FYI: WA Sup Ct Holds Deed of Trust Provisions Allowing Entry and Securing of Collateral Not Enforceable

The Supreme Court of Washington recently held that the provisions in a deed of trust allowing a servicer to enter and secure a property after default and before the completion of a foreclosure conflict with Washington state law, and are therefore unenforceable.

 

The Court also held that Washington's receivership provisions at chapter 7.60 RCW are not the only remedy for servicers to gain access to a borrower's property.

 

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

 

The borrower defaulted on her mortgage loan.  Pursuant to a provision in the deed of trust, one of the servicer's representatives came to the borrower's home, inspected it, determined the property was vacant and changed the locks to the door.  A phone number was placed on the door to contact to gain access to the property.

 

The borrower disputed her home was vacated.  She contacted the number provided and gained access to the property.  The next day she claims she vacated the property. 

 

The borrower filed a putative class action against the servicer, purporting to represent a class of 3,600 homeowners in Washington who, under similar deed of trust provisions, were locked out of their homes. 

 

The deed of trust provisions allowed the servicer to enter the borrower's home upon default without providing any notice ("entry provisions").  However, the borrower asserted claims against the servicer for trespass, breach of contract, and supposed violations of the Washington Consumer Protection Act (Ch. 19.86 RWC) (WCPA) and the federal Fair Debt Collection Practices Act (15 U.S.C. § 1692, et seq) (FDCPA).   Accordingly, one of the primary issues was whether the entry provisions in the deed of trust conflict with Washington law.

 

The trial court certified the proposed class, and the servicer removed the case to federal district court. The federal district court certified the following two questions of Washington state law to the Supreme Court of Washington:

 

1. Under Washington's lien theory of mortgages and RCW 7.28.230(1), can a borrower and lender enter into a contractual agreement prior to default that allows the lender to enter, maintain, and secure the encumbered property prior to foreclosure?

 

2. Does chapter 7.60 RCW, Washington's statutory receivership scheme, provide the exclusive remedy, absent post default consent by the borrower, for a lender to gain access to an encumbered property prior to foreclosure?

 

The Supreme Court of Washington answered both questions in the negative.

 

As to the first question, the Court noted that the entry provisions in the deed of trust allow a servicer to enter the property after an event of default.  However, the Court also noted that Washington law prohibits a servicer from taking possession of collateral prior to foreclosure.  The Supreme Court of Washington held that, because the entry provisions in the deed of trust allow the servicer to take possession of the collateral prior to foreclosure, the entry provisions are in conflict with Washington law and are unenforceable.

 

The Court explained that "it is the general rule that a contract which is contrary to the terms and policy of an express legislative enactment is illegal and unenforcible [sic]." State v. Nw.Magnesite Co., 28 Wn.2d 1, 26, 182 P.2d 643 (1947). While there is overarching freedom to contract, provisions are unenforceable where they are prohibited by statute. State Farm Gen. Ins. Co. v. Emerson, 102 Wn.2d 477, 481, 687 P.2d 1139 (1984).

 

As you may recall, Washington law prohibits a lender from taking possession of property before foreclosure of the borrower's home.  More specifically, RCW 7.28.230 provides that

 

(1) A mortgage of any interest in real property shall not be deemed a conveyance so as to enable the owner of the mortgage to recover possession of the real property, without a foreclosure and sale according to law.

 

The Supreme Court of Washington noted that courts have interpreted RCW 7.28.230(1) to mean that a mortgagor's default does not terminate the mortgagor's right to possession and that the mortgage can retain possession until the foreclosure process is completed. Howard v. Edgren, 62 Wn.2d 884, 885, 385 P.2d 41 (1963).

 

Here, the servicer argued that exercise of the entry provisions in the deed of trust do not constitute possession.  To answer the first question, the Court had to determine if the entry provisions cause the servicer to gain possession.  The Court held it did. 

 

The Supreme Court of Washington looked to several definitions of the "possession."  Under any definition, the Court held, the conduct allowed under the entry provisions constitutes possession because the actions satisfy the key element of possession which is control. 

