FYI: Maryland Ct of Appeals Rules Holder of Note Did Not Need to Prove Chain of Title to Note, or Legal Existence of Note Owner

The Court of Appeals of Maryland recently held that the holder of note, properly indorsed in blank from the original payee, and secured by a deed of trust, is entitled to foreclose without the necessity of proving the chain of title to the note, or the legal existence of the owner of the note, which was a Securitized Trust.

A copy of the opinion is available at:  http://mdcourts.gov/opinions/coa/2013/55a12.pdf

The Borrower filed a separate lawsuit claiming that, because the Securitized Trust (through its trustee) that held her loan had terminated its SEC filings, it did not "legally exist."  Alternatively, the Borrower claimed that the Securitized Trust did not own the subject promissory note, and had no authority to appoint the substitute trustees or invoke the power of sale under the deed of trust. 

The defendants, the Securitized Trust and sub-servicer for the loan, jointly moved for summary judgment, presenting evidence that the note was assigned to the Securitized Trust, and sub-serviced by the sub-servicer, who as attorney-in-fact for the Securitized Trust, had appointed the substitute trustees.  The trial court granted summary judgment in favor of the defendants (as well as the substitute trustees).  

Upon the Borrower's appeal, the intermediate appellate reversed the trial court's grant of summary judgment, determining that the facts were in dispute and/or were not established by the lender.  The Securitized Trust and sub-servicer filed a petition for certiorari with the Court of Appeals of Maryland, which was granted.

The Court of Appeals reversed the intermediate appellate court, and directed that the judgment of the trial court be reinstated.  The Court reiterated that "a deed of trust securing a negotiable promissory note cannot be transferred like a mortgage, rather the corresponding note may be transferred, and carries with it the security provided by the deed of trust."  Op. at 14.  Accordingly, the Court observed that the Maryland version on the Uniform Commercial Code resolved who may enforce the deed of trust.

Determining that the subject note contained all the necessary indorsements, the Court distinguished its prior opinion in Anderson v. Burson, which had required a transferee of an "underindorsed" note to prove its rights in the note, by proving the transaction through which the transferee acquired it.  Op. at 19.  Unlike Anderson which involved an "underindorsed note", the sub-servicer was in possession of the Note, which was indorsed in blank.  Therefore, the Court determined that the sub-servicer was the holder of the Note, and as the holder, was a person or entity entitled to enforce it.  See id.

Consequently, the Court rejected the Borrower's claims that the Securitized Trust that owned the note did not exist, explaining "whether the Trust is (or is not) the owner of the Note is irrelevant for present purposes."  Id.  Likewise, the Court also rejected the Borrower's claim that the appointment of the substitute trustee was ineffective. 

To that end, the borrower had argued that, if the Trust was nonexistent, the appointment of substitute trustee was ineffective, because, according the borrower, the sub-servicer could not act as an agent for an entity which does not legally exist.   Disagreeing, the Court explained:  "whether [the sub-servicer] signed the Deed of Appointment on its own authority or as agent on behalf of the Trust 'is a distinction without a difference.'" 

The Court held that, in either capacity, the sub-servicer has the authority to appoint the substitute trustees and is bound by the Deed of Appointment.  Thus, even if there is a dispute of fact over the Trust's continued existence, is not material to the outcome of the case."

Accordingly, the Court of Appeals held that the trial court properly dismissed the borrower's lawsuit.

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

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FYI: 1st Cir Rules in Favor of Bank in Deficiency Collection Dispute Involving Chattel Mortgage

The U.S. Court of Appeals for the First Circuit recently upheld summary judgment in favor of a bank that extended a first preferred ship mortgage on a yacht, ruling that the lender was contractually permitted to use any of a number of options available under the mortgage to repossess and sell the yacht, including selling the yacht under "applicable law," which here was the Florida Uniform Commercial Code. 

 
In so doing, the Court ruled that, because one of the bank's options was to sell the yacht under applicable law, and because the notice of sale provided to the borrower complied with the UCC, Borrower was liable for any deficiency owed even though the notice borrower received did not indicate the time and place of the sale, as required by another provision of the first preferred ship mortgage that the Court determined did not apply under the circumstances.

 

A copy of the opinion is available at:  http://www.ca1.uscourts.gov/pdf.opinions/11-2289P-01A.pdf.

