Friday, June 22, 2012

FYI: Ill App Ct Holds Borrower Does Not Have Standing to Challenge Alleged Securitization Improprieties

The Illinois Appellate Court, Second District, recently held that mortgagors lack standing to challenge the propriety of an assignment of mortgage loans into a pooled-asset trust in alleged violation of a pooling and servicing agreement, as any alleged failing would not void the assignment but instead was a "voidable" act that could be ratified by trust beneficiaries. 
 
The Court also ruled that the mortgagors could not rely on a breach of contract theory as to the pooling and servicing agreement, because they were not third-party beneficiaries of the pooling and servicing agreement.
 
A copy of the opinion is available at: 
 
Defendants-borrowers ("Borrowers") were commercial entities that executed two mortgages on commercial property located in DuPage County, Illinois, in favor of the lender ("Lender").  The mortgage loans eventually became part of an asset backed securities trust governed by a pooling and servicing agreement ("PSA"). 
 
The PSA contained a choice-of-law provision specifying that New York law governed the PSA.  The PSA also provided that only certain specifically-named entities were entitled to convey mortgage loans to the trust.  In addition, the PSA expressly prohibited the trustee from "'accept[ing] any contribution of assets to the Trust not specifically contemplated by [the PSA]."
 
The PSA further set forth four ways in which third-party defendant loan servicer could handle loans that went into default.  The servicer could permit the loan to be paid in full, modified, or brought current. The servicer also had the option to initiate foreclosure proceedings. 
 
Although Lender was not one of the entities named in the PSA as being authorized to convey mortgages to the trust, the Lender conveyed the mortgage loans to the trust through an intermediary.
 
Borrowers eventually defaulted on their loan payments and the successor trustee ("Plaintiff Trustee") brought a foreclosure action against Borrowers.  The trial court granted summary judgment in favor of Plaintiff Trustee,  ruling that Plaintiff Trustee had standing to foreclose. 
Borrowers appealed, arguing that Plaintiff Trustee lacked standing to foreclose and that summary judgment was improper because Plaintiff Trustee breached the PSA.
 
The Appellate Court affirmed. 
 
Turning first to the choice-of-law provision in the PSA, the Appellate Court noted that, although the PSA provided that New York law governed the PSA, Borrowers could not rely on the PSA because they were neither parties to the PSA nor the intended third-party beneficiaries thereof.  Nevertheless, after applying Illinois choice-of-law rules and ultimately concluding that Illinois law applied to the two mortgages, the Court ruled that New York law governed the validity of the transfer of those mortgages to the trust.
 
Next, addressing the question as to Plaintiff Trustee's standing to foreclose, the Court rejected Borrowers' argument that because the mortgages were conveyed in a manner that violated the PSA, Plaintiff Trustee did not have good title to the mortgages and thus lacked standing to enforce an interest it did not own.
 
In so doing, the Court recognized that a borrower ordinarily lacks standing to challenge a mortgage assignment, but may raise a defense to an assignment, as long as the defense rendered the assignment completely void.  See Livonia Property Holdings, L.L.C. v. 12840-12976 Farmington Road Holdings, L.L.C., 717 F. Supp. 2d 724, 735-36 (E.D. Mich. 2010)(debtor may challenge a void assignment, but not an assignment that is merely voidable). 
 
In applying New York law to Lender's assignment of the mortgages, the Court noted the apparent tension between a line of New York cases holding that a trustee's unauthorized acts may be ratified by a trust beneficiary (and are thus merely voidable and not subject to challenge) and cases holding that under New York statutory law any act of a trustee counter to the provisions of a trust are completely void and cannot be ratified.  Compare Knight v. Knight, 589 N.Y.S.2d 195, 197 (N.Y. App. Div. 1992(void assignment may not be subsequently ratified) and N.Y. Est. Powers & Trusts Law § 7-2.4 (McKinney 1998) (trustee's unauthorized acts render every conveyance and sale void) with Mooney v. Madden, 597 N.Y.S.2d 775, 776 (N.Y. App Div. 1993) (trust was bound by trustee's ultra vires acts where beneficiary ratified those acts).  
 
The Court ultimately ruled that the assignment issue in this case was a voidable act, that did not void the assignment.  The Court explained, "[t]hat this line of cases exists (particularly the cases recognizing the possibility of ratification, since a void act cannot be ratified . . . is enough for us to conclude that such acts are merely voidable. . . . [Borrowers] can prevail only if they can show that the assignment of the mortgages is void."    Accordingly, the court ruled that Borrowers lacked standing to challenge the assignment to the trust and that the foreclosure was proper.
 