 

The Court noted that the servicer here drilled out the existing locks and replaced it with its own.  The Court opined that rekeying the property has the effect of informing the borrower that the servicer now has control.  Thus, the Court held, the borrower was left with no method of entering her property. 

 

Even though the servicer provided the borrower with a method to reenter the property, the Court held that the action of changing the locks and allowing for reentry only after contacting the servicer was a clear expression of control. 

 

Accordingly, the Court held the entry provisions in the deed of trust allow the servicer to take possession of the property after default and prior to the completion of a foreclosure. The Supreme Court of Washington held that, because Washington law prohibits the taking possession of the borrower's property before foreclosure, the entry provisions are in conflict with Washington state law and cannot be enforced.

 

As to the second certified question, the Court held that Chapter 7.60 RCW is not the exclusive remedy for lenders to gain access to a property.

 

Chapter 7.60 RCW governs receiverships in Washington.  A "receiver" is a third party appointed by a court to manage the property as the court directs. 18 WILLIAM B. STOEBUCK & JOHN W. WEAVER, WASHINGTON PRACTICE: REAL ESTATE: TRANSACTIONS, § 18.6, at 310 (2d ed. 2004). Even if a mortgage clause provides for the appointment of a receiver, lenders are not immediately entitled to one.  STOEBUCK & WEAVER,  § 18.6, at 312.  Although statutory grounds exist for a court-appointed receiver prior to foreclosure, it is rarely sought.  Id.

 

The borrower here argued that the entry provisions in the deed of trust attempted to bypass the receivership statutes.  The Court read the statutes as not being concerned with a servicer's access to the collateral property but rather merely setting forth requirements should a receiver be necessary.

 

Thus, Supreme Court of Washington held that the entry provisions in the deed of trust do not attempt to circumvent the receivership statutes and thus do not conflict with chapter 7.60 RCW. 

 

The statute provides, in relevant part:

 

A receiver may be appointed by the superior court of this state in the following instances, but except in any case . . . in which a receiver's appointment with respect to real property is sought under (b)(ii) of this subsection, a receiver shall be appointed only if the court additionally determines that the appointment of a receiver is reasonably necessary and that other available remedies either are not available or are inadequate.

 

RCW 7.60.025(1)

 

Subsection (b)(ii) provides that a receiver may be appointed after the commencement of a foreclosure proceeding on a lien against real property where the appointment is provided for by agreement or is necessary to collect rent or profits from the property.

 

Under subsection (b)(ii), a receiver shall be appointed, but only if the court makes additional findings. First the court must find a receiver is "reasonably necessary." RCW 7.60.025(1)(b)(ii). Second, the court must determine that "other available remedies either are not available or are inadequate." RCW 7.60.025(1).

 

The Supreme Court of Washington held that the plain language of the statute does not suggest that chapter 7.60 RCW was intended to be an exclusive remedy.  The Court noted there are other remedies outside of appointing a receiver but it was not for the Court to determine what those remedies are. 

 

Accordingly, the Court answered the second certified question in the negative, ruling that "[t]he text of the receivership statutes, the legislative intent behind them, and public policy considerations compel us to find that chapter 7.60 RCW is not the exclusive remedy for lenders to gain access to a borrower's property."

 

 

 

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

 

 

 

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FYI: Fla App Ct (1st DCA) Dismisses Foreclosure Due to Trial Court's Lack of Jurisdiction

The District Court of Appeal for the First District, State of Florida, recently ordered the dismissal of a foreclosure action because it held that the trial court's jurisdiction expired prior to the entry of the judgment of foreclosure in the case.

 

The Appellate Court held that the trial court failed to consider whether it had jurisdiction over the action to enter judgment of foreclosure after it previously dismissed the same action. 

 

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

 

A mortgagee commenced a foreclosure action against a borrower in 2009.  The mortgagee alleged that the borrower was in default and that it was entitled to foreclose on the property as the holder of the mortgage and note. 

