InfoBytes Blog

North Carolina Court of Appeals Denies Foreclosure Action Due to Improper Endorsement on Borrower’s Note

The North Carolina Court of Appeals recently denied a lender’s right to foreclose on a borrower’s property, holding that the lender had not established by competent evidence that it was the owner and holder of the borrower’s note and deed of trust. In re Foreclosure by David A. Simpson, No. COA10-361 (N.C. App. May 3, 2011). In this case, the borrower had executed a note to refinance an existing mortgage on his home in 2006 with payment and principal due to the First National Bank of Arizona. Two years later, the borrower ceased making payments on his note. In 2009, a substitution of trustee was recorded with the register of deeds and it identified Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6 (Deutsche Bank RAL) as the new holder of the note and the lien. Soon thereafter, Deutsche Bank RAL commenced non-judicial foreclosure proceedings which were upheld, after appeal, in county superior court. The borrower appealed the superior court’s order based on two claims. First, the borrower claimed that the debt was not valid due to recission; he contended that he had rescinded the transaction because the original lender failed to provide all material disclosures as required by the federal Truth in Lending Act, 15 U.S.C. § 1635 (TILA). The court rejected this argument, holding that because recission under TILA is an equitable remedy, it cannot be properly raised in a non-judicial foreclosure proceeding under North Carolina law, but must instead be brought in a separate civil action in superior court. Second, the borrower claimed that Deutsche Bank RAL was not the owner and holder of the note. The court agreed, finding that while both the original note and an allonge to that note evidenced the note’s transfer, the party to whom the note was transferred to was not the same party bringing the foreclosure action. Specifically, while the foreclosure action was brought by Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6, the endorsement to the note was in the name of Deutsche Bank Trust Company Americas only. Because the note was not properly endorsed to the named plaintiff in the foreclosure action, the court found that under the Uniform Commercial Code there was "not sufficient evidence that [the] Petitioner [was] the ‘holder’ of the Note."

Tennessee Amends Consumer Protection Provision of the Uniform Debt-Management Services Act

The state of Tennessee recently amended the Uniform Debt-Management Services Act regarding registration applicants for entities providing debt-management services in the state. The new provision requires applications for registration to include (at their own expense) the results of fingerprint-based criminal history records, both state and national, covering every officer of the applicant and every employee or agent of the applicant who is authorized to have access to the trust account used to hold money for disbursement to creditors. This amendment is effective immediately.

Maryland Appeals Court Rules Printed MySpace Page Not Properly Authenticated & Provides Guidelines

On April 28, Maryland’s highest court overturned a lower court that had ruled the MySpace profile page of a convicted murderer’s girlfriend was properly authenticated evidence. The girlfriend’s profile page, used by the prosecution at trial, contained threatening statements allegedly made by the defendant, the defendant’s unique nickname, pictures of the defendant and his girlfriend, and a reference to the girlfriend’s birthday. Testimony was also presented linking the defendant with his nickname and the girlfriend with her profile picture In Griffin v. Maryland, 2011 WL 1586683, No. 74 (Ct. App. Md., Apr. 28, 2011), the court of appeals held that more is required when dealing with printouts from social networking sites, noting that anyone can set up a fake account on MySpace and "masquerade under another person’s name or . . . gain access to another’s account by obtaining the user’s username and password[.]" Finding that the lower court simply "failed to acknowledge the possibility or likelihood that another user could have created the profile in issue or authored the [threatening statements]," the appeals court observed that electronically stored information, "with its potential for manipulation, requires greater scrutiny of the ‘foundational requirements’ than letters or other paper records, to bolster reliability," and went on to hold that such potential "requires a greater degree of authentication [of an image printed from such a site] than merely identifying the date of birth of the creator and her visage." The court then went on to offer specific guidelines for proper authentication of such information: first, the purported creator of the profile or posting should be asked whether he created it; second, digital forensics should be performed on the purported creator’s computer; and, finally, information should be obtained directly from the social networking site that links the profile to the person allegedly creating it. Significantly, none of these steps had been taken at trial in Griffin.

California Federal Court Dismisses Lawsuit After Finding Adequate Disclosures Regarding Online Discount Program

On April 11, the U.S. District Court for the Southern District of California dismissed claims against an online discount program and online movie ticketing website that the defendants deceptively enrolled the plaintiff into a costly program. Berry v. Webloyalty.com, Inc., et al., No. 10-1358, 2011 WL 1375665 (S.D. Cal. Apr. 11, 2011). Plaintiff alleged that, while purchasing movie tickets online, he clicked on an advertisement promising discounted movie tickets and, after later providing his email address, unwittingly enrolled in a "savings club" that began charging a monthly fee. The court dismissed plaintiff’s claims of misrepresentation, unfair competition, false advertising, and invasion of privacy on the ground that multiple disclosures in the advertisement (which plaintiff did not read) adequately disclosed the terms and conditions of membership in the savings club, including the monthly fee.

