Tag Archive | "Breach"

Alison Frankel: How BofA could lose big if it wins MBIA regulatory challenge

Alison Frankel: How BofA could lose big if it wins MBIA regulatory challenge

Alison Frankel’s On The Case-

I’ve spent a lot of time talking about what I consider Bank of America’s risky gamesmanship in its multi-pronged litigation with the bond insurer MBIA, but it may be that I’ve underestimated that risk by focusing on the downside for the bank in MBIA’s breach of contract and fraud suit. Under a not-implausible scenario, BofA faces serious risk in its regulatory challenge to MBIA’s transformation that’s going to trial on May 14. And ironically, the risk comes not from losing the case — but from winning it.

According to a sophisticated and well-advised MBIA institutional investor that has devoted serious resources to analyzing the issue — trust me, even though the investor doesn’t want to broadcast its involvement, this is a seriously savvy player — if Bank of America and two French banks succeed in overturning MBIA’s 2009 split into separate muni bond and structured finance businesses, there’s a reasonable likelihood that BofA could wind up at the back of the line of MBIA claimants, waiting years for whatever scraps are left over from payouts to municipal bond insurance policyholders.

Here’s why. For all sorts of reasons…


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Alison Frankel: NY AG’s curious new bid to intervene in $8.5 bl BofA MBS deal

Alison Frankel: NY AG’s curious new bid to intervene in $8.5 bl BofA MBS deal

Reuters Legal-

New York Attorney General Eric Schneiderman still wants a say in whether Bank of America’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities investors should be approved by a state-court judge. The AG’s new intervention motion, filed more than seven months after Schneiderman first moved to join the case, makes the exact same arguments as the old motion, which was pending before New York State Supreme Court Justice Barbara Kapnick when the settlement was removed from state court to Manhattan federal court last August. There’s just one notable exception: The AG’s office “deleted” its explosive fraud counterclaims against Countrywide MBS trustee Bank of New York Mellon. Is playing nice (or, at least, nicer) enough to win the AG a seat at the table?

Those fraud counterclaims, as you’ll surely recall, caused quite a stir when Schneiderman’s office tacked them onto its original motion to intervene. One Manhattan business development official questioned the wisdom of attacking a trustee that was at least making an effort to respond to investors’ concerns and warned that the AG was endangering the city’s standing as the preferred home of financial institutions. BNY Mellon and the institutional investors backing the proposed $8.5 billion settlement responded in kind to the AG’s intervention motion, asserting that Scheiderman didn’t have standing to intervene because he’s not a Countrywide MBS investor.


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NY pushes objection to BofA $8.5 billion mortgage pact

NY pushes objection to BofA $8.5 billion mortgage pact


Bank of America Corp’s proposed $8.5 billion mortgage bond settlement received fresh opposition on Tuesday from New York’s attorney general, who said the accord appears unfair to investors who may deserve to recover more.

Eric Schneiderman, the attorney general, filed papers on Tuesday asking a New York State Supreme Court justice for permission to intervene.

He had made the same request last August before the case moved to federal court. It returned to the state court in February.

The settlement announced last June arose from Charlotte, North Carolina-based Bank of America’s 2008 purchase of Countrywide Financial Corp, once the nation’s largest mortgage lender.


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LETTER: MBIA tells judge of newly uncovered Countrywide fraud “FACTS” database

LETTER: MBIA tells judge of newly uncovered Countrywide fraud “FACTS” database

Alison Frankel-

I sure hope the Securities and Exchange Commission and other members of the new joint mortgage-backed securities task force are paying attention to the docket in MBIA’s New York State Supreme Court fraud and breach-of-contract suit against Countrywide. On Wednesday, MBIA’s lawyers at Quinn Emanuel Urquhart & Sullivan sent a letter to Justice Eileen Bransten requesting that she order Countrywide to produce discovery on an internal fraud-tracking database “which MBIA had not previously known to exist.” MBIA said it needs the discovery to prepare for upcoming depositions of former Countrywide employees who tried to expose its allegedly fraudulent mortgage underwriting practices, including the well-known whistleblowers Eileen Foster and Mari Eisenman.


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Law Offices of Howard G. Smith Announces Investigation of Lender Processing Services, Inc.

Law Offices of Howard G. Smith Announces Investigation of Lender Processing Services, Inc.

Market Watch-

The investigation concerns whether the Company or its fiduciaries breached their fiduciary duties by improperly processing mortgages and mortgage foreclosures. A civil lawsuit filed in December 2011 by the Office of the Attorney General of the State of Nevada alleges that LPS and certain of its subsidiaries: (1) engaged in a pattern and practice of falsifying, forging and/or fraudulently executing foreclosure related documents, resulting in numerous foreclosures that were predicated upon deficient documentation; (2) fraudulently notarized documents without ensuring that the notary did so in the presence of the person signing the document; (3) implemented a widespread scheme to forge signatures on key documents, to ensure that volume and speed quotas were met; (4) concealed the scope and severity of the fraud by misrepresenting that the problems were limited to clerical errors; (5) improperly directed and/or controlled the work of foreclosure attorneys by imposing inappropriate and arbitrary deadlines that forced attorneys to churn through foreclosures at a rate that sacrificed accuracy for speed; (6) improperly obstructed communication between foreclosure attorneys and their clients; and (7), demanded a kickback/referral fee from foreclosure firms for each case referred to the firm by LPS and allowed this fee to be misrepresented as “attorney’s fees” on invoices passed on to Nevada consumers and/or submitted to Nevada courts.


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Syncora Guar. Inc. v Countrywide Home Loans, Inc. 650042/09 1.3.2012

Syncora Guar. Inc. v Countrywide Home Loans, Inc. 650042/09 1.3.2012

Supreme Court, New York County

Syncora Guarantee Inc., Plaintiff,



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MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008 SUMMARY JUDGMENT 1.3.2012

MBIA Insurance Corp. v. Countrywide Home Loans Inc., 602825-2008 SUMMARY JUDGMENT 1.3.2012


MBIA Insurance Corporation,


Countrywide Home Loans, Inc., et al., 

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REUTERS Exclusive: SEC warns staff their stocks data was exposed

REUTERS Exclusive: SEC warns staff their stocks data was exposed

Why aren’t we surprised? Staff?