 

As you may recall, under Florida law, a party seeking to foreclose must tender the original promissory note to the trial court or seek to reestablish the lost note.  The mortgagee failed to produce the original note during discovery and the borrower sought to compel such production.  In January 2013, the trial court ordered the mortgagee to file the original note and mortgage within 30 days of the order.  The mortgagee did not comply.

 

In May 2013, the borrower filed his motion to dismiss the case due to the mortgagee's failure to comply with the court's order.  The trial court denied the motion, and stated that its previous order compelling the mortgagee to file the original note was still in effect.

 

In February 2014, the borrower filed a second motion to dismiss, again based on the mortgagee's continued failure to comply with the court's order to produce the original documents.  The trial court granted the motion to dismiss "without prejudice."  

 

A few days thereafter, the borrower erroneously filed and served a notice of hearing on his second motion to dismiss.  This notice did not constitute a motion for rehearing.  This mistaken "notice" did not postpone the entry of the order, revive the pendency of his second motion to dismiss, or toll the time for any challenge to the order by the mortgagee. 

 

There was apparently no hearing on the borrower's mistaken notice of hearing, and no transcript was contained in the record to indicate any oral motion or ruling.  In April 2014, without explanation or reference to its February 2014 order, the trial court entered a second order on the borrower's second motion to dismiss, this time denying the motion and directing the mortgagee to file an amended complaint within sixty days.

 

After the eventual filing of the amended complaint, which asserted a new cause of action to enforce a lost note, and upon the mortgagee's motion for summary judgment, the trial court entered summary final judgment of foreclosure in favor of the mortgagee in August 2015.  The borrower appealed.

 

The First District Court of Appeal exclusively analyzed the issue of jurisdiction to arrive at its decision.  The Court explained that jurisdiction over an action does not endure indefinitely and that it was an error for the trial court never to address the viability of its jurisdiction over the case after the entry of the order of dismissal in February 2014.

 

The Appellate Court held that the entry of the order granting the second motion to dismiss, without prejudice, but without indicating any future judicial action in that particular case, together with the lack of a future motion on the order, resulted in finality and the concomitant loss of the court's jurisdiction in this particular case. 

 

The First District supported its ruling by considering the Florida Rules of Civil Procedure, the history of the case at that point, and the appealable nature of that order. 

 

In analyzing the Florida Rules of Civil Procedure, the Appellate Court focused on the "without prejudice" language in the order.  The Court explained that "without prejudice" can indicate the trial court's intention to bring an end to the judicial labor in the matter. 

 

Moreover, a dismissal under rule 1.420(b) of the Florida Rules of Civil Procedure operates as an adjudication on the merits.  Thus, the First District held, a second lawsuit on the same note, mortgage, and default is barred as res judicata unless the court includes the phrase "without prejudice" in the order of dismissal. 

 

The First District then turned to the history of the case to support its ruling.  The February 2014 order was final and appealable as a sanction for discovery abuses.  The Court noted that Florida appellate courts have upheld orders dismissing action without prejudice as a sanction for discovery violations.  

 

The Appellate Court noted that the dismissal order was appealable, but the mortgagee did not appeal the order of dismissal entered in February 2014.  The Court also noted that the mortgagee did not file a motion for rehearing, appeal, or motion for relief from judgment or order, pursuant to Rule 1.540 of the Florida Rules of Civil Procedure. 

 

The First District held that these were the available mechanisms for challenging the order and in light of these mechanisms the time to rehear the order expired in March 2014.  The Appellate Court held that the trial court's jurisdiction to enter additional rulings is limited, and decreases as time progresses after a final, appealable order is entered by the trial court.  The Appellate Court also noted that a trial court loses jurisdiction of a case at the expiration of the time for filing a petition for rehearing. 

 

Consequently, the First District held, the trial court had no jurisdiction to further entertain the mortgagee's claim against the borrower on the same cause of action.

 

The Court concluded that the order entered in April 2014, denying the borrower's second motion to dismiss (despite the previous grant of the same motion in February 2014), and directing the mortgagee to file an amended complaint in the same case, was a nullity as was the judgment of foreclosure entered on the amended complaint. 