California Bankruptcy Court Denies Bank’s Request for Relief from Automatic Stay Because of Failure to Record Assignment of Deed of Trust Prior to Foreclosure

On April 11, the United States Bankruptcy Court for the Southern District of California held that a national bank was not entitled to relief from an automatic bankruptcy stay in order to proceed with a foreclosure-related action because the bank did not record its assignment of the deed of trust. In re: Eleazar Salazar, Bankruptcy No. 10-17456 (Bankr. Ct. S.D. Cal. Jan. 25, 2011). The original lender’s interest in the promissory note and a deed of trust executed by the debtor were later assigned to a national bank, but the bank did not record the assignment. The debtor defaulted on the note, leading the bank to conduct a non-judicial foreclosure on debtor’s property and to file an unlawful detainer action against the debtor in state court. The debtor filed for Chapter 13 bankruptcy the day before trial on the unlawful detainer action. The bank then moved in the bankruptcy court for relief from the automatic bankruptcy stay. The debtor challenged the bank’s motion, arguing that the foreclosure sale was defective because the bank did not record the assignment of its interest in the deed of trust as required by California Civil Code § 2932.5. The court concluded that the bank had to satisfy two requirements contained in § 2932.5 in order for the nonjudicial foreclosure to be valid: (i) the bank must have obtained an assignment of the right to be paid the mortgage debt, and (ii) the power of sale must have been recorded. The court found an endorsement in blank by the lender to be sufficient to meet the first requirement. However, the court found that the bank failed to record its assignment and, therefore, failed to comply with § 2932.5. The court rejected the bank’s arguments that the fact that MERS was a nominal beneficiary on the original deed of trust eliminated the need to record the assignment and that the MERS foreclosure process is an alternative to statutory foreclosure law because only the state legislature can change statutory requirements.

Massachusetts Supreme Court Analyzes Activities of National Title Vendor as Possible Unauthorized Practice of Law

On April 25, the Supreme Court of Massachusetts decided Real Estate Bar Association for Massachusetts v. National Real Estate Information Services, 459 Mass. 512 (Mass. 2011), which addressed claims of unauthorized practice of law in Massachusetts real estate conveyancing. The court concluded that certain real estate settlement activities undertaken by the defendants, National Real Estate Information Services (NREIS), did not constitute the unauthorized practice of law, but also stated that based on the record before the court, it could not determine whether other settlement activities constituted the unauthorized practice of law.  The court acknowledged the impossibility of a comprehensive definition of the practice of law, but stated "[t]he practice of law involves applying legal judgment to address a client’s individualized needs."

The plaintiffs, the Real Estate Bar Association for Massachusetts (REBA), an association of real estate lawyers, sued the defendants, a real estate settlement services provider and title insurance agency, on the grounds that the defendants engaged in the unauthorized practice of law.  The defendants described the activities as facilitating mortgage transactions for its lender clients, services it claims are "managerial, administrative, clerical or ministerial."

Mortgage transactions are conveyancing transactions in Massachusetts. Conveyancing, according to the Black’s Law Dictionarydefinition cited by the Court, is the act or business of drafting and preparing legal instruments, especially those that transfer an interest in real property. However, the Court rejected the notion that "conveyancing" is a unitary, indivisible activity. "Many of the discrete services and activities that may fall within the penumbra of modern conveyancing do not qualify as the practice of law."

Among the activities held not to be the practice of law in this decision are: (i) conducting title examinations and preparing title abstracts, (ii) obtaining public records such as municipal lien certificates, property appraisals and flood reports, (iii) preparing HUD-1 settlement statements, (iv) reviewing mortgage loan documents to ensure valid execution, (v) delivering documents to the registry of deeds for recordation, (vi) disbursing mortgage loan proceeds, and (vii) issuing title insurance commitments and policies.

Activities that do constitute the practice of law include providing opinions or advice regarding marketability of title to real estate and drafting deeds to real property.

Activities that may or may not constitute the practice of law include clearing title defects and placing oneself as an intermediary between attorney and client or facilitating the relationship between attorney and client.

The Court reconfirmed the established practice in Massachusetts that an attorney must conduct real estate closings in the state. "As a matter of common and long-standing practice in the Commonwealth, an attorney must be involved in the closing or settlement of real property conveyances.... The closing is ... a critical step in the transfer of title and the creation of significant legal and real property rights. Because this is so, we believe that a lawyer is a necessary participant at the closing to direct the proper transfer of title and consideration and to document the transaction...." Moreover, the attorney must do more than simply appear at the closing; he or she must "play a meaningful role" in the closing because of his professional responsibility to ensure (1) that marketable title is conveyed, and (2) that the consideration for the conveyance is transferred.

