Buying a Cow and Selling Hamburgers- A Closer Look at Mortgage Securitization

Posted on April 2, 2010. Filed under: Banking, Foreclosure Defense, Mortgage Law, Securitization | Tags: , , , , , , |

Our legal system is extremely difficult to understand and maneuver by a non attorney, partly because there is no single source or authority for answering complicated legal questions. For example how do you know if your mortgage was eviscerated through the securitization process? Did securitization of the note and mortgage constitute conversion of the asset thereby rendering the mortgage unenforceable? This question has not been answered by a high court yet but there is no shortage of legal scholars and practitioners analyzing the securitization process and its impact on the housing market and the economy as a whole.

Most agree that securitization changes the traditional debtor creditor relationship and interferes with contractual rights derived from a mortgage transaction. When two parties enter in to a contract they normally have the right to modify the terms of their agreement as long as there is mutual assent. When a contractual relationship is ongoing, as is the case with a mortgage contract, it is not uncommon for the parties to amend their agreement as and when unforeseen events occur or circumstances change. The main reason for doing so is to mitigate losses when modification is in the best interest of both parties and no better alternative is available.

Securitization, because of its complex structure and infusion of additional parties into the mortgage transaction, militates to an entirely different and unique set of priorities, obligations and interests that often conflict and compete with one another. In many instances, although it may be economically feasible for both the borrower and note holder to modify the loan, the rules of the securitization agreement prohibit or limit change of loan terms, thereby forcing the servicer to foreclose rather than negotiate. Securitization interferes with the mortgagee’s and mortgagor’s rights to freely engage in loss mitigation negotiations in order to mitigate their own losses, without having to be concerned with losses that may be incurred by a third party, who was not a party to the original mortgage contract.

One practitioner, Richard Kessler Esq., has compared securitization to buying a cow and selling hamburgers – “The people who buy hamburgers have paid for and are legally entitled to the hamburger but do not thereby become owners of or acquire an ownership interest in the cow… It [securitization] renders the mortgage note used to generate income unenforceable by eliminating the status of note holder.”

More than 60% of all mortgages are securitized representing in excess of seven trillion dollars in outstanding mortgage debt. (Source: Wikepedia, Mortgage-Backed-Securities) Once a mortgage loan has been funded by the originating lender the loan (note and mortgage) is sold to a sponsor who forms a pool of hundreds of loans and transfers them to a pass-through/conduit trust (REMIC), which issues certificates backed by the cash flow generated from the mortgage notes. The certificates are simultaneously sold to a broker/underwriter who subsequently sells them to investors. Additionally a trustee is appointed to manage the trust, who in turn appoints a servicer for collecting payments from borrowers, managing the escrow accounts, forwarding the payments to investors and when necessary initiating and processing foreclosures.

In order to qualify for a REMIC status which allows the cash to flow to certificate holders without taxation at the trust/conduit level (investors will still pay income tax individually) Mr. Kessler states that all legal and beneficial interest in the mortgage loans must be transferred to certificate holders, rendering the trust effectively asset free. “Therefore, neither the trustee nor the servicing agent can have any legal or equitable interest in the mortgages”. The investors are the purported owners and holders of the notes but the terms of the pooling and servicing agreement (PSA) do not allow them to foreclose or participate in controlling the mortgage notes. “The certificate holders bear the losses but do not control the mortgages. As such the moral hazard is severed from command and control thereby restructuring the debtor creditor relationship created by the original note and mortgage”. Richard Kessler, MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEFENDANTS MOTION TO DISMISS.

“The certificate holders, therefore, cannot be [note]holders because they lack the necessary rights and powers conferred by holding the note: the right to payment, the right to sell or transfer the note, the right to foreclose and the right to modify the terms and conditions of the note or mortgage with the consent of the mortgagor.” id

In the event of default ordinarily the trustee initiates foreclosure proceedings claiming the secured party is the conduit trust, but one can argue this is legally impossible since the trust, in order to qualify for a REMIC status, cannot own a legal or equitable interest in the mortgage loans. Further, the investors cannot appoint the trustee as their agent to foreclose on the mortgage since as demonstrated above they are not the holders of the note. A principal cannot convey rights to an agent which the principal lacks. The rights of certificate holders are created by and derive from contractual obligations granted by and pursuant to the PSA as opposed to those conferred to holders of the notes.

