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In re: MARGERY KANAMU KALEHUANANI KEKAUOHA-ALISA, 9th Cir. BAP – “Court voided the sale and awarded her treble damages, Atty’s Fees”

In re: MARGERY KANAMU KALEHUANANI KEKAUOHA-ALISA, 9th Cir. BAP – “Court voided the sale and awarded her treble damages, Atty’s Fees”


FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

In re: MARGERY KANAMU-
KALEHUANANI KEKAUOHA-ALISA,
Debtor,

MARGERY KANAMU-KALEHUANANI
KEKAUOHA-ALISA,
Appellant,

v.

AMERIQUEST MORTGAGE COMPANY;
JPMC SPECIALTY MORTGAGE, LLC,
FKA WM Specialty Mortgage,
LLC,
Appellees.

Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Pappas, Dunn, and Jury, Bankruptcy Judges, Presiding

Argued and Submitted
February 15, 2012—Honolulu, Hawaii

Filed March 26, 2012

Before: Alfred T. Goodwin, Stephen S. Trott, and
Mary H. Murguia, Circuit Judges.

Opinion by Judge Trott

COUNSEL

Lissa D. Shults and Bradley R. Tamm, Shults & Tamm, ALC,
Honolulu, Hawaii, for the appellant.

Paul Alston and Tina L. Colman, Alston Hunt Floyd & Ing,
Honolulu, Hawaii, for the appellees.

OPINION

TROTT, Senior Circuit Judge:

This case requires us to determine whether a mortgage
company violated Hawaii state law when it did not publicly
announce the postponement of a foreclosure sale of property
owned by Appellant Margery Kanamu-Kalehuanani
Kekauoha-Alisa, and if so, to ascertain the proper remedy for
that violation. A federal bankruptcy court held that Appellees’
failure publicly to announce the foreclosure violated the
requirements of Hawaii’s nonjudicial foreclosure procedure
under Hawaii Revised Statute (HRS) § 667-5, as well as its
consumer protection law, HRS § 480-2. The court voided the
sale of the Appellant’s property and awarded her treble dam-
ages of $417,761.66 under HRS § 480-13 for violation of the
consumer protection statute. The Bankruptcy Appellate Panel
reversed, ruling that the mortgagee’s actions did not violate
state law.

We hold that (1) the lack of public announcement did vio-
late Hawaii’s nonjudicial foreclosure statute, and (2) this
defect was a deceptive practice under state law. Accordingly,
we affirm the bankruptcy court’s avoidance of the foreclosure
sale. However, we remand to the bankruptcy court for a
proper calculation of attorneys’ fees and damages under HRS
§ 480-13.

I BACKGROUND

In 2002, Margery Kanamu-Kalehuanani Kekauoha-Alisa
(Debtor) refinanced a mortgage on her property on Hawaii
Island and executed a promissory note to Ameriquest Mort-
gage Company in the amount of $127,500. Debtor defaulted
on her loan eight times, causing Ameriquest to initiate fore-
closure proceedings in early 2005. On April 6, 2005 Ameri-
quest assigned its interest in the mortgage to WM Speciality
Mortgage LLC, which later became JPMC Mortgage, the
named party in this action. The assignment notwithstanding,
Ameriquest continued to service Debtor’s mortgage (hereaf-
ter, Ameriquest and JPMC Mortgage are referred to collec-
tively as “Lenders”). A foreclosure sale was scheduled for
May 13, 2005.

On May 10, 2005, three days before the scheduled foreclo-
sure sale, Debtor filed for Chapter 13 bankruptcy, triggering
an automatic stay of the sale. To comply with the stay, a law
firm employed by Lenders postponed the scheduled foreclo-
sure sale. HRS § 667-51 authorizes a foreclosure sale to be
“postponed from time to time by public announcement made
by the mortgagee or by a person acting on the mortgagee’s
behalf.” The law firm properly announced the postponement
of the sale three times from May 13, 2005 until September 23,
2005.

On September 23, 2005, the law firm attempted to postpone
the sale yet again, a fourth and final time. The auction was
scheduled to occur at noon at a flagpole located in front of
Hale Halewai, a local community center. The firm delegated
the task to a legal secretary who had never before postponed
a foreclosure sale. The secretary arrived ten or fifteen minutes
before noon. Rather than shouting out the postponement to all
those present, the secretary asked several of the people pres-
ent if they were interested in Debtor’s property. Everyone she
spoke to said they were not. She did not attempt to speak to
those individuals who appeared to be there for another auction
that was occurring at the same time, and she did not speak to
everyone in the area. She did not tell those she spoke with that
the auction was postponed to December 2, 2005. The secre-
tary stayed at the flagpole until approximately 12:25 PM, after
the other auction had finished and the area was deserted. She
left without ever announcing or posting the information that
the sale of Debtor’s property had been postponed.

On November 1, 2005, Lenders moved for relief from the
stay to allow them to proceed on the foreclosure sale. On
November 21, after Debtor failed to respond, the bankruptcy
court granted Lenders’ motion. The foreclosure sale took
place on December 2. The successful — and only bid — was
a credit bid made by the auctioneer on behalf of Lenders. A
quitclaim deed to the property was recorded on December 27,
2005. Lenders initiated an ejectment action in state court in
January, 2006. Lenders obtained a judgment in their favor on
April 11, 2006, which Debtor appealed. That appeal is still
pending in state court — apparently waiting for our decision.

On April 26, 2006, Debtor filed a complaint in the bank-
ruptcy court, alleging, inter alia, that the sale had violated the
automatic stay, breached the terms of the mortgage contract,
constituted an unfair and deceptive trade practice under HRS
§ 480-2, violated various requirements of nonjudicial foreclo-
sure procedure under HRS § 667-5, and constituted a fraudu-
lent transfer under HRS § 651C-7. The bankruptcy court
dismissed on summary judgment Debtor’s claims alleging a
violation of the stay and fraudulent transfer.

After a five-day bench trial on the remaining claims, the
bankruptcy court issued amended findings of fact and conclu-
sions of law. The court concluded that Lenders’ failure to
publicly pronounce the postponement of the foreclosure sale
on September 23, 2005, violated the “public announcement”
requirement of HRS § 667-5 as well as the terms of the mort-
gage contract. Contrary to Debtor’s assertion on appeal, the
court found only a single violation of HRS § 667-5. As a rem-
edy, the court voided the foreclosure sale. The court held that
the improper postponement was also a breach of the mortgage
contract, because the contract required that Lenders comply
with state law in any foreclosure proceeding.

In addition, the court ruled that the improper postponement
was an unfair and deceptive trade practice under HRS § 480-
2. It awarded Debtor treble damages, under HRS § 480-13,
for damages sustained as a result of the violation of § 480-2,
calculating the damages sustained as (1) Debtor’s lost equity
in her house, (2) the rental value of the house for the time dur-
ing which she lost possession of it, and (3) the attorneys’ fees

Debtor expended defending against the state court ejectment
action. The total money judgment was $417,761.66.

Finally, the court awarded Debtor additional attorneys’ fees
under two Hawaii statutes: HRS § 607-14, allowing fees for
the prevailing party in contract claims, and HRS § 480-
13(b)(1), allowing fees for the party establishing a violation
of HRS § 480-2. The court allocated attorneys’ fees equally
between the contract claim and the HRS § 480-2 claim.
Because HRS § 607-14 limits attorneys fees to twenty-five
percent of the judgment on a contract claim, the court allowed
recovery of only $38,945.01 for that portion of the attorneys’
fees claim, a sum which it arrived at by calculating twenty-
five percent of the value of Debtor’s equity in the mortgaged
property.

Lenders appealed the bankruptcy court’s decision to the
Bankruptcy Appellate Panel (“BAP”), challenging both the
bankruptcy court’s findings of liability and its calculation of
damages and attorneys’ fees. Debtor cross-appealed, challeng-
ing only the bankruptcy court’s ruling that attorneys’ fees
under HRS § 607-14 should be limited to twenty-five percent
of the value of Debtor’s equity in the foreclosed property.

The BAP reversed the bankruptcy court on its findings of
liability, holding that Lenders’ actions (1) met the public
announcement requirement of HRS § 667-5, (2) did not
breach the mortgage contract, and (3) did not constitute an
unfair or deceptive practice under HRS § 480-2. Because it
found in favor of Lenders on the liability issues, the BAP did
not reach the parties’ challenges to damages and attorneys’
fees. Debtor now appeals the decision of the BAP.

II STANDARD OF REVIEW

We review the decisions of the BAP de novo. Wood v.
Stratos Prod. Dev., LLC (In re Ahaza Sys., Inc.), 482 F.3d
1118, 1123 (9th Cir. 2007). We apply the same standard of
review that the BAP applied to the bankruptcy court’s ruling.
Id. We review the bankruptcy court’s legal conclusions de
novo and its factual findings for clear error. Stevens v. Nw.
Nat’l Ins. Co. (In re Siriani), 967 F.2d 302, 303-04 (9th Cir.
1992).

III ANALYSIS

A. Hawaii Revised Statute § 667-5

[1] HRS § 667-5 authorizes a foreclosure sale to be “post-
poned from time to time by public announcement made by the
mortgagee or by a person acting on the mortgagee’s behalf.”
In this case, we must first address whether the secretary’s
actions on September 23rd constituted a “public announce-
ment” under the meaning of Hawaii law. When interpreting
state law, we are bound by the decision of the highest state
court. Sec. Pac. Nat’l Bank v. Kirkland (In re Kirkland), 915
F.2d 1236, 1238 (9th Cir. 1990). Absent a controlling state
court decision, our duty is to predict how the highest state
court would decide the issue. Id. at 1239.

[2] Neither HRS § 667-5 nor Hawaii case law defines the
term “public announcement.” Therefore, we apply Hawaii’s
rules of statutory construction to interpret the term. Hawaii
courts follow “certain well-established principles of statutory
construction.” Haw. Gov’t Emps. Ass’n, AFSCME Local 152,
AFL–CIO v. Lingle, 239 P.3d 1, 6 (Haw. 2010). Under those
principles, “ ‘where the statutory language is plain and unam-
biguous, our sole duty is to give effect to its plain and obvious
meaning.’ ” Id. (quoting Awakuni v. Awana, 165 P.3d 1027,
1034 (Haw. 2007)). If there is ambiguity, we may consider
context and legislative purpose to determine the meaning of
the word or phrase. Id. at 6, 11 n.16.

[3] Applying these principles, it is clear that any reason-
able meaning of “public announcement” does not encompass
Lenders’ actions in this instance. The bankruptcy court turned
to the dictionary, noting that Merriam-Websters defines “an-
nounce” as “to make known publicly: PROCLAIM” and “an-
nouncement” as “public notification or declaration.” No party
suggests a different definition, and this interpretation captures
the essence of what the statute requires: Mortgagees shall
publicly announce the postponement of a foreclosure sale to
a subsequent date.

[4] In this case, the secretary engaged in several conversa-
tions with individuals whom, based on the secretary’s judg-
ment, appeared as if they might have been present because
they were interested in the foreclosure of Debtor’s property.
Even in these conversations, the secretary did not communi-
cate that the sale had been postponed. The secretary did not,
in private conversation or otherwise, announce that the Debt-
or’s property would be sold on December 2, 2005. The bank-
ruptcy court’s conclusion, based on these facts, was that the
secretary “never made an open, oral announcement to all
those present of the date and time to which the auction was
being postponed and she did not post or display such an
announcement in written form.” Lenders do not dispute this
finding of fact, and it suffices to establish under the plain
meaning of HRS § 667-5 that there was no public announce-
ment of a postponement.

The BAP acknowledged that “[i]t is undisputed that the
secretary did not make a ‘public announcement’ within its
commonly understood or dictionary meaning.” Nonetheless, it
reasoned that the phrase must be given a “fair and reasonable
construction” and interpreted in light of the purpose of the
statute. The BAP concluded that the requirements of the stat-
ute could be met by “any mode of communication that reason-
ably achieves the spirit and purpose of the ‘public
announcement’ requirement,” which they reasoned was to
“inform those who appeared at a foreclosure sale that it has
been postponed.”

[5] The BAP erred in relying on statutory context and pur-
pose to introduce ambiguity into the meaning of “public
announcement” because, as it acknowledged, the meaning of
the phrase is plain on its face. See Ross v. Stouffer Hotel Co.
Ltd., 879 P.2d 1037, 1044 (Haw. 1994) (“[W]here the terms
of a statute are plain, unambiguous and explicit, we are not at
liberty to look beyond that language for a different mean-
ing.”). However, even if use of these tools of statutory inter-
pretation were appropriate, we would not find the BAP’s
conclusion persuasive. Hawaii’s nonjudicial foreclosure stat-
ute affords mortgagees a quick and inexpensive alternative to
judicial foreclosure but balances that accommodation by man-
dating compliance with minimal procedural requirements to
protect mortgagors’ interest in their property. Lee v. HSBC
Bank USA, 218 P.3d 775, 779-80 (Haw. 2009). That statutory
balance would be upset if mortgagees could dispense with
those procedures they perceive as futile, or substitute proce-
dures they believe achieve the “spirit and purpose” of the law.
A reviewing court would frequently have no evidence of the
adequacy of those substitute procedures other than the testi-
mony of the mortgagee’s agent. In this case, for instance, the
bankruptcy court would be required to rely on the rough
assessment of a legal secretary undertaking her first foreclo-
sure postponement that none of the individuals present was
interested in Debtor’s property. Moreover, the secretary
admitted she had signed a declaration stating that she had
publicly announced the postponement when she knew she had
not made a public announcement. We reject an approach that
would force a trial court to rely upon evidence of this sort,
and hold that Lenders’ actions violated the plain meaning of
“public announcement” in HRS § 667-5.

[6] We turn to the question of the proper remedy for Lend-
ers’ violation of HRS § 667-5. Hawaii law does not specify a
remedy. The bankruptcy court, based on its reading of Silva
v. Lopez, 5 Haw. 262, 1884 WL 6695 (1884), ruled that
improper postponement required voiding the subsequent fore-
closure sale. The BAP, on the other hand, believed that Silva
does not provide controlling precedent, and reasoned that the
Hawaii Supreme Court would have to look to other jurisdic-
tions to decide the issue. Relying on the trend in the majority
of states, the BAP concluded that the Hawaii Supreme Court
would draw a distinction between technical violations of fore-
closure procedures which do not prejudice a mortgagor and
substantive violations which do. The BAP held that a foreclo-
sure sale should be voided only when a procedural violation
is “significant, material, causes prejudice or otherwise con-
tributes to the inadequacy of the price or other injury.” The
BAP concluded in this instance that Debtor had shown no
prejudice from the foreclosure and was not entitled to any
relief.

[7] With all respect to the BAP, we agree with the bank-
ruptcy court that Hawaii precedent is clear and controlling.
Mortgagee violation of the nonjudicial foreclosure require-
ments of HRS § 667-5, whether those violations are griev-
ously prejudicial or merely technical, voids a subsequent
foreclosure sale. Id. at *7. In Silva, the Hawaii Supreme Court
voided a mortgage sale of real estate and livestock because
the mortgagee did not comply with the conditions of the
power of sale set out in the mortgage contract. Id. The Silva
mortgagee erred by scheduling the foreclosure sale one day
too early: under the mortgage contract, the power of sale
could be exercised only after three weeks of notice and the
Silva mortgagee had scheduled the sale after only twenty days
of notice. Id. at *3, *5. The Silva court affirmed the trial
court’s ruling that “if the notice is insufficient, the sale under
it is void and not merely voidable.” Id. at *7. Silva establishes
that under Hawaii law, even technical violations of foreclo-
sure procedures void a subsequent foreclosure sale.

The BAP attempted to distinguish Silva on two grounds.
First, the BAP noted that the Silva court did not explain why
strict, rather than substantial compliance, with foreclosure
procedure is required. However, this undercuts, rather than
supports, the BAP’s conclusion. The fact that the Silva court
did not discuss prejudice or substantial compliance demon-
strates that this factor is irrelevant to the mortgagor’s remedy
under Hawaii law.

The BAP also distinguished Silva on the ground that there
“the defect in the notice requirement was coupled with
another irregularity — the livestock was not available for
inspection at the auction sale.” This assertion misreads Silva.
In fact, the Silva court voided the sale of real estate solely on
the basis of inadequate notice, and not because of the failure
to display the auctioned cattle. The decision makes this clear:
“[T]he third objection to the sale [that the mortgagee failed to
display the cattle to bidders] . . . applies only to the sale of the
chattels.” Silva, 1884 WL 6695, at *3 (emphasis added).

That Hawaii law requires strict compliance with statutory
foreclosure procedures is confirmed by the Hawaii Supreme
Court’s recent decision in Lee, a decision that was not avail-
able at the time the BAP issued its decision. The Lee court,
answering a question certified to it by a federal district court,
held that a foreclosure sale conducted after the mortgagors
had cured their default was not valid. The court cited Silva for
the proposition that the “foreclosure sale did not comply with
the requirements of HRS section 667-5 and was, thus, inval-
id.” Lee, 218 P.3d at 779. As in Silva, there was no discussion
in Lee of the degree to which the violation of HRS § 667-5
prejudiced the mortgagor that would suggest that prejudicial
impact is relevant under Hawaii’s law. While Lee involved
the violation of a different requirement of HRS § 667-5 than
is at issue here, the court’s reasoning encompasses the facts
of this case.

Finally, we note that a strict compliance requirement is not
so out of step with the law of other jurisdictions that we have
reason to second-guess our interpretation of Hawaii law. The
BAP is accurate in noting that the majority of states draw a
distinction between procedural defects that are insignificant
and those that are prejudicial enough to render a foreclosure
sale void or voidable. See, e.g., Gilroy v. Ryberg, 667 N.W.2d
544, 553-54 (Neb. 2003) (describing the majority approach
and collecting cases). However, this trend is far from unani-
mous. Several states have long required strict compliance
with nonjudicial foreclosure statutes. See Univ. Sav. Ass’n v.
Springwoods Shopping Ctr., 644 S.W.2d 705, 706 (Tex.
1982) (mortgagee’s failure to perform “ministerial act” of
recording appointment of successor trustee grounds for void-
ing sale); Bottomly v. Kabachnick, 434 N.E.2d 667, 669-70
(Mass. App. Ct. 1982) (failure in notice of sale to identify the
holder of mortgage voids sale). Other states have begun to
strictly construe the terms of recently enacted statutes
designed to protect mortgagors. See Aurora Loan Servs., LLC
v. Weisblum, 923 N.Y.S.2d 609, 614 (N.Y. App. Div. 2011)
(strict compliance with statutorily mandated notice require-
ments is condition precedent to foreclosure, without consider-
ation of prejudice to mortgagor); EMC Mortg. Corp. v.
Chaudhri, 946 A.2d 578, 586 (N.J. Super. Ct. App. Div.
2008) (“[A] lender’s substantial compliance with the contents
of a notice of intent, sent by a lender prior to initiation of fore-
closure, . . . was not authorized by the statute’s terms.” (inter-
nal quotation marks omitted)). Hawaii’s approach, therefore,
might place it in the minority, but does not place it out of the
mainstream.

[8] We conclude that Lenders’ failure to postpone properly
the foreclosure sale did violate HRS § 667-5 and that the
proper remedy was avoidance of the sale.

B. Breach of Contract

[9] The bankruptcy court ruled that the terms of the par-
ties’ mortgage agreement specified that Lenders could fore-
close only in compliance with the procedural requirements of
HRS § 667-5. Lenders do not dispute the court’s interpreta-
tion of the contractual language. Therefore, because Lenders’
improper postponement of the foreclosure sale violated HRS
§ 667-5, it also constituted a breach of contract.

[10] Lenders’ contractual breach is an alternative ground
upon which the bankruptcy court properly voided the foreclo-
sure sale. Lenders argue, however, that damages for the
breach of contract should be subject to standard causation
requirements, and that the breach was not the cause of the
foreclosure. Lenders’ discussion of general contract principles
of causation is not persuasive in the context of the mortgage
at issue. The bankruptcy court read the mortgage contract as
requiring compliance with the nonjudicial foreclosure statute
as a condition precedent to Lenders’ right to exercise the
power of sale in the contract. We agree. In the context of this
interpretation of the mortgage, the avoidance of the sale is
consistent both with case law particular to mortgage agree-
ments and with general contract principles. See Silva, 1884
WL 6695, at *7; Stevens v. Cliffs at Princeville Assocs., 684
P.2d 965, 969 (Haw. 1984) (“If the condition is not fulfilled,
the right to enforce the contract does not come into exis-
tence.” (internal quotation marks omitted)).

C. Hawaii Revised Statute § 480-2 and § 480-13

[11] HRS § 480-2(a) prohibits “unfair or deceptive acts or
practices in the conduct of any trade or commerce.” Consum-
ers who establish a violation of § 480-2 are entitled to three-
fold damages under HRS § 480-13 for those “damages
sustained” as a result of the defendant’s deceptive actions.
HRS § 480-13(a)(1). Whether a practice is deceptive or unfair
is “ordinarily a question of fact,” Balthazar v. Verizon
Hawaii, Inc., 123 P.3d 194, 197 n.4 (Haw. 2005), subject to
review under a clearly erroneous standard.

The test for whether a practice is “deceptive” under HRS
§ 480-2 is distinct from whether a practice is “unfair,” and
both tests are established by case law rather than by statute.
State ex rel. Bronster v. U.S. Steel Corp., 919 P.2d 294, 313
(Haw. 1996). “A deceptive act or practice is ‘(1) a representa-
tion, omission, or practice that (2) is likely to mislead con-
sumers acting reasonably under the circumstances where (3)
the representation, omission, or practice is material.’ ”
Yokoyama v. Midland Nat’l Life Ins. Co., 594 F.3d 1087,
1092 (9th Cir. 2010) (quoting Courbat v. Dahana Ranch, Inc.,
141 P.3d 427, 435 (Haw. 2006)) (alterations omitted). This
inquiry is objective — the test is whether the practice was
“capable of misleading a reasonable consumer.” Id. at 1089.
There need not be an intent to deceive nor actual deceit. Cour-
bat, 141 P.3d at 435 n.9.

[12] The bankruptcy court found that failure to make a
public announcement “is likely to mislead a consumer acting
reasonably under the circumstances . . . . Proper notice of the
actual date of a foreclosure auction is essential to ensure that
foreclosed properties bring adequate prices and that the public
has an appropriate opportunity to bid.” The court’s factual
finding is a reasonable one to which we must defer.

The BAP’s reversal of this finding is premised on two
errors. First, by focusing on whether there were, in fact, any
consumers in the vicinity that would have heard a public
announcement, the BAP failed properly to apply the requisite
objective test. Given that “actual deception need not be
shown; the capacity to deceive is sufficient,” State ex rel.
Bronster, 919 P.2d at 313, the BAP’s concern with the fact
that no potential buyers appeared to be present was an
improperly subjective inquiry into whether there was actual
deception.

Second, the BAP did not afford the bankruptcy court’s fac-
tual finding the required degree of deference when it reasoned
that it was “not required to accept [the bankruptcy court’s]
conclusions as to the legal effect of [its factual findings].”
Whether a reasonable consumer would likely be misled by a
practice is a question of fact unless “no reasonable person
would determine the issue in any way but one.” Courbat, 141
P.3d at 436 (internal quotation marks omitted). Under this
standard, the bankruptcy court’s determination that improper
postponement of this sort would deceive a reasonable con-
sumer is not clearly erroneous. See Anderson v. City of Besse-
mer City, 470 U.S. 564, 574 (1985) (“Where there are two
permissible views of the evidence, the factfinder’s choice
between them cannot be clearly erroneous.”).

Because we affirm the bankruptcy court’s finding that
Lenders’ improper postponement was a deceptive practice
under HRS § 480-2, we need not consider whether it was also
an unfair practice.

[13] However, our conclusion that Lenders’ improper post-
ponement amounted to a deceptive practice does not automat-
ically entitle Debtor to monetary damages.2 Under HRS
§ 480-13(b)(1), a consumer injured by a violation of § 480-2
“[m]ay sue for damages sustained by the consumer, and, if the
judgment is for the plaintiff, the plaintiff shall be awarded a
sum not less than $1,000 or threefold damages.” Under this
statute, consumers are entitled to damages for a violation of
HRS § 480-2 only if they show that those acts “cause private
damage.” Ai v. Frank Huff Agency, Ltd., 607 P.2d 1304, 1312
(Haw. 1980), overruled in part on other grounds by Robert’s
Haw. Sch. Bus. Inc. v. Laupahoehoe Transp. Co., 982 P.2d
853 (Haw. 1999); see also Haw. Med. Ass’n v. Haw. Med.
Serv. Ass’n, 148 P.3d 1179, 1216 (Haw. 2006) (to receive
damages under HRS § 480-13 the injured consumer must
show “(1) a violation of HRS chapter 480; (2) injury to the
plaintiff ’s business or property resulting from such violation;
and (3) proof of the amount of damages” (footnotes omitted)).

Any injury must be fairly traceable to the defendant’s
actions. Flores v. Rawlings Co., LLC, 177 P.3d 341, 355 n.23

We do not consider Lenders’ argument that they cannot be held vicari-
ously liable for the actions of an independent contractor because that argu-
ment was not made before the BAP and was therefore forfeited. See
Resolution Trust Corp. v. First Am. Bank, 155 F.3d 1126, 1129 (9th Cir.
1998) (issues raised for first time before appellate court are generally for-
feited).

(Haw. 2008). Under HRS § 480-13, the injury is measured
through standard expectation damages, i.e., damages suffi-
cient to make the plaintiff whole. Leibert v. Fin. Factors, Ltd.,
788 P.2d 833, 836-37 (Haw. 1990). The Hawaii Supreme
Court has emphasized that “ ‘[d]eception [is] the evil that con-
sumer fraud statutes seek to rectify.’ ” Flores, 177 P.3d at 357
(second alteration in original) (quoting Zanakis-Pico v. Cutter
Dodge, Inc., 47 P.3d 1222, 1231 (Haw. 2002)).

[14] The proper calculation of damages and causation are
questions of fact under Hawaii law, which we do not disturb
unless they are clearly erroneous. Kato v. Funari, 191 P.3d
1052, 1058 (Haw. 2008) (damages are question of fact); Doe
Parents No. 1 v. State Dep’t of Educ., 58 P.3d 545, 569 (Haw.
2002) (causation is question of fact). In this instance, how-
ever, the bankruptcy court failed to make the requisite factual
findings. See Jess v. Carey (In re Jess), 169 F.3d 1204, 1208-
09 (9th Cir. 1999) (Bankruptcy Rule 7052 requires the bank-
ruptcy court to make findings of fact and conclusions of law).
While the bankruptcy court’s decision acknowledges that cau-
sation is a required element of Debtor’s case, the court made
no finding — explicit or otherwise — that the enumerated
damages were caused by and fairly traceable to Lenders’
improper postponement. Rather, the court simply listed as
damages Debtor’s loss of equity in her property, the rental
value of the property for the time Debtor was apparently
excluded from possession, and attorneys’ fees accrued in the
state court ejectment action.

