FYI: Ark Fed Ct Dismisses Putative Class Action Against MERS by County Clerk for Recording Fees and Alleged UDAP Violations

Dismissing a putative class action law suit to collect county recording fees, the U.S. District Court for the Western District of Arkansas recently held that MERS and its members had no duty under Arkansas law to record mortgage assignments and that the plaintiff lacked standing to enforce any alleged legal obligation to record mortgages truthfully.  A copy of the opinion is attached.

 

An Arkansas circuit clerk filed a class-action lawsuit in Arkansas state court on behalf of all Arkansas circuit clerks to collect mortgage recording fees from Mortgage Electronic Registration System, Inc. ("MERS") and other mortgage-related defendants (collectively, "Defendants"). 

 

Claiming that Defendants had breached their duty under Arkansas law to record every mortgage transfer, and that Defendants were using the MERS mortgage registration system as a means to avoid the payment of recording fees, the complaint alleged that Defendants improperly deprived Arkansas counties of recording fees and thus were unjustly enriched and violated the Arkansas Deceptive Trade Practices Act ("ADTPA").   The complaint also alleged that the failure to pay recording fees constituted an illegal exaction under the Arkansas Constitution and that Defendants' mortgage recordings were untruthful in that MERS could not legally serve as beneficiary for Defendants' mortgages.

 

Defendants removed the case to federal court and moved to dismiss.  The federal District Court dismissed the complaint with prejudice.

 

Describing the streamlined process of transferring mortgages under the MERS registration system, and noting that the purpose of mortgage recording is to give constructive notice to subsequent purchasers, the District Court ruled that Plaintiff's ADTPA and unjust enrichment claims failed, because Arkansas law did not impose a duty to record mortgage assignments.  See Ark. Code Ann.  § 14-15-404(a)(2012).  As the court explained, "a mortgage's legal efficacy as to the original parties is not diminished if the mortgage goes unrecorded."  See, e.g., Bryan v. Easton Tire Co., 262 Ark. 731, 733, 561 S.W.2d 79, 80 (Ark. 1978)(no statutory duty to record assignments); Judkins v. State, 123 Ark. 28, 184 S.W. 407, 408 (Ark. 1916) ("an unrecorded mortgage is good between the parties thereto, and constitutes a lien which may be enforced as against the mortgagor").

 

The Court also rejected Plaintiff's arguments that Defendants had a contractual duty to record mortgages whenever the underlying debt is sold to a non-MERS purchaser and that as the third-party beneficiary of those contracts, Plaintiff had the right to enforce them.  

 

Noting the presumption in Arkansas that "parties contract only for themselves" and the absence of "substantial evidence of a clear intention to benefit" Plaintiff, the Court ruled that Plaintiff was not the third-party beneficiary of Defendants' contracts with MERS and thus lacked standing to  enforce any alleged recording duty contained in them.  See, e.g., Elsner v. Farmers  Ins. Group, 364 Ark. 393, 395, 220 S.W.3d 633, 635 (Ark. 2005).   The Court stated, "if Defendants contracted in the first place to avoid recording fees, it seems unlikely that they would contract to require recording in narrow circumstances to benefit circuit clerks."

 

In addition, the Court also ruled that because Defendants had no duty to record their mortgages, they also had no duty to record them truthfully or accurately.  In so ruling, the Court noted that because they record for their own benefit, Defendants bear any harm caused by inaccurate disclosure in the recording.   The Court further concluded that "even if untruthful recording causes a specific harm to third-parties rather than to the false recorder itself, Plaintiff has not shown that she [. . .] suffered that specific harm, and so she lacks standing to sue on that theory."

 

Finally, the Court also dismissed Plaintiff's illegal exaction claim, ruling that, unlike in this case where the Plaintiff, a "tax receiver," sued a private entity for its allegedly illegal withholding, an illegal exaction claim is properly brought by a taxpayer to protect against the government's enforcement of an illegal exaction.  See Ark. Const. Art. XVI, § 13.

