Wednesday, September 21, 2016

Tax Court: Sale Leaseback Deal Fails Substance Over Form Test; Transaction An Improper Tax Dodge Treated As A Loan For Income Tax Purposes

From a recent post in CCH Tax Day Report:

  • A series of transactions consisting of a like-kind exchange, coupled with a sale and leaseback between an electricity producer/distributor corporation and two tax-exempt public utilities, were disregarded because they failed the substance over form test.

    The transactions were recharacterized as loans because the taxpayer funded the transactions entirely with its own funds and received the funds back with interest in two payments: the first six months after the closing date and the second at the end of the sublease term in the form of the option cancellation payment. In addition, the taxpayer’s return on investment was predetermined and it did not have an upside potential or much of a downside risk.

    The transactions were similar to traditional sale/leaseback (SILO) and lease-in/lease-out (LILO) transactions because they created a circular flow of money accompanied by a transfer of tax benefits from a tax-exempt to a taxable entity. In addition, the terms of the transaction ensured that only six months into the deal, the taxpayer was in the same cash position as if it had taken out a loan to finance the transaction.

    Moreover, the taxpayer did not have any obligation regarding the maintenance, operation or insurance of the leased property during the sublease term or the remainder of the headlease. Under the terms of the sublease, the municipal utility accepted all of the risks associated with the operation of the power plant during the sublease term. Further, the taxpayer’s due diligence did not indicate any ownership rights because the taxpayer did not follow up on any of the red flags raised in the engineering reports.
For more, see Like-Kind Exchange with Sale and Lease-Back Transactions Were Loans; Penalties Imposed.

For the court ruling, see Exelon Corp. v. Commissioner. 147 T.C. No. 9 (September 19, 2016).

Monday, July 18, 2016

Ohio Supreme Court Slams Brakes On Liability Insurer's Attempt To Automatically Deny Coverage To Landlord Sued By Prospective Tenant For Alleged Discrimination Under Fair Housing Act

From a recent article appearing in the insurance industry publication, Claims Journal:

  • [T]he Ohio Supreme Court recently considered application of the inferred-intent doctrine(1) in a federal fair housing discrimination lawsuitGranger v. Auto-Owners Ins., 144 Ohio St.3d 57, 40 N.E.3d 1110 (Ohio 2015).

    In Granger, the insured [ie. the landlord] owned various rental properties. Those properties were insured by Auto-Owners Insurance Group with a primary dwelling policy that included landlord-liability coverage and a second umbrella policy. The primary policy was issued by Auto-Owners Mutual Insurance Company and the second policy was issued by Owners Insurance Company.

    Both policies covered personal injuries. However, the definition of what constituted a “personal injury” differed between the policies. The primary policy defined “personal injury” in terms of causes of action, i.e., libel, slander, defamation, false arrest, invasion of privacy, wrongful eviction, etc. The definition of “personal injury” contained within the umbrella policy was broader in scope. The umbrella policy definition included reference to particular types of damages rather than only particular types of causes of action. The broader definition of “personal injury” in the umbrella policy included within the definition “humiliation.”

    The insured refused to rent one of the insured properties because the proposed renter was African-American and had a six year old son who would be living with her at the property. It was determined that the insured had discriminated against the tenant on the basis of familial status and race in violation of 42 U.S.C. 3604 and R.C. 4112 .02(H). Part of the damages sought by the putative tenant was emotional distress.(2)

    The umbrella policy also contained an intentional act exclusion. Specifically, the policy excluded coverage when “the personal injury … was expected or intended.” Auto-Owners asserted that the exclusion was applicable. Auto-Owners argued that “discriminatory intent is inferred as a matter of law for purposes of an intentional act exclusion under an umbrella policy of insurance on a claim for pre-leasing housing discrimination.” 144 Ohio St.3d at 64, 40 N.E.3d at 1117.

    Auto-Owners was seeking application of the inferred-intent doctrine. Under the inferred-intent doctrine, “when there is no evidence of direct intent to cause harm and the insured denies the intent to cause any harm, the insured’s intent to cause harm will be inferred as a matter of law in certain instances.” Auto-Owners argued that it could be inferred as a matter of law from the nature of the insured’s act—pre-leasing housing discrimination—that the insured intended to cause the putative tenant’s personal injuries and, therefore, the exclusion applied.

    The Ohio Supreme Court in Granger disagreed.

    Previously, the Ohio Supreme Court had rejected the “substantially certain” test in inferred-intent cases. 144 Ohio St.3d at 65, 40 N.E.3d at 1118. Under the “substantially certain” test, any harm that was substantially certain to result from an intentional act would fall under the intentional act exclusion of the policy.

    The Ohio Supreme Court adopted a different test for application of the inferred-intent doctrine. Under Ohio law, “the doctrine of inferred intent applie[d] only in cases in which the insured’s intentional act and the harm caused [were] intrinsically tied so that the act [had] necessarily resulted in the harm.” 144 Ohio St.3d at 65, 40 N.E.3d at 1118.

    The Ohio Supreme Court then found that humiliation was not so intrinsically tied to pre-leasing discrimination that the insured’s act necessarily resulted in the harm suffered by the putative tenant.

    While acknowledging that emotional distress damages were available under the law to victims of housing discrimination, the Court found that such damages were not automatically awarded.

    Therefore, the Court remanded the case to the trial court so that the trier of fact could determine whether the insurance company was able to demonstrate that the insured intended to cause humiliation to the putative tenant without the benefit of the inferred-intent doctrine removing that burden of proof.
For the article, see Ohio High Court Rejects Inferred-Intent Doctrine in Fair Housing Discrimination Case.

For the court ruling, see Granger v. Auto-Owners Ins., 144 Ohio St.3d 57, 40 N.E.3d 1110 (Ohio 2015).

See also, Landlord Owed Defense In Bias Row, Ohio High Court Says (may require subscription; if no subscription, TRY HERE, then click the appropriate link for the story).
(1) In Ohio, the inferred-intent doctrine is a judicially-created rule that liability insurers often rely on when attempting to wiggle their way out of providing coverage denying coverage to a policy holder when the insurer claims that the conduct of an insured that gives rise to harm was as a result of an intentional act, thereby triggering the intentional act exclusion in the insurance policy (which allows the insurer to deny coverage).

The court describes the inferred-intent doctrine as follows:
  • Under the inferred-intent doctrine, "when there is no evidence of direct intent to cause harm and the insured denies the intent to cause any harm, the insured's intent to cause harm will be inferred as a matter of law in certain instances." Campbell, 128 Ohio St.3d 186, 2010-Ohio-6312, 942 N.E.2d 1090, ¶ 9, citing Gearing v. Nationwide Ins. Co., 76 Ohio St.3d 34, 36, 665 N.E.2d 1115 (1996), paragraph one of the syllabus.
(2) A summary of the facts that led up to the landlords' lawsuit against the insurance company (including a description of their alleged conduct that triggered the fair housing lawsuit against them), as roughly abstracted from the court ruling, follow:
  1. In June, 2010, the prospective tenant ("Kozera") first made contact with the landlord.
  2. After being discouraged by the landlord from applying for a vacant apartment available for rental on the subject premises, a four-unit property in Akron, Ohio, Kozera contacted the Fair Housing Contact Service, Inc. ("FHCS"), the local non-profit fair housing organization, which investigated her housing discrimination claims by using trained testers to interact with the landlord ("Granger").
  3. One tester inquired about the property by e-mail, and Granger replied, "Truely [sic] a lovely and large apartment and in a very well keep [sic] apartment house. No pets or children."
  4. Granger later sent an additional e-mail to the same tester, stating, "Yes it is still available as I am selective as to who [sic] I rent to and I run a background check on any possible tenant, just so you know. It is an adult apartment house so it is quite [sic] and very will keep [sic] with no children or pets permitted."
  5. He sent a proposed lease to at least one tester; one of its terms was "No children or pets are permitted—period."
  6. Further, FHCS related that Granger told only an African-American tester that he ran background checks on prospective tenants because "he didn't want a rapist in the building"; he did not make the same comment to a Caucasian tester.
  7. Based on information from Kozera and the testers, FHCS contended that Granger had discriminated against Kozera, an African-American, on the basis of familial status and race in violation of 42 U.S.C. 3604 and R.C. 4112.02(H).
  8. In March, 2011, (nine months after her initial contact with the landlord), Kozera, along with FHCS, filed a fair housing lawsuit in federal court against Granger and one, Steigerwald, (Granger's partner/co-landlord), individually and in their capacities as trustees of the trust that held title to the subject rental property).
  9. Kozera claimed that she had "experienced out of pocket costs and emotional distress as a result of Defendants' conduct"; FHCS alleged that it had "expended its resources and was harmed in its mission by Defendants' conduct."
  10. In May, 2011 (two months after getting hit with the fair housing lawsuit), Granger and Steigerwald forwarded the lawsuit to their insurance agent, who then contacted the insurance company, seeking coverage under one of the policies, including the providing of a legal defense to the fair housing lawsuit (ie. the insurer's "duty to defend"),
  11. A month later, citing various reasons, the insurer denied coverage on one of the policies; they immediately requested coverage under their second policy (the umbrella policy), but they never heard back from the insurer,
  12. On July 11, 2011, Granger and Steigerwald settled the federal case with Kozera and FHCS for $32,500. Separate payments went to the two plaintiffs: $5,000 to Kozera and $27,500 to FHCS.
  13. On July 22, 2011 (less than two weeks thereafter), the landlords, Granger and Steigerwald, sued the insurance company (unfortunately for the insurance agency and the individual insurance agent, they too got roped into the landlord's lawsuit) for claims relating to the insurer's failure to provide coverage.

