FYI: 11th Cir Holds No RESPA Liability for "Markups," Borrower Had Standing Despite Defense's Argument of No "Actual Injury"

Applying the language of the Supreme Court of the United States’ rulings in Freeman v. Quicken Loans, Inc., 132 S. Ct. 2034, 2040 (2012), the U.S. Court of Appeals for the Eleventh Circuit recently held that “markups” for settlement services do not violate the federal Real Estate Settlement Procedures Act, 12 U.S.C. § 2601, et seq. (“RESPA”).

 

However, the Court rejected the defendants’ argument that, because the borrower received a credit for the allegedly illegal charges at closing, the borrower suffered no “actual injury” and therefore lacked standing to sue.

 

A copy of the opinion is available at:  http://media.ca11.uscourts.gov/opinions/pub/files/201411636.pdf

 

The borrower refinanced a mortgage, and then sued the title agency hired by the lender, the law office that the title agency contracted with to perform the closing, and the individual closing attorney.  The borrower alleged that the title agency and law firm violated Section 8 of RESPA, 12 U.S.C. 2607(b), which makes it illegal to accept any portion of a settlement charge unless a service is actually rendered, by splitting a $300 settlement fee.  The borrower also alleged that the title agency violated the same subsection by charging $125 for recording charges when it only paid $40. The borrower also attempted to assert claims for statutory violations and unjust enrichment under Georgia law.

 

The defendants moved to dismiss, and the district court dismissed the case for lack of subject matter jurisdiction, reasoning that because the borrower received a credit for the allegedly illegal charges at closing, she did not suffer any actual injury and thus lacked standing to sue.

 

On appeal, the Eleventh Circuit quickly disposed of the standing issue, ruling that the borrower alleged an actual injury and had standing to sue under Article III of the Constitution because she alleged she should have received an additional $385, and because the borrower did not need to prove her allegations at the pleading stage.

 

The Eleventh Circuit then turned to whether the record supported an alternative basis for dismissal under the “tipsy coachman” doctrine, and found that it did.

 

The Court held that the title company did not violate RESPA by allegedly splitting the $300 fee because, even though it may have been illegal for the title company to provide settlement services under Georgia law, and thus it services were arguably “unearned,” the alleged fee split was “not in exchange for nothing.”

 

In addition, the Eleventh Circuit held that the law office and attorney earned their portion of the fee, because arranging for a third party to perform a service is itself a compensable service.

 

Likewise, the Court held that the title company did not violate RESPA by increasing the actual cost of recording fees, because it actually performed services for the borrower and received nothing back from a third party in return services it did not perform.

 

The Eleventh Circuit reasoned that its interpretation was consistent with the language of the Supreme Court of the United States’ rulings in Freeman v. Quicken Loans, Inc., 132 S. Ct. 2034, 2040 (2012), and the rulings of the majority of circuit courts that have held that Congress chose to leave markups to the free market.

 

The case was remanded to the district court to decide whether to exercise supplemental jurisdiction over the state law claims or remand them to state court.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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FYI: Ill App Ct Confirms Standing Not Relevant to Subject Matter Jurisdiction, Borrower Waived Untimely Affirmative Defenses Including Standing

The Illinois Appellate Court, First District, recently affirmed a lower court's decision to deny a borrower's motion to vacate a default judgment in a mortgage foreclosure action, ruling that:

 

(1) the borrower's contention that the plaintiff lacked standing was not relevant to whether the lower court had subject matter jurisdiction over the action;

(2) the borrower's contention - raised after the foreclosure sale - that the bank failed to provide her with a grace period notice was untimely; and

(3) that lack of standing is an affirmative defense that must be raised in an answer or responsive pleading.   

 

A copy of the opinion is available at http://www.state.il.us/court/Opinions/AppellateCourt/2015/1stDistrict/1133898.pdf.

 

A borrower defaulted on her home loan, and the bank foreclosed.  The borrower appeared in the action and was given time to file an appearance and answer or otherwise plead to the bank's complaint.  The borrower failed to do either. 

 

The bank then filed a motion for judgment of foreclosure and sale, which the lower court granted.  The property was sold at judicial sale, and the bank purchased the property and filed a motion to confirm the sale. 