Some practitioners argue that because the pooling and servicing agreement restricts the mortgagee’s ability to modify the loan and since the mortgagor was never notified of or consented to such restrictions, this amounts to a unilateral and illegal modification of the mortgage contract, thereby rendering it null and void. I, however, don’t understand this theory, since modification is not an express right or obligation under the terms of the mortgage contract and thus restricting it cannot be considered a unilateral amendment and hence a breach of contract. Further, even if we assume arguendo that the mortgage has been illegally modified, I am not so sure voiding the contract will be the proper remedy.

Others proffer that securitization interferes with a mortgagors right of redemption since he/she is restricted from negotiating directly with the mortgagee who may have been willing to accept a reasonable settlement offer but cannot do so because such decisions are no longer made by the actual note holder and not predicated on the mutual interests of mortgagee and mortgagor. For example often the competing interests of junior and senior tranches within a securitized pool of mortgages makes it impossible to negotiate a loan modification that under normal circumstances would have been beneficial to both the debtor and creditor. One can also argue “this constitutes either a breach of contract or a tortious interference with a contract, or both.” George Beckus Esq, blog.floridaforeclosurelawyer.org

The only conclusion I can draw with any certainty from the above analysis is that securitization and its legal and economic implications are difficult to understand or measure and even harder to explain. Imagine trying to explain all this to a judge with the cow and hamburger analogy. Judges are not always as smart as they are proclaimed to be and they resist novel legal theories, specially when they can hurt the banks. At the end of the day, regardless of how persuasive a theory may sound or how passionately it is argued by its proponents, until it becomes law it is just a theory.

Dean Mostofi

National Loan Audits

301-867-3887

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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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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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Fannie Mae to rent out homes instead foreclosing

Posted on November 5, 2009. Filed under: Foreclosure Defense, Housing, Mortgage Law | Tags: , , , , , , |

Fannie Mae to rent out homes instead foreclosing

By ALAN ZIBEL (AP) – 4 hours ago

WASHINGTON — Thousands of borrowers on the verge of foreclosure will soon have the option of renting their homes from Fannie Mae, under a policy announced Thursday.

The government-controlled company, through its new “Deed for Lease” program, will allow borrowers to transfer ownership to Fannie Mae and sign a one-year lease, with month-to-month extensions after that.

The program will “eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities,” Jay Ryan, a Fannie Mae vice president, said in a statement.

But the effort is likely to affect a relatively small number of homeowners. In the first half of the year, Fannie Mae took back about 1,200 properties through this process, known as a deed-in-lieu of foreclosure. That pales in comparison to the 57,000 foreclosed properties the company repossessed in the period.

While neither option is particularly attractive for the homeowner, a deed-in-lieu does less harm to the borrower’s credit record.

The rental program is designed to help homeowners who don’t qualify for a loan modification under the Obama administration’s plan, but still want to remain in their homes. Fannie Mae is not planning to market the homes for sale during the one-year rental period.

Fannie Mae has hired an outside company, which officials declined to identify, to manage the properties.

To qualify, homeowners have to live in the home as their primary residence and prove that they can afford the market rent, which would be determined by the management company. The rent can’t be more than 31 percent of their pretax income.

Fannie Mae’s sibling company, Freddie Mac, launched a similar effort in March. That policy, however, requires the foreclosure to be complete and only allows month-to-month leases. A Freddie Mac spokesman declined to say how many borrowers have participated.

via The Associated Press: Fannie Mae to rent out homes instead foreclosing.

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IN RE DARRELL ROYCE SHERIDAN, SHERRY ANN SHERIDAN, Chapter 7 Debtors.

Posted on October 25, 2009. Filed under: bankruptcy, Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , , , , , , , , |

Sheridan_decision

In this Chapter 7 case, the trustee, Ford Elsaesser (“Trustee”), objects to amotion under § 362(d) for relief from the § 362(a) automatic stay.1 Motions under § 362(d) are common in bankruptcy cases.2 Most stay relief requests proceed promptly to entry of an order, after proper notice, without any objection.