Thursday, March 10, 2016

Void vs. Voidable: Illinois Lawsuit: Failure To Use State-Licensed Private Detective Agency To Serve Foreclosure Lawsuits Violates State Law, Leads To Slew Of Void (Not Merely Voidable) Foreclosure Judgments; Property Owner Seeks Return Of $3.5 Million In Proceeds From 22 Sales

In Chicago, Illinois, the Cook County Record reports:

  • Trying to take advantage of a “procedural windfall,” a Chicago-area investment firm is alleging West Suburban Bank owes it almost $3.5 million from the sales of foreclosed properties held as collateral for a $10 million loan the firm defaulted on, because the firm was not legally served with notice of the foreclosures, as the process servers did not work for a state-licensed private detective agency as required by law.

    Advantage Financial Partners lodged a one-count restitution complaint Feb. 16 in Cook County Circuit Court against West Suburban Bank, which is headquartered in Lombard and has 19 branches in the suburbs.

    The case originated in 2005, when Advantage took a $10 million loan from West Suburban Bank, putting up 23 mortgaged properties as collateral, 15 of which were in Cook County, with the rest in DuPage, Will and Kane counties. The bank, however, alleged Advantage defaulted in 2008, and initiated foreclosure proceedings in December that year. The bank used a private detective agency, MPSI, to serve summonses on Advantage for 22 of the cases, and used another process server in the 23rd case. Advantage purportedly never responded.

    In 2009, default judgments were ordered against Advantage. West Suburban next bought the properties at sheriff’s sales, then sold them to third parties for $3.5 million, according to Advantage.

    In April 2013, Advantage sued to have 22 of the foreclosure judgments vacated, saying MPSI was not licensed with the state at the time its agents served foreclosure notice on Advantage. Specifically, MPSI’s agency license had expired Aug. 31, 2008, and was never renewed. Given that MPSI was not licensed, Advantage argued it was never legally served with notice of the foreclosure actions.

    Advantage did not claim it never received the summonses.

    West Suburban Bank filed a motion to consolidate the cases, which was granted, with 22 of the cases combined in DuPage County Circuit Court; the 23rd case was from Cook County and remained there. The bank then moved for dismissal of the cases in DuPage County handled by MPSI, contending, although the agency was not licensed as a detective agency, the agency’s employees who served the summonses were licensed. As a consequence, the bank contended the summonses were lawfully served.

    DuPage County Judge Robert G. Gibson agreed with the bank and dismissed Advantage’s suit in September 2013. Advantage appealed to Second District Appellate Court in Elgin, which in November 2014 overturned Gibson’s ruling, voided the foreclosure judgments and reinstated Advantage’s case.(1)

    The appellate court found the detective agency was the entity authorized to serve process, not the agency’s employees, regardless of whether they were individually licensed. Justice Mary Seminara-Schostok, who authored the appellate opinion, noted the opinion was in keeping with judicial principles “embedded in Illinois law for over a century.”(2)

    However, the court reached this decision with reluctance, having concern about the unjust effect of its ruling.

    “I invite the reader to step back and set aside, for a moment, the procedural niceties in play here and consider this case with an intuitive sense of justice. I venture that few would find this result at all palatable. Advantage has received an undeserved procedural windfall,” said Justice Joseph E. Birkett, who concurred in the opinion with Justice Schostok, as well as with Justice Ann B. Jorgensen.

    The case was remanded to DuPage County Circuit Court, where more legal maneuvers were made before the case was closed in July 2015.

    Advantage lodged a new complaint Feb. 16 in Cook County Circuit Court, demanding West Suburban Bank return to Advantage the $3.5 million in proceeds from the sale of 21 of the foreclosed properties, plus pre- and post-judgment interest, as well as any damages the judge deems just.

    Advantage alleged the money the bank received by selling the properties was based upon “unlawful judicial proceedings,” as the appellate court laid out in its ruling.
Source: Foreclosed land investors exploit technicality to demand $3.5 million 'procedural windfall' from bank.
(1) West Suburban Bank v. Advantage Financial, 23 NE 3d 370 (Ill. App. 2nd Dist. 2014).

(2) From the 2014 appeals court ruling:
  • ¶ 20 WSB argues that MPSI's expired certification is a technical defect that should not result in a lack of personal jurisdiction. However, the weight of Illinois law is clearly to the contrary: defects in the service of process are neither "technical" nor insubstantial.
    Further, strict compliance with the statutes governing the service of process is required before a court will acquire personal jurisdiction over the person servedSarkissian v. Chicago Board of Education, 201 Ill.2d 95, 109, 267 Ill.Dec. 58, 776 N.E.2d 195 (2002); C.T.A.S.S. & U. Federal Credit Union v. Johnson, 383 Ill.App.3d 909, 912, 322 Ill.Dec. 543, 891 N.E.2d 558 (2008).
    ¶ 24 WSB contends that the defect in service of process merely rendered the judgments voidable, not void, [...].
    As we have said, the proposition is well established that invalid service results in a judgment that is void for lack of personal jurisdictionSarkissian, 201 Ill.2d at 109, 267 Ill.Dec. 58, 776 N.E.2d 195; Thill, 113 Ill.2d at 308-09, 100 Ill.Dec. 794, 497 N.E.2d 1156; see also Pennoyer v. Neff, 95 U.S. 714, 732, 24 L.Ed. 565 (1877) ("if the court has no jurisdiction over the person * * * and, consequently, no authority to pass [judgment] upon his personal rights and obligations[,] * * * the whole proceeding * * * is coram non judice and void").

    There is no similar support for the idea that lack of personal jurisdiction merely renders a judgment voidable.

Monday, March 7, 2016

Florida Appeals Court Invokes 'Two Strikes & You're Out!' Rule To Permanently Sink Foreclosure Action; Unanimous Panel Says Banksters Allowed Only One Refiling Per Mortgage Note (Not Per Plaintiff), Then Get The Boot After The 2nd

In West Palm Beach, Florida, the Daily Business Review reports:

  • One voluntary dismissal too many sank a foreclosure case for a lender who acquired a debt that had been sold at least twice before.

    The Fourth District Court of Appeal considered the procedural history and the number of voluntary dismissals tied to the note rather than the dismissals per plaintiff to reverse the foreclosure Wednesday and leave homeowner attorneys celebrating.

