Rossdale CLE Foreclosure Law and MERS · Foreclosure Law and MERS . ... See In re Veal, 450 B.R. 897, 911 (9th Cir. BAP 2011) ... In re Walker, 466 B.R. 271 (Bkrtcy

Rossdale CLE

Eric M. Hurwitz

Stradley, Ronon, Stevens & Young, LLP

457 Haddonfield Road, Suite 100

856-321-2406

[email protected]

Foreclosure Law and MERS

mailto:[email protected]

Stradley Ronon Stevens & Young, LLP 1

AGENDA

• Standing Challenges – Is the Note a

“Note”?

• Pooling and Servicing Agreements

• Challenges to Assignments

• Split the Note Theories


“PERSON ENTITLED TO ENFORCE THE NOTE”

UNDER THE UCC

(1) A holder (i.e., in possession of the note where the note is payable to the

person or is payable to bearer); See UCC § 1-201 (definition of “holder”),

§3-201 (manner of negotiation). Requires physical examination not only of

the face of the note but also of any indorsements.

(2) A nonholder in possession with the rights of a holder. See UCC §§ 3-

203, 3-301(2). Arises when a party obtains possession of a note by means

of a “transfer,” rather than a “negotiation.” See In re Veal, 450 B.R. 897, 911

(9th Cir. BAP 2011) (comparing UCC § 3-201 (definition of negotiation) with

UCC § 3-203(a) (definition of transfer)).

(3) If note is destroyed or lost, or is in wrongful possession of unknown

person or person that cannot be found, by establishing that person was

formerly in possession of note with right to enforce when loss of possession

occurred. See UCC § 3-309.


WHAT IS A NOTE?

Negotiable Instrument – UCC § 3-104(a)

“unconditional promise or order to pay a fixed amount of money,

with or without interest or other charges.”

(1) is payable to bearer or to order, at time it is issued or first

comes into possession of holder;

(2) is payable on demand or at a set, specific time; and

(3) does not state any undertaking or instruction by person

promising or ordering payment to do any act other than

payment of money.

.


SECURITY PROVISIONS

Some non-monetary obligations or rights are specifically

permitted by the UCC, even though they might otherwise render

an instrument non-negotiable:

(i) an undertaking or power to give, maintain, or protect collateral

to secure payment,

(ii) an authorization or power to holder to confess judgment or

realize on or dispose of collateral, or

(iii) a waiver of benefit of any law intended for advantage or

protection of an obligor.”

UCC § 3-104(a)(3).


CHALLENGE:

PRE-PAYMENT PROVISIONS DESTROY

THE NOTE’S NEGOTIABILITY

Claimed “non-monetary obligation to give the note holder notice of a

prepayment of principal strips the Note of its status as a negotiable

instrument.” In re Walker, 466 B.R. 271 (Bkrtcy. E.D. Pa. 2012)

REJECTED: “The right …, under the note, to prepay part of the principal

does not constitute an "additional undertaking or instruction" that adversely

affects the negotiability of the note.” Id.

The fact that defendants must notify the lender in the event they opt for

prepayment imposes no additional liability on them and is not a condition

placed on defendants' promise to pay. Rather, notification is simply a

requirement of the exercise of the right of prepayment which, as noted,

defendants are free to reject. This requirement does not render the note

in issue non-negotiable.” Id.

See also In re Sia, 2013 WL 4547312 (Bkrtcy. D.N.J. 2013) and HSBC

Bank, N.A. v. Gouda, 2010 WL 5128666 (N.J. Super. App. Div. 2010)


A “NOTE” ABOUT HELOCS

“Borrower promises to pay to the order of Lender the principal sum of

[maximum credit limit], or so much thereof as may be disbursed to, or

for the benefit of, the Borrower by Lender in Lender’s sole and

absolute discretion.”

Does not set a fixed amount of money to be paid.

Some courts have held that HELOCs are therefore non-negotiable

instruments.

See Heritage Bank v. Bruha, 812 N.W.2d 260 (Neb. 2012) (revolving

line of credit where borrower promised to pay principal of $75,000 “or

so much as may be outstanding” was not negotiable instrument under

UCC § 3-104); Yin v. Society National Bank Indiana, 665 N.E.2d 58

(Ind. App. 1996) (line of credit note not negotiable)


CHALLENGE:

TRUST LAW OVERRIDES UCC AND PSA WAS

BREACHED => ASSIGNMENT VOID

Contentions:

Regardless of the UCC, the Pooling and Servicing Agreement (PSA) and

New York trust law govern the holder’s rights in the note.