However, changes in mortgage practices over the past several years have created a number of new issues. The one highlighted in this case is the standing of the moving creditor. Serial assignments of the mortgagee’s interest(s) and the securitization of mortgages have complicated what was previously a generally straight-forward standing analysis. Though many creditors provide in their motions adequate explanation and documentation of their standing to seek relief on real estate secured debts, Trustee challenges the adequacy of the subject motion in this case.

Following hearing and consideration of the arguments of the parties, the Court determines that Trustee’s objection is well taken and the same will be sustained. The motion for stay relief will be denied.

BACKGROUND AND FACTS

On June 24, 2008, Darrell and Sherry Ann Sheridan (“Debtors”) filed their joint chapter 7 bankruptcy petition, schedules and statements. They scheduled a fee ownership interest in a residence located in Post Falls, Idaho. See Doc. No. 1 at sched. A (the “Property”). Debtors asserted the Property’s value was $225,000.00. Id. They indicated secured claims existed in favor of “Litton Loan Servicing” ($197,000.00) and “Citimortgage” ($34,000.00). Id. at sched. D.

While this left no apparent equity in the Property, Debtors nevertheless claimed the benefit of an Idaho homestead exemption. Id. at sched. C.4

Sheridan_decision

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Deutsche Bank v. Debra Abbate Etal.

Posted on October 23, 2009. Filed under: Case Law, Foreclosure Defense, Mortgage Audit, Mortgage Law | Tags: , , , , , , , , , , , , |

Deutsche Bank National Trust Company, AS TRUSTEE FOR THE CERTIFICATE HOLDERS OF CARRINGTON MORTGAGE LOAN TRUST 2005-OPT2, ASSET-BACKED CERTIFICATES, SERIES 2005-OPT2, Plaintiff

against

Debra Abbate, CARMELA ABBATE, KIM FIORENTINO, BOCCE COURT HOMEOWNERS ASSOCIATION, INC., NEW YORK CITY ENVIRONMENTAL CONTROL BOARD, NEW YORK CITY TRANSIT ADJUDICATION BUREAU, NEW YORK CITY PARKING VIOLATIONS BUREAU, and “JOHN DOE No. 1″ through “JOHN DOE #10,” the last ten names being fictitious and unknown to the plaintiff, the person or parties intended being the person or parties, if any, having or claiming an interest in or lien upon the Mortgaged premises described in the Complaint, Defendants.

100893/07

Plaintiff was represented by the law firm of Frenkel Lambert Weiss & Weisman.

Defendant was represented by Robert E. Brown, Esq.

Joseph J. Maltese, J.

The defendants Kim Fiorentino, Debra Abbate, and Carmella Abbate’s motion to dismiss the plaintiff’s complaint is granted in its entirety.

This is an action to foreclose a mortgage dated February 24, 2005, upon the property located at 25 Bocce Court, Staten Island, New York. The mortgage was originated by Suntrust Mortgage Inc. (”Suntrust”) and was recorded in the Office of the Clerk of Richmond County on April 26, 2005. The plaintiff filed the Summons, Complaint, and Notice of Pendency on March [*2]1, 2007.[FN1] However, Suntrust assigned the first mortgage on this property to Option One Mortgage Corporation, which was executed on July 6, 2007. Another assignment to plaintiff Deutsche Bank National Trust Company (”Deutsche Bank”) was executed on March 7, 2007. Both assignments, which were recorded on July 23, 2007, contained a clause expressing their intention to be retroactively effective: the first one to date back to February 24, 2005, and the second one to February 28, 2007.[FN2] On November 19, 2007, this court issued an order of foreclosure and sale on the subject property. This court also granted two orders to show cause to stay the foreclosure on January 9, 2008 and April 8, 2008.[FN3]

Discussion

The Appellate Division, Second Department ruled and reiterated in Kluge v. Kugazy the well established law that “foreclosure of a mortgage may not be brought by one who has no title to it . . . .”[FN4] The Appellate Division, Third Department has similarly ruled that an assignee of a mortgage does not have a right or standing to foreclose a mortgage unless the assignment is complete at the time of commencing the action.[FN5] An assignment takes the form of a writing or occurs through the physical delivery of the mortgage.[FN6] Absent such transfer, the assignment of the mortgage is a nullity.[FN7]

Retroactive Assignments of a Mortgage are Invalid
The first issue this court must resolve is whether the clauses in the July 6, 2007 and March 7, 2007 assignments setting the effective date of the assignment to February 24, 2005 and February 28, 2007 respectively are permissible. This court rules that, absent a physical or written transfer before the filing of a complaint, retroactive assignments are invalid.

