FYI: Nevada Supreme Court Rules Foreclosure Proper When Bank Entitled to Enforce Both Note and DOT

The Nevada Supreme Court recently held that (1) to participate in Nevada's Foreclosure Mediation Program, the party seeking to foreclosure must demonstrate that it is both the beneficiary of the deed of trust, and the current holder of the promissory note;  (2) where MERS is the named beneficiary, but a different entity holds the promissory note, the note and deed of trust are split such that nonjudicial foreclosure is improper;  and (3) any such split may be cured "when the promissory note and deed are reunified." 

 

A copy of the opinion is available at http://www.nevadajudiciary.us/images/advanceopinions/128nevadvopno48.pdf. 

 

A borrower executed a note and deed of trust with a lender to obtain a home loan.  The terms of the note allowed the lender to transfer it.  The deed of trust named MERS the beneficiary, as the nominee of the lender and the lender's successors and assigns, and provided that MERS had the right to foreclose on the subject property. 

 

The note and deed of trust were transferred and assigned several times. At the time of the instant litigation, MERS had assigned the deed of trust to a bank (the "bank",) the respondent in this action.  The conveyance language in the assignment of deed of trust provided that it was assigned and transferred "together with the note..."  The note was endorsed in blank and was in the possession of the bank's foreclosure trustee ("trustee"). 

 

When the borrower stopped making payments, the bank sent him a notice of default, and notified the borrower that he could choose to enter Nevada's Foreclosure Mediation Program ("FMP").  The borrower chose to do so, and the parties participated in the mediation program without coming to an agreement.  The mediator's report did not indicate that the bank failed to participate in good faith, or otherwise failed to meet the requirements of the FMP. 

 

The borrower filed a pro se petition for judicial review, arguing among other things that bank had failed to show that it had legal authority to foreclose on the borrower's home.  The lower court ruled in favor of the bank, and the borrower appealed. 

 

As you may recall, the statutory scheme for nonjudicial foreclosures in Nevada requires the trustee to obtain and record an FMP certificate before proceeding with a foreclosure.  See NRS 107.086.  In order to obtain that certificate, a foreclosing party must show, among other things, that it has the requisite authority over the note, and that it is the beneficiary, or a representative of the beneficiary, of the deed of trust.  Id. at 107.086(4). 

 

On appeal, the Court began by examining whether the bank had standing to participate in the FMP.  It recited the statutory standards mentioned above, and also noted that "to have standing to foreclose, the current beneficiary of the deed of trust and the current holder of the promissory note must be the same." 

 

The borrower argued that the bank did not legally become the beneficiary of the deed of trust, because MERS did not provide evidence that it had authority from the originator to assign the originator's interest in the same.  Accordingly, the Court considered "whether the use of MERS irreparably 'splits' the note and the deed of trust," which would render the bank incapable of participating in the FMP and foreclosing on the borrower's property.

 

The Court rejected the borrower's argument, ruling that "nothing in Nevada law prohibited MERS' actions..."  However, the question of how to determine a beneficiary's rights where the note and deed of trust were "split" remained unresolved.

 

To answer that question, the Court first surveyed the "traditional rule" for resolving that issue, whereby "a court need follow only the ownership of the note, not the corresponding deed of trust, to determine who has standing to foreclose."  Under that rule, the Court explained, MERS' attempt to assign the deed of trust without possessing the promissory note would have no force. 

 

The Court declined to adopt the "traditional rule," finding it to be inconsistent with the statutory scheme discussed above.  The Court reasoned that Nevada's requirement that a foreclosing party must have the authority to enforce both the deed of trust and the note would be "superfluous" under the traditional rule. 

 

Accordingly, the Court rejected the "traditional rule" in favor of the "restatement rule," which provides that "a promissory note and deed of trust are automatically transferred together unless the parties agree otherwise." 

 

The Court then scrutinized the deed of trust and note at issue here.  It found that MERS was the beneficiary under the former document, for two reasons: first, "it is an express part of the contract that [the Court] is not at liberty to disregard," and second "it is prudent to have the recorded beneficiary be the actual beneficiary and not just a shell for the 'true' beneficiary."  Similarly, the Court relied on the terms of the note to hold that "MERS holds an agency relationship with [the originator] and its successors and assigns with regard to the note." 

 

That did not conclude the Court's analysis.  The Court also observed that because MERS was the beneficiary of the deed of trust, but not the holder of the note, the two documents were "effectively split...at inception." That presented a problem because the "holder of a note is entitled to a distinctly different set of rights than that of a note holder."  Specifically, the Court explained that the holder of a note is entitled to payments only, whereas the beneficiary of a deed of trust has the right to use the property as a means of satisfying repayment.