With respect to Borrowers' arguments that Plaintiff Trustee's breach of the PSA precluded summary judgment, the Court ruled that Borrowers were not the direct and intended third party beneficiaries under the PSA, and thus could not enforce any provisions in the PSA requiring the servicer to take certain steps before a foreclose may be initiated.
 



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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Monday, June 18, 2012

FYI: 10th Cir Rejects CFPB Amicus Arguments, Holds TILA Rescission Deadline Not Extended by Demand for Rescission w/in 3 Yrs

The U.S. Court of Appeals for the Tenth Circuit recently held that a borrower's failure to file suit within three years of closing precluded a claim for rescission under the federal Truth in Lending Act, even though the borrower had sent notice of rescission to the loan holder within that three-year period.   In so ruling, the Court rejected the CFPB's arguments to the contrary.
 
A copy of the opinion is available at: 
 
Plaintiff ("Borrower") obtained a refinancing loan on her home from a lender that later assigned the loan to a bank ("Defendant Bank").  Within three years of the loan transaction, Borrower sent Defendant Bank a written notice of rescission supposedly rescinding the loan transaction based on the originating lender's alleged Truth in Lending Act ("TILA") disclosure violations.  Defendant Bank never responded to Borrower's rescission notice. 
 
After Borrower fell behind on her payments, Defendant Bank instituted foreclosure proceedings in Colorado state court.  In response to the foreclosure action, Borrower raised the alleged rescission as a defense, asserting that she had previously rescinded the loan transaction when she sent Defendant Bank the notice of rescission.  The state court rejected this argument and Defendant Bank scheduled a foreclosure sale of Borrower's property.
 
Shortly before the scheduled foreclosure sale, but more than three years after the loan closing, Borrower filed a lawsuit in state court seeking in part a declaratory judgment that the loan had been rescinded when she sent the rescission notice and that Defendant Bank thus could not proceed with the foreclosure. 
 
Defendant Bank removed the case to federal court and filed a motion to dismiss. 
 
Following the Supreme Court's decision in Beach v. Ocwen Fed. Bank, 523 U.S. 410 (1998) ("Beach"), the District Court dismissed Borrower's complaint, ruling that Borrower had failed to file suit within TILA's three-year statute of repose.  The District Court further ruled that Borrower also failed to file suit within one year after she had notice of the alleged TILA violation, as required.  Borrower appealed.
 
The Tenth Circuit affirmed, ruling in part that TILA's section 1635(f) extinguished Borrower's claim for rescission because she failed to file suit within three years of the loan transaction.
  
As you may recall, TILA provides that "[a]n obligor's right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first, notwithstanding the fact that the information and forms required under this section or any other disclosures required under this part have not been delivered to the obligor."  15 U.S.C. § 1635(f).  See also 12 C.F.R. §§ 226.1 -.59 (Regulation Z).
 
Relying on the Supreme Court's ruling in Beach that section 1635(f) is a statute of repose rather than a statute of limitations, the Tenth Circuit rejected Borrower's position that her lawsuit was timely because she had sent a notice of rescission to Defendant Bank within the three-year rescission period.  
 
In so ruling the Tenth Circuit explained that the plain language of section 1635(f) was consistent with the goal of providing clear title to a buyer in a foreclosure sale and noted that "accepting a consumer's unilateral notice of an intent to rescind as a legally effective exercise of rescission, where the creditor has not in any sense actually acted on the consumer's wishes, would indirectly enlarge the congressionally established three-year time period under TILA, and would work to cloud the title of the property for an indefinite period of time." 
 
The Court thus observed that although "the giving of notice is a necessary predicate act to the ultimate exercise of the right," it is not "sufficient for such exercise."
 
Significantly, the Court of Appeals disagreed with the Consumer Financial Protection Bureau ("CFBP") which had filed an amicus brief arguing that a TILA rescission is a "non-judicial rescission process" that may be "accomplished privately by notice" within the three-year period.  In so ruling, the Tenth Circuit reasoned that the CFBP's position ran counter to the U.S. Supreme Court's ruling in Beach that a law suit must be filed within TILA's three-year period so as "to prevent the rescission right from acting to unduly 'cloud a bank's title on foreclosure.'"
 
Given its ruling on section 1635(f), the Tenth Circuit did not address the District Court's ruling on the one-year limitations period for failure to rescind after notice.
 


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
 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


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