Virginia Court Shoots Down “Splitting the Note” and “Double Recovery” Theories

Posted on April 15, 2010. Filed under: Banking, Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , , , |

In Forez v. Goldman Sachs Mortgage, Lexis 35099 (E.D Va. 2010) plaintiffs asserted that Defendants lacked “authority” to foreclose under Virginia’s non-judicial  foreclosure statutes. Second, Plaintiffs argued that loan  securitization bars foreclosure because securitization “splits” the Note from the  Deed of Trust or because “credit enhancements” related to securitized notes absolve borrowers of any liability under a  mortgage loan as a “doub1e recovery.”

The only problem was that there was no evidence the subject loan had been securitized. The loan had been originated by CTX Mortgage who had sold it to Goldman Sachs who subsequently sold it to Freddie Mac. The list of usual suspects included MERS as nominee for the lender and Litton as the servicer. Regardless, the court held that under Virginia law negotiation of a note or bond secured by a deed of trust or mortgage carries with it the security instrument without formal assignment or delivery. The court cited to Stimpson v. Bishop, 82 Va. 190, 200-01 (1886) (“It is undoubtedly true that a transfer of a secured debt carries with it the security without formal assignment or delivery.”). And in Williams v. Gifford, the Supreme Court of Virginia ruled:

[I]n Virginia, as to common law securities, the law is that both deeds of trust and mortgages are regarded in equity as mere securities for the debt and whenever the debt is assigned the deed of trust or mortgage is assigned or transferred with it.

139 Va. 779, 784, 124 S.E. 403 (1924).

“Thus, even if, as Plaintiffs assert without any factual support, there has been a so-called “split” between the Note and the Deed, the purchaser of the First Note, in this case GSMC and then Freddie Mac, received the debt in equity as a secured  party.”

The court further noted “federal law explicitly allows for the creation of mortgage-related securities, such as the Securities Act of 1933 and the Secondary Mortgage Market Enhancement Act of 1984. Indeed, pursuant to 15 U.S.C. § 77r-1, “[a]ny person, trust, corporation, partnership, association, business trust, or business entity . . . shall be authorized to purchase, hold, and invest in securities that are . . . mortgage related securities.” Id. § 77r-1(a)(1)(B). Foreclosures are routinely and justifiably conducted by trustees of securitized mortgages. Therefore, the court held “Plaintiffs arguments for declaratory judgment and quiet title based on the so-called “splitting” theory fail as a matter of law.”

According to Plaintiffs “any alleged obligation was satisfied, once the default was declared, because the various credit enhancement policies paid out making any injured party whole.” Plaintiffs averred that foreclosure on the Property to collect on payment owed under the First Note will result in a double recovery prohibited by Virginia statute and case law. However, the court went on to say that Plaintiffs’ double recovery argument against Defendants is based on false assumptions because neither MERS, Litton, nor Goldman own the Notes or securitized the Notes. Therefore, the court concluded, none of the named Defendants could receive a “double recovery,” assuming such claim existed.

Judge Claude Hilton reminded the Plaintiffs “no provision in the U.S. or Virginia Codes supports [their] argument that credit enhancements or credit default swaps (“CDS”) are unlawful. No decision from any court in any jurisdiction supports such a claim.”

Hilton further stated that “Plaintiffs’ double recovery theory ignores the fact that a CDS contract is a separate contract, distinct from Plaintiffs’ debt obligations under the reference credit (i.e. the Note). The CDS contract is a “bilateral financial contract” in which the protection buyer makes periodic payments to the protection seller. See Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co., 375 F.3d 168, 172 (2d Cir. 2004).”

If the credit event occurs, noted Hilton, the CDS buyer recovers according to the terms of the CDS contract, not the reference credit. “Any CDS “payout” is bargained for and paid for by the CDS buyer under a separate contract. See In re Worldcom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 651 n.29 (S.D.N.Y. 2004) (explaining that a premium is paid on a swap contract to the seller for credit default protection, and if the default event does not occur, payer has only lost the premium).”

The court held that “CDS do not, as Plaintiffs suggest, indemnify the buyer of protection against loss, but merely allow parties to balance risk through separate third party contracts. Therefore, Plaintiffs’ “double recovery” argument fails as a matter of law.”

Dean Mostofi

National Loan Audits

301-867-3887

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Would you like a bag of chips with your frozen loan audit?

Posted on March 23, 2010. Filed under: Banking, Case Law, Foreclosure Defense, Mortgage Audit, Mortgage Fraud, Mortgage Law, Truth in Lending Act | Tags: , , , , , , , |

Every day I get calls from attorneys or people facing foreclosure asking about my services as a forensic loan auditor and expert witness. Generally the callers are reasonably well informed about my work and know what they can and cannot expect from an audit. But yesterday a nice lady from Ohio called and asked for information on a frozen loan audit! And increasingly I am getting calls from people who begin by asking what I charge, immediately followed by how many pages long my audits are! Maybe I am getting a little sensitive as I am nearing my 49th birthday but I become irritated when I am made to feel like a server at a fast food joint. Not that there is anything wrong with being a server, but what would be an appropriate response to such a dumb question?  Today’s special is all you can read for $299 and a bag of chips at no extra cost. Will that be for here or to go?

What is this fascination with size and quantity that drives the average consumer? He wants a McMansion, a Big Mac, an Extra Large Latte, a Jumbo Dog, a Super Sized Pizza, and a Voluminous Frozen Audit. Or is it forensic? Who cares, as long as you get a lot of pages and one of them money back guarantees. Oh yes, we love a money back guarantee.  But seriously, why would someone facing foreclosure or having difficulty making mortgage payments care about the size of an audit? Are they calling five auditors and going with the cheapest who offers the most words for the money? Is that how you hire a professional these days?

Of course, I can’t place the entire blame on consumers who are simply trying to find the most affordable solution for perhaps the biggest problem they have had to face – losing their home. Understandably they are trying to find a method to measure the value of such an esoteric service as a forensic loan audit, which no one had even heard about until a few months ago. You can’t blame them for wanting to shop and compare products before buying and parting with their hard earned money. It is the service providers who are misleading the public and selling them a thick pile of worthless junk packaged as a forensic loan audit with a guarantee that if no violations are discovered a refund will be issued with no questions asked. I wonder how many refunds on these fake audits have been issued.

There are even law firms now peddling these audits for up to $2500 a pop but delivering nothing more than a standardized list of technical violations with some added legalese and fictitious causes of action thrown in for good measure (such as Rescission and Breach of the Covenant of Good Faith and Fair Dealing, none of which are valid or independent causes of action but they sound good). After all, how can you justify charging $2500 for a template audit, if you don’t embellish it with a few Latin words no one can pronounce or omit citations to inapposite case law inserted to fill space for lack of meaningful research.

This industry has been flooded with unprofessional ex loan officers and underemployed ambulance chasing lawyers who have setup shop as auditors with cheap copycat websites and a subscription to compliance software, representing themselves as experts offering hope to distressed homeowners, who in their desperation for keeping their homes and stopping foreclosure are easy prey.

What these unsavory characters are selling is essentially overpriced data entry and a template report purporting to be a legal analysis of the homeowner’s rights and remedies for alleged violations of the Truth in Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), Fair Credit Reporting Act, Predatory Lending, Breach of Fiduciary Duty, Negligence, Fraud and Unfair or Deceptive Acts or Practices to name a few. After completion of the audit the borrower is usually encouraged to demand a response from the lender via a Qualified Written Request (QWR), which the auditor/lawyer sometimes offers to draft and submit as an added bonus with the assurance that as soon as the lender is served with their masterfully prepared QWR and sees the auditor’s impressive findings, its lawyers begin trembling with fear of being sued and offer to settle for pennies on the dollar. All that for $399 and a money back guarantee! How can anyone turn down such an offer? Yes please, I will have one audit and a bag of chips to munch on while laying back on my couch watching the bank get on its knees and beg for my forgiveness. I want to watch them grovel before they rescind my predatory loan and hand over the deed to my house free and clear. After all this is America.

TILA/RESPA

Of course the reality is markedly different than what is purported by these overenthusiastic yet incompetent advocates. I have seen hundreds of audits and they all have one thing in common – they are worthless. First, many of the so called violations these audits uncover, such as failure to issue a good faith estimate within three days of application, or failure to issue a HUD-1 one day prior to settlement, provide for no private right of action, so their only value may lie in establishing a pattern and practice of misrepresentation, deception or on rare occasions fraud. But even if sufficient facts exist for allegations of broker or loan officer misconduct, liability for such conduct ordinarily remains with the original tortfeasor and not the assignee of the loan, who in all likelihood is a holder in due course, unless you can show, for example, that the holder had notice of your claims prior to purchasing the Note or that the Note was not properly negotiated or for various reasons it does not qualify as a negotiable instrument.

As mentioned ordinarily the holder in due course is not liable for disputes or claims you may have against the originator or mortgage broker who sold you the loan unless certain conditions pursuant to HOEPA have been met, or the TILA violation is apparent on the face of the loan documents, or you are using the claim as a defense in a collection action, or if you can state with particularity facts that would make the note and mortgage void under other legal theories. Some courts, however, have held that you cannot use certain claims in nature of recoupment in non judicial foreclosure proceedings in states such as California, while, on the other hand,  a West Virginia court has said: “Securitization model – a system wherein parties that provide the money for loans and drive the entire origination process from afar and behind the scenes – does nothing to abolish the basic right of a borrower to assert a defense to the enforcement of a fraudulent loan, regardless of whether it was induced by another party involved in the origination of the loan transaction, be it a broker, appraiser, closing agent, or another”. Generally a fraudulent loan is not enforceable regardless of the holder in due course status of the party with the right to enforce. The trick is in providing sufficient facts to prove fraud, which, under normal circumstances is not an easy task to accomplish.

Fiduciary Duty

A popular finding proffered by some practitioners is an alleged violation of fiduciary duty by the lender. In general, however, a lender does not owe a fiduciary duty to a borrower. “A commercial lender is entitled to pursue its own economic interests in a loan transaction. This right is inconsistent with the obligations of a fiduciary which require that the fiduciary knowingly agree to subordinate its interests to act on behalf of and for the benefit of another.” Nymark v. Heart Fed. Savings & Loan Assn., 231 Cal. App. 3d 1089, 1093 n.1, 283 Cal. Rptr. 53 (1991). “[A]bsent special circumstances . . . a loan transaction is at arm’s length and there is no fiduciary relationship between the borrower and lender.” Oaks Management Corporation v. Superior Court, 145 Cal. App. 4th 453, 466, 51 Cal. Rptr. 3d 561 (2006).

Determining the existence of a fiduciary relationship involves a highly individualized inquiry into whether the facts of a given transaction establish that there has been a special confidence reposed in one who, in equity and good conscience, is bound to act in good faith and with due regard to the interests of the one reposing the confidence. Mulligan v. Choice Mortg. Corp. USA, 1998 U.S. Dist. LEXIS 13248 (D.N.H. Aug. 11, 1998).

As such, an audit must inquire in to the circumstances surrounding the borrower’s initial introduction to and meeting with the lender’s agent and the content of all verbal and written communications between them. It is important for the auditor to determine the level and extent of trust and confidence reposed by borrower in the lender’s agent. A lender may owe to a borrower a duty of care sounding in negligence when the lender’s activities exceed those of a conventional lender. For example if it can be shown the appraisal was intended to induce borrower to enter into the loan transaction or to assure him that his collateral was sound the lender may have a duty to exercise due care in preparing the appraisal. See Wagner v. Benson, 101 Cal. App. 3d 27, 35, 161 Cal. Rptr. 516 (1980) (“Liability to a borrower for negligence arises only when the lender actively participates in the financed enterprise beyond the domain of the usual money lender.”).

Vicarious Liability

A lender may be secondarily liable through the actions of a mortgage broker, who may have a fiduciary duty to its borrower-client, but only if there is an agency relationship between the lender and the broker. See Plata v. Long Beach Mortg. Co., 2005 U.S. Dist. Lexis 38807, at *23 (N.D. Cal. Dec. 13, 2005); Keen v. American Home Mortgage Servicing, Inc., 2009 U.S. Dist. LEXIS 100803, 2009 WL 3380454, at *21 (E.D. Cal. Oct. 21, 2009).

Therefore, the audit must propound sufficient facts to establish an agency relationship between lender and broker. An agency relationship exists where a principal authorizes an agent to represent and bind the principal. Although lenders offer the brokers incentives to act in ways that further their interests, there needs to be a showing that a lender gave the broker authority to represent or bind it, or that a lender took some action that would have given borrower the impression that such a relationship existed. I have yet to see an audit that provided facts for such a conclusion but instead they are filled with conclusory allegations unsupported by facts. It is not enough to merely state that lender is vicariously liable through the broker or that broker is lender’s authorized agent without specific facts to support such conclusions.

Civil Conspiracy

Under the conspiracy theory a party may be vicariously liable for another’s tort in a civil conspiracy where the plaintiff shows “(1) formation and operation of the conspiracy and (2) damage resulting to plaintiff (3) from a wrongful act done in furtherance of the common design.” Rusheen v. Cohen, 37 Cal. 4th 1048, 1062, 39 Cal. Rptr. 3d 516, 128 P.3d 713 (2006) (citing Doctors’ Co. v. Superior Court, 49 Cal.3d 39, 44, 260 Cal. Rptr. 183, 775 P.2d 508 (1989)), see also Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 511, 28 Cal. Rptr. 2d 475, 869 P.2d 454 (1994). The California Supreme Court has held that even when these elements are shown, however, a conspirator cannot be liable unless he personally owed the duty that was breached. Applied Equipment, 7 Cal. 4th at 511, 514.

Civil conspiracy “cannot create a duty . . . . [i]t allows tort recovery only against a party who already owes the duty.” Courts have specifically held that civil conspiracy cannot impose liability for breach of fiduciary duty on a party that does not already owe such a duty. Everest Investors 8 v. Whitehall Real Estate Ltd. Partnership XI, 100 Cal. App. 4th 1102, 1107, 123 Cal. Rptr. 2d 297 (2002) (citing Doctors’ Co., 49 Cal. 3d at 41-42, 44 and Applied Equipment, 7 Cal. 4th at 510-512).

Thus, civil conspiracy allows imposition of vicarious liability on a party who owes a tort duty, but who did not personally breach that duty. Doctors’ Co., 49 Cal. 3d at 44 (A party may be liable “irrespective of whether or not he was a direct actor and regardless of the degree of his activity.”).

Joint Venture

Participation in a joint venture with a broker or other party in a predatory lending context gives rise to liability for such claims under a claim of joint venture. See Short v. Wells Fargo Bank Minnesota, N.A., 401 F. Supp. 2d 549, 2005 U.S. Dist. LEXIS 28612, available in 2005 WL 3091873, at 14-15 (S.D.W.Va. Nov. 18, 2005); see also generally Armor v. Lantz, 207 W. Va. 672, 677-78, 535 S.E.2d 737, 742-43 (2000); Sipple v. Starr, 205 W. Va. 717, 725, 520 S.E.2d 884, 892 (1999); Price v. Halstead, 177 W.Va. 592, 594, 355 S.E.2d 380, 384 (1987).

Similarly, if one party is directing or exercising control over loan origination in the circumstance of securitized lending, it is a factual question as to whether there is a principal/agency relationship sufficient to impose such liability on all the participants. See Short v. Wells Fargo Bank Minnesota, N.A., supra, 2005 U.S. Dist. LEXIS 28612, 2005 WL 3091873, at 14-15; England v. MG Investments, Inc., 93 F. Supp. 2d 718, 723 (S.D.W.Va. 2000); Arnold, 204 W.Va. at 240, 511 S.E.2d at 865.

An audit must inquire in to the relationships between parties involved in the joint venture and determine the level of control exercised by one party over another. Again, it is not sufficient to merely recite legal conclusions such as “Crooked Funding LLC controlled Scam Brokers Inc.”.

Fraud and Deceit

In most jurisdictions, “[t]he elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or scienter); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” Small v. Fritz Companies, Inc., 30 Cal. 4th 167, 173, 132 Cal. Rptr. 2d 490, 65 P.3d 1255 (2003).

To prove mail fraud, as an example, the auditor must propound facts with particularity as follows:

Johnny Crookland, Crooked Broker’s President, misrepresented his intention to get borrowers the best rate available at their initial meeting in March 2006. The audit should also contain the date and content of all mailings and communications between the Crooked Broker and the borrowers through which the broker with the aid of a warehouse lender (Scam Fundings LLC) effectuated its scheme to defraud: (1) direct mail advertisement from Crooked Broker showing a teaser interest rate of 6.75% with zero broker fees or points (2) a “good faith estimate” of the loan terms mailed by Crooked Broker on March 26 which did not mention anything about a $5,890 fee for origination, (3) the first (rejected) loan document, with an interest rate of 7% which included a $ 5,890 fee, presented to the borrowers on April 13 at the first closing (though presumably mailed or faxed from the warehouse lender’s office in New York shortly before that date) (4) borrowers refusal to sign the closing documents because of the unauthorized fee that appeared on the HUD-1 on closing day, (5) a second good faith estimate mailed by Crooked Broker on April 16, showing 7% interest but this time without the unauthorized fee; and the second (accepted) loan document, which was presented in Baltimore on April 19 but at a higher rate of 7.125% and now subject to a yield spread premium that was never disclosed or explained  as to how it may impact total finance charges over the length of the loan. (6) Crooked Broker’s statement in response to borrowers’ inquiry about the yield spread premium that it was standard practice and paid by lender with no impact on total finance charges payable by borrowers.

Show Me the Note

The template audits invariably omit a detailed inquiry in to the securitization process after the loan was funded by the Originator and sold to investors through securitization. Often the only theory proffered by incompetent auditors revolves around the “show me the note” defense, which has been shot down by almost every court in every jurisdiction because it lacks merit. A lost note affidavit can easily overcome this argument, so by itself as a foreclosure defense strategy this does nothing but cast doubt on a borrower’s credibility.

A skilled auditor will carefully examine all documents including the Note, Mortgage/DOT, Mortgage/DOT Assignment, Note Endorsement/Allonge, Notice of Default and the Pooling and Servicing Agreement to determine the identity of all parties involved in the chain of securitization and their respective interests in the Note and Mortgage.

Once settlement occurs the Note and Mortgage are normally transferred to a document custodian (e.g. Wells Fargo), while numerous book entries record their movement through the securitization chain which normally begins with the Originator (e.g. Mason Mortgage) who then sells them to an aggregator (e.g. Countrywide Home Loans) who then sells them with a thousand other loans to a Depositor (e.g. Asset Securities Inc.) who then deposits them with a Trustee (e.g Wells Fargo) for the benefit of the securitization trust (e.g Asset Securities Trust IV-290989 – 2003) which issues securities backed with the pool of mortgages (MBS).  The trustee also selects a Servicer (e.g Countrywide Home Loans) to collect borrower payments and process foreclosures/short sales on behalf of the investors who own the MBS.

When there is default and in order to effectuate foreclosure, the Servicer asks the document custodian for the collateral file that pursuant to the PSA should contain the original Note indorsed by the Originator (e.g. Mason Mortgage), usually in blank thereby converting it in to a bearer instrument, and the Mortgage/DOT with an executed assignment either already recorded or in recordable form. Usually this is where everything can fall apart for the secured party attempting to foreclose and where the best defense opportunities may be uncovered by a skilled examiner.  Without giving away too much proprietary information here is a list of some questions a diligent auditor should be asking:

  1. Was the execution of the Mortgage/DOT by the borrower properly witnessed and acknowledged?
  2. Was the Note legally negotiated and formally transferred from the Originator to the Aggregator, from the Aggregator to the Depositor and from the Depositor to the Trustee?
  3. Was the Note indorsed by an authorized agent of its holder before each transfer?
  4. Is the Indorsement evidenced by an Allonge while there is room for an Indorsement on the original Note?
  5. Was the Note negotiated to its current holder prior to the date of default?
  6. Did the Mortgage travel with the Note through the chain of securitization?
  7. Is the Mortgage held by MERS?
  8. Has the Mortgage assignment been properly recorded?
  9. Was the Mortgage and Note assigned to the Trustee by MERS?
  10. Was MERS authorized or allowed to assign the Mortgage?
  11. Who signed the assignment on behalf of MERS?

MERS and Splitting the DOT from the Note

The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation.  The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.”  Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009).

Some courts have found that, because MERS is not the original holder of the promissory note and because there is no evidence that the original holder of the note authorized MERS to transfer the note, the language of the assignment purporting to transfer the promissory note is ineffective. “MERS never held the promissory note, thus its assignment of the deed of trust to Ocwen separate from the note had no force.” 284 S.W.3d at 624; see also In re Wilhelm, 407 B.R. 392 (Bankr. D. Idaho 2009) (standard mortgage note language does not expressly or implicitly authorize MERS to transfer the note); In re Vargas, 396 B.R. 511, 517 (Bankr. C.D. Cal. 2008) (“[I]f FHM has transferred the note, MERS is no longer an authorized agent of the holder unless it has a separate agency contract with the new undisclosed principal. MERS presents no evidence as to who owns the note, or of any authorization to act on behalf of the present owner.”); Saxon Mortgage Services, Inc. v. Hillery, 2008 U.S. Dist. LEXIS 100056, 2008 WL 5170180 (N.D. Cal. 2008) (unpublished opinion) (“[F]or there to be a valid assignment, there must be more than just assignment of the deed alone; the note must also be assigned. . . . MERS purportedly assigned both the deed of trust and the promissory note. . . . However, there is no evidence of record that establishes that MERS either held the promissory note or was given the authority . . . to assign the note.”).

IN CONCLUSION, the value of a forensic loan audit lies not in its word count, size or thickness but rather in the knowledge and expertise of the individual performing the work and examining the documents. Many of the worthless template audits produced by scammers consist of more than 100 pages of garbage and pointless recitations of statutes you can find online or in any library. Moreover, finding a technical violation in loan documents is a virtual certainty, so a money back guarantee is merely a marketing gimmick offered by unscrupulous con artists to gain your trust and to distract you from what really counts. If you are worried about word count and a money back guarantee you are missing the point. And if you are looking for the least expensive audit advertised on the web, you will certainly get what you pay for. An authentic audit done right takes at least 3 hours to complete (a more detailed analysis can take over 8 hours) and a skilled auditor charges between $250 to $300 per hour, so do the math.

Remember an audit is merely a tool that should be handled with care by a seasoned attorney. It does not magically stop foreclosure while you lay back on the couch with a bag of chips. A lengthy template audit attached to a lengthy QWR sent to a lender’s loss mitigation department will most likely end up in the trash. The best way to measure the quality and value of an auditor’s work, short of a referral, is by picking up the phone, speaking to him and making sure he knows what he is talking about. Surround yourself with smart and skilled advocates and you will be a step or two ahead of the bank trying to take your home away.  That I can guarantee.

Dean Mostofi, President

National Loan Audits

Tel: 301-867-3887

E-mail: dean@lenderaudits.com

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In re GIFTY SAMUELS, Debtor

Posted on March 16, 2010. Filed under: Banking, bankruptcy, Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , |

In re GIFTY SAMUELS, Debtor

Chapter 11, Case No. 06-11656-FJB

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS, EASTERN DIVISION

415 B.R. 8; 2009 Bankr. LEXIS 1954

July 6, 2009, Decided

CASE SUMMARY:

PROCEDURAL POSTURE: In contested Chapter 11 proceedings, movant creditor, as trustee–under a pooling and servicing agreement–of a mortgage investment trust, sought summary judgment as to an objection filed by the debtor to its secured claim, which was based on a promissory note and a mortgage given as security. The debtor challenged the creditor’s claim that it was the holder of the note and the owner of the mortgage and its standing to enforce its rights.

OVERVIEW: The debtor alleged that defects existed in the creditor’s proof of chain of title to the promissory note and the mortgage. The creditor argued that it held the documents as a successor-in-interest to the original bankruptcy claimant. The court agreed, finding that the loan originator had endorsed both the note and the mortgage in blank–converting them into bearer instruments–then delivered them to the creditor as pool trustee. In 2008, an assignee acting under a limited power of attorney (LPA) executed a confirmatory assignment of the mortgage, which it recorded. Although the documents submitted with the proof of claim did not show a valid assignment of rights, depriving the claim of prima facie validity, the creditor met its burden of showing that it held rights to the note and the mortgage. Under Mass. Gen. Laws ch. 106, § 3-205(b) the creditor was the holder of the note, which it had standing to enforce under Mass. Gen. Laws ch. 106, § 3-301. The assignee retroactively ratified the mortgage through the 2008 LPA. The postpetition transfer of the recorded mortgage did not constitute a transfer of an estate asset in violation of the automatic stay in 11 U.S.C.S. § 362(a).