 

Defendant borrower ("Borrower") purchased a custom-made yacht with a loan from plaintiff lender ("Bank") that was executed in Massachusetts, Borrower's place of residence and the location of the yacht.   After Borrower defaulted on the loan, Bank issued Borrower a formal notice of default, and repossessed the yacht.  Bank eventually moved the yacht to Florida, where Bank listed the vessel for sale. 

 

Almost a year after sending Borrower the notice of default, Bank sent Borrower a second notice ("Notice of Sale") indicating its plan to sell the yacht.  The Notice of Sale informed Borrower that Bank intended to sell the yacht in accordance with Florida's Uniform Commercial Code ("UCC") and that "[t]he vessel . . . will be sold by way of private sale sometime after the date of this letter."  The Notice of Sale did not specify the date, time, or place of sale.  Around two months later, Bank sold the yacht for less than what was owed on the loan, and Bank later filed suit against Borrower in federal court in Massachusetts for the deficiency. 

 

Borrower moved for summary judgment, arguing that Bank was not entitled to any deficiency, because Bank allegedly violated the terms of the first preferred ship mortgage by supposedly failing to provide Borrower proper notice of the sale under a particular provision of the mortgage.  Bank responded that it provided proper notice in accordance with a different provision of the same first preferred ship mortgage.

 

The lower court denied Borrower's motion, but granted summary judgment on its own in Bank's favor on the issue of liability.  Borrower appealed.  The First Circuit affirmed.

 

In rejecting Borrower's various assertions, the First Circuit ruled that Borrower was liable for the deficiency under the terms of the first preferred ship mortgage contract.  The Court disagreed with Borrower's arguments that:  (1) Bank was required to provide Borrower ten days' notice as to the time and date of a sale in all sales, including those conducted under the Uniform Commercial Code, pursuant to a provision in the mortgage (the "Umbrella Notice Provision") providing that in the event of default Bank may repossess and sell the yacht "at any place and at such time as [Bank] may specify and in such manner as [Bank] may deem advisable . . . [as long as Bank gives Borrower] notice thereof (10) days in advance of the time and place of sale"; and (2) because the Notice of Sale failed to indicate the time and place of sale, the Notice of Sale was insufficient, thus prohibiting Bank from collecting a deficiency. 

 

Instead, the First Circuit agreed with Bank that, because Bank sold the yacht under a different provision of the first preferred ship mortgage (the "Stand-Alone Remedy") which provided that "[Bank] may exercise any 'rights, privileges and remedies granted by applicable law," the Umbrella Notice Provision that Borrower relied on did not apply in this case.   

 

Specifically, in reaching its conclusion, the Court applied basic principles of contract interpretation, noting in particular that the plain language of the first preferred ship mortgage agreement expressly allowed Bank to choose from among seven different options in the event of default.  Examining the mortgage's "Rights and Remedies on Default" provision, the First Circuit noted that the provision specified that the "Mortgagee may, at its option, do any one or more of the following," including repossess and sell in accordance with the Stand-Alone Remedy or the Umbrella Notice Provision.  In so doing, the Court pointed out that the Umbrella Notice Provision was part of a self-help remedy, whereas the Stand-Alone Remedy allowed Bank to employ statutory remedies that have their own notice and procedural requirements, thereby "making it unnecessary to restate them in the contract itself."

 

Another provision the First Circuit found significant provided that each remedy listed in the first preferred ship mortgage was cumulative, and in addition to any remedies specifically conferred by the mortgage itself, by law or statute.   The Court thus concluded that Bank had at its disposal all rights available to it by law, whatever the source, and could exercise those rights alone or together with its other rights.

 

Accordingly, determining that Bank's choice to conduct the sale of the yacht under Florida's UCC rendered the Umbrella Notice Provision inapplicable, the Court ruled that Borrower's argument lacked merit and that the lower court correctly granted summary judgment in Bank's favor. 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

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FYI: Ill App Ct Rejects Borrower's Argument That Consent Order Provided Basis to Overturn Foreclosure Judgment

The Illinois Appellate Court, Fifth District, recently upheld a default judgment of foreclosure and order approving a foreclosure sale where a borrower, seeking relief from the judgment and sale, failed to pursue a potential lack-of-standing argument based on supposedly defective mortgage documentation prior to entry of judgment or to set forth specific factual allegations showing that her failure to discover and present a defense was not a result of her own mistake or negligence. 

