FYI: 1st Cir Upholds Dismissal of Borrower's "Try Title" Challenge to Foreclosure Assignment of Mortgage

The U.S. Court of Appeals for the First Circuit recently affirmed a lower court's dismissal of a borrower's complaint against a mortgagee under Massachusetts' "try title statute", Mass. Gen.  Laws ch. 240, §§ 1-5, for failure to state a cause of action.  

 

In reaching its ruling, the Court determined that:  (1) pleading an "adverse claim" on the disputed property is a necessary element for a complaint brought under the try title statute; and (2) a mortgagee's legal title to a property does not constitute an "adverse claim".

 

A copy of the opinion is available at:
http://media.ca1.uscourts.gov/pdf.opinions/12-2275P-01A.pdf

 

The borrower brought suit following the assignment of the subject property's mortgage from MERS to the defendant/appellee ("mortgagee").  Specifically, the borrower's try title complaint alleged that the assignment was invalid and fraudulent.  The borrow sought relief in the form of an order invalidating the assignment and enjoining the mortgagee from commencing foreclosure proceedings. 

 

As you may recall, a complaint under a "try title statute", such as the Massachusetts law at issue here, is a specialized form of action which seeks to compel a party with an adverse claim to the petitioner's property to bring an action to try its title to the disputed property.  In Massachusetts, an adverse claimant who fails to bring its action to try its title can be forever barred from having or enforcing its claim adverse to the petitioner.

 

The mortgagee filed a motion to dismiss arguing that the borrower failed to state a cause of action. The lower court granted the mortgagee's motion, dismissed the complaint without prejudice, and denied the borrower's motion for leave to amend.

 

The borrower appealed to the First Circuit based upon two arguments: (1) that the try title statute does not require that the petitioner allege an "adverse claim"; and, in the alternative, (2) that the mortgagee's attempt to foreclose on the subject property constituted an "adverse claim". 

 

The First Circuit rejected both of borrower's arguments.
 
First, the Court determined that the plain language of the Massachusetts try title statute requires the petitioner to allege the existence of an adverse claimant:  "'[i]f the record title of land is clouded by an adverse claim, or by the possibility thereof, a person in possession of such land' may file a petition to try title." See Mass. Gen. Laws ch. 240, § 1.  

 

Additionally, the First Circuit noted that the borrower failed to cite to any case law supporting their contention; instead, the Massachusetts courts consistently dismissed try title complaints for failure to allege the existence of an adverse claim. 

 

Second, the Court quickly dismissed the borrower's argument that the mortgagee's interest was adverse.  Massachusetts subscribes to the "title theory" of mortgage law, which as you recall recall means that the mortgage creates two titles in the property: the legal title, owned by the mortgagee and securing the underlying debt, and the equitable title retained by the mortgagor.  Under the "title theory" of mortgage law, the two titles created by the mortgage are separate but complementary claims to the property that do not survive the mortgage or each other.  Thus, neither the equitable title holder or the legal title holder can claim that the other has an adverse claim to its own. 

 

The Court held that, because the borrower's complaint against the mortgagee was based solely upon the mortgagee's purported status as the legal title holder, no adverse claim was alleged, and dismissal was appropriate.
 
Accordingly, the First Circuit affirmed the lower court's order dismissing the borrower's try title complaint. 

 

 

 

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

 

Admitted to practice law in Illinois

 

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FYI: DC Cir Vacates DOL's 2010 FLSA Opinion Letter on Overtime Pay for Loan Officers

The U.S. Court of Appeals for the D.C. Circuit recently directed that the U.S. Department of Labor's 2010 opinion letter determining that mortgage loan officers do not fall within the "administrative exemption" of the federal Fair Labor Standards Act be vacated.

 

A copy of the opinion is available at:  Opinion 

 

As you may recall, the federal Fair Labor Standards Act ("FLSA") generally provides that employees who work more than 40 hours per week must be paid overtime.  See 29 U.S.C. Sec. 207(a).  However, the FLSA also provides those who are employed in a bona fide administrative capacity are exempt from the overtime requirement.  Id. at 213(a)(1). 