OUTCOME: The court granted summary judgment in favor of the bank.

JUDGES: Frank J. Bailey, United states Bankruptcy Judge.

OPINION BY: Frank J. Bailey

OPINION

MEMORANDUM OF DECISION ON MOTION OF DEUTSCHE BANK FOR SUMMARY JUDGMENT ON DEBTOR’S OBJECTION TO ITS PROOF OF CLAIM

By the motion before the Court, Deutsche Bank National Trust Company,  [*11]  as trustee under a pooling and servicing agreement of a certain mortgage investment trust (“Deutsche Bank”), seeks summary judgment as to the objection filed by Chapter 11 debtor Gifty Samuels to its secured claim. Deutsche Bank’s claim is based on the contention that Deutsche Bank is the present holder of a promissory note given by Samuels to Argent Mortgage Company, LLC (“Argent”), and the owner of the mortgage given by Samuels to Argent to secure the promissory note. By her objection, Samuels now challenges not the validity of the underlying note and mortgage but only Deutsche Bank’s claim to be the holder of the note and owner of the mortgage and thus its standing to enforce these. Finding the motion for summary judgment to be well-supported, the Court will grant summary judgment and overrule the objection to claim.

PROCEDURAL HISTORY

Gifty Samuels filed a petition for relief under  [**2] Chapter 13 of the Bankruptcy Code on June 1, 2006, thereby commencing this bankruptcy case. Upon discovery that her debt exceeded the eligibility limits for Chapter 13, she moved to convert her case to one under Chapter 11, and the Court granted that motion on August 10, 2006. She has remained a debtor in possession under Chapter 11 since that time.

AMC Mortgage Services, Inc., as loan servicer for Argent, filed a proof of a claim in the case on June 23, 2006 for $ 292,206.37, and an amended proof of claim on September 18, 2006 for $ 294,466.50. 1 Both indicated that the claim in question was secured, but neither included an attached promissory note or mortgage or identified the property securing the debt.

1   The original proof of claim appears on the claims register as number 3-1, the amended as -2.

The property securing this debt was certain real property owned by Samuels and located at 316B, Essex Street, Lynn, Massachusetts. AMC Mortgage Services, Inc., as loan servicer for Argent, moved for relief from the automatic stay as to this property on April 2, 2007. [Doc. # 143] After a hearing, the court denied the motion without prejudice to renewal but, in the same order, expressly permitted  [**3] AMC Mortgage Services, Inc. to file an affidavit of noncompliance seeking further court action if the Debtor, commencing in July 2007, failed to make timely monthly mortgage payments. [Doc. # 198]

On November 9, 2007, Citi Residential Lending, Inc. (“Citi Residential”), by Mario Vasquez, a duly authorized agent, filed such an affidavit of noncompliance. [Doc. # 239] In the affidavit, Mr. Vasquez stated that Citi Residential “is now the servicer for Argent Mortgage Company” and that Samuels had failed to make her monthly mortgage payments. On November 23, 2007, the Court held a hearing on the affidavit and the underlying motion for relief, resulting in entry of an agreed order of that same date, granting Citi Residential relief from the automatic stay to foreclose, effective January 31, 2008. [Doc. # 251]

On February 1, 2008, in an Omnibus Objection to claims, Samuels objected to the amended claim of AMC Mortgage Services (Claim No. 3-2), stating that “[t]his claim alleges a security interest but fails to identify the property securing the claim or to attach a copy of any documentation in support of the claim.” [Doc. # 267] Citi Residential Lending filed a response to the objection [Doc.  [**4] # 294] that identified the property in question as the real property at 316B Essex Street, Lynn, Massachusetts,  [*12]  and included as attachments the relevant promissory note and mortgage. Just prior to the preliminary hearing on the objection, the Debtor filed a report and hearing agenda that, with respect to this claim, stated:

A response was filed by Citi Residential Lending, Inc. regarding this claim []. The response includes a copy of the Note and Mortgage, as requested in the objection, but fails to demonstrate that AMC or Citi Residential is the actual holder of the note and mortgage, such as by attaching a copy of an assignment(s). The response also fails to provide a complete Loan History or to provide an affidavit of the keeper of records regarding the amount owed as of the date of the response.

The Debtor thus essentially retracted her original grounds for objecting–failure to identify the property and lack of supporting documentation–and raised new grounds: lack of evidence that AMC or Citi Residential was the actual holder of the promissory note and mortgage. The court held a preliminary hearing on the objection as so amended on April 15, 2008 and a continued hearing on June  [**5] 20, 2008. The court then issued a procedural order requiring (i) that the claimant file documentation establishing true ownership of the note and mortgage that form the basis for its claim and then (ii) that the Debtor file a response indicating whether it accepts the evidence as establishing the validity of the claim, including (in the event of rejection) an explanation as to why.

The documentation required by the first prong of this order was filed by Deutsche Bank National Trust Company, as Trustee, in trust for the registered holders of Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-W3 (“Deutsche Bank”). In the response to which the documentation was attached [Doc. # 363], 2 Deutsche Bank claimed to be the present holder of the mortgage at issue. The Debtor filed a response indicating that she did not accept the documents adduced as evidence establishing the validity of the lien. [Doc. # 366]

2   Deutsche Bank also filed a Supplemental Response [Doc. # 364].

On August 19, 2008, Citi Residential, as loan servicer and attorney-in-fact for Deutsche Bank, then moved to amend proof of claim No. 3, stating that AMC Mortgage Services, Inc. had incorrectly named  [**6] Argent as the creditor in that proof of claim. [Doc. # 377] Citi Residential said in the motion that in fact the loan is held by Deutsche Bank, and therefore that the proof of claim should name Deutsche Bank as the creditor. The motion further stated that effective October 1, 2007, Citi Residential had replaced AMC Mortgage Services, Inc. as servicer of the loan. On October 21, 2008, and over the Debtor’s objection, the court granted this motion. Accordingly, on October 24, 2008, Deutsche Bank National Trust Company, as Trustee, in trust for the registered holders of Argent Securities Inc., Asset-Backed Pass- Through Certificates, Series 2005-W3, filed proof of claim No. 14-2, complete with supporting documents, as an amendment to claim No. 3-2. The supporting documents, filed as exhibits to the proof of claim, included (i) the Samuels Note, (ii) the Samuels Mortgage, (iii) on the Samuels Mortgage, a registry stamp constituting evidence that the Mortgage was recorded on August 23, 2005; (iv) a Confirmatory Assignment of the Samuels Mortgage and Note from Argent to Deutsche Bank, dated August 4, 2008, bearing a registry stamp constituting evidence that the Confirmatory Assignment was  [**7] recorded on August 11, 2008; and (v) a Limited Power of Attorney from Argent  [*13]  to Citi Residential, dated October 18, 2007 (the “2007 LPA”).

On September 29, 2008, while the motion to amend proof of claim was pending, and pursuant to FED. R. BANKR. P. 3001(e)(2), Citi Residential filed evidence–essentially a notice–of transfer of claim No. 3 (as amended) other than for security [Doc. # 396]. The notice indicates that Claim No. 3 was transferred from AMC Mortgage Services, Inc., as loan servicer for Argent, to Citi Residential, as loan servicer and attorney in fact for Deutsche Bank. The clerk promptly then notified AMC Mortgage Services, Inc. of the evidence of transfer and established a deadline for the alleged transferor to object, failing which the transferee would be substituted for the original claimant without further order of the court. AMC Mortgage Services, Inc. filed no objection, and the time to object has long since passed.

On December 11, 2008, Deutsche Bank then filed the present Motion for Summary Judgment as to Claim No. 14 [Doc. # 415]. 3 Deutsche Bank construes the Debtor’s objection to Claim No. 3 as in fact an objection to Claim No. 14 (because Claim No. 14 is an  [**8] amendment to Claim No. 3) and, by its motion for summary judgment, seeks an order overruling the objection and allowing Claim No. 14. In support of the motion, Deutsche Bank submitted the affidavits of Ronaldo Reyes, Diane E. Tiberend, and Margarita Guerreo and the exhibits authenticated by these affiants. The Debtor has filed an opposition to the motion and, in support of her opposition, an unauthenticated deposition of Tamara Price. 4 Price is a Citi Residential employee that was deposed in another case. The court held a hearing on the motion on March 31, 2009 and took the matter under advisement.

3   A motion for summary judgment may appropriately be filed as to an objection to claim. An objection to claim is a contested matter. Pursuant to FED. R. BANKR. P. 9014(c), Rule 7056 of the Federal Rules of Bankruptcy Procedure applies to contested matters. Rule 7056 in turn makes FED. R. CIV. P. 56 applicable.

4   In her opposition, the Debtor also asks the court to take judicial notice of the entire record of this case, but she fails to identify particular documents or parts of the record of which she would have the court take judicial notice.

ARGUMENTS OF THE PARTIES

This contested matter has  [**9] evolved in two significant respects since its inception with the Debtor’s filing of her objection to Claim No. 3. First, the underlying claim has been amended, such that the claim in issue is no longer Claim No. 3, filed by AMC Mortgage Services, Inc., as loan servicer for Argent, but Claim No. 14-2, filed by Deutsche Bank, with Deutsche Bank claiming to be the successor in interest to Argent as holder of the same promissory note and mortgage that formed the basis of the Claim No. 3. Second, the grounds of objection have changed: the Debtor’s original objection–that the proof of claim “alleges a security interest but fails to identify the property securing the claim or to attach a copy of any documentation in support of the claim”–has been satisfied, the note and mortgage having been adduced and the property having been identified. Instead, the objection has now become a challenge to Deutsche Bank’s contention that it holds the promissory note and owns the mortgage on which the claim is based. It is this particular objection, as it is leveled against Claim No. 14-2, that is presently before the court as the subject of Deutsche Bank’s motion for summary judgment. Neither party disputes  [**10] that the issue so framed is properly  [*14]  before the Court, the lack of a formal objection to Claim No. 14-2 notwithstanding.

Deutsche Bank’s argument in support of summary judgment is as follows. Pursuant to a certain Mortgage Loan Purchase and Warranties Agreement, the following sequence of transfers occurred: Argent, as the originator of the loan and payee and original holder of the note, sold the loan in question to Ameriquest Mortgage Company LLC, which, in turn sold the loan to Argent Securities, Inc., which deposited the loan into the ARSI Series 2005-W3 Pool subject to the Pooling and Servicing Agreement (“PSA”) dated as of October 1, 2005 between Argent Securities, Inc. as Depositor, Ameriquest as Master Servicer, and Deutsche Bank, as Trustee. Accordingly, Argent endorsed the original promissory note in blank, without recourse–thus converting it into a bearer instrument, negotiable by transfer of possession alone–and delivered it to Deutsche Bank as pool Trustee, which has had actual physical custody of the note since August 18, 2005. The mortgage followed a similar path, twice: first on August 18, 2005, when Argent Mortgage Company LLC, the original mortgagee, assigned the mortgage  [**11] in blank and delivered it to Deutsche Bank as pool Trustee; and a second time on August 4, 2008, when Citi Residential, acting under a limited power of attorney from Argent, executed on behalf of Argent a confirmatory assignment of the mortgage to Deutsche Bank as pool Trustee and recorded the same in the applicable registry of deeds. In addition, Deutsche Bank argues, Argent ratified the assignment of the mortgage to Deutsche Bank by raising no objection to the court’s notice of evidence of transfer of claim.

The Debtor argues that Deutsche Bank must show that it is the lawful owner of both the note and the mortgage. The Debtor does not dispute that the promissory note was indorsed in blank and transferred to Deutsche Bank and that Deutsche Bank is now, and since August 18, 2005 has been, in possession of the note. The Debtor instead concentrates her opposition on the mortgage, arguing that there exist several defects in Deutsche Bank’s chain of title, or at least in Deutsche Bank’s proof of the chain of title. First, the Debtor argues that Argent’s original assignment of the mortgage in blank was ineffective because a mortgage is an interest in land that, under the statute of frauds,  [**12] requires a conveyance in writing that identifies the assignee; Argent’s conveyance in blank, though in writing, does not identify an assignee and therefore, the Debtor concludes, was ineffective.

Second, the Debtor contends that the PSA required that all mortgages acquired thereunder had to be funneled to Deutsche Bank, as pool trustee, through the entity designated by the PSA as “depositor,” ARSI. A failure to follow this protocol–such as by direct assignment of the mortgage from the loan originator to the pool trustee, bypassing the depositor–would, the Debtor contends, constitute a breach of the PSA, a breach of fiduciary obligations under the PSA to investors, a breach of federal regulations, and an act giving rise to unfavorable tax consequences for the investors. The Debtor argues that because the mortgage assignments described by Deutsche Bank do not indicate that title passed to Deutsche Bank through the depositor, the assignments of the mortgage must be invalid.

Third, the Debtor argues that the confirmatory assignment is invalid because the vice-president of Citi Residential who executed that assignment, a Ms. Tamara Price, indicated in a deposition in an unrelated case that  [**13] (1) she signs documents  [*15]  presented to her for signing without knowing what she is signing and (2) she signs these documents outside the presence of a notary, after which the documents are forwarded to a notary for completion. The Debtor further argues that Price patently lied when she recited in the Confirmatory Assignment that the original assignment “was lost”; the assignment in blank was produced in this proceeding and therefore was not lost. The Debtor does not elaborate on the consequences or import of these allegations. Nor does he dispute that Ms. Price had authority to execute the assignment and that she actually did execute it.

Fourth, the Debtor argues very briefly that, because the execution and recording of the confirmatory assignment occurred after she filed her bankruptcy petition, these acts constituted violations of the automatic stay and of 11 U.S.C. § 549 (permitting a trustee to avoid certain postpetition transfers). In support of this argument, the Debtor cites In re Beaulac, 298 B.R. 31 (Bankr. D. Mass. 2003) without elaboration. She offers no explanation as to how the postpetition transfer of a mortgage already in existence and previously recorded can constitute  [**14] a transfer of an asset of the estate or a violation of the automatic stay. She further suggests that she has the power to avoid the “unauthorized postpetition conveyance” but does not explain how or on what grounds and has not moved to avoid the conveyance.

SUMMARY JUDGMENT STANDARD

[HN1] A party is entitled to summary judgment only upon a showing that there is no genuine issue of material fact and that, on the uncontroverted facts, the movant is entitled to judgment as a matter of law. FED R. CIV. P. 56(c). Where, as here, the burden of proof at trial would fall on the party seeking summary judgment, that party must support its motion with evidence–in the form of affidavits, admissions, depositions, answers to interrogatories, and the like–as to each essential element of its cause of action. The evidence must be such as would permit the movant at trial to withstand a motion for directed verdict under FED. R. CIV. P. 50(a). Anderson v Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). If the motion is properly supported, the burden shifts to the adverse party to submit evidence demonstrating the existence of a genuine issue as to at least one material fact. If the adverse party does not so respond,  [**15] “summary judgment, if appropriate, shall be entered against the adverse party.” FED. R. CIV. P. 56(e); Jaroma v. Massey, 873 F.2d 17, 20 (1st Cir. 1989). The court makes no findings of fact but only determines whether there exists a genuine issue of material fact and, if not, whether, on the uncontroverted facts, the moving party is entitled to judgment as a matter of law.

DISCUSSION

a. Burden of Proof

The present motion seeks summary judgment as to a proof of claim. The burdens with respect to proofs of claim were summarized by Judge Somma in In re Long, 353 B.R. 1, at 13 (Bankr. D. Mass. 2006):

[HN2] A proof of claim executed and filed in accordance with the Federal Rules of Bankruptcy Procedure constitutes prima facie evidence of the validity and amount of the claim. FED. R. BANKR. P. 3001(f); see also Juniper Dev. Group v. Kahn (In re Hemingway Transp., Inc.), 993 F.2d 915, 925 (1st Cir. 1993). In order to rebut this prima facie evidence, the objecting party must produce “substantial evidence.” United States v. Clifford (In re Clifford), 255 B.R. 258, 262 (D. Mass. [*16] 2000) (Hemingway Transport, 993 F.2d at 925). If the objecting party produces substantial evidence in opposition to the proof  [**16] of claim and thereby rebuts the prima facie evidence, the burden shifts to the claimant to establish the validity of its claim. Hemingway Transport, 993 F.2d at 925 (“Once the trustee manages the initial burden of producing substantial evidence . . . the ultimate risk of nonpersuasion as to the allowability of the claim resides with the party asserting the claim.”). Where the proof of claim is not filed in accordance with the Federal Rules of Bankruptcy Procedure, the proof of claim does not constitute prima facie evidence of the validity and amount of the claim, and therefore the burden of proof rests at all times on the claimant.

In order for a proof of claim to be executed and filed in accordance with the Federal Rules of Bankruptcy Procedure, it must satisfy (among other things) two requirements set forth in Rule 3001 itself. First, “when a claim . . . is based on a writing, the original or a duplicate shall be filed with the proof of claim.” FED. R. BANKR. P. 3001(c). Second, “[i]f a security interest in property of the debtor is claimed, the proof of claim shall be accompanied by evidence that the security interest has been perfected.” FED. R. BANKR. P. 3001(d).

Deutsche Bank contends  [**17] that its amended proof of claim (No. 14-2) enjoys prima facie validity, and that the Debtor has not rebutted this prima facie validity with substantial evidence or any evidence at all. The Debtor disagrees, arguing that the proof of claim was not supported by documents showing a complete chain of title and therefore does not constitute prima facie evidence of the claim, such that the burden rests from the start on the claimant.

The Court agrees with the Debtor: the documents attached to Proof of Claim No. 14-2–in relevant part, the Note, the Mortgage, the Confirmatory Assignment, and the 2007 LPA–do not, by themselves, establish the necessary chain of title. The Note and Mortgage are in fact the underlying documents on which the claim is based, but they identify Argent as payee and mortgagee, not Deutsche Bank. Deutsche Bank attempted to show that it now holds the rights originally given to Argent by attaching the Confirmatory Assignment to its proof of claim. The Confirmatory Assignment, being an assignment in writing from Argent to Deutsche Bank of all rights under the Note and Mortgage, would suffice but for one problem: its validity is contingent on the limited power of attorney  [**18] pursuant to which Citi Residential executed it for Argent, but the 2007 LPA that was attached to the proof of claim does not authorize the particular type of mortgage assignment that was involved in the Confirmatory Assignment.

The 2007 LPA expressly authorizes Citi Residential to execute, on behalf of Argent, only two kinds of mortgage assignment: (i) “the assignment of any Mortgage or Deed of Trust and the related Mortgage Note, in connection with the repurchase of the mortgage loan secured and evidenced thereby,” and (ii) “the full assignment of a Mortgage or Deed of Trust upon payment and discharge of all sums secured thereby in conjunction the refinancing thereof.5 The Confirmatory Assignment was not executed in connection with the repurchase of a mortgage loan or the refinancing of  [*17]  this loan, and the 2007 LPA does not authorize mortgage assignments of any other kind. A further paragraph in the 2007 LPA authorizing Citi Residential to foreclose on mortgages is not an authorization to execute assignments of mortgages, even where the assignment would facilitate a foreclosure of the mortgage. 6 Where the 2007 LPA narrowly circumscribed the two types of mortgage assignment it did  [**19] authorize Citi Residential to execute, the further grant of authority to foreclose should not be construed broadly to authorize additional types of mortgage assignment.

5   2007 LPA (attached as Exhibit 4 to Proof of Claim No. 14-2), at PP 6 and 7 (emphasis added).

6   Judge Feeney reached this same conclusion with respect to identical language in another limited power of attorney from Argent to Citi Residential. See In re Hayes, 393 B.R. 259, 268, 270 (Bankr. D. Mass. 2008).

Consequently, the documents submitted with the proof of claim do not by themselves show a valid assignment of rights from Argent to Deutsche Bank and do not fully support the asserted claim. It follows that the proof of claim is not supported by documents adequate to establish the assignment of rights on which it is based, and therefore that the claim does not enjoy prima facie validity. In the alternative, whatever prima facie validity the claim initially enjoyed was rebutted by the Debtor’s pointing out of the defect in the chain of title that was evident in the documents submitted with the proof of claim. Either way, for purposes of the present motion, the proof of claim does not enjoy prima facie validity, and the  [**20] burden is on the claimant, Deutsche Bank, to establish that it now holds the rights given by the Debtor to Argent in the Note and Mortgage.

b. The Factual Record

The evidence adduced in support of summary judgment, when construed in the light most favorable to Samuels, shows the following. There are no genuine issues as to the material facts.

On August 18, 2005, Samuels, as owner of the real property located at 316B Essex Street, Lynn, Massachusetts (“the Property”), executed in favor of Argent Mortgage Company LLC, as lender, a promissory note (“the Note”) in the original principal amount of $ 272,000 and, to secure repayment of the note, a mortgage on the Property (“the Mortgage”). The Mortgage was recorded with the Essex South Registry of Deeds on August 23, 2005.

On the same day that it originated the Samuels loan, Argent endorsed the Note in blank and also executed a written assignment in blank–i.e., without designation of an assignee–of the Note and Mortgage (“the Assignment”). Also on the same day, Argent transmitted the Note, Mortgage, and Assignment to Deutsche Bank in its capacity as custodian of Argent’s original collateral files.

Under a Mortgage Loan Purchase and Warranties  [**21] Agreement (“MLPWA”) 7 dated January 2, 2003 between Argent and its affiliate, Ameriquest Mortgage Company, Inc., Argent regularly and systematically sold and transferred the loans that it originated to Ameriquest for securitization purposes. The MLPWA did not itself effectuate conveyance or sale of any specific loan; under section 2(a) of the MLPWA, a further act would be necessary to effectuate a sale pursuant to the MLPWA: specifically, the execution of an Assignment and Conveyance Agreement. From the affidavit of Diane Tiberand, a senior vice president of ACC Capital Holdings Corporation, the parent company of both Argent and Ameriquest, it is clear that both Argent and  [*18]  Ameriquest believe that the Samuels loan was conveyed by Argent through Ameriquest to Argent Securities, Inc. (“ARSI”) to Deutsche Bank. However, Deutsche Bank has adduced no evidence that the Samuels loan was among those that Argent sold and transferred to Ameriquest, either under the MLPWA or otherwise.

7   Tiberand Affidavit [Doc. 420], Exhibit 1.

Ameriquest securitized its mortgage loans through one of two corporate vehicles; in the case of the Samuels loan, the vehicle Ameriquest used was ARSI. Pursuant to and through  [**22] a Mortgage Loan Purchase Agreement dated October 26, 2005 (“MLPA”) between Ameriquest and ARSI, 8 Ameriquest sold the Samuels loan–or at least whatever interest Ameriquest had therein–to ARSI for subsequent deposit by ARSI into the ARSI Series 2005-W3 pool trust. The sale and transfer of the loan from Ameriquest to ARSI was effectuated by the MLPA itself, which was not merely an agreement to sell but also the actual written instrument of conveyance. Thus, section 1 of the MLPA states, “[t]he Seller hereby sells, and the Purchaser hereby purchases, as of October 28, 2005, certain . . . residential mortgage loans.” The loans in question were identified in a Closing Schedule executed pursuant to Section 2 of the MLPA. The Samuels loan was listed on the closing schedule as Loan No. 83442632, which is the loan number that appears on both the Note and the Mortgage.

8   The Mortgage Loan Purchase Agreement of October 26, 2005 is attached as Exhibit C to the affidavit of Ronaldo Reyes [Doc. 418].

ARSI then deposited the Samuels Loan, or whatever interest ARSI had in that loan, into the ARSI Series 2005-W3 pool trust by transfer to Deutsche Bank as trustee. The deposit into the pool trust was  [**23] done pursuant to a Pooling and Servicing Agreement dated October 1, 2005 (“the PSA”) among ARSI, Ameriquest, and Deutsche Bank. Under the PSA, ARSI, as Depositor, deposited certain designated mortgage loans, including the Samuels loan, into the pool; Ameriquest, as Master Servicer, agreed to be responsible for servicing of the loans, either itself or through one or more subservicers; and Deutsche Bank agreed to serve as trustee to hold legal title to the pooled mortgage loans for the benefit of investors in the pool. ARSI sold and deposited the Samuels loan (and 9,909 other mortgage loans) into the ARSI Series 2005-W3 pool on October 28, 2005. The PSA itself, in conjunction with the schedule of mortgages deposited through it into the pool trust, served as a written assignment of the designated mortgage loans, including the mortgages themselves. Thus in section 2.01, the PSA states: “The Depositor [ARSI], concurrently with the execution and delivery hereof, does hereby transfer, assign, set over and otherwise convey to the Trustee [Deutsche Bank] without recourse for the benefit of the Certificateholders all the right, title and interest of the Depositor, including any security interest  [**24] therein for the benefit of the Depositor, in and to the Mortgage Loans identified on the Mortgage Loan Schedule[.]” (Emphasis added.) Per Section 2 of the MLPA, the Mortgage Loan Schedule for the PSA was the same document as the Closing Schedule executed pursuant to Section 2 of the MLPA, on which was listed the number of the Samuels Loan.

