FYI: REMINDER - HOTEL DISCOUNT EXPIRES OCT 20 ::: Annual Consumer Financial Services Conference (CCFL | Nov. 19-20, 2015 | Chicago, IL)

As a reminder, the Conference discount at the hotel will be expiring on Tuesday, Oct. 20, 2015.

 

Please join us at the Annual Consumer Financial Services Conference organized by The Conference on Consumer Finance Law, along with various law firms.

 

 

REGISTRATION:  http://www.ccflonline.org/conference  (or you can use the attached to register by mail)

 

WHEN:  Nov. 19-20, 2015

WHERE:  Chicago, Illinois

CLE:  12.0 CLE Credits to Be Provided, including 1.0 hr of Ethics

PRICE:  $595 ($100 off Add'l Attendees)

 

Please circulate this Invitation to any other people -- inside or outside your firm or company -- whom you think might be interested in attending.

 

 

 

The Conference will include presentations by some 45 of the best and brightest speakers and practitioners in the country, on the following topics:

 

 

TCPA: The New FCC Order

Fair Lending and HMDA

CFPB Administrative Appeals

Arbitration Developments

UDAAP

Cybersecurity

CFPB Regulation of Non-Bank Auto Finance

 

TRID: Issues and Implementation

Flood and Lender-Placed Insurance

Mortgage Servicing and Bankruptcy

 

State Regulation of Debt Collection/Debt Buyers

Credit Reporting and Bankruptcy

The Madden Case and Debt Sales

 

CFPB Regulation Through Enforcement Actions

Ethics and Professional Responsibility

 

 

Additional information is provided in the attached, and at:  http://www.ccflonline.org/conference

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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 and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

and

 

Insurance Recovery Services

 

 

 

 

FYI: 11th Cir Confirms No TILA Right to Cancel As To Loan Secured By Fixtures On Borrower's Home

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed the entry of summary judgment against homeowners who sued under the federal Truth in Lending Act (TILA) for an alleged failure to disclose certain financing terms in connection with a water treatment system, holding that because the credit agreement did not create a security interest in the home and the system was not a fixture, the relevant TILA provisions were not violated because both depend on a security interest in the residence.

 

A copy of the opinion is available:  http://media.ca11.uscourts.gov/opinions/pub/files/201411449.pdf

 

The plaintiff homeowners signed an agreement to purchase a water treatment system for their home, that the salesman promised would be financed at a low interest rate. Twenty four hours later, the system was installed.

 

The purchase agreement contained a 3-day right to cancel, following which a credit agreement was delivered to the homeowners, who then realized the interest rate was actually close to 18 percent, but they eventually signed.

 

The plaintiff homeowners sued in district court, alleging that the transaction (a) violated TILA by failing to disclose the minimum payments and maximum repayment period in connection with an extension of open end credit secured by the consumer's principal dwelling; and (b) violated TILA by not delaying installation of the system to allow the plaintiff borrowers three business days to rescind the contract.

 

The district court granted summary judgment in the defendant lender's favor because the credit agreement did not create a security interest in the plaintiff borrowers' home, and thus neither of the TILA provisions at issue was violated because both depended on the existence of such a security interest. The district court also concluded that the system was not a fixture, and even if it were, Regulation Z excludes fixtures from the definition of a "security interest."

 

On appeal, the Eleventh Circuit began by questioning the district court's conclusion that the water treatment system was not a fixture under Florida law, but assumed for purposes of its analysis that it was a fixture.

 

The Court then pointed out that, contrary to the plaintiff borrowers' argument that a security interest in a fixture is also a security interest in the real property where the fixture is installed, section 679.604(3), Florida Statutes, instead "provides that a party holding a security interest in fixture may, after default, 'remove the collateral from the real property,'" similar to removing a hot water heater.

 

Turning to whether the contract created a security interest in the plaintiff borrowers' home, the Eleventh Circuit noted that under Florida law, the starting point is to examine the parties' contract.

 

The credit agreement stated that the buyers granted to defendant "a purchase money security interest in any purchases" made on the account, and the Court reasoned that the "purchase" at issue "was the treatment system, not the residence."

