InfoBytes Blog

Oregon Bankruptcy Court Allows MERS Wrongful Foreclosure Claim To Proceed

On February 7, the U.S. Bankruptcy Court for the District of Oregon allowed a wrongful foreclosure claim to proceed based in part on plaintiff’s allegation that not every transfer of the loan was recorded in the land records. McCoy v. BNC Mortgage, Inc. et al., No. 10-06224 (Bankr. D. Or. Feb. 7, 2011). In McCoy, plaintiff received a mortgage loan secured by a deed of trust naming MERS as the "Beneficiary." According to the allegations in plaintiff’s complaint, the beneficial interest in the loan was sold several times, and was eventually securitized into a mortgage-backed security. According to plaintiff, none of the transfers was recorded in the county land records. Plaintiff eventually defaulted on the loan and, after the substitute trustee issued a notice of default, filed a chapter 7 bankruptcy petition. The assignee of the deed of trust was granted relief from the automatic stay to foreclose and plaintiff was discharged. Simultaneous with the discharge, plaintiff filed a chapter 13 bankruptcy, despite having been "informed by the court that he [was] ineligible for a discharge of debts due to the discharge received in the previously filed chapter 7 case." The assignee was again granted relief from the stay. Plaintiff then filed a lawsuit for wrongful foreclosure and to quiet title in state court. The lawsuit was removed from state court to federal court and then transferred to the bankruptcy court, where the assignee moved to dismiss both claims. The court dismissed the quiet title claim, which was based on the allegation that plaintiff no longer owed any money on the loan because his obligation was paid by "income from the trust, credit default swaps, TARP money, or federal bailout funds," because it was based on "conclusory legal allegations." The court allowed the wrongful foreclosure claim to proceed, however, finding that plaintiff’s allegations state a plausible claim that the assignee did not satisfy Oregon’s non-judicial foreclosure requirements. According to the court, the Oregon non-judicial foreclosure requirements were not met because - according to the allegations in the complaint - MERS was not a beneficiary as defined by the Oregon foreclosure statute (regardless of how it was defined under the deed of trust) and because not every transfer of the beneficial interest in the loan was recorded. The court noted in dicta, however, that Oregon’s judicial foreclosure statute allows for foreclosures where not every transfer has been recorded.

Illinois Appellate Court Holds That Assignee of Legal Title May Sue To Collect Debt In Own Name

On February 1, an Illinois state appellate court concluded that the Illinois Collection Agency Act permits an assignee of an account to sue in its own name to collect on the account, but the assignee must prove a valid assignment in order to do so. Unifund CCR Partners v. Shah, No. 1-10-0855, 2011 WL 477725 (Ill. App. Ct. Feb. 1, 2011). In this case, the plaintiff, an assignee of the account, sued to collect on a defaulted credit card debt. The defendant moved to dismiss, arguing that the plaintiff could not prove a valid assignment because the plaintiff could not produce one document that included all of the information required under section 8b of the Illinois Collection Agency Act (i.e., the account information, the consideration paid for the assignment, and the effective date of the assignment). The circuit court denied the motion to dismiss, but certified two questions for the appellate court to review, (i) does an assignee for collection of a debt only have standing to sue in its own name; and (ii) can a plaintiff properly plead that an assignment exists using multiple documents?

Answering the first question, the court relied on two statutes, one which provides that an assignee and owner of a non-negotiable chose in action may sue in his or her own name, and a second in the Collection Agency Act which permits an account to be assigned to a collection agency in order to enable collection of the account in the agency’s name as assignee. The court found that the specific statute in the Collection Agency Act is broad enough to encompass not just assignees who take complete ownership of an account, but assignees who take legal title for the purposes of collection while the creditor retains a beneficial interest and equitable title.

To address the second question, the court recited the rule in the Collection Agency Act that permits an agency to bring suit only when "the assignment is manifested by a written agreement, separate from and in addition to any document intended for the purpose of listing a debt with a collection agency." The court found that the phrase "written agreement" signifies a term that refers to the parties’ entire bargain in written form, and not just a single document. Therefore, an assignment must be manifested in a written contract, but such contract can include or incorporate all or part of other instruments or documents by reference. As such, a valid assignment can be established through multiple documents, as long as the documents include the required information under section 8b. The court did add that the Collection Agency Act’s provision specifying a written contract must prove the existence of an assignment is not broad enough to permit a valid assignment to be proven by affidavit.