(Reuters) –

The Securities and Exchange Commission is warning staffers that their personal brokerage account information may have been compromised, after it uncovered security flaws with an ethics compliance program.

The SEC put the program in place after its internal watchdog raised concerns about possible insider trading among SEC staffers.


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MBIA Ins. Corp. v Countrywide Home Loans, Inc. | NY Appeals Court “Fraud, Breach, Securitization, MBS”

MBIA Ins. Corp. v Countrywide Home Loans, Inc. | NY Appeals Court “Fraud, Breach, Securitization, MBS”


[*1]MBIA Insurance Corporation, Plaintiff-Respondent-Appellant,


Countrywide Home Loans, Inc., et al., Defendants-Appellants-Respondents, Bank of America Corp., Defendant.

Cross appeals from the order of the Supreme Court, New York County (Eileen Bransten, J.), entered April 29, 2010, which, to the extent appealed from as limited by the briefs, granted the Countrywide defendants’ CPLR 3211 motion to dismiss the amended complaint to the extent of dismissing the negligent misrepresentation claim and narrowing the claim for breach of the implied duty of good faith and fair dealing, and denied said defendants’ motion to dismiss the fraud claim, and from the order, same court and Justice, entered July 13, 2009, which granted in part and denied in part the Countrywide defendants’ motion to dismiss the original complaint.

First Judicial Department
Angela M. Mazzarelli,J.P.
David B. Saxe
Dianne T. Renwick
Leland G. DeGrasse
Roslyn H. Richter, JJ.
Index 602825/08


Plaintiff MBIA Insurance Corporation (MBIA) is in the business of providing financial guarantee insurance and other forms of credit protection on financial obligations. Defendant Countrywide Financial Corporation (Countrywide Financial), itself or through its subsidiaries, is engaged in mortgage lending and other real estate finance related businesses, including mortgage banking, securities dealing and insurance underwriting. Defendant Countrywide Home Loans, Inc. (Countrywide Home) originates residential home mortgage loans and, together with defendant Countrywide Home Loans Servicing LP (Countrywide Servicing), services those loans. Defendant Countrywide Securities Corporation (Countrywide Securities), a registered broker-dealer, underwrites offerings of mortgage-backed securities.[FN1]

In this action, MBIA alleges that the Countrywide defendants (collectively Countrywide) committed fraud and breached certain contracts in connection with the securitization of pools of residential mortgages [FN2]. Securitization involves packaging numerous mortgage loans into a trust, issuing debt securities in the trust and selling those notes, known as residential mortgage-backed securities, to investors. The securities are backed by the mortgages, and the borrowers’ payments of principal and interest on their mortgage loans are used to pay the investors who purchased the securities.

According to the amended complaint, Countrywide Home originated or acquired residential mortgages, selected certain of those loans for securitization and transferred them into Countrywide-created trusts that issued the notes. Either Countrywide Home or Countrywide Servicing acted as the servicer for the mortgage loans. Countrywide Securities underwrote the securitizations and sold the securities to investors.

In order to make the securities more marketable, Countrywide engaged MBIA to provide [*3]financial guarantee insurance. Between 2002 and 2007, MBIA entered into 17 insurance contracts with Countrywide Home and Countrywide Servicing relating to 17 of Countrywide’s securitizations; 15 of these, spanning from 2004 through 2007, are at issue in this action. Each securitization generally comprised one or two pools of mortgage loans consisting of between approximately 8,000 and 48,000 loans. All of the loans in the securitizations were either home equity lines of credit (HELOCs) or closed-end second mortgages (CESs).[FN3]

Pursuant to the insurance contracts, MBIA guaranteed the payments of interest and principal to the investors. Because the trusts’ obligations were backed by MBIA, in its capacity as insurer, any shortfalls in trust payments to the investors would be covered by MBIA. According to the amended complaint, MBIA’s guarantee allowed Countrywide to market the securities based on a AAA credit rating, rather than the lower credit rating the notes would otherwise have obtained.

In the late fall of 2007, there was a material increase in delinquencies, defaults and subsequent charge-offs of the loans underlying the securitizations. As a result, the trusts were unable to meet their payment obligations to the investors who held the securities and MBIA was forced to pay out on its insurance policies. As of August 29, 2009, MBIA had paid $1.4 billion on its guarantees and faces future claims in excess of hundreds of millions of dollars more.

MBIA commenced this action alleging that the various Countrywide entities made material misrepresentations and breached warranties concerning the origination and quality of the mortgage loans underlying the securitizations. MBIA alleges that Countrywide falsely represented that the loans were made in strict compliance with its underwriting standards and guidelines, as well as industry standards. In fact, MBIA claims, Countrywide abandoned those guidelines by knowingly lending to borrowers who could not afford to repay the loans, or who committed fraud in loan applications or whose applications could not satisfy basic criteria for responsible lending.

For each securitization, Countrywide Home solicited bids from MBIA and provided it with “loan tapes” – key statistics about each underlying loan in the pool – that purportedly contained materially false information indicating that the borrowers were more creditworthy than [*4]they actually were [FN4]. In addition, Countrywide is alleged to have falsely represented that appraisals of residential properties were conducted by independent third-party appraisers. In fact, MBIA alleges, the appraisers were not independent but rather were affiliated with Countrywide, which led to a conflict of interest and increased the risk of inflated appraisals. In addition, Countrywide Securities gave MBIA prospectuses for the securities MBIA was going to insure. MBIA alleges that these documents too contained false representations.