 

Accordingly, the First District reversed the trial court's judgment of foreclosure, and remanded for dismissal of the case. 

 

 

 

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

 

 

 

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FYI: 9th Cir Holds Car Dealer Failed to Provide "Completed Inspection Report" as to "Certified" Used Car

The U.S. Court of Appeals for the Ninth Circuit recently held that a car dealership inspection certificate violated California statutory law that required that a vehicle seller provide a "completed inspection report" prior to the sale of any "certified" used car.

 

In so ruling, the Court held that the term "inspection report" was a term of art in the auto industry and in other state statutes, and that the California Legislature must have been aware of its usage.

 

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

 

An individual purchased a vehicle from a car dealership.   The individual alleged that he was drawn to the car dealership after hearing advertisements regarding the benefits of purchasing a "certified" vehicle that had passed the car dealership's rigorous "125-point" certification inspection.  The individual alleged that he would have paid less, or possibly not even purchased the car, had it not been a "certified" vehicle. 

 

According to the individual, it is the car dealership's policy to simply provide purchasers of used vehicles with a pre-printed car dealership "Quality Inspected Certificate" ("Certificate") listing the vehicle components that were inspected.  The individual received two versions of the Certificate: a one-sided Certificate provided to him prior to sale, and a two-sided Certificate, which was placed in the glove compartment before he took possession of the vehicle. 

 

In addition to the two Certificates that the car dealership provides to purchasers of used vehicles, the car dealership also uses a third document known as a "CQI/VQI Checklist."  This checklist contains 236 points of inspection and is filled out by a technician during the inspection process.

 

The CQI/VQI Checklist, unlike the Certificates, indicates the condition of each individual component inspected. Rather than provide the CQI/VQI Checklist to consumers, the car dealership destroys the document after the inspection results are entered into its electronic system, and no copy of the checklist is retained.

 

Shortly after purchasing the vehicle, the individual experienced some difficulty with the car. The individual filed suit in state court alleging violation of California consumer protection laws -- (1) the Consumer Legal Remedies Act ("CLRA"); (2) the Song-Beverly Consumer Warranty Act ("Song-Beverly"); (3) common law fraud and deceit; and (4) the Unfair Competition Law ("UCL"). 

 

The individual's central theory was that the car dealership violated state law by failing to provide him with a "completed inspection report" prior to the sale of the "certified" vehicle.

 

The car dealership removed to federal court asserting diversity jurisdiction. A week after removal, the car dealership filed a motion to dismiss, as well as a motion to strike the individual's punitive damages claim.

The following month, while the motion to dismiss the first amended complaint was pending, the district judge issued an order to show cause regarding subject matter jurisdiction, noting that he had "serious doubts" as to whether the case met the amount-in-controversy requirement.

 

After the parties responded to the order to show cause, the district judge found that the car dealership had shown by a preponderance of the evidence that the amount in controversy was over $75,000 and thus the action was properly removable.

 

The district court then granted the car dealership's motion to dismiss on all claims except for the CLRA and UCL claims. Following discovery, the car dealership filed a motion for summary judgment on the CLRA and UCL claims. The district court granted the motion, holding that there was no material legal difference between the one-sided form and the two-sided form, and that both forms were legally sufficient. 

 

The individual appealed the district court's dismissal and summary judgment orders.  In this opinion, the Ninth Circuit only considered the appeal of the summary judgment.

 

The Court of Appeals for the Ninth Circuit first addressed the potential lack of subject matter jurisdiction. As you may recall, to establish original jurisdiction based on diversity of parties, the amount in controversy must exceed the sum or value of $75,000, exclusive of interest and costs.  The Ninth Circuit explained that the amount in controversy is the amount at stake in the underlying litigation and includes damages, the cost of complying with an injunction, as well as attorney's fees awarded under fee shifting status.  The Court of Appeals held that the amount in controversy in this matter exceeded the minimal required when the potential cost of complying with injunctive relief was considered along with the individual's claims for compensatory and punitive damages.  