 

Shortly before the hearing on that motion, an attorney appeared for the first time on behalf of the borrower, and filed a combined motion to vacate default and judgment and response to the motion to confirm.  Therein, the borrower argued that the bank failed to send her the required grace period notice, and that it lacked standing to foreclose. 

 

The lower court denied the borrower's motion, and granted the bank's motion to confirm the same.  The borrower appealed, repeating her earlier arguments and also claiming that the lower court lacked subject matter jurisdiction over the matter.

 

The Appellate Court rejected the borrower's arguments.  It began with her subject matter jurisdiction argument - which as the Court noted was premised on the theory that because the foreclosing party allegedly had no interest in the loan, the lower court lacked jurisdiction and its orders were "void for lack of justiciability." 

 

The Appellate Court had little difficulty in disposing of this argument, noting that "legal deficiencies in an action, alone, are not enough to divest a court of subject matter jurisdiction."  Rather, the "only consideration [as to whether a matter is justiciable] is whether the alleged claim falls within the general class of cases that the court has the inherent power to hear and determine."  In re Luis R.,  239 Ill. 2d 299, 301 (2010). 

 

Thus, because "there can be no dispute that the [lower] court had the power to hear and enter dispositions on the foreclosure complaint" brought by the bank, the Court determined that the borrower's claim was without merit. 

 

Next, the Appellate Court turned to the borrower's contention that the lower court erred in denying her motion to vacate the judgment of foreclosure and sale, explaining that because the borrower filed her motion to vacate after the sale, she would have to establish among other things that justice was not done in connection with the foreclosure sale.  735 ILCS 5/15-1508(b). 

 

The borrower argued that "justice was not done" within the meaning of 735 ILCS 5/15-1508(b), in that the bank failed to provide a grace period notice required by Illinois statute.  However, the Court noted she did not raise her argument until after the sale had occurred, nor did she raise any allegations of fraud or misrepresentation that might have prevented her from raising her defenses earlier.

 

The Appellate Court observed that Illinois case law provides that, following a sale, it is not enough to raise a meritorious defense; rather, the borrower must argue fraud, misrepresentation or another equitable matter that prevented her from raising her defenses earlier.  See Wells Fargo Bank v. McCluskey, 2013 IL 115469, para. 26. 

 

Accordingly, the Appellate Court determined that the borrower's grace period notice allegation did not satisfy the grounds of section 15-1508(b). 

 

Finally, the Appellate Court rejected the borrower's standing arguments, noting that "lack of standing is an affirmative defense that must be pleaded in the answer or responsive pleading."  Because the borrower did not do so, the Court determined that her standing argument was untimely and thus waived. 

 

Accordingly, the Appellate 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@mwbllp.com

 

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FYI: 9th Cir Confirms Fannie Mae and Freddie Mac Exempt from State and Local Excise Taxes on Transfers of Real Property

The U.S. Court of Appeals for the Ninth Circuit recently held that the statutory charters of Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) exempts them from paying state and local excise taxes on the transfer of real property. 

 

In so ruling, the Ninth Circuit joins the First, Third, Fourth, Sixth, Seventh, Eighth, and D.C. Circuits, in finding that the statutory exemptions granted to Fannie Mae and Freddie Mac did not exceed Congress’s authority under the Commerce Clause.

 

A copy of the opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2014/12/30/13-35655.pdf

 

This appeal is part of a wave of similar lawsuits brought throughout the country against Fannie Mae, Freddie Mac, and their conservator the Federal Housing Finance Agency (“FHFA”).  The city here (“City”) sued Fannie Mae and Freddie Mac, arguing that they are required to pay state and local real property transfer taxes because such taxes fall under their statutory carve-out provision for taxes on real property. 

 

As you may recall, Fannie Mae and Freddie Mac “shall be exempt from all [state and local] taxation, . . . except that any real property of [Fannie Mae and Freddie Mac] shall be subject to State [and] local taxation  to the same extent . . . as other real property is taxed”.  See 12 U.S.C. §§ 1452(e) and 1723a(c)(2).