Except only as set forth in the following sentence, Deutsche Bank has had and continues to have possession of the Note and Mortgage evidencing the Samuels loan since August 18, 2005, first as custodian of Argent’s original collateral files and then, from and after October 28, 2005, as trustee  [*19]  of the ARSI Series 2005-W3 pool for the benefit of certificate holders of the trust. In August 2008, Deutsche Bank relinquished physical custody of the collateral file, including the Note, to Citi Residential for purposes of an evidentiary hearing scheduled for August 20, 2008. Citi Residential had by then become servicer of the loan for Deutsche Bank. The collateral file, including the Note, remains in Citi Residential’s physical custody for the benefit of Deutsche Bank.

On October 18, 2007, Argent executed a limited power of attorney (“the 2007 LPA”) under which  [**25] it made Citi Residential its attorney-in-fact for certain purposes. In relevant part, the 2007 LPA gave Citi Residential

full power and authority to sign, execute, acknowledge, deliver, file for record, and record any instrument on its behalf and to perform such other act or acts as may be customarily and reasonably necessary and appropriate to effectuate the following enumerated transactions in respect of any of the mortgages or deeds of trust (the “Mortgages” and “Deeds of Trust”, respectively) and promissory notes secured thereby (the “Mortgage Notes”). 9

The enumerated transactions include, in relevant part:

(6) The assignment of any Mortgage or Deed of Trust and the related Mortgage Note, in connection with the repurchase of the mortgage loan secured and evidenced thereby.

(7) The full assignment of a Mortgage or Deed of Trust upon payment and discharge of all sums secured thereby in conjunction the refinancing thereof.

(8) With respect to a Mortgage or Deed of Trust, the foreclosure, the taking of a deed in lieu of foreclosure, or the completion of judicial or non-judicial foreclosure . . . . 10

9   2007 LPA.

10   2007 LPA, PP 6, 7, and 8.

On August 4, 2008, Argent, acting through Citi Residential  [**26] as attorney in fact for Argent, executed a confirmatory assignment of the Samuels Mortgage to Deutsche Bank. The document was signed for Citi Residential by its vice president Tamara Price. The Confirmatory Assignment states that it was effective as of April 14, 2006. In the confirmatory assignment, Ms. Price also stated that the confirmatory assignment was being executed with intent “to replace the original assignment which due to inadvertence and/or mistake was lost[.]” 11 Citi Residential recorded this confirmatory assignment in the Essex South Registry of Deeds on August 11, 2008. Though the Mortgage itself had previously been recorded, no earlier assignment of the Mortgage had been recorded.

11   Aside from this statement, Deutsche Bank has adduced no evidence that an assignment of the mortgage has been lost; nor does Deutsche Bank allege that there exists a lost assignment or rely on any lost assignment in this motion. There is evidence of only one assignment that predates the Confirmatory Assignment: the assignment in blank that was executed immediately after origination of the loan. That assignment is in evidence here, and there is no evidence that it was ever lost. There exists  [**27] a genuine issue as to whether the original assignment was lost and as to whether Ms. Price’s representation to that effect was knowingly false, but, as explained below, the Court also concludes that these facts are not material to resolution of the present controversy. They present no genuine issue of material fact.

On December 5, 2008, Argent executed another limited power of attorney (“the 2008 LPA”) under which it made Citi Residential its attorney-in-fact for certain purposes. The 2008 LPA stated that it was  [*20]  effective retroactively to September 1, 2007, and that Argent ratified any and all actions theretofore taken by Citi Residential within the scope of the powers granted by the 2008 LPA from and after September 1, 2007. The 2008 LPA expressly stated that the powers it conferred on Citi Residential included the power to execute and record the assignment of any mortgage and the related mortgage note.

Since the recording of the Confirmatory Assignment, record title to the Mortgage has stood in the name of Deutsche Bank. Neither Argent nor Ameriquest claims any interest in the Samuels Mortgage and Note.

c. The Promissory Note

The uncontroverted evidence shows, and the Debtor does not  [**28] dispute, that the Samuels Note was endorsed in blank by its named payee, that possession of the note was thereafter transferred to Deutsche Bank, and that Deutsche Bank is now, and since August 18, 2005 has been, in possession of the note. As a negotiable instrument, the Note may be transferred in accordance with Article 3 of the Uniform Commercial Code as enacted in Massachusetts: [HN3] “When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.” G.L. c. 106, § 3-205(b). By virtue of its possession of a note indorsed in blank, Deutsche Bank is the holder of the note and as such has standing in this case to seek payment thereof. G.L. c. 106, § 3-301 ([HN4] “Person entitled to enforce” an instrument includes the holder of the instrument.”); First National Bank of Cape Cod v. North Adams Hoosac Savings Bank, 7 Mass. App. Ct. 790, 797, 391 N.E.2d 689 (1979) (“As the holder of the note, [plaintiff] also would be entitled to all payments to be made by the mortgagors on the note.”).

d. The Mortgage

In order to establish that it holds not only the Samuels Note but also the Samuels Mortgage, Deutsche Bank follows two alternate paths. The  [**29] first relies on showing a chain of three assignments of the mortgage: from Argent to Ameriquest, then Ameriquest to ARSI, and then ARSI to Deutsche Bank. The problem with this strategy is that Deutsche Bank has adduced no writing evidencing the first of these transfers, from Argent to Ameriquest. [HN5] A mortgage is an interest in real property, and the statute of frauds accordingly requires that an assignment of a mortgage be in writing. Warden v. Adams, 15 Mass. 233 (1818) (“By force of our statutes regulating the transfer of real estates and for preventing frauds, no interest passes by a mere delivery of a mortgage deed, without an assignment in writing and by deed.”). Deutsche Bank has adduced evidence of an agreement pursuant to which Argent agreed to transfer mortgage loans to Ameriquest, but it has adduced no writing evidencing the assignment of the Samuels Mortgage from Argent to Ameriquest. Consequently, the chain of title is incomplete, and Deutsche Bank must, as it anticipated, fall back on its alternate strategy.

In the alternative, Deutsche Bank relies on the Confirmatory Assignment from Argent to Deutsche Bank, executed for Argent by Citi Residential on August 4, 2008 under  [**30] a limited power of attorney. The Confirmatory Assignment expressly and in writing conveys from Argent to Deutsche Bank both the Samuels Mortgage and the Samuel Note.

The Confirmatory Assignment was not executed by Argent itself but by Citi Residential purporting to act under a limited power of attorney. Deutsche Bank contends that this action by Citi Residential  [*21]  should be deemed a valid and effective act by Argent for three independent reasons: Argent authorized it by the 2007 LPA; Argent ratified it by the 2008 LPA; and Argent further ratified it by not objecting to the evidence of transfer of claim filed by Citi Residential in this bankruptcy case. For the following reasons, the Court rejects the first, accepts the second, and, having accepted the second, does not address the third.

The first is that, prior to the Confirmatory Assignment, Argent had executed a limited power of attorney, the 2007 LPA, that empowered Citi Residential to execute this assignment for Argent. This reliance on an already-existing limited power of attorney is unavailing for the reasons articulated above (in the section on Burden of Proof): the 2007 LPA did not authorize Citi Residential to execute the Confirmatory  [**31] Assignment.

Second, and in the alternative, Deutsche Bank relies on the 2008 LPA, executed by Argent on December 5, 2008, some four months after the confirmatory assignment. The 2008 LPA was expressly retroactive to September 1, 2007, and ratified any and all actions theretofore taken by Citi Residential within the scope of the powers granted by the 2008 LPA from and after September 1, 2007. The 2008 LPA expressly conferred on Citi Residential the power to execute and record the assignment of any mortgage and the related mortgage note, which powers, I conclude, include the power to execute the Confirmatory Assignment. By its ratification through the 2008 LPA of actions undertaken before it was issued, Argent remedied any lack of authority that may have existed when Citi Residential executed the Confirmatory Assignment. Linkage Corp. v. Trustees of Boston University, 425 Mass. 1, at 18, 679 N.E.2d 191 (1997) (“Where an agent lacks actual authority to agree on behalf of his principal, the principal may still be bound if the principal acquiesces in the agent’s action[.]”).

The Debtor argues that the Confirmatory Assignment should nonetheless be deemed ineffective for three reasons. First she argues that  [**32] the confirmatory assignment is invalid because the vice-president of Citi Residential who executed that assignment, a Ms. Tamara Price, indicated in a deposition in an unrelated case that (1) she signs documents presented to her for signing without knowing what she is signing and (2) she signs such documents outside the presence of a notary, after which the documents are forwarded to a notary for completion. The Debtor further contends that Price patently lied when she recited in the Confirmatory Assignment that the original assignment “was lost.” The Debtor does not elaborate on the consequences or import of these allegations. The Court sees no reason that these alleged facts, if true, should invalidate the assignment. There is no evidence that Price signed this Confirmatory Assignment without knowing what she was signing, much less that Citi Residential did not know what it was doing by having her sign the Confirmatory Assignment on its behalf, but even if neither Price nor Citi Residential knew what they were doing, that would not invalidate the assignment. Nor does it matter that Price signed documents outside the presence of a notary and then forwarded them to the notary for completion,  [**33] where the Debtor neither disputes that Price did in fact sign the Confirmatory Assignment nor offers argument that this practice was contrary to applicable law and constitutes a defect in the assignment. And any falsity or lie as to the purpose of the confirmatory assignment is immaterial: the Court knows of no requirement that an assignment contain a  [*22]  statement of purpose, truthful or otherwise.

Second, the Debtor argues that the PSA required that all mortgages acquired thereunder to be funneled to Deutsche Bank, as pool trustee, through the entity designated by the PSA as “depositor,” ARSI. A failure to follow this protocol–such as by direct assignment of the mortgage from the loan originator to the pool trustee, bypassing the depositor–would, the Debtor contends, constitute a breach of the PSA, a breach of fiduciary obligations under the PSA to investors, a breach of federal regulations, and an act giving rise to unfavorable tax consequences for the investors. The Debtor argues that because the Confirmatory Assignment is a direct assignment from Argent to Deutsche Bank that bypasses the depositor, it must be invalid. This argument falls far short of its goal. Even if this direct  [**34] assignment were somehow violative of the PSA, giving rise to unfavorable tax, regulatory, contractual, and tort consequences, 12 neither the PSA nor those consequences would render the assignment itself invalid. In fact, under the Debtor’s own argument, the unfavorable consequences could and would arise only if, and precisely because, the assignment were valid and effective.

12   The Court does not conclude that the Confirmatory Assignment violates the PSA or gives rise to unfavorable tax, regulatory, contractual, or tort consequences; the debtor’s argument is so lacking in detail on all these points as to constitute no real argument at all, certainly none permitting the conclusions she urges on the Court.

Third and last, the Debtor argues very briefly that, because the execution and recording of the confirmatory assignment occurred after she filed her bankruptcy petition, these acts constituted violations of the automatic stay and of 11 U.S.C. § 549 (permitting a trustee to avoid certain postpetition transfers). In support of this argument, the Debtor cites In re Beaulac, 298 B.R. 31 (Bankr. D. Mass. 2003) without elaboration. She offers no explanation as to how the postpetition transfer  [**35] of a mortgage already in existence and previously recorded can constitute a transfer of an asset of the estate or a violation of the automatic stay. She further suggests that she has the power to avoid the “unauthorized postpetition conveyance” but does not explain how or on what grounds and has not moved to avoid the conveyance.

I find no merit in this argument or any of its parts. The postpetition assignment of a mortgage and the related note from one holder to another is not a transfer of property of the estate. The mortgage and note are assets of the creditor mortgagee, not of the Debtor. Nor is the postpetition assignment of a mortgage and the related note an act to collect a debt; the assignment merely transfers the claim from one entity to another. The Debtor cites no particular subsection of 11 U.S.C. § 362(a), the automatic stay, that she contends such an assignment violates, and the court is aware of none.

I need not address the Debtor’s further unsupported contention that the postpetition recording of an assignment of mortgage is a violation of the automatic stay 13 or of 11 U.S.C. § 549(a). 14 As the  [*23]  Debtor herself acknowledges, [HN6] an assignment of mortgage need not be recorded  [**36] in order to be valid against the mortgagor or her grantees. Lamson & Co. v. Abrams, 305 Mass. 238, 241-242, 25 N.E.2d 374 (1940); O’Gasapian v. Danielson, 284 Mass. 27, 32, 187 N.E. 107 (1933). Therefore, even if the recording were void and ineffectual, the assignment to Deutsche Bank would still be valid.

13   The recording of an assignment of mortgage by the assignee of the mortgagee creates a record chain of title for anyone taking through the mortgage and protects the assignee from subsequent transfers by or through the assignor. The Debtor offers no explanation as to how the recording might be an act to collect a debt or a violation of some other section of the automatic stay. In Beaulac, which the Debtor cites without discussion, the mortgage in question had been given to the debtor, not by the debtor; Beaulac is therefore wholly inapposite.

14   The debtor invokes the automatic stay and § 549(a) only defensively.

CONCLUSION

For the reasons set forth above, the Court concludes that there are no genuine issues of material fact and that, on the uncontroverted facts, Deutsche Bank has established that it is in possession of the note and the owner of the mortgage securing it and therefore is entitled to summary judgment  [**37] as a matter of law. A separate order will enter allowing Deutsche Bank’s Motion for Summary Judgment and overruling the Debtor’s objection to its proof of claim, No. 14-2.

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Wells Fargo Slapped With $155,000 Judgment for Trespass

Posted on March 12, 2010. Filed under: Banking, Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , |

Wells Fargo, Plaintiff v. Steven E. Tyson, SUSAN L. TYSON, LEITH ANN TYSON, LINDSAY TYSON and KYRA TYSON, Defendants

2007-28042

SUPREME COURT OF NEW YORK, SUFFOLK COUNTY

2010 NY Slip Op 20079; 2010 N.Y. Misc. LEXIS 410

March 5, 2010, Decided

JUDGES: JEFFREY ARLEN SPINNER, J.S.C.

OPINION BY: JEFFREY ARLEN SPINNER

OPINION

Jeffrey Arlen Spinner, J.

On September 7, 2007 Plaintiff commenced this action claiming foreclosure of a mortgage by filing its Notice of Pendency and Summons and Complaint with the Clerk of Suffolk County. The mortgage at issue was originally given in favor of New Century Mortgage Corporation, Plaintiff’s assignor. Said mortgage was given to secure a note and constitutes a first lien upon premises known as 3 Danville Court, Greenlawn, Town of Huntington, New York. On November 30, 2007, Plaintiff filed an application with this Court seeking the appointment of a referee pursuant to RPAPL § 1321 but withdrew that application on December 5, 2007. Subsequently and on September 18, 2009, Plaintiff filed a second application for the same relief which was granted by Order of this Court dated November 4, 2009.

On January 14, 2010, upon the written request of Defendant STEVEN TYSON, this Court convened a conference in order to address certain serious issues which had arisen with  respect to the property under foreclosure. Defendant took the time to appear in person while Plaintiff dispatched a per diem attorney who had absolutely no knowledge of the matter inasmuch as she was not regular counsel, was not provided with any information and hence no meaningful progress could occur. The Court was thereupon compelled to continue the conference to February 24, 2010, at which time the Defendant again appeared in person, on this occasion, with counsel of record for the Plaintiff, appearing as instructed by the Court.

The issue that brings these parties before the Court at this time concerns the entry, without permission, into Defendant’s dwelling house, by agents dispatched expressly for that purpose by Plaintiff. Plaintiff vociferously  asserts that it has the absolute and unfettered right, under the express terms of the mortgage, to enter the premises at any time, for purposes of inspection and protection of its security interest and that it is free to do so without having to obtain Defendant’s consent for the same. Defendant counters that Plaintiff has wrongfully and without justification entered the dwelling on at least two separate occasions, causing damage to  the premises and resulting in the loss of various items of personalty.

The following facts are not in dispute. Defendant and his wife are the owners, in fee simple absolute, of the premises known as 3 Danville Court, Greenlawn, New York, which are subject to a first lien in favor of Plaintiff. Plaintiff has commenced an action to foreclose that lien, but there has been no devolution of title. Defendant’s personal financial situation is such that he can no longer maintain the high cost of utility service, resulting in the voluntary discontinuance of same. Defendant has previously winterized the plumbing and heating systems in the dwelling, has secured the building, maintains the exterior of the premises and retains virtually all of his personalty in the home including furniture, clothing and foodstuffs. Defendant has, previous to any entry on the premises herein, notified Plaintiff of the discontinuance of utility service and the winterization and securing of the dwelling. Defendant, although he is now residing elsewhere, has not abandoned the property, has not evinced any intent to abandon it and he visits the premises at least once weekly and sometimes with greater frequency. In addition,  Defendant has arranged with a neighbor to keep a watchful eye on the property in his absence.

It is also undisputed that without any notice to Defendant, on or about November 13, 2009, Plaintiff dispatched an agent to the premises who thereupon changed the locks, thus barring Defendant from access to his property. When Defendant contacted Plaintiff relative to his wrongful ouster from the dwelling and demanded access, Plaintiff’s representative denied any knowledge of the entry and directed him to contact Fein Such & Crane, their counsel of record. Upon contacting them, Defendant was advised by someone named Matt that the entry into the home was standard procedure but a new key to the premises would be provided to him by Plaintiff, and Defendant expressly directed that they remain away from the property. In spite of Defendant’s requests Plaintiff caused the property to be entered yet again in late December or early January, at which time Defendant, having been telephoned by his neighbor, actually confronted these persons and urged them to immediately leave the premises. Defendant was able to discover that these persons obtained access by use of a key identical to the one that was previously  provided by Plaintiff to Defendant. Defendant then secured the premises only to return later that day to find his garage open and the loss of various items of personal property, including an 8 kilowatt portable generator, a 14 foot aluminum sectional extension ladder, an aluminum step ladder, a convertible hand truck, an AquaBot pool cleaning device and other items, valued, according to documentation supplied by Defendant, at $ 4,892.00. Defendant thereafter contacted the Suffolk County Police Department and made a full report, which was docketed under central complaint no. 10-85647.

It is at this point that the accounts begin to diverge. Defendant offered sworn testimony as follows: he arrived at the premises on November 17, 2009 to discover that he had been “locked out,” so to speak; upon communicating with Plaintiff, he was redirected to their attorney who informed him that the property was “inspected and secured” due to its abandoned state; they dispatched a new key to him whereupon he discovered that his door lock cylinders had been drilled out; Plaintiff advised Defendant that he was in possession of the premises, that he had not abandoned the dwelling, that it was replete with  his furniture and personal effects and he further instructed them to remain away from the property and to refrain from any entry into the dwelling; according to Defendant, Plaintiff’s representative apologized and stated that they would not enter the premises.

On February 24, 2010, Plaintiff produced a witness, one John Denza, who testified under oath, as follows: at the express direction of Plaintiff, his company (a private property inspection and preservation firm) caused the mortgaged premises to be inspected on November 3, 2009, allegedly found the front door to be wide open and the premises completely unsecured and so notified Plaintiff; Plaintiff faxed his company a work order on November 6, 2009 directing that the locks be changed and the dwelling be secured and winterized and further, that on November 13, 2009 his company caused the locks to be changed; he flatly denied that the locks had been drilled or otherwise forcibly removed, instead asserting that the front door to the premises was ajar and the existing lock cylinders were simply unscrewed and set aside. It was only after a rather probing examination by the Court that Mr. Denza conceded that he had no actual knowledge  as to the matters about which he testified since he never visited the premises, relying instead upon another individual to whom he had delegated all responsibility. Placing things into simpler terms, the totality of his testimony consisted of nothing more than self-serving statements constituting  [*3]  inadmissible hearsay not subject to any exception, Latimer v. Burrows 163 NY 7, 57 NE 95 (1900), People v. Huertas 75 NY2d 487, 553 N.E.2d 992, 554 NYS2d 444 (1990). No testimony or evidence from a party with actual knowledge was proffered by Plaintiff.

The law is clear that  it is both the province and the obligation of the trial court to assess and determine all matters of credibility, Matter of Liccione v. Miuchael A. 65 NY2d 826, 482 NE2d 917, 493 NYS2d 121 (1985), Morgan v. McCaffrey 14 AD3d 670, 789 NYS2d 274 (2nd Dept. 2005). It is for the trial court to apply and resolve issues of witness credibility. Here, Plaintiff has produced a witness who has absolutely no firsthand knowledge of the controversy, hence his testimony is devoid of all probative value and cannot be the subject of any serious consideration. On the other hand, upon assessment of Defendant’s demeanor and comportment, the Court is convinced  that he is telling the truth and he is worthy of belief.

At the February 24, 2010 conference, Plaintiff’s counsel doggedly insisted that Plaintiff was wholly justified in taking the actions complained of by Defendant (entry upon the property), asserting that it had done so in accordance with the rights conferred upon it under the terms of the mortgage and therefore Plaintiff bore no liability whatsoever to Defendant. At no time was there any denial that Plaintiff had caused Defendant’s property to be entered on more than one occasion, counsel simply asserting that Plaintiff had the right to enter into and protect the property as it saw fit.

Though not specifically enumerated by counsel, the Court presumes that Plaintiff derives its claimed rights from Paragraph 7(b) of the mortgage herein, which states, in pertinent part, that “Lender, and others authorized by Lender may enter on and inspect the Property. They will do so in a reasonable manner and at reasonable times. If it has a reasonable purpose, Lender may inspect the inside of the home or other improvements on the Property. Before or at the time an inspection is made, Lender will give me notice stating a reasonable purpose for such [**9] interior inspection.” Though this contractual provision clearly requires some kind of notice to Defendant, there is no indication that any notice at all was provided to Defendant. Indeed Plaintiff does not even advance any claim that it has complied with this section but instead baldly asserts, through counsel and not through any person with actual knowledge, that it has what appears to be an unfettered right to enter the premises at any time.

Presumably, counsel for Plaintiff further relies upon the express provisions of Paragraph 9 of the mortgage which states, in pertinent part, that “If…I have abandoned the Property, then Lender may do and pay for whatever is reasonable and appropriate to protect Lender’s interest in the Property…Lender’s actions may include but are not limited to: (a) protecting and/or assessing the value of the Property; (b) securing and/or repairing the Property;…Lender can also enter the Property to make repairs, change locks…and take any other action to secure the Property.” This section presupposes that Defendant has abandoned the property. It logically follows then that abandonment would be a strict pre-requisite to Plaintiff’s right of entry upon and within the premises. Here, Defendant’s testimony plainly reveals that he has not abandoned the property in any manner whatsoever and therefore the required condition precedent to Plaintiff’s entry does not exist.

A fair reading of the contractual provisions set forth, supra makes it abundantly clear that any and all actions taken by Plaintiff must be reasonable and, where entry into improvements on the property s contemplated, then the same must be accomplished only upon notice to the other party. It is apparent that Plaintiff has breached its own contract by its failure to give notice and further, that its actions are not reasonable under the circumstances presented. This is especially true herein since the condition precedent to Plaintiff’s right of entry has not occurred.

Since the mortgage at issue is an instrument promulgated by the lender to the borrower and since the operative and binding terms thereof are not negotiable by the borrower, such an instrument is considered to be a contract of adhesion which is typically construed against the drafter thereof, Belt Painting Corp. v. TIG Insurance Company 100 NY2d 377, 795 N.E.2d 15, 763 N.Y.S.2d 790 (2000). Under the circumstances presented to this Court, it is appropriate  [**11] and fair that the terms of the instrument be construed in favor of Defendant.