Application of the PSA and New York trust law compels the conclusion that

the holder has no rights in the note.

“Based on the foundational premise that the PSA and New York law, rather

than the UCC, control, the Debtor then asserts that the transfer of the Note

to BNYM was not carried out in conformity with the requirements of the PSA,

and that the lack of compliance with the PSA requires the disallowance of

the Proof of Claim.”

In re Walker, 466 B.R. 271 (Bkrtcy. E.D. Pa. 2012)


REJECTED: NOTE IS NEGOTIABLE

INSTRUMENT => UCC APPLIES

“The Debtor overlooks the fact that the Note's status as a negotiable

instrument was established at the outset of the transaction—when

the Debtor executed the Note in favor of Allied—long before the

assignment of the Note to the Trust.”


“It therefore is difficult to understand how a later agreement (the

PSA)—to which the Debtor is not a party—could alter the nature of

the contract and instrument she executed years earlier.” Id.


REJECTED: BORROWER LACKS STANDING

FOR PSA VIOLATIONS

“a borrower lacks standing to

1, challenge the validity of a mortgage securitization or

2, request a judicial determination that a loan assignment is invalid

due to noncompliance with a pooling and servicing agreement, when

the borrower is neither a party to nor a third party beneficiary of the

securitization agreement, i.e., the PSA.”


“This claim is frivolous, because [the borrower] has no standing to

enforce the terms of the PSA, as he is neither a party to it, or an

intended third-party beneficiary.”

Calvino v. Conseco Finance Serv. Corp., 2013 WL 4677742 (W.D.

Tex. 2013)


Is A Post-closing Date Transfer Into

A Securitized Trust The Type Of Defect

That Would Render The Transfer Void?

New York Estates, Powers & Trusts Law section 7-2.4:

“If the trust is expressed in an instrument creating the estate of the trustee, every sale, conveyance or other act of the trustee in contravention of the trust, except as authorized by this article and by any other provision of law, is void.”

Glaski v. Bank of America, N.A., 2013 WL 4037310 (Cal.App. 5 Dist. 2013)

“Because the WaMu Securitized Trust was created by the pooling and servicing agreement and that agreement establishes a closing date after which the trust may no longer accept loans, this statutory provision provides a legal basis for concluding that the trustee’s attempt to accept a loan after the closing date would be void as an act in contravention of the trust document.” Id.


HELD: BORROWER HAS STANDING TO

CHALLENGE TRUST’S CHAIN OF OWNERSHIP

“Transfers that violate the terms of the trust instrument are void under New

York trust law, and borrowers have standing to challenge void

assignments of their loans even though they are not a party to, or a third

party beneficiary of, the assignment agreement.”

Glaski v. Bank of America, N.A., 2013 WL 4037310 (Cal. App. 5 Dist. 2013)

“We conclude that a borrower may challenge the securitized trust’s chain of

ownership by alleging the attempts to transfer the deed of trust to the

securitized trust (which was formed under New York law) occurred after the

trust’s closing date.” Id.

“As a result, Glaski has stated a cognizable claim for wrongful foreclosure

under the theory that the entity invoking the power of sale (i.e., Bank of

America in its capacity as trustee for the WaMu Securitized Trust) was not

the holder of the Glaski deed of trust.” Id.


BUT WHAT ABOUT OTHER CASES

THAT REJECTED STANDING?

“These cases are not persuasive because they do not address the

principle that a borrower may challenge an assignment that is void

and they do not apply New York trust law to the operation of the

securitized trusts in question.”

Glaski v. Bank of America, N.A., 2013 WL 4037310 (Cal. App. 5 Dist.

2013)

“We are aware that some courts have considered the role of New

York law and rejected the post-closing date theory on the grounds

that the New York statute is not interpreted literally, but treats acts in

contravention of the trust instrument as merely voidable. Despite the

foregoing cases, we will join those courts that have read the New

York statute literally.” Id.


IS GLASKI BEING FOLLOWED?

“[M]any courts have held that mortgagors, who are not parties to the

transactions securitizing their loans, cannot rely on a PSA’s terms to defend

against foreclosure.”

Deutsche Bank v. Adolfo, 2013 WL 4552407 (N.D. Ill. 2013)

“Illinois courts have recognized an exception to this general rule: ‘a borrower

may raise a defense to an assignment that would render it ‘absolutely

invalid,’ that is, void.’” Id.

“However, we are persuaded by the courts that have held that a transfer

that does not comply with a PSA is voidable, not void.” Id.