 

The Ninth Circuit rejected the City’s arguments, noting that the United States Supreme Court recognizes “the distinction between an excise tax, which is levied upon the use or transfer of property even though it might be measured by the property’s value, and a tax levied upon the property itself.”  United States v. Wells Fargo Bank, 485 U.S. 351, 355 (1988).  According to the Ninth Circuit, this distinction was apparent from state laws at issue. 

 

Under Washington law, taxes on real property are located in the “Property Taxes” title of Wash. Rev. Code title 84, and taxes on the conveyance of real property are located in the “Excise Taxes” title of Wash. Rev. Code title 82.  The transfer taxes at issue in this case were of the latter type under Wash. Rev. Code 82.45.060 (imposing “an excise tax upon each sale of real property”), and Wash. Rev. Code 82.46.010(2)(a) (authorizing cities and counties to impose a similar “excise tax on each sale of real property”). 

 

Because of the clear distinction in the statutory scheme, the Ninth Circuit concluded that Fannie Mae and Freddie Mac are statutorily except from paying transfer taxes on real property in the State of Washington.

 

The City also argued that the statutory exemptions to Fannie Mae and Freddie Mac exceeded Congress’s authority under the Commerce Clause, because state and local taxation is not commerce, but rather “the State exercising its sovereign duties” in taxing local intrastate activity.

 

As you may recall, the United States Supreme Court has identified three broad categories of activity that Congress may regulate under the Commerce Clause: (1) channels of interstate commerce; (2) instrumentalities of interstate commerce, or persons or things in interstate commerce; and (3) activities that substantially affect interstate commerce.  See, e.g., United States v. Lopez, 514 U.S. 549, 558-59 (1995).

 

Moreover, Congress is authorized to enact laws “necessary and proper for carrying into Execution” the powers “vested by th[e] Constitute in the Government of the United States.”  U.S. Const. art. I, § 8, cl. 18.  “[T]he Necessary and Proper Clause makes clear that the Constitution’s grants of specific federal legislating authority are accompanied by broad power to enact laws that are ‘convenient, or useful’ or ‘conducive’ to the authority’s ‘beneficial exercise.’”  United States v. Comstock, 560 U.S. 126, 133-34 (2010).  The court must therefore “look to see whether the statute constitutes a means that is rationally related to the implementation of a constitutionally enumerated power.”  Id. at 134.

 

In rejecting the City’s argument, the Ninth Circuit reasoned that Congress is empowered under the Commerce Clause to regulate the national secondary mortgage market.  Chartering Fannie Mae and Freddie Mac was a means rationally related to Congress’s regulation of the secondary mortgage market – e.g., to establish secondary market facilities for residential mortgage, to provide stability in the secondary market for residential mortgages, and to promote access to mortgage credit throughout the nation. 

 

If Congress had the power to create Fannie Mae and Freddie Mac, according to the Ninth Circuit, then it must have the power to protect their statutory mission by exempting them from state and local taxes.   In fact, the United States Supreme Court previously recognized that Congress is authorized to exempt another federally chartered corporation from state and local taxes.  See, e.g., Pittman v. Home Owners’ Loan Corp. of Washington, D.C., 308 U.S. 21, 33 (1939).  

 

The Ninth Circuit determined that the Congress could rationally have believed that states might be tempted to target Fannie Mae and Freddie Mac with large taxes, given the sheer volume of their mortgage portfolios and their statutory obligations to continue purchasing and guaranteeing mortgages throughout the country.  Moreover, Congress might rationally have believed that, without the exemptions, Fannie Mae and Freddie Mac would be exposed to inconsistent taxation, and their statutory mission to increase mortgage liquidity throughout the country would be undermined.

 

In short, the Ninth Circuit concluded that because Congress has power to regulate the secondary mortgage market under the Commerce Clause, it has power under the Necessary and Proper Clause to exempt them from state and local taxes.

 

Next, the Ninth Circuit rejected the City’s argument that the exemptions violated the Tenth Amendment because they are tantamount to congressional commandeering of state employees, and they violate general principles of federalism enshrined in the Tenth Amendment.

The Ninth Circuit disagreed.  The exemptions at issue did not impose any new affirmative obligation on municipalities.  Rather, they simply preclude state and local governments from enforcing preempted tax laws against Fannie Mae and Freddie Mac. 