Countrywide also provided MBIA with “shadow ratings” on the proposed pools of mortgage loans selected for the securitizations. A shadow rating, issued by a credit rating agency based on information provided by Countrywide as to the credit quality of the mortgage loans, represents the rating the securitization would have had without MBIA’s financial guarantee. All of the securitizations had shadow ratings of at least BBB- or the equivalent. MBIA contends that in the absence of credit quality reflected by a shadow rating of at least BBB-, it would not have agreed to provide the financial guarantees. MBIA alleges that the shadow ratings were false, misleading or inflated.

According to the amended complaint, as a result of Countrywide’s alleged misconduct and fraudulent misrepresentations concerning the quality of the loans underlying the securitizations, thousands of mortgage loans went into default and MBIA was forced to pay out on its guarantees. MBIA contends that if it had known that Countrywide’s representations about the loans were false, MBIA would never have guaranteed the notes and suffered the losses alleged.

In its amended complaint, MBIA asserts causes of action against the various Countrywide entities for, inter alia, fraud, negligent misrepresentation and breach of the implied duty of good faith and fair dealing [FN5]. Countrywide moved to dismiss these claims pursuant to CPLR 3211(a)(1) and (7), and in a decision entered April 29, 2010, the motion court dismissed the negligent misrepresentation cause of action, but declined to dismiss the fraud cause of action. With respect to the breach of the implied duty of good faith and fair dealing cause of action, the court dismissed the claim except for MBIA’s allegation that Countrywide deliberately refused to take corrective action on defaulting loans so that it could collect more fees. Both plaintiff and Countrywide now appeal.

The motion court properly concluded that the fraud cause of action is not duplicative of the contract claim alleging breaches of certain representations and warranties. In order to [*5]establish fraud, a plaintiff must show a material misrepresentation of an existing fact, made with knowledge of its falsity, an intent to induce reliance thereon, justifiable reliance upon the misrepresentation, and damages (Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559 [2009]). General allegations that a defendant entered into a contract with the intent not to perform are insufficient to support a fraud claim (New York Univ. v Continental Ins. Co., 87 NY2d 308, 318 [1995]; Univec, Inc. v American Home Prods. Corp., 265 AD2d 403, 403 [1999]).

A fraud claim will be upheld when a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, even though the same circumstances also give rise to the plaintiff’s breach of contract claim (First Bank of Ams. v Motor Car Funding, 257 AD2d 287, 291-292 [1999]). “Unlike a misrepresentation of future intent to perform, a misrepresentation of present facts is collateral to the contract . . . and therefore involves a separate breach of duty” (id. at 292; see also Deerfield Communications Corp. v Chesebrough-Ponds, Inc., 68 NY2d 954, 956 [1986]; GoSmile, Inc. v Levine, 81 AD3d 77, 81 [2010]; Selinger Enters., Inc. v Cassuto, 50 AD3d 766, 768 [2008]; WIT Holding Corp. v Klein, 282 AD2d 527, 528 [2001]). We find that MBIA has sufficiently pleaded a fraud independent of the contract claim. The amended complaint alleges that: (i) for each securitization, Countrywide Home provided MBIA with loan documentation, including requests for bids, loan tapes and underlying transaction documents; (ii) representations made in this documentation, such as the loan-to-value ratio, the debt-to-income ratio and the borrower’s FICO score, were false and misleading; (iii) for each securitization, Countrywide Securities provided MBIA with prospectuses; (iv) these prospectuses contained false representations about Countrywide’s compliance with its underwriting guidelines, the independence of the third-party appraisers, and Countrywide’s knowledge of facts that would have caused a reasonable originator to conclude that a borrower would not be able to repay the loan; (v) Countrywide provided MBIA with false, misleading or inflated “shadow ratings” for the loans selected for securitization; (vi) Countrywide made regular presentations to MBIA falsely representing its risk-management systems and loan origination practices; and (vii) all of these representations were made with knowledge of their falsity and to induce MBIA to enter into the insurance agreements. MBIA further alleges that Countrywide Financial directed the activities of Countrywide Home and Countrywide Securities.

Because MBIA alleges misrepresentations of present facts, and not future intent, made with the intent to induce MBIA to insure the securitizations, the fraud claim survives (see First Bank, 257 AD2d at 292 [“defendants intentionally misrepresented material facts about various individual loans so that they would appear to satisfy [the] warranties” in the parties’ agreements]). It is of no consequence that some of the allegedly false representations are also contained in the agreements as warranties and form a basis of the breach of contract claim (see id. [“a fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim”]; Jo Ann Homes at Bellmore v Dworetz, 25 NY2d 112, 119-121 [1969] [allowing fraud claim to proceed in tandem with a contract claim, where the seller misrepresented facts as to the present condition of his property, even though these facts [*6]were warranted in the parties’ contract]). “It simply cannot be the case that any statement, no matter how false or fraudulent or pivotal, may be absolved of its tortious impact simply by incorporating it verbatim into the language of a contract” (In re CINAR Corp. Secs. Litig., 186 F Supp 2d 279, 303 [ED NY 2002]).

There is no merit to Countrywide’s claim that the fraud cause of action fails to satisfy the particularity pleading requirements of CPLR 3016(b). Although CPLR 3016(b) requires a plaintiff to detail the allegedly fraudulent conduct, “that requirement should not be confused with unassailable proof of fraud” (Pludeman v Northern Leasing Sys., Inc., 10 NY3d 486, 492 [2008]). The amended complaint sufficiently identifies Countrywide’s misrepresentations and describes when and how they were made to MBIA, including through false and misleading loan tapes and prospectuses. The fraud claim also lists 4,689 loans that allegedly failed to comply with Countrywide’s underwriting guidelines, specifies that the defective loans had debt-to-income ratios or combined loan-to-value ratios exceeding maximum guideline levels and alleges that the loans were approved on the basis of unverified borrower-stated income that was patently unreasonable. These allegations are “sufficient to permit a reasonable inference of the alleged conduct” (id. at 492). Furthermore, the amended complaint sufficiently identifies Countrywide Securities and Countrywide Financial’s roles in the alleged fraud.