    "This has always been the rule … but it's interesting in the context of foreclosure where there's this constant shifting of plaintiffs," said foreclosure defense attorney Thomas Ice of Ice Legal in Royal Palm Beach, who was not involved in the litigation. "Often the parties are different on paper, but they're related somehow, so it really is the same lawsuit."

    The appellate court invoked the so-called two-dismissal rule under Florida Rule of Civil Procedure 1.420(a)(1)which allows one voluntarily dismissal but not two.(1)

    The appeal pitted Loxahatchee property owner Charles Nolan against MIA Real Holdings LLC, a successor lender that sought to foreclose on the same default as its predecessor, Flagstar Bank. It was the third foreclosure attempt against Nolan following two voluntary dismissals.

    The first suit came from Flagstar, which filed for foreclosure in 2011 after Nolan reportedly defaulted on the loan.

    Flagstar dismissed that case and later assigned the note and mortgage to DKR Mortgage, which started its own foreclosure before selling the debt as a trouble mortgage to MIA Real Holdings.

    MIA sought to be substituted as the real party in interest to take over the case but then voluntarily dismissed the suit before filing a third complaint alleging the same breach.

    Nolan's lawyers, Brian Korte and Scott Wortman of Korte & Wortman in West Palm Beach, argued the suit — "based on the same mortgage, same note, same default and same damages as the prior two actions" — was barred under the two-dismissal rule.

    "It's just unfair," Korte told the Daily Business Review. "The court wants some finality. You get two bites of the apple."

    MIA attorney Jerome Tepps of Sunrise did not respond to requests for comment by deadline. His client triumphed at trial when Palm Beach Circuit Judge Catherine Brunson counted MIA's voluntary dismissal as the only one applied to the current parties in the litigation.

    But Nolan successfully challenged that decision.

    "We hold that the two noteholders — the original plaintiff and the subsequent assignee of the note — were the same 'plaintiff' under the rule, so that the second voluntary dismissal triggered an 'adjudication on the merits,' " Fourth DCA Judge Robert Gross wrote in a unanimous decision with Judges Martha Warner and Spencer Levine concurring.
Source: Appeals Court: Two Strikes and You're Out on Foreclosure Dismissals (may require subscription; if no subscription, TRY HERE, then click appropriate link for the story).

For the court ruling, see Nolan v. MIA Real Holdings, LLC, No. 4D15-666 (Fla. App. 4th DCA, February 24, 2016).
(1) "[A] notice of dismissal operates as an adjudication on the merits when served by a plaintiff who has once dismissed in any court an action based on or including the same claim." Florida Rule of Civil Procedure 1.420(a)(1). (Page 124)

Tuesday, March 1, 2016

Florida Appeals Court: "Precise Identity Of Each Entity In The Chain Of Transfers Is Crucial" When Bankster Is A 'Nonholder In Possession' Attempting To Foreclose On Note Containing 'Special Indorsement'

From a recent client alert from the law firm Maurice Wutscher LLP:

  • The District Court of Appeal of the State of Florida, Fourth District, recently affirmed the dismissal of a mortgage foreclosure action because the mortgagee failed to present competent, substantial evidence that it had standing to foreclose, due to lack of conformity between the name of the plaintiff mortgagee and the names in the transactional documentation by which the plaintiff mortgagee claimed an interest in the note at issue. [...] The promissory note contained a special indorsement in favor of the mortgagee's predecessor in interest, astrustee.(1)

For the court ruling, see Bank of New York Mellon Trust Company, NA v. Conley, No. 4D14-2430 (Fla. App. 4th DCA, January 6, 2016).
(1) From the court ruling:
  • In this foreclosure case, the trial court granted the borrower's motion for involuntary dismissal because the bank did not present competent substantial evidence of its standing to foreclose. We affirm.

    The record in this case reveals that, at one time or another, at least six different banking entities claimed ownership of the borrower's note. The problem is not the number of entities claiming ownership, but the similarities of their names. Two of the entities are:

    • JP Morgan Chase Bank; and
    • JP Morgan Chase & Co.

     Two others are:

    • Bank of New York Company, Inc.; and
    • The Bank of New York Mellon Trust Company, National Association

     We write to emphasize that when a nonholder in possession attempts to establish its right to enforce a note, and thus its standing to foreclose, the precise identity of each entity in the chain of transfers is crucial.

    At bar, the plaintiff is:

    The Bank of New York Mellon Trust Company, National Association fka The Bank of New York Trust Company, N.A. as Successor to JPMorgan Chase Bank N.A. as Trustee for RASC 2004KS4 [hereinafter "the Bank of New York Mellon"].

    In pursuit of this foreclosure, the Bank of New York Mellon presented an original note bearing a special indorsement in favor of "JP Morgan Chase Bank, as Trustee."

Wednesday, February 24, 2016

Reminder To Florida Trial Judges On Reestablishment Of Lost Notes (Both In Foreclosure & Non-Foreclosure Debtor-Creditor Cases): No Entry Of Judgment Allowed Until Person Required To Pay On Instrument Is Adequately Protected Against Risk Of Loss Of Double Payment

recent ruling by a Florida appeals court serves as a reminder to all trial judges presiding over debtor-creditor cases (both foreclosure and non-foreclosure cases) that, when a bankster claims to have lost the promissory note it seeks to enforce, and is able to provide sufficient evidence to prove entitlement to reestablish a lost note, a trial judge still cannot enter a final judgment in the bankster's favor without first providing adequate protection to the property owner as mandated by Fla. Sta. § 673.3091.

The protection is against the possibility that the lost note turns up in another party's hands, and that party attempts to enforce the note a second time (essentially, making the property owner pay twice).

From the ruling:

  • (2) A person seeking enforcement of an instrument under subsection (1) must prove the terms of the instrument and the person's right to enforce the instrument. If that proof is made, s. 673.3081 applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means§ 673.3091, Fla. Stat. (2014) (emphasis added).

    As this statutory language makes clear, and contrary to the Blitches' argument here, adequate protection is not an element of the Bank's prima facie case. Instead, it is a post-proof condition of the entry of the final judgment. See Fifth Third Bank v. Alaedin & Majdi Invs., Inc., No. 8:11-CV-2206-T-17TBM, 2012 WL 1137104, at *3 (M.D. Fla. Apr. 4, 2012) (noting that after the plaintiff showed that it was entitled to enforce the note at the time it lost the note, "the Court is required to address the issue of providing adequate protection to the defaulting party against loss that might occur if a claim were brought by another party to enforce the instrument"); see also Correa v. U.S. Bank Nat'l Ass'n, 118 So. 3d 952, 956 n.2 (Fla. 2d DCA 2013) (stating that "[i]f the court is concerned that another person might attempt to enforce the original note, it may require security in favor of the payor to ensure adequate protection" (emphasis added)); Beaumont v. Bank of New York Mellon, 81 So. 3d 553, 555 (Fla. 5th DCA 2012) (after discussing the deficiencies in the bank's proof, stating "[t]he trial court was also required to address the issue of providing adequate protection to Beaumont" (emphasis added)).

    Because the court's consideration of the issue of adequate protection is a condition of entering a judgment that reestablishes a lost note, its failure to provide adequate protection, or to make a finding that none is needed under the circumstances, requires reversal and remand for the court to consider the issue. See Delia v. GMAC Mortg. Corp., 161 So. 3d 554, 556 (Fla. 5th DCA 2014).

    Generally this post-proof condition is satisfied through a written indemnification agreement in the final judgment, the posting of a surety bond, a letter of credit, a deposit of cash collateral with the court, or "[s]uch other security as the court may deem appropriate under the circumstances." § 702.11(1)(e), Fla. Stat. (2014).

    Here, the Bank proved at the bench trial that (1) it was entitled to enforce the note when the loss of possession occurred; (2) the loss of possession was not due to a valid transfer or lawful seizure; and (3) it could no longer reasonably obtain possession of the note because it was lost while in the possession of its first law firm, which is no longer in existence. The Bank also presented evidence to establish the terms of the note and that it had the right to enforce it when it was lost. This evidence was sufficient to show that the Bank was entitled to reestablishment of the lost note.