 

Next, the Court of Appeals considered the individual's claims under the California CLRA and UCL claims.

 

Section 11713.18 of the California Vehicle Code prohibits a car dealer from either advertising for sale or selling a used vehicle as "certified" under nine circumstances, including if:  "[p]rior to sale, the dealer fails to provide the buyer with a completed inspection report indicating all the components inspected."  Cal. Veh. Code § 11713.18(a)(6).  The statute further provides that a violation of any of these provisions is actionable under the CLRA, the UCL, false advertising statutes, or any other applicable state or federal law. Cal. Veh. Code §  11713.18(b).

 

Applying the state law, the Ninth Circuit held that the car dealership's Certificates did not satisfy the requirements of § 11713.18.  The Court found support for its ruling in the plain meaning of the statutory language, as the statute requires a completed "inspection report."

 

The Court explained that, while the term is not defined in the statute, an "inspection report" is a term of art in the automobile industry.  Specifically, the Ninth Circuit noted, the term "inspection report" is understood to mean a report that lists the components inspected, with a space corresponding to each component in which the inspector designates whether or not that component is functional.

 

The Ninth Circuit also noted that a "completed inspection report" is one in which those spaces have been appropriately marked so as to indicate the result of the inspection.  The Court further noted that these terms are common in California state statutes, regulations, and everyday usage in the auto industry, and other states also use such a term of art for a document that requires an area for marking the components for defects.

 

The Court held it had to assume that the California legislature was aware of the meaning of "inspection report" and intended the meaning to control.  In disregarding this meaning, the Court would have improperly make the word "completed" superfluous. 

 

The Ninth Circuit also found support for its ruling in the purpose, history, and public policy of the statute.  The Court noted that section 11713.18(a)(6) was part of California's "Car Buyer's Bill of Rights," which, according to the author of the bill, aimed to "strengthen the protections afforded [to] California car buyers by improving laws regarding the sales, marketing, and financing of new and used vehicles."  Assembly Judiciary Comm., 2005Ð2006 Session, Analysis of AB-68 5 (March 1, 2005).

 

Prior to the enactment of this bill, the California legislature noted that there was no legal standard for use of the term "certified," despite the growing trend for dealers to use this term.  According to the Court, the legislature enacted this statute to protect consumers and assure that they received a fair bargain and for there to be transparency in the sale of "certified" vehicles.

 

The Ninth Circuit emphasized that the car dealership's certificates did not provide the status of the individual components inspected under its inspections.  Instead, the Court noted, the Certificates merely guaranteed that the vehicle's overall condition satisfied its certification program and listed the components under the program.  The Court found dispositive the fact that the consumer did not know neither the condition of the individual components nor which, or how many, components must pass the test before a vehicle is "certified." In other words, the Court explained, the individual did not know what it meant to pass the inspection.

 

The Ninth Circuit rejected the car dealership's argument based on the drafting history of the legislation.  In drafting the bill, the California legislature deleted the phrase "and certifies that all of the inspected components meet the express written standards of the vehicle certification program."  The Court explained that this deletion spared dealers from another substantive obligation, while leaving the requirement to provide a "completed inspection report" intact.

 

Accordingly, the Ninth Circuit reversed the district court's grant of summary judgment in favor of the car dealership and sua sponte granted summary judgment in favor of the individual.  

 

 

 

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

 

 

 

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FYI: 4th Cir Holds Foreclosure is FDCPA "Debt Collection", Mere Servicer Need Not Provide TILA Notice of Assignment of Loan

The U.S. Court of Appeals for the Fourth Circuit recently confirmed that a law firm and its employees, who pursued foreclosure on behalf of creditors, were acting as "debt collectors," under the federal Fair Debt Collection Practices Act ("FDCPA") when they pursued foreclosure proceedings against a borrower.

 

In so ruling, the Court also confirmed that a servicer that does not also own the mortgage loan does not have a duty to provide notice of the sale and assignment of a loan to itself under the federal Truth in Lending Act ("TILA"), merely because it accepts the assignment of the deed of trust.