In the matter before the Court, it is apparent that Plaintiff has perpetrated a trespass against the real property of Defendant, which is actionable and subjects Plaintiff to liability for damages. Distilled to its very essence, trespass is characterized by one’s intentional entry, with neither permission nor legal justification, upon the real property of another, Woodhull v. Town of Riverhead 46 AD3d 802, 849 NYS2d 79 (2nd Dept. 2007). The injury arising  therefrom afflicts the owner’s right of exclusive possession of the property, Steinfeld v. Morris 258 AD 228, 16 NYS2d 155 (1st Dept. 1939), Kaplan v. Incorporated Village of Lynbrook 12 AD3d 410, 784 NYS2d 586 (2nd Dept. 2004). [HN3] The elements of a claim for trespass are intent coupled with the entry upon the land that is in possession of another. In order for trespass to lie, general intent is legally insufficient. Instead, there must be a specific intent, either to enter the land or to engage in some act whereby it is substantially certain that such entry onto the land will result therefrom, Phillips v. Sun Oil Co. 307 NY 328, 121 NE2d 249 (1954). The intent  [**12] need not be illegal or unlawful, MacDonald v. Parama Inc. 15 AD2d 797, 224 NYS2d 854 (2nd Dept. 1962) but even one who enters the land upon the erroneous belief that he has the right to enter thereon will be held liable in trespass, Burger v. Singh 28 AD3d 695, 816 NYS2d 478 (2nd Dept. 2006). Trespass will lie against a party if entry upon the land was perpetrated by a third party, such as an independent contractor or other party, at the direction of the party to be charged, Gracey v. Van Kamp 299 AD2d 837, 750 NYS2d 400 (4th Dept. 2002). It follows then, both logically and legally, that the injured party must have been in possession, whether actual or constructive, at the time that the alleged wrongful entry occurred, Cirillo v. Wyker 51 AD2d 758, 379 NYS2d 505 (2nd Dept. 1976). In the matter that is presently sub judice, it is clear that a trespass has occurred on at least two separate occasions. It is apparent to the Court that this trespass was perpetrated against the property of Defendant and was done at the special instance and request and upon the affirmative directive of Plaintiff. Since the Court finds that liability for trespass lies against Plaintiff and in favor of Defendant,  [**13] the Court must now move forward to consider and to determine the damages, if any, that should properly be awarded to Defendant.

Actual damages may be recovered against the trespasser-tortfeasor though they are not a mandatory component of the claim, Amodeo v. Town of Marlborough 307 AD2d 507, 763 NYS2d 132 (3rd Dept. 2003). The rule applicable herein is that [HN5] where the invasion is de minimis or the actual amount of damages is not capable of calculation nor is it readily quantifiable, then an award of nominal damages will be appropriate under the circumstances, Town of Guilderland v. Swanson 29 AD2d 717, 286 NYS2d 425 (3rd Dept. 1968), aff’d 24 NY2d 802, 249 NE2d 467, 301 NYS2d 622 (1969). Indeed, the damages that are recoverable by the injured party include those resulting from each and every consequence of the trespass, inclusive of both damage to property and injury to the person but only to the extent that such damages arose as a direct result of the wrongful intrusion by the trespasser-tortfeasor, Vandenburgh v. Truax 4 Denio 464, 1847 LEXIS 157 (Supreme Court Of Judicature Of New York, 1847).

Damages for injury to real property are typically calculated and awarded as the lesser amount  of the decline in fair market value versus the cost of restoring the property to its state before the trespass, in other words, the injured party is entitled to recover the amount by which the property has been devalued, Hartshorn v. Chaddock 135 NY 116, 31 NE 997 (1892) Slavin v. State 152 NY 45, 46 NE 321 (1897). In this matter, there is no evidence that the value of the property has been diminished or otherwise adversely affected by the trespass, hence this method of calculation of damages is inapplicable.

In instances where the conduct complained of is willful, wanton or egregious, the Court is vested with the power to award exemplary damages. Exemplary damages may lie in a situation where it is necessary not only to effectuate punishment but also to deter the offending party from engaging in such conduct in the future. Such an award may also be made to address, as enunciated by the Court of Appeals in Home Insurance Co. v. American Home Products Corp. 75 NY2d 196, 550 NE2d 930, 551 NYS2d 481 (1989) “…gross misbehavior for the good of the public…on the ground of public policy“. Indeed, exemplary damages are intended to have a deterrent effect upon conduct which is unconscionable,  egregious, deliberate and inequitable, I.H.P. Corp. v. 210 Central Park South Corp. 12 N.Y.2d 329, 189 NE2d 812, 239 NYS2d 547 (1963).

Since an action to foreclose a mortgage is a suit in equity, Jamaica Savings Bank v. M.S. Investing Co. 274 NY 215, 8 NE2d 493 (1937), all of the rules of equity are fully applicable to the proceeding, including those regarding punitive or exemplary damages, I.H.P. Corp. v. 210 Central Park South Corp., supra. Indeed this Court is persuaded that Judge Benjamin Cardozo was most assuredly correct in stating that “The whole body of principles, whether of law or of equity, bearing on the case, becomes the reservoir drawn upon by the court in enlightening its judgment” Susquehannah Steamship Co. Inc. v. A.O. Andersen & Co. Inc. 239 NY 285 at 294, 146 NE 381 (1925). In a suit in equity, the Court is empowered with jurisdiction to do that which ought to be done. While the Court notes that the formal distinctions between an action at law and a suit in equity have long since been abolished in New York (see CPLR 103, Field Code of 1848 §§ 2, 3, 4, 69), the Supreme Court is nevertheless vested with equity jurisdiction and  [*5]  the distinct rules governing equity are still very much  [**16] applicable, Carroll v. Bullock 207 NY 567, 101 NE 438 (1913). Therefore, in a matter where the conduct of the party to be charged is either willful, wanton or reckless, the Court may invoke the principles of equity so as to make an award of exemplary damages.

Here, the Court is constrained to find that the conduct of Plaintiff in this matter was both willful and wanton, as evidenced by not one but two unauthorized entries into Defendant’s dwelling, occurring in complete derogation of Defendant’s right of possession. This conduct becomes even more glaring when consideration is given to the fact that Defendant affirmatively notified Plaintiff that he had secured the property and that it was not abandoned and still contained his personal property. Even so, Plaintiff maintains that it has entered the property under a color of right, which turns out to be illusory under the circumstances. In spite of these declarations, Plaintiff willfully took it upon itself to enter the property on more than one occasion, doing so unreasonably and without notice, in direct contravention of the terms of its mortgage promulgated to Defendant by its assignor. This is even more distressing when it is considered that Plaintiff breaches its obligations to Defendant under the mortgage, running roughshod over Defendant’s rights with a specious claim that it is acting to protect its rights and the property. In short, the conduct of Plaintiff was nothing short of oppressive and would best be described as heavy handed and egregious, to say the very least. Certainly, the trespass was willful and calculated and was not accidental in any way and the Court finds that Plaintiff did not act in good faith. Under these circumstances, an award of both actual and exemplary damages is necessary and appropriate in order to properly compensate Defendant for the losses he has sustained by way of Plaintiff’s shockingly wrongful conduct as well as to serve as an appropriate deterrent to any future outrageous, improper and unlawful deeds.

The Court finds the appropriate measure of damages for the trespass to Defendant’s possessory interest in the property to be in the amount of $ 200.00. The Court further finds that Defendant is entitled to recover $ 4,892.00 representing the value of the personalty lost as a direct result of Plaintiff’s actions in trespass. Finally, the Court finds that Defendant is entitled to  recover exemplary damages from Plaintiff in the amount of $ 150,000.00.

For all of the foregoing reasons, it is, therefore

ORDERED, ADJUDGED and DECREED that the Defendant STEVEN E. TYSON residing at 3 Danville Court, Greenlawn, New York 11740 recover judgment against the Plaintiff WELLS FARGO BANK N.A. with an office located at 3476 Stateview Boulevard, Fort Mill, South Carolina 29715 the sum of $ 200.00 for damages resulting from trespass, together with the sum of $ 4,892.00 for actual loss, together with the sum of $ 150,000.00 for exemplary damages, for a total recovery of $ 155,092.00 and that the Defendant have execution therefor. The Clerk of Suffolk County is directed to enter judgment accordingly.

This shall constitute the Decision, Judgment and Order of this Court.

Dated: March 5, 2010

Riverhead, New York

ENTER:

JEFFREY ARLEN SPINNER, J.S.C.

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Lenders Increasingly Facing Forensic Loan Audits

Posted on February 4, 2010. Filed under: Foreclosure Defense, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending, Refinance, RESPA, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , |

For the past couple of years, it has become a fairly common practice for lenders and servicers to employ forensic loan audits on pools of mortgages, with the goal of uncovering patterns of noncompliance with federal and local regulations, the presence of fraud and/or the testing of high fee violations. Unfortunately, for these same lenders, the practice of forensic loan auditing has slipped over to the consumer side of the market and is now being used against the lenders themselves.

Homeowners, many of whom are facing foreclosures, have begun hiring forensic loan auditors to review their loan documents, and if violations are found, they are hiring attorneys to bring their case against the lenders. What do they hope to gain? At the very least, the homeowners are trying to forestall a foreclosure, push for a loan modification or, at the end of continuum, try to get the loan rescinded.

“The forensic loan review as we know it today came about two years ago, when the mortgage market started to melt down,” explains Jeffrey Taylor, co-founder and managing director for Orlando-based Digital Risk LLC. “The idea of the forensic review was to look for a breach of representations and warranties so the investor or servicer could put the loan back to the originator. This is when you had all the big banks reviewing nonperforming assets to see if there was any fraud material or breaches so as to put them back to the entity that sold the loan.”

Originally, and still today, most forensic loan reviews are done by institutions on nonconforming assets. Starting in about 2008, the concept morphed into a kind of consumer protection program. Forensic loan auditing companies have since sprouted up like weeds, and many advisors are now advocating the program as a best practice and the first step before bringing a lawsuit against the lender to get a “bad” mortgage rescinded or force a loan modification.

“Every constituent along the way is looking for their own get-out-of-jail-free card,” observes Frank Pallotta, a principal with Loan Value Group LLC of Rumson, N.J. “I’ve been seeing this for the last two years. It started with banks that bought loans from small correspondents, and when those loans were going down, they would look for anything in the loan documentss to put it back to the person they bought the loan from. Fannie and Freddie are doing it, too. Now you have borrowers going to the banks to see if they have all their documents in place; they want their own get-out-of-jail-free card.”

Litigation-a-go-go

In some regards, lenders should be worried, as a swarm of potential lawsuits could fly in their direction. These might not always be hefty lawsuits, considering they mostly represent individual loan amounts, but they are annoying and the fees to defend the institution from these efforts can mount up very quickly. In addition, if homeowners are successful in the bids to rescind a loan, the lender has to pay back all closing costs and finance charges.
The industry should also be concerned because experts in mortgage loan rescissions say it is very hard for a bank to mount an effective defense against people who can prove that their loan contained violations.

“It is extremely difficult for lenders to defend against a lawsuit when they face a bona fide rescission claim,” says Seth Leventhal, an attorney with Fafinski Mark & Johnson PA in Eden Prairie, Minn., who often works with banks.

Additionally, in this age of securitization, many banks don’t own the loans they originated, but, says Leventhal, this is not a defense. “If they don’t own the loan anymore, they are going to have to get in touch with the servicer who does,” he says.

On the other hand, the homeowner’s cost to arrange a loan audit and hire an attorney can be prohibitive, so there is some balance.
Jon Maddux, principal and founder of Carlsbad, Calif.-based You Walk Away LLC, started one of the first companies offering forensic home loan audits for homeowners back in January 2008.

“We found that about 80% of the loans we audited had some type of violation,” he says. “And we thought it was going to be a great new tactic to help the distressed homeowner.”

However, it wasn’t. Homeowners would take the audit findings to their lender or servicer, only to find themselves pretty much as ignored as they were before they made the investment in the audit.

“We found lenders weren’t really reacting to an audit,” says Maddux, adding that lenders and servicers would only react to lawsuits based on audit information.

An audit by itself is not some magical way to make everything go away; it’s just the beginning, adds Dean Mostofi, the founder of National Loan Audits in Rockville, Md.

“Borrowers who contact lenders with an audit don’t get too far,” he says. “It’s in their best interest to go in with an attorney.”

The problem is, Mostofi states, that the first point of contact is the loss mitigation department, and “those people typically have no idea what you are talking about. To get past them sometimes requires lawsuits.”

Paper chase

The forensic loan audit lets the homeowner know if the closing documents contain any violations of the Truth In Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), or if there was any kind of fraud or misrepresentation.

“We go through the important documents – in particular, the applications – TILA disclosure, Department of Housing and Urban Development forms, the note, etc., making sure that everything was disclosed properly to the borrower and that borrowers knew what they were getting into,” says Mostofi. “We also look at the borrower’s income to see if everything was properly disclosed. If the lender didn’t care about the borrower’s income, then we look further for other signs that it might be a predatory loan.”

According to August Blass, CEO and president of Walnut Creek, Calif.-based National Loan Auditors, a forensic loan audit is a thorough risk assessment audit performed by professionals who have industry and legal qualifications to review loan documents and portfolios for potential compliance or underwriting violations, and provide an informative, accurate loan auditing report detailing errors or misrepresentations.

Some elements of a forensic loan audit, says Blass, should include: a compliance analysis report based on data from the actual file; post-closing underwriting review and analysis; and summary of applicable statutes, prevailing case law and action steps that the attorney or loss mitigation group may chose to act upon.

TILA’s statute of limitations extends back three years, so most people who end up on their lender’s doorsteps are people who financed or refinanced during the boom period of 2005 through early 2007. If serious violations are discovered, the borrower can move to have the mortgage rescinded.

Not everyone appreciates the efforts of the forensic loan auditors working the homeowner side of the business.

“It began with a bunch of entrepreneurial, ex-mortgage brokers who learned how to game the system the first time, then started offering services to consumers to teach them the game,” Digital Risk’s Taylor says.

A year ago, most people didn’t know what a forensic audit was, but “now almost everyone knows,” says Mostofi. “The problem that we are having is that the banks are coming back and telling borrowers that everyone who is offering some kind of service to help them is a crook because they are charging a fee.”

Indeed, fees for a forensic audit often fall into the $2,000 to $5,000 range – but a hefty sum for someone facing foreclosure.
This could all be a desperate attempt to get a loan rescinded, but in regard to loan rescissions, there’s bad news and good news.

“Yes, it’s tough for lenders to defend themselves,” says James Thompson, an attorney in the Chicago office of Jenner & Block LLP who represents banks and finance companies. But, he adds, there is an exception: the plaintiff in this kind of lawsuit has to essentially buy back the loan, which means the plaintive (borrower) has to get new financing.

“The borrower has to be able to repay the amount he borrowed,” explains Thompson. “If the property is underwater, as many of these are, the borrower can’t go out and get a replacement mortgage that would give him the entire amount he would need to repay the lender.”

In some court cases, as part of the initial lawsuit, the plaintiff needs to prove that he or she is capable of getting a refinancing. What happens if the court grants a rescission but the consumer can’t find financing? Oddly, no one knows, because court cases haven’t gotten that far.

“Every one of these cases gets resolved,” says Thompson. “The borrowers are struggling to get the attention of the overworked loan servicers, who are scrambling with as many loan modifications and workouts they can come up with. You can get to the head of the line sometimes if you show up with an attorney and forensic loan examination, saying, ‘Here is a TILA violation; we want to rescind.'”

“I don’t see very many of these litigating,” National Loan Auditors’ Blass concurs. “It brings the settlement offer to the table a little faster. It’s not as if the lender would not have brought an offer to the table without the audit. It just seems to fast-track the process a little bit more.”

Forensic loan audits expose mistakes and unscrupulous lending practices that will assist the borrower in negotiation efforts, Blass adds. “Federal-, state- or county-specific lending violations and the legal guidelines for remedy, can pave the way to successful and expedient modification.”

Perhaps, the bigger nightmare of all is not the lawsuits brought by individual homeowners, but the big law firms finding all these individuals and bringing them together for a class action suit.

“The plaintiff bar is as active as ever. They have these big dragnets, trying to capture all the misdeeds of mortgage bankers, going after them with class-action lawsuits,” says David Lykken, president of Mortgage Banking Solutions in Austin, Texas.

This just aggravates the situation, adds Lykken. “I have not seen one class-action lawsuit bring about any positive change. Punitive damages just drain the cash-out of already cash-strapped companies.”

Steve Bergsman is a freelance writer based in Mesa, Ariz., and author of “After The Fall: Opportunities & Strategies for Real Estate Investing in the Coming Decade,” published by John Wiley & Sons.

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Lynne Huxtable and Jeffrey Agnew, v. Timothy F. Geithner, et al.,

Posted on December 29, 2009. Filed under: Case Law, Foreclosure Defense, Legislation, Loan Modification, Mortgage Law, Uncategorized | Tags: , , , , , |

Lender’s refusal to modify loan may have violated borrowers’ Fifth Amendment rights to due process.

____________________________________________________________________________________________

LYNNE HUXTABLE and JEFFREY A. AGNEW, Plaintiffs, v. TIMOTHY F. GEITHNER, et al., Defendants.

Case No. 09cv1846 BTM(NLS)

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA


December 23, 2009, Decided

December 23, 2009, Filed


CORE TERMS: lender, public function, joint action, mortgage, factual allegations, private entities, modification, state action, state actors, quotations, guaranty, notice, home mortgage, mortgage loan, mere fact, federal program, summary judgment, fully developed, fact-bound, foreclosed, defaulted, federally, veteran’s, nexus, government officials, discovery, recorded

COUNSEL: [*1] For Lynne Huxtable, Jeffrey A Agnew, Plaintiffs: Jeffrey Alan Agnew, LEAD ATTORNEY, Jeffrey A Agnew, Attorney at Law, Ramona, CA.

For Timothy F. Geithner, as United States Secretary of the Treasury, United States Department of the Treasury, Defendants: Thomas C Stahl, LEAD ATTORNEY, U S Attorneys Office Southern District of California, San Diego, CA.

For The Federal Housing Finance Agency, as conservator for the Federal National Mortgage Association and for the Federal Home Loan Mortgage Corporation, doing business as Freddie Mac, doing business as Fannie Mae, Defendant: Christopher S Tarbell, LEAD ATTORNEY, Arnold & Porter LLP, Los Angeles, CA.

For National City Corporation, a Delaware corporation, PNC Financial Services Group, Inc, a Pennsylvania corporation, National City Mortgage, a division of National City Bank, National City Bank, a nationally chartered bank, Defendants: Cathy Lynn Granger, LEAD ATTORNEY, Wolfe & Wyman LLP, Irvine, CA.

For Cal-Western Reconveyance Corporation, a California corporation, Defendant: Thomas N Abbott, LEAD ATTORNEY, Pite Duncan LLP, San Diego, CA.

JUDGES: Honorable Barry Ted Moskowitz, United States District Judge.

OPINION BY: Barry Ted Moskowitz

OPINION

ORDER DENYING MOTION TO DISMISS

On  [*2] September 21, 2009, Defendants National City Bank and PNC Financial Services Group, Inc. (“Moving Defendants”) filed a motion to dismiss the Complaint for failure to state a claim. For the following reasons, the motion is DENIED.

I. BACKGROUND

Plaintiffs’ Complaint arises out of non-judicial foreclosure proceedings related to their home in Ramona, California. The following are factual allegations in the Complaint and are not the Court’s findings.

Plaintiffs defaulted on their home mortgage in November 2007. (Compl. P 26.) In February 2008, a notice of default was recorded and served. (Compl. P 27.) And in December 2008, a notice of sale was recorded and served, setting a date for the public auction of Plaintiffs’ home. (Compl. P 29.) Pursuant to a joint motion, the Court has enjoined the sale of Plaintiffs’ home during the pendency of this action. (September 29, 2009 Order, Doc. 25.)

Plaintiffs allege that they are eligible for a loan modification under the Home Affordable Modification Program (“HAMP”). (Compl. P 95.) HAMP is a federally funded program that allows mortgagors to refinance their mortgages and reduce their monthly payments. (Compl. P 66.) Despite their eligibility for HAMP,  [*3] the loan servicer, Defendant National City Mortgage Company, twice denied their application for a loan modification. (Compl. PP 90, 93.) Plaintiffs did not receive a reason for the denial or an opportunity to appeal. (Compl. P 100.)

Plaintiffs’ Complaint contains two counts. Both are for violation of due process under the Fifth Amendment for failing to create rules implementing HAMP that comport with due process. (Compl. PP 114-27.)

Defendants National City Bank and PNC Financial Services Group, Inc. have moved to dismiss the Complaint on the grounds that Plaintiffs have failed to plead that they are state actors.

II. LEGAL STANDARD

Under Federal Rule of Civil Procedure 8(a)(2), the plaintiff is required only to set forth a “short and plain statement of the claim showing that the pleader is entitled to relief,” and “give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). When reviewing a motion to dismiss, the allegations of material fact in plaintiff’s complaint are taken as true and construed in the light most favorable to the plaintiff. See Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995).  [*4] But only factual allegations must be accepted as true–not legal conclusions. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. Although detailed factual allegations are not required, the factual allegations “must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. Furthermore, “only a complaint that states a plausible claim for relief survives a motion to dismiss.” Iqbal, 129 S.Ct. at 1949.

III. DISCUSSION

Plaintiffs have alleged that Defendants have violated their Fifth Amendment procedural due process rights. The Fifth Amendment, however, only applies to governmental actions, Bingue v. Prunchak, 512 F.3d 1169, 1174 (9th Cir. 2008), and the Moving Defendants are private entities. Therefore, the Moving Defendants argue, the Complaint fails to state a claim against them.

But in some circumstances the Fifth Amendment does apply to private entities. “In order to apply the proscriptions of the Fifth Amendment to private actors, there must exist a sufficiently close nexus between the (government) and the challenged action of the .  [*5] . . (private) entity so that the action of the latter may be fairly treated as that of the (government) itself.” Rank v. Nimmo, 677 F.2d 692, 701 (9th Cir. 1982) (internal quotations omitted). There are four different tests used to determine whether private action can be attributed to the state: “(1) public function; (2) joint action; (3) governmental compulsion or coercion; and (4) governmental nexus. Satisfaction of any one test is sufficient to find state action, so long as no countervailing factor exists.” Kirtley v. Rainey, 326 F.3d 1088, 1092 (9th Cir. 2003). The application of these tests is a “necessarily fact-bound inquiry.” Lugar v. Edmondson Oil Co., Inc., 457 U.S. 922, 939, 102 S. Ct. 2744, 73 L. Ed. 2d 482 (1982).

Plaintiffs argue that two tests apply here: public function and joint action.

1. Public Function

“Under the public function test, when private individuals or groups are endowed by the State with powers or functions governmental in nature, they become agencies or instrumentalities of the State and subject to its constitutional limitations. The public function test is satisfied only on a showing that the function at issue is both traditionally and exclusively governmental.” Kirtley, 326 F.3d at 1093 [*6] (internal quotations and citations omitted). Mortgage loan servicing is neither traditionally nor exclusively governmental, and Plaintiffs cannot show government action under this test.

2. Joint Action

Under the joint action test, the Court considers “whether the state has so far insinuated itself into a position of interdependence with the private entity that it must be recognized as a joint participant in the challenged activity. This occurs when the state knowingly accepts the benefits derived from unconstitutional behavior.” Kirtley, 326 F.3d at 1093 (internal quotations omitted). “A private party is liable under this theory, however, only if its particular actions are ‘inextricably intertwined’ with those of the government.” Brunette v. Humane Soc’y of Ventura County, 294 F.3d 1205, 1211 (9th Cir. 2002). “The mere fact that a business is subject to state regulation does not itself convert its action into that of the State . . . . Nor does the fact that the regulation is extensive and detailed . . . .” Jackson v. Metropolitan Edison Co., 419 U.S. 345, 350, 95 S. Ct. 449, 42 L. Ed. 2d 477 (addressing equivalent provision in Fourteenth Amendment).

The Court does not have sufficient facts before it to determine whether  [*7] state action exists here. As the Supreme Court has stated, this is a “necessarily fact-bound inquiry.” Lugar, 457 U.S. at 939. Although the mere fact that a business is subject to extensive regulation is not sufficient to find joint action, here there may be more than just extensive regulation. Plaintiffs have pled that the HAMP program imposes affirmative duties on lenders, like the Moving Defendants, who participate in the program. If an applicant meets certain federally created criteria, then the lender has no discretion and must grant a loan modification. The federal program is completely administered by the Moving Defendants, and they are essentially acting as the government’s agents in executing HAMP. Making all reasonable inference in Plaintiff’s favor, the Court find that Plaintiff has stated a claim upon which relief can be granted.

Of course, facts developed through discovery may ultimately show that Plaintiff cannot establish state action. But at this stage in the litigation, the Court does not have the answers to several relevant issues, including (1) whether government officials were involved in the decision to deny Plaintiff’s request; (2) whether government officials  [*8] provide guidance to the Moving Defendants regarding the administration of HAMP; (3) the extent of ongoing communication between the government and the Moving Defendants regarding HAMP; (4) and the financial arrangements between the government and the Moving Defendants regarding HAMP. This is not an exhaustive list and the course of discovery may yield other relevant facts not listed here.

