FYI: 9th Cir Holds Servicer Did Not Need to Produce Servicing Contract to Assert Federal Foreclosure Bar

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's order of summary judgment in favor of a loan servicer ("Servicer") on claims arising from a non-judicial foreclosure sale conducted by a homeowners' association ("HOA") on real property located in Las Vegas, Nevada.

 

In so ruling, the Ninth Circuit held that:

 

(1) As loan servicer for a Government Sponsored Entity ("GSE"), the Servicer had standing to invoke the federal Foreclosure Bar ("Foreclosure Bar");

 

(2) The Servicer timely invoked the Foreclosure Bar by bringing the instant quiet title action within the appliable statute of limitations;

 

(3) the Foreclosure Bar applied to the HOA foreclosure sale at issue; and

 

(4) the Foreclosure Bar preempted Nevada law regarding the priority of the HOA's lien.

 

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

 

In 2005, two borrowers obtained a $219,200.00 loan ("Loan") secured by a Deed of Trust ("DOT") recorded against real property located in Las Vegas, Nevada (the "Property"). One of the GSEs purchased the Loan in March 2005. On October 28, 2010, an assignment of the DOT was recorded assigning the DOT to the Loan's prior servicer ("Prior Servicer").

 

As a result of borrowers' failure to pay their HOA dues, the HOA foreclosed on the Property and sold it to Co-Defendant Trust (the "Trust") on October 5, 2012 (the "HOA Foreclosure").  In August 2013, an assignment of the DOT was recorded assigning the DOT to Plaintiff.  In September 2013, the Trust conveyed the Property to Co-Defendant Limited Liability Company (the "LLC Defendant").

 

On November 11, 2015, the Servicer instituted the instant action against the Trust and LLC Defendant seeking to quiet title and obtain a "declaration that [GSE's interest in the Property] was not extinguished by the HOA Foreclosure."  The trial court granted summary judgment in favor of the Servicer finding that the Foreclosure Bar prevented the extinguishment of the GSE's interest in the Property.  The LLC Defendant timely appealed the trial court's summary judgment order.

 

On appeal, LLC Defendant initially argued that the Servicer lacked standing to invoke the Foreclosure Bar.  The Ninth Circuit disagreed, explaining that the Nevada Supreme Court previously declared that a "a loan servicer has standing to assert the Federal Foreclosure Bar on behalf of . . . Fannie Mae."  Daisy Tr. v. Wells Fargo Bank, N.A., 445 P.3d 846, 847 n.1 (Nev. 2019) (en banc).

 

The Ninth Circuit separately determined that the Servicer "presented ample evidence" establishing its servicing relationship with the GSE. Indeed, this relationship, coupled with the authority the GSE "delegates to its loan servicers .. was more than sufficient to establish that [Servicer] was [the GSE's] loan servicer and had the authority to assert the Foreclosure in this case."

 

Having found that the Servicer had the requisite standing, the Ninth Circuit next determined that the Servicer timely invoked the Foreclosure Bar by bringing the instant quiet title action within the applicable six-year statute of limitations under 12 U.S.C. § 4617(b)(12)(A).

 

The LLC Defendant proceeded to argue that the HOA foreclosure extinguished the DOT before it was assigned to Plaintiff.  As you may recall, the Foreclosure Bar applies if, "at the time of the foreclosure sale; (1) [the GSE] was in FHFA conservatorship; (2) [the GSE] owned the [DOT]; and (3) [the GSE] had an agency relationship with…the beneficiary of record on the [DOT]."

 

Concerning the first factor, the Ninth Circuit noted the GSE was placed in the "FHFA's conservatorship on September 6, 2008 and remains there today."  As to the second and third elements, the Court held that both requirements were met as the Servicer introduced evidence that: (1) the GSE acquired the Loan on March 1, 2005 and continued to own it through the HOA Foreclosure; and (2) the Prior Servicer was acting as the GSE's servicer for this Loan until transferring that responsibility to the Servicer on April 30, 2013.

 

Importantly, and contrary to the LLC Defendant's argument, the Court held that the Servicer was not required to specifically produce the "Mortgage Servicing Contract" in order to establish an agency relationship with the GSE. See Daisy Tr., 445 P.3d at 849–50.

 

The LLC Defendant separately argued that the GSE did not hold an ownership interest in the Loan because the Servicer did not produce a "signed writing" in accordance with Nevada's statute of frauds.  The Ninth Circuit rejected this argument stating that the LLC Defendant was not a party to the agreement to which the GSE acquired the Loan, and thus the LLC Defendant lacked standing to raise a statute of frauds defense.

 

The Court further determined that: (1) Nevada's recording statutes did not require the GSE to be identified as the beneficiary of record in order to establish its ownership interest in the Loan; (2) it was adequate for the Loan's servicer to be listed as the Loan's beneficiary at the time of the HOA Foreclosure; and (3) even if Nevada's bona fide purchaser statutes were at issue, the LLC Defendant was not a bona fide purchaser as it had "constructive knowledge of [the GSE's] interest in the [DOT]."