    However, the trial court made no provision for adequate protection of the Blitches in the final judgment, nor did it determine that adequate protection was unnecessary in this case. This omission requires us to reverse the final judgment and remand for further proceedings, at which the court must address the means by which the Bank must satisfy this post-proof condition.
For the ruling, see Blitch v. Freedom Mortgage Corporation, No. 2D14-4398 (Fla. App.2nd DCA, February 5, 2016).

Editor's Note:
Question for the Day

For all those past foreclosure judgments that have been entered in "lost note" cases that ended up in a foreclosure sale, where adequate protection against the risk of double payment was neither given to the homeowner, or even addressed by the trial judge, are those foreclosure sales VOID, or are they MERELY VOIDABLE???

Since there was no foreclosure sale in this case, the point was a non-issue, and accordingly, was unnecessary to address by the court.

Friday, February 19, 2016

Void vs. Voidable Mortgage Assignments: California Foreclosed-Upon Homeowners Score Big Win Over Sloppy Banksters; "[A]n Allegation That The Assignment Was Void, & Not Merely Voidable At The Behest Of The Parties To The Assignment, Will Support An Action For Wrongful Foreclosure," Say State Supremes In Unanimous (7-0) Decision

In Sacramento, California, National Mortgage News reports:

  • The California Supreme Court on Thursday ruled that borrowers may challenge a wrongful foreclosure on the grounds that the assignment of the deed of trust was invalid.(1)

    The decision in Yvanova v. New Century Mortgage Corp. has the potential to radically increase the number of lawsuits brought by borrowers, particularly on loans that were pooled into securitized trusts, experts on both sides of the issue said.

    "There will be a flood of litigation only because the lending industry was not diligent in doing its paperwork during the housing finance boom," said Richard Antognini, who represented the plaintiff, California homeowner Tsvetana Yvanova.

    The decision tackles a question that became important after the housing market's collapse in 2008: can a defaulted homeowner contest the validity of the chain of assignments involved in the securitization of loans?

    In 2012 Yvanova challenged the foreclosure and public auction of her Woodland Hills, Calif., home, alleging there was a four-year break in the chain of title, essentially making it void.

    Yvanova in 2006 took out a loan for $483,000 from Irvine, Calif.-based New Century Mortgage, which went bankrupt the next year. In 2011 the mortgage servicer Ocwen Loan Servicing executed an assignment of the deed of trust on Yvanova's loan to Deutsche Bank, which served as a trustee of a Morgan Stanley investment trust.

    But Yvanova alleged that the Morgan Stanley investment trust had a closing date of January 2007 and should never have been assigned the mortgage. But the foreclosure went through, and Yvanova ultimately was evicted in May 2015.

    Multiple lower courts in California had ruled in high-profile cases such as Jenkins v. JPMorgan Chase that borrowers have no standing to file a claim of wrongful foreclosure because they are not a party to or holder of the debt.

    However, the state Supreme Court disagreed with those rulings and essentially sided with a 2013 state appellate ruling in Glaski v. Bank of America, which held that a borrower has standing to challenge a nonjudicial foreclosure sale based on alleged violations of the terms of a pooling and servicing agreement.

    "The borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security," the Supreme Court stated in a 33-page ruling. "A homeowner who has been foreclosed on by one with no right to do so has suffered an injurious invasion of his or her legal rights at the foreclosing entity's hands. No more is required for standing to sue."

    The case now will go back to the state Court of Appeals or a trial court, which would decide on the merits of Yvanova's claim.

    Frederick Levin, a partner at BuckleySandler, said the decision will breathe new life into the foreclosure defense bar, which believes that a loan assigned into a securitized trust after the trust's closing date makes the assignment void.

    "This decision has [the] potential to increase litigation challenging securitized loans," said Levin, who on behalf of banks has long argued that contractual language gives investors and lenders broad latitude to reassign loans.

    Others said the court was sending a big message to the lending industry.

    "This was the court in California directing lenders and Wall Street securitizers to be very careful in documenting their instruments and assignments," said Kenneth Styles, a litigator at the law firm Miller Starr Regalia. "They've been more than sloppy in the past, and this was a directive to make sure their procedures are clean."

    Antognini, the attorney for Yvanova, put it this way: "if you claim you own a debt, you have to prove it. And if you claim to own a debt, the borrower has the ability to allege and later to prove that you don't own it."
Source: Calif. Supreme Court Lets Borrowers Challenge Wrongful Foreclosures.

For the court ruling, see Yvanova v. New Century Mortgage Corp., S218973 (Cal. February 18, 2016).

Editor's Note: Having a clear understanding of how this ruling may lead to a flood of litigation against banksters guilty of using sloppy mortgage assignments in their chains of title, the California Supreme Court took great pains in trying to tamp down the excitement this ruling will create within the foreclosure defense bar.

In that light, the court prefaced its ruling with the following admonition:
  • Our ruling in this case is a narrow one. We hold only that a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment.

    We do not hold or suggest that a borrower may attempt to preempt a threatened nonjudicial foreclosure by a suit questioning the foreclosing party‘s right to proceed.

    Nor do we hold or suggest that plaintiff in this case has alleged facts showing the assignment is void or that, to the extent she has, she will be able to prove those facts.

    Nor, finally, in rejecting defendants‘ arguments on standing do we address any of the substantive elements of the wrongful foreclosure tort or the factual showing necessary to meet those elements.
(1) From the introductory part of the ruling:
  • The collapse in 2008 of the housing bubble and its accompanying system of home loan securitization led, among other consequences, to a great national wave of loan defaults and foreclosures. One key legal issue arising out of the collapse was whether and how defaulting homeowners could challenge the validity of the chain of assignments involved in securitization of their loans. We granted review in this case to decide one aspect of that question: whether the borrower on a home loan secured by a deed of trust may base an action for wrongful foreclosure on allegations a purported assignment of the note and deed of trust to the foreclosing party bore defects rendering the assignment void.

    The Court of Appeal held plaintiff Tsvetana Yvanova could not state a cause of action for wrongful foreclosure based on an allegedly void assignment because she lacked standing to assert defects in the assignment, to which she was not a party. We conclude, to the contrary, that because in a nonjudicial foreclosure only the original beneficiary of a deed of trust or its assignee or agent may direct the trustee to sell the property, an allegation that the assignment was void, and not merely voidable at the behest of the parties to the assignment, will support an action for wrongful foreclosure.

Friday, December 11, 2015

Florida Appeals Courts Spent A Busy 2015 Reversing Trial Court Screw-ups In Foreclosure Cases

Anyone paying attention to the foreclosure litigation going on in the Florida courts knows that the appeals courts have been kept busy having to reverse incorrect rulings issued by the trial courts which have been unfavorable to homeowners (by my rough count, we're looking at around 150-175 reversals in 2015 alone (and counting) - possibly even a little more).

The following list (not necessarily all-inclusive, and in no particular order) represents what appears to be most of the reversals of homeowner-unfavorable trial court rulings (37 in total to date) by only one of Florida's five appellate courts - the 4th District Court of Appeal - in 2015.

Included in the list is the case caption, appellate court case number (those looking for the official citation are left on their own to locate it - sorry), and the guilty trial judge issuing the incorrect ruling. In addition, while most of the cases involved homeowners represented by attorneys, six involved homeowners who represented themselves (ie. pro se) - at least in the appellate phase of the litigation, and are noted accordingly.

Finally, in each case, the appeals court reversal was unanimous (3-0 rulings).

One can only imagine, through extrapolation, how many screwed-over homeowners lost their homes due to incorrect trial judge rulings who, because they (or their attorneys) lacked the knowledge and/or wherewithal, failed to appeal the outcomes of their cases in the lower courts (dozens for every one reversal? maybe 100 or more per reversal?).