 

Nevertheless, the Court noted that "this split at the inception of the loan is not irreparable or fatal," explaining that it can be cured when the same entity acquires both the deed of trust and the note.  However, the Court emphasized that the foreclosure would be prevented "unless the two documents are ultimately held by the same party." 

 

With the appropriate standards in place, the Court had little difficulty in holding that the bank was entitled to enforce both the deed of trust and the note. 

 

This was so because the bank produced copies of the deed of trust and assignment at the mediation.  Further, the Court held that MERS' assignment of the deed of trust, which provided that the deed of trust was assigned "together with the note," was effective in transferring the latter document.  The Court reached that conclusion because of its conclusion that "MERS, as agent (nominee) for [the originator's] successors and assigns, can transfer the note on behalf of the successors and assigns..."  The Court also determined that the bank was entitled to enforce the note, because the bank's trustee "physically possessed the note," which was indorsed in blank.

 

The Court therefore held that "[b]ecause [the bank] was entitled to enforce both the note and the deed of trust, which were reunified, we conclude that [the bank] demonstrated authority over the note and to foreclose."  Accordingly, Nevada Supreme Court 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: 6th Cir Holds Furnisher Could Violate FCRA by Requiring Police Report or Fraud Affidavit as Pre-Condition to Investigating Dispute Received through CRA

The U.S. Court of Appeals for the Sixth Circuit recently held that a furnisher could have violated the federal Fair Credit Reporting Act by requiring a consumer to provide a police report or fraud affidavit as a pre-condition to investigating the consumer's allegations of forgery, where the furnisher received proper notice of the consumer's dispute from a credit reporting agency.   

 

A copy of the opinion is available at http://www.ca6.uscourts.gov/opinions.pdf/12a0350p-06.pdf. 

 

The plaintiff-appellant, a consumer ("consumer") was in the process of obtaining a divorce from his wife. He moved out-of-state before the divorce was finalized. The consumer alleged that during this period, his wife purchased a car without his knowledge.  The car was paid for with a loan from the defendant-appellee, a lender (the "lender").  The consumer further alleged that his wife forged his name on the check from the lender to the car dealership.
 
Later, the consumer experienced credit problems when his former wife fell behind on the car payments.  He disputed the loan with all three major credit reporting agencies (CRAs).  The lender reported back to the CRAs that the consumer was a co-obligor to the loan in question.  The lender then informed the consumer that it would further investigate the loan only if he submitted a police report, or a fraud affidavit. 

 

The consumer then sued the lender, alleging violations of the Fair Credit Reporting Act ("FCRA").  The lower court granted summary judgment to the lender, and the consumer appealed. 

 

As you may recall, the FCRA provides that after a furnisher of credit information receives notice of a dispute provided to a CRA, it must (a) conduct an investigation; (b) review all relevant information provided by the CRA; (c) report the results of the investigation to the CRA; (d) correct any incomplete or inaccurately reported information to the CRAs; and (e) if a disputed item cannot be verified, that item must be modified, deleted or blocked.  FCRA, Sec. 1681s-2(b)(1).  Further, the FCRA creates a private right of action where a furnisher "willfully fails to comply with any required imposed, with respect to any consumer..."  Id. at Sec. 1681n. 

 

The Sixth Circuit began its analysis by outlining the statutory framework of the FCRA, finding that it "unquestionably creates a private right of action" as to some, but not all, of the FCRA's requirements. Specifically, the Sixth Circuit noted that Sec. 1681s-2(c) expressly precludes consumers from enforcing the "requirement that furnishers...initially provide complete and accurate consumer information to a CRA."  Therefore,the Sixth Circuit found that under the FCRA, "consumers may step in to enforce their rights only after a furnisher has received proper notice of a dispute from a CRA." 

 

The Sixth Circuit described the question of which of the requirements outlined in Sec. 1681s-2(b)(1) might give rise to a private remedy as an issue of first impression in that circuit.  The Court surveyed the findings of other circuits on the issue, and had little difficulty in concluding that "the investigation an information furnisher undertakes must be a reasonable one," and further that "how thorough the investigation must be to be 'reasonable' turns on what relevant information was provided to the furnisher by the CRA..."

 

Next, the Sixth Circuit considered each of the requirements laid out in sec. 1681s-2(b)(1), and concluded that the "FCRA expressly creates a private right of action against a furnisher who fails to satisfy" any of the five duties described within that section. 

