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Financial Services Law Insights and Observations

Virginia Federal Court Dismisses Note-Splitting Claims in Foreclosure Case

State Issues

On May 13, the U.S. District Court for the Eastern District of Virginia rejected “splitting the note” and “illegal gambling” claims regarding credit default swaps on, and the securitization of, a mortgage loan. Ruggia v. Wash. Mutual, No. 1:09-cv-1067, 2010 WL 1957218 (E.D. Va. May 13, 2010). InRuggia, the plaintiff borrower obtained a mortgage and the note was subsequently transferred several times over. When the plaintiff eventually defaulted on the note, the substitute trustee moved to foreclose. The plaintiff responded by filing a suit alleging that the foreclosing entity lacked power to enforce the deed securing the note because the various transfers that followed the original mortgage had effectively split the note from the underlying deed. Relying on state law regarding negotiable instruments, the court ruled that the security instruments run with the note upon assignment and, as such, the subsequent transferees could foreclose. In this regard, the court added that the securitization did not split the note from the security instrument. The court also dismissed as frivolous the plaintiff’s claims that the purchase of credit default swaps on his note violated state law prohibiting illegal gambling.