FYI: NC App Ct Holds Indorsement to Trustee Insufficient, Due to Abbreviated Trustee Name in Indorsement

The North Carolina Court of Appeals recently held that an indorsement on a
note to "Deutsche Bank as Trustee" was not sufficient to allow "Deutsche
Bank Trust Company Americas as Trustee for Residential Accredit Loans,
Inc. Series 2006-QA6" to enforce the instrument. A copy of the opinion is
attached.

Respondent-Borrower ("Borrower") executed a note to refinance an existing
mortgage on his home. The Note was originated by First National Bank of
Arizona and subsequently indorsed to "Deutsche Bank Trust Company Americas
as Trustee" ("Deutsche Bank"). When Borrower defaulted, "Deutsche Bank
Trust Company Americas as Trustee for Residential Accredit Loans, Inc.
Series 2006-QA6" ("Deutsche Bank/Residential") initiated foreclosure
proceedings. Borrower challenged those proceedings, contending that
Deutsche Bank/Residential had not proved that it was the holder of the
Note. The Superior Court of Hyde County permitted the foreclosure to
continue. The borrower appealed.

As you may recall, North Carolina law provides that the party seeking
foreclosure must prove that it is the holder of a valid debt. N.C. Gen.
Stat. § 45-21.16(d)(1) (2009). The holder of an instrument is defined as
"[t]he person in possession of a negotiable instrument that is payable
either to bearer or to an identified person that is the person in
possession." Id. at § 25-1-201(b)(27). North Carolina law further
provides that if an instrument is payable to a person described as
trustee, then the instrument is payable to that trustee, "whether or not
the beneficiary or estate is also named." Id. at § 25-3-110(c).

Deutsche Bank/Residential contended that its possession and production of
the original Note evidenced that it was the holder of that instrument, and
therefore entitled to enforce it. However, the Court held that the Note
was not indorsed to Deutsche Bank/Residential or to bearer, and therefore
that mere possession of a note was not enough to prove ownership or holder
status. Therefore, the Note as indorsed did not constitute "competent
evidence that (Deutsche Bank/Residential) is the holder" of that
instrument, and consequently the Court reversed the lower court's order
permitted the foreclosure to proceed.

Deutsche Bank/Residential also produced affidavits from two employees of
the sub-servicer of the loan. The first affiant claimed that Deutsche
Bank/Residential was the owner and holder of the Note. The Court rejected
this claim as conclusory, and because "[t]he record is void of any
evidence that the Note was assigned and securitized to a trust." The
second affidavit averred that Deutsche Bank/Residential had possession of
the original Note. However, the affidavit did not provide any basis for
the Court to conclude that the affiant had personal knowledge of the facts
he asserted.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
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FYI: Ind App Ct Says MERS Not Entitled to Notice of Second-Lien Mortgagee's Foreclosure

An Indiana Court of Appeals recently affirmed a lower court's ruling that
a second-lien mortgagee was not required to send notice of its foreclosure
to Mortgage Electronic Registration Systems, Inc. ("MERS"), but rather
only to the lender identified in the mortgage. The Court also held that
MERS did not have an enforceable right under a mortgage separate from the
interest held by the originating lender. A copy of the opinion is
attached.

The borrower, Shannon S. Barabas ("Barabas"), obtained a first mortgage
from Irwin Mortgage Corporation ("Irwin"), which designated MERS as
mortgagee, acting as nominee for Irwin. The mortgage provided that any
notice to Irwin was to be mailed to Irwin's address indicated in the
mortgage, and that any notice provided in accordance with the mortgage
"shall be deemed to have been given to . . . [the] Lender. . . ." Barabas
subsequently obtained additional loans from Appellee ReCasa Financial
Group, Inc. LLC ("ReCasa"), one of which was a second mortgage on the same
property that secured Barabas's loan with Irwin. After Barabas defaulted
on the loan owed to ReCasa, ReCasa foreclosed on the property, naming
Irwin as a defendant. Irwin, however, filed a disclaimer of interest in
the property. ReCasa purchased the property at the foreclosure sale and
later sold the property to another appellee in the case (the "Purchaser").

