Tag Archives: Wells Fargo

Federal Judge Declares War on Wells Fargo

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Never saw this before:

And so, Wells Fargo wins on a technicality.  The Court never addresses the merits of this case and expresses no opinion thereon. Still, it is appropriate to point out that, were Henning to prove his case on the merits, the conduct of Wells Fargo would be shown to be nothing short of outrageous.  On the other hand, perhaps if Wells Fargo addressed the merits, its conduct would be vindicated by fair-minded American jurors.  A quick visit to Wells Fargo’s website confirms that it vigorously promotes itself as consumer friendly, Loans and Programs, page within Home Lending, wellsfargo.com, https://www.wellsfargo.com/mortgage/loan-programs/ (last visited September 17, 2013); a far cry from the hard-nosed win-at-any-cost stance it has adopted here.

The technical (and now obsolete) preemption defense upon which Wells Fargo relies is an affirmative defense which can be waived.  See, e.g., Tompkins v. United Healthcare of New England, 203 F.3d 90, 97 (1st Cir. 2000).  The disconnect between Wells Fargo’s publicly advertised face and its actual litigation conduct here could not be more extreme.  These facts lead this Court to inquire whether Wells Fargo wishes to address Henning’s claims on the merits.  After all, it may be that Wells Fargo has done nothing wrong.

ACCORDINGLY, it is ORDERED that Wells Fargo, within 30 days of the date of this order, shall submit a corporate resolution bearing the signature of its president and a majority of its board of directors that it stands behind the conduct of its skilled attorneys and wishes to avail itself of the technical preemption defense to defeat Henning’s claim.

Should it do so, judgment will enter for Wells Fargo. If no such resolution is filed, the Court will deem the preemption defense waived and both Wells Fargo and Henning will have the opportunity to address the merits (i.e., what really happened) at a trial before an American jury. (36-37)

So ends District Judge Young’s (D. Mass.) opinion in Henning v. Wachovia Mortgage, F.S.B., n/k/a Wells Fargo Bank, N.A., No. 11-11428 (Sept. 17, 2013). Henning brought suit against his lender, which sought to have it dismissed, arguing in large part that the state law claims are preempted by the federal Home Owners’ Loan Act.

Judge Young does not make clear the basis for his authority to require such a resolution from Wells Fargo. I am guessing that we will see a motion for reconsideration pretty soon.

[HT April Charney]

Laches Upends Priority of Mortgagee in Utah

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Professor Wilson Freyermuth posted this summary of the Utah Supreme Court’s opinion, Insight Assets, Inc. v. Farias, ___ P.3d ___, 2013 WL 3990783 (August 6, 2013), to the DIRT listserv:

Synposis:   Although vendor purchase money mortgagee may generally have a superior claim to priority over a third-party purchase money mortgagee under the Restatement, vendor purchase money mortgagee was barred from asserting that priority by the doctrine of laches.

Facts:  In 2004, the Phalens sold land in Ogden, Utah to the Boecks for $88,000.  The Boecks financed the purchase with a $70,300 institutional mortgage loan from First Franklin Financial Corp. (First Franklin) and $17,600 in seller purchase money mortgage financing from the Phalens.  At closing, the Boecks executed deeds of trust to First Franklin and the Phelans.  After closing, the title company recorded the two deeds of trust together, but with First Franklin’s deed of trust being recorded first.  First Franklin later assigned its mortgage to Wells Fargo.

After closing, the Boecks defaulted to both Bank and to Sellers.  In June 2005, Wells Fargo foreclosed on the property and acquired the property by a trustee’s deed.  The Phelans did not attempt to foreclose on the property.  Wells Fargo sold the property, which ultimately passed by intervening conveyances to Farias.

In 2009, the Phelans assigned their interest under their deed of trust to Insight Assets (“Insight”), who executed a substitution of trustee, recorded a notice of default, and instituted foreclosure proceedings.  Farias sought summary judgment, claiming that he had held free and clear title as a bona fide purchaser.  The district court entered judgment for Farias, and Insight appealed.