 

With that standard in place, the Court turned to the specific allegations at issue.  It noted that because the lender was put on notice as to the consumer's dispute, a "reasonable investigation" would have to consist of reviewing the "relevant, underlying documentation."  As to this issue, the Sixth Circuit held that "the evidence presented is not so one-sided as to mandate that [the lender's] investigation was reasonable as a matter of law." 

 

Although the lender argued that its company policy was to require a police report of fraud affidavit before conducting further inquiry into a claim, the Sixth Circuit found that this policy had little relation to the lender's duties under the FCRA, stating that "the mere existence of such a company policy does not resolve the inquiry into the reasonableness of the investigation." 

 

The Sixth Circuit also considered the lower court's finding that the lender did not "willfully" violate the FCRA, a finding which relied on the consumer's statement that the lender did not do anything to "intentionally" put him in "this situation."  The Sixth Circuit disagreed, noting that the Supreme Court has found that "willfulness," as used in Sec. 1681n of the FCRA, encompasses both knowing and reckless violations.  Safeco Ins. Co. v. Burr, 551 U.S. 47, 57 (2007). 

 

Accordingly, the Sixth Circuit reversed the lower court's decision granting summary judgment in favor of the lender.

 

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: 11th Cir Holds Settlement Offer w/o Offer of Judgment Does Not Moot FDCPA Claim

The U.S. Court of Appeals for the Eleventh Circuit recently held that a settlement offer for alleged violations of the federal Fair Debt Collection Practices Act does not deprive the district court of subject matter jurisdiction due to mootness, if the settlement offer does not also include an offer of judgment.    

 

A copy of the opinion is available at:  http://www.ca11.uscourts.gov/opinions/ops/201112413.pdf.

 

Three debtors (collectively, "Debtors") separately filed lawsuits in federal district court against debt collection agencies ("Debt Collectors"), claiming that Debt Collectors had violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq., by making harassing, abusive, or annoying phone calls, failing to identify the purpose of the calls, or failing to meaningfully identify the caller or to state that the caller was a debt collector.   In each complaint, as part of the request for relief, Debtors sought damages, attorneys fees, costs, as well as a judgment in their favor against Debt Collectors. 

 

In response to the lawsuits, Debt Collectors sent settlement offers via e-mail to Debtors for $1,001 to resolve their claims.  The amount offered in each case exceeded by $1 the maximum statutory damages available for individual plaintiffs under the FDCPA.  The settlement offers also included attorneys fees and costs, but did not include an offer of judgment as Debtors had requested.   None of the Debtors responded to the settlement offers.

 

Debt Collectors subsequently moved to dismiss for lack of subject matter jurisdiction, asserting that because they had offered Debtors everything that Debtors were entitled to under the FDCPA, Debtors' FDCPA claims were moot and should be dismissed with prejudice.

 

The district court granted the Debt Collectors' motions and dismissed the cases with prejudice, explaining in virtually identical orders that, because Debt Collectors had made offers more than adequate to satisfy all of Debtors' demands, Debtors had "no remaining stake" in the litigation and that the cases had thus become moot.  Debtors appealed.

 

The Eleventh Circuit reversed and remanded, ruling that the failure to include an offer of judgment prevented mooting of the FDCPA claims, because the offered settlements were not for the "full relief" requested.

 

Rejecting Debt Collectors' assertion that the lack of an offer of judgment in these cases did not preclude a mootness finding, the appellate court noted that offers for the full relief requested may render a claim moot, but also pointed out that, although the settlement offers here were for the full amount of statutory damages requested under the FDCPA, they did not offer to have judgments entered against Debt Collectors and were thus not for the "full relief" requested.   See, e.g., Simmons v. United Mortg. & Loan Inv., LLC, 634 F.3d 754, 764 (4th Cir. 2011)("Simmons")(ruling that a settlement offer purporting to offer "full relief" did not moot a Fair Labor Standards Act claim, because the offer did not include the requested judgment and was thus not for "full relief").

 

Quoting the Simmons opinion, the Eleventh Circuit stressed the importance of obtaining a judgment because district courts "have inherent power to compel defendants to satisfy judgments against them . . . but lack the power to enforce the terms of a settlement agreement absent jurisdiction over a breach of contract action for failure to comply with the settlement agreement."  Id. at 765. 

 

Agreeing with the analysis in Simmons, the court of appeals concluded that Debt Collectors' settlement did not moot the FDCPA claims, ruling that, because the offers had omitted the judgments that Debtors had sought, they were not for the full relief requested and left a live controversy over the issue of a judgment.   As the court explained, "with no offer of judgment accompanying [the] settlement offers, [Debtors] were left with a mere promise to pay" and would have to file a second action for breach of contract to enforce the settlement agreement. 

 

Accordingly, the appellate court reversed and remanded.   

 

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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