FYI: 10th Cir Rejects Borrower's "Standing" Challenge Based on Mortgage Loan Securitization Argument

The U.S. Court of Appeals for the Tenth Circuit recently held that securitization of a mortgage loan (1) did not affect the foreclosure rights of the holder of an underlying trust deed or the rights of the holder's nominee; and  (2) did not require the express authorization from all the investors in the asset securitization trust before the foreclose process could begin. 

 

A copy of the opinion is available at: 

http://www.ca10.uscourts.gov/opinions/11/11-4092.pdf.

 

Plaintiff-appellant borrower obtained a residential mortgage loan secured by a deed of trust naming Mortgage Electronic Registration System, Inc. (MERS) as beneficiary and nominee.  Sometime thereafter, the loan was sold and became part of a mortgage-backed securities trust. 

 

Pursuant to agreement, a bank served as trustee of the securitization trust and owned the underlying mortgage notes on behalf of the trust investors.   Later, the borrower defaulted on his mortgage loan, MERS assigned its beneficial interest in the trust deed to the trustee bank, and a substitute foreclosure trustee foreclosed on the loan and sold the property.  

 

Plaintiff borrower filed suit in state court against the mortgage originator, the bank as trustee of the securitization trust, MERS, and unknown investors (collectively "Defendants"), claiming among other things that the foreclosure and sale of his property were improper because the Defendants supposedly lacked an enforceable interest in the subject property under the trust deed due to the securitization of the loan. 

 

Asserting various purported "causes of action" seeking injunctive and declaratory relief, Plaintiff borrower argued that the investors in the mortgage-backed securities trust owned the underlying debt and thus solely possessed the right to foreclose.  Plaintiff borrower further argued that the holder of the underlying note could not properly foreclose without the investors' express authorization.  

 

Defendants removed the case to federal court based on diversity jurisdiction and moved to dismiss, arguing that, contrary to Plaintiff borrower's assertions, investors in mortgage-backed securities do not own the underlying promissory notes or have authority to enforce a deed of trust, but own an interest in the proceeds of the trust fund.  Defendants also argued that all actions taken by Defendants leading up to the foreclosure and property sale were valid and proper under Utah law.

 

The district court, noting the insufficiency of Plaintiff borrower's briefing and evidence, ordered Plaintiff borrower to provide additional support for his arguments and converted Defendants' motion to dismiss to a motion for summary judgment.  When Plaintiff borrower's counsel failed to provide the additional support and authority, the court concluded that Plaintiff borrower had not demonstrated any impropriety in the foreclosure process or that the investors held anything other than an interest in the proceeds from the payments made on the underlying mortgages. 

 

The court also concluded that the trustee bank owned legal title to both the securitization trust holding Plaintiff borrower's debt as well as the beneficial interest under the underlying mortgage trust deed.   The court entered judgment in favor of the Defendants. Plaintiff borrower appealed, and the Tenth Circuit affirmed.

 

As did the lower court, the Court of Appeals noted the conspicuous inadequacy of the pleadings and evidence to support Plaintiff borrower's arguments that the securities investors owned the underlying promissory notes and that the trustee bank thereby lacked any interest in Plaintiff borrower's note or trust deed.  The Court also observed that this case was the latest in a series of nearly identical cases filed by Plaintiff borrower's attorney asserting that securitization of a mortgage nullifies the foreclosure rights of the holder of the underlying trust deed and the rights of its agent-nominees. 

 

Citing a number of court opinions in Utah and the Tenth Circuit, the Tenth Circuit concluded that precedent required it to affirm the district court's judgment.  See, e.g., Commonwealth Prop. Advocates, LLC v. Morg. Elec. Registration Sys., Inc.,  __   F.3rd  __, 2012 WL __ (10th cir. 2012) (rejecting theory that securitization destroys the foreclosure rights of the holder of underlying trust deed and holder's nominees).   Accordingly, the Tenth Circuit affirmed the grant of summary judgment in favor of Defendants. 

 

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: 3rd Cir Holds Printing Truncated Card Number and Partial Expiration Date on Credit Card Receipt Violates FACTA, But No "Willful" Violation in This Case

The U.S. Court of Appeals for the Third Circuit recently held that a retailer violated the federal Fair and Accurate Credit Transactions Act (FACTA) by printing the expiration month, along with the last four digits of the credit card account number, on its credit card receipts.  However, the Third Circuit further held that the violation was not "willful." 

 

A copy of the opinion is available at:

http://www.ca3.uscourts.gov/opinarch/111554p.pdf.

 

When a consumer purchased goods from a retailer, he received a receipt that displayed the last four digits of his credit card account number, as well as the expiration month, but not the year, of that credit card.  Although the consumer conceded that he did not suffer any actual damages, he nevertheless filed a class action against the retailer, alleging that the retailer willfully violated the federal Fair and Accurate Transactions Act ("FACTA") credit card receipt truncation requirements by printing the expiration month of his credit card on its receipt. 

 

The lower court granted the retailer's motion to dismiss, holding that FACTA's prohibition of listing the expiration date of credit cards in addition to the truncated credit card number on receipts was not violated by printing only the month of expiration, and that in any event the violation was not "willful." 