 

The Court rejected the plaintiff homeowners' argument that a paragraph of the credit agreement created a security interest because it discussed remedies after default in terms that specifically mentioned a lien on the plaintiffs' home, reasoning that "it is not the Credit Agreement or UCC financing statement itself, but the judgment against the debtor, that gives rise to the potential lien against the home." The language in the agreement stating that the judgement resulting from any default would be a valid lien against the home, and would be paid in full if the home was sold or refinanced, added nothing that did not already exist under Florida law, which already makes every judgment a lien against real property if it is properly recorded.

 

The Eleventh Circuit further reasoned that at most, the language of the credit agreement created a security interest in the proceeds of any voluntary sale or refinancing of the home, but this did not help because Regulation Z, 12 C.F.R. § 1026.2(a)(1) and (a)(25) "excludes proceeds from the definition of 'security interest' in 15 U.S.C. §§ 1635 & 1637a."

 

In concluding, the Court recognized that the transaction at issue "may be subject to the sort of abuse of consumers that Congress sought to prevent through TILA," but the answer was to "refer the matter to the proper agency for study" and to determine if Regulation Z should be changed rather than "stretch the statutory language or the language of the written agreements entered into by the parties."

 

Because there was no security interest created in the plaintiffs' home, the provisions of TILA raised by the homeowners were not triggered, and the district court's summary judgment was affirmed.

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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 and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

and

 

Insurance Recovery Services

 

 

FYI: 9th Cir Reverses Dismissal of "Unlicensed Foreclosure Trustee" Putative Class Action, Holds CAFA's "Local Controversy" Exception Applied

The U.S. Court of Appeals for the Ninth Circuit recently reversed the dismissal of a class action that was removed to federal court under the federal Class Action Fairness Act (CAFA).  In so ruling, the Court held that the case fit the narrow "local controversy exception" to CAFA's grant of federal court jurisdiction.

 

A copy of the opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2015/06/18/13-15185.pdf

 

The trial court found it had jurisdiction over a class removed from state court under CAFA.  Then, the trial court dismissed the suit for failure to state a claim.  However, the Appellate Court focused its analysis on the jurisdictional question alone and reversed on that basis alone. 

 

The putative class consisted of Nevada borrowers who took out loans against Nevada real property.  Later, those borrowers defaulted, and the six defendants initiated non-judicial foreclosures.  The borrowers alleged the defendants engaged in illegal debt collection activity in connection with those foreclosures. 

 

More specifically, the borrowers alleged the defendants engaged in "claim collection" without being licensed as supposedly required by Nevada Revised Statutes (NRS) Section 649.  The borrowers argued that Nevada law requires foreclosure trustees to be licensed, and that the defendants' failure to register as "collection agencies" (as defined in NRS Section 649.020), constituted a deceptive trade practice.  The borrowers also alleged that the defendants engaged in unjust enrichment, trespass, quiet title, and elder abuse.

Of the six defendants, only one company was domiciled in Nevada.  The borrowers alleged that company engaged in fifteen to twenty percent of the total debt collection activities in the suit.  The borrowers estimated the damages recoverable from that defendant were between $5,000,000 and $8,000,000.  The borrowers also sought equitable relief against that company.

 

Before turning to the Appellate Court's analysis, a discussion of is necessary.

 

To meet CAFA's relevant jurisdictional requirements, a case must meet a three-part test.  First, the class must consist of 100 or more members.  Second, the aggregate amount in controversy must exceed $5,000,000.  Third, any class member must be a citizen of a state different from any defendant.  This case met those requirements. 

 

However, as you may recall, there is also a "local controversy exception" in CAFA.

 

Under CAFA's "local controversy" exception, a federal court must decline to exercise CAFA jurisdiction if: (1) more than two-thirds of the members of the class are citizens of the state where the action was filed; (2) a defendant against whom "significant relief" is sought and whose alleged conduct "forms a significant basis for the claims asserted" is a citizen of the state where the action was originally filed; and (3)  the "principal injuries" complained of occurred in the state where the action was filed.