Wednesday, November 4, 2015

Homeowners' Standing To Challenge Mortgage Assignments Where They Fail To Comply With Terms Of Trust's Governing Docs: U.S. Supreme Court Denies Homeowner's Petition For Review

A follow-up on the last post (September 24, 2015), U.S. Supremes Asked To Address Foreclosing Banksters' Claims That Homeowners Lack Standing To Contest Mortgage Assignments (Void or Voidable???) That Fail To Comply With Terms Of Trust's Governing Documents:

Regrettably for homeowners, consumer attorneys, and their other advocates, the U.S. Supreme Court made quick work of the case, denying the petition for certiorari on November 2, 2015.

Go here for the November 2, 2015 docket entry.

Thanks again to Deontos for the update.


Editor's Note: The crucial question here (where, by its terms, the governing trust documents are controlled by New York state law) involves, not the application of federal substantive law, but the application of the substantive law of the state of New York. Further, while there is a long list of federal cases deciding this issue, the issue of law here appears to be one for which no controlling precedent of the New York Court of Appeals exists.

The next time a case like this one works its way up the federal court system to an appeals court, it may be a good idea for the homeowners' advocates to request that the federal appeals court, before deciding the case, first certify the question of law to the New York Court of Appeals,(1) the state's highest court and "best authority on its own law", as to whether the failure to comply with the terms of a trust's governing documents renders a mortgage assignment void, or only voidable. (See generally, Certified Question.)

As a reminder, and as the U.S. Supreme Court has said in Commissioner v. Estate of Bosch, 387 U.S. 456 (1967), and followed by the subsequent cases thereunder on the significance of how the highest courts of each state interpret their own state's substantive (as opposed to procedural) laws, and that the federal courts are to follow these interpretations (generally referred to as a part of the Erie Doctrine):
  • "This is but an application of the rule of Erie R. Co. v. Tompkins, supra, where state law as announced by the highest court of the State is to be followed. This is not a diversity case but the same principle may be applied for the same reasons, viz., the underlying substantive rule involved is based on state law and the State's highest court is the best authority on its own law."

(1) See New York Court of Appeals Rule 500.27 - Discretionary Proceedings to Review Certified Questions from Federal Courts and Other Courts of Last Resort:
  • (a) Whenever it appears to the Supreme Court of the United States, any United States Court of Appeals, or a court of last resort of any other state that determinative questions of New York law are involved in a case pending before that court for which no controlling precedent of the Court of Appeals exists, the court may certify the dispositive questions of law to the Court of Appeals.
Note that the certification process is strictly discretionary, both on the part of the certifying court and the New York Court of Appeals. That is, the New York Court of Appeals is not required to accept any question of law certified to it; likewise, the court being requested by a party to certify a question of law to New York's highest court (or the highest court of any state, for that matter) is not required to certify the question of law.

It should be noted the United States Supreme Court has encouraged (but not mandated) the lower federal courts to make use of the certification process where available, which "in the long run save[s] time, energy, and resources and hel[ps] build a cooperative judicial federalism." Lehman Brothers v. Schein, 416 U.S. 386, 391 (1974), and which has been addressed by this list of cases thereunder.

See also, Arizonans for Official English v. Arizona, 520 U. S. 43, 77 (1997) ("Through certification of novel or unsettled questions of state law for authoritative answers by a State's highest court, a federal court may save `time, energy, and resources, and hel[p] build a cooperative judicial federalism'" (brackets in original)).

Thursday, September 24, 2015

U.S. Supremes Asked To Address Foreclosing Banksters' Claims That Homeowners Lack Standing To Contest Mortgage Assignments (Void or Voidable???) That Fail To Comply With Terms Of Trust's Governing Documents

In New York City, Law 360 reports:

  • Property owners have asked the U.S. Supreme Court to review their suit against several banks, saying the Second Circuit did not appropriately determine whether they had standing to claim that mortgage-backed securities trusts managed by the banks did not own the petitioners' mortgages.

    In an Aug. 31 petition, the property owners said that their mortgages were transferred to 37 MBS trusts that the banks — Bank of New York Mellon Corp., HSBC Bank NA, US Bank NA, Deutsche Bank National Trust Co. and Wells Fargo Bank NA — were trustees for, but that those transactions were invalid.

    The appeals courts are split on how to determine the standing of property owners who challenge mortgage transfers, and the Second Circuit conflated standing with the merits of the instant case by way of an analysis that “swallows its own tail and makes no sense,” according to the petition.

    “The Second Circuit effectively reached the merits of an issue while simultaneously claiming that the parties before it were not suitable to present those issues to it in the first place,” the petition said. “The contradiction in such an approach is palpable and calls into question the integrity of the decision-making process.”

    The Racketeer Influenced and Corrupt Organizations Act suit alleged the banks have collected mortgage payments and initiated foreclosure proceedings based on the assumption that they own the mortgages. However, the petition contended that the banks do not own the mortgages and have been fraudulently collecting payments and foreclosing on properties.

    The issue of whether the banks own the mortgages turns primarily on whether the mortgages were validly transferred from the originating banks to the trusts. The petition argued that the transactions did not comply with the terms of the agreements that created the trusts because the trusts already closed at the time of the attempted transfers, meaning that New York law renders those transfers void.

    The New York federal court dismissed the case with prejudice, saying the petitioners lacked standing to challenge the validity of the transfer. The district court agreed with the banks that the property owners were neither parties to, nor third-party beneficiaries of, the agreements they claimed the banks did not comply with, and that the owners thus had no right to assert that the agreements were breached.

    In reaching that conclusion, the district court addressed a disputed issue about the merits of the case — whether the banks' failure to comply with the agreements rendered the transactions completely void under New York law or merely voidable if a party to, or third-party beneficiary of, the transactions wanted to void them.

    The district court ruled that the latter was true, a decision the Second Circuit upheld, saying the claims were indistinguishable from the claims in the circuit's own 2014 decision in Rajamin v. Deutsche Bank National Trust Co.

    However, the circuit's 2014 decision conflicts with the First Circuit's 2013 ruling in Culhane v. Aurora Loan Services of Nebraska, the petition said.

    The Rajamin court reasoned that the alleged injuries were merely hypothetical because the petitioners did not dispute the underlying debt, did not say they were not in default and did not claim they paid more than they owed.

    In Culhane, the First Circuit found that an appellant facing foreclosure had constitutional standing to challenge the validity of her mortgage assignment, as well as foreclosure, even when she was not a party to or beneficiary of that transaction, because the “essence of standing is that a petitioner must have a personal stake in the outcome of the litigation.”

    Regarding prudential standing, the Second Circuit in Rajamin looked at the merits of the petitioners' argument and concluded that unauthorized actions were not void but merely voidable.

    Meanwhile, the First Circuit in Culhane said that decisions finding mortgagers lacked prudential standing to challenge mortgage assignments because they were not parties or third-party beneficiaries painted “with too broad a brush.”

    By deciding the question of prudential standing on a superficial consideration of the merits of the claim, the Second Circuit paid little attention to state-law issues better addressed fully on the merits, the Aug. 31 petition said.

    The banks could not be reached for comment Tuesday.

    The petitioners are represented by Erik S. Jaffe of Erik S. Jaffe PC.

    Counsel information for the banks was not available Tuesday.

    The case is Tran et al. v. Bank of New York, et al., case number 15-260, in the Supreme Court of the United States.
Source: Row Over Mortgage Transfers To MBS Trusts Hits High Court.

Foe the homeowner's petition to the U.S Supreme Court, see Anh N. Tran, Et Al. v. Bank of New York (August 31, 2015).

Thanks to Deontos for the heads-up on this litigation.

Friday, September 18, 2015

Court Nixes Feds' Attempted Forfeiture Snatch Against Recipient Of Quit Claim Deed, Despite Grantor's Subsequent Wire Fraud Indictment; Grantee's Release Of Claims In Exchange For Property Transfer, Lack Of Knowledge Of Seller's Use Of Embezzled Cash To Originally Buy Premises Enough To Trigger "Innocent Owner" Protection

From a news release, from the law firm Bryan Cave LLP:

  • In a rare defeat for the United States, Bryan Cave persuaded a federal judge in the Middle District of Florida to enter summary judgment against the government in a civil forfeiture case.