Maine Federal Court Rejects Emotional Distress Claims in Mortgage Foreclosure

On January 10, the U.S. District Court for the District of Maine held that a plaintiff could not state a cause of action for either negligent or intentional infliction of emotional distress against a servicer or trustee in a mortgage foreclosure action. James v. GMAC Mortg. LLC, No. 2.09-cv-84 (D. Me. Jan. 10, 2011). In James, the mortgage originator allegedly understated the amount that the borrower owed on his mortgage payments by $32 per month in the required federal disclosure forms. Over a year later, the loan servicer notified the borrower that his loan was in default. Although the borrower tendered a check to remedy the default, the check lacked any information to identify the borrower or the loan, and the servicer returned the check and foreclosed on the mortgage. The magistrate judge rejected the borrower’s argument that the relationship between a homeowner and a mortgagor or servicer is a "special relationship" that could form the basis of a negligent infliction of emotional distress claim. The court also held that a minor error in the required mortgage payments, failure to cash a check that lacked identifying information, actual foreclosure, and force placing insurance were not "so extreme and outrageous as to exceed all possible bounds of decency" and that these actions could not sustain a claim for intentional infliction of emotional distress.

Massachusetts Supreme Court Affirms Decision Invalidating Foreclosures by Securitization Trustees Who Failed to Demonstrate Valid Pre-foreclosure Assignments

On January 7, the Supreme Judicial Court of Massachusetts (Supreme Court) affirmed the decision of a lower court invalidating foreclosures by two securitization trustees (Trustees) who failed to demonstrate that they were the mortgage holder pursuant to valid pre-foreclosure assignments. U.S. Bank National Association v. Ibanez, No. SJC-10694 (Mass. Sup. Ct. Jan. 7, 2011) The case arose when the Trustees conducted non-judicial foreclosure sales pursuant to powers of sale contained in the underlying mortgages. The Trustees purchased the underlying properties at those foreclosure sales. Following the foreclosure sales, the Trustees recorded assignments of the relevant mortgages that they obtained after the completion of the foreclosure sales (though one of the assignments recited that it was effective as of a date prior to the sale). They then brought actions in the Massachusetts Land Court (Land Court) seeking a declaration that they held clear title in fee simple to the foreclosed properties. The Land Court ruled against them, finding that neither Trustee had shown by sufficient evidence that it was the holder of the relevant mortgage, thus invalidating the foreclosures. The Supreme Court affirmed the invalidation. The Supreme Court relied on a provision of Massachusetts law that allows the exercise of a statutory power of sale only by "the mortgagee or his executors, administrators, successors or assigns....Any effort to foreclose by a party lacking ‘jurisdiction and authority’ to carry out a foreclosure under these statutes is void." [Citations omitted.] Each of the Trustees was thus required to show that it was--at the time of the foreclosure sale--the holder of the relevant mortgage pursuant to an effective assignment. The Supreme Court noted that "[a] plaintiff that cannot make this modest showing cannot justly proclaim that it was unfairly denied a declaration of clear title." In addition to affirming the Land Court’s invalidation of the foreclosure sales, the Supreme Court held (i) that assignments do not have to be recorded or in recordable form to be effective, (ii) that assignments in blank "convey nothing and are void", (iii) that the mortgage does not follow the promissory note if not validly assigned (though the mortgage holder then holds the mortgage in trust for the noteholder) and (iv) that confirmatory assignments of earlier valid assignments are acceptable.

State of Maine’s Department of Professional and Financial Regulation and Bureau of Consumer Credit Protection Issue Joint Advisory Ruling Regarding the Federal Reserve’s Interim Truth In Lending Rule

On January 6, Maine’s Department of Professional and Financial Regulation and Bureau of Consumer Credit Protection (Bureaus) issued a Joint Advisory Ruling regarding closed-end credit disclosures in light of the Federal Reserve’s Interim Truth-in-Lending Rule (Interim Rule), which was published on September 24, 2010. The Bureaus confirmed that lenders must continue to follow Maine’s current version of 12 C.F.R. 226.18 when providing disclosures to Maine consumers. However, the Bureaus announced that they would use their regulatory discretion to not take action to enforce Maine’s inconsistent disclosure provisions against lenders that act in conformity with the Interim Rule. The Bureaus issued the no-action declaration because the Interim Rule provide more complete disclosures and better protection for Maine consumers.

California Federal Court Holds National Bank Act Preempts State Law Claims Asserting National Bank Mislead Consumers by Failing to Make Material Disclosures

Recently, a California federal court held that the National Bank Act (NBA) preempts state laws purporting to require disclosure requirements on the bank's deposit-related activities. Robinson v. Bank of America, N.A., Case No. CV 11-03939-GHK JEM, 2011 WL 5870541 (C.D. Cal. Nov. 11, 2011).  In this case, the plaintiff was charged a fee for using a cash-access account, which can be avoided by going to a branch office to withdraw funds. The plaintiff alleged that the failure to disclose the ability to avoid the fee violated, among other things, California's Consumer Legal Remedies Act (CLRA) and unfair competition law (UCL). The defendant argued that the NBA preempts any claims alleging to regulate disclosures on deposit accounts, and the court agreed. The court also rejected the plaintiff's argument that state laws that require all businesses generally (as opposed to banks in particular) to refrain from misrepresentations and from fraudulent, unfair, or illegal behavior are not specific disclosure requirements preempted by the NBA. In support of its holding, the court cited the standard articulated by the U.S. Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996) that a state may only regulate the activities of a national bank where doing so does not prevent or significantly interfere with the exercise by the national bank of its powers. As such, the court granted the motion for judgment on pleadings, and dismissed the case.