 

With this framework in mind, the Ninth Circuit began its analysis by deciding which allegations it could consider, because the trial court had rejected the plaintiffs' request to amend their complaint prior to dismissing the suit for failure to state a claim. 

 

First, the Court decided, without significant discussion, that the trial court abused its discretion by not allowing the plaintiffs leave to amend.  Then, the Court held that it could consider facts in the proposed second amended complaint to determine the jurisdictional analysis.

 

The Ninth Circuit recognized that viewing the proposed second amended complaint was against the general principle that jurisdiction is determined at the time of removal.  The Court's rationale for doing so was that, unlike in a standard case, a post-removal amendment could actually supplement jurisdictional facts relevant to the CAFA analysis that the plaintiffs would otherwise not include in their initial complaint.  As the complaint's allegations control the "significant relief" analysis in the "local controversy exception" above, the Ninth Circuit found that the class should have had a chance to elaborate on those allegations.

 

Next, the Court began its analysis of the "local controversy exception" by analysis of the first requirement — i.e., that two-thirds of the putative class were from the state the action was filed — finding this requirement was met. 

 

Then, it turned to whether the Nevada company's conduct formed a "significant basis" of the class claims, and whether the class sought "significant relief" against the Nevada company. 

 

Ultimately, the Ninth Circuit adopted a comparative approach to determine if the Nevada company's conduct was a "significant basis" for the class claims.  The Court focused on how much of the conduct at issue was attributable to the Nevada company, as opposed to the other defendants.  In doing so, the Court found the Nevada company's conduct formed the required "significant basis."  The Court emphasized that the Nevada company was just one of six defendants, and had engaged in fifteen to twenty percent of the alleged illegal conduct.

 

In deciding whether the class demanded "significant relief," the Court did not focus on the comparative relief sought against the Nevada company versus the other defendants.  Rather, the Ninth Circuit simplified its approach and looked only to how much the plaintiffs alleged they should recover from the Nevada company.  The Court found that the relief sought — between $5,000,000 and $8,000,000 and equitable relief — was significant. 

 

The Court did not discuss the third factor (the place of the injury) in detail.  Given that the foreclosed homes and the borrowers were in Nevada, there was little question that the injury occurred in Nevada. 

 

Accordingly, the Ninth Circuit reversed the dismissal, with instructions to remand the case to Nevada state court.

 

One judge dissented because the judge believed the Court should have considered only the allegations that existed at the time of removal.

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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 and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

and

 

Insurance Recovery Services

 

 

FYI: 5th Cir Rejects Borrower's Challenges to MERS, Pooling and Servicing Agreement, Other Claims

The U.S. Court of Appeals for the Fifth Circuit recently held that an assignment of a mortgage deed of trust ("DOT") from Mortgage Electronic Registration Systems ("MERS") to an assignee ("Assignee") was valid under Texas law, because MERS was specifically named as a beneficiary in the DOT and was vested with the power to exercise the rights set forth in the DOT.  Therefore, the Court held, MERS was a valid beneficiary under the Texas Property Code and contract law, and the assignment from MERS to Assignee was valid.

 

The Fifth Circuit further held that the Borrowers lacked standing to challenge the applicable pooling and servicing agreement because they were not parties or third-party beneficiaries of that agreement.  The Fifth Circuit also held that the assignment of the DOT did not violate Texas's false lien statute, because MERS was a valid beneficiary and could assign the DOT.  Therefore, Assignee's assertion that it had a right to foreclose was not false.

 

In so ruling, the Fifth Circuit affirmed the district court's dismissal of the Borrowers' complaint, in which the Borrowers attempted to challenge Assignee's ability to foreclose.

 

A copy of the opinion is available at:  http://www.ca5.uscourts.gov/opinions/pub/14/14-20585-CV0.pdf

 

In 2006, the Borrowers purchased a house in Texas with a loan, executing a promissory note in favor of the lender ("Lender") and its successors and assigns secured by the DOT.  The DOT named MERS as a beneficiary and Lender's nominee, granting MERS the right to act on Lender's behalf and to foreclose.