 

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

 

After obtaining a mortgage loan, the borrower sent her servicer a written request for information about the fees and costs that it was charging and how it was maintaining the escrow account on the loan. The servicer allegedly failed to respond or responded inadequately to her request and her follow-up inquiries.

 

The borrower stopped making payments on her mortgage loan, and went into default.  The servicer retained a law firm to pursue foreclosure. The law firm informed the borrower that the firm had been instructed to initiate foreclosure proceedings on her property.

 

Several of the law firm's employees were substituted as trustees on the deed of trust to facilitate foreclosure, and the substitute trustees filed a foreclosure action.

 

The borrower brought an action for damages against the mortgagee, the servicer, and the law firm and its employees, alleging that they violated the FDCPA and TILA, by failing to provide her with required notices and information.

 

The district court granted the mortgagee, the servicer, and the law firm's motions to dismiss the borrower's FDCPA and TILA claims.

 

On appeal, the borrower argued that the district court erred in concluding that her complaint failed to allege sufficient facts to establish that the law firm and its employees were "debt collectors" subject to the FDCPA's regulation.

 

As you may recall, the FDCPA defines the term "debt collector" to include "any person [1] who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or [2] who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another."

 

The law firm and its employees argued that the borrower failed to plead any facts indicating that they had made any demands for payment, or communicated deadlines and penalties for the borrower's failure to make any payment.

 

They also argued that the actions occurred in connection with the enforcement of security interests in real property, which were distinct from debt collection activity under the FDCPA. They further argued that a foreclosure action was not designed to obtain payment on an underlying debt, but to terminate borrower s ownership interests of the mortgagor in the property.  Finally, they argued that their activity was only incidental to a bona fide fiduciary obligation and therefore was excluded from regulation by an exception contained in the FDCPA's definition of "debt collector."

 

The Fourth Circuit disagreed with the law firm, noting that it had already decided this issue in Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 375-77 (4th Cir. 2006), where it held that a law firm that provided notice that it was preparing foreclosure papers and thereafter initiated foreclosure proceedings could be a debt collector as defined by the FDCPA.

 

The Court reversed the district court, holding that the borrower's debt remained a debt even after foreclosure proceedings commenced and the law firm's actions surrounding the foreclosure proceeding were attempts to collect that debt.  The Fourth Circuit also held that foreclosure was not excluded from the FDCPA because it was central to the mortgagee's fiduciary obligation under the deed of trust.

 

In sum, the Fourth Circuit held that borrower's complaint adequately alleged that the law firm and its employees were debt collectors under the FDCPA, and that their actions in pursuing foreclosure constituted a step in collecting debt and thus debt collection activity that is regulated by the FDCPA.

 

The Court noted, however, that its conclusion was not to be construed to indicate, one way or the other, whether the law firm and its employees, as debt collectors, violated the FDCPA.

 

The borrower next argued that the district court erred in dismissing her claim that the mortgagee violated TILA by failing to give her notice of its purchase of her loan.

 

As you may recall, TILA at 15 U.S.C. § 1641(g) provides that the new owner or assignee of a mortgage loan must provide written notice to a borrower no later than 30 days after the date on which it is sold or otherwise transferred or assigned.

 

The Fourth Circuit disagreed with the borrower, affirming the district court's dismissal of the TILA claims against the mortgagee, because Congress added this provision to TILA in 2009, and the borrower failed to that the sale and transfer of the mortgage loan to the mortgagee occurred after 2009.

 

Because the borrower seemed to concede that at least as of December 2011, she had notice that the mortgagee was the owner of her loan, the Court also affirmed the district court's alternative conclusion that the claim was barred by TILA's one-year statute of limitations.

 

Finally, the borrower contended that the district court erred in dismissing her claim against the servicer for failing to give her notice of the assignment of the deed of trust to it, in supposed violation of TILA, 15 U.S.C. § 1641(g). The district court had dismissed her claim because it concluded that the servicer received only a beneficial interest, not legal title, in order to service the loan.