New Jersey Amends Provisions Regarding Foreclosure Consultants

Recently, New Jersey amended provisions under the Foreclosure Rescue Fraud Prevention Act (the Act), requiring foreclosure consultants and distressed property purchasers who contract with owners of residential properties in financial distress, to adhere to certain practices in providing foreclosure prevention services to owners. The law is scheduled to take effect 180 days from its enactment. Among other provisions, the Act requires foreclosure consultants (a defined term under the Act) to (i) obtain a license from the Commissioner of Banking and Insurance prior to conducting any business in the state, (ii) ensure that a contract for foreclosure consulting services include the services to be performed, the foreclosure consultants representations, and the distressed property relief to be secured. In addition the Act provides a homeowner the right to cancel the foreclosure consulting contract at any time until after the foreclosure consultant has fully performed every service and secured the relief the consultant contracted to perform. 

Illinois Bill Amends Real Estate License Act; Expands Anti-Predatory Lending Database

On December 31, Illinois Governor Pat Quinn signed into law Senate Bill 1894, a bill that increases education requirements for Illinois real estate agents and expands the state’s anti-predatory lending database to three additional counties. Specifically, the bill (i) increases the pre-licensing education requirements for Illinois real estate agents from 45 to 120 hours, (ii) eliminates the “salesperson” license category, (iii) establishes the “broker” license category as the entry-level real estate license in the state, and (iv) establishes a “managing broker” license category, which requires 165 hours of pre-licensing education and 24 hours of continuing education every renewal period. The bill also expands the state’s anti-predatory lending database program to include Kane, Will, and Peoria counties, which rank among the state’s highest foreclosure rates. The program, which currently only applies to Cook County (most-recently reported in InfoBytes, May 16, 2008), aims to reduce predatory lending practices by assisting the borrower in understanding the terms and conditions of the loan for which he or she has applied. The program is set to expand into the three additional counties on July 1, 2010. Finally, the bill includes a provision that allows municipalities, until certain conditions take place, to obtain a lien for costs associated with the clean-up of abandoned residential properties.

Florida Supreme Court Approves Mandatory Mediation For All Homestead Foreclosure Cases in Florida State Courts

On December 28, the Florida Supreme Court approved a model administrative order that requires mediation for all foreclosure cases in Florida state courts involving residential homestead property unless (i) the plaintiff and borrower agree otherwise, (ii) effective pre-suit mediation that substantially complies with the model administrative order’s mediation program requirements has been conducted, or (iii) a borrower opts out of the mediation process. In re Final Report and Recommendations on Residential Mortgage Foreclosure Cases, No. AOSC09-54 (Fl. Sup. Ct. Dec. 28, 2009). A task force, charged with recommending policies, strategies, and methods for easing the backlog of pending residential mortgage foreclosure cases in Florida recommended the model administrative order, which the Florida Supreme Court approved with minor changes. Features of the model administrative order’s mediation program include (i) referral of the borrower to foreclosure counseling prior to mediation, (ii) early electronic exchange of borrower and lender information prior to mediation, and (iii) the ability of a plaintiff’s representative to appear at mediation by telephone. Under the model administrative order, a designated mediation manager must schedule a mediation program between 60 and 120 days after a suit is filed. Mediation program costs are to be paid initially by plaintiffs, but these costs are recoverable in the final judgment of foreclosure or settlement order. 

New Jersey Adjusts Definition Of "High Cost Home Loan" Under Home Ownership Security Act

Recently, the New Jersey Department of Banking and Insurance (Department) issued a bulletin increasing the maximum principal amount of a loan that may be considered a high cost home loan to $430,955.10. High cost home loans in New Jersey are subject to additional lender requirements under the New Jersey Home Ownership Security Act of 2002. When the New Jersey Home Ownership Security Act of 2002 (Act) became effective in 2003, the maximum principal amount that would trigger the "high cost home loan" provisions of the Act was $350,000. Pursuant to a requirement in the Act to annually review and, if necessary, adjust the maximum principal amount that will trigger the "high cost home loan" provisions of the Act, the maximum principal amount was last adjusted in 2008 to $428,615.60. The Department made the adjustment to $430,955.10. The Department made this adjustment based upon the United States Department of Labor, Bureau of Labor Statistics’ Consumer Price Index for the New York - Northern New Jersey Region. This increase in the definition of a high cost home loan is effective for all completed loan applications received by a lender on or after January 1, 2011.