Defendant’s best case–which it does not cite–in support of its motion to dismiss is Rank v. Nimmo, 677 F.2d 692 (9th Cir. 1982). In Nimmo, the Ninth Circuit held that a private mortgage lender who foreclosed on a plaintiff’s property was not a state actor. The plaintiff had obtained a mortgage loan through the VA Home Mortgage Guarantee Program, which was a federal program that guaranteed a portion of a qualifying veteran’s mortgage, enabling veterans to obtain mortgage loans without a substantial down payment. 677 F.2d at 693-94. A private commercial lender made a loan to the plaintiff under the program. Id. at 693. When the plaintiff defaulted, the lender foreclosed on the plaintiff’s property. Id. at 695-96. The Plaintiff sued the lender for depriving him of his entitlement to a federal-home-loan  [*9] program without affording him due process under the Fifth Amendment. Id. at 696. The Ninth Circuit held that even though the private lender was subject to extensive federal regulation under the federal home loan guaranty program, the private lender was not a state actor. Id. at 702.

This case is different from Nimmo for at least two reasons. First, and most importantly, the Ninth Circuit decided Nimmo on cross motions for summary judgment and had the benefit of a more fully developed factual record. And second, the guaranty program at issue in Nimmo was very different from HAMP. Under the guaranty program, private lenders applied to the government for participation in the program and the government could deny their participation if the private lender failed to meet certain criteria. 677 F.2d 692, 694. But in this case, Plaintiffs contend that the government required private lenders to participate if they have received federal money, and the private lenders must administer HAMP on the government’s behalf. Whether this is correct or not is not an issue that can be determined on the record before the Court.

IV. CONCLUSION

For the foregoing reasons, the Court DENIES the Motion to Dismiss (Doc.  [*10] 21.) The Moving Defendants may raise their argument again on a motion for summary judgment once the record has been more fully developed.

IT IS SO ORDERED.

DATED: December 23, 2009

/s/ Barry Ted Moskowitz

Honorable Barry Ted Moskowitz

United States District Judge

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MARLA LYNN SWANSON, Plaintiff, vs. EMC MORTGAGE CORPORATION, et al.,

Posted on December 12, 2009. Filed under: Case Law, Foreclosure Defense, Mortgage Law, Predatory Lending | Tags: , , , , |

MARLA LYNN SWANSON, Plaintiff, vs. EMC MORTGAGE CORPORATION, et al., Defendants.

CASE NO. CV F 09-1507 LJO DLB

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA

October 29, 2009, Decided

October 29, 2009, Filed


COUNSEL: For Marla Lynn Swanson, Plaintiff: Sharon L. Lapin, LEAD ATTORNEY, Attorney At Law, San Rafael, CA.

For EMC Mortgage Corporation, Mortgage Electronic Registration System, Inc., Defendants: S. Christopher Yoo, LEAD ATTORNEY, Adorno Yoss Alvarado and Smith, Santa Ana, CA.

For Robert E. Weiss INC, Defendant: Cris A Klingerman, LEAD ATTORNEY, Robert E. Weiss, Inc., Covina, CA.

For Brokerleon Inc. DBA: A-ONE Home Loans, Leon Turner Jr., Shantae Michelle Curran, Defendants: SUSAN L. MOORE, LEAD ATTORNEY, Pascuzzi, Moore & Stoker, Attorneys At Law, Apc, Fresno, CA.

JUDGES: Lawrence J. O’Neill, UNITED STATES DISTRICT JUDGE.

OPINION BY: Lawrence J. O’Neill

OPINION

ORDER ON DEFENDANTS’ F.R.Civ.P. 12 MOTION TO DISMISS

(Doc. 17.)

INTRODUCTION

Defendants EMC Mortgage Corporation (“EMC”) and Mortgage Electronic Registration Systems, Inc. (“MERS”) seek to dismiss as meritless and insufficiently plead plaintiff Marla Lynn Swanson’s (“Ms. Swanson’s”) claims arising from a loan, default and mortgage on Ms. Swanson’s Sanger residence (“property”). Ms. Swanson filed no papers to oppose dismissal of her claims against EMC and MERS. This Court considered EMC and MERS’ F.R.Civ.P. 12(b)(6) motion to dismiss on the record and VACATES the November  [*2] 10, 2009 hearing, pursuant to Local Rule 78-230(h). For the reasons discussed below, this Court DISMISSES this action against EMC and MERS.

BACKGROUND

Ms. Swanson’s Loan And Default

Ms. Swanson obtained a $ 308,000 loan from defendant Community Lending, Inc. (“Community Lending”) and which was secured by a deed of trust (“DOT”) encumbering the property and recorded on July 14, 2006. 1 The DOT identifies Ms. Swanson as borrower, Community Lending as lender, Stewart Title of California as Trustee, and MERS as beneficiary.

1   All documents pertaining to Ms. Swanson’s loan and default were recorded with the Fresno County Recorder.

Defendant Robert E. Weiss, Inc. (“Weiss”) was substituted as DOT trustee by a substitution of trustee recorded on February 24, 2009.

A Notice of Default and Election to Sell under Deed of Trust was recorded on February 24, 2009 and indicates that Ms. Swanson was $ 9,804.68 in arrears on her loan as of February 23, 2009.

A second Notice of Default and Election to Sell under Deed of Trust was recorded on March 5, 2009 and indicates that Ms. Swanson was $ 11,984.68 in arrears on her loan as of March 4, 2009.

Ms. Swanson’s Claims

On August 25, 2009, Ms. Swanson filed her complaint  [*3] (“complaint”) to allege federal and California statutory and common law claims. 2 The complaint appears to challenge EMC and/or MERS’ standing to initiate non-judicial foreclosure of the property. The complaint alleges on information and belief “that no legal transfer of the Mortgage Note, Deed of Trust or any other interest in Plaintiff’s Property was effected that gave any of the Defendants the right to be named a trustee, mortgagee, beneficiary or an authorized agent of trustee, mortgagee or beneficiary of Plaintiff’s Mortgage Note, Deed of Trust or any other interest in Plaintiff’s Property.” The complaint further alleges that “Defendants . . . are not the real parties in interest because they are not the legal trustee, mortgagee or beneficiary, nor are they authorized agents of the trustee, mortgagee or beneficiary, nor are they in possession of the Note, or holders of the Note, or non-holders of the Note entitled to payment . . . . Therefore, Defendants instituted foreclosure proceedings against Plaintiff’s Property without rights under the law.”

2   The complaint pursues claims against Ms. Swanson’s mortgage brokers. Such claims are not subject to EMC and MERS’ motion to dismiss.

The  [*4] complaint alleges six claims against EMS and/or MERS which this Court will address below and seeks an injunction against foreclosure, general, statutory and punitive damages, and attorney fees.

DISCUSSION

F.R.Civ.P. 12(b)(6) Standards

EMC and MERS attack the claims against them as meritless, barred by law and lacking supporting facts. EMC and MERS characterize the allegations against them as “conclusory and boilerplate.”

“A trial court may dismiss a claim sua sponte under Fed.R.Civ.P. 12(b)(6). . . . Such dismissal may be made without notice where the claimant cannot possibly win relief.” Omar v. Sea-Land Service, Inc., 813 F.2d 986, 991 (9th Cir. 1987); see Wong v. Bell, 642 F.2d 359, 361-362 (9th Cir. 1981). Sua sponte dismissal may be made before process is served on defendants. Neitzke v. Williams, 490 U.S. 319, 324, 109 S. Ct. 1827, 104 L. Ed. 2d 338 (1989) (dismissals under 28 U.S.C. § 1915(d) are often made sua sponte); Franklin v. Murphy, 745 F.2d 1221, 1226 (9th Cir. 1984) (court may dismiss frivolous in forma pauperis action sua sponte prior to service of process on defendants).

A F.R.Civ.P. 12(b)(6) motion to dismiss is a challenge to the sufficiency of the pleadings set forth in the complaint. “When a federal  [*5] court reviews the sufficiency of a complaint, before the reception of any evidence either by affidavit or admissions, its task is necessarily a limited one. The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.” Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 40 L. Ed. 2d 90 (1974); Gilligan v. Jamco Development Corp., 108 F.3d 246, 249 (9th Cir. 1997). A F.R.Civ.P. 12(b)(6) dismissal is proper where there is either a “lack of a cognizable legal theory” or “the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990); Graehling v. Village of Lombard, Ill., 58 F.3d 295, 297 (7th Cir. 1995).

In resolving a F.R.Civ.P. 12(b)(6) motion, the court must: (1) construe the complaint in the light most favorable to the plaintiff; (2) accept all well-pleaded factual allegations as true; and (3) determine whether plaintiff can prove any set of facts to support a claim that would merit relief. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-338 (9th Cir. 1996). Nonetheless, a court is “free to ignore legal conclusions, unsupported conclusions,  [*6] unwarranted inferences and sweeping legal conclusions cast in the form of factual allegations.” Farm Credit Services v. American State Bank, 339 F.3d 764, 767 (8th Cir. 2003) (citation omitted). A court need not permit an attempt to amend a complaint if “it determines that the pleading could not possibly be cured by allegation of other facts.” Cook, Perkiss and Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911 F.2d 242, 247 (9th Cir. 1990). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitlement to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 1964-65, 167 L. Ed. 2d 929 (2007) (internal citations omitted). Moreover, a court “will dismiss any claim that, even when construed in the light most favorable to plaintiff, fails to plead sufficiently all required elements of a cause of action.” Student Loan Marketing Ass’n v. Hanes, 181 F.R.D. 629, 634 (S.D. Cal. 1998). In practice, “a complaint . . . must contain either direct or inferential allegations  [*7] respecting all the material elements necessary to sustain recovery under some viable legal theory.” Twombly, 550 U.S. at 562, 127 S.Ct. at 1969 (quoting Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir. 1984)).

In Ashcroft v. Iqbal,     U.S.    , 129 S.Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009), the U.S. Supreme Court recently explained:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” . . . A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.

. . . Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice. (Citation omitted.)

For a F.R.Civ.P. 12(b)(6) motion, a court generally cannot consider material outside the complaint. Van Winkle v. Allstate Ins. Co., 290 F.Supp.2d 1158, 1162, n. 2 (C.D. Cal. 2003). Nonetheless, a court may consider exhibits submitted with the complaint. Van Winkle, 290 F.Supp.2d at 1162, n. 2. In addition, a “court may consider evidence on which the complaint ‘necessarily  [*8] relies’ if: (1) the complaint refers to the document; (2) the document is central to the plaintiff’s claim; and (3) no party questions the authenticity of the copy attached to the 12(b)(6) motion.” Marder v. Lopez, 450 F.3d 445, 448 (9th Cir. 2006). A court may treat such a document as “part of the complaint, and thus may assume that its contents are true for purposes of a motion to dismiss under Rule 12(b)(6).” United States v. Ritchie, 342 F.3d 903, 908 (9th Cir.2003). Such consideration prevents “plaintiffs from surviving a Rule 12(b)(6) motion by deliberately omitting reference to documents upon which their claims are based.” Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir. 1998). 3 A “court may disregard allegations in the complaint if contradicted by facts established by exhibits attached to the complaint.” Sumner Peck Ranch v. Bureau of Reclamation, 823 F.Supp. 715, 720 (E.D. Cal. 1993) (citing Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir.1987)). Moreover, “judicial notice may be taken of a fact to show that a complaint does not state a cause of action.” Sears, Roebuck & Co. v. Metropolitan Engravers, Ltd., 245 F.2d 67, 70 (9th Cir. 1956); see Estate of Blue v. County of Los Angeles, 120 F.3d 982, 984 (9th Cir. 1997).  [*9] A court properly may take judicial notice of matters of public record outside the pleadings'” and consider them for purposes of the motion to dismiss. Mir v. Little Co. of Mary Hosp., 844 F.2d 646, 649 (9th Cir. 1988) (citation omitted). As such, this Court may consider plaintiffs’ pertinent loan and foreclosure documents.

3   “We have extended the ‘incorporation by reference’ doctrine to situations in which the plaintiff’s claim depends on the contents of a document, the defendant attaches the document to its motion to dismiss, and the parties do not dispute the authenticity of the document, even though the plaintiff does not explicitly allege the contents of that document in the complaint.” Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005) (citing Parrino, 146 F.3d at 706).

Rosenthal Fair Debt Collections Practices Act

The complaint’s second claim attempts to allege EMC’s violation of California’s Rosenthal Fair Debtor Collection Practices Act (“RFDCPA”), Cal. Civ. Code, §§ 1788, et seq. The claim alleges that “Defendants are debt collectors within the meaning of the Rosenthal Act in that they regularly, in the course of their business, on behalf of themselves or others, engage in the  [*10] collection of debt.”

EMC and MERS challenge the claim in that the complaint “does not properly allege that EMC is a debt collector within the meaning of the RFDCPA.”

The RFDCPA’s purpose is “to prohibit debt collectors from engaging in unfair or deceptive practices in the collection of consumer debts and to require debtors to act fairly in entering into and honoring such debts.” Cal. Civ. Code, § 1788.1(b). The RFDCPA defines “debt collector” as “any person who, in the ordinary course of business, regularly, on behalf of himself or herself or others, engages in debt collection.” Cal. Civ. Code, § 1788.2(c).

EMC and MERS argue that the RFDCPA does not prevent a creditor to enforce its security interest under a deed of trust because foreclosing on property does not support a claim under the federal Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. §§ 1692, et seq. EMC and MERS note that as a loan servicer, EMC is an authorized agent of the DOT beneficiary to enforce the beneficiary’s security interest under the DOT.

EMC and MERS further fault the RFDCPA claim’s failure to allege facts to support EMC’s RFDCPA violation in that the claim conclusively alleges that “Defendants” “threatened  [*11] to take actions not permitted by law, including . . . collecting on a debt not owed to the Defendants, making false reports to credit reporting agencies, foreclosing upon a void security interest, foreclosing upon a Note of which they were not in possession nor otherwise entitled to payment, falsely stating the amount of a debt, increasing the amount of a debt by including amounts that are not permitted by law or contract, and using unfair and unconscionable means in an attempt to collect a debt.”

EMC and MERS cite to no conclusive authority that non-judicial foreclosure is not debt collection under the RFDCPA. However, “foreclosing on the property pursuant to a deed of trust is not the collection of a debt within the meaning of the FDCPA.” Hulse v. Ocwen Federal Bank, FSB, 195 F.Supp.2d 1188, 1204 (D. Or. 2002). As the fellow district court in Hulse, 195 F.Supp.2d at 1204, explained:

Foreclosing on a trust deed is distinct from the collection of the obligation to pay money. The FDCPA is intended to curtail objectionable acts occurring in the process of collecting funds from a debtor. But, foreclosing on a trust deed is an entirely different path. Payment of funds is not the object of  [*12] the foreclosure action. Rather, the lender is foreclosing its interest in the property.

. . . Foreclosure by the trustee is not the enforcement of the obligation because it is not an attempt to collect funds from the debtor.

Logic suggests that non-judicial foreclosure is not a debt collector’s act under California Civil Code section 1788.2(c). Like the FDCPA, the RFDCPA seeks to prohibit debt collection abuses. A foreclosure action does not address payment of funds. The complaint is void of facts that EMC sought to enforce Ms. Swanson’s obligation by collecting funds from her. The RFDCPA claim’s recitation of alleged wrongs fails to substantiate RFDCPA wrongdoing to warrant the claim’s dismissal against EMC and MERS.

Negligence

The complaint’s (third) negligence claim alleges that EMC and MERS “owed a duty to Plaintiff to perform acts in such a manner as to not cause Plaintiff harm.” The claim alleges “Defendants breached their duty of care to the Plaintiff when they failed to maintain the original Mortgage Note, failed to properly create original documents, failed to make the required disclosures to the Plaintiff and instituted foreclosure proceedings wrongfully.” The claim further alleges  [*13] that EMC and MERS “breached their duty of care to the Plaintiff when they took payments to which they were not entitled, charged fees they were not entitled to charge, and made or otherwise authorized negative reporting of Plaintiff’s creditworthiness to various credit bureaus wrongfully.”

EMC and MERS characterize the claim’s duty “theory” as a “common law duty of care.” EMC and MERS fault the claim’s “conclusory allegations” lacking details as to how EMC and MERS breached such a duty. EMC and MERS note their absence of a lender-borrower relationship with Ms. Swanson and an independent duty “to perform acts in such a manner as to not cause Plaintiff harm.”

“The elements of a cause of action for negligence are (1) a legal duty to use reasonable care, (2) breach of that duty, and (3) proximate [or legal] cause between the breach and (4) the plaintiff’s injury.” Mendoza v. City of Los Angeles, 66 Cal.App.4th 1333, 1339, 78 Cal.Rptr.2d 525 (1998) (citation omitted). “The existence of a duty of care owed by a defendant to a plaintiff is a prerequisite to establishing a claim for negligence.” Nymark v. Heart Fed. Savings & Loan Assn., 231 Cal.App.3d 1089, 1095, 283 Cal.Rptr. 53 (1991). “The  [*14] existence of a legal duty to use reasonable care in a particular factual situation is a question of law for the court to decide.” Vasquez v. Residential Investments, Inc., 118 Cal.App.4th 269, 278, 12 Cal.Rptr.3d 846 (2004) (citation omitted).

“The ‘legal duty’ of care may be of two general types: (a) the duty of a person to use ordinary care in activities from which harm might reasonably be anticipated [, or] (b) [a]n affirmative duty where the person occupies a particular relationship to others. . . . In the first situation, he is not liable unless he is actively careless; in the second, he may be liable for failure to act affirmatively to prevent harm.” McGettigan v. Bay Area Rapid Transit Dist., 57 Cal.App.4th 1011, 1016-1017, 67 Cal.Rptr.2d 516 (1997).

EMC and MERS correctly note the absence of an actionable duty between a lender and borrower in that loan transactions are arms-length and do not invoke fiduciary duties. Absent “special circumstances” a loan transaction “is at arms-length and there is no fiduciary relationship between the borrower and lender.” Oaks Management Corp. v. Superior Court, 145 Cal.App.4th 453, 466, 51 Cal.Rptr.3d 561 (2006); see Downey v. Humphreys, 102 Cal. App. 2d 323, 332, 227 P.2d 484 (1951) [*15] (“A debt is not a trust and there is not a fiduciary relation between debtor and creditor as such.”) Moreover, a lender “owes no duty of care to the [borrowers] in approving their loan. Liability to a borrower for negligence arises only when the lender ‘actively participates’ in the financed enterprise ‘beyond the domain of the usual money lender.'” Wagner v. Benson, 101 Cal.App.3d 27, 35, 161 Cal.Rptr. 516 (1980) (citing several cases). “[A]s a general rule, a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” Nymark, 231 Cal.App.3d at 1096, 283 Cal.Rptr. 53.

Public policy does not impose upon the Bank absolute liability for the hardships which may befall the [borrower] it finances.” Wagner, 101 Cal.App.3d at 34, 161 Cal.Rptr. 516. The success of a borrower’s investment “is not a benefit of the loan agreement which the Bank is under a duty to protect.” Wagner, 101 Cal.App.3d at 34, 161 Cal.Rptr. 516 (lender lacked duty to disclose “any information it may have had”).

The complaint alleges no facts of EMC and MERS’ cognizable duty to Ms. Swanson  [*16] to support a negligence claim. “No such duty exists” for a lender “to determine the borrower’s ability to repay the loan. . . . The lender’s efforts to determine the creditworthiness and ability to repay by a borrower are for the lender’s protection, not the borrower’s.” Renteria v. United States, 452 F. Supp. 2d 910, 922-923 (D. Ariz. 2006) (borrowers “had to rely on their own judgment and risk assessment to determine whether or not to accept the loan”). Ms. Swanson’s purported claims arise from her failure to pay her loan and subsequent initiation of foreclosure of the property. The complaint further lacks facts of special circumstances to impose duties on EMC and MERS in that the complaint depicts an arms-length home loan transaction, nothing more. The complaint fails to substantiate a special lending relationship with EMC and MERS or an actionable breach of duty to warrant dismissal of the negligence claim.

Real Estate Settlement Procedures Act

The complaint alleges that on June 10, 2009, a Qualified Written Request (“QWR”) under the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. §§ 2601, et seq., was mailed to EMC and included a demand to rescind the loan under the Truth  [*17] in Lending Act (“TILA”), 15 U.S.C. §§ 1601, et seq. The complaint further alleges that “EMC has yet to properly respond to this Request.” The complaint’s fourth claim alleges that “EMC violated RESPA, 12 U.S.C. § 2605(e)(3), 4 by failing and refusing to provide a proper written explanation or response to Plaintiff’s QWR.”

4 12 U.S.C. § 2605(e)(2) addresses response to a QWR and provides:

Not later than 60 days (excluding legal public holidays, Saturdays, and Sundays) after the receipt from any borrower of any qualified written request under paragraph (1) and, if applicable, before taking any action with respect to the inquiry of the borrower, the servicer shall–

(A) make appropriate corrections in the account of the borrower, including the crediting of any late charges or penalties, and transmit to the borrower a written notification of such correction (which shall include the name and telephone number of a representative of the servicer who can provide assistance to the borrower);

(B) after conducting an investigation, provide the borrower with a written explanation or clarification that includes–

(i) to the extent applicable, a statement of the reasons for which the servicer believes  [*18] the account of the borrower is correct as determined by the servicer; and

(ii) the name and telephone number of an individual employed by, or the office or department of, the servicer who can provide assistance to the borrower; or

(C) after conducting an investigation, provide the borrower with a written explanation or clarification that includes–

(i) information requested by the borrower or an explanation of why the information requested is unavailable or cannot be obtained by the servicer; and

(ii) the name and telephone number of an individual employed by, or the office or department of, the servicer who can provide assistance to the borrower.

No Private Right Of Action For Disclosure Violations

EMC and MERS argue that to the extent the RESPA claim seeks to recover for disclosure violations, the claim is a barred in the absence of a private right of action.

RESPA’s purpose is to “curb abusive settlement practices in the real estate industry. Such amorphous goals, however, do not translate into a legislative intent to create a private right of action.” Bloom v. Martin, 865 F.Supp. 1377, 1385 (N.D. Cal. 1994), aff’d, 77 F.3d 318 (1996). “The structure of RESPA’s various statutory provisions  [*19] indicates that Congress did not intend to create a private right of action for disclosure violations under 12 U.S.C. § 2603 . . . Congress did not intend to provide a private remedy . . .” Bloom, 865 F.Supp. at 1384.

EMC and MERS correctly point out the absence of a private right of action for RESPA disclosure violations to doom the RESPA claim to the extent it is based on disclosure violations.

Absence Of Pecuniary Loss

EMC and MERS further fault the RESPA claim’s failure to allege pecuniary loss.

“Whoever fails to comply with this section shall be liable to the borrower . . . [for] any actual damages to the borrower as a result of the failure . . .” 12 U.S.C. § 2605(f)(1)(A). “However, alleging a breach of RESPA duties alone does not state a claim under RESPA. Plaintiffs must, at a minimum, also allege that the breach resulted in actual damages.” Hutchinson v. Delaware Sav. Bank FSB, 410 F.Supp.2d 374, 383 (D. N.J. 2006).

The RESPA claim fails to allege pecuniary loss from EMC’s alleged failure to respond to Ms. Swanson’s QWR. Such omission is fatal to the claim given its mere reliance on a RESPA violation without more.

Fraud

The complaint’s (sixth) fraud claim alleges that “EMC misrepresented  [*20] to Plaintiff that EMC has the right to collect monies from Plaintiff on its behalf or on behalf of others when Defendant EMC had no legal right to collect such monies.” The claim further alleges that “MERS misrepresented to Plaintiff on the Deed of Trust that it is a qualified beneficiary with the ability to assign or transfer the Deed of Trust and/or the Note and/or substitute trustees under the Deed of Trust. Further, Defendant MERS misrepresented that it followed the applicable legal requirements to transfer the Note and Deed of Trust to subsequent beneficiaries.”

Absence Of Particularity

EMC and MERS challenge the fraud claim’s failure to satisfy F.R.Civ.P. 9(b) requirements to allege fraud with particularity.

The elements of a California fraud claim are: (1) misrepresentation (false representation, concealment or nondisclosure); (2) knowledge of the falsity (or “scienter”); (3) intent to defraud, i.e., to induce reliance; (4) justifiable reliance; and (5) resulting damage. Lazar v. Superior Court, 12 Cal.4th 631, 638, 49 Cal.Rptr.2d 377, 909 P.2d 981 (1996). The same elements comprise a cause of action for negligent misrepresentation, except there is no requirement of intent to induce reliance.  [*21] Cadlo v. Owens-Illinois, Inc., 125 Cal. App. 4th 513, 519, 23 Cal. Rptr. 3d 1, 23 Cal.Rtpr.3d 1 (2004).

“[T]o establish a cause of action for fraud a plaintiff must plead and prove in full, factually and specifically, all of the elements of the cause of action. Conrad v. Bank of America, 45 Cal.App.4th 133, 156, 53 Cal.Rptr.2d 336 (1996). There must be a showing “that the defendant thereby intended to induce the plaintiff to act to his detriment in reliance upon the false representation” and “that the plaintiff actually and justifiably relied upon the defendant’s misrepresentation in acting to his detriment.” Conrad, 45 Cal.App.4th at 157, 53 Cal.Rptr.2d 336.