We reject Countrywide’s contention that the fraud claim should have been dismissed for failure to plead a causal link between Countrywide’s alleged conduct and MBIA’s damages. To demonstrate fraud, a plaintiff must show, inter alia, that a defendant’s misrepresentations were the direct and proximate cause of the claimed losses (Laub v Faessel, 297 AD2d 28, 30 [2002]). “A fraudulent misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction in reliance upon it if, but only if, the loss might reasonably be expected to result from the reliance” (Stutman v Chemical Bank, 95 NY2d 24, 30 [2000], quoting Restatement [Second] of Torts § 548A).

The amended complaint alleges that (i) Countrywide knowingly lent to borrowers who could not afford to repay their loans, who committed fraud in loan applications, or who otherwise did not satisfy the basic risk criteria for prudent and responsible lending that Countrywide claimed to use; (ii) Countrywide falsely represented to MBIA that the loans were made in strict compliance with its underwriting standards and guidelines, and made numerous other misrepresentations about the quality of the loans; (iii) the number of delinquencies and defaults was extremely high because the loans materially failed to comply with Countrywide’s underwriting guidelines; (iv) a review conducted by MBIA revealed that 91% of the defaulted or delinquent loans showed material discrepancies from underwriting guidelines; and (v) as a result of the defaults, MBIA has been forced to make billions of dollars in claims payments on the insurance agreements.

These allegations are sufficient to show loss causation since it was foreseeable that MBIA would suffer losses as a result of relying on Countrywide’s alleged misrepresentations about the mortgage loans (see Silver Oak Capital L.L.C. v UBS AG, 82 AD3d 666, 667 [2011] [loss causation sufficiently alleged “since it was foreseeable that (the plaintiffs) would sustain a [*7]pecuniary loss as a result of relying on (the defendant’s) alleged misrepresentations”]; Teamsters Local 445 Frgt. Div. Pension Fund v Bombardier, Inc., 2005 US Dist LEXIS 19506, *57-58 [SD NY 2005]; see also Hotaling v Leach & Co., 247 NY 84, 93 [1928] [“The loss sustained is directly traceable to the original misrepresentation of the character of the investment the plaintiff was induced to make”]). It cannot be said, on this pre-answer motion to dismiss, that MBIA’s losses were caused, as a matter of law, by the 2007 housing and credit crisis (see In re Countrywide Fin. Corp. Sec. Litig., 588 F Supp 2d 1132, 1174 [CD Cal 2008] [it is the job of the fact-finder to determine which losses were proximately caused by misrepresentations and which are due to extrinsic forces]).

The motion court properly dismissed the negligent misrepresentation cause of action. A claim for negligent misrepresentation requires a showing of a special relationship of trust or confidence between the parties which creates a duty for one party to impart correct information to another (OP Solutions, Inc. v Crowell & Moring, LLP, 72 AD3d 622, 622 [2010]; Hudson Riv. Club v Consolidated Edison Co. Of N.Y., 275 AD2d 218, 220 [2000]). Generally, a special relationship does not arise out of an ordinary arm’s length business transaction between two parties (Aerolineas Galapagos, S.A. v Sundowner Alexandria, LLC, 74 AD3d 652, 653 [2010]; ESE Funding SPC Ltd. v Morgan Stanley, 68 AD3d 676, 677 [2009]).

The allegations in the amended complaint are insufficient to show that MBIA and Countrywide shared the type of business relationship that would give rise to a duty on the part of Countrywide to impart correct information. The transactions in question were conducted by two sophisticated commercial entities: MBIA, a long-established insurance company experienced in writing financial guarantee policies, and Countrywide, then an industry leader in the residential mortgage industry. MBIA’s claim of a long-standing relationship between the parties is belied by the allegations in the amended complaint that MBIA insured only two Countrywide securitizations in a short period prior to the transactions in question. MBIA and Countrywide’s limited prior dealings do not elevate this arm’s length transaction into a relationship of trust or confidence.

The claim that Countrywide had superior knowledge of the particulars of its own business practices is insufficient to sustain the cause of action (see Sebastian Holdings, Inc. v Deutsche Bank AG, 78 AD3d 446, 447 [2010] [“Plaintiff’s alleged reliance on defendant’s superior knowledge and expertise in connection with its foreign exchange trading account ignores the reality that the parties engaged in arm’s-length transactions pursuant to contracts between sophisticated business entities that do not give rise to fiduciary duties”]). Because MBIA has failed to allege facts showing that these sophisticated commercial entities engaged in anything more than an arm’s length business transaction, the negligent misrepresentation claim was properly dismissed.

The motion court should have dismissed in its entirety the cause of action for breach of the implied duty of good faith and fair dealing. Both the claim as pleaded in the amended complaint and the claim as upheld by the motion court are duplicative of the breach of contract claims because they arise from the same facts (see Logan Advisors, LLC v Patriarch Partners, [*8]LLC, 63 AD3d 440, 443 [2009]). MBIA’s newly-crafted claim on appeal fares no better. The allegation that Countrywide exercised its discretion in bad faith merely restates the contract-based claims that Countrywide failed to abide by industry standards.

Accordingly, the order of the Supreme Court, New York County (Eileen Bransten, J.), entered April 29, 2010, which, to the extent appealed from, as limited by the briefs, granted the Countrywide defendants’ CPLR 3211 motion to dismiss the amended complaint to the extent of dismissing the negligent misrepresentation claim and narrowing the claim for breach of the implied duty of good faith and fair dealing, and denied said defendants’ motion to dismiss the fraud claim, should be modified, on the law, to dismiss the implied duty claim in its entirety, and otherwise affirmed, without costs. The appeals from the order, same court and Justice, entered July 13, 2009, which granted in part and denied in part the Countrywide defendants’ motion to dismiss the original complaint, should be dismissed, without costs, as moot.

All concur.
Order, Supreme Court, New York County (Eileen Bransten, J.), entered April 29, 2010, modified, on the law, to dismiss the implied duty claim in its entirety, and otherwise affirmed, without costs. Appeal and cross-appeal from order, same court and Justice, entered July 13, 2009, dismissed, without costs, as moot.