    The case concerned the validity of a quit claim deed to real property in New York. The deed’s grantor conveyed the property as part of a settlement of disputed fraud claims with the grantee. One month later, the United States sued to invalidate the quit claim deed and to forfeit the grantee’s interest in underlying property. Shortly thereafter, a grand jury indicted the grantor for wire fraud.

    Bryan Cave successfully argued that the grantee was an "innocent owner" under 18 U.S.C. § 983. The court’s forty-page opinion, [...], is noteworthy for three reasons.

    First, the court found that the innocent owner defense applied so long as the grantee did not know that the property at issue was purchased with money obtained through fraud. Knowledge of the grantor’s criminal activity in general does not defeat the innocent owner defense.

    Second, the court found that the grantee had given value in exchange for the deed simply by releasing claims for fraud against the grantee. No exchange of money was necessary for the grantee to qualify as a purchaser for value.

    Third, the court held that the grantee’s inability to record the quit claim deed was of no consequence. The innocent owner defense applies even where the ownership interest is founded upon a deed that has not yet been recorded.

    Further, the grantee had standing to defend against forfeiture even though he never maintained possession of the property. The grantee exercised sufficient "dominion and control" over the property by, among other things, negotiating for the quit claim deed and hiring counsel to enforce his rights under that deed and to defend against forfeiture.
Source: Florida federal court addresses the scope of the innocent owner defense in civil forfeiture.

For the court ruling, see U.S. v. Real Property, Including All Improvements Thereon And Appurtenances Thereto, Located At 246 Main Street, Dansville, Livingston County, New York, Case No. 3:13-cv-1210-J-39PDB (M.D. Fla. July 13, 2015).

Monday, September 14, 2015

Florida Appeals Court Slams Brakes On Sloppy Foreclosing Lender's Attempt To Enforce Mortgage Where Only One Of Four Co-Owners Signed The Paperwork; Rejects Assertion That Non-Signatory Owners Ratified Mortgage Through Their Conduct

In a recent ruling by Florida's Third District Court of Appeal, the court denied a lender's attempt to foreclose a residential mortgage that was signed by only one of the four owners of the home when the loan was closed.

In bringing the foreclosure action, the lender attempted to circumvent this problem (obviously caused by sloppy loan origination, closing and title underwriting procedures, and occurring at a time in recent real estate history - late 2005 to early 2006 - that the trial court observed was one where "everybody was hoodwinking everybody") by asking the court to establish the existence of an equitable lien against property interest of all four owners by asserting the legal doctrine of ratification, and then foreclose against them on the basis of that lien.

Quoting from Citron v. Wachovia Mortgage Corp., 922 F.Supp. 2d 1309 (M.D. Fla. 2013), the court described ratification as follows:

  • "Ratification is conduct that indicates an intention, with full knowledge of the facts, to affirm a contract which the person did not enter into or which is otherwise void or voidable."
The court described the application of this legal doctrine in the context of a mortgage in this excerpt:
  • Ratification of a mortgage by a non-signatory property owner has been upheld in Florida in two distinct types of cases: (a) when the nonsignatory owner has received the benefit of the mortgage loan proceeds; or (b) when the non-signatory owner has authorized an attorney-in-fact to execute the mortgage on behalf of the owner.
For the reasons set forth in its ruling,(1) the appeals court rejected the application of the doctrine ratification under the facts and circumstances of this case, and declared that the property interest of the non-signing owners of the property was free of any lien.

For the ruling, see Wells Fargo Bank, N.A. v. Clavero, Case No. 3D14-520 (Fla. 3d DCA September 2, 2015).

For earlier posts on the legal doctrine of ratification, see:

(1) From the court's ruling:
  • A. Receipt of Benefit

    The non-signatory's receipt of mortgage loan proceeds, or receipt of a benefit from the application of those funds, may cure the failure to sign the mortgage as a matter of equitable subrogation, see Palm Beach Sav. & Loan Ass'n v. Fishbein, 619 So. 2d 267 (Fla. 1993), or ratification, see Fleet Fin. & Mortg., Inc., 707 So. 2d 949 (Fla. 4th DCA 1998).

    In the present case, however, neither the Parents nor the 3789 Property received a financial benefit from the loan proceeds. It is undisputed that all of the loan proceeds were utilized by the sole signatory to start the day care business. The Parents were not owners or employees of that business.

    We find no Florida case extending the principle of ratification to a parent's expression of a general intention to help a family member secure a loan for purposes of benefiting the family member. At oral argument, this type of indirect benefit was advanced by Wells Fargo as a worthy rationale for binding the Parents to the mortgage loan procured by Maria. We see no legal basis for extending the legal principle of ratification in such an instance, and on this record. The Washington Mutual loan circumvented the institutional lending process whereby the property owners/mortgagors sign documents informing them of the terms of the transaction, including the amount of the loan procured, federal Truth-in-Lending rights, interest rates, monthly payment amounts, and subjection of the homestead to the mortgage loan—all in a transaction in which the non-signatory owners themselves and the mortgaged property have received no benefit.

    Wells Fargo's reliance on the case of Citron v. Wachovia Mortgage Corp., 922 F.Supp. 2d 1309 (M.D. Fla. 2013), is unwarranted. In that case, Mr. Citron was a Florida-licensed mortgage broker. Mrs. Citron worked with him in a mortgage company, and the two had brokered some 47 mortgage loans for the lender that originally loaned money to the Citrons, World Savings. Wachovia Mortgage was the successor by merger to World Savings. The Citrons obtained hundreds of thousands of dollars of loan proceeds and invested those funds in a home later conveyed to their family trust.

    The Citrons sued Wachovia Mortgage in an attempt to rescind the loan for Truth-in-Lending violations and other alleged defects in the loan documents. The trial court denied any such relief because (among a number of facts in the record) the Citrons had received and had not promptly disgorged all of the direct benefits of the loan. Additionally, the Citrons had made monthly payments on the loan for over a year after learning of the alleged defects in the loan documents. "Ratification is conduct that indicates an intention, with full knowledge of the facts, to affirm a contract which the person did not enter into or which is otherwise void or voidable." 922 F.Supp. 2d at 1321 (quoting Still v. Polecat Indus., Inc., 683 So. 2d 634 (Fla. 3d DCA 1996)).

    In the present case, the Parents neither received loan proceeds, nor otherwise benefited from the application of those proceeds, nor made any monthly payments, nor acquired full knowledge of the material details of the mortgage loan.

    B. Attorney-in-Fact

    Section 695.01(1), Florida Statutes (2005), provides protection to creditors and purchasers who accept a conveyance or lien signed by an attorney-in-fact on behalf of a property owner (and then recorded), so long as the power of attorney itself is also recorded before the accrual of rights by "creditors or subsequent purchasers for a valuable consideration and without notice." Washington Mutual Bank could have required, but did not, such a power of attorney as a condition to the loan. And such a power of attorney is only effectual to the extent of the specific powers granted. Him v. Firstbank Fla., 89 So. 3d 1126 (Fla. 5th DCA 2012).

    Execution of the mortgage by an agent "previously unauthorized" may also be subject to ratification in certain instances. Branford State Bank v. Howell Co., 102 So. 649 (Fla. 1924). In that case, however, the Supreme Court of Florida held: "No rule of law is better settled than this: That the ratification of the act of an agent previously unauthorized must, in order to bind the principal, be with full knowledge of all the material facts." Id. at 650. In the present case, there was no evidence that Maria (or anyone else) informed the Parents or Hubert of all of the material facts relating to the Washington Mutual Bank loan and mortgage.

    Proceedings on Remand

    We affirm the trial court's findings that (a) Maria Castellon signed the promissory note, obtained the loan proceeds, and remains liable under the terms of the promissory note, (b) the defective Washington Mutual Bank promissory note and mortgage did not subject the Parents' homestead property to the lien of the mortgage and to sale, and (c) Wells Fargo does have an equitable lien to the extent of disbursements for property taxes and reasonable costs of insurance paid by Wells Fargo during the pendency of the foreclosure action, recoverable when the 3789 Property is no longer the Parents' homestead.