F.R.Civ.P. 9(b) requires a party to “state with particularity the circumstances constituting fraud.” 5 In the Ninth Circuit, “claims for fraud and negligent misrepresentation must meet Rule 9(b)‘s particularity requirements.” Neilson v. Union Bank of California, N.A., 290 F.Supp.2d 1101, 1141 (C.D. Cal. 2003). A court may dismiss a claim grounded in fraud when its allegations fail to satisfy F.R.Civ.P. 9(b)‘s heightened pleading requirements. Vess, 317 F.3d at 1107. A motion to dismiss a claim “grounded in fraud” under F.R.Civ.P. 9(b) for failure to  [*22] plead with particularity is the “functional equivalent” of a F.R.Civ.P. 12(b)(6) motion to dismiss for failure to state a claim. Vess, 317 F.3d at 1107. As a counter-balance, F.R.Civ.P. 8(a)(2) requires from a pleading “a short and plain statement of the claim showing that the pleader is entitled to relief.”

5 F.R.Civ.P. 9(b)‘s particularity requirement applies to state law causes of action: “[W]hile a federal court will examine state law to determine whether the elements of fraud have been pled sufficiently to state a cause of action, the Rule 9(b) requirement that the circumstances of the fraud must be stated with particularity is a federally imposed rule.” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th Cir. 2003) (quoting Hayduk v. Lanna, 775 F.2d 441, 443 (1st Cir. 1995)(italics in original)).

F.R.Civ.P. 9(b)‘s heightened pleading standard “is not an invitation to disregard Rule 8‘s requirement of simplicity, directness, and clarity” and “has among its purposes the avoidance of unnecessary discovery.” McHenry v. Renne, 84 F.3d 1172, 1178 (9th Cir. 1996). F.R.Civ.P. 9(b) requires “specific” allegations of fraud “to give defendants notice of the particular misconduct which is  [*23] alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong.” Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). “A pleading is sufficient under Rule 9(b) if it identifies the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations.” Neubronner v. Milken, 6 F.3d 666, 671-672 (9th Cir. 1993) (internal quotations omitted; citing Gottreich v. San Francisco Investment Corp., 552 F.2d 866, 866 (9th Cir. 1997)). The Ninth Circuit Court of Appeals has explained:

Rule 9(b) requires particularized allegations of the circumstances constituting fraud. The time, place and content of an alleged misrepresentation may identify the statement or the omission complained of, but these circumstances do not “constitute” fraud. The statement in question must be false to be fraudulent. Accordingly, our cases have consistently required that circumstances indicating falseness be set forth. . . . [W]e [have] observed that plaintiff must include statements regarding the time, place, and nature of the alleged fraudulent activities, and that “mere conclusory allegations of fraud are  [*24] insufficient.” . . . The plaintiff must set forth what is false or misleading about a statement, and why it is false. In other words, the plaintiff must set forth an explanation as to why the statement or omission complained of was false or misleading. . . .

In certain cases, to be sure, the requisite particularity might be supplied with great simplicity.

In Re Glenfed, Inc. Securities Litigation, 42 F.3d 1541, 1547-1548 (9th Cir. 1994) (en banc) (italics in original) superseded by statute on other grounds as stated in Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F.Supp. 1297 (C.D. Cal. 1996); see Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997) (fraud allegations must be accompanied by “the who, what, when, where, and how” of the misconduct charged); Neubronner, 6 F.3d at 672 (“The complaint must specify facts as the times, dates, places, benefits received and other details of the alleged fraudulent activity.”)

As to multiple fraud defendants, a plaintiff “must provide each and every defendant with enough information to enable them ‘to know what misrepresentations are attributable to them and what fraudulent conduct they are charged with.'” Pegasus Holdings v. Veterinary Centers of America, Inc., 38 F.Supp.2d 1158, 1163 (C.D. Ca. 1998) [*25] (quoting In re Worlds of Wonder Sec. Litig., 694 F.Supp. 1427, 1433 (N.D. Ca. 1988)). “Rule 9(b) does not allow a complaint to merely lump multiple defendants together but ‘require[s] plaintiffs to differentiate their allegations when suing more than one defendant . . . and inform each defendant separately of the allegations surrounding his alleged participation in the fraud.'” Swartz v. KPMG LLP, 476 F.3d 756, 764-765 (9th Cir. 2007) (quoting Haskin v. R.J. Reynolds Tobacco Co., 995 F.Supp. 1437, 1439 (M.D. Fla. 1998)). “In the context of a fraud suit involving multiple defendants, a plaintiff must, at a minimum, ‘identif[y] the role of [each] defendant[] in the alleged fraudulent scheme.” Swartz, 476 F.3d at 765 (quoting Moore v. Kayport Package Express, Inc., 885 F.2d 531, 541 (9th Cir. 1989)).

Moreover, in a fraud action against a corporation, a plaintiff must “allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.” Tarmann v. State Farm Mut. Auto. Ins. Co. 2 Cal.App.4th 153, 157, 2 Cal.Rptr.2d 861 (1991).

The complaint is severely lacking and fails  [*26] to satisfy F.R.Civ.P. 9(b) “who, what, when, where and how” requirements as to EMC, MERS and the other defendants. The complaint makes no effort to allege names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written. The complaint fails to substantiate the circumstances alleging falseness attributable to EMC or MERS. The complaint lacks facts to support each fraud element. The fraud claim’s deficiencies are so severe to suggest no potential improvement from an attempt to amend.

MERS California License

The fraud claim disputes that MERS is a qualified DOT beneficiary. Ms. Swanson appears to base such notion on grounds that MERS is not qualified to conduct business in California. The complaint alleges that “MERS was not registered to do business in California.”

MERS contends that “its activities pursuant to the DOT are not considered instrastate business that will require it to be licensed in California.” MERS points to California Corporations Code section 191(c)(7) which provides that a “foreign corporation shall not be considered to be transacting instrastate business” by “[c]reating  [*27] evidences of debt or mortgage, liens or security interests on real or personal property.” California Corporations Code section 191(d)(3) exempts from doing “business in the state” the “enforcement of any loans by trustee’s sale.” Moreover, a foreign corporation does not transact instrastate business by “defending any action or suit.”

MERS demonstrates that it was qualified to conduct California business to defeat a fraud claim to the effect MERS was not.

DOT Beneficiary Authority

The fraud claim disputes that MERS has authority to pursue non-judicial foreclosure. MERS notes that the DOT names MERS as a beneficiary to defeat the complaint’s attempt to allege that MERS lacks a right to foreclose.

“Financing or refinancing of real property is generally accomplished in California through a deed of trust. The borrower (trustor) executes a promissory note and deed of trust, thereby transferring an interest in the property to the lender (beneficiary) as security for repayment of the loan.” Bartold v. Glendale Federal Bank, 81 Cal.App.4th 816, 821, 97 Cal.Rptr.2d 226 (2000). A deed of trust “entitles the lender to reach some asset of the debtor if the note is not paid.” Alliance Mortgage Co. v. Rothwell, 10 Cal.4th 1226, 1235, 44 Cal.Rptr.2d 352, 900 P.2d 601 (1995).  [*28] If a borrower defaults on a loan and the deed of trust contains a power of sale clause, the lender may non-judicially foreclose. See McDonald v. Smoke Creek Live Stock Co., 209 Cal. 231, 236-237, 286 P. 693 (1930).

Under California Civil Code section 2924(a)(1), a “trustee, mortgagee or beneficiary or any of their authorized agents” may conduct the foreclosure process. Under California Civil Code section 2924(b)(4), a “person authorized to record the notice of default or the notice of sale” includes “an agent for the mortgagee or beneficiary, an agent of the named trustee, any person designated in an executed substitution of trustee, or an agent of that substituted trustee.” “Upon default by the trustor, the beneficiary may declare a default and proceed with a nonjudicial foreclosure sale.” Moeller, 25 Cal.App.4th at 830, 30 Cal.Rptr.2d 777.

“If the trustee’s deed recites that all statutory notice requirements and procedures required by law for the conduct of the foreclosure have been satisfied, a rebuttable presumption arises that the sale has been conducted regularly and properly.” Nguyen v. Calhoun, 105 Cal.App.4th 428, 440, 129 Cal.Rptr.2d 436 (2003). The California Court of Appeal  [*29] has explained non-judicial foreclosure under California Civil Code sections 2924-2924l:

The comprehensive statutory framework established to govern nonjudicial foreclosure sales is intended to be exhaustive. . . . It includes a myriad of rules relating to notice and right to cure. It would be inconsistent with the comprehensive and exhaustive statutory scheme regulating nonjudicial foreclosures to incorporate another unrelated cure provision into statutory nonjudicial foreclosure proceedings.

Moeller v. Lien, 25 Cal.App.4th 822, 834, 30 Cal.Rptr.2d 777 (1994).

MERS correctly notes that as DOT beneficiary, MERS is empowered to commence foreclosure proceedings, including causing the trustee to execute a notice of default to start foreclosure. The DOT contains a power of sale to authorize non-judicial foreclosure. MERS demonstrates that it is a qualified DOT beneficiary to defeat a fraud claim to the effect it is not.

In short, the fraud claim’s severe deficiencies warrant its dismissal without leave to amend.

Unfair Business Practices

The complaint’s seventh claim alleges EMC and MERS’ acts “constitute unlawful, unfair, and/or fraudulent business practices, as defined in California Business and Professions Code § 17200 et seq. [*30] (Unfair Competition Law [‘UCL’]).”

Standing

EMC and MERS contend that Ms. Swanson lacks standing to pursue a UCL claim.

California Business and Professions Code section 17204 limits standing to bring a UCL claim to specified public officials and a private person “who has suffered injury in fact and has lost money or property as a result of the unfair competition.”

Business and Professions Codesection 17203 addresses UCL relief and provides in pertinent part:

Any person who engages, has engaged, or proposes to engage in unfair competition may be enjoined in any court of competent jurisdiction. The court may make such orders or judgments . . . as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition. (Bold added.)

EMC and MERS correctly note the complaint’s absence of facts of Ms. Swanson’s money or property allegedly lost due to a UCL violation. The UCL claim offers an insufficient, bare allegation that “Plaintiff has suffered various damages and injuries according to proof at trial.” The complaint lacks sufficient allegations of Ms. Swanson’s standing to warrant dismissal of the UCL  [*31] claim.

Unfair, Fraudulent Or Deceptive Business Practices

EMC and MERS take issue with the complaint’s attempt to allege an illegal business practice under the UCL.

The UCL prohibits “unlawful” practices “forbidden by law, be it civil or criminal, federal, state, or municipal, statutory, regulatory, or court-made.” Saunders v. Superior Court, 27 Cal. App. 4th 832, 838, 33 Cal. Rptr. 2d 438 (1999). According to the California Supreme Court, the UCL “borrows” violations of other laws and treats them as unlawful practices independently actionable under the UCL. Farmers Ins. Exchange v. Superior Court, 2 Cal.4th 377, 383, 6 Cal.Rptr.2d 487, 826 P.2d 730 (1992).

“Unfair” under the UCL “means conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 187, 83 Cal. Rptr. 2d 548, 973 P.2d 527 (1999).

The “fraudulent” prong under the UCL requires a plaintiff to “show deception to some members of the public, or harm to the public interest,” Watson Laboratories, Inc. v. Rhone-Poulenc Rorer, Inc., 178 F.Supp.2d 1099, 1121 (C.D. Ca. 2001),  [*32] or to allege that “members of the public are likely to be deceived.” Medical Instrument, 2005 U.S. Dist. LEXIS 41411, 2005 WL 1926673, at *5.

“The California Supreme Court has held that ‘something more than a single transaction,’ either on-going wrongful business conduct or a pattern of wrongful business conduct, must be alleged in order to state a cause of action under the Unfair Business Practices Act.” Newman v. Checkrite California, 912 F.Supp. 1354, 1375 (E.D. Ca. 1995). “The use of the phrase ‘business practice’ in section 17200 indicates that the statute is directed at ongoing wrongful conduct.” Hewlett v. Squaw Valley Ski Corp., 54 Cal.App.4th 499, 519, 63 Cal.Rptr.2d 118 (1997). “[T]he ‘practice’ requirement envisions something more than a single transaction . . .; it contemplates a ‘pattern of conduct’ [citation], ‘on-going . . . conduct’ [citation], ‘a pattern of behavior’ [citation], or ‘a course of conduct.’ . . .” State of California ex rel. Van de Kamp v. Texaco, Inc., 46 Cal.3d 1147, 1169-1170, 252 Cal.Rptr. 221, 762 P.2d 385 (1988).

“A plaintiff alleging unfair business practices under these statutes [UCL] must state with reasonable particularity the facts supporting the statutory elements of the violation.” Khoury v. Maly’s of California, Inc., 14 Cal.App.4th 612, 619, 17 Cal.Rptr.2d 708 (1993).

EMC  [*33] and MERS are correct that the complaint is “insufficient to establish that Defendants engaged in any ‘unfair’ business practices within the meaning of section 17200.” The complaint lacks reasonable particularity of facts to support an UCL claim. The claim’s bare mention of “unlawful, unfair and/or fraudulent business practices” provides not the slightest inference that Ms. Swanson has a viable UCL claim. The complaint points to no predicate violation of law. Similar to the fraud claim, the UCL claim lacks particularity of fraudulent circumstances, such as a misrepresentation, for a UCL claim. The complaint lacks allegations of ongoing wrongful business conduct or a pattern of such conduct. The UCL claim lacks facts to hint at a wrong subject to the UCL to warrant the claim’s dismissal.

Wrongful Foreclosure

The complaint’s tenth claim appears to fault EMC and MERS for failure “to suspend the foreclosure action to allow the Plaintiff to be considered for alternative foreclosure prevention options.” The wrongful foreclosure claim references absence of “possession of the Note,” failure “to properly record and give proper notice of the Notice of Default,” and “failure to comply with the statutory  [*34] requirements [to deny] Plaintiff the opportunity to exercise her statutory rights.”

EMC and MERS criticize the wrongful foreclosure claim as premature in that the property has not been foreclosed upon. EMC and MERS point to the absence of recording a trustee’s deed upon sale.

EMC and MERS are correct that in the absence of a foreclosure sale, they cannot be liable for “wrongful foreclosure.” Moreover, “a trustee or mortgagee may be liable to the trustor or mortgagor for damages sustained where there has been an illegal, fraudulent or wilfully oppressive sale of property under a power of sale contained in a mortgage or deed of trust.” Munger v. Moore, 11 Cal.App.3d 1, 7, 89 Cal.Rptr. 323 (1970). The complaint lacks facts of EMC and/or MERS’ alleged illegal or fraudulent activity to impose tort liability based on their conduct in connection with foreclosure of the property.

The wrongful foreclosure claim gives rise to no cognizable claim. It fails with Ms. Swanson’ other claims. Ms. Swanson’s attempt to manufacture a claim based on “possession of the Note” fails.

“Under Civil Code section 2924, no party needs to physically possess the promissory note.” Sicairos v. NDEX West, LLC, 2009 U.S. Dist. LEXIS 11223, 2009 WL 385855, *3 (S.D. Cal. 2009) [*35] (citing Cal. Civ. Code, § 2924(a)(1)). Rather, “[t]he foreclosure process is commenced by the recording of a notice of default and election to sell by the trustee.” Moeller, 25 Cal.App.4th at 830, 30 Cal.Rptr.2d 777. An “allegation that the trustee did not have the original note or had not received it is insufficient to render the foreclosure proceeding invalid.” Neal v. Juarez, 2007 U.S. Dist. LEXIS 98068, 2007 WL 2140640, *8 (S.D. Cal. 2007).

The wrongful foreclosure claim is illogical to warrant its dismissal.

Attempt At Amendment And Malice

Ms. Swanson’s claims against EMC and MERS are insufficiently pled and barred as a matter of law. Ms. Swanson is unable to cure her claims by allegation of other facts and thus is not granted an attempt to amend.

Moreover, this Court is concerned that Ms. Swanson has brought this action in absence of good faith and that Ms. Swanson exploits the court system solely for delay or to vex EMC and MERS. The test for maliciousness is a subjective one and requires the court to “determine the . . . good faith of the applicant.” Kinney v. Plymouth Rock Squab Co., 236 U.S. 43, 46, 35 S. Ct. 236, 59 L. Ed. 457 (1915); see Wright v. Newsome, 795 F.2d 964, 968, n. 1 (11th Cir. 1986); cf. Glick v. Gutbrod, 782 F.2d 754, 757 (7th Cir. 1986) [*36] (court has inherent power to dismiss case demonstrating “clear pattern of abuse of judicial process”). A lack of good faith or malice also can be inferred from a complaint containing untrue material allegations of fact or false statements made with intent to deceive the court. See Horsey v. Asher, 741 F.2d 209, 212 (8th Cir. 1984). An attempt to vex or delay provides further grounds to dismiss this action against EMC and MERS.

CONCLUSION AND ORDER

For the reasons discussed above, this Court:

1. DISMISSES with prejudice this action against EMS and MERS; and

2. DIRECTS the clerk to enter judgment against plaintiff Marla Lynn Swanson and in favor of defendants EMC Mortgage Corporation and Mortgage Electronic Registration Systems, Inc. in that there is no just reason to delay to enter such judgment given that Ms. Swanson’s claims against defendants EMC Mortgage Corporation and Mortgage Electronic Registration Systems, Inc. are clear and distinct from claims against the other defendants. See F.R.Civ.P. 54(b).

IT IS SO ORDERED.

Dated: October 29, 2009

/s/ Lawrence J. O’Neill

UNITED STATES DISTRICT JUDGE

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MERS v. LISA MARIE CHONG

Posted on December 9, 2009. Filed under: bankruptcy, Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , , , |

UNITED STATES DISTRICT COURT

DISTRICT OF NEVADA

Dist. Ct. Case No. 2:09-CV-00661-KJD-LRL
Bankr. Ct. Case No. BK-S-07-16645-LBR

Presently before the Court is Appellant’s Appeal under 28 U.S.C. § 158(a) from the Bankruptcy Court’s Order Denying Motion to Lift Stay entered in the Adversary Proceeding No. BKS- 07-16645-LBR, docket no. 49, March 31, 2009.

Having considered the briefs and the record on appeal, including the arguments of parties at the consolidated hearing on November 10, 2009, the Court affirms the Order of the Bankruptcy Court

Procedural History and Facts

On April 14, 2009, Appellant Mortgage Electronic Registration Systems, Inc. (“MERS”) filed Notice of Appeal (#1) appealing the Bankruptcy Court’s order denying Appellant’s motion for relief from stay. This appeal is one of approximately eighteen (18) similar cases in which the Bankruptcy Court ruled that Appellant lacked standing to bring the motion.

In the underlying bankruptcy action, MERS filed its Motion for Relief from Stay (“the Motion”) pursuant to Federal Rule of Bankruptcy Practice (“Rule”) 4001 on January 14, 2008 seeking to have the automatic stay lifted so that MERS could conduct a non-judicial foreclosure saleon debtor’s real property because the debtor lacked the ability to make payments and could not provide adequate security. Trustee Lenard E. Schwartzer (“Trustee”) filed objections to the Motion claiming that MERS did not have standing as a real party in interest under the Rules to file the motion. (Appellant’s Appendix (“Appx.”) Doc. No. 12, p. 34).

In response, Appellant filed the Declaration of Faatima Straggans, an employee of Homecomings Financial, LLC the authorized servicing agent for MERS, attempting to authenticate a copy of the original Deed of Trust (“Deed”) and Note. (Appx. 36–38). The Deed described MERS as beneficiary and identified MERS as the nominee of the original lender, FMC Capital LLC. Id. However, the Declaration identified neither the current owner of the beneficial interest in the Note, nor any of the successors or assignees of the Deed of Trust. The Declaration also failed to assert that MERS, FMC Capital LLC or Homecomings Financial, LLC held the Note.

Due to the similar issues raised regarding motions for relief from stay in approximately twenty-seven (27) cases involving MERS, the Bankruptcy Court set a joint hearing for all twenty seven cases. (Appx. 113–18). The Bankruptcy Court also ordered consolidated briefing for all cases to be filed in Case No. 07-16226-LBR, In re Mitchell, the “lead case”. Id. In a majority of the cases, including the present case, Appellant attempted to withdraw the Motion but was procedurally unable to do so, because the Trustee would not consent. (Appx. 1383, 1902-1904, 1907-1909). MERS informed the Bankruptcy Court that it had attempted to withdraw the Motion, because it had been filed contrary to its own corporate procedures. (Appx. 432). Particularly in this case, MERS was unable to show that a MERS Certifying Officer was in physical possession of the Note at the time the Motion was filed. (Appx. 624).

A final hearing was held on August 19, 2008. (Appx. 650-729). On March 31, 2009, the Bankruptcy Court issued Memorandum Opinions and Orders denying MERS’ motions for relief from stay in Mitchell and two other cases. (Appx. 740-54, 1581-95, 1959-72). In the remaining cases, including the present case, the Bankruptcy Court denied the motions for relief from stay by incorporating the reasoning from the Mitchell Memorandum Opinion. (Appx.46). The Bankruptcy Court held that MERS lacked standing because it was not a real party in interest as required by the Rules. (Appx. 740-54). Specifically, the court found that “[w]hile MERS may have standing to prosecute the motion in the name of its Member as nominee, there is no evidence that the named nominee is entitled to enforce the note or that MERS is the agent of the note’s holder.” (Appx. 753).

The court further held that MERS’ asserted interest as beneficiary under the contract terms did not confer standing because MERS had no actual beneficial interest in the note and, therefore, was not a beneficiary. (Appx. 745-48). MERS now appeals that order asserting that the Bankruptcy Court erred as a matter of law when it determined that MERS may not be a beneficiary under the deeds of trust at issue in the eighteen consolidated cases where the express language of the deeds of trust provide that MERS is the beneficiary. The Trustee continues to assert that MERS lacks standing because it is not a real party in interest. II. Standard of Review

This Court has jurisdiction pursuant to 28 U.S.C. § 158(a) and reviews the Bankruptcy Court’s findings under the same standard that the court of appeals would review a district court’s findings in a civil matter. 28 U.S.C. § 158(c)(2). Therefore, the Court reviews the Bankruptcy Court’s factual findings under a clearly erroneous standard, and conclusions of law de novo. See In re Healthcentral.com, 504 F.3d 775, 783 (9th Cir. 2007); In re First Magnus Fin. Corp., 403 B.R. 659, 663 (D. Ariz. 2009). III. Analysis This appeal arises from eighteen cases in which MERS filed motions for relief from stay in the Bankruptcy Court. In each case, either a party or the Bankruptcy Court raised the issue of whether MERS had standing to bring the motion.

In holding that MERS did not have standing as the real party in interest to bring the motion for relief from stay, the Bankruptcy Court determined that MERS was not a beneficiary in spite of language that designated MERS as such in the Deed of Trust at issue. MERS seeks to overturn the Bankruptcy Court’s determination that it is not a beneficiary. However, the Court must affirm the Bankruptcy Court’s order under the facts presented because MERS failed to present sufficient evidence demonstrating that it is a real party in interest.

A motion for relief from stay is a contested matter under the Bankruptcy Code. See Fed. R. Bankr. P. 4001(a); 9014(c). Bankruptcy Rule 7017 applies in contested matters. Rule 7017 incorporates Federal Rule of Civil Procedure 17(a)(1) which requires that “[a]n action must be prosecuted in the name of the real party in interest.” See also, In re Jacobson, 402 B.R. 359, 365-66 (Bankr. W.D. Wash. 2009); In re Hwang, 396 B.R. 757, 766-67 (Bankr. C.D. Cal. 2008). Thus, while MERS argues the bankruptcy court erred when it determined that MERS was not a beneficiary under the deeds of trust, MERS only has standing in the context of the motion to lift stay under the Rules if it is the real party in interest. See Fed. R. Bankr. P. 7017. Since MERS admits that it does not actually receive or forfeit money when borrowers fail to make their payments, MERS must at least provide evidence of its alleged agency relationship with the real party in interest in order to have standing to seek relief from stay. See Jacobson, 402 B.R. at 366, n.7 (quoting Hwang, 396 B.R. at 767 (“the right to enforce a note on behalf of a noteholder does not convert the noteholder’s agent into a real party in interest”)).