Opinion by Richter, J. All concur.
Mazzarelli, J.P., Saxe, Renwick, DeGrasse, Richter, JJ.

ENTERED: JUNE 30, 2011 [*9]



Footnote 1: Countrywide Home, Countrywide Servicing and Countrywide Securities are all wholly-owned subsidiaries of Countrywide Financial. After the events set forth in the amended complaint, defendant Bank of America merged with Countrywide Financial and acquired these subsidiaries. Bank of America is not a party to this appeal.

Footnote 2: The facts set forth here are from the amended complaint which, unless contradicted by documentary evidence, must be accepted as true for purposes of this CPLR 3211 motion.

Footnote 3: With a HELOC, the equity in the property collateralizes a specified line of credit that may be drawn down by the borrower. A CES is also collateralized by the borrower’s equity, but the loan is of a fixed amount. Both HELOCs and CESs are second liens on residential property and are junior in priority to the first lien mortgage. Thus, if the property is foreclosed, the proceeds must be used to fully satisfy the first lien before the second lien is paid. Accordingly, both HELOCs and CESs present more risk than a first-lien mortgage.

Footnote 4: The loan tapes generally included information such as the loan-to-value ratio for each loan, the debt-to-income ratio for each borrower, and the borrower’s FICO score, which measured the borrower’s creditworthiness.

Footnote 5: Since MBIA’s original complaint was superseded by the amended complaint, we dismiss as moot the appeal and cross-appeal from the motion court’s July 13, 2009 order addressed to the original complaint.

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Liquidating Agent of U.S. Central Federal
Credit Union Western Corporate Federal
Credit Union, Members United Corporate
Federal Credit Union, and Southwest
Corporate Federal Credit Union,



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MA Dist. Court “Breach of Good Faith, Concerns Over Scheduled Foreclosure Sale” ALPINO v. JPMORGAN

MA Dist. Court “Breach of Good Faith, Concerns Over Scheduled Foreclosure Sale” ALPINO v. JPMORGAN


Civil No. 1:10-12040-PBS.United States District Court, D. Massachusetts.

April 21, 2011.


PATTI B. SARIS, District Judge.

I. Introduction

This cases arises after the defendant’s foreclosure of the plaintiffs’ home. The plaintiffs have alleged the following: the defendant breached the duty of good faith and reasonable diligence inherent in every mortgage contract in Massachusetts (Count I); the defendant breached its contract with the United States under the Home Affordable Modification Program (Count II); the defendant violated Mass. Gen. L. c. 244, § 14, regarding the operation of a foreclosure sale (Count III); and the defendant intentionally inflicted emotional distress (Count IV).

On November 24, 2010, the case was removed to federal court on the basis of diversity and federal question jurisdiction, see 28 U.S.C. §§ 1331, 1332, the federal question being the defendant’s alleged breach of the HAMP government contract. The defendant then filed a motion to dismiss. After considering the record, the Court DENIES the motion in part and ALLOWS the motion in part without prejudice to the filing of an amended complaint.

II. Factual Background

A) The Alpinos’ Mortgage:

The Court derives the following facts from the complaint (“Compl.”). For the purposes of this motion to dismiss, the facts are taken to be true. See Ashcroft v. Iqbal, 129 S. Ct. 1937, 1941 (2009).

The Alpinos purchased their home in December of 2002. In early 2004, they refinanced their original mortgage loan with a new loan from Washington Mutual Bank, Federal Association (“Washington Mutual”) in the amount of $366,000, secured by a first mortgage on their property. The loan is a 30 year, adjustable rate mortgage, which annually adjusts to 2.65% above the average of the prior 12 monthly yields of the one year United States Treasury Securities.

Like many Americans, when the economy began failing in 2008, the Alpinos had difficulty keeping up on their mortgage payments. Meanwhile in September 2008, Washington Mutual collapsed, and JPMorgan Chase Bank (“JPMorgan”) became its successor in interest to a number of financial interests, including the Alpinos’ mortgage and refinancing loan. The Alpinos contacted JPMorgan to see about adjusting their payments in order to avoid default. They “diligently provided JPMorgan with all the information requested” and “negotiated in good faith for a forbearance agreement, loan modification, or any other way to save their home from foreclosure.” (Compl. ¶ 15.) JPMorgan refused to modify, and when the Alpinos failed to stay current on their mortgage, the bank scheduled a foreclosure sale.

Besides the failure to consider a mortgage payment modification, this action also concerns events occurring at the scheduled foreclosure sale. The Alpinos allege that they arrived at their property around 4:15 pm on March 2, 2010 — fifteen minutes after the scheduled foreclosure auction was supposed to take place — and found a group of approximately twenty people. Mr. Alpino asked some of the people gathered whether the sale had already occurred. He was told that it had not. At that point he went inside the home to call a lawyer. Ms. Alpino remained outside waiting for the auction. After about ten minutes, all but two of the potential purchasers had left. After several more minutes, these remaining two individuals had left as well. According to Ms. Alpino, at no time during this period did an auctioneer appear to fly an auction flag or hold an auction. Nonetheless, the defendant asserts that it conducted a sale and that it “became the absolute title holder to the [Alpinos’ home].” (Def. Mem. at 3.)

B) The Home Affordable Modification Program (HAMP):

In February 2009 the President announced the Homeowner Affordability and Stability Plan to help millions of Americans restructure their mortgages and stay in their homes in the face of impending default and foreclosure. (See Doc. 7, Ex. A (“Supp. Directive”) at 1.) As part of that plan the government created the Home Affordable Modification Program (HAMP).