 

In 2006, the Department of Labor ("DOL") issued an opinion letter providing that mortgage loan officers fall within the "administrative exemption" provided for by the FLSA.  In 2010, the DOL changed its mind, and issued an opinion letter reversing its previous position. 

 

The Mortgage Bankers' Association sued, arguing that under the federal Administrative Procedures Act ("APA"), the DOL could not change its "definitive interpretation" without first allowing for notice and comment.  The lower court found against the MBA, which then appealed.  

 

On appeal, the D.C. Circuit began by explaining that, where an agency has given its regulation a "definitive interpretation" which it later "significantly" revises, that agency has effectively amended its rule.  See, e.g., Alaska Professional Hunters Ass'n v. FAA, 177 F.3d 1030, 1034 (D.C. Cir. 1999).  Under the APA, such an amendment requires "notice and comment."  Id. 

 

The DOL contended that in addition to the "definitiveness" and "significant revision" requirements, relevant case law establishes a third requirement of justified and substantial reliance.  The MBA argued that reliance is only one of several considerations that might determine whether the "definitiveness" requirement is met.     

 

After scrutinizing the relevant cases, the D.C. Circuit ruled in favor of the MBA.  The Court explained that "reliance is but one factor courts must consider in assessing whether an agency interpretation qualifies as definitive..."  This is so because "[a]gency pronouncements effectively ignored by regulated entities are unlikely to bear the marks of an authoritative decision."  Therefore, the Court determined that reliance was a "rough proxy for definiteness," and not a separate requirement. 

 

That concluded the matter, as both parties stipulated that MBA would prevail if the Court determined that reliance was one part of the definitiveness calculus, rather than a separate matter.  

 

Accordingly, the D.C. Circuit reversed the opinion of the lower court, and remanded the case with instructions to vacate the DOL's 2010 opinion letter. 

 

 

 

 

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

 

Admitted to practice law in Illinois

 

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FYI: 1st Cir Affirms Summary Judgment Against Borrower Under D'Oench Doctrine/FIRREA

The U.S. Court of Appeals for the First Circuit recently upheld an award of summary judgment in favor of the Federal Deposit Insurance Corporation as receiver of a failed bank under the D'Oench Doctrine and FIRREA, ruling that borrowers had no defense to repayment of a commercial line of credit loan because they had failed to produce a written agreement showing that repayment of the loan was contingent upon the bank's funding of a separate loan to third parties. 

 

The Court also ruled that the borrowers could not maintain their counterclaim against the receiver in light of the FDIC's "no-value" determination that the failed bank's estate had no assets with which to satisfy claims of general unsecured creditors, such as borrowers' counterclaim, even if they prevailed. 

 

A copy of the opinion is available at:  http://media.ca1.uscourts.gov/pdf.opinions/11-2113P-01A.pdf.

 

Defendants-borrowers ("Borrowers") took out a $700,000 business line of credit loan from a bank and defaulted on the loan a short time later.  The bank subsequently brought a collection action against Borrowers in commonwealth court in Puerto Rico.  Borrowers counterclaimed, asserting damages of over $50 million and claiming in part that repayment of the line of credit was contingent on the bank's financing of a commercial development project that would have allowed third parties to purchase commercial property from Borrowers.

 

During the pendency of the collection action, the bank became insolvent, and plaintiff Federal Deposit Insurance Corporation ("FDIC") was appointed receiver of the failed bank (the "Receiver").  The Receiver removed the action to federal court, eventually obtaining summary judgment in its favor.  In granting the Receiver summary judgment, the district court noted the absence of any dispute over Borrowers' obligation to repay the line of credit, finding nothing in the record indicated that Borrowers' repayment obligation was conditional under the alleged third-party financing agreement. The lower court also dismissed Borrowers' counterclaim for lack of subject-matter jurisdiction, concluding that Borrowers had failed to take timely action on their disallowed administrative claim against the Receiver. 

 

Borrowers appealed, arguing in part that summary judgment on the collection action was improper, because factual disputes remained as to the repayment obligation, and that they had satisfied all applicable requirements for pursuing their claim.  