A month after the foreclosure sale, MERS assigned the mortgage to
appellant CitiMortgage, Inc. ("Citi"). Seeking to foreclose on the first
mortgage and to have the trial court's judgment in favor of ReCasa set
aside, Citi argued that as the assignee of MERS and owner of the first
mortgage, Citi could assert all rights of MERS, that the Purchaser took
the property subject to the first mortgage, and that the Purchaser's
interest was junior to Citi's. Citi also argued that, because MERS was
the designated mortgagee of record, MERS, rather than Irwin, should have
been given notice of ReCasa's foreclosure and should have been named as a
party defendant in the foreclosure action. According to Citi, ReCasa's
failure to do so rendered the foreclosure judgment ineffective as to MERS
and Citi.

The Court of Appeals examined Indiana Code section 32-29-8-3 ("section
32-29-8-3"), which provides in part that a purchaser of mortgaged premises
at a judicial sale, who buys without actual notice of an assignment, holds
the premises free and clear of the lien, but is subject to an assignee's
right to redeem the premises for one year following the sale. The Court
of Appeals agreed with the trial court that section 32-29-8-3 "precluded
Citi's claim because [Citi] failed to intervene until more than a year
after it first acquired interest in the Property," and in any event that
Citi failed to redeem the property within one year following the judicial
sale.

Moreover, the Court of Appeals rejected Citi's argument that section
32-29-8-3 did not apply because ReCasa failed to notify MERS of the
foreclosure lawsuit and that Citi's interest in the property was not
eliminated by the foreclosure. Following the reasoning in a factually
similar case, Landmark Nat'l Bank v. Kesler, 216 P.3d 158, 161 (Kan.
2009), the Court concluded that MERS acted as an agent or representative
and not on its own account. Further, because Irwin had disclaimed its
interest in the foreclosure, the Court agreed with the trial court that
MERS, as "mere nominee and holder of nothing more than bare legal title to
the mortgage, did not have an enforceable right under the mortgage
separate from the interest held by Irwin Mortgage." The Court of Appeals
also agreed that notice of the foreclosure was proper under the mortgage
where the notice was sent to Irwin's address indicated in the mortgage,
but not to MERS.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
http://www.mtwllp.com

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FYI: 1st Cir Holds No Coverage for TCPA Allegations

The U.S. Court of Appeals for the First Circuit recently held that a commercial insurance policy, covering injury caused by advertising, did not provide coverage for alleged violations of the Telephone Consumer Protection Act ("TCPA"), 47 U.S.C. § 227(b)(1)(C).  A copy of the opinion is attached.

Plaintiff Cynosure, Inc. ("Cynosure") brought a declaratory judgment action to determine coverage liabilities under an insurance policy insuring against liability for injury caused by advertising.  The underlying civil action involved allegations that Cynosure sent commercial fax messages "without consent from the recipients" in violation of the TCPA.  Cynosure's insurance policy provided coverage for "making known to any person or organization covered material that violates a person's right of privacy."  Cynosure's insurer ("Insurer") denied that the provision extended to liability under the TCPA, arguing that the policy only applied "where an insured makes known to others covered material that violates some other person's right of privacy," but not where the recipient of the fax suffered the privacy injury, as in the underlying civil action.

Thus, the issue before the Court was whether "policies insuring against liability for violating privacy by advertising activity mean privacy understood as repose undisturbed by commercial intrusion (and thus liability for violating the [TCPA]), or privacy as freedom from disclosure to a third-party recipient of information" that the third-party does not want disclosed.

The lower court found the relevant provision ambiguous, followed the common rule that ambiguity is resolved in favor of coverage, and therefore held in favor of Cynosure.  The First Circuit reversed, holding that the relevant policy provisions referred unambiguously to "disclosure" of private third-party information, and not to "intrusion" as to the recipient of the communication, and therefore the policy did not cover liability for violating the Act.

The Court first distinguished the case relied upon by the district court, Terra Nova Ins. Co. v. Fray-Witzer, 449 Mass. 406 (2007), and determined that the issue before it was one of first impression to be decided by Massachusetts state principles of insurance contract interpretation.