 

The Court thus concluded that because Defendants had no duty to record their mortgages, they did not deprive Plaintiff or the putative class of anything to which they were entitled.  Accordingly, the District Court dismissed the complaint with prejudice.

 

 

Ralph T. Wutscher
McGinnis 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: Cal App Ct Allows Trial On Allegations that Bank Told Borrower to Miss Payment to Receive Loan Mod, Rules Cal Civ Code 2924(g) Not Preempted

The California Court of Appeals, Fourth Appellate District, recently held that a borrower raised triable issues of fact regarding her claims of intentional misrepresentation, fraud, and a violation of Cal. Civ. Code 2924g(d), based upon her allegation that her lending bank instructed her to miss a mortgage payment to receive a loan modification, but nevertheless proceeded to foreclose on the subject property.  In so holding, the Court also determined that Cal. Civ. Code 2924g(d) creates an implied private right of action, and is not preempted by federal law.

 

A copy of the opinion is available at http://www.courts.ca.gov/opinions/documents/G045580.PDF. 

 

A borrower refinanced her home loan.  Shortly thereafter, she alleged that her signature had been forged on several of the loan documents, though she did not dispute signing the note or deed of trust. 

 

Several years later, the borrower sought to modify her loan.  She alleged that an employee of the bank that owned the loan instructed her to miss a payment, and represented that if she did so, she would receive a loan modification.  When the bank informed her that it would charge a fee to modify the loan, the borrower requested that the fee be waived, on the grounds that "the loan was forged and nothing was done about it." 

 

The borrower then spoke with a supervisor, who allegedly told her that the forgery allegations would have to be investigated by the bank's legal department, and that the bank could not collect from the borrower during the investigation.  The borrower did not make that month's payment.  She received a delinquency notice, along with correspondence indicated the bank's intention to foreclose, shortly thereafter. 

 

Over the next several months, the borrower alleged that she made several attempts to contact the bank to determine the status of her loan.  Each time, she alleged that she was either told that the foreclosure would not proceed, or supposedly promised return calls that never came.  The borrower also supposedly attempted to make several payments on her loan, each of which was supposedly rejected by the bank. 

 

The trustee recorded a notice of trustee's sale, and the borrower filed the instant lawsuit, asserting various causes of action based on her claims that the bank instituted foreclosure proceedings after instructing her to miss a payment and refusing several subsequent payments.  The bank denied these allegations. 

 

The borrower then filed an application for a temporary restraining order ("TRO"), to enjoin the foreclosure sale.  The bank provided her with the amount necessary to reinstate her loan, which included late fees, interest and foreclosure costs.  The borrower stated that she could not pay that amount. 

 

The lower court entered a conditional TRO, whereby the borrower was given several weeks to bring her loan current.  If she did not do so, the lower court found that "there would seem to be no need to issue a preliminary injunction..." 

 

The borrower did not bring her loan current, and the borrower's home was sold the day after the expiration of the deadline set by the lower court. 

 

Litigation continued.  The borrower ultimately filed a third amended complaint several years later, which asserted causes of action for negligent misrepresentation, fraud, violation of Cal. Civil Code Section 2924g(d), and intentional and negligent infliction of emotion distress, among others.  The lower court granted the bank's motion for summary judgment as to all claims, and the borrower appealed. 

 

The Appellate Court began by considering the borrower's claim of negligent misrepresentation.  It noted that the borrower presented evidence that she missed a payment in reliance on the bank's alleged representation that she should do so. 

 

The bank argued that the borrower did not suffer damages -- an element necessary to prevail on a claim of negligent misrepresentation -- because she admitted that she could not reinstate the loan at the time of the foreclosure sale.