 

Moreover, nothing in the text or structure of the Constitution categorically immunizes state taxation from federal preemption.  In fact, Congress’s dormant commerce authority precludes state taxation that improperly burdens interstate commerce, and the Constitution’s Supremacy Clause precludes state taxation of federal instrumentalities.

 

For all these reasons, the Ninth Circuit concluded that the exemptions neither commandeered state and local officials nor transgressed the general principles of federalism.

 

Accordingly, the Ninth Circuit affirmed the district court’s judgment.

 

 

 

 

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@mwbllp.com

 

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FYI: Fla Trial Court Rules Mortgage Loan Owner's Liability for Unpaid Condo Assessments Not Limited by Fla Safe Harbor, Where Foreclosure Judgment Was Entered in Servicer's Name

A judge in the 17th Judicial Circuit of Florida in and for Broward County recently held that a mortgage loan owner’s liability to a condominium association for unpaid assessments was not limited by Florida’s safe harbor provision at Fla. Stat. § 718.116(1)(b), where the loan owner was not the first mortgagee of record at the time of foreclosure, but rather was assigned the right to bid at the foreclosure sale by the loan’s servicer, who had been the plaintiff and mortgagee of record in the underlying foreclosure action.  A copy of the opinion is attached.

 

Here, the subject mortgage was executed in 2006, naming a third party registry as mortgagee.  The loan owner purchased the same shortly after closing.  In 2009, the third party registry assigned the mortgage to the loan’s servicer “together with the note and each and every other obligation described in said mortgage and the money due and to become due thereon.”

 

Shortly after being assigned the mortgage, the loan’s servicer filed a foreclosure action.  In the foreclosure complaint, the servicer alleged that it was the present holder of the note and mortgage “as servicer for the owner and acting on behalf of the owner with authority to do so[.]”

 

In August of 2012, a foreclosure judgment was entered in the servicer’s favor. The servicer assigned its right to bid at the foreclosure sale to the loan owner post-judgment. 

 

On March 12, 2013, the clerk of court then issued a certificate of title in favor of the loan owner.

 

Thereafter, in order to resolve an apparent dispute with the condominium association over unpaid assessments, the owner of the loan filed a declaratory action, asking the court to find that it was entitled to the provisions of the safe harbor provision set forth in Fla. Stat. § 718.116(1)(b).

 

As you may recall, section 718.116(1)(b) limits “the liability of a first mortgagee or its successors or assignees who acquire title to a [condominium] unit by foreclosure or by deed in lieu of foreclosure for unpaid assessments that became due before the mortgagee’s acquisition of title to the lesser of: (a) the [unpaid assessments] which accrued or came due during the 12 months immediately preceding [acquisition of title]; or (b) one percent of the original mortgage debt[.]”  § 718.116(1)(b), Fla. Stat.

 

Accordingly, in order to be entitled to limited liability under the Florida safe harbor, “a party must establish: (1) it was a first mortgagee; (2) it acquired title to the condominium unit through foreclosure; and (3) the condominium association was joined as a defendant in the foreclosure action[.]”

 

The court held that, in order to be entitled to the safe harbor, “[t]he key is who had rights and obligations under the mortgage at the time of foreclosure, whether as a first mortgagee or as a successor or assignee.” Bermuda Dunes Private Residences v. Bank of Am., 133 So. 3d 609, 615 (Fla. 5th DCA 2014).

 

The court found as a matter of undisputed fact that the original first mortgagee (the third party registry) had assigned the mortgage to the loan’s servicer in 2009, and that the servicer was still the first mortgagee as of the date the final judgment of foreclosure was entered.  The trial court also ruled that the owner of the loan did not take title to the condominium unit through foreclosure, but rather as the successful bidder at the post-judgment foreclosure sale.

 

A post-judgment assignment of a foreclosure judgment is insufficient to confer the protections of the safe harbor as a matter of Florida law.  Bay Holdings, Inc. et al. v. 2000 Island Boulevard Condo. Ass’n, 895 So. 2d 1197 (Fla. 3d DCA 2005). 

 

Accordingly, the trial court granted the condominium association’s motion for summary judgment, finding that the owner of the loan was not entitled to the liability limitations set forth in section 718.116(1)(b), Florida Statutes.