Debtor urges us to overlook this omission and to construe
the bankruptcy court’s calculation of damages as including an
implicit factual finding of causation. If we were to adopt
Debtor’s suggestion, which we do not, we would be com-
pelled by the record to conclude that the bankruptcy court’s
“implicit” finding of causation was clearly erroneous. The
damages the bankruptcy court awarded all flow from the fore-
closure on Debtor’s home and appear to give Debtor an inap-
propriate windfall. This seems irreconcilable with the
bankruptcy court’s finding that Debtor did not experience
foreclosure of her home because of Lenders’ imperfect post-
ponement procedure. As the bankruptcy court phrased it,
“There is no question, . . . that the Mortgage was in default
and that the mortgagee was entitled to foreclose. The only
question is whether the proper party foreclosed the Mortgage
in the proper manner.” In sum, the court’s findings of fact
appear to establish that Debtor’s losses “result[ed] from” her
default, rather than Lenders’ failure to shout out the postpone-
ment of the foreclosure. Haw. Med. Ass’n, 148 P.3d at 1216.

[15] However, rather than reading an erroneous finding of
causation into the bankruptcy court’s decision, we follow our
ordinary procedure when a necessary factual finding is absent,
and remand the case to the bankruptcy court to make the
proper requisite findings of fact under HRS § 480-13. See
Graves v. Myrvang (In re Myrvang), 232 F.3d 1116, 1124
(9th Cir. 2000). This is the appropriate course because the fac-
tual record may not be complete — Debtor suggests, for
example, that she can prove that but for Lenders’ improper
postponement, she might have succeeded in curing her
default. This fact, if proven, might establish that Debtor’s
temporary loss of possession of the property was “fairly trace-
able” to Lenders’ deceptive practice. Flores, 177 P.3d at 355
n.23. Therefore, on remand the bankruptcy court must deter-
mine the difference, if any, between Debtor’s situation had
Lenders properly postponed the foreclosure sale and Debtor’s
actual situation, given that the sale was improperly postponed.
This framing properly narrows the inquiry to the damage
caused by Lenders’ deceptive postponement. Id. at 357.

D. Attorneys’ Fees

[16] We also vacate the bankruptcy court’s order awarding
attorneys’ fees and remand for calculation of reasonable attor-
neys’ fees in light of our remand of the damages-causation
issue in Debtor’s HRS § 480-13 claim. See UFJ Bank Ltd. v.
Ieda, 123 P.3d 1232, 1233 (Haw. 2005) (vacatur of attorneys’
fees judgment and remand appropriate where judgment on
which fees are based is remanded). Because the issues are
“likely to arise again on remand” we address the parties’ chal-
lenges to the bankruptcy court’s original calculation of attor-
neys’ fees. Everett v. Perez (In re Perez), 30 F.3d 1209, 1216
(9th Cir. 1994).

First, on remand, the bankruptcy court may, in its discre-
tion, consider evidence of the settlement offer purportedly
made by Lenders early in the course of this litigation. The
bankruptcy court initially ruled that it was prohibited from
admitting evidence of the settlement offer by Federal Rule of
Evidence Rule 408. With the benefit of our recent decision in
Ingram v. Oroudjian, 647 F.3d 925 (9th Cir. 2011) (per
curiam), it is now clear that this evidence is admissible. In
Ingram we adopted the reasoning of the Third Circuit’s opin-
ion in Lohman v. Duryea Borough, 574 F.3d 163 (3d Cir.
2009), and held that Rule 408 does not preclude admission of
evidence of a settlement agreement for the purpose of calcula-
tion of attorneys’ fees. Ingram, 647 F.3d at 927. Therefore,
the bankruptcy court may consider evidence of a settlement
offer to the degree such evidence is relevant to the calculation
of reasonable attorneys’ fees under Hawaii law.

[17] Second, Debtor challenges the bankruptcy court’s
decision limiting the portion of attorneys’ fees allotted to the
breach of contract claim to twenty-five percent of Debtor’s
lost equity on the house. The bankruptcy court’s ruling was
based on the twenty-five percent limit contained in HRS
§ 607-14, the statute governing attorneys’ fees in contract
cases. That statute states that “[I]n all actions in the nature of
assumpsit . . . there shall be taxed as attorneys’ fees, to be
paid by the losing party . . . a fee that the court determines to
be reasonable; . . . provided that this amount shall not exceed
twenty-five per cent of the judgment.” HRS § 607-14.

Debtor argues that the twenty-five percent limit does not
apply to her under the exception created in Food Pantry, Ltd.
v. Waikiki Business Plaza, Inc., 575 P.2d 869, 880 (Haw.
1978), because the avoidance of the foreclosure sale was not
a monetary judgment subject to the twenty-five percent limit.
In Food Pantry, the Hawaii Supreme Court held that an action
to enforce a lease did not trigger the twenty-five percent limit
because it “could not result in a money judgment to which the
twenty-five percent limitation could be applied.” Id.

[18] The bankruptcy court did not err in applying the
twenty-five percent limit on attorneys’ fees. The Food Pantry
exception applies only “if no money damages are sought or
awarded, as in a complaint for declaratory judgment, [where]
there is no monetary amount on the basis of which to calcu-
late the twenty-five percent statutory ceiling.” Amfac, Inc. v.
Waikiki Beachcomber Inv. Co., 839 P.2d 10, 35 (Haw. 1992).
Debtor’s complaint requested only damages and attorneys’
fees for her breach of contract claim. The monetary damages
for the contract claim were easily discernible as Debtor’s lost
equity in her property, and the bankruptcy court noted that
Debtor later “elected to recover the Mortgaged Property” in
lieu of monetary damages. Debtor’s election of remedies does
not render the value returned to Debtor an “economic incident
of the judgment” that can escape the twenty-five percent limit.
DFS Group L.P. v. Paiea Props., 131 P.3d 500, 504 n.5
(Haw. 2006).

IV CONCLUSION

We AFFIRM the decision of the bankruptcy court with
respect to its findings of liability for a violation of HRS
§ 667-5, a violation of HRS § 480-2, and breach of contract.
We also AFFIRM the bankruptcy court’s order voiding the
foreclosure sale of Debtor’s property. We VACATE the bank-
ruptcy court’s award of money damages under § 480-13 and
attorneys’ fees under HRS § 607-14 and HRS § 480-13(b)(1),
and we REMAND so that the bankruptcy court may (1) make
the necessary findings of causation and damages under HRS
§ 480-13 and (2) properly calculate attorneys’ fees.

AFFIRMED in part, VACATED and REMANDED in part.

The parties shall bear their own costs on this appeal.

[ipaper docId=86846596 access_key=key-1t94qpfdxtjy52ft185h height=600 width=600 /]

 

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IN RE: RODRIGUEZ | NJ Bankruptcy Court awards debtors counsel 85K fees because Countrywide willfully violated the automatic stay pursuant to § 362(k)

IN RE: RODRIGUEZ | NJ Bankruptcy Court awards debtors counsel 85K fees because Countrywide willfully violated the automatic stay pursuant to § 362(k)


UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW JERSEY

Re: In re Rodriguez (Chapter 13)
Case No. 07-24687 (MBK)

EXCERPT:

D. The Attorneys’ Fees Requested are Reasonable
Having ruled that the Debtors are entitled to attorneys’ fees, the Court must determine whether the requested fees are reasonable. See Miller, supra, 447 B.R. at 434 (“For Debtors to recover attorneys’ fees, however, such fees must be reasonable and necessary”). Indeed, the policy to discourage willful stay violations is tempered by a reasonableness standard. Id. While such policy guards against excessive litigation, however, it was Countrywide’s actions that created such substantial litigation costs to the Debtors in this case. Moreover, Countrywide has voiced no objection to the reasonableness of the fees requested by Debtors’ counsel. The Court has reviewed the documentation in support of the requested attorneys’ fees and regards the fees to be reasonable in light of the work performed in this case.

V. Conclusion
For the foregoing reasons, this Court: (i) finds that Countrywide willfully violated the
automatic stay pursuant to § 362(k), (ii) awards damages to the Debtors in the form of attorneys’
fees in the amount of $85,033.814, and (iii) directs Countrywide to make payment of the award
to “Francisco and Anna Rodriguez, in care of Abelson & Truesdale, LLC” within 30 days of
entry of this ruling. The Court will enter an order consistent with its findings.

[ipaper docId=82743740 access_key=key-16dspzovwcgo0qi7jl4d height=600 width=600 /]

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O. Max Gardner lll: The Rules of the Road for Securitization of Residential Mortgage Loans

O. Max Gardner lll: The Rules of the Road for Securitization of Residential Mortgage Loans


Written by: -

The term “Mortgage Note” or “Note” refers to the promise to pay signed by the homeowner or obligor.

The term “Mortgage” refers to the real estate security instrument (mortgage or deed of trust) that must be filed with the local land registry to perfect the rights of the holder of the note and that is subject to the Statute of Frauds.

Note that Standard Fannie and Freddie Uniform Instruments cross-reference the note and the mortgage and provide that a breach of covenants in either document provides right to accelerate balance due and declare a default.

State law determines how mortgages travel—always travel by assignment due to statute of frauds.  An assignment is a conveyance of a security interest in real property.

State law governs the necessity to record assignments.  Some state laws have been amended to accommodate MERS, but not that many.

Failure to record an assignment is a matter of priority and perfection if a bankruptcy is filed

[AVVO]

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IN RE: BALDERRAMA | 2nd allonge includes an endorsement from RFC (Judy Faber) to Deutsche that did not exist in the first allonge…3 different Promissory Notes

IN RE: BALDERRAMA | 2nd allonge includes an endorsement from RFC (Judy Faber) to Deutsche that did not exist in the first allonge…3 different Promissory Notes


**Judy Faber has a history on this site and named in some important cases…check it out!

 

UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF FLORIDA
ORLANDO DIVISION

In re
MARIA RENEE BALDERRAMA
Debtor.

CARLA P. MUSSELMAN, TRUSTEE
Plaintiff,

vs.

DEUTSCHE BANK TRSUTE COMPANY
AMERICAS, in trust for Residential
Accredit Loans, Inc. Mortgage Asset-
Backed Pass-Through Certificates, Series
2007-QH5,
Defendant.

MEMORANDUM OPINION PARTIALLY GRANTING AND
PARTIALLY DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
AND DENYING PLAINTIFF’S CROSS MOTION FOR SUMMARY JUDGMENT

EXCERPT:

In response, the trustee filed her own cross motion for summary judgment arguing the
various documents Deutsche has provided to support its position, including three different
versions of the note and two versions of the allonge, were ineffective to transfer any interest to
Deutsche and evidence Deutsche‘s bad faith in purporting to own the note.17 The trustee‘s
argument primarily is based on the second allonge provided by Deutsche upon the Court‘s order
compelling discovery. The second allonge includes an endorsement from RFC to Deutsche that
did not exist in the first allonge, and, according to the trustee, Deutsche caused this endorsement
to be made fraudulently to meet the needs of litigation.18 The trustee urges the Court to find
Deutsche has not adequately explained the discrepancies between the two allonges, has not met
its burden to prove it is the legitimate owner of the note, and title to the Property should vest in
the trustee.

[…]

Neither version of the allonge, however, includes dates of the alleged transfers as stated
by Ms. Faber. Even assuming she had the authority to endorse the note to Deutsche, Ms. Faber
does not explain why RFC initially failed to produce the second allonge with the RFC
endorsement in its motion to lift stay, even though it allegedly existed at that time. These ?holes?
present substantial questions of fact as to Deutsche‘s good faith and the second allonge‘s
authenticity. The Court cannot avoid suspecting that the second allonge indeed was created
solely to rebut the trustee‘s assertions in this litigation and did not previously exist. If so, the
Court suggests Deutsche and Ms. Faber individually consider the possible consequences of
propounding potentially false evidence and perjured testimony to the Court.

[ipaper docId=81975432 access_key=key-1kab3johohtn0eshfdqc height=600 width=600 /]

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A valentine from Chief United States, Bankruptcy Court Middle Dist. of Florida Judge Karen S. Jennemann on Feburary 14, 2012

A valentine from Chief United States, Bankruptcy Court Middle Dist. of Florida Judge Karen S. Jennemann on Feburary 14, 2012


A valentine from Chief United States Bankruptcy Judge Karen S. Jennemann on Feburary 14, 2012:

The Court cannot avoid suspecting that the second allonge indeed was created solely to rebut the trustee‘s assertions in this litigation and did not previously exist. If so, the Court suggests Deutsche and Ms. Faber individually consider the possible consequences of propounding potentially false evidence and perjured testimony to the Court. Muselman v. Deutsche Bank, U.S. Bankruptcy Court, Middle District of Florida, Orlando Division, Case No. 6:10-bk-07828-KSJ. Document 67, page 8.

As gratifying as this recognition of fraudulent documents may be, it does raise the question: just what are the consequences of propounding false evidence and perjured testimony to the Court. With the exception of a few judges and a few decisions, there have been no consequences whatsoever.

FRAUD DIGEST by Lynn E. Szymoniak, ESQ.

 

NOTE:

I would like to make a note of this because as soon as I posted this IN RE BALDERRAMA | FL BK Court “Deutsche Bank, Not proven to either the trustee or the Court that it holds a validly endorsed promissory note evidencing its purchase of the debt on the disputed property”, it went completely missing from the site! See for yourself and it’s still missing and not sure why some cases go missing.

 

451 B.R. 185 (2011)

In re Maria Renee BALDERRAMA, Debtor.
Carla P. Musselman, as Chapter 7 Trustee, Plaintiff,

v.

Deutsche Bank Trust Company Americas, in trust for Residential Accredit Loans, Inc. Mortgage Asset-Backed Pass-Through Certificates, Series 2007-QH5, Defendant.

Bankruptcy No. 6:10-bk-07828-KSJ. Adversary No. 6:10-ap-00245-KSJ.
United States Bankruptcy Court, M.D. Florida, Orlando Division.
May 4, 2011.
186*186 Seldon J. Childers, Childers Law LLC, Gainesville, FL, for Plaintiff.

Daniel A. Miller, Broad and Cassel, West Palm Beach, FL, for Defendant.

MEMORANDUM OPINION PARTIALLY GRANTING AND PARTIALLY DENYING TRUSTEE’S AMENDED AND RENEWED MOTION TO COMPEL PRODUCTION OF DEUTSCHE BANK

KAREN S. JENNEMANN, Bankruptcy Judge.

In this adversary proceeding the Chapter 7 trustee, Carla Musselman, seeks to quiet title and to value at zero dollars defendant Deutsche Bank’s alleged secured interest in debtor Maria Balderrama’s non-homestead real property. As part of discovery, the trustee served interrogatories and document production requests seeking information about the bank’s purchase of the promissory note and mortgage on the disputed property.[1] Deutsche Bank resists producing any discovery related to the purchase history of the note and the chain of title of the mortgage arguing that, under Florida law, it has established its secured interest in the property merely by alleging it holds the original promissory note endorsed specially in its favor.[2] The trustee disputes Deutsche Bank’s characterization of Florida law and notes that neither the Court nor the trustee has seen the original endorsed note. She now requests the Court 187*187 compel the bank to produce the requested information.[3]

Although Deutsche Bank is correct that under Florida law if it holds a validly endorsed original note it may be deemed equitably also to own the mortgage, the bank first must establish its actual possession of the original note. As such, the trustee’s discovery requests pertaining to Deutsche Bank’s status as holder of the note, including the authenticity and authority of the signatures endorsing the note, are relevant. All other requests, including any requests for information regarding the prior ownership history of the note or the mortgage, are irrelevant and overbroad under Florida law. Accordingly, the Court will grant in part and deny in part the trustee’s motion and direct Deutsche Bank to respond to interrogatory number 5 and document request numbers 7 and 30 on or before June 3, 2011. The trustee’s motion to compel otherwise is denied, and the objections raised by the bank are sustained as to all other interrogatories and production requests.

On September 28, 2010, the trustee initiated this adversary proceeding to value Aurora Loan Services’ secured claim at $0.00 pursuant to § 506(a) of the Bankruptcy Code[4] and to quiet title in property owned by the debtor located in Rockledge, Florida. Aurora is the servicing agent on the mortgage, and it previously has moved for relief from stay to foreclose on the mortgage,[5] which this Court denied without prejudice for lack of evidentiary support.[6] On October 18, 2010, the trustee served her first set of interrogatories and first requests for production of documents on Aurora. On November 17, 2010, Aurora filed its objections to the trustee’s discovery requests,[7] objecting to certain requests seeking information about the history of the ownership of the subject note and mortgage. Aurora’s objections are based on its position that under Florida law the holder of a promissory note may equitably own and enforce a mortgage, even without a written assignment of the mortgage, and, accordingly, that the trustee’s requests seeking information regarding chain of ownership are irrelevant and overbroad.

On December 16, 2010, at a pretrial conference before this Court, the parties discussed Aurora’s objections to the trustee’s discovery, and the trustee made an ore tenus motion to amend the complaint to name Deutsche Bank as the real defendant in interest as the alleged holder of the original promissory note, which the Court granted.[8] At the hearing, the trustee also agreed to file an amended motion to compel Deutsche Bank to respond to the discovery requests served on Aurora, and Deutsche Bank has agreed for purposes of resolving the amended motion to compel and its/Aurora’s objections to the trustee’s discovery that it will step into Aurora’s position and stipulate for convenience that the discovery served on Aurora properly was served on it.[9]

188*188 Accordingly, on January 4, 2011, the trustee amended her complaint to change the name of the defendant from Aurora to Deutsche Bank Trust Company Americas, in trust for Residential Accredit Loans, Inc. Mortgage Asset-Backed Pass-Through Certificates, Series 2007-QH5.[10] On January 18, 2011, Deutsche Bank filed its answer to the amended complaint.[11] On January 28, 2011, the trustee filed her amended motion to compel defendant’s response to trustee’s first interrogatories and request for production of documents and an associated memorandum of law.[12] On February 25, 2011, Deutsche Bank filed its memorandum in response to the trustee’s motion to compel.[13]

The trustee’s amended complaint argues Deutsche Bank cannot provide sufficient evidence of its purchase of either the note or the mortgage to assert a secured claim to the disputed property. The trustee now seeks to compel production of information from Deutsche Bank regarding its purchase of the underlying debt and mortgage, and especially whether the note and mortgage were properly assigned.

In response to the motion to compel, Deutsche Bank reiterates Aurora’s previous position, arguing certain interrogatories and production requests regarding chain of title are irrelevant and overbroad because, under Florida law, it need only show it holds the original note evidencing its purchase of the debt underlying the mortgage for it to equitably own the mortgage, too.[14] Essentially, the bank argues that, in Florida, a mortgage travels equitably with the underlying debt in the absence of a formal written assignment of the mortgage. Because the bank allegedly holds the note specially endorsed in its favor, Deutsche Bank maintains it already has established its security interest in the property.

The Court largely agrees with Deutsche Bank’s legal argument. Under applicable Florida law,[15] a mortgage, even without a written assignment, may travel equitably to the holder of the underlying debt, i.e., to the entity holding the original, properly executed and endorsed promissory note. Thus, if Deutsche Bank establishes it is the holder of a validly endorsed note, it, in turn, will establish its equitable ownership of the mortgage securing the note. This general rule of Florida law (the “General Rule”) was stated best in 1938 by the Florida Supreme Court in the seminal case Johns v. Gillian, as follows:

… a mortgage is but an incident to the debt, the payment of which it secures, and its ownership follows the assignment of the debt. If the note or other debt secured by a mortgage be transferred without any formal assignment of the mortgage, or even a delivery of it, the mortgage in equity passes as an incident to the debt, unless there be some plain and clear agreement to the contrary, if that be the intention of the parties.[16] 189*189 Johns goes on to say that “[t]he transfer of the note or obligation evidencing the debt… operates as an assignment of the mortgage securing the debt, and it is not necessary that the mortgage papers be transferred, nor, in order that the beneficial interest shall pass, that a written assignment be made.”[17] Johns concluded that “if there had been no written assignment, Gillian would be entitled to foreclose in equity upon proof of his purchase of the debt.”[18] Finding that Gillian had sufficiently proven his purchase of the debt through his in-court testimony, the court held that Gillian was the “equitable owner of the mortgage” entitled to foreclose, even though no formal assignment of the mortgage was executed.

The General Rule is alive and well in Florida.[19] In Riggs v. Aurora Loan Services, LLC,[20] Florida’s Fourth District Court of Appeals held Aurora was entitled to summary judgment in a foreclosure action when it produced the original mortgage, a promissory note endorsed in blank, and affidavits that stated Aurora was the proper holder of the note and mortgage. Aurora did not submit a written assignment of the mortgage, and Aurora was not the original mortgagee. Nonetheless, the court found Aurora was the holder of the note entitled to enforce its terms under Fla. Stat. § 673.3011, and thus could foreclose on the mortgage, because it provided sufficient evidence of its purchase of the debt underlying the mortgage: possession of the original note endorsed in blank.[21]

Likewise, in another decision, the Fourth District Court of Appeals reversed and remanded a dismissal of a foreclosure action because the lower court failed to consider application of the General Rule.[22] In that case, WM Specialty filed a foreclosure complaint on December 3, 2002, and later, in response to a motion to dismiss, filed an assignment of mortgage dated January 3, 2003. The assignment, however, reflected that the mortgage was transferred to WM Specialty prior to the complaint date on November 25, 2002. The lower court found the complaint was void ab initio because WM Specialty did not hold the note and mortgage as of the date of filing the complaint. In reversing the lower court, the appellate court instructed the lower court to consider on remand whether WM Specialty acquired an equitable interest in the mortgage before execution of the written assignment by virtue of the prior transfer of the note and mortgage to WM Specialty. The court quoted Johns favorably at length for the proposition that “the mortgage in equity passes as an incident to the debt,” and indicated the lower court had failed to consider this General Rule.

In reaching its conclusion, WM Specialty Mortgage distinguished the facts before it from Jeff-Ray Corp. v. Jacobson,[23] another Fourth District Court of Appeals case the Chapter 7 trustee relies on in attempting to establish an exception to the General Rule. Jeff-Ray held that a trial court erred in not dismissing a foreclosure complaint for failure to state a cause of 190*190 action because it relied upon an assignment that was not in existence when the complaint was filed. There, the complaint was filed on January 4, 1988, supported by an alleged assignment of mortgage dated in 1986, which was not attached to the complaint. When the plaintiff later produced the assignment, it was dated April 18, 1988, four months after the complaint was filed. The plaintiff’s actions therefore led the appellate court to conclude that plaintiff had lied to the court by stating it held an assignment of mortgage from 1986 when in fact it held no assignment at all. Moreover, the court in Jeff-Ray did not discuss the General Rule or consider whether equitable transfer of the mortgage occurred prior to filing the foreclosure complaint because the plaintiff had not alleged any facts that might have indicated such transfer occurred (e.g. purchase of the underlying debt or any indication the plaintiff held possession of the mortgage in 1986).

These recent Florida appellate court cases all support Deutsche Bank’s position that proof of ownership of the debt underlying a mortgage is sufficient under Florida law to equitably convey the mortgage to the debt holder. Moreover, these cases suggest a note specifically endorsed to a foreclosure plaintiff is sufficient proof of purchase of the debt underlying a mortgage to equitably convey such mortgage. Indeed, Riggs indicates the holder of a note endorsed in blank may hold an equitable interest in the mortgage securing the note.[24]

The trustee disputes this legal analysis and, in response, argues that an exception to the General Rule applies.[25] She interprets Johns[26] to create an exception to the General Rule that if a foreclosure plaintiff lacks a written assignment of the mortgage he must prove his purchase of the debt beyond merely establishing he is the holder of the note underlying the mortgage. The trustee relies on this sentence: “Or if there had been no written assignment, Gillian would be entitled to foreclose in equity upon proof of his purchase of the debt.” Noticeably absent from this sentence and the Johns decision, however, is any statement that a creditor’s proof of its status as holder of a promissory note is not proof of purchase of the debt. The trial court in Johns required testimony of Gillian to establish he purchased the mortgage debt because there were factual issues raised concerning the timing of the purchase of the note.[27] But nothing in Johns or the more recent Florida appellate court cases can credibly be construed as establishing an exception to the General Rule that would require a note holder to prove its purchase of the debt beyond simply establishing that it is indeed the note holder. Proof of a creditor’s status as holder of a note underlying a 191*191 mortgage is proof of purchase of the debt, and the previous ownership history of the note and mortgage is irrelevant.

The trustee’s argument also relies on a decision from the Massachusetts Supreme Court, applying Massachusetts law, to argue that Florida state courts require more than the original note to convey equitable title to a mortgage.[28] Because Massachusetts law treats the equitable assignment of mortgages very differently than Florida law, a Massachusetts court’s interpretation of the law of their state is irrelevant to this proceeding. Ibanez sums up well how Massachusetts law deals with equitable transfer of mortgages as follows:

In Massachusetts, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage. [] Rather the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment.[29]

These procedures are quite different than Florida’s procedures and its General Rule. Unlike Massachusetts, Florida law does allow the assignment of a note to carry with it the implicit assignment of the mortgage. Indeed, Ibanez distinguishes Massachusetts law from such other states’ laws that provide for equitable assignment of a mortgage.[30] Massachusetts law simply differs from Florida law and, as such, cannot create any type of exception to the still valid Florida General Rule. A creditor who holds a validly endorsed promissory note is deemed to hold an equitable lien arising from the related mortgage, without any requirement to have a separate valid assignment of the mortgage.[31]

Deutsche Bank, however, still has not proven to either the trustee or the Court that it holds a validly endorsed promissory note evidencing its purchase of the debt on the disputed property. Therefore, Deutsche Bank cannot rely on the General Rule to avoid responding to the trustee’s discovery requests pertaining to the authenticity of the note. The trustee has raised in her complaint doubts concerning the authenticity and effectiveness of the endorsements on the allonge to the note. The copies of the note and mortgage attached as an exhibit to its response therefore are insufficient to establish Deutsche Bank’s status as holder of the note.

Because the trustee has raised issues concerning the authenticity of and authority to endorse the note and allonge, the Court will overrule Deutsche Bank’s objection and compel its response to interrogatory number 5, seeking the names and addresses of “each person whose signature appears on any endorsements on the Note or any allonge.” The Court similarly will overrule Deutsche Bank’s objections and 192*192 compel its response to requests for production numbers 7 and 30. These requests seek documents and information related to Deutsche Bank’s purchase of the note and the authority of the individual who signed the endorsement. The inquiries are relevant to whether Deutsche Bank is the holder of a properly endorsed note.