 

The First Circuit affirmed, reasoning that: (1) Borrowers' assertions as to the alleged financing agreement could not overcome the requirement that agreements must be in writing in order to be enforceable against the FDIC; and (2) the FDIC's determination that the failed bank's estate lacked sufficient funds with which to pay general unsecured claims effectively rendered Borrowers' counterclaim moot. 

 

As you may recall, 12 U.S.C. § 1823(e)(1) bars enforcement of unwritten agreements against the FDIC, providing:  "No agreement which tends to diminish or defeat the interest of the [FDIC] in any asset acquired by it . . . as receiver of any insured depository institution, shall be valid against the [FDIC] unless such agreement – (A) is in writing . . . [and] . . . (D) has been, continuously, from the time of its execution, an official record of the depository institution."  12 U.S.C. § 1823(e)(1)(codifying the  so-called "D'Oench Doctrine" established in D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942)).

 

In addition, a federal district court lacks jurisdiction over a disallowed claim against the receiver unless the claimant either requests administrative review of the disallowed claim, or files or continues an action in district court within 60 days of the notice of disallowance.  See 12 U.S.C. § 1821(d)(6), (d)(13)(D).   

 

Noting initially that Section 1823(e) barred Borrowers' defense to the collection action, as they could produce no written documentation to support their assertion that repayment was contingent on the bank's funding of the construction project under the alleged financing agreement, the First Circuit pointed out that Borrowers failed to identify any material fact that would warrant reversal of the lower court's grant of summary judgment.

 

Next, turning to Borrowers' counterclaim, the First Circuit pointed out that, shortly after the lower court's ruling that it lacked subject matter jurisdiction over the counterclaim because Borrowers had failed to take action on their claim within 60 days of the Receiver's disallowance of their administrative claim, the FDIC published notice of its determination that the failed bank had insufficient assets to pay any claims of general unsecured creditors. 

 

As the Court observed, for Borrowers, such a "no-value" determination would mean that there were no assets in the receivership estate to pay Borrowers' counterclaim even if they prevailed.   Accordingly, the First Circuit explained that the FDIC's so-called "no-value determination" precluded any relief for Borrowers by which they could satisfy the constitutional case or controversy requirement.  The Court also agreed with the Receiver, observing that "even if 'some theoretical case or controversy exists,' dismissal of the counterclaim would still be warranted as a matter of prudential mootness."

 

Consequently, the First Circuit affirmed the lower court's judgments, but on different grounds with respect to the counterclaim.

 

 

 

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

 

Admitted to practice law in Illinois

 

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FYI: 4th Cir Holds Alleged Oral Promises of Loan Modification Insufficient to Set Aside Foreclosure Sale

The U.S. Court of Appeals for the Fourth Circuit recently held, in an unpublished opinion, that a lender's oral promises that it would provide a loan modification failed to satisfy the statute of frauds, and therefore could not support a borrowers' equitable claim to set aside a foreclosure sale, given the undisputed default.  A copy of the opinion is attached.

 

According to their Complaint, Plaintiff-borrowers ("Borrowers") obtained a loan which was secured by a deed of trust on their home.  Shortly thereafter, the lender sold the loan but retained the obligation to function as the loan's servicer.  After Borrowers experienced difficulty in making loan payments, they began the application process for loan modification under the Home Affordable Modification Program (HAMP).  However, the process was delayed, with Borrowers and servicer finding fault in each other.

 

Prior to a final decision on Borrowers' loan modification application, they received a notice of foreclosure, stating that, because they had defaulted on the loan, their property would be sold at auction.  Upon receipt of such notice, Borrowers contacted the servicer.  According to Borrowers, a servicer representative informed them orally that "their loan modification was in process, and that no foreclosure would occur."  Nevertheless, the foreclosure sale proceeded consistent with the notice.  About one week after the foreclosure sale, Borrowers received written notice from the servicer that their loan modification application had been denied.