“A contrary interpretation would injure the parties that the statute is designed

to protect. [C]ertificate holders would be harmed if they could not

receive foreclosure proceeds because a transfer, otherwise effective

under Article 3, did not comply with 2.01(b).” Id.

“[B]ecause New York law permits a beneficiary to ratify a trustee’s ultra

vires transactions, ‘such transactions are, accordingly, voidable.’”

Svoboda v. Bank of America, 2013 WL 4017904 (W.D. Tex. 2013)


IS GLASKI BEING FOLLOWED (AT ALL)?

A “third party, and ‘particularly the obligor’ cannot successfully challenge the

validity or effectiveness of the transfer when the assignment is merely

voidable.”

In re Sandri, 2013 WL 5925655 (Bkrtcy. N.D.Cal. 2013)

“This court does not agree with the next prong of the Glaski analysis: that an

assignment violating the trust agreement or [PSA] is void under New York

state law and thus subject to challenge by non-parties. New York

intermediate appellate courts have repeatedly and consistently found

that an act in violation of a trust agreement is voidable, not void.” Id.

Accord Mendoza v. JPMorgan Chase Bank, 228 Cal.App.4th 1020 (Cal.

App. 3 Dist., 2014);Yvanova v. THR California, 2014 WL 815774 (Bkrtcy.

C.D. Cal. 2014); Gieseke v. Bank of America, 2014 WL 718463 (N.D. Cal.

2014); Covarrubias v. FHLMC, 2014 WL 311060 (S.D. Cal. 2014); Apostol v.

Citimortgage, 2013 WL 6140528 (N.D. Cal. 2013); Dahnken v. Wells Fargo

Bank, N.A., 2013 WL 5979356 (N.D. Cal. 2013); Boza v. US Bank Nat.

Ass’n., 2013 WL 5943160 (C.D. Cal. 2013). See also Tran v. Bank of New

York, 2014 WL 1225575 (S.D.N.Y. 2014)


STANDING TO CHALLENGE ASSIGNMENTS

A plaintiff must be a party to or a third-party beneficiary of the disputed

contract.”

Bishop v. FNMA, 2014 WL 1266363 (D. Del. 2014)

“a debtor may not challenge an assignment between an assignor and

assignee. Based upon the well-established law in this area, [the borrower]

lacks standing to challenge the mortgage assignment.” Id.

“Regardless of any assignment, the debtor must only pay its obligations

once, and must do so to the holder of the note.”

Rinaldi v. HSBC Bank USA, N.A., 2013 WL 5876233 (E.D. Wis. 2013)

“So long as Plaintiff was a holder of the Note [when it commenced

foreclosure], when precisely before that date the Mortgage was assigned

makes no difference to Plaintiff’s right to proceed with foreclosure here.”

Citbank, N.A. v. Wilbern, 2014 WL 1292374 (N.D. Ill. 2014)


A VOID / VOIDABLE DISTINCTION FOR CHALLENGES

Void - “We hold only that a mortgagor has standing to challenge a mortgage

assignment as invalid, ineffective, or void (if, say, the assignor had nothing

to assign or had no authority to make an assignment to a particular

assignee).”

Voidable - “[A] mortgagor does not have standing to challenge shortcomings

in an assignment that render it merely voidable at the election of one

party but otherwise effective to pass legal title.”

Culhane v. Aurora Loan Services of Nebraska, 708 F.3d 282 (1st Cir. 2013)

“‘Void’ contracts or agreements are those that are of no effect whatsoever;

such as are a mere nullity, and incapable of confirmation or ratification. By

contrast, ‘voidable’ refers to a contract or agreement that is ‘injurious

to the rights of one party, which he may avoid at his election.’”

Wilson v. HSBC Mortgage Services Inc., 744 F.3d 1 (1st Cir. 2014)


A SIMILAR APPROACH…

Although “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.’”

Reinagel v. Deutsche Bank, 2013 WL 5832812 (C.A.5 (Tex.) 2013)

However, borrowers, as non-parties to the PSA, “have no right to enforce its

terms unless they are its intended third-party beneficiaries.” Id.

“[E]ven assuming that the [borrowers] are third-party beneficiaries, the fact

that the assignments violated the PSA – a separate contract – would not

render the assignments void, but merely entitle the [borrowers] to sue for

breach of the PSA.” Id.

Borrowers “have no standing to challenge MERS’ assignment on grounds

that MERS lacked the authority to assign the note and deed.” Contract

signed by unauthorized agent is not void, but only voidable by the principal.