 

In so ruling, the court reasoned that: (1) because any alleged defects in the mortgage documentation existed at the time the foreclosure action was filed, the borrower failed to exercise due diligence in defending against the foreclosure action; and (2) because the borrower also failed to plead any facts showing that her mortgage documentation was defective, she also failed to demonstrate that she had a meritorious defense to the foreclosure.

 

A copy of the opinion is available at:  http://www.state.il.us/court/Opinions/AppellateCourt/2013/5thDistrict/5110475.pdf.

 

After a borrower defaulted on her mortgage loan, the loan owner ("Bank") initiated foreclosure proceedings.   Bank unsuccessfully attempted to personally serve Borrower with process and ultimately served Borrower by publication.  Borrower never answered Bank's foreclosure complaint or otherwise responded.  Consequently, Bank moved for default judgment, which the lower court granted. 

 

Four months later, Borrower filed a pro se motion to vacate the default judgment, but did not set the motion for hearing.  Consequently, Borrower filed a second motion to vacate the default judgment and a notice of hearing.  

 

One day before the hearing on Borrower's pro se motion to vacate, an attorney entered an appearance on Borrower's behalf, but did not appear at the hearing on Borrower's motion to vacate.  The lower court thus denied the motion with prejudice, issuing an order incorrectly stating that no counsel had entered an appearance.   Borrower's attorney filed a motion to reconsider the denial of the motion to vacate, pointing out that he had in fact filed both his appearance and a motion for continuance the day before the hearing on the motion to vacate and further asserting that Borrower had a meritorious defense.

 

The lower court denied the motion to reconsider, finding that Borrower failed to present a meritorious defense. The property was subsequently sold at public auction to Bank for the unpaid balance of the debt, and the court ultimately entered an order approving the sale. 

 

Citing the existence of a Consent Order involving Bank, involving Bank and the federal Office of Thrift Supervision and related to alleged mortgage servicing practices and supposed foreclosure improprieties ("Consent Order"), which was issued only about a month before the sale of Borrower's property, Borrower moved for reconsideration of the order approving the sale or to stay the execution of the order.  In so doing, Borrower alleged essentially that Bank lacked standing to initiate a foreclosure action, because the assignment of the mortgage to Bank, as well as other mortgage documentation, was potentially defective and that Bank may have improperly foreclosed on mortgages that were being considered for loan modifications.

 

The lower court denied the motion for reconsideration.  Appearing again pro se this time, Borrower filed a petition seeking to vacate the judgment of the lower court and asserting the same lack-of-standing argument as she did previously. 

 

Following a hearing on the petition at which Bank argued that Borrower had shown neither diligence in bringing the petition, nor the existence of a meritorious defense, the lower court denied Borrower's petition, concluding that Borrower had failed to show the existence of a meritorious defense that was likely to succeed.  Borrower appealed.

 

The Appellate Court affirmed, reasoning that Borrower failed to demonstrate due diligence in pursuing her defense prior to judgment or the existence of a meritorious defense, as any alleged defect in Borrower's mortgage documentation existed at the time Bank filed the foreclosure action. 

 

As you may recall, a party seeking vacatur of an order or judgment under Section 2-1401 of the Illinois Code of Civil Procedure must show: (1) the existence of a meritorious defense or claim that would have prevented the original judgment if the facts had been of record when the judgment was entered; (2) due diligence in pursuing that claim or defense before judgment; and (3) diligence in pursuing the claim or defense after judgment.  ILCS 5/2-1401.  See also Malkin v. Malkin 301 Ill. App. 3d 303, 310 (1998)(noting exception to 30-day period for review of judgment); Smith v. Airoom, Inc. 114 Ill. 2d 209, 220-21 (1986)(petitioner must affirmatively set forth specific factual allegations supporting each element).

 

The appellate court rejected the Bank's argument that the court lacked jurisdiction to hear the appeal in this case, and instead addressed each element of a Section 2-1401 petition.  The Appellate Court noted that due diligence requires the petitioner to have a reasonable excuse for failing to act prior to entry of judgment.  Specifically, as the Court pointed out, the petitioner must demonstrate that the failure to defend against the lawsuit was not the result of her own mistake or negligence, and that she acted reasonably under the circumstances in failing to challenge the judgment. See Smith, 114 Ill. 2d at 222.