The Court will sustain Deutsche Bank’s objections to every other interrogatory[32] and document production request,[33] finding such requests are irrelevant and overbroad in light of the General Rule. In particular, information on the chain of title of the mortgage, which parties have ever held an interest in the note or mortgage, and the electronic records related to this mortgage is irrelevant to the question of whether Deutsche Bank now holds the original validly endorsed note.

Accordingly, the Court will partially grant and partially deny the trustee’s motion to compel and direct defendant Deutsche Bank to respond to certain of the trustee’s first set of interrogatories and document production requests on or before June 3, 2011, as specified above. A further pretrial conference is set in this adversary proceeding for 2:00 p.m. on June 22, 2011.

A separate order consistent with this memorandum opinion will be entered simultaneously.

DONE AND ORDERED.

[1] As discussed below, the trustee’s discovery requests actually were served on Deutsche Bank’s predecessor to this adversary proceeding, Aurora Loan Services. Deutsche Bank has stipulated for purposes of this motion to compel that such requests were served on it, too. The Court similarly assumes that Deutsche Bank is authorized to prosecute the objections to the trustee’s discovery requests previously articulated by Aurora Loan Services and, for purposes of this motion, the interest of Deutsche Bank and Aurora Loan Services are identical.

[2] Defendant’s Response to Trustee’s Amended and Renewed Motion to Compel Defendant’s Response to Trustee’s First Interrogatories and Trustee’s First Request for Production of Documents and Incorporated Memorandum of Law (Doc. No. 25). A list of defendant’s specific objections to particular interrogatories and production requests is attached to its Response as Exhibit B.

[3] Trustee’s Amended and Renewed Motion to Compel Defendant’s Response to Trustee’s First Interrogatories and Trustee’s First Request for Production of Documents (Doc. No. 23).

[4] All references to the Bankruptcy Code are to Title 11 of the United States Code.

[5] Doc. No. 22 in the Main Case.

[6] Doc. No. 36 in the Main Case.

[7] Doc. Nos. 7, 8.

[8] Doc. No. 15.

[9] Fn. 4 of Defendant’s Response (Doc. No. 25). Deutsche Bank has adopted Aurora’s objections by incorporating them as Exhibit B to its Response.

[10] Doc. No. 17.

[11] Doc. No. 19.

[12] Doc. Nos. 23, 24.

[13] Doc. No. 25.

[14] Doc. No. 25 and Ex. B thereto set forth the bank’s specific objections.

[15] Paragraph 16 of the copy of the mortgage attached as Exhibit A to Defendant’s Response (Doc. No. 25) states the applicable law is the “law in which the property is located.” The property is located in Rockledge, Florida, and neither party disputes that Florida law applies.

[16] Johns v. Gillian, 134 Fla. 575, 184 So. 140, 143 (1938) (citations omitted).

[17] Id. (quoting 41 C.J., Mortgages, Sec. 686, p. 677) (quotations omitted).

[18] Id. at 143-44 (citing Pease v. Warren, 29 Mich. 9, 18 Am.Rep 58).

[19] Riggs v. Aurora Loan Services, LLC, 36 So.3d 932 (Fla. 4th DCA 2010) (per curiam); WM Specialty Mortgage, LLC, v. Salomon, 874 So.2d 680, 682-3 (Fla. 4th DCA 2004).

[20] 36 So.3d at 933-34.

[21] Id.

[22] WM Specialty Mortgage, 874 So.2d at 682-3.

[23] 566 So.2d 885, 886 (Fla 4th DCA 1990).

[24] 36 So.3d at 933-34.

[25] Doc. No. 24.

[26] 184 So. at 143.

[27] Specifically, one of the main issues in Johns was whether a possibly dissolved corporation properly transferred its ownership of a mortgage. Because factual issues arose as to the timing of the corporation’s assignment of the mortgage, the purported purchaser of the note and mortgage testified in court as to his purchase of the debt. Johns makes no mention of the lack of a written assignment of the mortgage as the reason for the purported note holder’s testimony. The trustee’s interpretation of Johns as establishing a requirement under Florida law that without a written assignment of mortgage a purported note holder must go beyond proof of its status as note holder to establish the purchase of the debt, including chain of title and the entire ownership history of the note, therefore is strained and unsupported by the facts of the case.

[28] U.S. Bank N.A. v. Ibanez, 458 Mass. 637, 941 N.E.2d 40, 53-4 (2011).

[29] Id. (citations omitted).

[30] Id. (citing Barnes v. Boardman, 149 Mass. 106, 114, 21 N.E. 308 (1889) and quoting within the citation “In some jurisdictions it is held that the mere transfer of the debt, without any assignment or even mention of the mortgage, carries the mortgage with it, so as to enable the assignee to assert his title in an action at law … This doctrine has not prevailed in Massachusetts….”).

[31] The trustee also argues the Florida U.C.C. has abolished the General Rule. This proposition has no support in either the Florida U.C.C. or, as demonstrated by the recent Fourth D.C.A. decisions discussed above, in Florida case law.

[32] In particular, the objections are sustained as to interrogatory numbers: 1, 2, 3, 8, 9, 10, 13, 16, 17.

[33] In particular, the objections are sustained as to requests for production numbers: 8, 9, 10, 11, 17, 18, 19, 20, 22, 23.

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IN RE: MILLER | 10th Cir. Court of Appeals Reverses 10th Cir. BAP “Under the U.C.C. … Deutsche Bank failed to show that it is the current holder of IndyMac’s Note”

IN RE: MILLER | 10th Cir. Court of Appeals Reverses 10th Cir. BAP “Under the U.C.C. … Deutsche Bank failed to show that it is the current holder of IndyMac’s Note”


 United States Court of Appeals, Tenth Circuit.

IN RE MILLER
In re: MARK STANLEY MILLER, also known as A Moment to Remember Photo & Video, also known as Illusion Studioz; JAMILEH MILLER, Debtors. MARK STANLEY MILLER; JAMILEH MILLER, Appellants,
v.
DEUTSCHE BANK NATIONAL TRUST COMPANY, Appellee.

 No. 11-1232.

 February 1, 2012.

EXCERPT:

3. The BAP Appeal

The Millers appealed the bankruptcy court’s order granting relief from stay to the BAP. The BAP began its decision by noting that “[t]he details surrounding the assignment to Deutsche Bank are not part of the record on appeal.” Aplee. Supp. App. at 6 n.8. In particular, the record submitted to the BAP did not even contain a copy of the Note, much less the original.

In its decision, the BAP spent little time discussing the adequacy of proof that Deutsche Bank was in possession of the original Note, and the legal consequences thereof. Instead, the BAP relied on the Rooker-Feldman doctrine. See Rooker v. Fid. Trust Co., 263 U.S. 413 (1923); D.C. Court of Appeals v. Feldman, 460 U.S. 462 (1983). Though noting that the bankruptcy court had not expressly mentioned this doctrine, it concluded that the court had relied on the state court’s decision on the standing issue. The BAP further concluded that in light of this doctrine, which generally prohibits federal courts from entertaining suits by parties who have lost in state court and who seek review of state court decisions in federal court, “the bankruptcy court properly declined to revisit the state court’s decision that Deutsche Bank was an `interested person’ entitled to a Rule 120 order of sale.” Aplee. Supp. App. at 16. Armed with the state-court decision finding Deutsche Bank had standing to proceed with the foreclosure, the BAP reached a further conclusion that Deutsche Bank had standing to seek relief from stay.

[…]

We conclude that neither the Rooker-Feldman doctrine nor issue preclusion applies to prevent a federal court from determining whether Deutsche Bank is a “party in interest” entitled to seek relief from stay. Because the BAP incorrectly relied on Rooker-Feldman and because neither the bankruptcy court nor the BAP conducted a proper statutory standing analysis under § 362(d), we could simply stop our analysis here and remand for a further consideration of the standing issue. The parties, however, have presented arguments on the merits concerning standing, and the sufficiency of Deutsche Bank’s showing concerning standing in this case is a legal issue that can be resolved on appeal. We will therefore now proceed to discuss why Deutsche Bank has failed to demonstrate its standing as a “party in interest.”

4. Deutsche Bank’s Status as “Party in Interest”

We return to the key question: is Deutsche Bank a “creditor” of the Millers with standing to seek relief from stay? To answer this question, we turn to the Bankruptcy Code. According to the Bankruptcy Code, a “creditor” includes an “entity that has a claim against the debtor.” 11 U.S.C. § 101(10)(a). A “claim” is a “right to payment.” Id. § 101(5)(A).

Does Deutsche Bank have a “right to payment” from the Millers? In examining this question, we begin with the principle that “[w]ithin the context of a bankruptcy proceeding, state law governs the determination of property rights.” In re Mims, 438 B.R. 52, 56 (Bankr. S.D.N.Y. 2010). We must therefore turn to Colorado law, in particular that state’s version of the Uniform Commercial Code (U.C.C. or Code).

We ask first how Colorado law would classify the Note signed by the Millers. Under Colorado law, a promise or order such as the Note is payable “to order” “if it is payable (i) to the order of an identified person or (ii) to an identified person or order.” Colo. Rev. Stat. § 4-3-109(b). The Note at issue here is payable “to the order of Lender. Lender is IndyMac Bank, F.S.B., a federally chartered savings bank[.]” Aplt. App., Vol. I at 14. Thus, the Note is payable to the “order” of IndyMac Bank under § 4-3-109(b).

But “[a]n instrument payable to an identified person [such as IndyMac Bank] may become payable to bearer if it is indorsed in blank pursuant to section 4-3-205(b).” Colo. Rev. Stat. § 4-3-109(c).7 Section 4-3-205(b) provides that “[i]f an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a `blank indorsement.’ When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specifically indorsed.” (emphasis added).

Deutsche Bank presented evidence that IndyMac had indorsed the Note in blank. Is proof of this indorsement sufficient under the U.C.C. requirements to establish Deutsche Bank as the successor holder of the note? As we shall see, it is not, because Deutsche Bank must also prove it has possession of the Note.

The U.C.C. identifies the requirements for “negotiation” of a note, that is, for “transfer of possession . . . to a person who thereby becomes its holder.” Id. § 4-3-201(a). This statute provides that “if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder.” Id. § 4-3-201(b) (emphasis added). The Official Commentary to section 4-3-201 explains that negotiation “always requires a change in possession of the instrument because nobody can be a holder without possessing the instrument, either directly or through an agent.” (emphasis added). See also Colo. Rev. Stat. § 4-1-201(b)(20)(A) (defining “holder” of negotiable instrument as “person in possession” of it).

“Possession is an element designed to prevent two or more claimants from qualifying as holders who could take free of the other party’s claim of ownership.” Georg v. Metro Fixtures Contractors, Inc., 178 P.3d 1209, 1213 (Colo. 2008) (citation omitted).8 “With rare exceptions, those claiming to be holders have physical ownership of the instrument in question.” Id. (citation omitted).9 In the case of bearer paper such as the Note, physical possession is essential because it constitutes proof of ownership and a consequent right to payment.10

While Deutsche Bank has offered proof that IndyMac assigned the Note in blank, it elicited no proof that Deutsche Bank in fact obtained physical possession of the original Note from IndyMac, either voluntarily or otherwise.11 Under the U.C.C. requirements, Deutsche Bank has therefore failed to show that it is the current holder of the Note.

Colorado law does not limit enforcement of an obligation to a holder who received the instrument through negotiation. A note may also be enforced by a transferee. See Colo. Rev. Stat. § 4-3-203. “Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument.” Id. § 4-3-203(b). But transfer requires delivery: “An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.” Id. § 4-3-203(a) (emphasis added). “Delivery” with respect to an instrument “means voluntary transfer of possession” of the instrument. Id. § 4-1-201(14). Because Deutsche Bank has failed to prove transfer of possession of the original Note it has failed to establish its status as a transferee.

Deutsche Bank also argues that it has standing because under Colorado law it can initiate a public trustee foreclosure without producing the original Note. It cites Colo. Rev. Stat. § 38-38-101(1), which provides that the “holder of an evidence of debt” may initiate a foreclosure. An “evidence of debt” includes a promissory note such as the Note at issue here. Colo. Rev. Stat. § 38-38-100.3(8). Under certain circumstances, the “holder of an evidence of debt” can file a public trustee foreclosure without supplying the original note. See id. § 38-38-101(b)(I)-(III).

But this argument depends, first, on Deutsche Bank’s ability to show that it is a “holder of an evidence of debt.” Article 38 defines a “holder of an evidence of debt” as a person “in actual possession of” or “entitled to enforce an evidence of debt.” Colo. Rev. Stat. § 38-38-100.3(10) (emphasis added). Section 38-38-100.3(10) lists a number of presumptive holders of a debt presumed to be the “holder of an evidence of debt.” Each of these requires possession of the evidence of debt, which Deutsche Bank has thus far failed to demonstrate. See id. § 38-38-100.3(10)(a)-(d).

Deutsche Bank appears to argue that notwithstanding its failure to prove it has actual possession of the Note, it qualifies as a “person entitled to enforce an evidence of debt” under § 38-38-100.3(10) and thus is a “holder of an evidence of debt” because (1) it holds a copy of the Note indorsed in blank and (2) it can initiate a foreclosure without presenting the original Note to the public trustee. Deutsche Bank contends that it is a “qualified holder,” see id. § 38-38-100.3(21), that would be permitted under Colorado law to foreclose without presenting the original note, see id. § 38-38-101(B)(II). But foreclosure under this provision requires either the bank or its attorney to execute a statement “citing the paragraph of section 38-38-100.3(20) under which the holder claims to be a qualified holder and certifying or stating that the copy of the evidence of debt is true and correct” and that the bank agrees to “indemnify and defend any person liable for repayment of any portion of the original evidence of debt in the event that the original evidence of debt is presented for payment to the extent of any amount, other than the amount of a deficiency remaining under the evidence of debt after deducting the amount bid at sale, and any person who sustains a loss due to any title defect that results from reliance upon a sale at which the original evidence of debt was not presented.” Id. §§ 38-38-101(b)(II), 38-38-101(2)(a). There is no evidence that Deutsche Bank or its attorneys have executed such a certification or intend to do so. We therefore reject Deutsche Bank’s claim to standing founded on these statutes.

5. Conclusion

For the foregoing reasons, the evidence is insufficient as it currently stands to establish that Deutsche Bank is a “party in interest” entitled to seek relief from stay. The bankruptcy court therefore abused its discretion by granting Deutsche Bank relief from stay.

The Millers raise a number of other objections to the proceedings and orders in the bankruptcy court and the BAP but we need not reach any of them in light of the remand we now order. The judgment of the BAP is REVERSED and the case is REMANDED to the BAP with instructions to remand to the bankruptcy court for further proceedings in accordance with this opinion. The Millers’ motion for leave to file a supplemental appendix is DENIED.

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In Re: ALGER | MA BK Court Denies Countrywide & BONY’s Motion For Summary Judgment “NOTICE of RIGHT TO CANCEL”

In Re: ALGER | MA BK Court Denies Countrywide & BONY’s Motion For Summary Judgment “NOTICE of RIGHT TO CANCEL”


UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
CENTRAL DIVISION

 In re:
JAMES E ALGER, JR. and
DEBORAH J ALGER
Debtors

 

JAMES E. ALGER, JR. and DEBORAH J. ALGER, Plaintiffs,

v.

COUNTRYWIDE HOME LOANS, INC., MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., and BANK OF NEW YORK MELLON, F/K/A THE BANK OF NEW YORK, AS TRUSTEE FOR THE CERTIFICATEHOLDERS CWALT, INC., ALTERNATIVE LOAN TRUST 2006-11CB MORTGAGE PASS-THROUGH CERTIFICATES, 11CB, Defendants.

Excerpt:

Each acknowledgment form that the Algers signed contained the following language: “The undersigned each acknowledge receipt of two copies of NOTICE of RIGHT TO CANCEL and one copy of the Federal Truth in Lending Disclosure Statement.” It is unclear whether the Algers acknowledged that each of them received two copies for a total of four or whether they each acknowledged receipt of two copies in total. In analyzing the identical acknowledgment language in In re Cromwell, Judge Hillman, too, found the language ambiguous:

The placement of the word “each” before “acknowledge” renders the phrase susceptible to two meanings. First, that the Debtors acknowledged each receiving two copies as the Defendants[] assert, or second, that they each acknowledged receipt of a total of two copies as the Debtors suggest. While I understand that Countrywide intended the former as that is what the law required, the average consumer would not have necessarily known that. 2011 WL 4498875, at *17. The existence of this ambiguity neutralizes any presumption created by the acknowledgment in favor of delivery of the requisite number of Notices. See id. (resolving the ambiguity “against the drafter of the Acknowledgment such that it did not create a presumption of adequate delivery of a total of four copies”).

In the absence of a presumption of adequate delivery, the burden shifts to the defendants to prove that the Algers each received two copies of the Notice for a total of four for the couple. See id. While the defendants rely on the deposition testimony of Ms. Manugian as evidence of her general practice during closings to establish that the Algers received four copies, the Algers have attested through their affidavits that the first time their loan file was opened after the closing it contained a total of three Notices. The question of how many copies of the Notice the Algers received remains a genuine and material fact in dispute. The defendants’ motion for summary judgment is therefore DENIED.

[…]

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In RE: COLLINS | 6th BAP “whether either Litton or BoNY was the holder of a fully and properly indorsed note, MERS assignment day after the debtor filed bankruptcy”

In RE: COLLINS | 6th BAP “whether either Litton or BoNY was the holder of a fully and properly indorsed note, MERS assignment day after the debtor filed bankruptcy”


BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT

In re: ELIZABETH R. COLLINS,

Debtor.
No. 10-8085

_____________________________________

J. JAMES ROGAN, Trustee,

Appellant,

v.

LITTON LOAN SERVICING, L.P.,
THE BANK OF NEW YORK, MELLON FKA
THE BANK OF NEW YORK AS SUCCESSOR
TO JP MORGAN CHASE BANK, N.A., AS
TRUSTEE FOR THE BENEFIT OF THE
CERTIFICATE HOLDERS OF POPULAR, ABS,
INC. MORTGAGE PASS-THROUGH
CERTIFICATES SERIES 2005-3,

AIG FEDERAL SAVINGS BANK DBA
WILMINGTON FINANCE,

CITIBANK, NA, and

GMAC MORTGAGE LLC,

Appellees.

Appeal from the United States Bankruptcy Court
for the Eastern District of Kentucky
Bankruptcy Case No. 10-50990; Adv. Proceeding No. 10-05065

EXCERPT:

STEVEN RHODES, Bankruptcy Appellate Panel Judge. J. James Rogan, the trustee in this
chapter 7 case, appeals an opinion and order of the bankruptcy court dismissing his complaint. The
complaint sought a declaratory judgment to determine the validity, extent, and priority of liens on
the real property of the debtor, Elizabeth Collins, held by defendants Litton Loan Servicing, Bank
of New York, GMAC Mortgage, and Wilmington Finance. The trustee also appeals an opinion and
order of the bankruptcy court granting a motion to vacate the default judgment entered against
Wilmington Finance.

For the reasons that follow, as to defendants Litton Loan Servicing and Bank of New York,
the Panel vacates the dismissal and remands the matter for further proceedings to determine who was
the holder of the first mortgage on the date of filing, and if it was either Litton Loan Servicing or
Bank of New York, then whether either was the holder of a fully and properly indorsed note.

[…]

On the day after the first mortgage was recorded, February 5, 2005, Wilmington Finance
assigned the mortgage to Mortgage Electronic Registration Systems, Inc. (“MERS”). On June 16,
2005, this assignment was recorded. (Addendum to Br. of Bank of New York, February 16, 2011,
app. case no. 10-8085, ex. 2.)

The record also includes an assignment dated March 26, 2010, the day after the debtor filed
bankruptcy. MERS assigned this mortgage to the Bank of New York Mellon f/k/a The Bank of New
York, as successor to JPMorgan Chase Bank, N.A. as trustee for the benefit of the certificate holders
of Popular ABS, Inc. Mortgage Pass-Through Certificates Series 2005-3 c/o Litton Loan Servicing.
(bankr. claim 1-1.) On April 7, 2010, which was twelve days after the debtor filed bankruptcy, this
assignment was recorded. Thus, on the day that the debtor filed bankruptcy, it appears that neither
Bank of New York nor Litton Loan Servicing held any interest in the first mortgage. Inexplicably
however, the debtor listed Bank of New York/Litton Loan Servicing on schedule D as the secured
creditor holding the first mortgage. (bankr. dkt. #1.) Schedule D appears to have been filed on the
date of the petition. The record does not provide an explanation for how the debtor would have
known that Bank of New York/Litton Loan Servicing would be the secured creditor prior to the
assignment.

[…]

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IN RE CHALGREN, Bankr. Court, ND California “Lender Processing Services admits faults in the documents produced by the DOCX office”

IN RE CHALGREN, Bankr. Court, ND California “Lender Processing Services admits faults in the documents produced by the DOCX office”


NOTE: Korell Harp misspelled, also see signature variations below.

In re: RICHARD AND KAREN CHALGREN, Chapter 13, Debtors.
RICHARD AND KAREN CHALGREN, Plaintiffs,
v.
DEUTSCHE BANK NATIONAL TRUST COMPANY, ET AL., Defendants.

Case No. 09-56729 ASW, Adv. Proc. No. 10-5057.
United States Bankruptcy Court, N.D. California.
October 7, 2011.

MEMORANDUM DECISION ON MOTIONS TO DISMISS

ARTHUR S. WEISSBRODT, Bankruptcy Judge.

Before this Court are two motions to dismiss the First Amended Complaint of debtors Richard Scott Chalgren and Karen Chalgren (” Plaintiffs”). For the following reasons, this Court grants Defendants’ motions with leave to amend with regard to the first, second, third, and sixth causes of action. This Court denies Defendants’ motions to dismiss with regard to the fifth cause of action and grants the motions in part with regard to the fourth cause of action.

This Memorandum Decision constitutes the Court’s findings of fact and conclusions of law, pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.

A. PROCEDURAL HISTORY

Plaintiffs initiated this adversary proceeding on February 25, 2010. On July 27, 2010, defendants American Home Mortgage Corp. d/b/a American Brokers Conduit and AHM SV, Inc. f/k/a American Home Mortgage Servicing, Inc. filed a Suggestion of Bankruptcy in this adversary proceeding. Prior motions to dismiss were granted in part and denied in part at a hearing on September 20, 2010. Plaintiffs filed an amended complaint on November 2, 2010 (“First Amended Complaint”). The First Amended Complaint alleges six causes of action. The first cause of action is for violation of California Civil Code section 2923.5. The second cause of action is for violation of Real Estate Settlement Procedures Act, 12 U.S.C. §§ 2601-2617 (“RESPA”). The third cause of action is for violation of the automatic stay of the Bankruptcy Code. The fourth cause of action is for declaratory relief. The fifth cause of action is for injunctive relief. The sixth cause of action is for cancellation of the deed of trust and other instruments and records.

On November 16, 2010, Defendants Deutsche Bank National Trust Company, Deutsche Bank National Trust Company as Trustee of the GSR Mortgage Loan Trust 2006-OA1 (“Deutsche Bank as Trustee”), and American Home Mortgage Servicing, Inc. (“AHMSI”) filed a motion to dismiss the First Amended Complaint (“First Motion to Dismiss”). On November 29, 2010, Defendants Fidelity National Title Company and Default Resolution Network filed a motion to dismiss the First Amended Complaint (“Second Motion to Dismiss”).

The First Motion to Dismiss asserts that Plaintiffs’ response to the First Motion to Dismiss should not be considered by this Court because the response is late-filed, and that Plaintiffs have failed to meet the pleading requirements of Federal Rule of Civil Procedure 8(a). Both motions to dismiss also allege that the First Amended Complaint should be dismissed on the merits for various reasons.

Regarding the purported late-filing of Plaintiffs’ response to the First Motion to Dismiss, the hearing on the First Motion to Dismiss was originally set for December 16, 2010, meaning that Plaintiffs’ response should have been filed by December 2, 2010. No such response was filed. On December 6, 2010, Plaintiffs filed an opposition to a motion for relief from stay with a caption containing this adversary proceeding’s number. On December 10, 2010, pursuant to an amended notice of hearing, the hearing on the First Motion to Dismiss was continued to January 14, 2011. Plaintiffs’ response was filed on December 30, 2010, which is timely under the local rules with respect to the continued hearing date. While Plaintiffs should abide in the future with the deadlines set out in the local rules, there is no prejudice such that the First Amended Complaint should be dismissed and the merits of Plaintiffs’ opposition ignored.

In Plaintiff’s opposition filed on December 30, 2010, Plaintiffs agreed to amend the First Amended Complaint with regard to the first, second, and third causes of action in response to the motions of defendants Fidelity National Title Company, Default Resolution Network, Deutsche Bank National Trust Company, Deutsche Bank as Trustee, and AHMSI (collectively,” Defendants”), as well as to delete the sixth cause of action. The Court held a hearing on both motions to dismiss on January 14, 2011.

At the hearing on January 14, 2011, the Court provided the parties with the Suggestion of Bankruptcy filed by American Brokers Conduit and American Home Mortgage Servicing, Inc. in this adversary proceeding and asked the parties to submit supplemental briefs regarding why the motions to dismiss should proceed notwithstanding the automatic stay of the bankruptcy case of Defendant American Brokers Conduit. The matter was continued to March 1, 2011 with the parties to file a joint statement prior to the hearing.

On February 18, 2011, the parties filed a joint statement which the Court reviewed. The Court subsequently issued an order on February 23, 2011 taking the motions to dismiss off calendar without prejudice to being restored upon the filing of appropriate legal authority and/or declarations showing that this Court can proceed notwithstanding the automatic stay in Defendant American Brokers Conduit’s bankruptcy case.

On May 2, 2011, Plaintiffs dismissed American Brokers Conduit from this adversary proceeding. The motions to dismiss were re-set for hearing on June 30, 2011 at a Case Management Conference held on May 6, 2011. The June 30, 2011 hearing was continued to July 14, 2011 by stipulation of the parties. The July 14, 2011 hearing was taken off calendar to allow the Court to issue a written decision.

Meanwhile, on May 18, 2011, attorney Mitchell Abdallah substituted in as counsel for Plaintiffs.

On July 11, 2011, Plaintiffs filed a Second Amended Complaint.[1] The Second Amended Complaint named American Brokers Conduit as a defendant and did not make any substantive changes to the third, fourth, or sixth causes of action that Plaintiffs had said would be made. The Court suggests that if Plaintiffs file another amended complaint, Plaintiffs should consider that it appears to the Court that the bankruptcy case of American Brokers Conduit, case number 07-11051, is still pending in the District of Delaware. Plaintiffs should also consider that: (1) a cause of action under the Real Estate Settlement Procedures Act, 12 U.S.C. §§ 2601-2617 (” RESPA”) should specify which section(s) of RESPA Defendants allegedly violated; and (2) Plaintiffs should allege sufficient facts about the contents of Plaintiffs’ alleged letters to AHMSI to show that the letters qualify as “qualified written requests” under RESPA.