 

The Appellate Court disagreed.  It found that the evidence presented by the borrower "created at the very least a triable issue of fact on damages." In so holding, the Appellate Court relied on the fact that the borrower represented that she could have made the back payments due at the time of the foreclosure sale, but not the fees assessed for late payments and foreclosure costs.  The Appellate Court held that the borrower presented evidence indicating that the late payments and foreclosure costs were incurred only because the bank induced the borrower to miss a payment.  Accordingly, it noted that, if the borrower's allegations were correct, the bank "had no right to demand payment of additional fees...to reinstate the loan." 

 

The Court used similar reasoning to reverse summary adjudication of the borrower's fraud claim. 

 

The Court then turned to the borrower's claim that the bank and its agents violated Cal. Civ. Code 2924g(d), which provides that foreclosure sales may be conducted "no sooner than on the seventh day after...expiration or termination of [an] injunction...that required the postponement of the sale..." 

 

The borrower alleged that the bank held a foreclosure sale the day after the expiration of the injunction issued by the lower court.  The bank argued that Sec. 2924g(d) does not create a private right of action and is preempted by federal law; and that the lower court did not issue an injunction at all; rather, it issued a conditional order whereby the bank was only restrained from conducted a sale if the borrower brought the loan current, which she did not do.  The Court considered each argument in turn. 

 

It began by holding that "section 2924g(d) creates a private right of action and is not preempted."  To reach that conclusion, the Court relied on precedent establishing that a private right of action is impliedly created where "there [is] no administrative mechanism to enforce the statute, a private remedy further[s] the purpose of the state and was necessary for it to be effective," while also noting that California courts do not favor constructions of statutes that render them advisory only.  Mabry v. Superior Court (2010) 185 Cal. App. 4th 208, 218. 

 

Here, the Court found that there was no administrative mechanism to enforce 2924g(d), and further found that it was unreasonable to expect the attorney general to enforce all instances in which the statute might be violated.  The Court also found that the statute was not preempted, because the foreclosure process is traditionally a matter of state law. 

 

The Court then considered whether the lower court's order constituted a restraining order.  It answered in the affirmative, holding that the lower court's order that the borrower reinstate the loan by a certain date was "a condition subsequent, the failure of which to satisfy would terminate the injunctive relief." 

 

Finally, the Court considered the borrower's claims of intentional and negligent infliction of emotion distress.  The borrower alleged intentional infliction of emotion distress with regard to her claim that the bank induced her not to make mortgage payments, and then foreclosed on her home; and negligent infliction of emotional distress in that the bank sold her home at a foreclosure sale. 

 

The Court found for the borrower in as to the claim of intentional infliction of emotional distress, and for the bank as to the negligent infliction of emotional distress claim relating to the foreclosure sale. 

 

The Court held that the borrower's allegations as to the bank's conduct, if proven, "was so extreme as to exceed all bounds of decency in our society," which established a triable issue of material fact as to intentional infliction of emotional distress. 

 

Nevertheless, the Court held that the borrower "cannot recover under cause of action for negligent infliction because [the bank's] conduct resulted only in injury to property...[and because] she cannot prove a relationship giving rise to a duty of care."  The Court reached this conclusion because "[n]o fiduciary duty exists between a borrower and a lender in an arm's length transaction." 

 

Accordingly, the Court reversed the lower court's judgment with regard to the intentional misrepresentation, fraud and intentional infliction of emotional distress claims, and affirmed the lower court's judgment with regard to the negligent infliction of emotion distress claim. 

 

Ralph T. Wutscher
McGinnis 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: 1st Cir Upholds Enforceability of Debt Settlement Agreement by Unlicensed Debt Collector

The United States Court of Appeals for the First Circuit recently held that a borrower's release of all claims against an unlicensed debt collector warranted the dismissal of that borrower's putative class action lawsuit, where the debt collector took no wrongful actions after the borrower executed the release agreement. 

 

A copy of the opinion is available at http://www.ca1.uscourts.gov/pdf.opinions/11-2274P-01A.pdf.

 

An unlicensed debt collector instituted a collection action against a borrower.  In 2005, the parties agreed agreed to a settlement agreement that reduced the total amount owed and extended the term of the payments.  The borrower also agreed to a release that barred all actions for claims "remotely attributable or related to" the debt, present and future. 