 

Stressing that setting aside a judgment based on newly discovered evidence requires that the evidence be such that it could not have reasonably been discovered at the time of or prior to judgment, the Appellate Court noted that Borrower presented no excuse for her failure to answer or otherwise respond to the complaint or to present the lack-of-standing argument -- i.e., the alleged faulty assignment and defective documentation referred to in the Consent Order -- prior to the entry of the default foreclosure judgment.  In so doing, the Court pointed out that the defense Borrower sought to raise on appeal was available prior to the entry of judgment had she only made the effort to appear and contest the foreclosure, as the alleged defects in the mortgage documents would have existed at the time Bank initiated the foreclosure action.  Accordingly, the Appellate Court concluded that Borrower failed to demonstrate due diligence in pursuing the standing argument prior to judgment. 

 

The Appellate Court also concluded that Borrower failed to plead facts showing the existence of a meritorious defense to the foreclosure.  In so doing, the Court noted that Borrower failed to affirmatively set forth specific factual allegations to support her assertion that Bank lacked standing to foreclose due to the supposedly defective documentation.  Notably, as the Court pointed out, Borrower's Section 2-1401 petition merely suggested that the documentation relating to mortgages other than hers might be defective, but that she pleaded no facts demonstrating that the documentation relating to her own mortgage was in fact somehow defective. 

 

Finding that Borrower presented no "newly discovered" evidence or other excusable reason for her failure to raise any meritorious defenses to the foreclosure action prior to the entry of judgment or after judgment, the Court concluded that the lower court properly denied Borrower's Section 2-1401 petition.  Accordingly, the Appellate Court affirmed.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

 

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FYI: FL Supreme Court Limits Economic Loss Rule to Products Liability Cases

The Florida Supreme Court recently held that the application of the Florida economic loss rule is limited to products liability cases.

 

A copy of the opinion is available at:  http://www.floridasupremecourt.org/decisions/2013/sc10-1022.pdf.

 

A condominium association ("Association") retained an insurance broker ("Broker") to secure condominium insurance coverage.  Association's building suffered significant damage cause by Hurricane Frances and Hurricane Jeanne.  Association proceeded with repairs based on assurances by Broker regarding the policy limits of Association's coverage, but later was denied coverage for almost half the amount of Association's costs for repairs when it submitted its claim.  Association filed a lawsuit against the Broker, alleging causes of action including negligence and breach of fiduciary duty.

 

The trial court granted summary judgment in Broker's favor as to all counts, and the Eleventh Circuit Court of Appeals affirmed the trial court on all but the negligence and breach of fiduciary duty claims.  For these claims, the Eleventh Circuit certified to the Florida Supreme Court the question of whether the economic loss rule bars an insured's suit against an insurance broker where the parties are in contractual privity and the damages sought are solely for economic losses.

 

As you may recall, the economic loss rule prevents a party from bringing tort actions against entities with whom they are in contractual privity for purely economic loss unaccompanied by any personal injury or damage to property.  As stated by the Florida Supreme Court, the underlying rationale for the economic loss rule is that "[w]hen parties are in privity, contract principles are generally more appropriate for determining remedies for consequential damages that the parties have, or could have, addressed through their contractual agreement."  In other words, "[w]here damages sought in tort are the same as those for breach of contract a plaintiff may not circumvent the contractual relationship by bringing an action in tort."  Ginsberg v. Lennar Fla. Holdings, Inc., 645 So. 2d 490, 494 (Fla. 3rd Dist. 1994).

 

Discussing the historical roots of the economic loss rule, the Florida Supreme Court explained that the rule is rooted in the products liability arena, and was primarily intended to limit actions in the products liability context.  The  Court then described the "unprincipled expansion" of the rule out of the products liability arena, and into contractual privity generally. 

 

Having noted the multiple exceptions to the economic loss rule created since its inception, including exceptions for professional malpractice, fraudulent inducement, negligent misrepresentation, and free-standing statutory causes of action, the Court ultimately decided that these exceptions "simply did not go far enough," stating that "we now take this final step and hold that the economic loss rule applies only in the products liability context."

 

Two dissenting opinions expressed concern that the majority "obliterates the use of the doctrine when the parties are in contractual privity, greatly expanding tort claims and remedies available without deference to contract claims."  Both dissenting opinions would have instead relied on existing decisions to hold that the economic loss rule bars actions against insurance brokers in contractual privity with the insured on the grounds that insurance brokers are not professionals as defined by the Florida Supreme Court, and the professional services exception to the economic loss rule therefore does not apply.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee 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@mwbllp.com

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