The Court interpreted the policy "according to the fair and reasonable meaning of the words" of the policy.  In this case, the policy "distinguish[ed] 'person' and 'organization' and thus provid[ed] that a covered advertising injury occurs when an insured makes known to an 'organization' some material that violates a 'person's' right of privacy…"  The Court held that, "[s]ince a mere intrusion into the recipient's repose does not violate any right of a non-recipient … the communication to the recipient violates the non-recipient's right of privacy only if it is a communication about the non-recipient" which that person reasonably does not want disclosed.

The Court further reasoned that its interpretation was "consistent with the straightforward meaning of related provisions in the Insurer's policies covering liability for other advertising offenses," such as libel and slander, where "the injury turns on the content of the material communicated to a third party."  In addition, the Court's interpretation of the policy was "congruent with the accepted definition of the verb phrase 'make known,' which other courts have read as commonly meaning 'telling, sharing or otherwise divulging.'"

The Court also reasoned that, unlike the use of "publication" in other insurance contract provisions, "there is no apparent ambiguity in the 'making known' provision considered here, describing coverage of liability for making known to one person or organization something about a third person."  Finally, the Court reasoned that "the content of the material communicated (revealing something about a third party) is necessary for a covered violation of a right of privacy" because the modifying phrase "that violates a person's right to privacy" referred to "material," and not "making known" as Cynosure argued.

Accordingly, the Court determined that the "language in these 'making known' policies is not ambiguous," and that the advertising liability coverage applies only "where an insured makes known to others covered material that violates some other person's right of privacy," which is not a basis "for liability incurred by sending faxes in violation of § 227(b)(1)(C)" of the TCPA.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois  60602
Direct:  (312) 551-9320 
Fax:  (312) 284-4751
Mobile:  (312) 493-0874
RWutscher@mtwllp.com
http://www.mtwllp.com

 
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FYI: 4th Cir Rejects Foreclosure Def's Standing Arguments as "Absurd"

The U.S. Court of Appeals for the Fourth Circuit recently confirmed that a
foreclosure plaintiff had standing to foreclose under Virginia law,
because the plaintiff was the holder of the note indorsed in blank. A
copy of the opinion is attached.

Plaintiff-Appellant borrower ("Borrower") received a loan from America's
Wholesale Lender ("AWL") that was secured by a deed of trust on Borrower's
home. The note evidencing the loan was endorsed in blank and securitized,
and was in the possession of the Bank of New York ("BNY") when Borrower
defaulted on his loan. After the default, BNY foreclosed on Borrower's
home. Borrower filed suit, arguing that only the originator of the loan
had the authority to foreclose on the property. The district court
dismissed the lawsuit.

In affirming the district court's decision, the Court began by examining
the terms of the note, which provided that AWL could transfer the note at
any time. Transferees were to obtain the powers of the note holder upon
transfer, including the rights to receive payment and to accelerate the
payment of the loan upon default. The terms of the deed of trust also
provided that it was freely transferable, without prior notice to the
Borrower.

Next, the Court noted that longstanding principles of Virginia law provide
that negotiable instruments are freely transferrable. Further, Virginia
has adopted the provisions of the Uniform Commercial Code governing
negotiable instruments. As you may recall, those provisions allow for
negotiable instrument to be endorsed in blank. Whoever possesses a
negotiable instrument that is endorsed in blank "has full power to enforce
it."

Based on that examination of the terms of the loan documents and Virginia
law, the Court concluded that "it is difficult to debate" that BNY had the
authority to enforce the note.
Borrower advanced several arguments to the contrary. First, he argued
that although BNY might have the authority to enforce the note, it did not
have the authority to enforce the deed of trust. The latter document,
borrower contended, was governed by the law of real property and by
equitable principles, which suggested that only the originator of the loan
could enforce the deed of trust. Second, Borrower contended that per the
terms of the deed of trust, only AWL could appoint a substitute trustee
and foreclose on the property. The Court rejected both of these arguments
because, among other reasons, accepting either argument would render the
note unenforceable upon purchase - a result that the Court considered
"absurd."

Finally, the Court noted that Borrower's briefs "are filled with
allegations of fraud in the mortgage industry and discussions of the
financial crisis that have plagued the country of late." However, the
Court considered those allegations to be merely a distraction from "what
in reality is a straightforward commercial case."

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
http://www.mtwllp.com

NOTICE: We do not send unsolicited emails. If you received this email in
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