 

 

 

 

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@mwbllp.com

 

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FYI: 6th Cir Holds Retroactive Application of State Law Affecting Loan Terms Not Unconstitutional

The U.S. Court of Appeals for the Sixth Circuit recently held that a solvency covenant in a commercial mortgage-backed securities loan was unenforceable under Michigan's Nonrecourse Mortgage Loan Act (MNMLA), and rejected various constitutional challenges to the MNMLA including under the Contracts Clause and Due Process Clause relating to the retroactive effect of the MNMLA.   

  

A copy of the opinion is available at:  Link to Opinion  

 

A borrower defaulted on a nonrecourse loan secured by real property.  The loan at issue was part of a commercial mortgage-backed securities ("CMBS") transaction.  The lender foreclosed, and a purchaser ("purchaser") bought the property at auction.  Standing in the lender's shoes, the purchaser sued the borrower and its guarantor to collect a $6 million deficiency.  The lower court granted summary judgment in favor of the borrower, and the purchaser appealed. 

 

On appeal, the Sixth Circuit began by reviewing the structure of CMBS loans, explaining that such loans typically contain two "bedrock elements" designed to protect investors: first, they are nonrecourse; and second, they contain a promise from the borrower to refrain from taking what the court termed "bad boy" acts, including an agreement that the borrower retains single-purpose entity status. 

 

Further, CMBS loans typically include a covenant in which the borrower agrees to remain solvent - which, the Sixth Circuit explained, was intended to prevent borrowers from filing bankruptcy - and was not intended to apply to simple defaults due to loss of cash-flow. 

 

The Sixth Circuit then reviewed recent case law pertaining to CMBS loans.  In Wells Fargo Bank, NA v. Cherryland Mall Partnership, 812 N.W. 2d 799 (Mich. Ct. App. 2011) the court determined that a borrower's failure to remain solvent violated the applicable CMBS loan agreement, such that the borrower was personally liable for the loan amount. 

 

In response, the Michigan Legislature passed the Nonrecourse Mortgage Loan Act in 2012 ("MNMLA"), which applied retroactively to render solvency covenants in nonrecourse loans unenforceable, finding such covenants to be against public policy. 

 

On appeal, the purchaser argued that the solvency covenant in the borrower's CMBS loan was unenforceable, and that the MNMLA violated the Contract and Due Process clauses of the United States and Michigan Constitutions, among other arguments. 

 

The Sixth Circuit rejected all of the purchaser's contentions, and affirmed the judgment of the lower court. 

 

First, the purchaser argued that the MNMLA did not apply because the loan allegedly lost its nonrecourse status before the effective date of the act.  The Sixth Circuit disagreed, noting that the purchaser's reading of the act was not the only possible reading, and was not the reading that "most closely hews to the legislature's intent." 

 

Further, the Sixth Circuit found that the purchaser's reading of the MNMLA would "contradict the legislature's prohibition on the enforcement of solvency covenants as violative of public policy - in that the purchaser's reading would allow lenders to pursue recourse judgments as to many CMBS loans. 

 

Next, the purchaser argued that the MNMLA was unconstitutional under the Contract Clauses of both the United States and Michigan constitutions.  To determine the merit of that position, the Sixth Circuit considered whether the MNMLA substantially impaired the reasonable expectations of the purchaser.  It agreed with the lower court that the purchaser's reasonable expectations were not substantially impaired, in light of the general practices in the CMBS loan industry - wherein the "nonrecourse promise performs a central function" by discouraging borrowers from filing for bankruptcy. 

 

Accordingly, the Sixth Circuit rejected the purchaser's claim that the MNMLA violated the Contract Clause. 

 

The purchaser also challenged the MNMLA's constitutionality under the Due Process Clause.  The Sixth Circuit had little difficult in rejecting this challenge, finding that the legislature easily established a rational basis for enacting the MNMLA - which the Sixth Circuit noted is "all the law requires." 

 

The Sixth Circuit therefore affirmed the lower court's judgment. 

 

 

 

 

 

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@mwbllp.com

 

Admitted to practice law in Illinois

 

 

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