 

The Ninth Circuit also held that "the Foreclosure Bar preempts the Nevada super-priority lien scheme," stating that this preemption issue has "already been clearly and repeatedly answered."

 

Lastly, the LLC Defendant argued the trial court wrongly granted the Servicer "equitable relief from the recitals in the foreclosure deed, namely the default recital."  Assuming and without deciding whether the relief was equitable in nature, the Ninth Circuit rejected this argument because the LLC Defendant failed to explain "how, under Nevada law, monetary damages constitute an adequate remedy for loss of real property rights."

 

Accordingly, and for all of the above reasons, the Ninth Circuit affirmed the trial court's grant of summary judgment in favor of the Servicer. 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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: MA SJC Holds State False Claims Act Action Barred by Prior Public Disclosure

The Massachusetts Supreme Judicial Court recently affirmed a trial court's judgment dismissing a relator's claims alleging that the defendants, certain financial institutions, collectively engaged in and conspired to engage in fraud, holding that the suit was subject to the public disclosure bar of the Massachusetts False Claims Act (MFCA), Mass. Gen. Laws ch. 12, 5A-50.

 

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

 

The Massachusetts False Claims Act (MFCA) prohibits making fraudulent claims against the Commonwealth and its municipalities. See G. L. c. 12, §§ 5A-5O. The statute also permits enforcement of that prohibition by means of qui tam actions, in which "[a]n individual, hereafter referred to as a relator, may bring a civil action . . . on behalf of the relator and the [C]ommonwealth or any political subdivision thereof." G. L. c. 12, §§ 5A, 5C (2). The Commonwealth may intervene and take over the case. G. L. c. 12, §§ 5C (3), 5D. Successful relators are awarded a percentage of the funds recovered by the Commonwealth. G. L. c. 12, § 5F.

 

The relator commenced this action on behalf of the Commonwealth against the defendants, certain financial institutions and their subsidiaries, alleging that the defendants collectively engaged in and conspired to engage in fraud in connection with resetting interest rates for certain municipal bonds, referred to as variable rate demand obligations (VRDOs).

 

The defendants argued that dismissal was required pursuant to the MFCA's public disclosure bar because the subject transactions had previously been disclosed to the public through news media and the relator was not an original source of the information concerning the fraud. The trial court agreed with the defendants, and granted their motion to dismiss the complaint. The relator timely appealed.

 

The MCFA includes a public disclosure bar, which attempts to prevent "parasitic" suits, United States ex rel. Ondis v. Woonsocket, 587 F.3d 49, 53 (1st Cir. 2009), where a relator, "instead of plowing new ground, attempts to free-ride by merely repastinating previously disclosed badges of fraud," id., citing United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 26-27 (1st Cir. 2009), cert. denied, 561 U.S. 1005 (2010).

 

Where, as here, the Commonwealth chooses not to intervene, a multipart inquiry governs whether the public disclosure bar applies. "The first three parts of this inquiry ask: (1) whether there has been a prior, public disclosure of fraud; (2) whether that prior disclosure of fraud emanated from a source specified in the statute's public disclosure provision; and (3) whether the relator's qui tam action is [substantially the same as] that prior disclosure of fraud." United States ex rel. Poteet v. Bahler Med., Inc., 619 F.3d 104, 109 (1st Cir. 2010).

 

Where "all three questions are answered in the affirmative, the public disclosure bar applies unless the relator qualifies under the 'original source' exception." Poteet, supra at 109-110, quoting Ondis, supra at 53-54.

 

The Supreme Judicial Court determined that the defendants here must establish that "both [the] misrepresented state of facts and [the] true state of facts" were in the public domain when the relator filed his claims. Poteet, supra.

 

The Court found that the defendants' representations that they would comply with the obligations in their agreements with the VRDO issuers were set forth in several publicly available sources, including Municipal Securities Rulemaking Board (MSRB) rules that address remarketing agents' duties to VRDO issuers; Securities Industry Financial Markets Association (SIFMA) model disclosures; and the remarketing agreements, including remarketing circulars and official statements, reached between the defendants and the Commonwealth. See Poteet, 619 F.3d at 110, citing United States ex rel. Maxwell v. Kerr–McGee Oil & Gas Corp., 540 F.3d 1180, 1185 (10th Cir. 2008).

 

The Supreme Judicial Court held that these sources disclosed that the defendants undertook (purportedly falsely) to comply with their obligations to obtain the lowest possible interest rates that would have permitted a sale on the market on a given rate determination date. Thus, the Court concluded that the defendants had shown a prior public disclosure of the misrepresented state of facts alleged in the complaint.

 

Accordingly, the Supreme Judicial Court turned to the question of whether the second element of fraud was disclosed -- namely, whether there was a public disclosure of the "true state of facts so that the listener or reader may infer fraud." See Poteet, 619 F.3d at 110.