On appeal to the Utah Supreme Court, Insight argued that as a matter of law, the Phelans’ seller deed of trust was entitled to priority over First Franklin’s deed of trust under Restatement (Third) of Property — Mortgages § 7.2(c) (“A purchase money mortgage given to a vendor of real estate, in the absence of a contrary intent of the parties to it and subject to the operation of the recording acts, has priority over a purchase money mortgage on that real estate given to a person who is not its vendor.”).  By contrast, Farias made three arguments:  (1) that First Franklin did not know of the Phelans’ seller purchase money mortgage and thus the Restatement rule should not apply; (2) that even if First Franklin did know of the seller purchase money mortgage, that knowledge was irrelevant because Farias was a bona fide purchaser who took free and clear of the mortgage; and (3) that Insight’s claims was otherwise barred by the doctrine of laches.

Analysis:  The Supreme Court of Utah rejected Farias’s bona fide purchase argument, noting (correctly and obviously) that the recording act cannot protect Farias against a prior properly-recorded mortgage.  The Court also noted that while the Restatement rule generally gives a vendor purchase money mortgage priority over a third-party purchase money mortgage, that rule was subject to a caveat — “where only one of the parties has notice of the other,” the recording acts should govern and award priority to the party lacking notice.

Insight argued that its vendor purchase money mortgage should still prevail, because (a) First Franklin had actual knowledge of the Phelans’ seller purchase money mortgage and (b) the title company’s knowledge of the Phelans’ seller purchase money mortgage was imputed to First Franklin.  The court did not reach this argument, however, concluding that Insight’s priority claim was barred under the equitable doctrine of laches. Although Insight did file its notice of default within the applicable six-year statute of limitations, the court stated that this did not preclude the possible application of laches.  The court concluded that application of laches was appropriate due to the Phelans’ lack of diligence and Farias’s resulting injury.  The court noted that during the five years between the Boecks’ default and the Phelans’ assignment to Insight, the Phelans “took no action to clarify or assert their rights to the property.” The court held that this was inaction unreasonable because the Restatement rule involves a “multi-factor balancing test under which priority is determined by ‘the circumstances of the given case, the equities, and the effect of the recording act.’” Thus, in the court’s view, the Phelans “could not have rationally assumed that their interest had priority” without having brought an action to establish that priority.  By failing to bring such a claim during the Wells Fargo foreclosure proceedings, the Phelans “risked forfeiting their security interest entirely.”

The court also concluded that Farias would be injured if Insight’s untimely claim was allowed to proceed, noting that Farias had negotiated the price for his home without considering the $17,600 debt owed to Insight and that when Farias purchased the home years after the Phelans’ default, “it was reasonable for him to infer from [their] inaction that their security interest had been extinguished” by the Wells Fargo foreclosure.  The court also noted that the passage of time had harmed Farias by making it difficult to gather evidence in his defense, as First Franklin was now out of business (making it difficult for Farias to locate records or former employees who might have information relevant to the question of First Franklin’s knowledge).

Comment:  This is the second 2013 periodic development involving a case where the title company recorded a third-party purchase money mortgage prior to a vendor purchase money mortgage.  In the earlier case, Insight LLC v. Gunter, the Idaho Supreme Court rejected the Restatement rule and held that the third-party mortgage had priority under the recording act.  As noted in the critique of Gunter, https://dirt.umkc.edu/February%202013/InsightLLCvGunter.pdf, that decision wrongly opened the door for purchase money lenders to structure closings in a fashion likely to disadvantage the unsuspecting purchase money seller, particularly where the purchase money lender knew of the purchase money seller and could have easily required a subordination agreement as a condition of making the purchase money loan.  Gratifyingly, the Utah court rejected the reasoning of Gunter, noting that the Restatement rule is the appropriate starting principle for vendor vs. third party lender purchase money priority disputes.

The Utah court’s judgment regarding the application of laches is harder to evaluate without the ability to review the factual record in greater detail.  On the one hand, the court is correct to note that because the Restatement rule is subject to the application of the recording act if the third party mortgagee lacks notice of the vendor mortgagee (or vice-versa), then the Phelans couldn’t be certain of their priority over First Franklin without a court decree.  On the other hand, Farias’s actions also seem similarly unreasonable.  Because the Phelans’ mortgage was recorded (and could have been entitled to priority over the First Franklin mortgage), Farias also couldn’t have been certain he was getting clear title without a court decree.  It’s not obvious where the equities lie here.