An agent for the purpose of bringing suit is “viewed as a nominal rather than a real party in interest and will be required to litigate in the name of his principal rather than his own name.” Hwang, 396 B.R. at 767. This is particularly important in the District of Nevada where the Local Rules of Bankruptcy Practice require parties to communicate in good faith regarding resolution of a motion for relief from stay before it is In other cases movant did not seek to withdraw the Motion, but similarly produced no evidence that it held the note or acted as the agent of the noteholder. filed. LR 4001(a)(3). The parties cannot come to a resolution if those with a beneficial interest in the note have not been identified and engaged in the communication.

In the context of a motion for relief from stay, the movant, MERS in this case, bears the burden of proving it is a real party in interest. In re Wilhelm, 407 B.R. 392, 400 (Bankr. D. Idaho 2009)(citing In re Hayes, 393 B.R. 259, 267 (Bankr. D.Mass. 2008)(“To have standing to seek relief from the automatic stay, [movant] was required to establish that it is a party in interest and that its rights are not those of another entity”)).

Initially, a movant seeking relief from stay may rely upon its motion. Id. However, if a trustee or debtor objects based upon standing, the movant must come forward with evidence of standing. Id.; Jacobson, 402 B.R. at 367 (requiring movant at least demonstrate who presently holds the note at issue or the source of movant’s authority). Instead of presenting the evidence to the Bankruptcy Court, MERS attempted to withdraw the Motion from the Bankruptcy Court’s consideration, citing the failure of a MERS Certifying Officer to demonstrate that a member was in physical possession of the promissory note at the time the motion was filed.1 The only evidence provided by MERS was a declaration that MERS had been identified as a beneficiary in the deed of trust and that it had been named nominee for the original lender.

Since MERS provided no evidence that it was the agent or nominee for the current owner of the beneficial interest in the note, it has failed to meet its burden of establishing that it is a real party in interest with standing. Accordingly, the order of the Bankruptcy Court must be affirmed. This holding is limited to the specific facts and procedural posture of the instant case. Since the Bankruptcy Court denied the Motion without prejudice nothing prevents Appellant from refilling the Motion in Bankruptcy Court providing the evidence it admits should be readily available in its system. The Court makes no finding that MERS would not be able to establish itself as a real party in interest had it identified the holder of the note or provided sufficient evidence of the source of its authority. IV.

Conclusion

Accordingly, IT IS HEREBY ORDERED that the Order of the Bankruptcy Court entered March 31, 2009 is AFFIRMED. DATED this 4th day of December 2009.

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Ortiz v. Accredited Home Lenders

Posted on December 5, 2009. Filed under: Case Law, Foreclosure Defense, Loan Modification, Truth in Lending Act | Tags: , , , , , , , |

ERNESTO ORTIZ; ARACELI ORTIZ, Plaintiffs, v. ACCREDITED HOME LENDERS, INC.; LINCE HOME LOANS; CHASE HOME FINANCE, LLC; U.S. BANK NATIONAL ASSOCIATION, TRUSTEE FOR JP MORGAN ACQUISITION TRUST-2006 ACC; and DOES 1 through 100, inclusive, Defendants.

CASE NO. 09 CV 0461 JM (CAB)

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA

ORDER GRANTING MOTION TO DISMISS

Doc. No. 7

On February 6, 2009, Plaintiffs Ernesto and Araceli Ortiz (“Plaintiffs”) filed a complaint in the Superior Court of the State of California, County of San Diego, raising claims arising out of a mortgage loan transaction. (Doc. No. 1, Exh. 1.) On March 9, 2009, Defendants Chase Home Finance, LLC (“Chase”) and U.S. Bank National Association (“U.S. Bank”) removed the action to federal court on the basis of federal question jurisdiction, 28 U.S.C. § 1331. (Doc. No. 1.) Plaintiffs  [*1162]  filed a First Amended Complaint on April 21, 2009, naming only U.S. Bank as a defendant and  [**2] dropping Chase, Accredited Home Lenders, Inc., and Lince Home Loans from the pleadings. (Doc. No. 4, “FAC.”) Pending before the court is a motion by Chase and U.S Bank to dismiss the FAC for failure to state a claim pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6). (Doc. No. 7, “Mot.”) Because Chase is no longer a party in this matter, the court construes the motion as having been brought only by U.S. Bank. Plaintiffs oppose the motion. (Doc. No. 12, “Opp’n.”) U.S. Bank submitted a responsive reply. (Doc. No. 14, “Reply.”) Pursuant to Civ.L.R. 7.1(d), the matter was taken under submission by the court on June 22, 2009. (Doc. No. 12.)

For the reasons set forth below, the court GRANTS the motion to dismiss.

I. BACKGROUND

Plaintiffs purchased their home at 4442 Via La Jolla, Oceanside, California (the “Property”) in January 2006. (FAC P 3; Doc. No. 7-2, Exh. 1 (“DOT”) at 1.) The loan was secured by a Deed of Trust on the Property, which was recorded around January 10, 2006. (DOT at 1.) Plaintiffs obtained the loan through a broker “who received kickbacks from the originating lender.” (FAC P 4.) U.S. Bank avers that it is the assignee of the original creditor, Accredited Home  [**3] Lenders, Inc. (FAC P 5; Mot. at 2, 4.) Chase is the loan servicer. (Mot. at 4.) A Notice of Default was recorded on the Property on June 30, 2008, showing the loan in arrears by $ 14,293,08. (Doc. No. 7-2, Exh. 2.) On October 3, 2008, a Notice of Trustee’s Sale was recorded on the Property. (Doc. No. 7-2, Exh. 4.) From the parties’ submissions, it appears no foreclosure sale has yet taken place.

Plaintiffs assert causes of action under Truth in Lending Act, 15 U.S.C. § 1601 et seq. (“TILA”), the Perata Mortgage Relief Act, Cal. Civil Code § 2923.5, the Foreign Language Contract Act, Cal. Civ. Code § 1632, the California Unfair Business Practices Act, Cal. Bus. Prof. Code § 17200 et seq., and to quiet title in the Property. Plaintiffs seek rescission, restitution, statutory and actual damages, injunctive relief, attorneys’ fees and costs, and judgments to void the security interest in the Property and to quiet title.

II. DISCUSSION

A. Legal Standards

A motion to dismiss under Rule 12(b)(6) challenges the legal sufficiency of the pleadings. De La Cruz v. Tormey, 582 F.2d 45, 48 (9th Cir. 1978). [HN2] In evaluating the motion, the court must construe the pleadings in the light most favorable to  the plaintiff, accepting as true all material allegations in the complaint and any reasonable inferences drawn therefrom. See, e.g., Broam v. Bogan, 320 F.3d 1023, 1028 (9th Cir. 2003).  While Rule 12(b)(6) dismissal is proper only in “extraordinary” cases, the complaint’s “factual allegations must be enough to raise a right to relief above the speculative level….” U.S. v. Redwood City, 640 F.2d 963, 966 (9th Cir. 1981); Bell Atlantic Corp. v. Twombly, 550 US 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). The court should grant 12(b)(6) relief only if the complaint lacks either a “cognizable legal theory” or facts sufficient to support a cognizable legal theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990).

In testing the complaint’s legal adequacy, the court may consider material properly submitted as part of the complaint or subject to judicial notice. Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007). Furthermore, under the “incorporation by reference” doctrine, the court may consider documents “whose contents are alleged in a complaint and whose authenticity [*1163]  no party questions, but which are not physically attached to the [plaintiff’s] pleading.” Janas v. McCracken (In re Silicon Graphics Inc. Sec. Litig.), 183 F.3d 970, 986 (9th Cir. 1999) [**5] (internal quotation marks omitted). A court may consider matters of public record on a motion to dismiss, and doing so “does not convert a Rule 12(b)(6) motion to one for summary judgment.” Mack v. South Bay Beer Distributors, 798 F.2d 1279, 1282 (9th Cir. 1986), abrogated on other grounds by Astoria Fed. Sav. and Loan Ass’n v. Solimino, 501 U.S. 104, 111, 111 S. Ct. 2166, 115 L. Ed. 2d 96 (1991). To this end, the court may consider the Deed of Trust, Notice of Default, Substitution of Trustee, and Notice of Trustee’s Sale, as sought by U.S. Bank in their Request for Judicial Notice. (Doc. No. 7-2, Exhs. 1-4.)

B. Analysis

A. Truth in Lending Act

Plaintiffs allege U.S. Bank failed to properly disclose material loan terms, including applicable finance charges, interest rate, and total payments as required by 15 U.S.C. § 1632. (FAC PP 7, 14.) In particular, Plaintiffs offer that the loan documents contained an “inaccurate calculation of the amount financed,” “misleading disclosures regarding the…variable rate nature of the loan” and “the application of a prepayment penalty,” and also failed “to disclose the index rate from which the payment was calculated and selection of historical index values.” (FAC P 13.) In addition,  Plaintiffs contend these violations are “obvious on the face of the loans [sic] documents.” (FAC P 13.) Plaintiffs argue that since “Defendant has initiated foreclosure proceedings in an attempt to collect the debt,” they may seek remedies for the TILA violations through “recoupment or setoff.” (FAC P 14.) Notably, Plaintiffs’ FAC does not specify whether they are requesting damages, rescission, or both under TILA, although their general request for statutory damages does cite TILA’s § 1640(a). (FAC at 7.)

U.S. Bank first asks the court to dismiss Plaintiffs’ TILA claim by arguing it is “so summarily pled that it does not ‘raise a right to relief above the speculative level …'” (Mot. at 3.) The court disagrees. Plaintiffs have set out several ways in which the disclosure documents were deficient. In addition, by stating the violations were apparent on the face of the loan documents, they have alleged assignee liability for U.S. Bank. See 15 U.S.C. § 1641(a)(assignee liability lies “only if the violation…is apparent on the face of the disclosure statement….”). The court concludes Plaintiffs have adequately pled the substance of their TILA claim.

However, as U.S. Bank argues, Plaintiffs’ TILA claim is procedurally barred. To the extent Plaintiffs recite a claim for rescission, such is precluded by the applicable three-year statute of limitations. 15 U.S.C. § 1635(f) “Any claim for rescission must be brought within three years of consummation of the transaction or upon the sale of the property, whichever occurs first…”). According to the loan documents, the loan closed in December 2005 or January 2006. (DOT at 1.) The instant suit was not filed until February 6, 2009, outside the allowable three-year period. (Doc. No. 1, Exh. 1.) In addition,  “residential mortgage transactions” are excluded from the right of rescission. 15 U.S.C. § 1635(e). A “residential mortgage transaction” is defined by 15 U.S.C. § 1602(w) to include “a mortgage, deed of trust, … or equivalent consensual security interest…created…against the consumer’s dwelling to finance the acquisition…of such dwelling.” Thus, Plaintiffs fail to state a claim for rescission under TILA.

As for Plaintiffs’ request for damages, they acknowledge such claims are normally subject to a one-year statute of limitations, typically running from the date of loan execution. See 15 U.S.C. §1640(e) any claim under this provision must be made “within one year from the date of the occurrence of the violation.”). However, as mentioned above, Plaintiffs attempt to circumvent the limitations period by characterizing their claim as one for “recoupment or setoff.” Plaintiffs rely on 15 U.S.C. § 1640(e), which provides:

This subsection does not bar a person from asserting a violation of this subchapter in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law.

Generally, “a defendant’s right to plead ‘recoupment,’ a ‘defense arising out of some feature of the transaction upon which the plaintiff’s action is grounded,’ … survives the expiration” of the limitations period. Beach v. Ocwen Fed. Bank, 523 U.S. 410, 415, 118 S. Ct. 1408, 140 L. Ed. 2d 566 (1998) (quoting Rothensies v. Elec. Storage Battery Co., 329 U.S. 296, 299, 67 S. Ct. 271, 91 L. Ed. 296, 1947-1 C.B. 109 (1946) (internal citation omitted)). Plaintiffs also correctly observe the Supreme Court has confirmed recoupment claims survive TILA’s statute of limitations. Id. at 418. To avoid dismissal at this stage, Plaintiffs must show that “(1) the TILA violation and the debt are products of the same transaction, (2) the debtor asserts the claim as a defense, and (3) the main action is timely.” Moor v. Travelers Ins. Co., 784 F.2d 632, 634 (5th Cir. 1986) (citing In re Smith, 737 F.2d 1549, 1553 (11th Cir. 1984)) (emphasis added).

U.S. Bank suggests Plaintiffs’ TILA claim is not sufficiently related to the underlying mortgage debt so as to qualify as a recoupment. (Mot. at 6-7.) The court disagrees with this argument, and other courts have reached the same conclusion. See Moor, 784 F.2d at 634 (plaintiff’s use of recoupment claims under TILA failed on the second and third prongs only); Williams v. Countrywide Home Loans, Inc., 504 F.Supp.2d 176, 188 (S.D. Tex. 2007) (where plaintiff “received a loan secured by a deed of trust on his property and later defaulted on the mortgage payments to the lender,” he “satisfie[d] the first element of the In re Smith test….”). Plaintiffs’ default and U.S. Bank’s attempts to foreclose on the Property representing the security interest for the underlying loan each flow from the same contractual transaction. The authority relied on by U.S. Bank, Aetna Fin. Co. v. Pasquali, 128 Ariz. 471, 626 P.2d 1103 (Ariz. App. 1981), is unpersuasive.  Not only does Aetna Finance recognize the split among courts on this issue, the decision is not binding on this court, and was reached before the Supreme Court’s ruling in Beach, supra. Aetna Fin., 128 Ariz. at 473,

Nevertheless, the deficiencies in Plaintiffs’ claim become apparent upon examination under the second and third prongs of the In re Smith test. Section 1640(e) of TILA makes recoupment available only as a “defense” in an “action to collect a debt.” Plaintiffs essentially argue that U.S. Bank’s initiation of non-judicial foreclosure proceedings paves the path for their recoupment claim. (FAC P 14; Opp’n at 3.) Plaintiffs cite to In re Botelho, 195 B.R. 558, 563 (Bkrtcy. D. Mass. 1996), suggesting the court there allowed TILA recoupment claims to counter a non-judicial foreclosure. In Botelho, lender Citicorp apparently initiated non-judicial foreclosure proceedings, Id. at 561 fn. 1, and thereafter entered the plaintiff’s Chapter 13 proceedings by filing a Proof of Claim. Id. at 561. The plaintiff then filed an adversary complaint before the same bankruptcy court in which she advanced her TILA-recoupment theory. Id. at 561-62. The Botelho court evaluated the validity of the  recoupment claim, taking both of Citicorp’s actions into account – the foreclosure as well as the filing of a proof of claim. Id. at 563. The court did not determine whether the non-judicial foreclosure, on its own, would have allowed the plaintiff to satisfy the three prongs of the In re Smith test.

On the other hand, the court finds U.S. Bank’s argument on this point persuasive: non-judicial foreclosures are not “actions” as contemplated by TILA. First, § 1640(e) itself defines an “action” as a court proceeding. 15 U.S.C. § 1640(e) (“Any action…may be brought in any United States district court, or in any other court of competent jurisdiction…”). Turning to California law, Cal. Code Civ. Proc. § 726 indicates an “action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property” results in a judgment from the court directing the sale of the property and distributing the resulting funds. Further, Code § 22 defines an “action” as “an ordinary proceeding in a court of justice by  which one party prosecutes another for the declaration, enforcement, or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense.” Neither of these state law provisions addresses the extra-judicial exercise of a right of sale under a deed of trust, which is governed by Cal. Civ. Code § 2924, et seq. Unlike the situation in Botelho, U.S. Bank has done nothing to bring a review its efforts to foreclose before this court. As Plaintiffs concede, “U.S. Bank has not filed a civil lawsuit and nothing has been placed before the court” which would require the court to “examine the nature and extent of the lender’s claims….” (Opp’n at 4.) “When the debtor hales [sic] the creditor into court…, the claim by the debtor is affirmative rather than defensive.” Moor, 784 F.2d at 634; see also, Amaro v. Option One Mortgage Corp., 2009 U.S. Dist. 2855, 2009 WL 103302, at *3 (C.D. Cal., Jan. 14, 2009) (rejecting plaintiff’s argument that recoupment is a defense to a non-judicial foreclosure and holding “Plaintiff’s affirmative use of the claim is improper and exceeds the scope of the TILA exception….”).

The court recognizes that U.S. Bank’s choice of remedy under California law effectively  denies Plaintiffs the opportunity to assert a recoupment defense. This result does not run afoul of TILA. As other courts have noted, TILA contemplates such restrictions by allowing recoupment only to the extent allowed under state law. 15 U.S.C. § 1640(e); Joseph v. Newport Shores Mortgage, Inc., 2006 U.S. Dist. LEXIS 8199, 2006 WL 418293, at *2 fn. 1 (N.D. Ga., Feb. 21, 2006). The court concludes TILA’s one-year statute of limitations under § 1635(f) bars Plaintiffs’ TILA claim.

In sum, U.S. Bank’s motion to dismiss the TILA claim is granted, and Plaintiffs’ TILA claims are dismissed with prejudice.

B. Perata Mortgage Relief Act, Cal. Civ. Code § 2923.5

Plaintiffs’ second cause of action arises under the Perata Mortgage Relief Act, Cal. Civ. Code § 2923.5. Plaintiffs argue U.S. Bank is liable for monetary damages under this provision because it “failed and refused to explore” “alternatives to the drastic remedy of foreclosure, such as loan modifications” before initiating foreclosure proceedings. (FAC PP 17-18.) Furthermore, Plaintiffs allege U.S. Bank violated Cal. Civ. Code § 2923.5(c) by failing to include with the notice of sale a declaration that it contacted the borrower to explore such options. (Opp’n at  6.)

Section 2923.5(a)(2) requires a “mortgagee, beneficiary or authorized agent” to “contact the borrower in person or by telephone in order to assess the borrower’s [*1166]  financial situation and explore options for the borrower to avoid foreclosure.” For a lender which had recorded a notice of default prior to the effective date of the statute, as is the case here, § 2923.5(c) imposes a duty to attempt to negotiate with a borrower before recording a notice of sale. These provisions cover loans initiated between January 1, 2003 and December 31, 2007. Cal. Civ. Code § 2923.5(h)(3), (i).

U.S. Bank’s primary argument is that Plaintiffs’ claim should be dismissed because neither § 2923.5 nor its legislative history clearly indicate an intent to create a private right of action. (Mot. at 8.) Plaintiffs counter that such a conclusion is unsupported by the legislative history; the California legislature would not have enacted this “urgency” legislation, intended to curb high foreclosure rates in the state, without any accompanying enforcement mechanism. (Opp’n at 5.) The court agrees with Plaintiffs. While the Ninth Circuit has yet to address this issue, the court found no decision from this circuit  [**15] where a § 2923.5 claim had been dismissed on the basis advanced by U.S. Bank. See, e.g. Gentsch v. Ownit Mortgage Solutions Inc., 2009 U.S. Dist. LEXIS 45163, 2009 WL 1390843, at *6 (E.D. Cal., May 14, 2009)(addressing merits of claim); Lee v. First Franklin Fin. Corp., 2009 U.S. Dist. LEXIS 44461, 2009 WL 1371740, at *1 (E.D. Cal., May 15, 2009) (addressing evidentiary support for claim).

On the other hand, the statute does not require a lender to actually modify a defaulting borrower’s loan but rather requires only contacts or attempted contacts in a good faith effort to prevent foreclosure. Cal. Civ. Code § 2923.5(a)(2). Plaintiffs allege only that U.S. Bank “failed and refused to explore such alternatives” but do not allege whether they were contacted or not. (FAC P 18.) Plaintiffs’ use of the phrase “refused to explore,” combined with the “Declaration of Compliance” accompanying the Notice of Trustee’s Sale, imply Plaintiffs were contacted as required by the statute. (Doc. No. 7-2, Exh. 4 at 3.) Because Plaintiffs have failed to state a claim under Cal. Civ. Code § 2923.5, U.S. Bank’s motion to dismiss is granted. Plaintiffs’ claim is dismissed without prejudice.

C. Foreign Language Contract Act, Cal. Civ. Code § 1632 et seq.

Plaintiffs  assert “the contract and loan obligation was [sic] negotiated in Spanish,” and thus, they were entitled, under Cal. Civ. Code § 1632, to receive loan documents in Spanish rather than in English. (FAC P 21-24.) Cal. Civ. Code § 1632 provides, in relevant part:

Any person engaged in a trade or business who negotiates primarily in Spanish, Chines, Tagalog, Vietnamese, or Korean, orally or in writing, in the course of entering into any of the following, shall deliver to the other party to the contract or agreement and prior to the execution thereof, a translation of the contract or agreement in the language in which the contract or agreement was negotiated, which includes a translation of every term and condition in that contract or agreement.

Cal. Civ. Code § 1632(b).

U.S. Bank argues this claim must be dismissed because Cal. Civ. Code § 1632(b)(2) specifically excludes loans secured by real property. (Mot. at 8.) Plaintiffs allege their loan falls within the exception outlined in § 1632(b)(4), which effectively recaptures any “loan or extension of credit for use primarily for personal, family or household purposes where the loan or extension of credit is subject to the provision of Article  7 (commencing with Section 10240) of Chapter 3 of Part I of Division 4 of the Business and Professions Code ….” (FAC P 21; Opp’n at 7.) The Article 7 loans referenced here are those secured by real property which [*1167]  were negotiated by a real estate broker. 1 See Cal. Bus. & Prof. Code § 10240. For the purposes of § 1632(b)(4), a “real estate broker” is one who “solicits borrowers, or causes borrowers to be solicited, through express or implied representations that the broker will act as an agent in arranging a loan, but in fact makes the loan to the borrower from funds belonging to the broker.” Cal. Bus. & Prof. Code § 10240(b). To take advantage of this exception with respect to U.S. Bank, Plaintiffs must allege U.S. Bank either acted as the real estate broker or had a principal-agent relationship with the broker who negotiated their loan. See Alvara v. Aurora Loan Serv., Inc., 2009 U.S. Dist. LEXIS 50365, 2009 WL 1689640, at *3 (N.D. Cal. Jun. 16, 2009), and references cited therein (noting “several courts have rejected the proposition that defendants are immune from this statute simply because they are not themselves brokers, so long as the defendant has an agency relationship with a broker or was acting as a  [**18] broker.”). Although Plaintiffs mention in passing a “broker” was involved in the transaction (FAC P 4), they fail to allege U.S. Bank acted in either capacity described above.

Although U.S. Bank correctly notes the authorities cited by Plaintiffs are all unreported cases, the court agrees with the conclusions set forth in those cases. See Munoz v. International Home Capital Corp., 2004 U.S. Dist. LEXIS 26362, 2004 WL 3086907, at *9 (N.D. Cal. 2004); Ruiz v. Decision One Mortgage Co., LLC, 2006 U.S. Dist. LEXIS 54571, 2006 WL 2067072, at *5 (N.D. Cal. 2006).

Nevertheless, Plaintiffs argue they are not limited to remedies against the original broker, but may seek rescission of the contract through the assignee of the loan. Cal. Civ. Code § 1632(k). Section 1632(k) allows for rescission for violations of the statute and also provides, “When the contract for a consumer credit sale or consumer lease which has been sold and assigned to a financial institution is rescinded pursuant to this subdivision, the consumer shall make restitution to and have restitution made by the person with whom he or she made the contract, and shall give notice of rescission to the assignee.Cal. Civ. Code § 1632(k) (emphasis added). There are two problems with Plaintiffs’  theory. First, it is not clear to this court that Plaintiffs’ loan qualifies as a “consumer credit sale or consumer lease.” Second, the court interprets this provision not as a mechanism to impose liability for a violation of § 1632 on U.S. Bank as an assignee, but simply as a mechanism to provide notice to that assignee after recovering restitution from the broker.

The mechanics of contract rescission are governed by Cal. Civ. Code § 1691, which requires a plaintiff to give notice of rescission to the other party and to return, or offer to return, all proceeds he received from the transaction. Plaintiffs’ complaint does satisfy these two requirements. Cal. Civ. Code § 1691 (“When notice of rescission has not otherwise been given or an offer to restore the benefits received under the contract has not otherwise been made, the service of a pleading…that seeks relief based on rescission shall be deemed to be such notice or offer or both.”). However, the court notes that if Plaintiffs were successful in their bid to rescind the contract, they would have to return the proceeds of the loan which they used to purchase their Property.

For these reasons discussed above, Plaintiffs have failed  to state a claim under Cal. Civ. Code § 1632. U.S. Bank’s motion to dismiss is granted and Plaintiffs’ claim for violation of Cal. Civ. Code § 1632 is dismissed without prejudice.