Massachusetts Federal Court Denies Servicer Motion to Dismiss UDAP Claim for HAMP Violation

On April 4, a Massachusetts federal court denied a mortgage servicer’s motion to dismiss a complaint that the servicer’s failure to timely comply with a request for modification under the federal Home Affordable Modification Program (HAMP) gave rise to a violation under Massachusetts’ unfair and deceptive trade practices statute (Chapter 93A). Morris v. BAC Home Loans Servicing, L.P., No. 1:10-11572 (D. Mass. Apr. 4, 2011). In this case, plaintiffs alleged that the defendant violated Chapter 93A when it failed to evaluate or respond to the plaintiffs’ request for a modification under HAMP. The defendant moved to dismiss, arguing that HAMP does not provide for a private right of action and that, therefore, the plaintiffs had failed to state a claim. The court disagreed, reasoning that a violation of HAMP would be actionable under Chapter 93A if the violation was unfair or deceptive and that recovery under Chapter 93A would be compatible with the objectives and enforcement mechanisms of HAMP. However, the court found that the plaintiffs had failed to plead sufficient facts to make the showing that the defendant’s alleged violations of HAMP rose to the level of unfair or deceptive. As a result, the court denied the motion to dismiss, and instructed the plaintiffs to amend the complaint within 30 days.

Kentucky Adds Exemption to Mortgage Loan Originator Licensing Law

On March 16, Kentucky Governor Steve Beshear signed into law H.B. 470, a bill which amends the Kentucky Mortgage Licensing and Regulation Act to exempt from the state’s mortgage loan originator licensing requirement a person (i) who originates a dwelling-secured mortgage loan, (ii) who is exempted by an order of the Commissioner of the Kentucky Department of Financial Institutions, and (iii) whose exemption would not run afoul of the mortgage loan originator registration requirements set forth under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008. H.B. 470 becomes effective June 8, 2011.

Virginia Passes Law Regarding Electronic Signatures

On March 15, the Virginia Assembly enacted legislation expanding the acceptance of electronic signatures. The new law provides that financial disclosure forms, lobbyist registration statements, and notary applications for recommission may be signed by electronic signature. 

Ninth Circuit Upholds FDCPA Ruling Against Debt Collection Law Firm

On March 4, the U.S. Court of Appeals for the Ninth Circuit affirmed a debtor’s judgment against a debt collector under the federal Fair Debt Collection Practices Act (FDCPA), the Montana Unfair Trade Practices and Consumer Protection Act and state tort claims of malicious prosecution and abuse of process. McCollough v. Johnson, Rodenburg & Lauinger, No. 09-35767 (9th Cir. Mar. 4, 2011). The plaintiff debtor’s delinquent credit card account was sold by the credit issuer to a debt buyer. The debt buyer brought a state court action to recover on the debt but dismissed the action after the debtor asserted in response that the statute of limitations had run. The debt buyer then retained a debt collection law firm, Johnson, Rodenburg & Lauinger (JRL), to pursue the action, which it did until it was instructed to dismiss the suit several months later based on it being time barred. The debtor brought an action against JRL in federal court. The district court granted partial summary judgment on the FDCPA claims and the debtor won the other claims at trial. In affirming the ruling of the district court, the Ninth Circuit found that JRL’s defense of bona fide error as to the FDCPA action failed as a matter of law. The court held that JRL erred by relying without verification on its debt buyer client’s representation that the statute of limitations was extended and by overlooking contrary information in its electronic file. "JRL thus presented no evidence of procedures designed to avoid the specific errors that led to its filing and maintenance of a timebarred collection suit" against the debtor, the court concluded. The court also upheld summary judgment on the debtor’s claim that JRL violated the FDCPA by pursuing unauthorized attorneys’ fees. The FDCPA prohibits "[t]he collection of any amount . . . unless such amount is expressly authorized by the agreement creating the debt or permitted by law." JRL’s presentment of generic evidence that all credit cardholder agreements provide provisions for attorneys’ fees was found to be insufficient to defeat summary judgment. The court also concluded that: false requests for admission of JRL in the underlying action violated the FDCPA; the district court did not abuse its discretion in allowed testimony from other consumers relating to JRL; and, that the district court properly allowed the jury’s $250,000 award for actual damages due to the emotional distress of the plaintiff, who years earlier had suffered a head injury and suffered from mixed personality disorder and multiple other afflictions, including post-traumatic stress disorder.