    We reverse that portion of the final judgment imposing and foreclosing an equitable lien for the principal or interest on the loan made by Washington Mutual Bank, with respect to the ownership interest of the Parents in the 3789 Property. On remand, the trial court should clarify that the Parents and Hubert are not personally liable for unpaid principal and interest due under the promissory note signed only by Maria.

    Affirmed in part, reversed in part, and remanded for further proceedings in accordance with this opinion.

Tuesday, August 4, 2015

Homeowners' Standing To Challenge Chain Of Title To Mortgage Being Foreclosed: Void vs. Voidable Mortgage Assignments

In a 2013 court ruling (Reinagel v. Deutsche Bank Nat'l Trust Co., 735 F.3d 220 (5th Cir. 2013)) involving a homeowner's challenge of the chain of title to a mortgage being foreclosed that allegedly involved robosigned assignments of mortgage, the 5th Circuit Court of Appeals ruled that, given the facts of the case, the homeowner lacked standing to challenge the assignments. The court applied the rule that one cannot challenge the validity of a contract to which it is neither a party nor a third-party beneficiary.

It should be noted (and emphasized), however, that (notwithstanding the propaganda put out by the banksters and their attorneys(1)) the court also reaffirmed the principle that there is an exception to this rule (regrettably for the homeowners in this case, an exception that the court, for the reasons set forth in its ruling, was unpersuaded was applicable to the particular facts of this case).

The exception the court reaffirmed (and one that has been recognized by other courts) was one where the homeowner alleges and proves that the assignment(s) of mortgage was(were) absolutely void (ie. void ab initio, void from inception, invalid, ineffective, a nullity, etc.), and not merely voidable (ie. an instrument that, while defective, is not so fatally defective as to make it invalid, and therefore is nevertheless binding on the parties to the assignment until challenged by the injured assignor or assignee, and set aside by the court).

The appeals court made this point in the following excerpt of its opinion ("The Reinagles" are the homeowners making the challenge):

  • Deutsche Bank urges that "the law is well settled that a stranger to a contract lacks standing to challenge [that] contract," and that "[n]umerous federal district courts have recognized that plaintiffs lack standing to challenge the assignment of security instruments in cases similar to the present."

    The Reinagels rejoin that "Texas state and federal courts routinely allow a homeowner to challenge the chain of assignments by which a party claims a right to foreclose," dismissing the cases relied upon by Deutsche Bank as incorrectly decided.

    We agree with the Reinagels. To be sure, Texas courts have held that a non-party to a contract cannot enforce the contract unless she is an intended third-party beneficiary,[6] occasionally couching this principle in terms of "standing."[7] Here, however, the Reinagels are not attempting to enforce the terms of the instruments of assignment; to the contrary, they urge that the assignments are void ab initio.

    Though "the law is settled" in Texas that an obligor cannot defend against an assignee's efforts to enforce the obligation on a ground that merely renders the assignment voidable at the election of the assignor, Texas courts follow the majority rule that the obligor may defend "on any ground which renders the assignment void."[8] A contrary rule would lead to the odd result that Deutsche Bank could foreclose on the Reinagels' property though it is not a valid party to the deed of trust or promissory note, which, by Deutsche Bank's reasoning, should mean that it lacks "standing" to foreclose.
They cited the following authority for its basis for this exception in footnote 8 of its opinion:
  • Tri-Cities Const., Inc. v. Am. Nat. Ins. Co., 523 S.W.2d 426, 430 (Tex. Civ. App. 1975) (citing Glass v. Carpenter, 330 S.W.2d 530, 537 (Tex. Civ. App. 1959)); see also, e.g., 6A C.J.S. ASSIGNMENTS § 132 (2013) ("A debtor may, generally, assert against an assignee ..., any matters rendering the assignment absolutely invalid ..., such as[] the nonassignability of the right attempted to be assigned, or a prior revocation of the assignment."); Murphy v. Aurora Loan Servs., LLC, 699 F.3d 1027, 1033 (8th Cir.2012) (recognizing that mortgagors can defend against foreclosure by establishing a fatal defect in the purported mortgagee's chain of title).

Lest one believe the type of propaganda put out by the banksters and their lawyers that there is a growing chorus of courts throughout the country holding that homeowners can't challenge mortgage assignments,(2) it is important to emphasize that, at best, such propaganda constitutes:
  • an overemphasis of the general rule that states a stranger or a non-third-party beneficiary to a contract (ie. the mortgage assignment) cannot challenge the validity of said contract, and
  • a complete failure by the banksters and friends to acknowledge that courts have found that a non-party can challenge a contract that is absolutely void (and not merely voidable).(3)
For the ruling, see Reinagel v. Deutsche Bank Nat'l Trust Co., 735 F.3d 220 (5th Cir. 2013).

(1) See, for example, this misleading headline in post by one lender-favoring lawyer: Borrowers Cannot Challenge Mortgage Assignments, Says Nebraska Joining Other States).

(2) Ibid.

(3) For earlier posts providing examples of courts acknowledging the exception to the rule precluding homeowners from challenging mortgage assignments, see:

Saturday, August 1, 2015

Banksters Dodge 'Ticking Time Bomb' Of Crappy Massachusetts Real Estate Titles; State High Court Says Lenders Failing To Strictly Comply w/ Conditions Precedent To Exercise Of Power Of Sale Will Result In Void (As Opposed To Voidable) Foreclosure Sales, But Refuses To Apply Ruling To Past Sales

From a comment on the website of Massachusetts law firm Johnson & Borenstein, LLC:

  • Mortgagees beware – the Supreme Judicial Court has ruled that a foreclosing entity must strictly comply with the provisions of the mortgage which delineate the notice of default to homeowners. This case extends the rule, set out in United States Bank Nat'l Ass'n v. Ibanez, 458 Mass. 637 (2011), that strict compliance with the power of sale provisions and the statutory notice requirements is necessary to result in a valid foreclosure.

    Lesley Phillips and Linda Pinti (“Pinti”) brought suit in Superior Court seeking to prevent their eviction as a result of Harold Wilion’s summary process action against them. Wilion purchased the property at a foreclosure sale, conducted by Emigrant Mortgage Company, Inc. by exercise of the power of sale contained in the Pinti mortgage. Pinti sought a declaratory judgment that the foreclosure sale was void because Emigrant failed to comply with paragraph 22 of the mortgage, which concerns the mortgagee's provision of notice to the mortgagor of default and the right to cure, and also the remedies available to the mortgagee upon the mortgagor's failure to cure the default, including the power of sale.


    The Superior Court granted summary judgment in favor of Wilion, concluding that there was no requirement that Emigrant strictly comply with paragraph 22 of the mortgage, because the provision has no direct relationship to the power of sale, and dismissed Pinti’s complaint. Pinti appealed, and the SJC opted to take the case for itself.

    A majority of the Court interpreted a long line of mortgage foreclosure cases to stand for the proposition that a mortgagee “must strictly comply not only with the terms of the actual power of sale in the mortgage, but also with any conditions precedent to the exercise of the power that the mortgage might contain.”

    Relying upon an old case, Foster, Hall & Adams Co. v. Sayles, 213 Mass. 319 (1913), the SJC determined that “the sending of the prescribed notice of default is essentially a prerequisite to use of the mortgage's power of sale,” and that “the ‘terms of the mortgage’ with which strict compliance is required -- both as a matter of common law under this court's decisions and under § 21 -- include not only the provisions in paragraph 22 relating to the foreclosure sale itself, but also the provisions requiring and prescribing the preforeclosure notice of default.”

    The concern, the SJC said, is that the notice sent by Emigrant did not inform the homeowners that they must initiate a lawsuit to challenge the foreclosure – the notice seems to say that the homeowners will have an opportunity to raise any valid defenses in a later foreclosure action. Because Massachusetts is a nonjudicial foreclosure State, that “later” action never arrives, thereby depriving a homeowner of the opportunity to contest the foreclosure. The Court also noted that it is “hardly unfair or burdensome” to require a mortgagee to comply with the terms of its own mortgage document.