Recently, trial courts have been faced with the situation where the plaintiff commenced a [*3]foreclosure action before the assignment of the mortgage.[FN8] In those cases the trial courts have held,

. . . where there is no evidence that plaintiff, prior to commencing the foreclosure action, was the holder of the mortgage and note, took physical delivery of the mortgage and note, or was conveyed the mortgage and note by written assignment, an assignment’s language purporting to give it retroactive effect prior to the date of the commencement of the action is insufficient to establish the plaintiff’s requisite standing. . .[FN9]

In this case, the plaintiff failed to offer any admissible evidence demonstrating that they became assignees to the mortgage on or before March 1, 2007; as such, this court agrees with its sister courts and finds that the retroactive language contained in the July 26, 2007 and March 7, 2007 assignments are ineffective. This court therefore rules that it lacks jurisdiction over the subject matter when the plaintiff has no title to the mortgage at the time that it commenced the action.

The next issue this court must resolve is whether the defendants waived subject matter jurisdiction because they did not raise that issue in their prior applications to this court.

Affirmative Defense of Standing

At the outset of any litigation, the court must ascertain that the proper party requests an adjudication of a dispute.[FN10] As the first step of justiciability, “standing to sue is critical to the proper functioning of the judicial system.”[FN11] Standing is a threshold issue; if it is denied, “the pathway to the courthouse is blocked.” [FN12]

The doctrine of standing is designed to “ensure that a party seeking relief has a sufficiently cognizable stake in the outcome so as to present a court with a dispute that is capable [*4]of judicial resolution.”[FN13] “Standing to sue requires an interest in the claim at issue in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request.”[FN14] Where the plaintiff has no legal or equitable interest in a mortgage, the plaintiff has no foundation in law or in fact.[FN15]

A plaintiff who has no standing in an action is subject to a jurisdictional dismissal since (1) courts have jurisdiction only over controversies that involve the plaintiff, (2) a plaintiff found to lack “standing is not involved in a controversy, and (3) the courts therefore have no jurisdiction of the case when such plaintiff purports to bring it.”[FN16]

On November 7, 2005, in the case of Wells Fargo Bank Minn. N.A. v. Mastropaolo [“Mastropaolo”], this court found that “Insofar as the plaintiff was not the legal titleholder to the mortgage at the time the action was commenced, [the Bank] had no standing to bring the action and it must be dismissed.”[FN17] Erroneously, this court “[o]rdered, that the plaintiff’s summary judgment motion is denied in its entirety and that this action is dismissed with prejudice.”[FN18]

This Court should have ordered that this matter was dismissed without prejudice, which would have given the plaintiff the right to start the action again after it had acquired title to the note and mortgage. Unfortunately, the plaintiff, did not seek a motion to reargue that error, which would have been corrected promptly. Instead, the plaintiff appealed the decision to the Appellate Division, Second Department, which rightfully reversed the decision 18 months later on May 29, 2007 based upon the dismissal with prejudice as opposed to a dismissal without prejudice to refile the action. However, in what appears to be dicta, the court went on to discuss whether lack of standing is tantamount to lack of subject matter jurisdiction. The court further stated that the failure of the initial pro se defendant to make a pre-answer motion or a motion to dismiss, the defense of lack of standing would be waived. But the Appellate Division did not address the issue of subject matter jurisdiction, which may not be waived. [*5]

In the instant case, this court is again faced with similar facts, which raise the issue that the Bank must have title to the mortgage before it can sue the defendant. Clearly, having title to the subject matter (the mortgage) is a condition precedent to the right to sue on that mortgage. This has always been the case, but since the Appellate Division, Second Department’s comments in Mastropaolo, that issue has been clouded.