B. FACTUAL BACKGROUND

The following facts are drawn from the First Amended Complaint, as alleged by Plaintiffs, but have not yet been proven. On or about April 4, 2006, Plaintiffs obtained a home loan and executed a promissory note in favor of American Brokers Conduit. The note was secured by a deed of trust on 411 Quail Run in Aptos, California (the “Property”). Defendant Mortgage Electronic Registration Systems (“MERS”) was listed as the beneficiary of the deed of trust, but MERS never held the note.

On February 1, 2009, Plaintiff Richard Chalgren became unable to work due to a physical disability and suffered a loss of income. Plaintiffs were unable to make the monthly payment on the note. Plaintiffs wrote letters to the loan servicer, AHMSI, requesting the name, address, and telephone number of the holder of the note and the name and address of any agent of the holder of the note which could discuss loan modification options with Plaintiffs. However, AHMSI did not respond to Plaintiffs’ letters and still, to this day, has failed to respond to Plaintiffs’ letters. The failure of AHMSI to respond caused Plaintiffs to suffer emotional distress.

On May 5, 2009, AHMSI, Default Resolution Network, and Fidelity National Title Company acted in concert to cause a notice of default to be recorded in the official records of the county of Santa Cruz. The notice of default falsely stated that Default Resolution Network had contacted Plaintiffs before the notice of default was recorded as required by California Civil Code section 2923.5.

On June 25, 2009, MERS as nominee for defendant American Brokers Conduit assigned the deed of trust to Deutsche Bank as Trustee. Kolrell Harper signed this document on June 30, 2009 as Vice President of MERS. The assignment was produced by defendant DOCX, LLC which is a subsidiary of defendant Lender Processing Services. Lender Processing Services has admitted that there were faults in the documents produced by the DOCX office and Plaintiffs are informed and believe that there was widespread document fraud.

The note was bundled into a pool of home mortgages which were securitized and sold to investors. At the time the note was assigned to the trust, the trust was closed. Also, at the time of the assignment, American Brokers Conduit was in a Chapter 11 bankruptcy proceeding, but the assignment was made without approval from the bankruptcy court overseeing the American Brokers Conduit bankruptcy case.

On July 6, 2009, an instrument was recorded in the official records of the county of Santa Cruz purporting to be an assignment of the deed of trust from MERS to Deutsche Bank National Trust Company.

On July 17, 2009, Plaintiffs sent demand letters via certified mail to Defendants pursuant to RESPA, wherein Plaintiffs requested the name of the holder of the note or the agent for such holder with authority to discuss loan modifications. Defendants have failed to respond to those demand letters, causing Plaintiffs to be unable to communicate with anyone with the authority to modify Plaintiffs’ loan and threatening Plaintiffs with the loss of Plaintiffs’ home of 15 years.

On August 14, 2009, Plaintiffs filed this chapter 13 bankruptcy petition.

On September 4, 2009, defendants Fidelity National Title Company, AHMSI, and Power Default Services acted in concert to cause a notice of trustee’s sale to be recorded in the official records of the county of Santa Cruz in violation of the automatic stay. This recordation caused Plaintiffs emotional distress.

C. LEGAL STANDARD

The Ninth Circuit has stated that the standard of review for motions to dismiss is:

The nature of dismissal requires us to accept all allegations of fact in the complaint as true and construe them in the light most favorable to the plaintiffs. However we are not required to accept as true conclusory allegations which are contradicted by documents referred to in the complaint, and we do not . . . necessarily assume the truth of legal conclusions merely because they are cast in the form of factual allegations.

Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003) (citations and internal quotations omitted).

D. ANALYSIS

The First Motion to Dismiss asserts that the First Amended Complaint fails to differentiate between Defendants in violation of Federal Rule of Civil Procedure 8 (a), as incorporated by Federal Rule of Bankruptcy Procedure 7008. The Court has reviewed the First Amended Complaint and has determined that the First Amended Complaint identifies the transactions giving rise to the causes of action and puts each Defendant on notice of each Defendant’s alleged conduct. The First Motion to Dismiss is denied on this basis.

(1) Plaintiffs’ First Cause of Action

The first cause of action is against AHMSI, Default Resolution Network, and Fidelity National Title Company for violation of California Civil Code section 2923.5. Plaintiffs assert that Default Resolution Network did not contact Plaintiffs about alternatives to foreclosure prior to recording the notice of trustee’s sale. The First Amended Complaint only requests damages for this statutory violation.

The First Motion to Dismiss asserts that Plaintiffs need to allege tender before obtaining a postponement of the foreclosure sale. However, the case of Mabry v. Superior Court, 185 Cal. App. 4th 208, 214 (2010), relied on by Defendants, explicitly held that tender was not required to postpone a foreclosure sale under California Civil Code section 2923.5. Mabry, 185 Cal. App. 4th at 213. In any event, Plaintiffs are only required to allege that Plaintiffs attempted to tender — or were capable of tendering — the value of the property, or that such equitable circumstances existed that conditioning rescission on any tender would be inappropriate. Mangindin v. Washington Mutual Bank, 637 F. Supp. 2d 700, 706 (N.D. Cal. 2009).

However, as conceded by Plaintiffs, the remedy for a violation of California Civil Code section 2923.5 is not damages, but a postponement of the foreclosure sale to allow such communications to take place. Mabry, 185 Cal. App. 4th at 214. Because the requested damages are not available, this Court dismisses this cause of action with leave to amend.

(2) Second Cause of Action

The second cause of action is against AHMSI for violation of RESPA for failure to respond to Plaintiffs’ letters requesting information relating to the identity of the holder of the note and such holder’s authorized agent. Plaintiffs have not provided copies of the letters to this Court. The First Motion to Dismiss asserts that Plaintiffs need to specify which section of RESPA AHMSI allegedly violated, and Plaintiffs have indicated, in Plaintiffs’ opposition to that motion, that Plaintiffs plan to specify 12 U.S.C. section 2605(f)(1) in any amended complaint.

While the First Motion to Dismiss asserts that the First Amended Complaint fails to allege damages caused by AHMSI’s failure to respond, the First Amended Complaint’s statement of facts alleges that the failure of AHMSI to respond caused Plaintiffs great emotional distress. This Court notes that the courts are divided on whether emotional distress damages are recoverable under section 2605(f)(1). Compare Allen v. United Financial Mortg. Corp., 660 F. Supp. 2d 1089, 1097 (N.D. Cal. 2009), with Espinoza v. Recontrust Co., N.A., 2010 WL 2775753, *4 (S.D. Cal. July 13, 2010). However, this Court will not decide this legal issue at the pleading stage. Therefore, the cause of action is not dismissed on this basis.

The First Motion to Dismiss also asserts that Plaintiffs’ letters do not qualify as “Qualified Written Requests” under RESPA. The statute defines a Qualified Written Request as either (1) a letter saying that the account is in error, or (2) a letter requesting other information. 12 U.S.C. § 2605(e)(1)(b). The RESPA statute provides that a response is required when the letter requests information relating to the servicing of the loan. 12 U.S.C. § 2605(e) (1) (a). Servicing is defined as: “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, . . . and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.” 12 U.S.C. § 2605(i).

While the First Motion to Dismiss asserts that Plaintiffs must allege that the letters stated that the account was in error, the statute defining what constitutes a Qualified Written Response is written in the disjunctive, and Plaintiffs have asserted that the letters contained requests for other information. This Court agrees with United States District Judge Fogel’s reading of 12 U.S.C. § 2605(e)(1)(b) found in Luciw v. Bank of America, N.A., 2010 WL 3958715, *3 (N.D. Cal. Oct. 7, 2010), which holds that a letter can be a Qualified Written Request even if the letter does not state that the account is in error. The Court notes that the statute does not clearly state that a letter is not a Qualified Written Response if the letter requests information both about the servicing of the loan and information not related to the servicing of the loan. Luciw, 2010 WL 3958715 at *3.

However, the First Amended Complaint fails to allege sufficient facts about the contents of the letters to show that Plaintiffs’ letters were related to the servicing of the loan such as to give rise to a statutory obligation by AHMSI to respond. The First Amended Complaint alleges that the letters request the identity of the holder of the note or such holder’s agent, which does not appear to relate to the receipt or application by AHMSI of periodic payments received from Plaintiffs. While Plaintiffs’ December 6, 2010 opposition to a motion for relief from stay provides a copy of the letter sent by Plaintiffs to Defendants, the Court is not considering that letter at this time because the letter was not incorporated into the First Amended Complaint.

The Court dismisses the second cause of action with leave to amend.

(3) Third Cause of Action

The third cause of action is against Fidelity National Title Company and AHMSI for violation of the automatic stay pursuant to Bankruptcy Code section 362(k). While the Second Motion to Dismiss asserts that this cause of action should be dismissed for failure to allege conduct rising to a requisite level of outrageousness, the determination of outrageousness is a factual issue, and the case relied upon in the Second Motion to Dismiss is a California state law case not involving Bankruptcy Code section 362(k).

However, both motions to dismiss assert that the First Amended Complaint fails to allege that the two defendants willfully violated the automatic stay. Bankruptcy Code section 362(k) clearly requires a willful violation. In re Bloom, 875 F.2d 224, 227 (9th Cir. 1989). The First Amended Complaint contains no allegations of willfulness and/or knowledge of the bankruptcy case on the part of Fidelity National Title Company and/or AHMSI, and Plaintiffs have indicated that Plaintiffs plan to amend the First Amended Complaint to so allege. The Court dismisses the third cause of action with leave to amend.

(4) Fourth Cause of Action

The fourth cause of action is against all Defendants for declaratory relief. The First Amended Complaint requests the following declaratory relief: (1) a finding that the deed of trust is unenforceable because the deed of trust was severed from the note, rendering the note unsecured; (2) a finding that the notice of default is void because the deed of trust was unenforceable; (3) a finding that assignment of the deed of trust to Deutsche Bank as Trustee is of no effect because the assignment was (a) made while American Brokers Conduit was in bankruptcy and (b) made after the securitized trust had closed; and (4) a finding that the notice of trustee’s sale is void for being in violation of the automatic stay. This cause of action does not request that the note and deed of trust be rescinded or otherwise set aside.

Both motions to dismiss assert that the fourth cause of action must be dismissed because the First Amended Complaint fails to allege that Plaintiffs either have tendered, or can tender, the amount of the outstanding loan balance. All but one of the cases cited by Defendants are cases in which a party requested quiet title or declaratory relief rescinding a loan contract, and those cases are not applicable.

The reasoning of Chavez v. Recontrust Co., 2008 WL 5210893 (E.D. Cal. Dec. 11, 2008), is not disposative here and this Court does not agree with it in any event. In Chavez, a plaintiff requested — among other things — an injunction against a foreclosure sale without either alleging that the plaintiff had tendered, or was able to tender, the amount outstanding on the loan. The Chavez court held: “[t]he law is long-established that a trustor or his successor must tender the obligation in full as a prerequisite to challenge of the foreclosure sale.” Chavez, 2008 WL 5210893 at *6 (quoting U.S. Cold Storage v. Great Western Savings & Loan Assn., 165 Cal. App. 3d 1214, 1222, (1985)). The quoted language is inapposite because the language of U.S. Cold Storage refers to an attempt to undo a foreclosure sale after the fact, rather than a request for declaratory relief based on a finding that a foreclosure sale cannot proceed because the wrong party is seeking to foreclose.

In the context of Truth in Lending Act (“TILA”) violations, Judge Ware has held that the Ninth Circuit “gives a trial court discretion to condition rescission on a tender by the borrower of the property, or the property’s reasonable value, to the lender. Yamamoto v. Bank of New York, 329 F.3d 1167, 1171 (9th Cir. 2003). Mangindin, 637 F. Supp. 2d at 705-06. Judge Ware stated:

Notably absent from Plaintiffs’ Complaint is any allegation that they attempted to tender, or are capable of tendering, the value of the property pursuant to the rescission framework established by TILA. Nor do Plaintiffs allege that such equitable circumstances exist that conditioning rescission on any tender would be inappropriate. Thus, the Court finds that Plaintiffs have failed to adequately allege that they are entitled to rescission under TILA.

Mangindin, 637 F. Supp. 2d at 706. Thus, Plaintiffs are only required to allege that Plaintiffs attempted to tender — or were capable of tendering — the value of the property, or that such equitable circumstances existed that conditioning rescission on any tender would be inappropriate.

The First Motion to Dismiss also asserts that the California nonjudicial foreclosure statutes do not require a foreclosing lender to produce the original copy of the note in order to foreclose. However, the First Amended Complaint does not request declaratory relief based on a finding that a foreclosure cannot take place because no party holds an original copy of the note. The First Amended Complaint seeks declaratory relief regarding whether the note is secured; whether the assignment of the note is of any legal effect; and whether the notice of trustee’s sale is void.

The First Motion to Dismiss next asserts that the First Amended Complaint fails to allege with sufficient specificity that the purported transfer of the note from American Brokers Conduit took place while American Brokers Conduit was a debtor in a bankruptcy proceeding. The First Amended Complaint clearly alleges that: “at the time of the assignment, American Broker’s Conduit was in a bankruptcy proceeding under chapter 11 of the U.S. Bankruptcy Code. Plaintiffs are informed and believe that the bankruptcy court did not authorize or approve the assignment of the deed of trust. . . .” First Amended Complaint at page 6, ¶ 20. This allegation is more than a mere threadbare recital and is sufficient to withstand this motion to dismiss. Therefore, the cause of action is not dismissed on this basis.

The First Motion to Dismiss asserts that American Brokers Conduit transferred the note and deed of trust on June 5, 2006 and provides a copy of a loan history for the property. This Court will not take judicial notice of the copy at this time because Plaintiffs have objected to the admissibility of this document and the copy was not part of an official record or court decision.

The First Motion to Dismiss also argues that — even if the deed of trust was transferred out of the bankruptcy estate of American Brokers Conduit without bankruptcy court approval — Plaintiffs have no standing to challenge the transfer. Plaintiffs assert that Plaintiffs have standing because the legal effect of the transfer directly affects Defendants’ ability to foreclose on Plaintiffs’ home. American Brokers Conduit filed for relief under chapter 11 as case number 07-11047 in the Bankruptcy Court for the District of Delaware. Bankruptcy Code section 1109(b) provides: “a party in interest . . . may raise and may appear and be heard on any issue in a case under this chapter.” 11 U.S.C. § 1109(b). The term party in interest is meant to be elastic, and whether a party is a party in interest is determined by the facts of the case. In re Amatex Corp., 755 F.2d 1034, 1042 (3d Cir. 1985). The First Amended Complaint clearly alleges that Plaintiffs have a very practical stake in the legal effectiveness of the transfer of the deed of trust. At least insofar as Plaintiffs seek to challenge that transfer, Plaintiffs’ interest in the American Brokers Conduit bankruptcy proceeding is sufficient to make Plaintiffs a party in interest.

The First Motion to Dismiss further asserts that, even if the assignment took place after American Brokers Conduit filed for bankruptcy, the assignment was in the ordinary course of business and did not require bankruptcy court approval. Under these circumstances, any assignment would be valid. 11 U.S.C. § 363(c)(1). The First Amended Complaint only alleges that the assignment was made when American Broker’s Conduit was in bankruptcy and that there was no authorization from the bankruptcy court, which is only required if the assignment was made outside of the ordinary course of business. Because the First Amended Complaint fails to allege that the assignment was not in the ordinary course of business, this Court dismisses the fourth cause of action with leave to amend with respect to the fact that the assignment from American Brokers Conduit was invalid as an unauthorized post-petition transfer from a bankruptcy debtor.

Finally, the First Motion to Dismiss asserts that the First Amended Complaint must be dismissed because Plaintiffs’ bad faith — as evidenced by Plaintiffs’ failure to tender or to make post-petition payments on the note — estops Plaintiffs from seeking equitable relief. However, the issue of Plaintiffs’ bad faith is a factual issue which this Court will not decide at the motion to dismiss stage. Also, as previously mentioned, this Court does not hold — and leaves for trial, a possible summary judgment motion or other context — Defendants’ contention that alleging tender in the particular manner that Defendants say is mandatory is a requirement to obtaining the declaratory relief sought in Plaintiffs’ First Amended Complaint. Mangindin, 637 F. Supp. 2d at 706.

For the above reasons, this Court dismisses the fourth cause of action with leave to amend only insofar as the fourth cause of action requests a finding that the assignment from American Brokers Conduit was without legal effect for being an unauthorized post-petition transfer from a bankruptcy debtor.

(5) Fifth Cause of Action

The fifth cause of action is against all Defendants for injunctive relief. Plaintiffs request an injunction against a foreclosure sale of the property. Both motions to dismiss assert that this cause of action should be dismissed because injunctive relief cannot be granted without the existence of a substantive cause of action. Shell Oil Co. v. Richter, 52 Cal. App. 2d 164, 168 (Cal. App. 1942). The First Amended Complaint has adequately pled a substantive cause of action for declaratory relief, so the motions to dismiss are denied as to the fifth cause of action.

(6) Sixth Cause of Action

The sixth cause of action is against all Defendants for cancellation of the deed of trust and other instruments and records. In Plaintiffs’ responses to both motions to dismiss, Plaintiffs have agreed to delete the sixth cause of action from future amended complaints based on Defendants’ arguments. Because, as noted earlier, Plaintiffs could allege that Plaintiffs attempted to tender — or were capable of tendering — the value of the property, or that such equitable circumstances exist that conditioning rescission on any tender would be inappropriate, this Court dismisses the sixth cause of action with leave to amend.

E. CONCLUSION

For the forgoing reasons, Defendants’ motions are granted in part with leave to amend and denied in part. Counsel for each set of moving parties shall prepare a form of order consistent with this ruling and submit the proposed order to the Court after service on counsel for Plaintiffs. The Court prefers for all counsel to sign off on the form of order.

[1] Defendants oppose Plaintiffs’ filing of the Second Amended Complaint. Plaintiffs filed the Second Amended Complaint without leave from the Court or consent from Defendants as required by Federal Rule of Civil Procedure Rule 15(a)(2), incorporated by Federal Rule of Bankruptcy Procedure Rule 7015. The Court is deciding these motions to dismiss as to the First Amended Compliant only, and not as to the Second Amended Complaint.

Various Signatures of Korell Harp

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IN RE JOHNSON: BK Court, ED Arkansas “J.P. Morgan was not qualified to use Non-judicial foreclosure process when it initiated against these Debtors”

IN RE JOHNSON: BK Court, ED Arkansas “J.P. Morgan was not qualified to use Non-judicial foreclosure process when it initiated against these Debtors”


In re DANIEL L. JOHNSON and SUSAN D. JOHNSON, Chapter 13 Debtors.
In re TAMMY R. PEEKS, Chapter 13 Debtor.
In re TRACY L. ESTES, Chapter 13 Debtor.

Case Nos. 3:10-bk-19119, 3:11-bk-10602, 3:10-bk-16541

 

 

United States Bankruptcy Court, E.D. Arkansas, Jonesboro Division. 
September 28, 2011.

MEMORANDUM OPINION AND ORDER OVERRULING OBJECTIONS TO CONFIRMATION

AUDREY R. EVANS, Bankruptcy Judge

In a consolidated hearing on July 14, 2011, the Court heard the Objection to Confirmation of Plan filed by Chase Home Finance, L.L.C. (“Chase”) in the case of Daniel and Susan Johnson, Case No. 3:10-bk-19119 (the “Johnson Objection to Confirmation”); the Objection to Confirmation of Plan filed by J.P. Morgan Chase Bank, N.A. (“J.P. Morgan”) in the case of Tammy Renae Peeks, Case No. 3:11-bk-10602 (the “Peeks Objection to Confirmation”); and the Objection to Confirmation of Plan filed by Chase in the case of Tracy L. Estes, Case No. 3:10-bk-16541 (the “Estes Objection to Confirmation”) (collectively the “Objections to Confirmation”). J.P. Morgan appeared through its counsel, Kimberly Burnette of Wilson & Associates, P.L.L.C.[1] The Debtors in all three cases were represented at the hearing by Joel Hargis of Crawley & DeLoache, P.L.L.C. Kathy A. Cruz of The Cruz Law Firm, P.L.L.C., also appeared as co-counsel for the Debtor, Tracy L. Estes. At the outset of the hearing, the parties agreed that the facts of the cases were not in dispute, and that the same underlying issue of law was present in each case. For that reason, the hearings were consolidated. The Court accepted evidence and heard the arguments of counsel.[2] At the close of the hearing, the Court took the matter under advisement.

This is a core proceeding under 28 U.S.C. § 157(b)(2)(L). This Order shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule of Procedure 7052. To the extent that any finding of fact is construed as a conclusion of law, it is adopted as such; to the extent that any conclusion of law is construed as a finding of fact, it is adopted as such. As explained herein, the Court overrules the Objections to Confirmation.

FACTS

The parties stipulated that at the time of the foreclosure proceedings at issue in these cases, neither Chase nor J.P. Morgan was “authorized to do business” in the state of Arkansas as required by § 18-50-117 of the Arkansas Statutory Foreclosure Act of 1987, Ark. Code Ann. §§ 18-50-101, et seq. (the “Statutory Foreclosure Act”). Additionally, the Court finds the following to be the facts of each case:

The Johnson Case

Chase initiated non-judicial foreclosure proceedings, through Arkansas’ Statutory Foreclosure Act, against a property owned by Daniel and Susan Johnson. On December 20, 2010, the Johnsons filed a Chapter 13 bankruptcy bringing that non-judicial foreclosure to a halt. In their bankruptcy case, the Johnsons filed a Chapter 13 plan listing Chase as a long-term secured creditor that was owed an arrearage of $7,485. On March 2, 2011, Chase filed the Johnson Objection to Confirmation claiming that the correct arrearage amount was $14,072.81. Chase filed a proof of claim in the case (the “Johnson Proof of Claim”) claiming a secured debt of $187,468.21, which included the $14,072.81 arrearage, and explained that $1,380 of the arrearage was for foreclosure fees and costs. On July 4, 2011, Chase transferred the Johnson Proof of Claim to J.P. Morgan.

The Peeks Case

J.P. Morgan initiated a non-judicial foreclosure proceeding, through Arkansas’ Statutory Foreclosure Act, against property owned by Tammy Renae Peeks. To initiate the foreclosure process, J.P. Morgan granted Wilson & Associates, P.L.L.C. (“Wilson & Associates”) a limited power of attorney authorizing Wilson & Associates to conduct the foreclosure.[3] On January 31, 2011, Ms. Peeks filed a Chapter 13 bankruptcy bringing the non-judicial foreclosure to a halt. On February 10, 2011, Ms. Peeks filed a proposed Chapter 13 plan that listed J.P. Morgan as a long-term secured creditor that was owed an arrearage of $7,500. On March 21, 2011, J.P. Morgan filed the Peeks Objection to Confirmation asserting that the correct arrearage amount was $10,089.19. J.P. Morgan filed a proof of claim in the Peeks case on July 13, 2011 (the “Peeks Proof of Claim”) claiming a secured debt of $133,172.09, which included an arrearage of $9,516.72, and explained that $2,400.02 of the arrearage was for foreclosure fees and costs.

The Estes Case

Chase initiated non-judicial foreclosure proceedings, through Arkansas’ Statutory Foreclosure Act, against a property owned by Tracy L. Estes. On September 8, 2010, Ms. Estes filed a voluntary petition for bankruptcy under Chapter 13, bringing that non-judicial foreclosure to a halt. On September 21, 2010, Ms. Estes filed a proposed Chapter 13 plan listing Chase as a long-term secured creditor that was owed an arrearage of $8,000. Chase filed the Estes Objection to Confirmation on October 20, 2010, asserting that the correct arrearage amount was $10,537.36. Chase filed a proof of claim in the Estes case on October 28, 2010 (the “Estes Proof of Claim”), claiming a secured debt of $37,041.96, which included an arrearage of $10,509.36, and explained that $2,706.56 of the arrearage was for to foreclosure fees and costs. On May 25, 2011, Chase filed an amended proof of claim adjusting the arrearage from $10,509.36 to $10,502.22. On July 14, 2011, Chase transferred the Estes Proof of Claim to J.P. Morgan.

DISCUSSION

The question before the Court is whether the Debtors owe J.P. Morgan the foreclosure fees and costs listed on its proofs of claims. The Bankruptcy Code allows a debtor in a Chapter 13 bankruptcy case to cure a default on a debt for its home mortgage through the plan. 11 U.S.C. §§ 1322(b)(3), (5). In order for that plan to be confirmed, a debtor must pay the default arrearage amount in full. The amount owed in order to cure a default is “determined in accordance with the underlying agreement and applicable nonbankruptcy law.” 11 U.S.C. § 1322(e). This determination poses two separate inquires: first, what fees and costs are allowed by the agreement between the parties, and second, what fees and costs are allowed by the applicable law. See In re Bumgarner, 225 B.R. 327, 328 (Bankr. D.S.C. 1998).

In these cases, there is no dispute that the foreclosure fees and costs are owed under the parties’ agreements because the instrument used to create each debt gives J.P. Morgan “the right to be paid back by me for all of its costs and expenses in enforcing this Note . . . .” The only question in each of these three cases is whether the foreclosure fees and costs are allowed by the controlling law. The controlling law is Arkansas’ Statutory Foreclosure Act (i.e., Arkansas’ non-judicial foreclosure procedure), and the issue is whether J.P. Morgan was qualified to use Arkansas’ non-judicial foreclosure procedure when it initiated the foreclosure proceedings against these Debtors.

The Debtors argue that J.P. Morgan was not qualified to use the non-judicial foreclosure process because § 18-50-117 of the Statutory Foreclosure Act requires an entity to be authorized to do business in Arkansas, and that J.P. Morgan was not in compliance with that requirement.

J.P. Morgan stipulated that it was not authorized to do business as is required Ark. Code Ann. § 18-50-117. Nonetheless, it maintains that it was qualified to use Arkansas’ non-judicial foreclosure process. J.P. Morgan makes three arguments in support of its position. First, J.P. Morgan argues that its compliance with § 18-50-102 of the Statutory Foreclosure Act enabled it to legitimately employ the non-judicial foreclosure process without being authorized to do business in the state as required by Ark. Code Ann. § 18-50-117. Second, J.P. Morgan argues that the authorized-to-do-business requirement is superseded by a conflicting provision in Arkansas’ Wingo Act, Ark. Code Ann. § 4-27-1501, and finally, that it is preempted by federal law through the provisions of the National Banking Act.