 

The Supreme Judicial Court held that it sufficed that other members of the public, albeit with sufficient expertise and after having conducted some analysis, could have identified the true state of affairs by using the data publicly available on the Electronic Municipal Market Access ("EMMA") website. United States ex rel. Findley v. FPC–Boron Employees' Club, 105 F.3d 675, 688 (D.C. Cir.), cert. denied, 522 U.S. 865 (1997), citing Springfield, 14 F.3d at 655.

 

Having determined that there was a public disclosure of the essential elements of the fraud, the Supreme Judicial Court turned to consider the second prong of the public disclosure bar: whether the prior disclosure "emanated from a source specified in the statute's public disclosure provision." Poteet, 619 F.3d at 109. Specifically, the Court considered whether the forum in which the public disclosure was made fell within any of three sources enumerated in the statute, (1) "a Massachusetts criminal, civil or administrative hearing in which the [C]ommonwealth is a party"; (2) "a Massachusetts legislative, administrative, auditor's or inspector general's report, hearing, audit or investigation"; or (3) "the news media." See G. L. c. 12, § 5G (c).

 

According to the complaint, the first publicly disclosed element of the asserted fraud, namely, the misrepresentation that the defendants would undertake to obtain the lowest interest rates that, in their judgment, would permit the sale of the VRDOs, was disclosed in the governing remarketing agreements, including in the official statements. The Supreme Judicial Court held that these official statements comprised Massachusetts "reports,"  one of the statutorily enumerated sources.

 

Additionally, the second publicly disclosed element of the fraud --namely, the assertion that the defendants were not obtaining the lowest interest rate that would permit the sale of the VRDOs, and instead were remarketing the bonds en masse in a way that did not obtain the lowest rates -- was disclosed on the EMMA website.

 

The Supreme Judicial Court held that the term "news media" is broad enough to encompass the many ways in which people in the modern world obtain financial news, including from publicly available websites on the Internet. See, e.g., United States ex rel. Repko vs. Guthrie Clinic, P.C., U.S. Dist. Ct., No. 3:04CV1556 (M.D. Pa. Sept. 1, 2011), aff'd, 490 Fed. Appx. 502 (3d Cir. Aug. 1, 2012).

The Court found that EMMA is the "official repository for information on all municipal bonds" and provides updates to bond market information by means of the Internet; the website is publicly available and widely disseminated. Therefore, the Court concluded that EMMA is much like traditional news sources that report market data and fall within the scope of the term "news media." See Poteet, 619 F.3d at 110

 

The Supreme Judicial Court next considered the third prong of the public disclosure inquiry: whether the public disclosure includes "substantially the same allegations or transactions as alleged in the action or claim." Poteet, 619 F.3d at 109. A "complaint that targets a scheme previously revealed through public disclosures is barred even if it offers greater detail about the underlying conduct." Winkelman, 827 F.3d at 210, citing Poteet, 619 F.3d at 115.

 

Here, the Supreme Judicial Court held that the publicly disclosed information was sufficient to put the Commonwealth "on the trail of the alleged fraud" without the relator's assistance. See Reed, 923 F.3d at 744, citing Fine, 70 F.3d at 571.

 

Because the public disclosure bar was applicable in this case, the Supreme Judicial Court reasoned that the complaint must be dismissed unless the relator was an "original source." See Poteet, 619 F.3d at 109-110. General Laws c. 12, § 5A, defines two types of relators who may qualify as original sources:

 

"an individual who: (1) prior to a public disclosure under paragraph (3) of [§] 5G, has voluntarily disclosed to the [C]ommonwealth or any political subdivision thereof the information on which allegations or transactions in a claim are based; or (2) has knowledge that is independent of and materially adds to the publicly-disclosed allegations or transactions, and who has voluntarily provided the information to the [C]ommonwealth or any political subdivision thereof before filing a false claims actions."

 

The relator contended that his knowledge was "independent of" EMMA because the complaint did not allege that he relied on that website to obtain the data underlying his analysis; it sufficed to defeat the defendants' motion, he argued, that the complaint alleged that his forensic analysis also used nonpublic, proprietary sources notwithstanding that the same data was available from EMMA.

 

However, the Supreme Judicial Court concluded that the relator cited no authority for the proposition that a relator may take advantage of the original source exception by using a nonpublic source to access the exact same data readily available from public sources. To the contrary, the Court noted that "when a relator's qui tam action is based solely on material elements already in the public domain, that relator is not an original source." Kennard v. Comstock Resources, Inc., 363 F.3d 1039, 1045 (10th Cir. 2004), cert. denied, 545 U.S. 1139 (2005).

 

The Court determined that the EMMA website publicly reported the same data upon which the relator relied, and the relator's analysis depended entirely on the interest rate data, which was available on EMMA. Thus, the Court concluded that the relator's analysis could not be said to be "independent of" the publicly disclosed transaction discussed. See Ondis, 587 F.3d at 59.

 

Accordingly, the Supreme Judicial Court affirmed the trial court's judgment.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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