D. Unfair Business Practices, Cal. Bus. & Prof. Code § 17200

California’s unfair competition statute “prohibits any unfair competition, which means ‘any unlawful, unfair or fraudulent [*1168]  business act or practice.'” In re Pomona Valley Med. Group, 476 F.3d 665, 674 (9th Cir. 2007) (citing Cal. Bus. & Prof. Code § 17200, et seq.). “This tripartite test is disjunctive and the plaintiff need only allege one of the three theories to properly plead a claim under § 17200.” Med. Instrument Dev. Labs. v. Alcon Labs., 2005 U.S. Dist. LEXIS 41411, 2005 WL 1926673, at *5 (N.D. Cal. Aug. 10, 2005). “Virtually any law-state, federal or local-can serve as a predicate for a § 17200 claim.” State Farm Fire & Casualty Co. v. Superior Court, 45 Cal.App.4th 1093, 1102-3, 53 Cal. Rptr. 2d 229 (1996). Plaintiffs assert their § 17200 “claim is entirely predicated upon their previous causes of action” under TILA and Cal. Civ. Code §§ 2923.5 and § 1632. (FAC PP 25-29; Opp’n at 9.)

U.S. Bank first contend Plaintiffs lack standing to pursue a § 17200 claim because they “do not allege what  [**21] money or property they allegedly lost as a result of any purported violation.” (Mot. at 9.) The court finds Plaintiffs have satisfied the pleading standards on this issue by alleging they “relied, to their detriment,” on incomplete and inaccurate disclosures which led them to pay higher interest rates than they would have otherwise. (FAC P 9.) Such “losses” have been found sufficient to confer standing. See Aron v. U-Haul Co. of California, 143 Cal.App.4th 796, 802-3, 49 Cal. Rptr. 3d 555 (2006).

U.S. Bank next offers that Plaintiffs’ mere recitation of the statutory bases for this cause of action, without specific allegations of fact, fails to state a claim. (Mot. at 10.) Plaintiffs point out all the factual allegations in their complaint are incorporated by reference into their § 17200 claim. (FAC P 25; Opp’n at 9.) The court agrees there was no need for Plaintiffs to copy all the preceding paragraphs into this section when their claim expressly incorporates the allegations presented elsewhere in the complaint. Any argument by U.S. Bank that the pleadings failed to put them on notice of the premise behind Plaintiffs’ § 17200 claim would be somewhat disingenuous.

Nevertheless, all three of Plaintiffs’ predicate  statutory claims have been dismissed for failure to state a claim. Without any surviving basis for the § 17200 claim, it too must be dismissed. U.S. Bank’s motion is therefore granted and Plaintiffs’ § 17200 claim is dismissed without prejudice.

E. Quiet Title

In their final cause of action, Plaintiffs seek to quiet title in the Property. (FAC PP 30-36.) In order to adequately allege a cause of action to quiet title, a plaintiff’s pleadings must include a description of “[t]he title of the plaintiff as to which a determination…is sought and the basis of the title…” and “[t]he adverse claims to the title of the plaintiff against which a determination is sought.” Cal. Code Civ. Proc. § 761.020. A plaintiff is required to name the “specific adverse claims” that form the basis of the property dispute. See Cal. Code Civ. Proc. § 761.020, cmt. at P 3. Here, Plaintiffs allege the “Defendant claims an adverse interest in the Property owned by Plaintiffs,” but do not specify what that interest might be. (Mot. at 6-7.) Plaintiffs are still the owners of the Property. The recorded foreclosure Notices do not affect Plaintiffs’ title, ownership, or possession in the Property. U.S. Bank’s motion to  dismiss is therefore granted, and Plaintiffs’ cause of action to quiet title is dismissed without prejudice.

III. CONCLUSION

For the reasons set forth above, U.S. Bank’s motion to dismiss (Doc. No. 7) is GRANTED. Accordingly, Plaintiffs’ claim under TILA is DISMISSED with prejudice and Plaintiffs’ claims under Cal. Civ. Code § 2923.5,  [*1169]  Cal. Civ. Code§ 1632, and Cal. Bus. & Prof. Code § 17200, and their claim to quiet title are DISMISSED without prejudice.

The court grants Plaintiffs 30 days’ leave from the date of entry of this order to file a Second Amended Complaint which cures all the deficiencies noted above. Plaintiffs’ Second Amended Complaint must be complete in itself without reference to the superseded pleading. Civil Local Rule 15.1.

IT IS SO ORDERED.

DATED: July 13, 2009

/s/ Jeffrey T. Miller

Hon. Jeffrey T. Miller

United States District Judge

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Indymac Bank F.S.B. v. Yano-Horoski

Posted on November 21, 2009. Filed under: Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , , , , |

Mortgage and Note voided, cancelled and nullified by the court because lender had acted in bad faith, refusing to negotiate a reasonable loan modification.

______________________________________________________________________________________________

Indymac Bank F.S.B. v Yano-Horoski
2009 NY Slip Op 52333(U)
Decided on November 19, 2009
Supreme Court, Suffolk County
Spinner, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 19, 2009

Supreme Court, Suffolk County

Indymac Bank F.S.B., Plaintiff

against

Diana Yano-Horoski, Wells Fargo Bank Minnesota National Association as Trustee for Soundview Home Equity Loan Trust 2001-1 and Kimberly Horoski, Defendants.

2005-17926

Steven J. Baum P.C.

Attorney for Plaintiff

P.O. Box 1291

Buffalo, New York 14240

Diana Yano-Horoski

Defendant Pro Se

8 Oakland Street

East Patchogue, New York 11772-5767

Jeffrey Arlen Spinner, J.

This is an action wherein the Plaintiff claims foreclosure of a mortgage dated August 4, 2004 in the original principal amount of $ 292,500.00 recorded with the Clerk of Suffolk County, New York in Liber 20826 of Mortgages at Page 285. The mortgage secures an adjustable rate note of the same amount with an initial interest rate of 10.375%. The mortgage encumbers real property commonly known as 8 Oakland Street, East Patchogue, Town of Brookhaven, New York and described as District 0200 Section 979.50 Block 05.00 Lot 001.000 on the Tax Map of Suffolk County. Plaintiff commenced this action by filing a Summons, Verified Complaint and Notice of Pendency on July 27, 2005. The Notice of Pendency was extended by Order dated April 28, 2008 and a Judgment of Foreclosure & Sale was granted on January 12, 2009.

Thereafter and in accordance with the Laws of 2008, Ch. 472, Sec. 3-a and in view of the fact that the loan at issue was deemed to be “sub-prime” or “high cost” in nature, Defendant seasonably requested that the Court convene a settlement conference. That request was granted and a conference was commenced on February 24, 2009 which was continued five times in a series of unsuccessful attempts by the Court to obtain meaningful cooperation from Plaintiff. In view of Plaintiff’s intransigence in its continuing failure and refusal to cooperate, both with the Court and with Defendant’s multiple and reasonable requests, the Court directed that Plaintiff produce an officer of the bank at the adjourned conference scheduled for September 22, 2009.

At the conference held on September 22, 2009, Karen Dickinson, Regional Manager of [*2]Loss Mitigation for IndyMac Mortgage Services, division of OneWest Bank F.S.B. (“IndyMac”) appeared on behalf of Plaintiff. IndyMac purports to be the servicer of the loan for the benefit of Deutsche Bank who, it is claimed, is the owner and holder of the note and mortgage (though the record holder is IndyMac Bank F.S.B., an entity which no longer is in existence). At that conference, it was celeritously made clear to the Court that Plaintiff had no good faith intention whatsoever of resolving this matter in any manner other than a complete and forcible devolution of title from Defendant. Although IndyMac had prepared a two page document entitled “Mediation Yano-Horoski” which contained what purported to be a financial analysis, Ms. Dickinson’s affirmative statements made it abundantly clear that no form of mediation, resolution or settlement would be acceptable to Plaintiff. IndyMac asserts the total amount due it to be in excess of $ 525,000.00 and freely concedes that the property securing the loan is worth no more than $ 275,000.00. Although Ms. Dickinson insisted that Ms. Yano-Horoski had been offered a “Forbearance Agreement” in the recent past upon which she quickly defaulted, it was only after substantial prodding by the Court that Ms. Dickinson conceded, with great reluctance, that it had not been sent to Defendant until after its stated first payment due date and hence, Defendant could not have consummated it under any circumstances (Defendant, through Plaintiff’s duplicity, found herself to be in the unique and uncomfortable position of being placed in default of the “agreement” even before she had received it). Plaintiff flatly rejected an offer by Plaintiff’s daughter to purchase the house for its fair market value (a so-called “short sale”) with third party financing. Plaintiff refused to consider a loan modification utilizing any more than 25% of the income of Plaintiff’s husband and daughter (both of whom reside in the premises with her), the excuse being that “We can’t control what non-obligors do with their money” (the logical follow up to this statement is how does the bank control what the obligor does with her money?). The Court found IndyMac’s position to be deeply troubling, especially since a plethora of sub-prime loans in this County’s Foreclosure Conference Part have been successfully modified with the lender’s reliance upon the income of non-obligors who reside in the premises under foreclosure. The Plaintiff also summarily rejected an offer by both Plaintiff’s husband and daughter to voluntarily obligate themselves for payment upon the full indebtedness, thus committing their individual incomes expressly to the purpose of a loan modification. It should be noted here that Defendant did not even request any waiver or “forgiveness” of the indebtedness aside from some tinkering with the interest rate, just a modification of terms so as to enable her to repay the same. It was evident from Ms. Dickinson’s opprobrious demeanor and condescending attitude that no proffer by Defendant (short of consent to foreclosure and ejectment of Defendant and her family) would be acceptable to Plaintiff. Even a final and desperate offer of a deed in lieu of foreclosure was met with bland equivocation. In short, each and every proposal by Defendant, no matter how reasonable, was soundly rebuffed by Plaintiff. Viewed objectively, it is apparent that Plaintiff’s conduct in this matter falls within the definitions set forth in 22 NYCRR § 130-1.1( c)(2), which might well warrant the imposition of monetary sanctions.

On the Court’s own motion, a hearing was held on November 18, 2009 in order to explore the issues herein. At the hearing, Ms. Dickinson appeared as well as Mr. Horoski. IndyMac claimed a balance due, as of September 22, 2009 of $ 527,437.73 which included an escrow overdraft of $ 46,627.88 for taxes advanced since the date of default but did not include attorney’s fees and costs.. Plaintiff was unable to tell the Court the amount of the principal [*3]balance owed. Mr. Horoski advised the Court that according to two letters received from Plaintiff, the principal balance was said to be $ 285,381.70 as of February 9, 2009 and $ 283,992.48 as of August 10, 2009. Plaintiff stated was that Defendant must have made payments though it was conceded that in fact no payment had been made.Plaintiff insisted that it had remained in regular contact with Defendant in an effort to reach an amicable resolution, that it had extended two modification offers to Defendant which she did not accept and further, that due to her financial status she was not qualified for any modification, even under the Federal HAMP guidelines. Plaintiff denied that it had “singled out” Defendants, simply stating that her status was such that she fell outside applicable guidelines. All of these assertions were disputed by Defendant.

That having been said, the Court is greatly disturbed by Plaintiff’s assertions of the amount claimed to be due from Defendant. The Referee’s Report dated June 30, 2008, which has its genesis in a sworn affidavit by a representative of Plaintiff (presumably one with knowledge of the account), reflects a total amount due and owing of $ 392,983.42. The principal balance is reported to be $ 290,687.85 with interest computed at the rates of 10.375% from November 1, 2005 through August 31, 2006 ($ 25,118.62), 12.50% from September 1, 2006 to February 28, 2007 ($ 18,018.66), 12.375% from March 1, 2007 to March 31, 2008 ($ 39,126.39) and 11.375% from April 1, 2008 to June 24, 2008 ($ 7,700.24) totalling $ 89,963.91. Plaintiff also claims $ 20.00 in non-sufficient funds charges, $ 295.00 in property inspection fees and $ 12,016.66 for tax and insurance advances. The Judgment of Foreclosure & Sale dated January 12, 2009 was granted in the amount of $ 392,983.42 with interest at the contract rate from June 24, 2008 through January 12, 2009 and at the statutory rate thereafter plus attorney’s fees of $ 2,300.00 and a bill of costs in the amount of $ 1,705.00. Even computing the accrual of pre-judgment interest of $ 18,299.18 (using Plaintiff’s per diem rate in the Referee’s Report) together with post-judgment interest at a statutory 9% through November 19, 2009 (an additional $ 31,740.90), the application of simple addition yields a total amount due of $ 447,028.50. This figure is $ 80,409.23 less than the $ 527,437.73 asserted by Plaintiff to be due and owing from Defendant. The Court is astounded that Plaintiff now claims to be owed an escrow advance amount of $ 46,627.88 when, under oath, its officer swore that as of June 24, 2008 that amount was actually $ 34,611.22 less. Moreover, it now appears that the elusive principal balance is either $ 290,687.85, $ 285,381.70 or $ 283,992.48.

It is the province and indeed the obligation of the trial court to assess and to determine issues regarding credibility, Morgan v. McCaffrey 14 AD3d 670 (2nd Dept. 2005). In the matter before the Court, the pendulum of credibility swings heavily in favor of Defendant. When the conduct of Plaintiff in this proceeding is viewed in its entirety, it compels the Court to invoke the ancient and venerable principle of “Falsus in uno, falsus in omni” (Latin; “false in one, false in all”) upon Defendant which, after review, is wholly appropriate in the context presented, Deering v. Metcalf 74 NY 501 (1878). Regrettably, the Court has been unable to find even so much as a scintilla of good faith on the part of Plaintiff. Plaintiff comes before this Court with unclean hands yet has the insufferable temerity to demand equitable relief against Defendant.

The Court, over the course of some six substantive appearances in seven months, has been afforded more than ample opportunity to assess the demeanor, credibility and general state [*4]of relevant affairs of Defendant and Plaintiff. Although not actually relevant to the disposition of this matter, the Court is constrained to note that Defendant is afflicted with multiple health problems which outwardly manifest in her experiencing great difficulty in ambulation, necessitating the use of mechanical supports. Moreover, Defendant’s husband, Mr. Gregory Horoski, suffers from a myriad of serious medical conditions which greatly impede most aspects of his daily existence. Nonetheless, both of these persons, together with their adult daughter who resides with them and who is substantially and gainfully employed, receive income which they are more than willing to commit, in good faith, toward repayment of the debt to Plaintiff and indeed, despite their physical challenges, they have appeared at each and every scheduled conference before this Court. At each appearance, they have assiduously attempted to resolve this controversy in an amicable fashion, only to be callously and arbitrarily turned away by Plaintiff. This has been so even in spite of the Court’s continuing albeit futile endeavors at brokering a settlement.

As a relevant aside, the scenario presented here raises the specter of a much greater social problem, that of housing those persons whose homes are foreclosed and who are thereafter dispossessed. It is certainly no secret that Suffolk County is in the yawning abyss of a deep mortgage and housing crisis with foreclosure filings at a record high rate and a corresponding paucity of emergency housing. While foreclosure and its attendant eviction are clearly the inevitable (and in some cases, proper) result in a number of these situations, the Court is persuaded that this need not be the case here. In this matter, Defendant is plainly willing to make arrangements for repayment and both her husband and daughter are likewise willing to allocate their respective incomes in order to reach the same end. Were Plaintiff amenable, she would presumably continue to maintain the property’s physical plant, pay taxes thereon and the property would retain or perhaps increase its market value. Plaintiff would receive a regular income stream, albeit with a reduced rate of interest and without sustaining a loss of several hundred thousand dollars. In addition, no neighborhood blight would occur from the boarding of the property after foreclosure which would, in turn, avert problems of litter, dumping, vagrancy and vandalism as well as a corresponding decline in the property values in the immediate area. In short, a loan modification would result in a proverbial “win-win” for all parties involved. To do otherwise would result in virtually certain undomiciled status for two physically unhealthy persons and their daughter, leading to an additional level of problems, both for them and for society.

Since an action claiming foreclosure of a mortgage is one sounding in equity, Jamaica Savings Bank v. M.S. Investing Co. 274 NY 215 (1937), the very commencement of the action by Plaintiff invokes the Court’s equity jurisdiction. While it must be noted that the formal distinctions between an action at law and a suit in equity have long since been abolished in New York (see CPLR 103, Field Code Of 1848 §§ 2, 3, 4, 69), the Supreme Court nevertheless has equity jurisdiction and distinct rules regarding equity are still extant, Carroll v. Bullock 207 NY 567, 101 NE 438 (1913). Speaking generally and broadly, it is settled law that “Stability of contract obligations must not be undermined by judicial sympathy…” Graf v. Hope Building Corporation 254 NY 1 (1930). However, it is true with equal force and effect that equity must not and cannot slavishly and blindly follow the law, Hedges v. Dixon County 150 US 182, 192 (1893). Moreover, as succinctly decreed by our Court of Appeals in the matter of Noyes v. [*5]Anderson 124 NY 175 (1890) “A party having a legal right shall not be permitted to avail himself of it for the purposes of injustice or oppression…” 124 NY at 179.

In the matter of Eastman Kodak Co. v. Schwartz 133 NYS2d 908 (Sup. Ct., New York County, 1954), Special Term stated that “The maxim of “clean hands” fundamentally was conceived in equity jurisprudence to refuse to lend its aid in any manner to one seeking its active interposition who has been guilty of unlawful, unconscionable or inequitable conduct in the matter with relation to which he seeks relief.” 133 NYS2d at 925, citing First Trust & Savings Bank v. Iowa-Wisconsin Bridge Co. 98 F 2d 416 (8th Cir. 1938), cert. denied 305 US 650, 59 S. Ct. 243, 83 L. Ed. 240 (1938), reh. denied 305 US 676, 59 S Ct. 356 83 L. Ed. 437 (1939); General Excavator Co. v. Keystone Driller Co. 65 F 2d 39 (6th Cir. 1933), cert. granted 289 US 721, 53 S. Ct. 791, 77 L. Ed. 1472 (1933), aff’d 290 US 240, 54 S. Ct. 146, 78 L. Ed. 793 (1934).

In attempting to arrive at a determination as to whether or not equity should properly intervene in this matter so as to permit foreclosure of the mortgage, the Court is required to look at the situattion in toto, giving due and careful consideration as to whether the remedy sought by Plaintiff would be repugnant to the public interest when seen from the point of view of public morality, see, for example, 55 NY Jur. Equity § 113, Molinas v. Podloff 133 NYS2d 743 (Sup. Ct., New York County, 1954). Equitable relief will not lie in favor of one who acts in a manner which is shocking to the conscience, Duggan v. Platz 238 AD 197, 264 NYS 403 (3rd Dept. 1933), mod. on other grounds 263 NY 505, 189 NE 566 (1934), neither will equity be available to one who acts in a manner that is oppressive or unjust or whose conduct is sufficiently egregious so as to prohibit the party from asserting its legal rights against a defaulting adversary, In Re Foreclosure Of Tax Liens 117 NYS2d 725 (Sup. Ct. Kings County, 1952), aff’d on other grounds 286 AD 1027, 145 NYS2d 97 (2nd Dept. 1955), mod. on other grounds on reargument 1 AD2d 95, 148 NYS2d 173 (2nd Dept. 1955), appeal granted 7 AD2d 784, 149 NYS2d 227 (2nd Dept. 1956). The compass by which the questioned conduct must be measured is a moral one and the acts complained of (those that are sufficient so as to prevent equity’s intervention) need not be criminal nor actionable at law but must merely be willful and unconscionable or be of such a nature that honest and fair minded folk would roundly denounce such actions as being morally and ethically wrong, Pecorella v. Greater Buffalo Press Inc. 107 AD2d 1064, 468 NYS2d 562 (4th Dept. 1985). Thus, where a party acts in a manner that is offensive to good conscience and justice, he will be completely without recourse in a court of equity, regardless of what his legal rights may be, Eastman Kodak Co. v. Schwartz 133 NYS2d 908 (Sup. Ct., New York County, 1954), York v. Searles 97 AD 331, 90 NYS 37 (2nd Dept. 1904), aff’d 189 NY 573, 82 NE 1134 (1907).

An objective and painstaking examination of the totality of the facts and circumstances herein leads this Court to the inescapable conclusion that the affirmative conduct exhibited by Plaintiff at least since since February 24, 2009 (and perhaps earlier) has been and is inequitable, unconscionable, vexatious and opprobrious. The Court is constrained, solely as a result of Plaintiff’s affirmative acts, to conclude that Plaintiff’s conduct is wholly unsupportable at law or in equity, greatly egregious and so completely devoid of good faith that equity cannot be permitted to intervene on its behalf. Indeed, Plaintiff’s actions toward Defendant in this matter have been harsh, repugnant, shocking and repulsive to the extent that it must be appropriately [*6]sanctioned so as to deter it from imposing further mortifying abuse against Defendant. The Court cannot be assured that Plaintiff will not repeat this course of conduct if this action is merely dismissed and hence, dismissal standing alone is not a reasonable option. Likewise, the imposition of monetary sanctions under 22 NYCRR § 130-1.1 et. seq. is not likely to have a salubrious or remedial effect on these proceedings and certainly would not inure to Defendant’s benefit. This Court is of the opinion that cancellation of the indebtedness and discharge of the mortgage, when taken together, constitute the appropriate equitable disposition under the unique facts and circumstances presented herein.

After careful consideration, it is the determination of this Court that the indebtedness evidenced by the Adjustable Rate Note dated August 4, 2004 in the original principal amount of $ 292,500.00 made by Diana J. Yano-Horoski in favor of IndyMac Bank F.S.B. should be cancelled, voided and set aside. In addition, the Mortgage which secures the Adjustable Rate Note, given to Mortgage Electronic Registration Systems Inc. As Nominee For IndyMac Bank F.S.B. dated August 4, 2004 and recorded with the Clerk of Suffolk County on August 16, 2004 in Liber 20826 of Mortgages at Page 285, as assigned by Assignment recorded with the Clerk of Suffolk County in Liber 21273 of Mortgages at Page 808 should be cancelled and discharged of record. Further, Plaintiff, its successors and assigns should be forever barred and prohibited from any action to collect upon the Adjustable Rate Note. In addition, the Judgment of Foreclosure & Sale granted on January 12, 2009 and entered on January 23, 2009 should be vacated and set aside and the Notice of Pendency should be cancelled and discharged of record. For this Court to decree anything less than the foregoing would be for the Court to be wholly derelict in the performance of its obligations.

Upon the Court’s own motion, it is

ORDERED that the Adjustable Rate Note in the amount of $ 292,500.00 dated August 4, 2004 made by Diana J. Yano-Horoski in favor of IndyMac Bank F.S.B. shall be and the same is hereby cancelled, voided, avoided, nullified, set aside and is of no further force and effect; and it is further

ORDERED that the Mortgage in the amount of $ 292,500.00 which secures said Adjustable Rate Note given by Diana J. Yano-Horoski to Mortgage Electronic Registration Systems Inc. As Nominee For IndyMac Bank F.S.B. dated August 4, 2004 and recorded with the Clerk of Suffolk County on August 16, 2004 in Liber 20826 of Mortgages as Page 285, as assigned to IndyMac Bank F.S.B. by Assignment recorded with the Clerk of Suffolk County in Liber 21273 of Mortgages at Page 808 shall be and the same is hereby vacated, cancelled, released and discharged of record; and it is further

ORDERED that the Plaintiff, its successors and assigns are hereby barred, prohibited and foreclosed from attempting, in any manner, directly or indirectly, to enforce any provision of the [*7]aforesaid Adjustable Rate Note and Mortgage or any portion thereof as against Defendant, her heirs or successors; and it is further

ORDERED that the Judgment of Foreclosure & Sale granted under this index number on January 12, 2009 and entered in the Office of the Clerk of Suffolk County on January 23, 2009 shall be and the same is hereby vacated and set aside; and it is further

ORDERED that the Notice of Pendency filed with the Clerk of Suffolk County on July 27, 2005 under sequence no. 172456, which was extended by Order dated September 2, 2008 shall be and the same is hereby cancelled, vacated and set aside; and it is further

ORDERED that the Notice of Pendency filed with the Clerk of Suffolk County on August 29, 2008 under sequence no. 199616, shall be and the same is hereby cancelled, vacated and set aside; and it is further

ORDERED that the Clerk of Suffolk County shall cause a copy of this Order & Judgment to be filed in the Land Records so as to effectuate of record each and every one of the provisions hereinabove set forth with respect to cancellation of the instruments and items of record; and it is further

ORDERED that Plaintiff shall pay to the Clerk of Suffolk County, within ten (10) days from the date of entry hereof, any and all fees and costs required to effect cancellation of record of the Mortgage, Notices of Pendency and any other fees so levied; and it is further

ORDERED that within ten (10) days of the date of entry hereof, Plaintiff’s counsel shall serve a copy of this Order upon the Clerk of Suffolk County and the Defendant.

This shall constitute the Decision, Judgment and Order of this Court.

Dated: November 19, 2009

Riverhead, New York

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