 

In 2011, MERS assigned the DOT to the Assignee. The Borrowers later defaulted, and the Assignee initiated foreclosure proceedings. The Borrowers sued the Assignee, MERS, seeking an injunction and declaratory relief preventing the Assignee from foreclosing, and also brought a false-lien claim under Texas state law. The district court granted the Assignee's motion to dismiss for failure to state a claim.

 

The Borrowers raised two issues on appeal.  First, they argued that MERS's assignment of the DOT to the Assignee was void, such that the Assignee cannot foreclose. They contended the assignment was void because Texas law does not permit MERS — as a book-entry system — to act as a beneficiary of a DOT. They alternatively maintained that New York law governs the validity of the assignment, under which the assignment was supposedly void because it violated the Trust's pooling and service agreement ("PSA").

 

Next, the Borrowers argued that MERS's assignment of the DOT to the Assignee created a false lien in violation Texas's false-lien statute — Section 12.002.

 

As you may recall, borrowers have limited standing to challenge their lenders' assignments of their promissory notes and DOTs. "In Texas [] an obligor cannot defend against an assignee's efforts to enforce the obligation on a ground that merely renders the assignment voidable at the election of the assignor . . . ." Rienagel v. Deutsche Bank Nat'l Trust Co., 735 F.3d 220 (5th Cir. 2013). But an obligor has standing to challenge an assignee's efforts to enforce the obligation on a ground that would render the assignment void.  Id.

 

The Fifth Circuit noted that the Borrowers have standing to challenge Assignee's efforts to foreclose if the Borrowers' claim would render the assignment void rather than voidable. The Borrowers failed to make that showing.

 

The Fifth Circuit noted that the DOT specifically named MERS as a beneficiary with the right to "exercise any or all of those interests" in the DOT. The Borrowers conceded that language but claim that Chapter 51 of the Texas Property Code ("Chapter 51") does not allow MERS to act as a beneficiary. They contended that Chapter 51 includes book-entry systems as eligible mortgagees only to allow book-entry systems to aid in administering foreclosures, not to act as beneficiaries.

 

The Fifth Circuit rejected a similar claim in Harris County v. MERSCORP Inc., 791 F.3d 545 (5th Cir. 2015).  There, various Texas counties claimed MERS fraudulently misrepresented itself as the beneficiary of DOTs recorded in the counties. The DOTs — using language identical to the language in the Borrowers' DOT — named MERS as a beneficiary with the right to exercise all of the interests in a DOT. The counties contended MERS had no interest in the debts or promissory notes and thus could not be a beneficiary of the DOTs. The Fifth Circuit concluded MERS had committed no fraudulent misrepresentation because it was a valid beneficiary as a matter of contract law and under Chapter 51. Id. at 558–59.

 

The Fifth Circuit reasoned that the DOTs explicitly designated MERS as a beneficiary, the borrowers agreed to the DOTs, and it was immaterial that MERS had no interest in the promissory notes or debts because Texas law treats a DOT and a note as separate instruments. See id. at 558.

 

Further, the Fifth Circuit observed that Chapter 51 grants MERS authority to act as a beneficiary of DOTs by including book-entry systems in Chapter 51's definition of "mortgagees" capable of initiating foreclosure. 

 

The Borrowers agreed to a DOT that explicitly designated MERS as the beneficiary with a right to exercise all the interests in the DOT.  Accordingly, as a beneficiary, MERS had the right to assign the DOT. Therefore, MERS' acting as the beneficiary did not render the transfer to the Assignee void.

 

The Fifth Circuit next addressed the Borrowers' argument that the assignment to the Assignee was void because it violated the trust's PSA.

 

The Fifth Circuit noted that its decision in Reinagel, 735 F.3d at 228, directly defeats this argument under Texas law.  In that case, the Fifth Circuit held that home-loan borrowers—such as the Borrowers—had no standing under Texas law to enforce a PSA because they were neither parties to the PSA nor intended third-party beneficiaries under it. Id.