Not That I’m Complaining, But

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Ian Ayres, Jeff Lingwall and Sonia Steinway have posted Skeletons in the Database: An Early Analysis of the CFPB’s Consumer Complaints on SSRN. It is interesting both for the details it documents, but also for what it represents.  Details first:

Analyzing a new data set of 110,000 consumer complaints lodged with the Consumer Financial Protection Bureau, we find that

(i) Bank of America, Citibank, and PNC Bank were significantly less timely in responding to consumer complaints than the average financial institution;

(ii) consumers of some of the largest financial services providers, including Wells Fargo, Amex, and Bank of America, were significantly more likely than average to dispute the company‘s response to their initial complaints; and

(iii) among companies that provide mortgages, OneWest Bank, HSBC, Nationstar Mortgage, and Bank of America all received more mortgage complaints relative to mortgages sold than other banks. (1)

The financial services industry has complained that the CFPB complaint system would unfairly expose companies to unverified complaints. But this kind of comparative look at financial services companies shows the great value of the CFPB’s approach. As the authors’ note, this dataset is a treasure trove for researchers and should result in helpful information for consumers and regulators alike.  Sunlight is the best disinfectant!

Ohio Bankruptcy Court Rules in Favor of Wells Fargo: Failure to Properly Record Mortgage Assignment Does Not Invalidate Mortgage

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In In re Williams, 395 B.R. 33 (Bankr. S.D. Ohio 2008), the Ohio Bankruptcy Court granted the defendant, Wells Fargo Bank, N.A.’s motion to dismiss the Plaintiff’s complaint, holding that mortgage assignments must be recorded under Ohio law, but that failure to do so does not terminate the underlying mortgage. Additionally, the Trustee could not be a bona fide purchaser and avoid the mortgage since he possessed constructive knowledge of this mortgage.

On May 2, 2005, Earl and Belinda Williams (the Debtors) executed a promissory note in the amount of $137,730 to United Wholesale Mortgage (UWM), secured by Debtors real property, and named MERS as a “nominee for UWM, its successors and assigns.” In November 2007, the Debtors filed a petition for relief under Chapter 7 of Title 11, under the US Bankruptcy Code. Plaintiff Thomas Nolan was appointed Chapter 7 Trustee. In February 2008, Mortgage Electronic Registration Systems, Inc. (MERS) filed a motion for relief from the automatic stay on the Property, and subsequently the Trustee initiated an adversarial proceeding to avoid the mortgage lien filed in the name of  MERS and alleged that under Ohio law, the assignment of the mortgage must be recorded on behalf of the holder of the note.

The plaintiff brought suit on two accounts. First, under the Trustee’s strong arm powers granted by the Bankruptcy Code § 544,  he alleged that “as a bona fide purchaser for value, he may avoid the mortgage held by Wells Fargo on account of the failure to record an assignment of the Mortgage.” The court elucidates that the Bankruptcy Code gives the Trustee power of a bona fide purchase for value if a hypothetical purchaser could have obtained that bona fide status. Under Ohio law, the assignment of a mortgage must be “recorded to protect those lien interests from avoidance by a bona fide purchaser of real property.” The parties disagree whether mortgages must be recorded under the terms of the Bankruptcy Code, and the Court ultimately determined that the Bankruptcy Code did include mortgages under the requirement to record “instruments of writing properly executed for the conveyance or unencumbrance of lands. . . . ” but that the failure to record the assignment of the mortgage did not terminate “the underlying mortgage and the lien of the underlying mortgage.” Since the Trustee had constructive knowledge of the mortgage, he could not then avoid and acquire bona fide purchaser status due to Wells Fargo’s failure to record its assignment. The Court then dismissed the first cause of action.

Second, the Trustee argued for the Disallowance of Wells Fargo’s claim on based his ability to avoid the mortgage (as argued above). The Trustee’s claim falls under § 502(b) of the Bankruptcy Code, which establishes “grounds upon which a claim that has been objected to by a party in interest may be disallowed.” The Court relied upon subsection 1 which permits disallowance of a claim that is “unenforceable against the debtor or property of the debtor.” The claim was then dismissed “without prejudice to the Trustee’s ability to object under Code § 502 and the Bankruptcy Rules of Procedure to any proof of claim filed by Wells Fargo or any other party claiming to be a creditor of the Debtors in connection with the Note on grounds not determined through this adversary proceeding.”