 

The borrower performed under the terms of the agreement for several years, but stopped paying when she lost her job.  The debt collector did not contact her at that time, or indeed at any time subsequent to the borrower's execution of the settlement agreement. 

 

In 2009, the borrowed filed a putative class action against the debt collector. She argued  that the debt collector was engaged in unlawful debt collection and that the release was obtained by fraud and coercion, in violation of Massachusetts law. 

 

The debt collector removed the matter to federal court, and moved for summary judgment.  The lower court granted the debt collector's motion. The borrower appealed. 

 

As you may recall, Massachusetts defines a debt collector as "any person who uses an instrumentality of interstate commerce...in any business the principal purpose of which is the collection of a debt, or who regularly collects or attempts to collect, directly or indirectly, a debt owed...to another."  Mass. Gen. Laws ch. 93, Sec. 24. 

 

The First Circuit began its analysis by noting that it appeared that the debt collector "was neither licensed nor within a statutory exemption" to collect debts at the time it attempted to collect its debt from the borrower.  Therefore, the case turned on whether and to what extent the settlement agreement operated to release the debt collector from the borrower's claims.     
   
The Court observed that the release might be unenforceable if it was obtained by fraudulent misrepresentation or duress.  However, it noted that "the borrower does not attempt to make any detailed showing along these lines." 

 

Further, the Court cited case law providing that "one seeking to repudiate an agreement allegedly entered into under duress must promptly complain of the circumstances under which the document was signed."  In re Bos. Shipyard Corp., 886 F.2d 451, 455 (1st Cir. 1989).  Here, however, the borrower executed the settlement agreement in 2005, and did not file her related lawsuit until 2009. 

 

The borrower argued that she did not know that the collection efforts were unlawful at the time.  The Court found that argument unpersuasive, noting that the release applied to all claims, whether known or unknown. 

 

Accordingly, the First Circuit rejected the borrower's arguments as to fraud and coercion. 

 

The First Circuit did acknowledge that the release could be unenforceable as to claims arising after the release.  Therefore, it analyzed whether the debt collector took any action after the release that might give rise to a claim by the borrower.

 

The only action taken by the debt collector was the receipt of payment, an action that the Court found to be "seemingly not within the Massachusetts statute."  And "although passive receipt might be deemed tainted if prompted by prior unlawful collection efforts," the Court observed that the lynchpin of any such argument would be "the wrongfulness of [the debt collector's] active debt collection activities prior to the 2005 lawsuit." 

 

Because the First circuit found that the borrower forfeited any such argument when she agreed to the settlement agreement, it held that "it is too late now to resuscitate claims that ultimately depend on the wrongfulness of the original debt collection efforts." 

 

Accordingly, the First Circuit affirmed the judgment of the lower court. 

 

Ralph T. Wutscher
McGinnis 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: Cal App Ct Reverses Dismissal of Breach of Loan Mod and Wrongful Foreclosure Action, Holds No Tender Required in Context of Performing Loan Mod

The California Court of Appeals, Second District, recently reversed a trial court's order sustaining a servicer's demurrer without leave to amend, holding that the borrower had sufficiently alleged formation of a valid contract to modify her loan and breach of the loan modification contract. The Court further held that the borrower should be allowed to amend the complaint to allege causes of action for breach of the covenant of good faith and fair dealing, and wrongful foreclosure.

 

A copy of the opinions is available at:
http://www.courts.ca.gov/opinions/documents/B229112.PDF

 

Plaintiff-borrower ("Borrower") completed a trial loan modification and entered into a loan modification ("Loan Modification") with Defendant-servicer ("Servicer"). The Borrower submitted the first payment contemplated by the terms of the Loan Modification in July of 2009 and Servicer acknowledged receipt of the payment and the Loan Modification documents.

