Monday’s Adjudication Roundup

Monday’s Adjudication Roundup

Reiss on Snuffing out FIRREA

Law360 quoting me in BofA Fight Won’t Blunt DOJ’s Favorite Bank Fraud Weapon (behind a paywall). It reads in part,

A federal magistrate judge on Thursday put a Justice Department case against Bank of America Corp. using a fraud statute from the 1980s in peril, but the case’s limited scope means the government is not likely to abandon its favorite financial fraud fighting tool, attorneys say.

Federal prosecutors have increasingly leaned on the Financial Institutions Reform, Recovery and Enforcement Act, a relic of the 1980s savings and loan crisis, as a vehicle for taking on banks and other financial institutions over alleged violations perpetrated during the housing bubble years.

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Some banking analysts hailed the ruling as potentially the beginning of the end of the government’s pursuit of housing bubble-era violations.

“If the judge’s recommendation is accepted by the federal district court judge, then this development will represent a significant setback for the government’s legal efforts and likely mark the beginning of the end for crisis-era litigation,” Isaac Boltansky, a policy analyst at Compass Point Research & Trading LLC, said in a client note.

However, others say the government’s case was brought under relatively narrow claims that Bank of America did not properly value the securities to induce regulated banks to purchase securities they otherwise might not have.

That is a tougher case to bring than the broad wire fraud and mail fraud claims that were available to the government under FIRREA. The government has employed those tools with great success against Bank of America and Standard & Poor’s Financial Services LLC in other cases in far-flung jurisdictions, said Peter Vinella, a director at Berkeley Research Group.

“There was no issue about whether BofA did anything wrong or not. It’s just that the case was filed incorrectly. It was very narrowly defined,” he said.

It is not entirely clear that Bank of America is in the clear in this case, either.

U.S. district judges tend to give great deference to reports from magistrate judges, according to David Reiss, a professor at Brooklyn Law School.

But even if U.S. District Judge Max O. Cogburn Jr. accepts the recommendation, the Justice Department has already lodged a notice of appeal related to the report. And in the worst-case scenario, the government could amend its complaint.

A victory for Bank of America in the North Carolina case is unlikely to have a widespread impact, given the claims that are at stake. The government will still be able to bring its broader, and more powerful claims, under a law with a 10-year statute of limitations.

“It is one opinion that is going against a number of FIRREA precedents that have been decided in others parts of the country,” Reiss said. “It also appears that this case was brought and decided on much narrower grounds than those other cases, so I don’t think that it will halt the government’s use of the law.”

United States Bankruptcy Court Bound by Precedent to Recognize Bank’s Standing in Foreclosure Action, but Opines on MERS’s Flawed Assignment Process and Status as Agent

In In re Agard, 444 BR 231, 235 (Bankr. E.D.N.Y. 2011) vacated in part sub nom. Agard v. Select Portfolio Servicing, Inc., BR 8-10-77338 REG (E.D.N.Y. 2012), the United States Bankruptcy Court for the Eastern District of New York held that U.S. Bank, the assignee bank in this case, had standing to foreclose because the state court had already determined that the assignment of the mortgage by MERS to U.S. Bank was a valid assignment. The court stated the issue as follows: “[homeowner] argues that the only interest U.S. Bank holds in the underlying mortgage was received by way of an assignment from. . . MERS, as a ‘nominee’ for the original lender. [Homeowner]’s argument raises a fundamental question as to whether MERS had the legal authority to assign a valid and enforceable interest in the subject mortgage.”

In holding for U.S. Bank, the court stated the homeowner’s argument had to be rejected because of the application of the Rooker-Feldman doctrine. The court stated, “[t]he Rooker-Feldman doctrine is derived from two Supreme Court cases, Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923), and D.C. Court of Appeals v. Feldman, 460 U.S. 462 (1983), which together stand for the proposition that lower federal courts lack subject matter jurisdiction to sit in direct appellate review of state court judgments.” Also, the court found that res judicata precludes the homeowner from prevailing here: “The state court already has determined that U.S. Bank is a secured creditor with standing to foreclose and this Court cannot alter that determination in order to deny U.S. Bank standing to seek relief from the automatic stay.”

However, the court in this case found it necessary to expound upon whether it believed that U.S. Bank had standing to foreclose, despite the state court’s binding opinion.  “[T]he Court believes that it is appropriate to set forth its analysis on the issue of whether [U.S. Bank], absent the Judgment of Foreclosure, would have standing to bring the instant motion.” The court began its analysis by stating, “in order to have standing to seek relief from stay, [U.S. Bank]. . . must show that [it] holds both the Mortgage and the Note. . . [U.S. Bank] can prove that [it] is the holder of the Note by providing the Court with proof of a written assignment of the Note, or by demonstrating that [it] has physical possession of the Note endorsed over to it. . . the Assignment of Mortgage is not sufficient to establish an effective assignment of the Note.” Therefore, U.S. Bank would have to show that MERS both assigned the note and that it had authority to assign the note. Regarding MERS’s authority to assign the note, the court held, “[w]hat remains undisputed is that MERS did not have any rights with respect to the Note and other than as described above, MERS played no role in the transfer of the Note… [U.S. Bank]’s failure to show that [it] holds the Note should be fatal to the Movant’s standing.”

Furthermore, the court took issue with MERS’s status as agent of the original mortgagee. The court stated, “the record of this case is insufficient to prove that an agency relationship exists under the laws of the state of New York between MERS and its members. According to MERS, the principal/agent relationship among itself and its members is created by the MERS rules of membership and terms and conditions, as well as the Mortgage itself. However, none of the documents expressly creates an agency relationship or even mentions the word “agency.” MERS would have this Court cobble together the documents and draw inferences from the words contained in those documents.” The court went even further in its criticism, saying, “Aside from the inappropriate reliance upon the statutory definition of ‘mortgagee,’ MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best. . . . even if MERS had assigned the Mortgage acting on behalf of the entity which held the Note at the time of the assignment, this Court finds that MERS did not have authority, as ‘nominee’ or agent, to assign the Mortgage absent a showing that it was given specific written directions by its principal. This Court finds that MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not support by the law. The relationship between MERS and its lenders and its distortion of its alleged ‘nominee’ status was appropriately described by the Supreme Court of Kansas as follows: ‘The parties appear to have defined the word [nominee] in much the same way that the blind men of Indian legend described an elephant – their description depended on which part they were touching at any given time.’ ”

Absent the state court precedent that the court was bound to follow, the court likely would have emphatically refused to recognize MERS’s authority to assign the note as well as the mortgage, and in turn would have prevented U.S. Bank from proceeding with the foreclosure. Thus, in future cases before the court with similar facts that are not bound by state law precedent, MERS and any assignee bank will not have standing to foreclose.