void, and that plaintiffs remain the owner of the property in fee title.

Count III, plaintiff alleged slander of title, plaintiffs asserted that Wilford, acted at direction of Deutsche Bank, drafted and recorded documents that were false and not executed by legally authorized persons, and that Deutsche Bank knew that the documents were false because unauthorized persons executed the power of attorneys and the assignments of mortgage.

As relief, plaintiffs sought: (1) a determination of adverse interest in the Property; (2) a declaration that the sheriff’s certificate of sale, the various assignments of mortgage, notices of pendency, and powers of attorney are all void; (3) a declaration that plaintiffs remain the owner of the Property in fee title; and (4) money damages. Id., Prayer for Relief.

After considering the plaintiff’s claims, this court granted the defendant’s motion to dismiss.

NY Federal Magistrate Issues Declaratory Ruling That Note Transfer Is Effective

Posted on by

Magistrate Judge Gold issued an opinion in Robinson v. H & R Block Bank, 12-Civ-4196 (EDNY, May 29, 2013).  Professor Dale Whitman posted a commentary about it on the Dirt listserv and he has given us permission to cross-post it here.

Synopsis: Transfer of note and mortgage were effective, despite defects in allonge and mortgage assignment.

This brief opinion by a federal magistrate neatly disposes of a couple of attacks on a secondary market sale of a mortgage. In 2005 Robinson obtained a mortgage loan from Option One. In 2006 he also obtained a second mortgage loan from the same lender. In 2007, he and Option One agreed to consolidate the two loans into a single loan, and Robinson signed a new note and mortgage for the combined balance.

Option One then sold the loan to H & R Block Bank, delivering the note to Block, but it made two errors in doing so. The first was that the endorsement of the note (which was a “special” endorsement to Block) was placed on an allonge, but the allonge was merely placed behind the note in the file, and was not physically affixed (by stapling) to the note until Block did so in 2013.

However, under the New York version of UCC Article 3, “An indorsement must be written by or on behalf of the  holder  and on the instrument or on a paper so firmly affixed thereto as to become a part thereof.” UCC 3-202(2). Hence, the endorsement on the allonge was not effective as of the date the note was delivered, and in effect the note was unendorsed.

Second, although Option One recorded an assignment of the mortgage to Block in 2008, it mistakenly referred to the original 2005 mortgage rather than the consolidated mortgage of 2007. This error was discovered in 2012, and a “correction assignment” was then recorded with a reference to the correct mortgage.

Later in 2012 Robinson filed an action against Option One and Block, claiming fraud in the mortgage transfer. The court correctly observes that there is no evidence whatever of fraud in any literal sense, but treats the plaintiff’s claim as on attacking the validity of the transfer. Even so, it concludes that the errors were harmless and that Block has the right to foreclose the mortgage.

With respect to the unattached allonge, the court observes that

Any alleged defect concerning the allonge, however, would be immaterial, because an assignment may be made under New York law by physical delivery and not only by written indorsement.  … [S]ee also In re Idicula, 484 B.R. 284, 288 (Bankr.S.D.N.Y.2013) (“An assignment of the note and mortgage can be effectuated by a written instrument or by physical delivery of the instrument from assignor to assignee.”).

On this point the court is plainly correct.  Under the current version of the Article 3 (New York has not adopted it, but it’s the relevant version for most DIRT readers), one can become a “holder” only by taking delivery of an endorsed note. However, a person with possession of a negotiable note, but without an endorsement, can be a “nonholder with the rights of a holder” under UCC 3-301(2). The 2011 PEB report on mortgage notes explains it this way:

[This can] occur if the delivery of the note to that person constitutes a “transfer” (as that term is defined in UCC Section 3-203, because transfer of a note “vests in the transferee any right of the transferor to enforce the instrument.” Thus, if a holder (who, as seen above, is a person entitled to enforce a note) transfers the note to another person, that other person (the transferee) obtains from the holder the right to enforce the note even if the transferee does not become the holder.

What’s more, “the transferee has a specifically enforceable right to the unqualified indorsement of the transferor.” See UCC § 3-203(c). Thus, since the note in this case was indisputably delivered, the absence of a valid endorsement really doesn’t matter.

The second error, the mortgage assignment with a reference to the wrong mortgage, was equally unimportant. First, it was corrected by a refiling. But even that was unnecessary for purposes of transferring the right to foreclose the mortgage. The reason is the ancient rule that “the mortgage follows the note.” Thus, whoever, has the right to enforce the note (Block, in this case) has the right to foreclose the mortgage as well — whether they have a mortgage assignment or not. As the court says,

Neither is it required that mortgage assignments are recorded, or that they even be in writing, as long as the mortgage and note are actually delivered. In re Feinberg, 442 B.R. 215, 223 (Bankr.S.D.N.Y. 2010) (noting that the holder’s “possession of the note and mortgage attests to their delivery and is sufficient evidence of a valid mortgage assignment”).

 The reference to “possession of the mortgage” is a bit peculiar; there is no legal principle that suggests that possession of the actual mortgage document has any legal relevance at all. It is possession of the note that is of critical importance, assuming that the note is negotiable (and it’s clear that this court is making that assumption).

This is a doctrine that is widely misunderstood. Many people have the incorrect belief that somehow, having a recorded chain of mortgage assignments is essential to the right to foreclose the mortgage. Not so, except in perhaps a dozen states where assignments are necessary to carry out nonjudicial foreclosures. (New York, of course, has no nonjudicial foreclosure, and no requirement for assignments at all.)

This is not to suggest that recording a mortgage assignment isn’t a good idea. It can accomplish two significant things for the assignee: (1) It will prevent the assignor from fraudulently releasing or satisfying the mortgage in the public records, allowing the borrower to sell the property free and clear to a bona fide purchaser; and (2) it will ensure that the assignee is entitled to notice of any litigation that might be filed affecting the real estate, such as an eminent domain action or a code enforcement proceeding. But it isn’t necessary to foreclose.

The bottom line: two common errors, often raised by foreclosure defense counsel, are simply red herrings: a failure to endorse the note, and a failure to record an assignment of the mortgage. On the other hand, failure to deliver the note would have been a huge problem for the Bank in this case — but fortunately, the note was indeed delivered.

 

(HT Mike Siris)