Monday, September 1, 2014

FYI: 5th Cir Upholds Dismissal of Fraudulent Lien Recording and MERS Assignment Challenges

The U.S. Court of Appeals for the Fifth Circuit recently affirmed the dismissal of the borrower’s complaint against a mortgage assignee, holding that:  (1) the borrower failed to properly allege that a statement made by the assignee’s attorney inquiring as to a potential settlement constituted common law fraud under Texas state law because the borrower failed to allege any purported statement was material or false;  (2) the borrower failed to properly assert a claim under the Texas fraudulent lien recording statute, § 12.002 of the Texas Civil Practice & Remedies Code, because he did not allege intent to cause injury; and  (3) the borrower could not challenge the validity of MERS’s assignment of the subject mortgage because Fifth Circuit precedent previously recognized MERS’s ability to assign such mortgages.

 

A copy of the opinion is available at http://www.mersinc.org/component/docman/doc_download/846-tx-reece-v-u-s-bank-nat-l-ass-n?Itemid=.

 

The borrower executed a promissory note on his home. The Note was secured by a corresponding Deed of Trust naming MERS as the nominee and beneficiary under the Deed of Trust.  MERS subsequently assigned the Deed of Trust to assignee. The borrower later defaulted on the Note and the assignee itself purchased the property at a foreclosure sale.

 

Following its purchase of the property, the assignee filed a forcible entry and detainer action seeking to evict the borrower from the property. The court entered an order granting the forcible eviction detainer. The borrower filed the present suit in Texas state court seeking an injunction staying his eviction and challenging the assignee’s standing to foreclose.  The assignee removed the action to federal court.

 

The assignee filed a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The district court granted the motion after determining, first, that all of the borrower’s claims relating to assignee’s standing to foreclose failed as a matter of law, and, second, that the borrower failed to allege any actionable misrepresentation on the part of the assignee. The borrower appealed.

 

On appeal, the Fifth Circuit first examined the borrower’s claim that the assignee’s lawyers committed fraud by making a statement to him in court inquiring as to whether he wished to settle the case out of court.

 

As you may recall, to establish a claim of fraud under Texas law a plaintiff must allege:

 

(1) that a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury.

 

In re FirstMerit Bank, N.A., 52 S.W.3d 749, 758 (Tex. 2001). The borrower failed to allege that the attorney for the assignee made a representation that was either material or false. As a result, the district court did not err when finding that the borrower failed to state a claim for common-law fraud under Texas law.

 

The borrower also alleged that the recorded security instruments evidencing the securitization of his home loan “constituted a fraudulent claim against real property because MERS never acquired a security interest in the mortgaged properties, and therefore, the recordings denominating MERS as a beneficiary of the security instruments are fraudulent.”  The Fifth Circuit construed the borrower’s allegation to be a claim under § 12.002 of the Texas Civil Practice & Remedies Code which prohibits individuals from placing fraudulent liens on real or personal property.

 

The Fifth Circuit noted that it addressed a similar issue previously in an unpublished case, a fraudulent lien claim in the similar context of a home foreclosure. Golden v. Wells Fargo Bank, N.A., 557 F. App’x 323, 327 (5th Cir. 2014). The Fifth Circuit found that the borrower, like the homeowner in Golden, failed to plead facts sufficient to meet an element of a claim under § 12.002, namely that the defendant “intended to cause the plaintiff physical injury, financial injury, or mental anguish.” Id. at 326–27.

 

In so ruling, the Court stated that the bank’s usage of an assignment for business purposes “hardly equates to an argument that [the bank] intended to inflict financial injury or mental anguish.” Id. at 327. Additionally, the borrower failed to allege facts to show that his property would not otherwise be subject to foreclosure absent the assignment; thus, the district court did not err when it found that the borrower failed to state a claim under § 12.002 of the Texas Civil Practice & Remedies Code.

 

Finally, the borrower argued that the assignee lacked standing to foreclose on his property because MERS lacked the ability to assign the Deed of Trust and, thus, the assignee was not the proper party to foreclose on the home. The Fifth Circuit noted that it has expressly recognized that MERS may assign a deed of trust to a third party, and that such assignments confer the new assignee standing to non-judicially foreclose on property associated with that particular deed of trust. See Martins v. BAC Home Loans Servicing, L.P., 722 F.3d 249, 253–55 (5th Cir. 2013). Accordingly, the borrower’s argument was foreclosed by Fifth Circuit precedent.

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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Email: RWutscher@mwbllp.com

 

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