For the reasons discussed below, the Court finds that J.P. Morgan was not qualified to use the Arkansas non-judicial foreclosure process when it initiated the foreclosures against these Debtors. J.P. Morgan failed to comply with the authorized-to-do-business requirement of Ark. Code Ann. § 18-50-117, and nothing in Ark. Code Ann. § 18-50-102, the Wingo Act, or the National Banking Act allowed it to conduct those proceedings without meeting that requirement. Absent compliance with Ark. Code Ann. § 18-50-117, J.P. Morgan’s avenue for foreclosing on these properties was that of judicial foreclosure through the courts, not through Arkansas’ non-judicial foreclosure process. As a result, the foreclosure fees and costs incurred by Chase and J.P. Morgan are not owed by the Debtors, and need not be included in the Debtors’ repayment plans in order for those plans to be confirmed.

Finally, both parties request their attorney fees for pursuing or defending these matters. The Court finds that an award of attorney fees to the Debtors is warranted.

The Statutory Foreclosure Act

In 1987, the Arkansas legislature enacted the Statutory Foreclosure Act, which authorized the use of non-judicial foreclosure proceedings as an alternative to judicial foreclosure proceedings. Ark. Code Ann. §§ 18-50-101, et seq. See also Union Nat’l Bank v. Nichols, 305 Ark. 274, 278, 807 S.W.2d 36, 38 (1991) (“The procedure is designed to be effectuated without resorting to the state’s court system . . . .”). These statutory provisions must be strictly construed. See Robbins v. M.E.R.S., 2006 WL 3507464, at *1 (Ark. Ct. App. 2006) (“It is also true that the Arkansas Statutory Foreclosure Act, being in derogation of common law, must be strictly construed.”).[4]

The parties’ arguments are based on two provisions of the Statutory Foreclosure Act; Ark. Code Ann. § 18-50-117 and Ark. Code Ann. § 18-50-102. Each of these two provisions places a restriction on who can use Arkansas’ non-judicial foreclosure process. The first provision, Ark. Code Ann. § 18-50-117, requires a creditor to be authorized to do business in Arkansas before employing the state’s non-judicial foreclosure process. Ark. Code Ann. § 18-50-117 (“No person, firm, company, association, fiduciary, or partnership, either domestic or foreign shall avail themselves of the procedures under this chapter unless authorized to do business in this state.”) (emphasis added).[5] The second provision, Ark. Code Ann. § 18-50-102, limits who can be a party to a non-judicial foreclosure proceeding to three categories of persons or entities: (1) trustees or attorneys-in-fact, (2) financial institutions, and (3) Arkansas state agencies. See Ark. Code Ann. § 18-50-102.[6] Further, this provision requires that in order to qualify, a “trustee or attorney-in-fact” must be a licensed member of the Arkansas bar, or a law firm who employs a licensed member of the Arkansas bar. Ark. Code Ann. § 18-50-102(a)(1).

The Debtors argued that J.P. Morgan was not qualified to use the non-judicial foreclosure process because § 18-50-117 of the Statutory Foreclosure Act requires an entity to be authorized to do business in Arkansas, and J.P. Morgan stipulated that it was not in compliance with that provision. J.P. Morgan argued that it was not required to comply with Ark. Code Ann. § 18-50-117 because it authorized Wilson & Associates to conduct the foreclosures as its attorney-in-fact, pursuant to Ark. Code Ann. § 18-50-102(a)(1). This argument extends in two directions.[7]

Specifically, one extension of J.P. Morgan’s argument is that when the attorney-in-fact category of § 18-50-102 is used, the authorized-to-do-business requirement of § 18-50-117 does not apply. The Court finds no support for this argument. The language of Ark. Code Ann. § 18-50-117 is broad, specifically stating that it is applicable to every “person, firm, company, association, fiduciary, or partnership, either domestic or foreign . . . .” An emergency clause recorded in the sessions laws of Ark. Code Ann. § 18-50-117 explains the reason that the provision was enacted:

It is found and determined by the General Assembly of the State of Arkansas that foreign entities not authorized to do business in the State of Arkansas are availing themselves to [sic] the provisions of the Statutory Foreclosure Act of 1987; that often times it is to the detriment of Arkansas citizens; and that this act is immediately necessary because these entities should be authorized to do business in the State of Arkansas before being able to use the Statutory Foreclosure Act of 1987.

2003 Ark. Acts 1303, § 3, effective Apr. 14, 2003. The broad language of this provision, and the clear concerns set out in the legislative history, indicate that Ark. Code Ann. § 18-50-117 was meant to apply without regard to which category of person or entity is conducting the foreclosure under Ark. Code Ann. § 18-50-102.

Further, the Court finds nothing in the language of Ark. Code Ann. § 18-50-102 to indicate that it eliminates the need to comply with the authorized-to-do-business requirement of Ark. Code Ann. § 18-50-117, or that the attorney-in-fact party should be treated in any way different from the other categories of persons or entities allowed to conduct a non-judicial foreclosure proceeding. Further, the most recent enactment of Ark. Code Ann. § 18-50-102, now in effect, places several additional requirements on an attorney-in-fact before he can qualify as a party to a non-judicial foreclosure proceeding. In addition to the requirement that the attorney-in-fact be licensed in Arkansas (which was the law at the time of these foreclosure proceedings), an attorney-in-fact must now also have an office located in Arkansas, be accessible during business hours, and be able to accept funds as payment on the subject mortgage. See 2011 Ark. Acts 901, § 2, effective July 27, 2011. These recent additional restrictions to the attorney-in-fact qualification provide further evidence of the Arkansas legislature’s intent to limit access to the Statutory Foreclosure Act, not to further broaden access to that process as J.P. Morgan’s argument would necessarily require.

A second extension of J.P. Morgan’s argument is that, even if Ark. Code Ann. § 18-50-117 applies, J.P. Morgan satisfied the authorized-to-do-business requirement because its attorney-in-fact, Wilson & Associates, satisfied that requirement. This argument also fails. The procedures for appointing an attorney-in-fact to conduct the foreclosure are self-contained within the § 18-50-102 of the Statutory Foreclosure Act. This appointment is accomplished through the use of a power of attorney. Ark. Code Ann. § 18-50-102(e) (“The appointment of an attorney-in-fact by a mortgagee shall be made by a duly executed, acknowledged, and recorded power of attorney . . . .”). That power of attorney provides the attorney-in-fact only with those powers held by the appointing mortgagee. Ark. Code Ann. 18-50-102(d) (“A mortgagee may delegate his or her powers and duties under this chapter to an attorney-in-fact, whose acts shall be done in the name of and on behalf of the mortgagee.”) (emphasis added).

J.P. Morgan appointed Wilson & Associates as its attorney-in-fact through a limited power of attorney. Wilson & Associates did not initiate the foreclosure proceedings on its own behalf, but initiated those proceedings “in the name of and on behalf of” J.P. Morgan. It is J.P. Morgan’s compliance with the authorized-to-do-business requirement that is relevant, not that of Wilson & Associates. Thus, the Court finds that J.P. Morgan’s compliance with Ark. Code Ann. § 18-50-102 by electing to use an attorney-in-fact did not, by substitute, afford it compliance with the authorized-to-do-business requirement in Ark. Code Ann. § 18-50-117.

Therefore, J.P. Morgan has failed to show that its compliance with § 18-50-102 of the Statutory Foreclosure Act enabled it to legitimately employ the non-judicial foreclosure process without being authorized to do business in the state.

The Wingo Act

J.P. Morgan argues that a conflict between the Wingo Act (Ark. Code Ann. §§ 4-27-1501, et seq.), and the Statutory Foreclosure Act (Ark. Code Ann. §§ 18-50-101, et. seq.), allows J.P. Morgan to conduct non-judicial foreclosures without complying with the authorized-to-do-business requirement found in § 18-50-117 of the Statutory Foreclosure Act.

The Wingo Act is a sub-provision of the Arkansas Business Corporation Act, found at Ark. Code Ann. §§ 4-27-101, et seq. The Wingo Act states that “[a] foreign corporation may not transact business in this state until it obtains a certificate of authority from the Secretary of State.” Ark. Code Ann. § 4-27-1501(a). However, the Wingo Act also contains a non-exhaustive list of actions that do not constitute transacting business. Ark. Code Ann. § 4-27-1501(b). This list includes, among other things, the acts of “[m]aintaining, defending, or settling any proceeding[,]” and “[s]ecuring or collecting debts or enforcing mortgages and security interests in property securing the debts[.]” Ark. Code Ann. §§ 4-27-1501(b)(1), (8).

J.P. Morgan asserts that a conflict exists between the Wingo Act and the Statutory Foreclosure Act because the Wingo Act does not require a creditor to be authorized to do business in order to collect on its debt; the Statutory Foreclosure Act does. J.P. Morgan argues that the Wingo Act controls this conflict, and thus, the authorized-to-do-business requirement of the Statutory Foreclosure Act does not apply.

It is a well-settled principle of construction that where two statutes conflict, the more specific statutory provision controls. See Ozark Gas Pipeline Corp. v. Arkansas Public Service Comm’n, 342 Ark. 591, 602, 29 S.W.3d 730, 736 (2000) (“The rule is well settled that a general statute must yield when there is a specific statute involving the particular matter.”). The exclusions afforded in the Wingo Act address the broad category of “[s]ecuring or collecting debts or enforcing mortgages and security interests . . . .” Ark. Code Ann. § 18-27-1501(b)(8). The Statutory Foreclosure Act, on the other hand, deals with a specific type of collection activity — foreclosure — and an even more specific type of foreclosure — non-judicial foreclosure. Given the greater specificity of Ark. Code Ann. § 18-50-117, the Court finds that the Statutory Foreclosure Act provision carves out the specific statutory procedure of non-judicial foreclosure from the broad category of collecting debts, and as a result, controls any conflict between the two provisions.

Further, J.P. Morgan’s argument ignores the other provisions of the Wingo Act . The provision immediately following the exclusionary provision states that the consequence of transacting business without a certificate of authority is: (1) the foreign corporation is prohibited from maintaining a cause of action in the state courts, and (2) the foreign corporation must pay a monetary penalty. Ark. Code Ann. §§ 4-27-1502(a), (d)(1)(A).[8] As such, the exclusions allowed by § 4-27-1501(b) of the Wingo Act enable a foreign corporation to conduct some activities (including collection activities) without being subject to the consequences found in § 4-27-1502. In other words, under the Wingo Act, a foreign corporation can bring a cause of action in the Arkansas courts in furtherance of its collection activities, without a certificate of authority and without being subject to monetary penalty. This, however, is the full effect of the Wingo Act’s exclusionary provision. While it is true that J.P. Morgan was not required to obtain a certificate of authority in order to collect on its debts in Arkansas under the Wingo Act, it was required to do so if it wanted to employ Arkansas’ non-judicial foreclosure process. J.P. Morgan’s extension of the Wingo Act exclusions to the Statutory Foreclosure Act is far too broad.

Finally, during the hearing, J.P. Morgan argued that Omni Holding and Development Corp. v. C.A.G. Investments, Inc., 370 Ark. 220, 258 S.W.3d 374 (2007), establishes authority for its position. In Omni, a creditor filed a lawsuit against Omni seeking a judgment on its promissory note and claiming that Omni had committed an unlawful detainer of its property. In response, Omni claimed the creditor lacked standing because it did not have a certificate of authority. The Arkansas Supreme Court held that the creditor did not need a certificate of authority because its actions fell within the Wingo Act exclusion for collection activities. See Omni Holding and Development Corp., 370 Ark. at 226. Consistent with the Court’s determination above, the holding in Omni only stands for the proposition that a creditor can file a lawsuit in furtherance of collection activities without a certificate of authority. Id. (“Thus, C.A.G. was not `transacting business’ in Arkansas and its failure to obtain a certificate of authority did not prevent C.A.G. from filing suit in the state.“) (emphasis added). Under the Wingo Act exclusions, J.P. Morgan was allowed to foreclose on these properties through a judicial foreclosure action in the state court, but it was prohibited from using the state’s non-judicial foreclosure process. Omni does not support J.P. Morgan’s argument.

Therefore, the Court finds that no conflict exists between the Wingo Act and the Statutory Foreclosure Act, and to the extent that any conflict is present the more precise provision of the Statutory Foreclosure Act controls.

The National Banking Act

Finally, J.P. Morgan maintains that federal legislation preempts the requirement in Arkansas’ Statutory Foreclosure Act that a bank be authorized to do business in Arkansas before it employs the state’s non-judicial foreclosure process.

The federal law presented as having preemptive authority in this case is the National Banking Act (“NBA”). A brief review of the text, history, and purpose of the NBA is essential to the task of analyzing its preemptive effect. In 1864, Congress placed into law an act that established a national banking system. An Act to Provide a National Currency Secured by a Pledge of United States Bonds, and to Provide for the Circulation and Redemption Thereof, ch. 106, 13 Stat. 99 (1864) (codified as amended at 12 U.S.C. §§ 1 et seq.). Today, that system of laws remains largely intact, and has been renamed the National Banking Act. 12 U.S.C. § 38. See also Watters v. Wachovia Bank, N.A., 550 U.S. 1, 10-11, 127 S.Ct. 1559, 1566, 167 L.Ed.2d 389 (2007). The purpose of the national banking act is to prevent the “[d]iverse and duplicative superintendence of national banks” by the differing laws of the individual states. Watters, 550 U.S. at 13-14. See also Easton v. State of Iowa, 188 U.S. 220, 229, 23 S.Ct. 288, 290, 47 L.Ed. 452 (1903) (describing the goal of the NBA as “the erection of a system extending throughout the country, and independent, so far as powers conferred are concerned, of state legislation which, if permitted to be applicable, might impose limitations and restrictions as various and as numerous as the states.”).

Preemption occurs under Article VI of the Constitution, the Supremacy Clause, which provides that the laws of the United States “shall be the supreme Law of the Land; . . . any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” U.S. Const. art. VI, cl. 2. A determination of whether a state law is preempted by federal law “start[s] with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.” Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447 (1947). A determination as to the congressional purpose of a law is the “ultimate touchstone” of any preemption analysis. Retail Clerks v. Schermerhorn, 375 U.S. 96, 103, 84 S.Ct. 219, 222, 11 L.Ed.2d 179 (1963); Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 30, 116 S.Ct. 1103, 1107 (1996) (“This question is basically one of congressional intent. Did Congress, in enacting the Federal Statute, intend to exercise its constitutionally delegated authority to set aside the laws of a State? If so, the Supremacy Clause requires courts to follow federal, not state, law.”).

Congressional intent to preempt a state law is typically derived from the language, structure, or purpose of the federal statute. See Jones v. Rath Packing Co., 430 U.S. 519, 525, 97 S.Ct. 1305, 51 L.Ed.2d 604 (1977). Accordingly, preemption is classified into three different categories: express preemption, field preemption, and conflict preemption. See Pacific Gas & Elec. Co. v. State Energy Resources Conservation and Dev. Comm’n, 461 U.S. 190, 203-04, 103 S.Ct. 1713, 1721-22, 75 L.Ed.2d 752 (1983). See also Altria Group, Inc. v. Good, 555 U.S. 70, 76, 129 S.Ct. 538, 543, 172 L.Ed.2d 398 (2008).

Express preemption exists where Congress’s intent to preempt the state law is clearly stated in the language of the federal statute. See Pacific Gas & Elec. Co., 461 U.S. at 203. However, more often than not, Congress does not make such an explicit manifestation of its intent. See Watters v. Wachovia Bank, N.A., 550 U.S. 1, 33, 127 S.Ct. 1559, 1579, 167 L.Ed.2d 389 (2007) (Stevens, J., dissenting). In the absence of such an explicit expression, the courts must determine whether the statutory provision implies a preemptive intent by evaluating the structure and purpose of the statute. See Barnett Bank of Marion County, N.A., v. Nelson, 517 U.S. 25, 32, 116 S.Ct. 1103, 1108, 134 L.Ed.2d 237 (1996). These implied forms of preemption are referred to as field preemption and conflict preemption, respectively. Id. Field preemption exists if the structure of the statute represents a “scheme of federal regulation . . . so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it.” Rice v. Santa Fe Elevator Corp., 331 U.S. at 230. Alternatively, conflict preemption exists where the purpose of the federal law conflicts with the state law. See Maryland v. Louisiana, 451 U.S. 725, 746, 101 S.Ct. 2114, 2128-29, 68 L.Ed.2d 576 (1981) (“It is basic to this constitutional command that all conflicting state provisions be without effect.”). Conflict preemption arises under two different scenarios. The first scenario, referred to as physical impossibility preemption, is when it is physically impossible to comply with both the federal law and the state law at the same time. See Pacific Gas & Elec. Co., 461 U.S. at 204; In re Bate, 2011 WL 2473493, at *2-4 (Bankr. M.D. Fla. June 22, 2011). The second scenario, referred to as obstacle preemption, is when the “state law stands as an obstacle to achieving the objectives of Congress.” Id.

In these cases, there is no real question that express preemption does not apply. There is no specific provision in the NBA clearly stating a congressional intent to preempt state laws regarding non-judicial foreclosure, or moreover, state laws requiring a person or entity to be authorized to do business in the state before employing the non-judicial foreclosure process. Thus, the NBA does not expressly preempt the authorized-to-do-business requirement of the Statutory Foreclosure Act.

Field preemption is also inapplicable. The Supreme Court has specifically identified the activities of the “acquisition and transfer of property,” and the “right to collect their debts,” as areas where banks are generally subject to state law. Watters, 550 U.S. at 11; McClellan, 164 U.S. at 357. Additionally, regulations promulgated by the Office of the Comptroller of Currency (the “OCC”) save certain areas of state law from general preemption by the NBA.[9] See Monroe Retail, Inc. v. RBS Citizens, N.A., 589 F.3d 274, 282 (6th Cir. 2009). Those regulations state that state laws on the subjects of the “rights to collect debts[,]” and the “[a]cquisition and transfer of property[,]” are not inconsistent with the national bank’s real estate lending powers, provided those state laws only “incidentally affect” the bank’s exercise of its powers. 12 C.F.R. §§ 34.4, 7.4007(c), 7.4008(e). The collection of debts and transfers of property are the specific types of activities dealt with by the state law in question, the Statutory Foreclosure Act. Thus, the Court is not persuaded that the NBA’s occupation of these areas is “so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it.” As a result, field preemption does not apply.

As previously mentioned, conflict preemption is found in two different forms: physical impossibility preemption and obstacle preemption. The first of these types, physical impossibility preemption, is not present in this case. It is not “physically impossible” for J.P. Morgan to comply with the requirements of both the NBA and the authorized-to-do-business requirement of the Statutory Foreclosure Act. Such a scenario might exist if, for example, a provision of the NBA prohibited national banks from being certified to transact business within a state. It might then be physically impossible for J.P. Morgan to comply with both the NBA’s requirement and the authorized-to-do-business requirement of the Statutory Foreclosure Act. However, no such provision is found in the NBA, and as a result, physical impossibility preemption does not apply.

The remaining determination is whether obstacle preemption applies. This determination turns on whether the authorized-to-do-business requirement of the Statutory Foreclosure Act “stands as an obstacle to achieving the objectives of Congress.” Pacific Gas & Elec. Co., 461 U.S. at 204. A state law stands as an obstacle to a federal law when it significantly interferes with the objectives of that federal law. Barnett, 517 U.S. at 33; Watters, 550 U.S. at 12. As previously stated, Congress’s objective in creating the NBA was to prevent the”[d]iverse and duplicative superintendence of national banks” by the differing laws of the individual states. In order to accomplish that objective, the NBA vests national banks with certain enumerated powers. 12 U.S.C. § 24.[10] Those enumerated provisions provide national banks with “all such incidental powers as shall be necessary to carry on the business of banking . . . .” 12 U.S.C. § 24 (Seventh). Additionally, Congress has given national banks the authority to “make, arrange, purchase or sell loans or extensions of credit secured by liens on interest in real estate . . . .” 12 U.S.C. § 371. See also Watters, 550 U.S. at 18 (stating that mortgage lending is one aspect of the “business of banking”).

The question is whether the burden of the requirement that a bank be authorized to do business in Arkansas before using the non-judicial foreclosure process significantly impairs the bank’s ability to conduct its business of banking, which includes its rights to hold and enforce mortgage liens. The Court finds that it does not. Obviously, the Statutory Foreclosure Act requirement places some measure of burden on a national bank holding a mortgage on property in Arkansas if it wants to foreclose on that property through the state’s non-judicial foreclosure process. However, a bank’s failure (or refusal) to comply with the Statutory Foreclosure Act requirement leaves the bank with the option of foreclosing on a property through the state’s judicial process. On that point, the Statutory Foreclosure Act specifically states that “[t]he procedures set forth in this chapter for the foreclosure of a mortgage or deed of trust shall not impair or otherwise affect the right to bring a judicial action to foreclose a mortgage or deed of trust.” Ark. Code Ann. § 18-50-116(a). While this alternative method of collection (judicial foreclosure) may not be as efficient as the non-judicial foreclosure process, the Court finds that it does not significantly impair the bank’s ability to collect on its debt.[11]

Moreover, the process of judicial foreclosure is available in all states, while only approximately 60 percent of the states allow non-judicial foreclosures. See Grant S. Nelson, Reforming Foreclosure: The Uniform Nonjudicial Foreclosure Act, 53 Duke L.J. 1399, 1403 (2004).[12] J.P. Morgan’s contention that the provisions of the NBA are significantly impaired by the authorized-to-do-business requirement is undermined by the fact that only slightly more than half of the states authorize such a procedure at all. The Court finds that the powers conferred to J.P. Morgan under the NBA are not significantly impaired by the Statutory Foreclosure Act’s requirement that J.P. Morgan be authorized to do business in Arkansas, and as a result, conflict preemption does not apply.

For the foregoing reasons, the Court finds that the Statutory Foreclosure Act’s requirement that a person or entity be authorized to do business in the state is not preempted by the NBA. As a result, the Court finds that J.P. Morgan was not in compliance with the Statutory Foreclosure Act, and that the Debtors do not owe, nor must they pay, J.P. Morgan for any fees and costs incurred through the non-judicial foreclosure proceedings conducted against these Debtors.

Attorney Fees

Both parties have asked for an award of attorney fees. As a general rule, known as the “American rule,” the parties to litigation must pay their own attorney fees. In re Hunter, 203 B.R. 150, 151 (Bankr. W.D. Ark. 1996). However, certain exceptions to this rule exist, one of which is found in Ark. Code Ann. § 16-22-308, which states,

In any civil action to recover on an open account, statement of account, account stated, promissory note, negotiable instrument, or contract relating to the purchase or sale of goods, wares, or merchandise, or for labor or services, or breach of contract, unless otherwise provided by law or the contract which is the subject matter of the action, the prevailing party may be allowed a reasonable attorney’s fee to be assessed by the court and collected as costs.

Ark. Code Ann. § 16-22-308. Under Arkansas law, an award of prevailing party attorney fees under this statute are permissive and discretionary. In re Cameron, No. 4:10-bk-14987, 2011 WL 1979503, at *6 (Bankr. E.D. Ark. May 17, 2011).

This action was brought by the Debtors to determine whether they owed the foreclosure fees and costs incurred by J.P. Morgan in conducting non-judicial foreclosure proceedings on its promissory notes. The Debtors are the prevailing party in these matters, and as such, the Court awards the Debtors a reasonable amount for their attorney fees. Counsel for the Debtors shall submit a separate application for those fees to the Court, as further ordered below.

CONCLUSION

For the foregoing reasons, the Court concludes that J.P. Morgan was not in compliance with the authorized-to-do-business requirement of the Statutory Foreclosure Act when it conducted the foreclosures against these Debtors. Additionally, the Court has determined that J.P. Morgan’s failure to comply with Ark. Code Ann. § 18-50-117 was not cured by empowering an attorney-in-fact under Ark. Code Ann. § 18-50-102, was not superceded by the Wingo Act, and was not preempted by the National Banking Act. As a result, the foreclosure fees and costs incurred by Chase and J.P. Morgan are not owed by the Debtors, and need not be included in the Debtors’ repayment plans in order for those plans to be confirmed.

Further, the Court has determined that the Debtors should be awarded their attorney fees incurred in pursuing these actions.

Therefore, it is hereby

ORDERED that the Objections to Confirmation are OVERRULED; it is further,

ORDERED that the Defendant shall pay the reasonable attorney fees incurred by the Debtors in pursuing these actions. The Court will determine the amount of this award on further application by Debtors’ Counsel, which shall include an itemization of the attorney fees incurred in these actions. This application must be filed with the Court within 14 days of the entry of this Order, and shall be served on Counsel for J.P. Morgan. J.P. Morgan shall have 14 days from the date that fee application is filed with the Court in which to file a response, should it wish to do so.

IT IS SO ORDERED.

[1] Although the objections to confirmation were filed by two separate creditors, J.P. Morgan and Chase, as of the date of the hearing all of the claims at issue in this matter had been transferred to J.P. Morgan.

[2] The Court also takes judicial notice of all filings and records in these cases, including the proofs of claim. See Fed. R. Evid. 201; In re Henderson, 197 B.R. 147, 156 (Bankr. N.D. Ala. 1996) (“The court may take judicial notice of its own orders and of records in a case before the court, and of documents filed in another court.”) (citations omitted); see also In re Penny, 243 B.R. 720, 723 n.2 (Bankr. W.D. Ark. 2000).

[3] J.P. Morgan only presented the limited power of attorney filed in the property records for the Peeks case, but J.P. Morgan’s counsel represented to the Court that a similar limited power of attorney was granted and recorded in the property records for each of the three cases.

[4] The Court notes that counsel for the Debtors argued that a determination that the statute had been violated would make any sale under the Statutory Foreclosure Act void ab initio. No property sales actually resulted from the foreclosure proceedings in these cases. The sole dispute in these cases is whether the foreclosure fees and costs incurred through use of Arkansas’ non-judicial foreclosure process are owed.

[5] The Court notes that no explanation is provided by the statute regarding what action is required in order to be authorized to do business under Ark. Code Ann. § 18-50-117. Following a review of other provisions within the Arkansas Code, it appears that this requirement generally demands that a party obtain a certificate of authority from the secretary of state. See Ark. Code Ann. § 23-48-1003 (“A certificate of authority authorizes the out-of-state bank to which it is issued to transact business in the state . . . .”); Ark. Code Ann. § 4-27-1501 (“A foreign corporation may not transact business in this state until it obtains a certificate of authority from the Secretary of State.”). However, no such determination is necessary in these cases because J.P. Morgan stipulated that it was not so authorized.

[6] J.P. Morgan did not argue that it met the requirements of the Statutory Foreclosure Act because it was a “financial institution.” Nonetheless, the Court notes that even if J.P. Morgan qualified as a financial institution under Ark. Code Ann. § 102, it would still be required to comply with the fundamental statutory requirement of Ark. Code Ann. § 18-50-117 for the same reasons discussed herein with regard to its use of an attorney-in-fact.