Among other things, HAMP creates a cost sharing system, whereby the government helps reduce the impact of mortgage modifications on lenders. In exchange, the program asks servicers to standardize and systemize a process for mortgage modification, including the implementation of the net present value (NPV) test. NPV compares the expected cash flow from a modified loan with the cash flow from the unmodified loan. If the expected cash flow from the modified loan exceeds the amount from the unmodified loan, then the loan servicer must modify the loan. Id. at 4. In considering a loan for modification, servicers must perform a “Standard Modification Waterfall.” Id. at 8. This process requires servicers to apply a series of modification steps that work to reduce loan monthly payments to as close as possible to 31 percent of the homeowners gross monthly income. See generally Morris at 10 n.3.

Servicers opt into HAMP by executing Servicer Participation Agreements (SPAs). These agreements between servicers and Fannie Mae, in its capacity as a financial agent for the United States, require servicers to consider all eligible mortgage loans for modification unless prohibited by the rules of an application pooling and servicing agreement (PSA), which establish private label securitizations of mortgages. See id. at 1. But even in the face of PSAs that prohibit modification, “[p]articipating servicers are required to use reasonable efforts to remove any prohibitions and obtain waivers or approvals from all necessary parties in order to carry out any modification under HAMP.” Id.

Despite these provisions, homeowners have not always seen the benefits HAMP was intended to foster. During the first year of operation, HAMP resulted in the permanent modification of only 230,801 mortgages, well below the target objective of three to four million borrowers. See Jean Braucher, Humpty Dumpty and the Foreclosure Crisis: Lessons from the Lackluster First Year of the Home Affordable Modification Program (HAMP), 52 Ariz. L. Rev. 727, 739 (2010). In June 2010, the Government Accountability Office traced some of this underperformance to servicers’ failure to adequately solicit HAMP eligible borrowers and to promptly respond to borrower inquiries regarding HAMP modifications. See U.S. Gov’t Accountability Office, GAO-10-634, Troubled Asset Relief Program, Further Actions Needed to Fully and Equitably Implement Foreclosure Mitigation Programs i (2010).

The defendant allegedly signed an SPA with the government and is a HAMP participant. (Comp. ¶ 19.)

III. Standard

The plaintiffs’ burden is to plead “sufficient matter, accepted as true, to state a claim for relief that is plausible on its face.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007)). “A case has `facial plausibility’ when plaintiff pleads factual content that allows the court to draw a reasonable inference that the defendant is liable for the misconduct alleged.” Id. Where a complaint pleads facts that are “merely consistent with” a defendant’s liability, it “stops short of the line between possibility and plausibility of `entitlement to relief.'” Id. In considering the adequacy of pleadings, a court must take as true the factual allegations in the plaintiff’s pleadings and must make all reasonable inferences in favor of the plaintiff. Rivera v. Rhode Island, 402 F.3d 27, 33 (1st Cir. 2005).

IV. Claims

Because it colors the resolution of the plaintiffs’ state law claims, the Court begins by discussing Count II, the plaintiffs’ claim for breach of the SPA between JPMorgan and the United States.

A) Count II

In order to bring a claim for breach of the SPA between the defendant and the United States Department of Treasury, the Alpinos must demonstrate that they are the third party beneficiaries of this agreement. See Speleos v. BAC Home Loans Servicing, 10-11503, 2010 WL 5174510, * 4 (D. Mass. Dec. 14, 2010)(“Speleos”). Of the number of federal courts to have considered this issue, the majority have held that homeowners are not the intended beneficiaries of these agreements and, thus, do not have a claim for breach of contract arising from lenders or servicers’ failures to abide by the terms of HAMP in considering inquiries related to mortgage modifications. See Speleos at * 3 (collecting cases). Only one court has held to the contrary. See Marques v. Wells Fargo Home Mortgage, Inc., 09-1985-L, 2010 WL 3212131 (S.D. Calif. Aug. 12, 2010) (“Marques”).

In December, this court denied a homeowner third party beneficiary status under HAMP. See Speleos (Gorton, J.). Quoting at length from the HAMP guidelines and Treasury announcements explaining the program, the court held that the borrower could make out a “colorable” claim that HAMP was intended to benefit homeowners. Id. at *5. However, the court ultimately concluded that a finding that homeowners could sue for the breach of an SPA was not consistent with the terms of the contract, which stated that the rights and remedies outlined in the SPA were “for our benefit and that of our successors and assigns.” Id.

The court in Marques arrived at the opposite conclusion after highlighting the numerous requirements HAMP imposes on servicers with regard to their interactions with borrowers. For example, the court noted that the “agreement expressly provides that the `[s]ervicer shall perform the Services for all mortgage loans it services. . . .'” Marques at *5 (quoting SPA at § 2(A)). Thus, the court held: “The Agreement on its face expresses a clear intent to directly benefit the eligible borrowers.'” Marques at *6.

There is compelling evidence that the government intended to benefit homeowners when it implemented the HAMP program, and the contractual language highlighted by the court in Marques requiring servicers to consider all eligible mortgages for HAMP modifications is illustrative of this design. But on its own, this language merely stresses that servicers are required to perform these obligations, not that private parties necessarily have third party beneficiary status to enforce them. As the Supreme Court recently illuminated in reversing the Ninth Circuit’s decision in Cnty. of Santa Clara v. Astra USA, Inc., 588 F.3d 1237 (9th Cir. 2009), rev’d, 131 S.Ct. 1342 (2011), the test for determining whether a plaintiff is a third party beneficiary to a government contract must focus on whether the contract intended to provide the plaintiff with a legal cause of action, not just whether the plaintiff falls within a class of individuals that the contract and its underlying policies seek to benefit. See Astra USA, Inc. v. Santa Clara Cnty., 131 S.Ct. 1342, 1348 (2011)(“The distinction between an intention to benefit a third party and an intention that the third party should have the right to enforce that intention is emphasized where the promisee is a governmental entity.” (quoting 9 J. Murray, Corbin on Contracts §45.6, p. 92 (rev. ed. 2007)(internal quotation marks omitted)).