 

On appeal, the borrower conceded that the statute is usually interpreted to mean that notice is required only when legal title to the debt obligation is transferred, but she argued that, in addition to receiving a beneficial interest, the servicer also received an ownership interest based on a line in the deed of trust that read, "The Note or a partial interest in the Note (together with this Security Instrument) can be sold."

 

The Fourth Circuit disagreed with the borrower, holding that the statement only indicated that the note could be sold.  Additionally, the Court noted that the inference would be inconsistent with the borrower's assertion that the mortgagee was in fact the owner and failed to give her timely notice of its ownership.

 

In short, the Court concluded that the district court did not err in dismissing this claim.

 

Accordingly, the Fourth Circuit affirmed in part the district court's judgment, reversed in part, and remanded. The Court reversed the order of dismissal of the borrower's FDCPA claims against the law firm and its employees and remanded for further proceedings, without suggesting whether or not those defendants violated the FDCPA.  As to the TILA claims, the Court 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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   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

 

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Insurance Recovery Services

 

 

 

 

FYI: Fla App Ct (2nd DCA) Reverses Foreclosure Due to No Evidence Loan Was Included in Trust Corpus

The District Court of Appeal of the State of Florida, Second District, recently reversed a final judgment of foreclosure in favor of the trustee of a mortgage-backed securities trust, holding that the mortgagee failed to prove that it had standing when the complaint was filed because there was no evidence that the loan was included in the trust.

 

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

 

A mortgagee sued to foreclose a mortgage as trustee under a pooling and servicing agreement, alleging that it was the holder of the note, a copy of which was not attached to the complaint. The borrowers raised as an affirmative defense that the mortgagee was neither the holder nor owner of the note and thus could not enforce it.

 

At trial, the mortgagee's sole witness, an employee of the loan servicer, testified about the identity of the original lender, which was reflected on the original note. She further testified that the original lender was also the sponsor, originator and initial servicer under the pooling and servicing agreement dated September 1, 2006 and that the agreement closed on September 7, 2006. The loan had been transferred for servicing by the original lender to another servicer, who in turn transferred it for servicing to the current servicer.

 

The mortgagee's witness did not, however, know the date that the borrowers' loan was transferred into the trust and could not find it listed in the pooling and servicing agreement. The original note introduced into evidence did not contain any dated indorsement, special or "blank."

 

The trial court entered a final judgment of foreclosure against the borrowers and they appealed.

 

On appeal, the Appellate Court noted that "[a] party suing to foreclosure must establish standing at the time the complaint was filed … [and] [a] substituted plaintiff acquires only the standing of the original plaintiff.

 

The Court then cited its 2015 ruling in St. Clair v. U.S. Bank Nat'l Assn, which reasoned that under section 673.3011 of the Florida Uniform Commercial Code, "a person entitled to enforce a negotiable instrument must be either: (1) the holder of the instrument, (2) a 'nonholder in possession of the instrument who has the rights of a holder,' or (3) a person not in possession but who has the right to enforce a lost, destroyed, or stolen instrument or an instrument paid by mistake. A holder is a person in possession of the negotiable instrument that is payable either to bearer or to the holder. § 679.201(21)(a), Fla. Stat. (2014). A person in possession of the instrument but who is not the original lender can still be a holder, but only if the instrument bears a special indorsement in his or her favor or a blank indorsement. … Absent a special or blank indorsement, 'the mere delivery of a note and mortgage, with intention to pass the title, upon a proper consideration, will vest the equitable interest in the person to whom it is so delivered.'"

 

The Court explained that although the trustee "was the holder of the note at the time of trial, it did not prove that it was the holder at the time of the filing of the original complaint" in 2008.

 

Because the parties agreed that any blank endorsement on the note was not dated and the trustee had not proven that it 'possessed the note with a blank endorsement at the time the complaint was filed", the Court concluded that the trustee failed to prove that the note had been equitably transferred into the pooling and servicing agreement "because there was no evidence that the [borrowers'] loan was included in the agreement."

 

Accordingly, the final judgment of foreclosure was reversed and the case remanded with instructions to enter judgment for the borrowers.  

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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