At the time that the plaintiff improperly commenced the action, the pathway to the Courthouse should have been blocked. Deutsche Bank had no legal foundation to foreclose a mortgage in which it had no interest at the time of filing the summons and complaint. Lack of a plaintiff’s interest at the beginning of the action strips the court’s power to adjudicate over the action.[FN19] Lack of interest and controversy is protected by the umbrella of subject matter jurisdiction. Whenever a court lacks jurisdiction, a defense can be raised at any time and is not waivable.[FN20] In other words, for there to be a cause of action, there needs to be an injury. At the time that the action was commenced, the instant plaintiff suffered no injury and had no interest in the controversy. Since the plaintiff filed this action to foreclose the mortgage before it had title to it, there was no controversy between the existing parties when the action commenced. Therefore, the court lacked subject matter jurisdiction to adjudicate the present case. The defendants are consequently entitled to a dismissal without prejudice because the court lacked jurisdiction over a non-existent controversy.

Accordingly, it is hereby:

ORDERED, that the defendants Kim Fiorentino, Debra Abbate, and Carmella Abbate’s motion to dismiss the plaintiff’s complaint is granted, without prejudice to the plaintiff having the right to refile within the time provided by the Statute of Limitations; and it is further

ORDERED, that the parties and counsel shall appear before this court to further conference this matter on November 20, 2009 at 11:00AM.

ENTER,

DATED: October 6, 2009

Joseph J. Maltese

Justice of the Supreme Court

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Foreclosures Are More Profitable Than Loan Modifications, According To New Report

Posted on October 23, 2009. Filed under: Foreclosure Defense, Housing, Mortgage Law | Tags: , , , , , , |

Mortgage companies are more likely to foreclose on homeowners than modify their loans because they make more money off foreclosures, argues a new report by a consumer advocacy group.

While homeowners, lenders and investors typically lose money on a foreclosure, mortgage servicers do not, says report author Diane E. Thompson, of counsel at the National Consumer Law Center. Servicers are the companies that manage the mortgages and collect payments.

“Servicers may even make money on a foreclosure,” she writes. “And, usually, a loan modification will cost the servicer something. A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified and no penalty, but potential profit, if the home is foreclosed.”

Thompson attributes this to a system of perverse incentives created by lawmakers and rulemakers in the market, like credit rating agencies and bond issuers. The private rulemakers typically dictate how a servicer can account for potential losses and profits. They hold enormous sway over securitized mortgages, which are owned by investors. More than two-thirds of mortgages issued since 2005 have been securitized, notes the report, using data from the industry publication Inside Mortgage Finance.

via Foreclosures Are More Profitable Than Loan Modifications, According To New Report.

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The next financial tsunami unleashed by toxic mortgages

Posted on October 23, 2009. Filed under: Banking, Foreclosure Defense, Fraud, Housing, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending | Tags: , , , , , , , , , , , |

By PAM MARTENS

The financial tsunami unleashed by Wall Street’s esurient alchemy of spinning toxic home mortgages into triple-A bonds, a process known as securitization, has set off its second round of financial tremors.

After leaving mortgage investors, bank shareholders, and pension fiduciaries awash in losses and a large chunk of Wall Street feeding at the public trough, the full threat of this vast securitization machine and its unseen masters who push the levers behind a tightly drawn curtain is playing out in courtrooms across America.

Three plain talking judges, in state courts in Massachusetts and Kansas, and a Federal Court in Ohio, have drilled down to the “straw man” aspect of securitization. The judges’ decisions have raised serious questions as to the legality of hundreds of thousands of foreclosures that have transpired as well as the legal standing of the subsequent purchasers of those homes, who are more and more frequently the Wall Street banks themselves.

Adding to the chaos, the Financial Accounting Standards Board (FASB) has made rule changes that will force hundreds of billions of dollars of these securitizations back onto the Wall Street banks balance sheets, necessitating the need to raise capital just as the unseemly courtroom dramas are playing out.

The problems grew out of the steps required to structure a mortgage securitization. In order to meet the test of an arm’s length transaction, pass muster with regulators, conform to accounting rules and to qualify as an actual sale of the securities in order to be removed from the bank’s balance sheet, the mortgages get transferred a number of times before being sold to investors. Typically, the original lender (or a sponsor who has purchased the mortgages in the secondary market) will transfer the mortgages to a limited purpose entity called a depositor. The depositor will then transfer the mortgages to a trust which sells certificates to investors based on the various risk-rated tranches of the mortgage pool. (Theoretically, the lower rated tranches were to absorb the losses of defaults first with the top triple-A tiers being safe. In reality, many of the triple-A tiers have received ratings downgrades along with all the other tranches.)

Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds.

Astonishingly, representatives for the trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without a proper paper trail on the mortgage assignments or proof that they had legal standing. In some cases, the courts have allowed the representatives to foreclose and evict despite their admission that the original mortgage note is lost. (This raises the question as to whether these mortgage notes are really lost or might have been fraudulently used in multiple securitizations, a concern raised by some Wall Street veterans.)

But, at last, some astute judges have done more than take a cursory look and render a shrug. In a decision handed down on October 14, 2009, Judge Keith Long of the Massachusetts Land Court wrote:

“The blank mortgage assignments they possessed transferred nothing…in Massachusetts, a mortgage is a conveyance of land. Nothing is conveyed unless and until it is validly conveyed. The various agreements between the securitization entities stating that each had a right to an assignment of the mortgage are not themselves an assignment and they are certainly not in recordable form…The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.” [Italic emphasis in original.] (U.S. Bank National Association v. Ibanez/Wells Fargo v. Larace)

A month and a half before, on August 28, 2009, Judge Eric S. Rosen of the Kansas Supreme Court took an intensive look at a “straw man” some Wall Street firms had set up to handle the dirty work of foreclosure and serve as the “nominee” as the mortgages flipped between the various entities. Called MERS (Mortgage Electronic Registration Systems, Inc.) it’s a bankruptcy-remote subsidiary of MERSCORP, which in turn is owned by units of Citigroup, JPMorgan Chase, Bank of America, the Mortgage Bankers Association and assorted mortgage and title companies. According to the MERSCORP web site, these “shareholders played a critical role in the development of MERS. Through their capital support, MERS was able to fund expenses related to development and initial start-up.”

In recent years, MERS has become less of an electronic registration system and more of a serial defendant in courts across the land. In a May 2009 document titled “The Building Blocks of MERS,” the company concedes that “Recently there has been a wave of lawsuits filed by homeowners facing foreclosure which challenge MERS standing…” and then proceeds over the next 30 pages to describe the lawsuits state by state, putting a decidedly optimistic spin on the situation.

MERS doesn’t have a big roster of employees or lawyers running around the country foreclosing and defending itself in lawsuits. It simply deputizes employees of the banks and mortgage companies that use it as a nominee. It calls these deputies a “certifying officer.” Here’s how they explain this on their web site: “A certifying officer is an officer of the Member [mortgage company or bank] who is appointed a MERS officer by the Corporate Secretary of MERS by the issuance of a MERS Corporate Resolution. The Resolution authorizes the certifying officer to execute documents as a MERS officer.”

Kansas Supreme Court Judge Rosen wasn’t buying MERS’ story. In fact, Wall Street was probably not too happy to land before Judge Rosen. In January 2002, Judge Rosen had received the Martin Luther King “Living the Dream” Humanitarian Award; he previously served as Associate General Counsel for the Kansas Securities Commissioner, and as Assistant District Attorney in Shawnee County, Kansas. Judge Rosen wrote:

“The relationship that MERS has to Sovereign [Bank] is more akin to that of a straw man than to a party possessing all the rights given a buyer… What meaning is this court to attach to MERS’s designation as nominee for Millennia [Mortgage Corp.]? The parties appear to have defined the word in much the same way that the blind men of Indian legend described an elephant — their description depended on which part they were touching at any given time. Counsel for Sovereign stated to the trial court that MERS holds the mortgage ‘in street name, if you will, and our client the bank and other banks transfer these mortgages and rely on MERS to provide them with notice of foreclosures and what not.’ ” (Landmark National Bank v. Boyd A. Kesler)

Lawyers for homeowners see a darker agenda to MERS. Timothy McCandless, a California lawyer, wrote on his blog as follows:

“…all across the country, MERS now brings foreclosure proceedings in its own name — even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers’ discovery requests with respect to predatory lending claims and defenses. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer’s home. While up against the wall of foreclosure, consumers that try to assert predatory lending defenses are often forced to join the party — usually an investment trust — that actually will benefit from the foreclosure. As a simple matter of logistics this can be difficult, since the investment trust is even more faceless and seemingly innocent than MERS itself. The investment trust has no customer service personnel and has probably not even retained counsel. Inquiries to the trustee — if it can be identified — are typically referred to the servicer, who will then direct counsel back to MERS. This pattern of non-response gives the securitization conduit significant leverage in forcing consumers out of their homes. The prospect of waging a protracted discovery battle with all of these well funded parties in hopes of uncovering evidence of predatory lending can be too daunting even for those victims who know such evidence exists. So imposing is this opaque corporate wall, that in a ‘vast’ number of foreclosures, MERS actually succeeds in foreclosing without producing the original note — the legal sine qua non of foreclosure — much less documentation that could support predatory lending defenses.”