Guided by this principle, the Court adopts the reasoning in Speleos. Despite HAMP’s general purpose to benefit homeowners, the SPA contains clear language limiting the class of actors who can enforce its terms. It states: “The Agreement shall inure to the benefit of and be binding upon the parties to the Agreement and their permitted successors-in-interest.” (See Pl. Ex. A (“SPA”) at § 11(B).) In the face of this language, and the Supreme Court’s recent holding in Astra, the Alpinos cannot demonstrate that they are the intended beneficiaries of the SPA. For this reason, Count II must be dismissed.

In dismissing Count II, the Court recognizes the difficulty homeowners have had in realizing the benefits of HAMP. HAMP enforcement tends to focus on servicers’ responsibilities after a loan has been modified and seek to protect “the Treasury for overpaying [incentives].” Marques at * 6. There has been little enforcement of the requirement that servicers consider eligible loans for modification. One recent article has noted that part of the problem Treasury has had in encouraging HAMP compliance may lie in the conflict between the incentives of loan servicers and mortgage loan holders. Servicers, who often administer mortgage loans that have been packaged and sold off to third-party holders in complicated securities instruments, will sometimes see greater returns from a foreclosure than a modification, even if the modification increases cash flows to mortgage holders. See, Adam J. Levitin & Tara Twomey, Mortgage Servicing, 28 Yale J. on Reg. 1 (2011).

This does not mean that homeowners like the Alpinos are without a means of redress. Even though the Alpinos cannot bring a claim directly for breach of the SPA agreement, the defendant’s failure to abide by HAMP’s terms may give rise to other causes of action under state law. Specifically, as this Court held in Morris, the Alpinos may have a cause of action under Mass. Gen. L. ch. 93A, the Consumer Protection Act, for the defendant’s failure to consider them for a HAMP modification, as long as they can show that this failure was deceptive or unfair under § 93A. See Morris at 7-8; see also Bosque v. Wells Fargo Bank, N.A., No. 10-10311, 2011 WL 304725, at *7-*8 (D. Mass. Jan. 26, 2011) (denying motion to dismiss Chapter 93A claim arising out of HAMP application). They may also be able to allege that the defendant’s failures amounted to negligence, for HAMP affects the mortgage lender’s legal duties. Speleos at *6 (stating, with regard to HAMP, that a “claim for negligence based on a statutory or regulatory violation can survive even where there is no private cause of action under that statute or regulation.”). In other words, even if the Alpinos do not have a federal cause of action under HAMP, some violations of HAMP may form the basis of state law causes of action. Count II is dismissed without prejudice.

B) Counts I and III

The Alpinos also allege that the defendant breached its “duty of good faith and reasonable diligence.” This claim does not concern HAMP or the SPA; rather, it posits the violation of independent state-law duties inherent in every mortgage contract in Massachusetts. Along with this claim, in Count III, the Alpinos allege that the defendant violated the Massachusetts foreclosure statute by failing to conduct an open public auction under the mortgage’s power of sale. See Mass. Gen. L. c. 244 § 14.

In Massachusetts “the basic rule of law applicable to the foreclosure of real estate mortgages is that `a mortgagee in exercising a power of sale in a mortgage must act in good faith and must use reasonable diligence to protect the interests of the mortgagor.'” Seppala & Aho Const. Co., Inc. v. Petersen, 373 Mass. 316, 367 N.E.2d 613, 616 (Mass 1977)(citations omitted). Technical compliance with the rules governing the foreclosure procedure does not necessarily ensure that a mortgagee has met its obligations under the law. If the mortgagee does not exercise good faith in the execution of a foreclosure, then the foreclosure sale is invalid. See Edry v. Rhode Island Hospital Trust Bank, 201 B.R. 604, 607 (Bankr. D. Mass. 1996) (finding that a mortgagee’s failure to make reasonable efforts to sell the property for the highest value possible invalidated a foreclosure sale). “[T]his responsibility is [even] `more exacting’ where the mortgage holder becomes the buyer at the foreclosure sale. .. .” U.S. Nat. Bank Ass’n v. Ibanez, 458 Mass. 637, 941 N.E.2d 40, 50 n. 16 (citations omitted).

Here, the Alpinos press two different theories of liability under Count I. First, they allege that the defendant breached its duties by failing to consider the Alpinos for a mortgage modification. Second, they argue that the defendant’s alleged failure to hold the auction in a reasonable manner is a violation of the inherent duty of good faith and reasonable diligence.

The Court need not address the first theory of liability, for it finds that the Alpinos have alleged sufficient facts to surpass a motion to dismiss on their second theory. In claims for a breach of the duty of good faith and reasonable diligence, Massachusetts courts have placed emphasis on a mortgagee’s duty to protect the mortgagor’s interests by seeking a reasonable foreclosure price and ensuring that the mortgagor has notice of the sale. For example, in Bon v. Graves, 216 Mass. 440, 130 N.E. 1023 (1914), the Supreme Judicial Court held that the fact that a mortgagee gave notice of a foreclosure sale in publications of limited circulation, along with the mortgagee’s failure to provide the mortgagor with personal notice of the sale, amounted to a breach of its duties under state law. Id. at 1026 (“The duty of one acting under a power of sale in a mortgage is to use that reasonable degree of effort and diligence to secure and protect the interests of the mortgagor, the owner of the equity of redemption and junior lienors, to the observance of which he is bound by the obligation in good faith.”).

Here, the Alpinos have alleged sufficient facts to raise a plausible claim that the defendant failed to make reasonable efforts to protect the Alpinos’ interests by conducting a fair and open foreclosure sale. See Aurea Aspasia Corp. v. Crosby, 331 Mass. 515, 120 N.E.2d 759, 760-61 (Mass. 1954)(finding that the appearance of an auctioneer, who announced the terms of the sale, and flew a red flag was sufficient to conclude that a foreclosure action had occurred). This would implicate the defendant’s duty to protect the plaintiff’s interests by securing the highest possible price in the foreclosure sale and its duty to ensure that the homeowner had adequate notice of the auction, a duty that is heightened in this case because the defendant allegedly purchased the property at issue.