 

In December of 2009, Borrower received a revised loan modification ("Revised Modification") agreement from Servicer reducing the monthly mortgage payments. The Revised Modification stated that if all of Borrower's representations remained true and all preconditions to the modification were met, the loan documents would automatically be modified and all unpaid late charges would be waived. 

 

Borrower alleged that the signed revised modification was submitted with, the contemplated monthly payment to Servicer on December 11, 2009. Borrower further alleged that the original signed Revised Modification was in the possession of Servicer. Borrower made payments pursuant to the Revised Modification for several months before receiving a notice to quit and learning the property had been foreclosed on and sold at auction.

 

Servicer allegedly returned the final payment made by Borrower for the reason that the payment was not sufficient to satisfy the default amount and no alternative payment arrangements had been made. The borrower's complaint also alleged that the trial loan modification was fully performed and that the Loan Modification and Revised Modification were partially performed. Borrower alleged that despite performance, Servicer breached the agreements by failing to honor the agreements' terms, wrongly proceeding to foreclosure sale, and wrongfully selling the property without offering her an alternative to avoid foreclosure.

 

Borrower filed a Complaint asserting causes of action for breach of contract, wrongful foreclosure and several other causes of action not at issue on appeal.

 

The Court held that the key issue in resolving whether Borrower had sufficiently plead a cause of action for breach of contract was whether the Borrower alleged performance of a condition precedent to formation of a valid agreement to modify the terms of the loan.  The Court recited the rule that, "[i]n contract law, a 'condition precedent' is 'either an act of a party that must be performed or an uncertain event that must happen before the contractual right accrues or the contractual duty arises.'

 

The conditions precedent at issue here are: 1) whether Borrower was required to have her signature notarized on the Loan Modification and Revised Modification; 2) whether execution of an agreement depended upon Servicer returning a copy of the Modification after it had been signed to Borrower; and 3) whether the Borrower had timely signed the Revised Modification.

 

First, the Court found that Borrower had adequately alleged a cause of action for breach of contract for the Loan Modification, but not the Revised Modification. The Court reasoned that because the Revised Modification had a detailed form for a notary to fill out acknowledging that Borrower signed the document before him or her, but the Loan Modification did not, notarizing the Revised Modification was a condition precedent. Due to this, the Court found that Borrower had only asserted a valid cause of action for breach of contract as to the Loan Modification.

 

Second, the Court found that the Servicer returning a copy of the loan modification agreement it had signed to Borrower could not be a condition precedent as it would give the Servicer sole control over the formation of the contract. Thus, the return of a signed copy of either the Loan Modification or Revised Modification was not a condition precedent to an enforceable contract.

 

Third, the Court glossed over the timeliness precondition, stating that there is no issue raised as to the timeliness of Borrower's signature on the Loan Modification, and that the timeliness issue only pertained to the Revised Modification.

 

The Court concluded that Borrower had alleged sufficient facts to state a cause of action for breach of contract with regard to the Loan Modification, but not the Revised Modification because the conditions precedent for a valid contract had not been met. Because Borrower sufficiently plead a cause of action for breach of contract with regards to the Loan Modification, the Court found the trail court had erred in sustaining Servicer's demurrer.

 

Further, the Court found Borrower should have been permitted to amend the complaint to include a cause of action for breach of the covenant of good faith and fair dealing. The Court reasoned that because every contract imposes a duty of good faith and fair dealing and because the Loan Modification Borrower had sufficiently plead the existence of a valid contract, Borrower should have been permitted leave to amend the complaint.

 

Finally, the Court found with respect to the wrongful foreclosure cause of action that Borrower had alleged a cause of action as Borrower was not in default under the terms of the Loan Modification. Servicer argued that Borrower was required to make a full tender to set aside a foreclosure. The Court held that because Borrower was not in default under the terms of the Loan Modification, there was no requirement Borrower tender any amount to forestall the foreclosure sale, and thus the Borrower should have been permitted leave to amend the complaint.

 

Ralph T. Wutscher
McGinnis 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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