[7] J.P. Morgan did not provide the Court with the analytical extensions needed to support its argument. As a result, the Court has analyzed all possible extensions of that argument, which include (1) that because J.P. Morgan authorized an attorney-in-fact to conduct the foreclosure, Ark. Code Ann. § 18-50-117 did not apply, or (2) that because J.P. Morgan authorized Wilson & Associates to conduct the foreclosure it satisfied the requirement of Ark. Code Ann. § 18-50-117.

[8] Ark. Code Ann. § 04-27-1502 is titled the “[c]onsequences of transacting business without authority,” and states that:

(a) A foreign corporation transacting business in this state without a certificate of authority may not maintain a proceeding in any court in this state until it obtains a certificate of authority.

. . .

(d)(1)(A) A foreign corporation that transacts business in this state without a certificate of authority shall pay a civil penalty to the state for each year and partial year during which it transacts business in this state without a certificate of authority.

Ark. Code Ann. § 4-27-1502.

[9] In many cases, the OCC regulatory interpretations are entitled to substantial deference, commonly known as Chevron deference. Investment Co. Institute v. Camp, 401 U.S. 617, 626-27, 91 S.Ct. 1091, 28 L.Ed.2d 367 (1971) (“It is settled that courts should give great weight to any reasonable construction of a regulatory statute adopted by the agency charged with the enforcement of that statute.”).

[10] J.P. Morgan did not direct the Court to any specific provision of the NBA to support its argument that the authorized-to-do-business requirement creates an obstacle to achieving Congress’s objectives. Nonetheless, the Court’s review of the NBA has identified several powers granted to national banks that extend to such an argument.

[11] The Court also notes that all a national bank must do in order to meet the requirements of Ark. Code Ann. § 18-50-117 is become authorized to do business in the state.

[12] A list of the types of foreclosure allowed by each state is available at http://www.realty trac.com/foreclosure-laws/foreclosure-laws-comparisons.asp (last visited Sept. 12, 2011).

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In Re: CROMWELL: Mass. BK Court “Consumer Credit Cost Disclosure Act, Notice of Right to Cancel, Truth in Lending Act”

In Re: CROMWELL: Mass. BK Court “Consumer Credit Cost Disclosure Act, Notice of Right to Cancel, Truth in Lending Act”


UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
EASTERN DIVISION

IN RE:
DOUGLAS CROMWELL, JR. AND
MARY CROMWELL,
DEBTORS.
___________________________________
DOUGLAS CROMWELL JR. AND
MARY CROMWELL,
PLAINTIFFS,

v.

COUNTRYWIDE HOME LOANS, INC.
AND MORTGAGE ELECTRONIC
REGISTRATION SYSTEMS, INC.,
DEFENDANTS.
__________________________

MEMORANDUM OF DECISION

I. INTRODUCTION
The matters before the Court are the Second Amended Complaint (the “Complaint”) filed
by Douglas Cromwell, Jr., and Mary Cromwell (collectively, the “Debtors”) against
Countrywide Home Loans, Inc. (“Countrywide”) and Mortgage Electronic Registration Systems,
Inc. (“MERS”) (jointly, the “Defendants”) alleging violations of the Massachusetts Consumer
Credit Cost Disclosure Act1 (the “CCCDA”), as well as the Debtors’ Objection to Proof of Claim
filed by Countrywide Home Loans, Inc. (the “Objection to Claim”) and the Objection to
Confirmation of Second Amended Chapter 13 Plan (the “Objection to Confirmation”) filed by
Countrywide. Through their Complaint, the Debtors seek, inter alia, rescission of a refinancing
transaction and a declaration that the mortgage granted by them to MERS, as nominee for
Countrywide, is void and that they have no tender obligation as a condition to effectuate the
rescission.2 In the Objection to Claim, they, in turn, contend that Countrywide’s claim is now
unsecured in light of the Debtors’ purported rescission. The Defendants dispute the Debtors’
allegations in the Complaint and object to the Debtors’ Chapter 13 plan on the basis that they
propose to treat Countrywide’s claim as unsecured. For the reasons set forth below, I will enter
judgment in favor of the Debtors and order them to file a fee application within thirty days,
sustain the Objection to Claim, and overrule the Objection to Confirmation.3

[…]

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OPINION: In Re: WASHINGTON MUTUAL, INC., Bankruptcy Judge Denies Reorganization Plan

OPINION: In Re: WASHINGTON MUTUAL, INC., Bankruptcy Judge Denies Reorganization Plan


THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In re:

WASHINGTON MUTUAL, INC., et al.,

OPINION1

Before the Court is the request of Washington Mutual, Inc. (“WMI”) and WMI Investment Corp. (collectively the “Debtors”) for confirmation of the Modified Sixth Amended Joint Plan of Affiliated Debtors (the “Modified Plan”). For the reasons stated below, the Court will deny confirmation of the Modified Plan.

[…]

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LETTER TO AZ ATTORNEY GENERAL HORNE RE: VASQUEZ CERTIFIED QUESTION

LETTER TO AZ ATTORNEY GENERAL HORNE RE: VASQUEZ CERTIFIED QUESTION


REQUIRED READING.

 

RE:

Brief of Amicus Curiae State of Arizona, Constituting the Opinion of the Arizona Attorney General, to the Arizona Supreme Court in Vasquez Deutsche Bank National Trust Company, as Trustee for Saxon Asset Securities Trust 2005-3; Saxon Mortgage, Inc. (“DBNTC”), No. CV 11-0091-CQ (Ariz. S. Ct. 2011), Certified Question from Bankruptcy Case, In re Vasquez, 4:08-bk-15510-EWH (Bky. D. Ariz Tucson)

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AZ AG Horne Files Amicus Brief With Supreme Court Favoring Homeowners – IN RE: VASQUEZ

AZ AG Horne Files Amicus Brief With Supreme Court Favoring Homeowners – IN RE: VASQUEZ


Read this entirely. It’s all about the TITLE today, tomorrow and the future to come.

H/T ForeclosureBlues & LivingLies

CASE IS SCHEDULED FOR ORAL ARGUMENT ON SEPTEMBER 22, 20011 IN TUCSON, AZ. CONTRARY TO RUMOR, DO NOT EXPECT A RULING FROM THE COURT ON THAT DATE. THE SUPREME COURT OF ARIZONA WILL TAKE AS MUCH TIME AS IT NEEDS TO MAKE THE DECISION.

JUDGE HOLLOWELL HAS CERTIFIED TWO QUESTIONS ESSENTIAL TO THE OUT COME OF HUNDRED OF THOUSANDS OF FORECLOSURE CASES. ATTORNEY GENERAL THOMAS C HORNE HAS SUBMITTED AN AMICUS (FRIEND OF THE COURT) BRIEF ADVOCATING A FAVORABLE RESULT FOR THE PROTECTION OF THE TITLE SYSTEM, THE MARKETPLACE AND BORROWERS.

The case is Julia Vasquez v Deutsch Bank National Trust Company, as Trustee for Saxon Asset Securities Trust 2005-3; Saxon Mortgage, Inc., and Saxon Mortgage Services, Inc. Supreme Court Case No CV 11-0091-CQ, U.S. Bankruptcy Court Case No: 4:08-bk-15510-EWH. Assisting in the writing of the Amicus Brief were Carolyn R. Matthews, Esq., Dena R. Epstein, Esq., and Donnelly A. Dybus, Esq..

In a a very well -written and well reasoned brief, the Arizona Attorney general takes and stand and makes a very persuasive case contrary to the tricks and shell games of the pretender lenders. It also addresses head-on the contention that that a negative ruling to the banks will cause financial disaster. Just as we have been saying for years here on these pages, the AG makes short shrift of that argument. And the AG takes the bank to task on their “spin” that stopping the foreclosures will have a chilling effect on the housing market and therefore the economy. The absurdity of both positions is exposed for what they are — naked aggression and greed justifying the means to defraud and corrupt the entire housing market, financial industry and the whole of the consumer buying base in this and other countries.

Of particular note is the detailed discussion in the Amicus Brief regarding the recordation of interests in real property. While the brief does not directly attach perfection of liens that violate the provisions of Arizona Statutes, the implications are clear: If the public record does not contain adequate disclosure as to the identity of the interested parties, the document is neither properly recorded, nor is the party seeking to enforce such a document entitled to use that document as though it had been recorded.

The use of a double nominee method of identifying the straw-man beneficiary (usually MERS) and a straw-man “lender” (usually the mortgage originator  that was acting only as a conduit or broker) leaves the public without any knowledge as to the identities of the real parties in interest. In the case of a mortgage lien, if it is impossible to know the identity of the party who can satisfy the lien, then the lien is not perfected. The same reasoning holds true with any other document required to be recorded, to wit:

PUBLIC POLICY OF ARIZONA AGAINST FORECLOSURES: The AG also meets head on the obvious bias in the courts in which the assumption is made that that it is somehow better for society to speed along the foreclosures. Not so, says the AG:

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IN RE: VASQUEZ | ORDER CERTIFYING STATE LAW QUESTIONS TO THE ARIZONA 16 V. SUPREME COURT “Who Owns the Note?”

IN RE: VASQUEZ | ORDER CERTIFYING STATE LAW QUESTIONS TO THE ARIZONA 16 V. SUPREME COURT “Who Owns the Note?”


Show some love to Judge Eileen W. Hollowell!

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ARIZONA

JULIA V. VASQUEZ,
Plaintiff

vs.

SAXON MORTGAGE, INC.;
SAXON MORTGAGE SERVICES,
INC.; DEUTSCHE BANK
NATIONAL TRUST COMPANY
AS TRUSTEE FOR SAXON
ASSET SECURITIES TRUST
2005-3
Defendants.


EXCERPT:

The Certifying Court has reviewed the proposals by the parties and certifies the following questions to the Arizona Supreme Court under A.R.S. § 12-1861 and Ariz. S. Ct. Rule 27(a)(3)(A):

(1) Is the recording of an assignment of deed of trust required prior to
the filing of a notice of trustee’s sale under A.R.S. § 33-808 when
the assignee holds a promissory note payable to bearer?

(2) Must the beneficiary of a deed of trust being foreclosed pursuant to
A.R.S. § 33-807 have the right to enforce the secured obligation?


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FISETTE v. KELLER | 8th Circuit BAP Okays ‘Chapter 20′ Lien Stripping on Unsecured Homestead 2nd Mortgage

FISETTE v. KELLER | 8th Circuit BAP Okays ‘Chapter 20′ Lien Stripping on Unsecured Homestead 2nd Mortgage


Via: Max Gardner’s Bankruptcy Boot Camp-

This is an important ruling for bankruptcy attorneys and their clients in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota, some of whom have been unable to lien strip as local judges waited for authority from above.

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT

No. 11-6012

In re:
Michael James Fisette,
Debtor.

Michael James Fisette,
Debtor – Appellant,

v.

Jasmine Z. Keller,
Trustee – Appellee.

EXCERPT:

ISSUES

The issue on appeal is whether the bankruptcy court may confirm the debtor’s
plan which provides for the avoidance of two junior liens on the Debtor’s principal
residence. In particular, we consider whether: (1) 11 U.S.C. § 1322(b)(2) prevents a
debtor from modifying the rights of junior lienholders of liens on his principal
residence if the value of the residence is less than the amount owed to the senior
lienholder; and (2) if not, whether such modification is contingent upon the debtor’s
receipt of a Chapter 13 discharge.

[ipaper docId=63547013 access_key=key-1iz7pehmkvq3k9g16sqa height=600 width=600 /]

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IN RE SCHWARTZ | MASS. BK Court Re-Opens Case “The fact that it had possession of the mortgage instrument did not render Deutsche the mortgagee and thus it lacked the power to sell the property”

IN RE SCHWARTZ | MASS. BK Court Re-Opens Case “The fact that it had possession of the mortgage instrument did not render Deutsche the mortgagee and thus it lacked the power to sell the property”


UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
CENTRAL DIVISION

In re:
SIMA SCHWARTZ
Debtor

SIMA SCHWARTZ
Plaintiff

v.

HOMEQ SERVICING, AGENT FOR
DEUTSCHE BANK NATIONAL TRUST
COMPANY, AS TRUSTEE and
DEUTSCHE BANK NATIONAL
COMPANY, AS TRUSTEE
Defendants

MEMORANDUM OF DECISION AND ORDER

After the plaintiff, Sima Schwartz, presented her case in chief during the first day of the trial in
this adversary proceeding, upon oral motion of the defendants, HomEq Servicing and Deutsche Bank
National Trust Company, as Trustee, I granted judgment on partial findings in favor of the defendants
on all counts of the complaint, pursuant to Fed. R. Civ. P. 52(c), made applicable to this proceeding by
Fed. R. Bankr. P. 7052. Ms. Schwartz then moved for a new trial as a result of which judgment was
vacated on count I of the complaint only. Schwartz v. HomEq Servicing (In re Schwartz), 2011 WL
1331963 (Bankr. D. Mass. Apr. 7, 2011). In count I, Ms. Schwartz alleges that the May 24, 2006
foreclosure sale of her home by Deutsche was invalid because Deutsche did not own the mortgage on
the property at the relevant time.1 I reopened the trial so that the defendants could present their case
with respect to that count, which they did on June 1, 2011. Based on the evidence and legal
submissions presented by the parties, my findings of fact, conclusions of law and order are set forth
below.

Jurisdiction and Standing

Core jurisdiction over this case is conferred upon the bankruptcy court by 28 U.S.C.
§ 157(b)(2)(G) and (O). See Atighi v. DLJ Mortg. Capital, Inc. (In re Atighi), 2011 WL 3303454, at
*3 (B.A.P. 9th Cir. Jan. 28, 2011). Ms. Schwartz’s standing to seek relief is based on her property
interest in light of the alleged wrongful foreclosure. Brae Asset Fund, L.P. v. Kelly, 223 B.R. 50, 56
(D. Mass. 1998).

Legal Framework

Mass. Gen. Laws ch. 244, § 14 establishes the procedure for a mortgagee to foreclose a
mortgage by exercise of the statutory power of sale. The statute provides that prior to a foreclosure
sale a notice of the sale must appear weekly for three consecutive weeks in a newspaper either
published in or generally circulated in the city or town where the property is located. The
Massachusetts Supreme Judicial Court has recently clarified that a foreclosing mortgagee must hold
the mortgage as of the date that the first notice of sale is published. U.S. Bank Nat. Ass’n v. Ibanez,

The Defendants’ Case

It is undisputed that Deutsche was not the original mortgagee of the mortgage on Ms.
Schwartz’s home, so it must prove that the mortgage was assigned to it prior to the date when the first
foreclosure notice was published. As discussed in the memorandum and order on the plaintiff’s
motion for a new trial, while the evidence established that an assignment of the mortgage from
Mortgage Electronic Registration Systems, Inc. (“MERS”) to Deutsche was executed on May 23,
2006, the day before the foreclosure sale, this assignment, being well after the notice of foreclosure
sale was first published, did not confer on Deutsche the power to foreclose on May 24. The Supreme
Judicial Court in Ibanez, however, offered an alternative method for a party to acquire sufficient rights
in a mortgage to qualify to foreclose:

Where a pool of mortgages is assigned to a securitized trust, the executed agreement
that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that
clearly and specifically identifies the mortgage at issue as among those assigned, may
suffice to establish the trustee as the mortgage holder.

Ibanez, 458 Mass. at 651.

With this in mind, the defendants introduced into evidence at trial all of the agreements
tracking the transfer of Ms. Schwartz’s mortgage loan from its originator, First NLC Financial
Services, LLC (“First NLC”), to Deutsche, complete with the necessary schedules of the pooled
mortgage loans specifically identifying her mortgage as being among those transferred. The
defendants argue that these agreements, together with other evidence introduced by them, establish that
Deutsche was the holder of the mortgage well in advance of the first publication of the notice of sale.
At trial, Ronaldo Reyes, a Deutsche vice president, testified that he had management
responsibility over the administration of the Morgan Stanley Home Equity Loan Trust 2005-4 (the
“Trust”) and that Deutsche had always been the trustee of the Trust. He testified that in his capacity
as vice president he had access to the books and records of the Trust and was qualified to authenticate
and testify about the documents admitted into evidence by the defendants. During the course of his
testimony, Mr. Reyes authenticated executed copies of each of the agreements discussed below, and
demonstrated that Ms. Schwartz’s mortgage loan was included on the mortgage loan schedules
attached as exhibits to several of the agreements. Mr. Reyes testified that each was used in the
ordinary course of Deutsche’s business as trustee of the Trust.

The following documents were admitted into evidence: (i) the mortgage on Ms. Schwartz’s
home; (ii) the original promissory note executed by Ms. Schwartz, which Mr. Reyes noted was
endorsed in blank by First NLC; (iii) the Amended and Restated Mortgage Loan Purchase Agreement
(the “Loan Purchase Agreement”) dated as of September 1, 2005 by and between Morgan Stanley
Mortgage Capital, Inc. (“MS Mortgage Capital”) and First NLC; (iv) the Assignment and Conveyance
Agreement dated September 29, 2005, by and between First NLC and MS Mortgage Capital; (v) the
Bill of Sale dated November 29, 2005 by and between MS Mortgage Capital and Morgan Stanley ABS
Capital I Inc. (“MS ABS Capital”); and (vi) the Pooling and Servicing Agreement (the “PSA”) dated
as of November 1, 2005 by and among MS ABS Capital, HomEq Servicing Corporation, JPMorgan
Chase Bank, National Association, First NLC, LaSalle Bank National Association and Deutsche. Mr.

Findings of Fact2

1. On July 22, 2005, Ms. Schwartz refinanced the mortgage loan on her property at 23 Sigel Street,
Worcester, Massachusetts, executing a promissory note in the amount of $272,000 payable to First
NLC and a mortgage securing her obligation under the note naming MERS, solely as nominee for
First NLC, its successors and assigns, as mortgagee.

2. The mortgage, which was duly recorded at the Worcester District Registry of Deeds, includes the
statutory power of sale under Mass. Gen. Laws. ch 183, § 21 which is invoked by reference to the
statute and which permits a mortgagee to foreclose a mortgage by public auction sale of the
property upon the mortgagor’s default in performance or breach of any conditions thereof.

3. On May 3, May 10 and May 17, 2006, a notice of foreclosure sale was published in the Worcester
Telegram and Gazette stating that “Deutsche Bank National Trust Company, as Trustee,” the
“present holder” of the mortgage, intended to foreclose the mortgage by public sale of Ms.
Schwartz’s property on May 24, 2006.

4. On May 23, 2006, Liquenda Allotey, described as a vice president of MERS, executed an
Assignment of Mortgage for the purpose of assigning the mortgage from MERS to “Deutsche Bank
National Trust Company, as Trustee.”

5. Deutsche, in its capacity as trustee of the Trust,3 conducted the foreclosure sale as scheduled on
May 24, 2006, bid in its mortgage debt and purchased the property.

6. In its answer, Deutsche admitted that a foreclosure deed conveying the property to itself was
recorded on October 13, 2006. There has been no evidence presented of any subsequent
conveyance of the property and hence I find that Deutsche remains the record owner of the Sigel
Street property.

7. As she testified on the first day of trial, Ms. Schwartz continues to reside in the Sigel Street
Property.

8. The original promissory note executed by Ms. Schwartz was endorsed in blank by an officer of
First NLC.

9. The original mortgagee as identified in the mortgage on Ms. Schwartz’s home was MERS, as
nominee for First NLC, its successors and assigns.

10. In accordance with Section 2 of the Loan Purchase Agreement, First NLC agreed to sell “Mortgage
Loans” to MS Mortgage Capital.

11. The Loan Purchase Agreement defines a “Mortgage Loan” as
An individual Mortgage Loan which is the subject of this Agreement, each Mortgage
Loan originally sold and subject to this Agreement being identified on the applicable
Mortgage Loan Schedule, which Mortgage Loan includes without limitation the
Mortgage File, the Monthly Payments, Principal Prepayments, Liquidation Proceeds,
Condemnation Proceeds, Insurance Proceeds, Servicing Rights and all other rights,
benefits, proceeds and obligations arising from or in connection with such Mortgage
Loan, excluding replaced or repurchased mortgage loans.

12. On September 29, 2005, by way of the Assignment and Conveyance Agreement, First NLC sold,
transferred, assigned, set over and conveyed to MS Mortgage Capital “all right, title and interest of,
in and to the Mortgage Loans listed on the Mortgage Loan Schedule attached hereto as Exhibit A.”

13. Ms. Schwartz’s mortgage loan was listed on the exhibit attached to the Assignment and Conveyance Agreement.

14. First NLC, therefore, transferred all of its right, title and interest in Ms. Schwartz’s mortgage loan
to MS Mortgage Capital on November 29, 2005.

15. By the Bill of Sale dated November 29, 2005, MS Mortgage Capital, as the “Seller,” transferred to
MS ABS Capital “all the Seller’s right, title and interest in and to the Mortgage Loans described on
Exhibit A attached hereto.”

16. Ms. Schwartz’s mortgage loan was listed on Exhibit A to the Bill of Sale.

17. MS Mortgage Capital, therefore, transferred its entire interest in Ms. Schwartz’s mortgage loan to
MS ABS Capital on November 29, 2005.

18. Section 2.01 of the PSA, which was dated November 1, 2005, provides that the MS ABS Capital,
as “Depositor,”

concurrently with the execution and delivery hereof, hereby sells, transfers, assigns, sets
over and otherwise conveys to [Deutsche] for the benefit of the Certificateholders,
without recourse, all the right, title and interest of the Depositor in and to the Trust
Fund, and the Trustee, on behalf of the Trust, hereby accepts the Trust Fund.

19. The “Trust Fund” includes all of the mortgage loans listed on an attached mortgage loan schedule.

20. Ms. Schwartz’s mortgage loan was listed on the mortgage loan schedule attached to the PSA.

21. While the PSA provides that the mortgage loans were transferred from MS ABS Capital to
Deutsche, “concurrently with the execution and delivery hereof” on November 1, 2005, the Bill of
Sale provides that MS ABS Capital did not acquire the mortgage loans until November 29, 2005.
The November 2009 PSA indicates, however, that the transaction in which MS ABS Capital would
transfer the loans to Deutsch, as trustee of the Trust, would not be consummated until November
29, 2005, which is defined as the “Closing Date.” Therefore, MS ABS Capital transferred Ms.
Schwartz’s mortgage loan to Deutsche, as trustee of the Trust, on the Closing Date of November
29, 2005, which is the same date as the Bill of Sale by which MS ABS Capital acquired the loan
from MS Mortgage Capital.

22. Section 2.01(b) of the PSA provides that if

any Mortgage has been recorded in the name of Mortgage Electronic Registration
System, Inc. (“MERS”) or its designee, no Assignment of Mortgage in favor of the
Trustee will be required to be prepared or delivered and instead, the applicable Servicer
shall take all reasonable actions as are necessary at the expense of the applicable
Originator to the extent permitted under the related Purchase Agreement and otherwise
at the expense of the Depositor to cause the Trust to be shown as the owner of the
related Mortgage Loan on the records of MERS for the purpose of the system of
recording transfers of beneficial ownership of mortgages maintained by MERS.

23. Thus MS ABS Capital did not assign to Deutsche the mortgage on Ms. Schwartz’s home in
connection with the transaction through which it transferred Ms. Schwartz’s mortgage loan
pursuant to the PSA.

24. In the chain of transactions by which Ms. Schwartz’s mortgage loan was sold, initially by First
NLC to MS Mortgage Capital, next by MS Mortgage Capital to MS ABS Capital and finally by
MS ABS Capital to Deutsche, the seller sold all of its right, title and interest in the mortgage loans
being transferred. However, as the mortgage itself was originally in the name of MERS as
mortgagee, and not First NLC, First NLC never held legal title to the mortgage and could not have
transferred such title to MS Mortgage Capital. Consequently, neither MS ABS Capital nor
Deutsche, as successors to First NLC and MS Mortgage Capital, obtained legal title to the
mortgage. This is consistent with § 2.01 of the PSA quoted above.

25. As of November 29, 2005, the Closing Date defined in the PSA, MERS continued to hold legal
title to the mortgage on Ms. Schwartz’s home as nominee for First NLC, its successors and assigns.

26. MERS continued to hold legal tile to the mortgage until May 23, 2006, when it assigned the
mortgage to Deutsche.

27. The custodial log establishes that Deutsche received Ms. Schwartz’s mortgage loan documents,
including the promissory note and mortgage instrument, on September 15, 2005 (presumably in
anticipation of the November loan sale), and retained custody of these documents until March 27,
2006, when they were sent to HomEq. The custodial log indicates that the documents were sent
to HomEq for servicing and lists the reason for the transfer as “foreclosure.” According to the
custodial log, the loan documents were returned to Deutsche on May 24, 2006, the day of the
foreclosure sale.
Conclusions of Law

In In re Marron, 2011 WL 2600543, at *5 (Bankr. D. Mass. June 29, 2011), I held that where a
loan was secured by a mortgage in the name of MERS, even when the loan itself changed hands
several times, MERS remained the mortgagee in its capacity as nominee for the original lender, its
successors and assigns.4 As MERS was the mortgagee, it had the authority to assign the mortgage to
the foreclosing entity. In this case too, while Ms. Schwartz’s loan passed from hand to hand, MERS
remained the mortgagee throughout. While MERS held only bare legal title to the mortgage on
behalf of Deutsche, the successor to First NLC, until it assigned the mortgage to Deutsche on May 23,
2006, only MERS had the authority to foreclose.

Having determined that MERS, and not Deutsche, held legal title to the mortgage on Ms.
Schwartz’s home mortgage as of May 3, 2006, when the notice of the foreclosure sale of her home was
first published, it follows that Deutsche did not have the right to exercise the statutory power of sale
and to foreclose the mortgage. See, e.g., Novastar Mortgage, Inc. v. Safran, 79 Mass. App. Ct. 1124,
948 N.E.2d 917 (2011) (finding, in a post-foreclosure eviction proceeding, that the foreclosing entity
had the burden to prove its title to the property by establishing that the mortgage had been assigned to
it by MERS “at the critical stages of the foreclosure process.”). By publishing notice of the
foreclosure sale when it was not the mortgagee, Deutsche failed to comply with Mass. Gen. Laws ch.
244, § 14, and thus its foreclosure sale is void. Ibanez, 438 Mass. at 646-47.5 A declaratory
judgment to that effect shall enter on count I of the complaint.

SO ORDERED.

At Worcester, Massachusetts this 22nd day of August, 2011.