 

As you may recall, FACTA provides that merchants may not "print more than the last 5 digits of the [credit] card number or the expiration date upon any receipt provided to the cardholder..."  15 U.S.C. Sec. 1681o(a)(1).  If the violation was merely negligent, only actual damages are available to a plaintiff; however, if the violation was willful, a plaintiff may recover punitive and statutory damages as well.  Id. at 1681(n)(a)(1)(A) and (a)(2). 

 

The Third Circuit noted that FACTA did not address whether printing a partial expiration date constitutes a violation.  However, it further noted that the statute explicitly permitted the partial printing of credit card account numbers.  Therefore, in the Court's view, "if Congress had intended to allow a partial printing [of expiration dates], it would have used language similar to what it used for credit or debit card numbers." 

 

Accordingly, the Court held that FACTA "prohibits a merchant from printing expiration date information on a receipt provided to the consumer, even if the year is redacted."  

 

Having determined that FACTA was violated, the Third Circuit turned to whether the violation was willful.  It held that it was not. 

 

To reach that conclusion, the Third Circuit first noted that the relevant question is whether the retailer's interpretation of the statute was "objectively unreasonable," and not merely erroneous. 

 

Here, the retailer contended that the phrase "expiration date" was not defined under the statute, and further that reading "expiration date" to refer to both a month and a year was not objectively unreasonable.  The Third Circuit agreed, holding that the consumer "has not stated a claim for a willful violation of FACTA."  Therefore, the Court affirmed the lower court's order.   

 

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: 3rd Cir Requires Arbitration and Appointment of Substitute Arbitrator, When Designated Arbitrator Not Available and Not "Integral"

The U.S. Court of Appeals for the Third Circuit recently held that the Federal Arbitration Act required enforcement of an arbitration provision in a consumer sales agreement, and appointment of a substitute arbitrator, where the arbitrator expressly designated in the agreement was unavailable but not "integral" to the arbitration clause.

 

A copy of the opinion can be found at: 

http://www.ca3.uscourts.gov/opinarch/103655p.pdf.

 

Plaintiff-Appellee filed a putative class action against a consumer computer desktop company (Company), asserting various claims including breach of warranty, fraud, and misrepresentation.  The plaintiff claimed that the computer he purchased from Company suffered from design defects that harmed his computer and necessitated multiple replacements of a critical computer component. 

 

Company moved to compel arbitration.  The arbitration provision specifically provided that the parties would submit disputes between them to arbitration administered by the National Arbitration Foundation (NAF).  The arbitration provision also specified that any arbitration between the parties would be governed by the Federal Arbitration Act, 9 U.S.C. § 1-16 (FAA).   

 

Plaintiff argued that, because NAF had been barred from conducting consumer arbitrations as the result of a consent judgment in unrelated litigation, NAF's unavailability to conduct the arbitration allowed the dispute to be resolved through litigation.  Plaintiff claimed that NAF's designation as the arbitral forum was integral to the arbitration provision and that NAF's unavailability thus rendered the arbitration provision unenforceable.   

 

The district court denied Company's motion, ruling that the appointment of NAF as the arbitrator was integral to the arbitration provision and that the appointment of a substitute arbitrator would improperly force the parties to resolve the dispute before an arbitrator they had not agreed on. 

 

The Third Circuit vacated the lower court's judgment and remanded.

 

As you may recall, Section 5 of the FAA provides that a court "shall designate" an arbitrator upon application of either party to an agreement, where the arbitrator designated in the agreement becomes unavailable.  See 9 U.S.C. § 5 ("if .  .  . there shall be a lapse in the naming of an arbitrator . . . or in filling a vacancy, then upon application of either party . . . the court shall designate and appoint an arbitrator .  .  .  who shall act  .  .  .  with the same force and effect as if he  . . . had been specifically named [in the agreement]" ).

 

Following essentially the same analysis employed by other courts that addressed the question of a designated arbitrator's unavailability, the Third Circuit focused on whether the parties' designation of NAF as the arbitrator was "integral" to the arbitration provision or merely ancillary to their intent to submit disputes to arbitration.  The Court observed that unless "the parties  . . . have unambiguously expressed their intent not to arbitrate their disputes in the event that the designated arbitral forum is unavailable," Section 5 of the FAA requires the appointment of a substitute arbitrator upon application by either party. 

 

In ruling for enforcement of the arbitration provision, the Third Circuit rejected plaintiff's assertions that NAF's designation was integral to the arbitration provision and that language in the sales contract providing that all disputes "shall be resolved exclusively and finally by binding arbitration administered by the [NAF]" meant that, in the event NAF were not available, disputes should not be resolved by arbitration.  The Court concluded that the contractual language was ambiguous as to whether NAF's exclusive designation was integral to the arbitration provision or whether the parties' intent to arbitrate trumped NAF's designation as the arbitrator.  In addition, the Court noted that the sales contract specifically incorporated NAF rules, which required that they be interpreted in accordance with the FAA. 

 

Citing the "liberal federal policy in favor of arbitration," the Third Circuit ruled that the FAA's mechanism for the appointment of a substitute arbitrator required resolving any ambiguity in favor of enforcement of the arbitration provision.  In so ruling, the Third Circuit held that the lower court's conclusion to the contrary was "at odds with the fundamental presumption in favor of arbitration."

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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