One of the first judges to hand Wall Street a serious slap down was Christopher A. Boyko of U.S. District Court in the Northern District of Ohio. In an opinion dated October 31, 2007, Judge Boyko dismissed 14 foreclosures that had been brought on behalf of investors in securitizations. Judge Boyko delivered the following harsh rebuke in a footnote:

“Plaintiff’s ‘Judge, you just don’t understand how things work,’ argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process…There is no doubt every decision made by a financial institution in the foreclosure is driven by money. And the legal work which flows from winning the financial institution’s favor is highly lucrative. There is nothing improper or wrong with financial institutions or law firms making a profit – to the contrary, they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns. Unlike the focus of financial institutions, the federal courts must act as gatekeepers…” (In Re Foreclosure Cases)

While the illegal foreclosure filings, investor lawsuits over securitization improprieties, and predatory lending challenges play out in courts across the country, a few sentences buried deep in Citigroup’s 10Q filing for the quarter ended June 30, 2009 signals that we’ve seen merely a few warts on the head of the securitization monster thus far and the massive torso remains well hidden in murky water.

Citigroup tells us that the Financial Accounting Standards Board (FASB) has issued a new rule, SFAS No. 166, and this is going to have a significant impact on Citigroup’s Consolidated Financial Statements “as the Company will lose sales treatment for certain assets previously sold to QSPEs [Qualifying Special Purpose Entities], as well as for certain future sales, and for certain transfers of portions of assets that do not meet the definition of participating interests. Just when might we expect this new land mine to go off? “SFAS 166 is effective for fiscal years that begin after November 15, 2009.” There’s more bad news. The FASB has also issued SFAS 167 and, long story short, more of those off balance sheet assets are going to move back onto Citi’s books.

Bottom line says Citi:

“… the cumulative effect of adopting these new accounting standards as of January 1, 2010, based on financial information as of June 30, 2009, would result in an estimated aggregate after-tax charge to Retained earnings of approximately $8.3 billion, reflecting the net effect of an overall pretax charge to Retained earnings (primarily relating to the establishment of loan loss reserves and the reversal of residual interests held) of approximately $13.3 billion and the recognition of related deferred tax assets amounting to approximately $5.0 billion….” [Emphasis in original.]

I’m trying to imagine how the American taxpayer is going to be asked to put more money into Citigroup as it continues to bleed into infinity.

Citigroup is far from alone in financial hits that will be coming from the Qualifying Special Purpose Entities. Regulators are receiving letters from Citigroup and other Wall Street firms pressing hard to rethink when this change will take effect.

Putting aside for the moment the massive predatory lending frauds bundled into mortgage securitizations, inadequate debate has occurred on whether securitization of home mortgages (other than those of government sponsored enterprises) should be resuscitated or allowed to die a welcome death. If we understand the true function of Wall Street, to efficiently allocate capital, the answer must be a resounding no to this racket.

Trillions of dollars of bundled home mortgage loans and derivative side bets tied to those loans were being manufactured by Wall Street without any one asking the basic question: why is all this capital being invested in a dormant structure? Houses don’t think and innovate. Houses don’t spawn new technologies, patents, new industries. Houses don’t create the jobs of tomorrow.

Also, by acting as wholesale lenders to the unscrupulous mortgage firms (some in house at Wall Street firms), Wall Street was not responding to legitimate consumer demand, it was creating an artificial demand simply to create mortgage product to feed its securitization machine and generate big fees for itself. Now we see the aftermath of that inefficient allocation of capital: a massive glut of condos and homes pulling down asset prices in neighborhoods as well as in those ill-conceived securitizations whose triple-A ratings have been downgraded to junk.