By the Court,
Melvin S. Hoffman
U.S. Bankruptcy Judge

Footnotes:

1 The complaint is unclear as to the relief Ms. Schwartz seeks as a result of the allegedly invalid
foreclosure. In addition to the allegation that the defendants did not own the mortgage, Ms. Schwartz
alleges that she was damaged by the foreclosure sale, which “was conducted fraudulently, in bad faith”
and to her detriment. I previously found that Ms. Schwartz failed to produce any evidence of the
defendants’ intent to defraud her. In addition, Ms. Schwartz failed to establish the extent of her
damages or that the foreclosure sale was conducted in bad faith. Though Ms. Schwartz does not
expressly request a declaratory judgment as to the validity of the foreclosure, based on the allegation of
invalidity in the complaint, and the parties’ arguments in the course of trial, I will consider count I of
the complaint to be a request for a declaratory judgment that the foreclosure sale was invalid.

2 Any finding of fact which should more properly be considered a conclusion of law, and vice versa,
shall be deemed as such.

3 The documents pertaining to the foreclosure sale identify Deutsche as “Deutsche Bank National
Trust Company, as Trustee” without identifying the trust.

4 The sophisticated financial minds who wrought the MERS regime sought to simplify the process of
repeatedly transferring mortgage loans by obviating the need and expense of recording mortgage
assignments with each transfer. No doubt they failed to consider the possibility of a collapse of the
residential real estate market, the ensuing flood of foreclosures and the intervention of state and federal
courts. Professor Alex Tabarrok of George Mason University has observed “[t]he law of unintended
consequences is when a simple system tries to regulate a complex system.” Alex Tabarrok, The Law
of Unintended Consequences, Marginal Revolution (Jan. 24, 2008, 7:47 am),

http://marginalrevolution.com/marginalrevolution/2008/01/the-law-of-unin.html.

5 Deutsche presented sufficient evidence to prove that either it or HomEq, its agent, had possession of
both the Schwartz mortgage and promissory note as of May 3, 2011. The note was endorsed in blank,
which gave Deutsche the right to enforce the note. The fact that Deutsche had possession of the
mortgage, however, is irrelevant to its status as mortgagee. While a promissory note endorsed in
blank may be enforced by the party in possession of the note, this is not the case with a mortgage.
“Like a sale of land itself, the assignment of a mortgage is a conveyance of an interest in land that
requires a writing signed by the grantor.” Ibanez, 458 Mass at 649. Deutsche had not received a
written assignment of the mortgage from MERS prior to May 3, 2011. The fact that it had possession
of the mortgage instrument did not render Deutsche the mortgagee and thus it lacked the power to sell
the property.

[ipaper docId=62936911 access_key=key-2nbd5rwuz8zw839qwzpe height=600 width=600 /]

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IN RE CRUZ | CA BK Court “2932.5, Foreclosure of the Property was wrongful due to MERS’ unauthorized substitution of trustee”

IN RE CRUZ | CA BK Court “2932.5, Foreclosure of the Property was wrongful due to MERS’ unauthorized substitution of trustee”


In re: CIRILO E. CRUZ JUANA CRUZ, Chapter 13, Debtors,

CIRILO E. CRUZ, Plaintiff,

v.

AURORA LOAN SERVICES LLC; SCME MORTGAGE BANKERS, INC.; ING BANK, F.S.B.; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC.; and DOES 1 to 100, Defendants,

Bankruptcy No. 11-01133-MM13, AP: 11-90116-MM.

United States Bankruptcy Court, S.D. California.

August 11, 2011.

MEMORANDUM DECISION ON MOTIONS TO DISMISS SECOND AMENDED COMPLAINT

MARGARET M. MANN, Bankruptcy Judge.

I. INTRODUCTION

The Court has considered the Motions (“Motions”) to Dismiss the Second Amended Complaint (“SAC”) of debtor and plaintiff Cirilo E. Cruz[1] (“Cruz”) brought pursuant to Fed. R. Bankr. P. 7012, incorporating by reference Fed. R. Civ. P. 12(b)(6), by Defendants Aurora Loan Services (“Aurora”), Mortgage Electronic Registration Systems, Inc. (“MERS”), and ING Bank, F.S.B. (“ING”).[2] The Court grants the Motions in part and denies them in part for the reasons set forth in this Memorandum Decision.

All Truth-In-Lending-Act (“TILA”) related causes of action are dismissed with prejudice. The Court concludes that Cruz cannot state a cause of action under any theory challenging the TILA disclosure because his claims are either unripe or barred by the statute of limitations. The TILA allegations cannot be stated as state law claims because of federal preemption as an alternative ground for dismissal. The Motions are granted to the additional extent they assert the foreclosure of the Property was wrongful due to MERS’ unauthorized substitution of trustee.

The Court denies the Motions to the extent that they assert ING was not required to record its assignment of beneficial interest before it foreclosed. The Motions request the Court reconsider its holding in U.S. Bank N.A. v. Skelton (In re Salazar), 448 B.R. 814, 822-24 (Bankr. S.D. Cal. 2011), that California Civil Code § 2932.5[3] pertains to both mortgages and deeds of trust. For the additional reasons set forth in this Memorandum Decision, the Court reaffirms its analysis in Salazar and concludes that ING’s failure to record its beneficial interest rendered its foreclosure sale void.

II. FACTUAL ANALYSIS

A. Standard of Review

The Court assumes the allegations of the SAC are true for purposes of the Motions and construes them liberally in favor of Cruz. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007); Gilligan v. Jamco Development Corp., 108 F.3d 246, 249 (9th Cir. 1997). However, the Court must also find that the SAC pleads sufficient facts to state a claim of relief that is “plausible on its face.” Twombly, 550 U.S. at 570; Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949 (2009) (citing Twombly). The SAC allegations must “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555; see also Iqbal, 129 S. Ct. at 1950 (citing Fed. R. Civ. P. 8(a)(2)).

B. Factual Summary

The SAC allegations relate to the 2004 financing of Cruz’s residence located at 3148 Toopal Drive, Oceanside, CA 92054 (” Property”), by a loan provided by SCME (“Loan”) documented by a variable interest rate note (“Note”) and deed of trust (” DOT”). Aurora was the servicer of the Loan and MERS was the initial nominal beneficiary of the Loan. Cruz claims the TILA disclosure provided to him when the Loan was made was misleading by understating its total cost through maturity, which caused him to forego less expensive financing alternatives.

After Cruz defaulted on the Loan, Defendants commenced the foreclosure process. ING had become the successor beneficiary under the DOT at some time before, but never recorded an assignment of beneficial interest. Cruz then entered into a forbearance agreement with Aurora. ING foreclosed on the Property on June 2, 2010 during the extended forbearance period agreed to by Aurora, even though Cruz was current on his payments at the time. ING’s interest, as assignee beneficiary, first appeared of record in the Trustee’s Deed Upon Sale (“Trustee’s Deed”), recorded a few weeks after the foreclosure. The Trustee’s Deed identified ING as the foreclosing beneficiary.

C. Procedural History

Cruz and his wife filed their joint Chapter 13 bankruptcy petition on January 25, 2011, and Cruz filed his First Amended Complaint (“FAC”) about a month thereafter. Defendants responded to the FAC with motions to dismiss brought pursuant to Fed. R. Bankr. P. 7012, incorporating by reference Fed. R. Civ. P. 12(b)(6) (“First Motions”). These were denied in part and granted in part in this Court’s order entered May 24, 2011 (” FAC Order”). The First Motions were denied to the extent they related to Aurora’s forbearance agreement. The Court also denied the First Motions pertaining to whether causes of action were stated under TULA and under California Business and Professions Code § 17200 (“Section 17200″). The Court granted the First Motions with leave to amend as to whether the TILA causes of action were barred by the statute of limitations; whether MERS had authority to substitute the trustee under the DOT; whether ING’s interest was required to be of record; and whether Cruz could allege facts to tender the Loan amount to set aside the foreclosure under TILA or to claim damages. The Court also granted leave to amend for Cruz to clarify which Defendants were named in the different causes of action.

In response to the FAC Order, Cruz filed his SAC,[4] to which Defendants responded with these Motions.

III. LEGAL ANALYSIS

A. The First Third and Tenth Causes of Action of the SAC are Preempted.

Cruz attempts in the first, third and tenth causes of action to allege his TILA claims indirectly under Section 17200, and as state law fraud and negligent misrepresentation claims. Since these causes of action rely upon the TILA disclosures made to Cruz when the Loan was made, they must be dismissed with prejudice due to federal preemption. In Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1003 (9th Cir. 2008), the Section 17200 claims were alleged based upon TILA disclosures. The Ninth Circuit dismissed these claims, finding Congress intended for TILA to preempt the field. Id. at 1004-06. Here as well, although the deceit and Section 17200 claims do not reference TILA, they are based solely upon the representations mandated by TILA. As in E*Trade Mortg. Corp., id., attempts to camouflage these claims from TILA scrutiny cannot save them from dismissal.

B. The First. Third and Tenth Causes of Action Relating to TILA Disclosures are Not Timely.

Even if the preemption bar did not apply, the Court concludes the first, third and tenth causes of action should still be dismissed. The FAC Order at ¶¶ 12-14 granted leave to amend the TILA causes of action to specify when Cruz discovered, or should have discovered, the harm of the alleged TILA inaccuracy. Gutierrez v. Mofid, 39 Cal. 3d 892, 897-98 (1985) (relevant discovery time is of the nature of the harm, not the existence of legal remedies). This is the date of discovery under state law for statute of limitations tolling purposes. See Grisham v. Philip Morris USA, Inc., 40 Cal. 4th 623, 646 (2007) (personal injury claim for a tobacco company’s misrepresentation accrued at the time that “the physical ailments themselves were, or reasonably should have been, discovered”).

Rather than providing more detail on when the harm was discovered, as required by the FAC Order, the SAC hedges the issue. It alleges that Cruz could not have discovered the understatement of the cost of the 2004 Loan until the TILA disclosure was reviewed by an expert in 2010. Alternatively, the SAC alleges that the harm could not be discovered until 2015, when the interest rate will become variable. SAC ¶ 23. But under either discovery date, Cruz cannot state a cause of action.

If the alleged harm occurred when the Loan was made in 2004 by misleading Cruz into a bad financing choice, then the cause of action is barred by the three year statute of limitations for state law deceit claims. Cal. Code Civ. Pro. § 338(d). Even though a complicated analysis is required, it is possible to discern from the Loan documents attached to the SAC that the total cost of financing on the TILA disclosure differed from the stated interest rate. Although Cruz only alleges state law deceit claims, the Court finds persuasive Ninth Circuit authority that addressed when the harm of TILA misrepresentations should be discovered. Although these claims are alleged under state law, both federal and state courts have applied TILA to assess related state law claims. See e.g. Pacific Shore Funding v. Lozo, 138 Cal. App. 4th 1342, 1347 (2006); Rubio v. Capital OneBank, 613 F.3d 1195, 1203 (9th Cir. 2010). Under Meyer v. Ameriquest Mortgage Co., 342 F.3d 899, 902 (9th Cir. 2003), because the plaintiffs “were in full possession of all information relevant to the discovery of a TTLA violation and a § 1640(a) damages claim on the day the loan papers were signed,” they could not toll the statute of limitations.

Cruz was in full possession of the Loan documentation in 2004. Because there are no allegations of fraudulent concealment, or any other action on the part of any Defendant to cover up the misrepresentations, the deceit causes of action accrued when the Loan was made. Id. This was the date the harm to Cruz could have been determined from the face of the Loan documents.

The alternative explanation of the discovery of the harm is that it has not yet occurred and will not occur, if at all, until the interest rate on the Loan becomes variable in 2015. SAC ¶ 23-33. Whether the Loan will be more or less expensive than either the stated 5.85% initial contract rate, or the projected variable index rate of 4.85% starting in 2015, cannot be known until 2015. It is beyond the capabilities of this Court, or any expert or jury, to speculate about future interest rates. If interest rates drop below the index assumption used when the Loan was made, Cruz will receive a windfall. If they rise, Cruz will suffer loss assuming he is still paying on the Loan. This lack of a concrete impact on the parties renders these claims unripe for resolution. See Thomas v. Union Carbide Agricultural Prod. Co., 413 U.S. 568, 580 (1985) (ripeness doctrine prevents premature adjudication where the impact of a claim against the parties cannot be known); see also Exxon Corp. v. Heinze, 32 F.3d 1399, 1404 (9th Cir. 1994).

The first, third and tenth causes of action, to the extent they are related to the TTLA disclosures,[5] are accordingly dismissed with prejudice because they are either barred by the statute of limitations or are unripe.

C. The Eighth and Ninth Causes of Action for Wrongful Foreclosure and Quiet Title Cannot Be Based upon a Wrongful Substitution of Trustee. But Only upon Section 2932.5.

There are two separate factual scenarios alleged in the wrongful foreclosure causes of action: 1) that MERS lacked authority to substitute Quality as trustee of the DOT; and 2) that ING had no recorded beneficial interest at the time it foreclosed. The second scenario, but not the first, alleges a viable cause of action.

1. The Substitution of Trustee by MERS was Valid.

In the FAC Order, Cruz was directed to specifically allege why MERS, as the nominee of the Lender under the DOT and the beneficiary of record, lacked authority under § 2934a(a)(1)(A) to substitute the trustee. The Court earlier ruled in the FAC Order that if MERS was authorized by the Lender under the DOT to substitute the trustee, this substitution would be valid.

Instead of alleging specific facts that MERS was not authorized by the Lender to substitute the trustee, Cruz relies upon general allegations that two parties cannot both be the beneficiary. SAC ¶ 101. These allegations seem to leave the resolution of whether MERS was authorized to substitute the trustee to the outcome of the litigation. But California law does not provide a cause of action to determine whether or not a party has authority to institute foreclosure proceedings. Gomes v. Countrywide Home Loans, 192 Cal. App. 4th 1149, 1154-56 (2011).

Cruz separately alleges that ING was the beneficiary throughout the foreclosure process.[6] He argues in his opposition that the DOT follows the Note, and MERS could not have been the beneficiary once ING was assigned the Note. This argument ignores that once ING was entitled to enforce the Note, it became the Lender under the DOT, even if its interest was not yet of record. As such, ING could direct MERS, as the beneficiary of record and as the Lender’s nominee, to substitute Quality as the trustee of the DOT. Ferguson v. Avelo Mortgage LLC, 195 Cal. App. 4th 1618, 1628 (2011) (authorized beneficiary may substitute the trustee). Avelo relied upon § 2934a which specifically authorizes substitutions of trustees to be recorded after the substituted trustee takes action. Id.

Leave to amend the substitution of trustee claim will not be granted because Cruz’ allegations that ING was the beneficiary throughout the foreclosure process disprove this claim. Abagninin v. AMVAC Chem. Corp., 545 F.3d 733, 742 (9th Or. 2008) (leave to amend may be denied if the allegation of other facts, consistent with those plead, cannot cure the deficiency).

2. Section 2932.5 Applies to Deeds of Trust.

Although Cruz’s other causes of action are fatally defective, Cruz has properly stated claims for wrongful foreclosure and quiet title based upon ING’s non-judicial foreclosure of the DOT.[7] Section 2932.5 required that ING’s interest be of record at the time of the foreclosure sale, and it was not. MERS was the beneficiary of record when ING foreclosed, but ING was the actual foreclosing beneficiary.[8] The Trustee’s Deed identified ING as the foreclosing beneficiary, and that recital is a binding statement of fact. Bank of America v. La Jolla Group II, 129 Cal. App. 4th 706, 731-32 (2005). Because ING lacked an interest of record, it was not authorized to proceed with the foreclosure sale under § 2932.5, rendering the sale void. Dimock v. Emerald Properties, 81 Cal. App. 4th 868, 874 (2000) (sale under deed of trust by former trustee void, and tender of the amount due is unnecessary); Bank of America, 129 Cal. App. 4th at 712.[9]

To reevaluate whether § 2932.5 concerns both mortgages and deeds of trust, the Court has carefully considered the” intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance . . .” to attempt to determine how the California Supreme Court would rule. Lewis v. Tel. Employees Credit Union, 87 F.3d 1537, 1545 (9th Cir. 1996). The Court remains convinced that the highest court in this state would hold that § 2932.5 requires an assignee trust deed beneficiary to record its interest before it non-judicially forecloses.

a. The Plain Language of § 2932.5 Can Be Applied to Deeds of Trust.

Defendants first contend the plain language of § 2932.5[10] cannot accommodate deeds of trust within its ambit. Starting with a review of the statutory language, and considering its legislative history, see Conservatorship of Whitley, 50 Cal. 4th 1206, 1214 (2010), the Court finds the plain language of § 2932.5 easily pertains to deeds of trust:

Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded.

(Emphasis added). The statute does not only apply to mortgagees but also to other encumbrancers. That a beneficiary under a deed of trust is an encumbrancer is confirmed by the California Supreme Court. “(M)ortgagees and trust deed beneficiaries alike hold security interests in property encumbered by mortgages and deeds of trust.” Monterey S. P. P’ship v. W. L. Bangham, 49 Cal. 3d 454, 461 (1989) (rejecting that a deed of trust conveyed true title to the trustee). Section 2932.5 further provides that the “power [of sale] is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument.” As the assignee of the Note, ING was the party entitled to the payment of money. It took title to the Property in satisfaction of the secured debt at the time of the foreclosure sale. Each of the clauses of § 2932.5 applies comfortably to deeds of trust.

The legislative history of § 2932.5 also supports its application to deeds of trust as well as mortgages. Section 2932.5 succeeded to § 858 verbatim as part of the 1986 technical revisions to California trust law. See Recommendation Proposing the Trust Law (Dec. 1985) 18 Cal. Law Revision Rep. (1985) p. 764; Selected 1986 Trust and Probate Legislation, (Sept. 1986) 18 Cal. Law Revision Com. Rep. (1986) p. 1483, available at http://www.clrc.ca.gov/Mreports-publications.html#V18. These technical revisions included two changes to California foreclosure law pertaining to deeds of trust-to renumber § 2932.5 as part of the non-judicial foreclosure statute, and to add § 2934b to apply Probate Code §§ 15643 (vacancy in the office of trustee) and 18102 (protections for third persons dealing with former trustee.) Had § 2932.5 been limited to mortgages, there would have been no need to revise it at the time of the other revisions to California trust law.

Strike v. Trans-West Discount Corp., 92 Cal. App. 3d 735, 742 (1979) cited the predecessor to § 2932.5; i.e., § 858 to validate the exercise of the power of sale by a trust deed beneficiary of record. Tamburri v. Suntrust Mortg., Inc., 2011 U.S. Dist. LEXIS 72202 * 12-13 (N.D. Cal. July 6, 2011) recognized that whether § 2932.5 applies to deeds of trust raises a serious question sufficient to grant a preliminary injunction against the sale of foreclosed property. The two authoritative treatises that discuss § 2932.5 also agree that deeds of trust fall within its purview. 4 Harry D. Miller & Marvin B. Starr, California Real Estate, §§ 10.2, 10:38, 10:39[11] (3d ed. 2010); and Cal Jur 3d (Rev) Deeds of Trust § 112.[12]

Defendants do not discuss the interpretation of § 2932.5 by these persuasive treatises and other authorities. They point instead to the conveyance language of the DOT, which conveys title to the Property, “with power of sale,” to the trustee, to claim the beneficiary cannot be the “encumbrancer” in whom a power of sale is vested. Not only does this contention ignore that the power of sale in the DOT is controlled and must be invoked by the beneficiary, it seeks to revive the outdated title distinction between mortgages and deeds of trust rejected by the California Supreme Court.

b. Defendants’ Primary Authority is Out-Dated.

Defendants primarily[13] rely on Stockwell v. Barnum, 7 Cal. App. 413, 416-17 (1908), and the District Court cases[14] that follow it, to assert the power of sale in a deed of trust is held by the trustee, not the beneficiary. Stockwell is not a sound basis to determine how the California Supreme Court would apply § 2932.5 because it relies upon the archaic title theory of deeds of trust rather than the modern lien theory. 4 Witkin Sum. Cal. Law STRP § 6(2) (10th ed.) (“In most situations, the title theory has been disregarded, and the deed of trust has been deemed to create a mere lien on the property.”).

In Stockwell, id. at 415, an assignee of a note and deed of trust failed to record her interest before the property was sold at a foreclosure sale. Before the foreclosure sale, the borrower had conveyed the property to someone else. Stockwell held that the purchaser at the foreclosure sale had superior title over the successor owner because the predecessor statute to § 2932.5 only applied to mortgages. Id. Its reason for the distinction was that a deed of trust “instead of creating a lien only, as in the case of a mortgage, passes the legal title to the trustee, thus enabling him in executing the trust to transfer to the purchaser a marketable record title.” Id. at 417.[15]

This reasoning of Stockwell is now inapposite. Under Monterey, 49 Cal. 3d at 461, a deed of trust is no longer a conveyance of actual title to the Property, but merely a lien. The borrower now retains actual title to the property. Bank of Italy Nat. Trust & Sav. Assn. v. Bentley, 217 Cal. 644, 656 (1933). That this title theory is discredited by the Supreme Court is recognized by the Ninth Circuit. Olympic Federal Sav. & LoanAsso. v. Regan, 648 F.2d 1218, 1221 (9th Cir. 1981) (mortgages and deeds of trust are “legally identical,” so that the borrower retains actual title to the property that the Internal Revenue Service can redeem despite the presence of a junior deed of trust). See also Aviel v. Ng, 161 Cal. App. 4th 809, 816 (2008) (to interpret a subordination clause in a lease, the terms mortgages and deeds of trust were treated as synonymous based upon Bank of Italy, 217 Cal. at 656).

This Court finds the California Supreme Court is likely to overrule Stockwell’s holding that the trustee of a deed of trust holds actual legal title, rather than a lien. It has done so before. Monterey, 49 Cal. 3d at 463 (overruling Johnson v. Curley 83 Cal. App. 627 (1927), which held that beneficiaries under a deed of trust were not necessary parties to an action to have that deed declared void for fraud).

c. The Beneficiary, Not the Trustee. Holds the Power of Sale.

A better predictor than Stockwell, 7 Cal. App. at 416-17, of whether the California Supreme Court would apply § 2932.5 to deeds of trust, is that Court’s analysis of the respective roles of trust deed trustees and beneficiaries found in Monterey, 49 Cal. 3d at 463. The trustee merely holds bare legal title to the extent necessary to reconvey the lien if the debt is paid, or to foreclose the security interest if it is not. Id. at 460. The trustee is bound by no fiduciary duties, and has no duty to defend the rights of the beneficiary, or authority to appear in the suit in its behalf. Id. at 462. The trustee of a deed of trust serves merely as a common agent of both parties. Vournas v. Fidelity Nat. Tit. Ins. Co. 73 Cal. App. 4th 668, 677 (1999). Because the beneficiary’s economic interests are threatened when the existence or priority of the deed of trust is challenged, it is the real party in interest under a deed of trust. Monterey, 49 Cal. 3d at 461 (trust deed beneficiary must be named in a mechanics lien foreclosure suit since trustee does not protect its interests). See also Diamond Heights Village Assn., Inc. v. Financial Freedom Senior Funding Corp., 196 Cal. App. 4th 290, 304 (2011) (beneficiary is the real party in interest in a fraudulent conveyance action to void the security).

To claim the trustee, rather than the beneficiary, is the party who holds the power of sale under the deed of trust, elevates form over substance. The beneficiary is the real party in interest and should comply with § 2932.5.

d. Section 2932.5 Protects Borrowers’ Rights.

The California Supreme Court is clear that the distinction between mortgages and deeds of trust is inapplicable where necessary to protect a borrower’s rights. Bank of Italy, 217 Cal. at 658. Even though other statutes address the notices required to be sent to the borrower,[16] who no longer has a right to redeem the property after any foreclosure,[17] the borrower still has a right to strict construction of all of the non-judicial foreclosure statutes, including § 2932.5, to prevent an improper sale of its property. See System Inv. Corp. v. Union Bank, 21 Cal. App. 3d 137, 153 (1971) (harshness of non-judicial foreclosure justifies strict compliance with statutes); Bank of America, 129 Cal. App. 4th at 712 (“Statutory provisions regarding the exercise of the power of sale provide substantive rights to the trustor and limit the power of sale for the protection of the trustor,” citing Miller & Starr, § 10:123 (3d ed. 2003)). Deeds of trust are “far more widely used in this state” than mortgages. 4 Witkin Sum. Cal. Law STRP § 4 (10th ed.) (Citations omitted). Application of § 2932.5 to deeds of trust advances California’s broader statutory scheme to protect borrowers, consumer and otherwise, from a wrongful foreclosure.

MERS argues that the assignee beneficiary need not record its interest to prevent a gap in title. It again confuses the title to the lien of the deed of trust with title to the Property. That MERS was the beneficiary of record even though ING was the foreclosing beneficiary created a gap in title to the lien. ING was a stranger to the record before the foreclosure giving rise to suspicion that the sale was not authorized. This is the very risk that § 2932.5 was intended to safeguard. Stockwell, 7 Cal. App. at 416-17 (“the record should correctly show the authority of a mortgagee or his assigns to sell” to ensure that the title so conveyed be free from suspicion).

D. MERS Remains a Party to the Eighth and Tenth Causes of Action.

MERS seeks to dismiss the only two causes of action against it in the SAC, the eighth (wrongful foreclosure) and the tenth (Section 17200). MERS remains a party to the wrongful foreclosure cause of action due to this Court’s ruling on § 2932.5, even though the substitution of trustee claims found in that cause of action are dismissed. Because MERS may be liable for wrongful foreclosure on that basis, Cruz has also stated a viable 17200 claim as well.

Section 17200 establishes a disjunctive three part definition prohibiting any “unlawful, unfair, or fraudulent business practice.” “Each of these three adjectives captures a `separate and distinct theory of liability.'” Rubio, 613 F.3d at 1203, citing Kearns v. Ford Motor Co., 567 F.3d 1120, 1127 (9th Cir. 2009). As amended by Proposition 64, Section 17200 is applicable to protect consumers who have suffered an injury in fact as well as business competitors. Californians for Disability Rights v. Mervyns’LLC, 39 Cal. 4th 223, 228 (2006).

Since MERS is not alleged to have participated in any fraudulent activity, the last prong is not at issue. Under its “unlawful” prong, Section 17200 borrows violations of other laws and makes them independently actionable. Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 180 (1999). Although not a criminal statute, violation of other civil statutes can satisfy Section 17200. State Farm Fire & Casualty Co. v. Superior Court, 45 Cal. App. 4th 1093, 1103 (1996) (unlawful prong includes “anything that can properly be called a business practice and that at the same time is forbidden by law,” including antidiscrimination laws, antitrust laws, environmental protection laws, fish and game laws, housing laws, labor laws, vehicle laws, and criminal laws (citations omitted)); Rubio, 613 F.3d at 1204 (TILA violation). The “unfair” prong is measured by the alternative public policy test adopted by Rubio, 613 F.3d at 1205, citing Gregory v. Albertson’s, Inc., 104 Cal. App. 4th 845, 854 (2002). This test looks to whether the practice violates public policy as declared by “specific constitutional, statutory or regulatory provisions.” Rubio, 613 F.3d at 1205. In Rubio, the Ninth Circuit simply noted that the statutory policy behind TILA would satisfy the “unfair” prong of the test. It in effect collapsed the two prongs where statutory violations are alleged. Id.