The plaintiffs have also alleged sufficient facts to establish that the defendant may have violated the Massachusetts foreclosure statute. Mass. Gen. L. c. 244, § 14 addresses a mortgagee’s “foreclosure under power of sale.” Id. Among other things, this section assumes the conducting of a public auction. See id. (providing a model form for the “Mortgagee’s Sale of Real Estate,” which includes specific mention of a “Public Auction” and leaves space for the time, date, and location of the auction.). If the defendant indeed failed to hold a public auction at the time and date noticed, then it violated both the letter and the spirit of the provision.

The fact that the foreclosure sale may not have been properly conducted does not necessarily mean that the Alpinos have asserted valid claims for relief. The plaintiffs allege that the defendant’s actions entitle them to, among other things, the issuance of a preliminary injunction preventing their eviction, a preliminary injunction preventing JPMorgan from selling the property, the granting of “unclouded title” in the property, reasonable damages, and a lis pendens. At a hearing before this Court, the plaintiffs stated that they were also seeking rescission of the mortgage contract. The defendant argues that the only cause of action available to the Alpinos is one in equity for redemption of the mortgage and seeks to dismiss Counts I and III because the Alpinos have not explicitly made a claim for redemption.

Massachusetts law recognizes two different types of actions that can be brought by a mortgagor alleging that his property has been transferred in a wrongful foreclosure sale: “[a]n action of tort, and a proceeding to set aside the foreclosure.” Cambridge Sav. Bank v. Cronin, 289 Mass. 379, 194 N.E. 289, 290 (Mass. 1935). The plaintiffs appear not to be pursuing a tort claim, for such a claim would be inconsistent with their stated desire to retain title to their home. See Rogers v. Barnes, 169 Mass. 179, 47 N.E. 602, 604 (Mass. 1897) (explaining that in cases where the plaintiff successfully brings an action in tort for wrongful foreclosure, which is similar to an action for conversion of personal property, the plaintiff surrenders legal title to the property at issue). Instead, the Court understands them to be seeking an invalidation of the foreclosure sale. Historically, this type of claim was styled as a “bill to set aside the foreclosure and redeem.” See Cambridge Savings Bank, 194 N.E. at 290. Nowhere in their complaint do the Alpinos explicitly state their intent to exercise their right of redemption. But, even assuming that this is the only form of relief available, a failure to explicitly seek a right of redemption does not require dismissal of a claim for equitable relief from an allegedly invalid foreclosure sale. Cf. State Realty Co. of Boston v. MacNeil Bros., Co., 334 Mass. 294, 135 N.E.2d 291, 294-95 (Mass. 1956)(finding that there “was no error in overruling the demurrer of” the mortgagee in a suit for redemption where the “bill for redemption [was] somewhat inartifically drawn” but identified the “mortgage and the parties interested in it, allege[d] that the mortgage is upon property of the plaintiff, and offer[ed] redeem.”). A determination that the foreclosure sale was unlawful will void the sale and return the plaintiffs to the position they were in before the sale allegedly occurred. See Ibanez, 941 N.E.2d at 50 (“[O]ne who sells under a power of sale must follow strictly its terms. If he fails to do so there is no valid execution of the power, and the sale is wholly void.” (internal quotation marks and citations omitted)); see also Rogers v. Barnes, 169 Mass. 179, 47 N.E. 602, 603 (Mass. 1897)(noting that a wrongful foreclosure sale gives rise to a “cloud upon the title of the plaintiff to an equity of redemption in the premises, which cannot be removed without some expense to the plaintiff, and the damages might be more than nominal.”).

D) Count IV: Intentional Infliction of Emotional Distress:

As explained by the First Circuit, “[u]nder Massachusetts law, an individual is liable for intentional infliction of emotional distress when he, `by extreme and outrageous conduct and without privilege, causes severe emotional distress to another.'” Limone v. U.S., 579 F.3d 79, 91 (1st Cir. 2009) (quoting Agis v. Howard Johnson Co., 371 Mass. 140, 355 N.E.2d 315, 318 (1976)).

Though the defendant may have engaged in some legally cognizable wrongdoing, and though the Alpinos may have suffered greatly, there is no indication that the defendant’s actions were extreme and outrageous. “The usage of the terms outrageous and extreme have become commonplace in today’s society, however, as used by the Agis Court they mean more than `annoyances, or even threats and petty oppressions.'” Harvard Univ. v. Goldstein, No. 961020, 2000 WL 282537, * 2 (Mass. Super. Ct. Feb. 15, 2000) (quoting Conway v. Smerling, 635 N.E.2d 268, 273 (1994)). The plaintiffs have not alleged that the defendant ever asked for more money than they actually owed on the mortgage, see Beecy v. Pucciarelli, 387 Mass. 589, 441 N.E.2d 1035, 1045 (D. Mass. 1982)(finding that attorney’s negligent actions in bringing a collection action against the wrong defendant did not constitute extreme and outrageous conduct), nor do they claim that they have been removed from their home in the wake of the wrongful foreclosure. At most, the defendant failed to consider the plaintiff for a mortgage modification under HAMP and then failed to operate an open and fair foreclosure sale. The Alpinos claim for intentional infliction of emotional distress is dismissed.


The Court ALLOWS the motion to dismiss Count II and Count IV. The Court ALLOWS the request for a lis pendens. The Court DENIES the motion to dismiss the remaining counts.

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UNSEALED “Sigma” COMPLAINT | AFTRA Retirement Board Sues JPMorgan Chase

UNSEALED “Sigma” COMPLAINT | AFTRA Retirement Board Sues JPMorgan Chase

“Very Big Money Making Opportunities As The Market Deteriorates”


In the summer of 2007, as the first tremors of the coming financial crisis were being felt on Wall Street, top executives of JPMorgan Chase were raising red flags about a troubled investment vehicle called Sigma, which was based in London. But the bank chose not to move out $500 million in client assets that it had put into Sigma two months earlier.

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© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

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