There’s no doubt that one of the contributing factors to the depression of the 30s and the intractable unemployment today stem from a massive misallocation of capital to both bad ideas and fraud. Today’s Wall Street, it turns out, is just another straw man for a rigged wealth transfer system.

Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article other than that which the U.S. Treasury has thrust upon her and fellow Americans involuntarily through TARP. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com

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New law denies homeowners access to legal representation

Posted on October 23, 2009. Filed under: Banking, Case Law, Foreclosure Defense, Housing, Legislation, Loan Modification, Mortgage Law, Politics | Tags: , , , , , , , , , , , , , , , , |

California has a new law on the books that bans collection of advance fees from firms that provide loan modification services to people struggling to avoid foreclosure.

Other real estate related bills signed into law this month by Gov. Arnold Schwarzenegger aim to crack down on abusive lending practices by mortgage brokers; provide more safeguards for seniors taking out reverse mortgages; and require lenders to provide a summary translation of loan papers to non-English speakers.

Effective Oct. 11, Senate Bill 94 made it illegal for anyone to collect advance fees from consumers seeking a loan modification. The legislation closed a loophole that previously allowed state- licensed real estate brokers and attorneys to collect advance payments for loan modification services provided a client signed off on forms approved by the state Department of Real Estate.

SB 94 was written by state Sen. Ron Calderon, D-Montebello.

“Over the past two years, unscrupulous attorneys and real estate brokers have abused their trusted roles and exploited desperate homeowners seeking to avoid foreclosure. The loophole that allowed this abusive practice has now been closed, and homeowners should avoid any person charging upfront fees for foreclosure relief services,” state Attorney General Jerry Brown said in a statement.

Advance payments previously collected before Oct. 11 are not impacted by the law but no additional fees can be collected going forward,


said Tom Pool, a Department spokesman.

About 1,000 real estate brokers had previously submitted the required paperwork to collect advance payments before the law became effective, he said. More than 1,300 consumers have contacted the department with complaints about foreclosure rescue firms, most of which involved paying advance fees and not getting the loan modification assistance that was promised, he said. In many cases, the fees were collected by people who were not even licensed to offer loan modifications.

SB 94 only allows fees to be collected after the promised services are provided. Consumers must also be told that similar services are available from nonprofit housing counseling agencies approved by the federal Department of Housing and Urban Development. Consumers must also be told they have the option of calling their lender directly to request a change in loan terms.

Effective Jan. 1, three other laws will kick in to provide more protections to consumer who take out home loans:

  • Assembly Bill 260, written by state Assemblyman Ted Lieu, D-Torrance, extends federal mortgage lending laws to state-regulated mortgage brokers. Among other things, mortgage brokers would be prohibited from steering borrowers into higher-priced, subprime loans in cases where they could qualify for a lower-interest, fixed-rate loan.AB 260 restricts the type of home loans that consumers have access to, said John Holmgren, an Oakland-based mortgage broker and spokesman for the California Association of Mortgage Brokers, which opposed the legislation.

    For now, subprime loans have pretty much gone away in response to tougher lending standards but Holmgren expects that demand for such products will eventually return when the economy improves.

    “It would be wonderful if every consumer had perfect credit” but that is not the case, Holmgren said. “It’s bad for those consumers (with poor credit scores) because it restricts their choice and that’s what this does … In this troubled economy, there is a number of people whose credit has suffered.”

    Mortgage brokers would also be banned from offering negative amortization loans, which results in a growing loan balance the longer the borrower holds the loan. Strict caps would also be placed on prepayment penalties.

  • Assembly Bill 329 adds existing consumer protections for reverse mortgages, which allow seniors to convert equity held in a home into tax-free income or a lump-sum payment while continuing to live in the home. Among other things, the law extends counseling requirements that apply to Federal Housing Administration-backed reverse mortgages to all lenders who offer reverse mortgages. The bill was written by state Assemblyman Mike Feuer, D-Los Angeles.n”‚Assembly Bill 1160 requires mortgage lenders to provide a translated summary document in the language in which it was originally verbally negotiated with a borrower whose primary language is not English. The translation requirement applies to Spanish, Chinese, Tagalog, Vietnamese and Korean languages. The law, written by state Assemblyman Paul Fong, D-Cupertino, extends translation requirements that already apply to mortgage brokers.

    Contra Costa Times

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