The allegations of the SAC support MERS’ involvement in the violation of § 2932.5. MERS was the beneficiary of record, even though ING was the foreclosing beneficiary. The “unlawful” prong is met; as is the “unfair prong” under these allegations, and MERS will not be dismissed from either the eighth or tenth causes of action.

IV. CONCLUSION

The distinction between mortgages and deeds of trust is more one of terminology than substance as Monterey, 49 Cal. 3d at 464 stated: “Regrettably, it appears to be too late in the development of our vocabulary to rename deeds of trust and the `trustees’ who act under those instruments.” Weighing the dubious continuing viability of the Stockwell case against the other authority cited in this Memorandum Decision, the Court concludes that ING as the foreclosing beneficiary under the DOT is as subject to the mandates of § 2932.5 as if it held a mortgage. The DOT gives the authority to exercise the power of sale to ING, who is the real party in interest by law for foreclosure matters. For the same reasons as a mortgagee must record its interest before it forecloses, so must a beneficiary of a deed of trust under § 2923.5. The ministerial role of the trustee does not justify any distinction between the two instruments for purposes of § 2932.5 because the trustee as agent simply acts at the direction of the beneficiary.

This Memorandum Decision will constitute the Court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052. Counsel for Cruz is directed to prepare an order in accordance with this Memorandum Decision within ten days of the date of entry.

IT IS SO ORDERED.

[1] The Court rules on the Motions despite the recent death of plaintiff Cruz. His demise does not abate this adversary proceeding, which pursues claims which now either belong to his estate or successor. Fed. R. Civ. P. 25 applies to allow the substitution of the successor of the deceased party in this case. Hawkins v. Eads, 135 B.R. 380, 384 (Bankr. E.D. Cal. 1991); see Fed. R. Bankr. P. 7025. The Court will decide any motion of substitution by any party or by the successors of Cruz at a later time. Hawkins, 135 B.R. at 384. The Chapter 13 case remains pending as Cruz’s wife is a co-debtor, and its status will be addressed in the bankruptcy case in chief pursuant to Fed. R. Bankr. P. 1016.

[2] Defendant SCME Mortgage Bankers, Inc. (“SCME”) has been defunct since 2007 and has not responded in any way to the complaints filed by Cruz. Quality Loan Service Corporation (“Quality”) has been deleted as a Defendant in the SAC, likely due to its filing of a Declaration of Nonmonetary Status pursuant to Cal. Civ. Code § 29241 (“Status Declaration”) to which Cruz did not timely object. In the Status Declaration, Quality stated it did not hold title to the Property and only served as the parties’ agent. Quality also agreed to be bound by any nonmonetary order or judgment of this Court. The Court will thus address the SAC only as it pertains to the moving parties Aurora, ING and MERS (collectively “Defendants”).

[3] All references to a statutory section are references to the California Civil Code unless otherwise specified.

[4] The SAC alleges ten causes of action: 1) intentional misrepresentation as to SCME and ING; 2) intentional misrepresentation as to Aurora and ING; 3) negligent misrepresentation as to SCME and ING; 4) negligent misrepresentation as to Aurora and ING; 5) breach of contract as to Aurora and ING; 6) breach of implied covenant of good faith and fair dealing as to ING and Aurora; 7) promissory estoppel as to ING and Aurora; 8) wrongful foreclosure as to ING, Aurora and MERS; 9) quiet title as to ING; and 10) violation of Section 17200 as to all Defendants.

[5] Cruz argued that since the Court denied the First Motions to dismiss the Section 17200 cause of action, MERS is precluded from challenging it again. But the Court’s analysis of the ripeness of this dispute is based upon new allegations of the SAC found in paragraph 23-that Cruz “would have discovered the interest rate discrepancy in the year 2015 when his payments would have deviated significantly from what the TILA disclosure statement reflected.”

[6] In SAC ¶ 100, Cruz alleges that “ING claims that they are and were the beneficiary of the Deed of Trust throughout the foreclosure process.” Cruz also alleges in SAC ¶ 61 that “Aurora was acting as agent for ING,” including when Aurora entered into the “Forbearance Contract” in October 2009. SAC ¶ 83.

[7] Although not the focus of his SAC, which is instead on the substitution of trustee under the DOT, Cruz alleges sufficient facts to assert this claim in SAC ¶ 106.

[8] Defendants do not contest that § 2932.5, if applicable, was not complied with by ING’s foreclosure without its interest being of record. They merely contest whether the statute applies to deeds of trust, or only to mortgages.

[9] Avelo, 195 Cal. App. 4th at 1628, on which Aurora relies for the broad statement that tender is required in any case seeking to set aside a completed sale, is not to the contrary. Avelo recognized that an unauthorized foreclose sale was void, but did not find the sale at issue was unauthorized. There, the substitution of trustee was signed by a lender before it was assigned any interest in the deed of trust. Because § 2934a retroactively validates a substitution of trustee by an unauthorized beneficiary, the substitution of trustee was deemed valid as of the time the deed of trust was assigned. Id., citing Dimock, 81 Cal. App. 4th at 876-78.

[10] Aurora and ING also direct the Court to a portion of § 2920(b) asserting that mortgages and deeds of trust are mutually exclusive under the foreclosure statute. This assertion ignores that § 2920(b) by its express terms only applies “(f)or purposes of Sections 2924 to 2924h, inclusive . . .” This limited exclusion of a deed of trust from the definition of a mortgage is patently inapplicable to § 2932.5.

[11] MERS incorrectly cites 4 Harry D. Miller & Marvin B. Starr, California Real Estate, §§ 10:2, 10:38, 10:39 (3d ed. 2010) (“Miller & Starr”) despite it being cited by MERS as an authoritative source on real estate. MERS quotes Miller & Starr to state that (“An assignment of the note and deed of trust need not be recorded to be effective. . . .”). The text quoted by MERS pertains only to the effectiveness of assignments between the assignee and assignor, but not to § 2932.5. Miller & Starr in the same section, § 10:39, proceed to specifically apply § 2932.5 to deeds of trust as well as mortgages: “In the case of a deed of trust or mortgage with a power of sale, an assignee can only enforce the power of sale if the assignment is recorded, because the assignee’s authority to conduct the sale must appear in the public records.”

[12] Cal Jur 3d (Rev) Deeds of Trust § 112 cites § 2932.5 and other authority for the following:

The assignment of a note and trust deed ordinarily vests in the assignee all the rights and interest of the beneficiary. The assignee becomes the equitable owner of the security and is entitled, as successor to the beneficiary, to all that is equitably due on the trust deed including interest on the amount secured to the date of payment or tender. The assignee has a right to bring a foreclosure action and may exercise the power of sale in a security instrument if the assignment is duly acknowledged and recorded.

[13] Defendants also cite two cases, neither of which supports that a deed of trust grants the power of sale to the trustee, rather than the beneficiary. Garretson v. Post, 156 Cal. App. 4th 1508, 1516 (2007) was actually a SLAPP case against the beneficiary arising from a claim of wrongful foreclosure, which summarily described the non-judicial foreclosure process. Py v. Pleitner, 70 Cal. App. 2d 576, 579 (1945) involved an obsolete difference between the right of redemption between mortgages and deeds of trust, rather than whether the trustee or beneficiary held the power of sale. Since Code of Civil Procedure § 729.010 now provides for a right of redemption following a judicial sale under either a mortgage or a deed of trust, Civ. Proc. § 729.010 (Deering 2011), it is particularly inapposite here.

[14] This Court respectfully is not bound by these District Court decisions. See State Compensation Ins. Fund v. Zamora (In re Silverman), 616 F.3d 1001, 1005 (9th Cir. 2010) (reserving whether bankruptcy courts are bound by district court decisions within the district where the bankruptcy court sits, but recognizing problems with a non-uniform body of law might result).

[15] Stockwell, 7 Cal. App. at 417, secondarily based its holding on its conclusion that “[i]t is immaterial who holds the note,” a conclusion recognized by Defendants as erroneous. In fact, they assert who holds the Note is dispositive, rather than “immaterial.” Defendants claim that because ING was the holder of the Note at the time of the foreclosure, it was unnecessary for it to record the assignment, because when the Note was transferred to ING, the beneficial interest in the DOT automatically transferred with it. Polhemus v. Trainer, 30 Cal. 686, 688 (1866) (interest in the collateral subject to the mortgage “does not pass unless the debt itself [is] assigned”). That ING is entitled to enforce the Note does not alone obviate compliance with § 2932.5, which also requires the assignment be recorded before the power of sale is exercised by the beneficiary.

[16] MERS correctly points out that notice requirement for borrowers are also addressed by other statutes. See §§ 2924b(b)(1) (trustor and mortgagee must receive copy of recorded notice of default via mail), 2924b(b)(2) (trustor and mortgagee must receive copy of recorded notice of sale via mail) and 2937 (trustor and mortgagee of residential property must receive notice of assignment of servicing of mortgage of trust deed via mail). This does not change the Court’s view addressed in Salazar, 448 B.R. at 821, that § 2932.5 helps ensure borrowers know who actually owns the loan and is the real party in interest during the foreclosure process. Id. at 818.

[17] See footnote 13, infra.

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IN RE MONK | Oregon BK Court “Proof Of Claim, Failure to Respond, LSI Title, Litton, U.S. Bank, PCFS”

IN RE MONK | Oregon BK Court “Proof Of Claim, Failure to Respond, LSI Title, Litton, U.S. Bank, PCFS”


UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF OREGON

IN RE
LESTER G. MONK, and
MARY L. MONK,
Debtors.
___________________
LESTER G. MONK, and
MARY L. MONK,
Plaintiffs

v.

LSI TITLE COMPANY OF OREGON, LLC,
LITTON LOAN SERVICING, LP,
U.S. NATIONAL BANK ASSOC., as Trustee
under a pooling and servicing agreement dated as of
March 1, 2002,
MORGAN STANLEY DEAN WITTER CAPITAL
I INC. TRUST 2002-NCI, and
DOES 1 through 10,
Defendants.

EXCERPTS:

DISCUSSION

A. Litton’s Motion to Dismiss
Defendant Litton has filed a motion to dismiss on the following grounds:
1) Plaintiffs do not have a private right of action under the discharge injunction and no violation of the
discharge injunction occurred under the facts of this case.
2) Plaintiffs’ Chapter 13 Plan did not affect the lien of the Defendants, which rode through bankruptcy
unaffected unaffected by the order disallowing the claim of PCFS, Litton’s predecessor in interest.
3) Plaintiffs entered into a novation of the loan after the discharge order was entered in the Chapter 13 case.
4) The bankruptcy court lacks post-confirmation subject matter jurisdiction over the claims set forth in the
Complaint.
5) Plaintiffs have failed to state a claim for rescission based on the foregoing and the fact that they failed to
plead that they could repay moneys owed to the Defendants in order to completely unwind the transaction.
6) The claim for violation of the FDCPA should be dismissed based on the foregoing and because: a)
Defendants are not “debt collectors” within the meaning of the FDCPA; b) the FDCPA claim is based on
alleged conduct outside the statute of limitations; and c) no FDCPA claim lies for alleged violations of the
discharge injunction.

[…]

Litton also seeks dismissal of the Claim on the basis that under the facts alleged, no violation of the
discharge injunction occurred. To determine whether this is so, some analysis of the actions which occurred
in the case must be made. First, the Trustee filed an objection to the secured claim of PCFS because it had
not provided the information the Trustee had been seeking to verify the secured status and perfection of the
claim. Proper notice was made to PCFS of the objection and order and the fact that it was required to
respond within 32 days or its claim would be “disallowed in full.” When PCFS failed to respond, its claim
was “disallowed.” Litton argues in its second ground for dismissal that PCFS’s lien was unaffected by the
disallowance of its claim and “rode through” bankruptcy unscathed. It is true that a lien will survive
bankruptcy despite the failure of the holder to file a proof of claim for the related claim. See Hamlett v.
Amsouth Bank (In re Hamlett), 322 F.3d 342 (4th Cir. 2003). Here, however, a proof of claim was filed, and
subsequently disallowed on the Trustee’s objection.

Section 506(d)4 provides as follows:

To the extent that a lien secures a claim against the debtor that is not an allowed secured
claim, such lien is void, unless —
(1) such claim was disallowed only under section 502(b)(5) [unmatured support obligation] or
502(e) [certain claims for reimbursement or contribution] of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a
proof of claim under section 501 of this title.

Because PCFS’s claim was “disallowed,” it was not an “allowed secured claim,” and the related lien
was void pursuant to § 506(d). Defendant’s claim was not of the type described in § 506(d)(1), and its claim
was disallowed for reasons other than its failure to file a proof of claim. Thus, when the discharge order was
entered in Debtors’ case, Defendant held a “disallowed” claim and a void lien.
Section 1328 provides in part:

(a) As soon as practicable after completion by the debtor of all payments under the
plan, unless the court approves a written waiver of discharge executed by the debtor after the
order for relief under this chapter, the court shall grant the debtor a discharge of all debts
provided for by the plan or disallowed under section 502 of this title, except any debts —
(1) provided for under section 1322(b)(5) of this title.
****

Defendant argues that Debtors did not file an amended Plan after disallowance of its claim and that
the Plan continued to provide for ongoing payments to Defendant on the long-term debt pursuant to ¶ 4, and
that the Plaintiffs did, in fact, continue to make the ongoing payments to PCFS even after the claim was
disallowed. If follows, argues Defendant, that the debt was not discharged under the exception at §
1328(a)(1).

Defendant’s argument fails for the following reason: The debt was disallowed under section 502 and, as provided by § 1328(a), it was discharged. A “debt” is defined at §101(12) as “liability on a claim.” A “claim” is defined as a “right to payment . . . .” §101(5)(A). Once the claim was disallowed, PCFS no longer had a right to payment and thus no longer had a “claim” or a “debt.” As it no longer possessed a “debt,” it follows that it did not have a “debt[] provided for under section 1322(b)(5),” and cannot use § 1328(a)(1) to except its nonexistent debt from discharge.

[…]

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LEVITIN | Standing to Invoke PSAs as a Foreclosure Defense

LEVITIN | Standing to Invoke PSAs as a Foreclosure Defense


Make sure you catch who signed the assignment of mortgage down below… but ERICA JOHNSON-SECK!

Credit Slips-

A major issue arising in foreclosure defense cases is the homeowner’s ability to challenge the foreclosing party’s standing based on noncompliance with securitization documentation. Several courts have held that there is no standing to challenge standing on this basis, most recently the 1st Circuit BAP in Correia v. Deutsche Bank Nat’l Trust Company. (See Abigail Caplovitz Field’s cogent critique of that ruling here.) The basis for these courts’ rulings is that the homeowner isn’t a party to the PSA, so the homeowner has no standing to raise noncompliance with the PSA.

I think that view is plain wrong.  It fails to understand what PSA-based foreclosure defenses are about and to recognize a pair of real and cognizable Article III interests of homeowners:  the right to be protected against duplicative claims and the right to litigate against the real party in interest because of settlement incentives and abilities.

[CREDIT SLIPS]

ERICA JOHNSON-SECK

INDYMAC FED. BANK FSB v. GARCIA | NYSC Vacates Default JDGMT “Robo-Signer, Fraudulent Erica Johnson-Seck Affidavit”

Full Deposition Of ERICA JOHNSON SECK Former Fannie Mae, WSB Employee

[NYSC] Judge Finds Issues With “NOTE AMOUNTS”, Robo Signer “ROGER STOTTS” Affidavit: ONEWEST v. GARCIA

[NYSC] JUDGE SCHACK TAKES ON ROBO-SIGNER ERICA JOHNSON SECK: DEUTSCHE BANK v. MARAJ (1) (64.591)

[NYSC] JUDGE SCHACK TAKES ON ROBO-SIGNER ERICA JOHNSON SECK: DEUTSCHE BANK v. HARRIS (2) (70.24)

[NYSC] JUDGE SCHACK TAKES ON ROBO-SIGNER ERICA JOHNSON SECK: ONEWEST BANK v. DRAYTON (3)

Wall Street Journal: Foreclosure? Not So Fast

ONEWEST BANK ‘ERICA JOHNSON-SECK’ ‘Not more than 30 seconds’ to sign each foreclosure document

INDYMAC’S/ONEWEST FORECLOSURE ‘ROBO-SIGNERS’ SIGNED 24,000 MORTGAGE DOCUMENTS MONTHLY

WM_Deposition_of_Erica_Johnson-Seck_Part_I

Deposition_of_Erica_Johnson-Seck_Part_II

Thank you to Mike Dillon for pointing and providing this crucial piece below

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© 2010-15 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.



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MERS: The Unreported Effects of Lost Chain of Title on Real Property Owners

MERS: The Unreported Effects of Lost Chain of Title on Real Property Owners


By: David E. Woolley

HARBINGER ANALYTICS GROUP

FORWARD

It has been widely reported that MERS1 has broken or severely diluted2 the chain of title for real property records, but what does this mean? To understand the importance of the chain of title to a property and the complexities of land boundaries we need to look no further than the advice given to practicing attorneys.

“To properly evaluate a case, counsel and survey experts often must examine chains of title for all properties subject to the dispute. In the case of a boundary dispute, it may be necessary to search the chain of title back to a patent to determine paramount title or to locate true boundaries.” 3

As is readily apparent, a broken chain of title will have adverse effects on adjoining properties and in many instances the boundaries of properties within an entire neighborhood. Attorneys are advised to “seriously consider not taking the case or withdrawing from it.” If attorneys are advised to “seriously consider” withdrawing, how will the common victim of MERS (by proxy) get relief?

The complexity of the problem is obvious. As lenders and title insurers pass responsibility back and forth, property owners who purchased a foreclosed property that had been in the MERS system (and now have broken chains of title) and their neighbors will be forced into expensive and complex litigation in order to determine their boundaries.

Who will be financially responsible for the litigation to quiet title?
This White Paper documents the importance of a chain of title and the far reaching effects of a lost chain of title.

[ipaper docId=61582207 access_key=key-nwuvl3v86jxwul57xco height=600 width=600 /]

© 2010-15 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.



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In RE SHAW | Ohio BK Court Grants Debtor Summary Judgment, Awards $71,539.46 Against Green Tree

In RE SHAW | Ohio BK Court Grants Debtor Summary Judgment, Awards $71,539.46 Against Green Tree


In re: Richard E. and Mary Shaw, Chapter 7, Debtor(s).
Eric W. Goering, Trustee, Plaintiff,
v.
Green Tree Financial Services Corp. et al., Defendants.

Case No. 09-10277, Adv No. 10-1020.

United States Bankruptcy Court, S.D. Ohio, Western Division.


May 2, 2011.

John A. Schuh, Esq., Adam M. Schwartz, Esq., David Demers, Esq., David H. Yunghans, Esq., for Debtors.

ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT’S CROSS MOTION FOR SUMMARY JUDGMENT

BURTON PERLMAN, Bankruptcy Judge

In this adversary proceeding, arising in a chapter 7 bankruptcy case, Plaintiff Trustee seeks to avoid a first mortgage lien held by Green Tree Financial Services Corp. (“Green Tree”.)

Now before the Court is a Motion for Summary Judgment brought by Plaintiff, and a Cross Motion by Defendant Green Tree. Plaintiff’s Motion is supported by the Stipulation of Facts (Doc. 35), Plaintiff’s affidavit, and the claims register contained in Appendix No. 4. Green Tree’s cross motion also looks to the Stipulation of Facts and the Entry Confirming Sale and Ordering Deed and Distribution, entered by the Brown County Court of Common Pleas of Ohio with attachments, including a copy of the subject mortgage. The issues before the Court are 1) whether a certificate of acknowledgment which fails to recite the grantor’s name renders the mortgage avoidable; 2) whether the establishment of lis pendens within the 90-day preference period provides constructive notice of the mortgage to the Trustee; and 3) the effect of the sale of the property via the foreclosure process to Green Tree and Green Tree’s subsequent sale of the property to a third party.

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the general order of reference entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K), (F) and (O).

Motions for summary judgment are governed by F.R.Civ.P. 56 which is incorporated into bankruptcy practice by F.R.B.P. 7056. That rule provides in part that a motion for summary judgment is to be granted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” The moving party bears the initial burden of showing that there is no issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323-324 (1986). The nonmoving party, however, bears the ultimate burden of showing that a genuine issue of material fact exists. In doing so, the nonmoving party cannot rest on its pleadings, but must, in response, offer some evidence which demonstrates a genuine issue of material fact for trial. Id.

FACTS

The material facts are not in dispute. On January 13, 1999, Debtor Richard E. Shaw granted a mortgage on the subject property, 1719 Kress Road, Mt. Orab, Ohio, in favor of Green Tree. The certificate of acknowledgment on the mortgage is blank as to the grantor’s name. On December 9, 2008, Green Tree initiated a foreclosure action in state court on the property.

On January 21, 2009, the Debtor filed his bankruptcy petition. Green Tree then filed its Motion for Relief From Stay. On February 27, 2009, the clerk entered a default order granting Green Tree’s Motion for Relief From Stay. Green Tree did not seek an abandonment from the Trustee and the Trustee did not abandon the property[1] The Trustee was never added as a party to the state court foreclosure action.

On April 17, 2009, a judgment entry and decree in foreclosure was entered in the state court action. The property was appraised by the sheriff for $85,000.00. At the July 13, 2009 sheriff’s sale, Green Tree was the highest bidder, with a credit bid of $56,667.00. The foreclosure sale was confirmed on August 25, 2009. Soon thereafter, Green Tree sold the property to Jared Smith for $79,900.00. Green Tree received net proceeds of $71,539.46 from the subsequent sale of the property.

DISCUSSION

A. Mortgage Validity.

Included in the record before the Court is a copy of the mortgage document. The mortgage concludes with a signature by Debtor Richard E. Shaw and the names of two witnesses. Following this is an Acknowledgment, the printed form stating: “This instrument was acknowledged before me this”, followed by the date. The second line contains the word “by” followed by a blank. In the blank, the notary has stamped his name. The Acknowledgment concludes with the signature of the notary. Nowhere in the Acknowledgment does the name of either debtor appear.

The law is well-settled in this district that the failure to identify the grantor as an acknowledging party in the acknowledgment clause renders the mortgage defective and, therefore, avoidable under 11 U.S.C. § 544(a)(3). In re Nolan, 383 B.R. 391 (B.A.P. 6th Cir. 2008); Countrywide Home Loans, Inc. v. Spaeth, Case No. 3-10-CV-120 (S.D. Ohio entered July 8, 2010)(Rose, J.)(affirming In re Highland, Adv. No. 09-3006)(Bankr. S.D. Ohio entered January 27, 2010)(Walter, J.)); In re Burns, 2010 WL 3081338 (Bankr. S.D. Ohio 2010)(Humphrey, J.); In re Sauer, 417 B.R. 523 (Bankr. S.D. Ohio 2009)(Hoffman, J.). Therefore, the mortgage here in question is fatally defective, and is avoidable under 11 U.S.C. § 544(a)(3).

B. Lis Pendens.

Normally, the establishment of lis pendens prior to the petition filing date imparts constructive knowledge of a defective mortgage to the Trustee, therefore protecting a mortgage from avoidance under 11 U.S.C. § 544(a)(3). In re Periandri, 266 B.R. 651 (B.A.P. 6th Cir. 2001). However, if the establishment of lis pendens occurs within the 90-day preference period, then the mortgage may be avoided as a preferential transfer, provided the Trustee satisfies his burden of proof as to all elements of 11 U.S.C. § 547(b). In re Gruseck & Son, Inc., 385 B.R. 799 at *9 (B.A.P. 6th Cir. 2008). In the present case, the Plaintiff has established all six elements of a preferential transfer under § 547(b). Green Tree does not contest this position. Therefore, lis pendens is avoided and the defense fails.

C. Damages.

Pursuant to 11 U.S.C. § 550, to the extent that a transfer is avoided under either § 544 or § 547, the trustee may recover, for the benefit of the estate, either the property transferred or the value of the property from the initial transferee. In the present case, because the property was subsequently conveyed by the initial transferee, Green Tree, to a third party, Plaintiff is seeking to recover the value of the transferred property from Green Tree rather than the property itself. Plaintiff contends that the best measure of the value of the property is the sale price of the property from Green Tree to the third party purchaser. We agree. That value here is $71,539.46.

D. Remaining Defenses.

Green Tree contends that it no longer has any interest in the subject property. This may be true, but it is not a defense to an avoidance action. See 11 U.S.C. § 550 (trustee may recover the property or the value of the property). Citing In re Spaude, 112 B.R. 304 (Bankr. D. Minn. 1990), Green Tree contends that as a part of the state court foreclosure process, the state court “ordered” Green Tree to release its mortgage, and therefore, that there is no mortgage for Plaintiff to avoid. In re Spaude is distinguishable. In Spaude, the debtor wished to strip down a wholly unsecured second mortgage. The court held that because the property had been purchased by the second mortgage holder at the sheriff’s sale and the second mortgage holder was now the owner of the property, the debtor had lost his right to strip the mortgage under 11 U.S.C. § 506(d). In contrast to the instant action, Spaude did not involve an avoidance action by Trustee.

Green Tree also contends that the estate has no interest in the property. Specifically, Green Tree contends that since there were no proceeds to be distributed from the foreclosure sale, the property was effectively abandoned by the Plaintiff. Green Tree cites numerous cases for the proposition that if a foreclosure sale results in excess proceeds, the excess proceeds normally belong to the estate. While Green Tree has correctly cited the law, the cases cited do not support Green Tree’s position that a lack of proceeds from a foreclosure sale equates to an abandonment. Green Tree also asserts that because it obtained relief from the automatic stay, it was free to exercise its rights in the property free from any restrictions under 11 U.S.C. § 362(g). Again, Green Tree has correctly cited the law, but the cases cited do not support its position. The lifting of the stay under 11 U.S.C. § 362 does not equate to an abandonment of the property by Plaintiff under 11 U.S.C. § 544.

Lastly, Green Tree contends that its mortgage is insulated from avoidance because a defective mortgage is valid and enforceable between the bank and its borrower, absent fraud. That proposition may be valid in actions by a debtor, as demonstrated by the cases relied upon by Green Tree. The proposition does not hold true, however, where it is a trustee who raises the question in a § 547 action.

* * *

Accordingly, Plaintiff’s Motion for Summary Judgment is GRANTED. Green Tree’s Cross Motion for Summary Judgment is denied. Plaintiff is awarded a money judgment in the amount of $71, 539.46 against Green Tree.

IT IS SO ORDERED.

[1] This district has a streamlined procedure for obtaining an abandonment from a trustee. See Local Bankruptcy Rule 6007-1.

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© 2010-15 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.



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