Applin v. Deutsche Bank, 2014 WL 1024006 (S.D. Tex. 2014)


CHALLENGE:

MERS OFFICERS LACK AUTHORITY

TO ASSIGN SECURITY INSTRUMENT

“MERS instructs its members to have someone on their own staff become a certified MERS officer with authority to sign on behalf of MERS.” Newman v. Bank of New York, 2013 WL 1499490 (E.D. Cal. 2013) “Under this practice, dual agency appears to be anticipated, and there does not appear to be a requirement that an agent actually be employed by MERS.” Id.

Argument:

Therefore, the MERS signer lacks authority to execute documents for MERS; and

Therefore, any instrument executed by the MERS officer is void for lack of authority.

Halajian v. Deutsche Bank, 2013 WL 593671 (E.D. Cal. 2013)


ARGUMENT REJECTED (MOSTLY): AT LEAST, MUST ALLEGE

THAT THE MERS OFFICER LACKS ACTUAL AUTHORITY

A “contract executed on behalf of a person fraudulently purporting to be a corporate officer is, like any other unauthorized contract, not void, but merely voidable at the election of the defrauded principal. [i.e., MERS]. The signer’s ‘alleged lack of authority, even accepted as true, does not furnish the [borrowers] with a basis to challenge the assignment.’” Calvino v. Conseco Finance Serv. Corp., 2013 WL 4677742 (W.D. Tex. 2013) “While MERS’s practice of appointing employees of member firms as certifying officers can be disparaged on policy grounds, such policy judgments are for the legislature, not the courts.” Culhane v. Aurora Loan Services of Nebraska, 708 F.3d 282 (1st Cir. 2013)


SIGNING AUTHORITY

“Given the MERS system’s signing and agency practices, … for an allegation of employment status to withstand dismissal, it must be coupled with at least an allegation that the signatory does not actually have authority to sign on behalf of MERS.” Newman v. Bank of New York, 2013 WL 1499490 (E.D. Cal. 2013) “The dissolution of the original lender does not affect MERS’ authority to assign a mortgage.” Almeida v. U.S. Bank Nat. Assoc., 2014 WL 907673 (D. Mass. 2014)


CHALLENGE:

SPLIT BETWEEN THE NOTE

AND SECURITY INSTRUMENT

Argument: If “ownership of a deed of trust is split from ownership of the underlying promissory note, one or both of those documents becomes unenforceable and no party can foreclose.”

Abram v. Wachovia Mortgage, 2013 WL 1855746 (W.D. Wash. 2013) See also Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory, 53 Wm. & Mary L. Rev. 111 (2011)


REJECTED:

MARY HAD A LITTLE LAMB RULE

Wherever note goes, so does mortgage.

From Permanent Editorial Board for the Uniform Commercial

Code, “Application of the Uniform Commercial Code to

Selected Issues Relating to Mortgage Notes”:

Recorded assignment of mortgage is not required to establish

a party’s right to enforcement of a note because mortgage

automatically follows assignment of a note under § 9-203(g) of

UCC.

Key inquiry is who can enforce the note.

See, e.g., Bank of New York v. Raftogianis, 418 N.J. Super.

323, 355–56 (N.J. Ch. Div. 2010).


REJECTED:

ALTERNATIVELY, ANY “SPLIT” CURED

WHEN NOTE AND MORTGAGE REUNIFIED

“We conclude that when MERS is the named beneficiary and a different entity owns the promissory note, the note and the deed of trust are split, making nonjudicial foreclosure by either improper.”

Edelstein v. Bank of New York Mellon, 286 P.3d 249 (Nev. 2012)

“However, any split is cured when the promissory note and deed of trust are reunified.” Id.

“[S]plitting a note from a deed of trust is not problematic as long as, at the time of foreclosure, the party attempting to foreclose holds the note or is acting on behalf of the note-holder.”

Bavand v. OneWest Bank, FSB, 2013 WL 1208997 (W.D. Wash. 2013)

“Massachusetts allows a mortgage to be split from its underlying note, and where, as here, MERS possesses a legal interest in [the] mortgage, such an interest is assignable.”

Butler v. Deutsche Bank Trust Co., 2014 WL 1328296 (C.A.1 (Mass.) 2014)

“[T]his only means that the holder of the mortgage has no right to enforce the mortgage, if the holder does not also hold the promissory note.”

Altier v. FNMA, 2013 WL 6388521 (N.D. Fla. 2013)


THE END

Thank You!

Documents

Rossdale CLE Foreclosure Law and MERS · Foreclosure Law and MERS . ... See In re Veal, 450 B.R. 897, 911 (9th Cir. BAP 2011) ... In re Walker, 466 B.R. 271 (Bkrtcy