 

Borrowers filed suit against the servicer, the loan owner, and the substitute trustee (collectively, "Defendants") asserting six claims, including a quiet title claim and a claim for equitable relief to set aside the foreclosure sale.  Defendants removed the case to federal court on the basis of federal question jurisdiction under 28 U.S.C. §1331, asserting that Borrowers' claims were preempted by the Home Owners Loan Act, 12 U.S.C. §§1461-1470, as the servicer is a federal savings bank.  Subsequently, Borrowers filed a motion to remand.  In Defendants' opposition, they argued that, in addition to federal question jurisdiction, the court had diversity jurisdiction over the action.

 

The federal district court denied Borrowers' motion to remand without stating which basis it was exercising jurisdiction.  Following a hearing, it granted defendants' motion to dismiss, finding that Borrowers failed to state a claim under Fed. R. Civ. P. 12(b)(6).  Upon Borrowers' appeal, this matter came before a three-judge panel in the Fourth Circuit Court of Appeals.  In an unpublished opinion, the Fourth Circuit affirmed.

 

Before addressing the Borrowers' allegations, the Fourth Circuit considered the jurisdiction issue.  Although Defendants did not raise diversity jurisdiction in their notice of removal, and did not argue diversity jurisdiction until opposition to Borrowers' motion to remand, the Court held that jurisdiction was proper because the parties were completely diverse.  In support of its holding, the Fourth Circuit determined that the citizenship of the substitute trustee of a deed of trust should not be considered for jurisdictional purposes under the fraudulent joinder doctrine.  The fraudulent joinder doctrine provides that the citizenship of a non-diverse defendant may be disregarded where "there is no possibility that the plaintiff would be able to establish a cause of action" against the non-diverse party.  Hartley v. CSX Transp. Inc., 187 F.3d 422, 424 (4th Cir. 1999).

 

Here, according to the Fourth Circuit, Borrowers lacked any possibility of prevailing on their three claims against the substitute trustee.  As to the quiet title action, the Court noted that Borrowers had not and could not allege that the substitute trustee had any basis for asserting a competing ownership claim to the property.  Borrowers allegations related to their claim for equitable relief to set aside the foreclosure sale were similarly lacking as against the substitute trustee.  Finally, Borrowers claim under the Virginia Consumer Protection Act against the substitute trustee also failed because (i) the substitute trustee was validly appointed under Virginia law and (ii) Borrowers did not allege that the substitute trustee owed them any fiduciary duties under the terms of the deed of trust, see Warner v. Clementson, 254 Va. 356, 492 S.E.2d 655, 657 (1997) (holding that, under Virginia law, the duties of a trustee under a deed of trust are limited and defined by the instrument under which the trustee acts).

 

The Fourth Circuit next considered whether dismissal of the quiet title claim and the claim for equitable relief to set aside the foreclosure sale was appropriate.  With respect to the quiet title claim, the Court quickly disposed of Borrowers' arguments that MERS was improperly named as beneficiary and that the substitute trustee was invalidly appointed.  To the contrary, the Court found that naming MERS as beneficiary was valid and served merely to establish a consistent beneficiary that enhanced "the ease with which the deed of trust could be transferred."  Horvath v. Bank of N.Y., N.A., 641 F.3d 617, 622 (4th Cir. 2011).  Also, the Court determined that the appointment of the substitute trustee conformed to Virginia law.  See Va. Code §55-59(9).

 

As for Borrowers' claim for equitable relief to set aside the foreclosure sale, Borrowers asserted that they relied on alleged oral promises by the servicer that it would modify the terms of the loan and that the foreclosure and sale of the property, of which Borrowers were notified in writing, would not take place. 

 

Although the Fourth Circuit noted that "any such promises certainly would have been improper," it held that "such alleged oral promises cannot serve as a basis to set aside a foreclosure sale of real property."  In support of its holding, the Court cited the statute of frauds, which provided that "oral promises and contracts affecting real property are not enforceable."  See Va. Code §11-2.

 

Accordingly, the Fourth Circuit Court of Appeal affirmed the lower court's denial of Borrowers motion to remand, and its grant of Defendants' motion to dismiss for failure to state a claim.

 

 

 

 

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

 

Admitted to practice law in Illinois

 

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.

Our updates are available on the internet, in searchable format, at:
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