    The Court distinguished its decision in U.S. Bank Nat'l Ass'n v. Schumacher, 467 Mass. 421 (2014), on the grounds that G.L. c. 244, § 35A, the statute at issue in Schumacher, is not related to the exercise of the power of sale, but concerns the provision of a sufficient period of time to permit a homeowner to cure a default. Therefore, the Court decided, the defective notice sent to Phillips and Pinti rendered the foreclosure sale void.(1)

    Lest mortgagees become unduly concerned about pending or past foreclosures being invalidated on the grounds of a notice failure, the SJC stated that this decision is prospective only.(2)
For more, see New Requirements For Foreclosing Mortgagees Courtesy Of The Supreme Judicial Court.

For the court ruling, see Pinti v. Emigrant Mortgage Co., No. SJC-11742 (Mass. July 17, 2015).

Thanks to Deontos for the heads-up on the court ruling.

(1) The court's discussion on finding the foreclosure sale void, as opposed to merely voidable, follows:
  • Given our conclusion, the question presents itself whether Emigrant's failure to comply strictly with the default notice provisions of paragraph 22 renders the title obtained by Wilion as a result of the subsequent foreclosure sale voidable rather than void.[23] See Chace v. Morse, 189 Mass. 559, 561-562 (1905), and cases cited. As the court observed in Chace, this is not always an easy question to answer:

    "The distinction between the two classes of cases [void and voidable] has not been very clearly defined, and the decisions in the different jurisdictions do not entirely agree. It has repeatedly been said that in order to make a valid sale under a power in a mortgage, the terms of the power must be strictly complied with. Roarty v. Mitchell, 7 Gray, 243 [(1856)]; Smith v. Provin, 4 Allen, 516 [(1862]). . . . Where the sale is to foreclose a mortgage for a breach of the condition, there is no authority to sell unless there is a breach, and an attempted sale would be without effect upon the right of redemption. So, where a certain notice is prescribed, a sale without any notice, or upon a notice, lacking the essential requirements of the written power, would be void as a proceeding for foreclosure. Moore v. Dick, 187 Mass. 207 [(1905)]. But if everything is done upon which jurisdiction and authority to make a sale depend, irregularities in the manner of doing it, or in the subsequent proceedings, which may affect injuriously the rights of the mortgagor, do not necessarily render the sale a nullity. The sale will be invalid so far as to enable the mortgagor, or perhaps the purchaser, to avoid it, and still be effectual if all the parties interested desire to have it stand."

    Id. See Bevilacqua v. Rodriguez, 460 Mass. 762, 778 (2011) ("Generally, the key question in this regard is whether the transaction is void, in which case it is a nullity such that title never left possession of the original owner, or merely voidable, in which case a bona fide purchaser may take good title").

    As the quoted passage from Chace, supra, suggests, a bona fide purchaser's "title is not to be affected by mere irregularities in executing a power of sale contained in a mortgage, of which irregularities he has no knowledge, actual or constructive." Rogers, 169 Mass. at 183-184. As applied to this case, therefore, the question of void versus voidable may be reframed to ask whether the failure of Emigrant, as the mortgagee, to send the plaintiffs a notice of default providing the actual information required by the terms of the mortgage concerning the plaintiffs' right "to bring a court action" in order to raise any defense to the foreclosure sale is a "mere irregularity" that does not affect the validity of the property's title.

    As previously discussed, in a nonjudicial foreclosure jurisdiction like Massachusetts, misstating this information in a way to suggest that a mortgagor with a defense does not need to initiate a lawsuit but may wait to respond to a foreclosure lawsuit filed by the mortgagee can have disastrous consequences for the mortgagor: if the mortgagor has a valid defense to the foreclosure sale going forward, but is not made aware that he or she must initiate an action in court against the mortgagee to raise that defense, the sale may well proceed and result in title passing to a bona fide purchaser without knowledge of the issue — at which point, and depending on the nature of the defense, the mortgagor's right to redeem his or her home may well be lost. See Bevilacqua, 460 Mass. at 777-778.[24] Emigrant's failure to provide the required and correct information on this point in the notice of default cannot fairly be described as a "mere irregularit[y] in executing a power of sale contained in a mortgage." Rogers, supra. Contrast Chace, 189 Mass. at 562. The failure renders the subsequent foreclosure sale to Wilion void.

    The position taken by the dissent is that strict compliance by Emigrant with the notice of default provisions in paragraph 22 was required, but that Emigrant's failure to do so did not render the foreclosure sale void. See post at ___. In the dissent's view, the result in this case is essentially controlled by our decision in Schumacher. See post at ___. The dissent reasons that § 35A, the subject of Schumacher, and the notice of default provisions in paragraph 22 are birds of a feather in terms of purpose and operation; that for the same reasons Schumacher concludes § 35A was not a statute relating to the foreclosure by sale, so paragraph 22 is not a term of the mortgage concerned with foreclosure by sale; and, consequently, as was the case in Schumacher, Emigrant's defective notice of default rendered the foreclosure sale only voidable, not void.

    We disagree. The dissent fails to take into account the distinction — reflected in our cases and in the language of § 21 — between the "terms of the mortgage" instrument relating to foreclosure by exercise of the power of sale, and "statutes" relating to foreclosure by the power of sale. But this distinction is a critical one. As discussed previously, that § 35A is not one of the statutes relating to foreclosure by the power of sale to which § 21 refers does not answer whether the provisions of paragraph 22 qualify as "terms of the mortgage" relating and integrally connected to the power of sale under § 21. And as to that question, this court's decisions about mortgage terms indicate that by structure and content, the notice of default required to be given under paragraph 22 is integrally connected, and operates as a prerequisite, to the proper exercise of the mortgage instrument's power of sale. Emigrant's strict compliance with the notice of default required by paragraph 22 was necessary in order for the foreclosure sale to be valid; Emigrant's failure to strictly comply rendered the sale void.

(2) Prospective vs. Retroactive effect

On this very significant point, the Massachusetts high court's desire here was to dodge, at all costs, the disaster with real estate titles that would have arisen throughout the state (the "ticking time bombs" of void - as opposed to voidable - titles) had the court applied this ruling retroactively. Some may remember that the court took this same dodge several years ago in Eaton v. Federal Nat'l Mtge. Ass'n, 462 Mass. 569 (2012).

In this regard, this case represents a significant win for the banksters in that the court decided to give this ruling prospective (ie. "going forward") effect only (although it does apply the ruling to the parties to this litigation as well), thereby rendering the ruling inapplicable to any past foreclosures (and, thus, obliterating any "ticking time bomb" problem that would have occurred with the flood of past foreclosure sales that would have been voided had the court decided to give this ruling retroactive effect).

The court addressed this point at the end of its majority opinion:
  • We turn to the question whether our decision in this case should be given prospective effect only, because the failure of a mortgagee to provide the mortgagor with the notice of default required by the mortgage is not a matter of record and, therefore, where there is a foreclosure sale in a title chain, ascertaining whether clear record title exists may not be possible.

    We confronted the same issue in Eaton, 462 Mass. at 586-587. As Eaton also indicates, in the property law context, we have been more willing to apply our decisions prospectively than in other contexts. See id. at 588.

    We conclude that in this case, because of the possible [me here - "disasterous"] impact that our decision may have on the validity of titles, it is appropriate to give our decision prospective effect only: it will apply to mortgage foreclosure sales of properties that are the subject of a mortgage containing paragraph 22 or its equivalent and for which the notice of default required by paragraph 22 is sent after the date of this opinion.

    As in Eaton, however, and for the reasons stated there, we will apply our ruling to the parties in the present case. See id. at 589, and cases cited.[25]
The court also noted, in footnote 25 of the majority opinion, that it expressly declined to decide whether it will apply their ruling to cases currently pending on appeal:
By giving this ruling prospective, as opposed to retroactive, effect only, the court appears to reaffirm the notion held by some that, no matter how badly the banksters screw up, they can usually count on the government (ie. the court system is part of the judicial branch of government) to somehow pull their collective asses out of the fire.