 

The Fifth Circuit stated that even if the borrowers had standing to enforce the PSA as intended third-party beneficiaries, their cause of action would be for breach of the PSA. Id. The assignment would thus be voidable but not void.

 

Therefore, the borrowers lacked standing under Texas law to challenge the lender's efforts to foreclose on the ground that it violated the PSA. The Borrowers failed to offer any theory to distinguish themselves from the borrowers in Reinagel, so their claim under Texas law that the assignment is void because it violated the PSA failed.

 

The Fifth Circuit next addressed the Borrowers' argument that New York law governs whether the alleged PSA violation renders the transfer void, because the trust is a common-law trust formed under New York law and the PSA states it should be construed in accordance therewith. They argued an assignment that violates the PSA is void—rather than voidable—under New York's Estate Powers & Trust Law § 7-2.4,7 so they have standing to challenge Assignee's efforts to foreclose. This appeal to New York law, however, was unavailing.

 

The Borrowers relied on the unreported New York trial-court decision in Wells Fargo Bank, N.A. v. Erobobo, No. 31648/2009, 2013 WL 1831799 (N.Y. Sup. Ct. Apr. 29, 2013). There, a trustee accepted assignment of a note and mortgage after the trust was closed, which violated the trust's PSA. Id. at *8. The court below concluded that Section 7-2.4 rendered void any conveyance made in violation of a PSA. Id. The Appellate Division reversed: "[A] mortgagor whose loan is owned by a trust[] does not have standing to challenge the [assignee's] possession or status as assignee of the note and mortgage based on purported noncompliance with certain provisions of the PSA." This case cut directly against the Borrowers' standing argument, even assuming New York law applied.

 

Assuming the Borrowers had standing to challenge violations of a PSA, New York courts have not applied Section 7-2.4 in the manner the Borrowers would hope but instead have treated a trustee's act in violation of the trust as voidable but not void. According to the Fifth Circuit, even under New York law, any alleged violation of the PSA would render MERS's assignment of the DOT to Assignee at most voidable but not void. It therefore made no difference which state's law applies.

 

The Borrowers also argued the Assignee violated Texas's false-lien statute— Section 12.002—by falsely asserting the right to foreclose. As you may recall, to state a claim under Section 12.002, a plaintiff must plead facts showing that the defendant (1) made, presented, or used a document with knowledge that it was a fraudulent lien or claim against real or personal property or an interest in real or personal property, (2) intended that the document be given legal effect, and (3) intended to cause the plaintiff physical injury, financial injury, or mental anguish.

 

The Fifth Circuit found that the Borrowers failed to state a claim under Section 12.002. The Borrowers argued that Assignee's attempt to foreclose was an assertion of a false lien because MERS could not validly assign Assignee the right to foreclose. Without a valid assignment, Assignee could only falsely assert the right to foreclose. The Fifth Circuit categorized the false-lien claim as entirely derivative of their first claim that the assignment to Assignee was invalid.

 

As the Fifth Circuit previously noted, the assignment was valid. Therefore the Assignee's lien (the right to foreclose) was in no way fraudulent. The DOT explicitly designated MERS as a beneficiary with the right to foreclose and gave MERS the right to assign the DOT. MERS validly assigned the DOT to Assignee, so there was no fraudulent lien.

 

Accordingly, the Fifth Circuit affirmed the district court's dismissal.

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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 and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

and

 

Insurance Recovery Services

 

 

FYI: Fla App Ct (3rd DCA) Applies "After Acquired Title" Doctrine to Save Mortgage Loan

The Third District Court of Appeals of the State of Florida recently affirmed the entry of summary judgment in favor of a mortgagee and against the purchaser at a condominium association assessment foreclosure sale based on the after-acquired title doctrine.

 

A copy of the opinion is available at: http://www.3dca.flcourts.org/opinions/3D14-1627.pdf

 

In July of 2007, the borrowers obtained a mortgage loan secured by a condominium unit at a luxury building in Miami Beach.

 

Although the mortgage contained the usual covenant that the borrowers owned legal title to and had the right to mortgage the property, the property was in fact owned by a corporation at the time of the deed.  The corporation conveyed title to the borrowers five days after the mortgage transaction took place.

 

In 2010, the condominium association sued to foreclose its lien for unpaid assessments, eventually obtaining title to the property as the highest bidder at the condominium association foreclosure sale. It then sold the property to a limited liability company in 2012.

 

In April of 2013, the mortgagee sued to foreclosure its mortgage, naming the borrowers, the new owner, and the condominium association as defendants, among others.

 

The new owner filed a counterclaim for declaratory relief and to quiet title, arguing that the mortgage was void ab initio because the borrowers did not own the property when they signed the mortgage.

 

The parties filed cross-motions for summary judgment, and the trial court granted the mortgagee's motion, holding that the after-acquired title doctrine applied to properly secure the mortgage. The new owner appealed.

 

On appeal, the Court explained that "[u]nder the doctrine of after-acquired title 'if a grantor purports to transfer ownership of real property to which he lacks legal title at the time of the transfer, but subsequently acquires legal title to the property, the after-acquired title inures, by operation of law, to the benefit of the grantee."

 

Describing the doctrine "as a species of estoppel by deed," the Appellate Court noted that "it has also been characterized as a doctrine grounded in the covenant or warranty of title made by the grantor when conveying the property" and that the doctrine "applies to mortgages."

 

The new owner argued that the doctrine "does not apply as against a non-party to the original mortgage and subsequent purchaser of the subject property," and that it "is not a privy or successor in interest" and was not bound by the borrowers' mortgage or the transaction by which they subsequently acquired title.

 

The Appellate Court disagreed, concluding that the new owner "is bound, as a successor in interest, and estopped to deny the existence of title acquired by [the borrowers] after the mortgage was executed."

 

First, the Court pointed out that the new owner had notice of the recorded mortgage.

 

Second, the Appellate Court reasoned, based on a long line of case law going back to 1918, that "[i]t is clear from the case law that the after-acquired title doctrine 'inures to the benefit of the grantee,'—here [the plaintiff successor in interest]—and that the covenant also 'runs with the land,' … binding those who are successors in interest to the grantor as well as the grantee."

 

The Court also rejected the new owner's argument that the after-acquired title doctrine did not apply "because the original transaction was a purchase money mortgage."  The Court reasoned that although "[u]nder Florida law, a 'purchase money mortgage given as part of the transaction in which the premises were purchased is an exception to the general rule that, where a mortgage contains full covenants of warranty, title acquired by the mortgagor after the execution of the mortgage inures to the benefit of the mortgagee," the exception did not apply to the transaction in the case at bar.

 

Although the mortgage at issue bore the name "purchase money mortgage," the Appellate Court held it was not "the type of transaction contemplated by the Florida Supreme Court when it established this exception to the doctrine of after-acquired title." The new owner conceded that the transaction at issue did not involve the typical purchase money mortgage, where "the mortgage is given by the buyer of the property to the seller of the property to secure the unpaid balance of the purchase price, and the conveyance and mortgage are executed simultaneously."

 

Citing Florida Supreme Court precedent, the Court noted that the exception "'is based on the idea that it would be unjust to allow a purchase-money mortgage to be foreclosed on any greater title than the seller had conveyed, merely because it contained a covenant of warranty.'

 

In other words, in the Florida Supreme Court's use of the term "purchase money mortgage," the mortgagee of the property is also the seller of the property, and that individual knows whether he is in fact lawfully seised of the property and able to convey full title.  Upon foreclosing, the pre-existing case law holds, a seller-mortgagee should not be permitted to obtain greater title than he could originally have conveyed.

 

Because in the case at bar, the original lender loaned money to the borrowers "in exchange for a mortgage on property which [borrowers] thereafter purchased from a third-party in a subsequent transaction," the Court concluded that "the purchase money mortgage exception to the after-acquired title doctrine does not apply to the instant case."

 

Accordingly, the trial court's summary judgment in favor of the lender's successor in interest was affirmed.

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

California   |   Florida   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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 and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

and

 

Insurance Recovery Services