Failure to Allege Lack of Default
by Daniel Edstrom
DTC Systems, Inc.
I came across the following on Google Scholar (http://scholar.google.com/scholar_case?case=16055101289176414591&q=Restatement+(Third)+Of+Property+(Mortgages)+%C2%A7+5.4&hl=en&as_sdt=2,5):
A. Failure to Allege Lack of Default
First, Nevada law is clear that “[a]n action for the tort of wrongful foreclosure will lie if the trustor or mortgagor can establish at the time the power of sale was exercised or the foreclosure occurred, no breach of condition or failure of performance existed on the mortgagor or trustor’s part which would have authorized the foreclosure or exercise of the power of sale.” Ernestburg v. Mortgage Investors Group, No. 2:08-cv-01304-RCJ-RJJ, 2009 WL 160241, at *6 (D. Nev. Jan. 22, 2009) (internal citations and quotations omitted). The plaintiff must establish that they were not “in default when the power of sale was exercised.” Id. (citing Collins v. Union Fed. Sav. & Loan Ass’n, 662 P.2d 610, 623 (Nev. 1983)). Furthermore, a claim for wrongful foreclosure does not arise until the power of sale is exercised. Collins, 662 P.2d at 623.
Green Plaintiffs admit that they have breached their loan obligations: “Borrower/Plaintiffs did not pay the payments agreed in the `Note’ . . .” Doc. 35, ¶ 92. In Lopez, Plaintiff Lopez “was unable to continue making payments” and a Notice of Default was recorded. Doc. 59-1, ¶¶ 58, 63. In fact, the Lopez Amended Complaint admits that every named plaintiff had been defaulted or was otherwise behind in their payments. Doc. 59-1, ¶¶ 71, 79, 88, 99, 109, 118. Similarly, the Dalton complaint alleges that at least one plaintiff could “no longer pay the payments” (see 10-81-PHX-JAT, Doc. 2, ¶ 138 (a)) and does not make any allegation that any plaintiff made the payments agreed upon under the terms of their loans. The Goodwin Second Amended Complaint alleges that at least one plaintiff “ceased making payments” (see Doc. 54-4, ¶ 134 (b)) and does not make any allegation that any plaintiff made the payments agreed upon under the terms of their loans. By failing to plead that their loans are not in default, all of Plaintiffs’ claims for wrongful foreclosure are barred as a matter of law and will be dismissed for failure to state a claim. Further, for many of the claims in these actions, Plaintiffs do not allege that the power of sale has been exercised. For these plaintiffs, these claims for wrongful foreclosure are premature and not actionable.
I have discussed this issue many times, but let’s review again. Look at your note, specifically the section titled “Who is Obligated Under this Note” and read what it says. The obligated parties are: those who executed the note (signed it as borrowers); those who endorsed the note (which is why they put WITHOUT RECOURSE); and those who act as a guaranty or bind themselves as a surety (add themselves as obligors to the note). This section goes on to say that all obligors are responsible for payment individually and as a group.
Looking at the Pooling and Servicing Agreement (PSA), the servicers and trustee are required and obligated to make the monthly payments of principal and interest regardless of whether the homeowner makes these payments. They have been added as obligors along with the borrower under the note. When you review the governing documents (Prospectus, Prospectus Supplement and the Pooling and Servicing Agreement) along with the monthly certificateholder statements and the monthly loan level files, it becomes apparent that the obligation is being met by those obligated under the note. The servicers and trustee freely took this obligation on themselves under the terms of the Pooling and Servicing Agreement. Further, the servicer has to keep track of these advances on a loan-by-loan basis in a separate accounting (a second set of books). It is their decision to NEVER bring the full accounting into court and explain to judges the true situation, which is that they are obligated along with the homeowner, and have also met the obligation and made the payments. The trustee and the investors (who they are allegedly foreclosing on behalf of), have received ALL payments as required under the note. Looking at UCC 3-602(a) we find that payments made by or on behalf of the homeowners discharge the obligation to the extent payment is made. The servicers and trustees are not disclosing, misrepresenting and failing to disclose the true situation. In my opinion this is fraud upon the borrowers and fraud upon the court, if only for the reason that the servicers and trustees (and their agents and attorneys) failed to disclose material information. The homeowners in this case were obviously ignorant of this information which was in the custody and control of the servicers and the trustees.
Yes it was the homeowners who were making the claims, but it was based on an accounting that was not true or complete. The homeowner was acting on information provided to it by the opposing parties. This information was not accurate or truthful. The opposing parties are supplying the correct information to the trustee, the certificateholders and the ratings agencies, but completely different information to the homeowners and to the courts. The homeowners relied on this incomplete information to their detriment. Further, the attorneys for these homeowners were also unaware of the true circumstances. The reason this information is relevant is because all of the documents used to foreclose in non-judicial states are based on the fact that there is a default. The Notice of Default, Substitution of Trustee, Notice of Sale, etc. If the trustee and the investors have received all of the payments, again, how could these documents be truthful and accurate?
This is a travesty of justice that needs to be rectified.
Nice going. When I read my PSA, I had thought it said the Servicer was making the payment to the Trust regardless of whether or not the homeowner was. So, this confirms it for me. Thanks!
Seems a Trustee for a Trust which is actually receiving payments would find it hard to claim any default, as you show.
Homeowners who have already been foreclosed may find
NRS 645F.430 useful, especially if a ‘credit bid’ were utilized in
buying the property at the trustee’s sale:
“NRS 645F.430 Foreclosure purchasers: Criminal penalty for fraud or deceit against homeowner. A foreclosure purchaser who engages in any conduct that operates as a fraud or deceit upon a homeowner in connection with a transaction that is subject to the provisions of NRS 645F.300 to 645F.450, inclusive, including, without limitation, a foreclosure reconveyance, is guilty of a gross misdemeanor and shall be punished by imprisonment in the county jail for not more than 1 year, or by a fine of not more than $50,000, or by both fine and imprisonment.
(Added to NRS by 2007, 2857; A 2009, 1461)
Others who have or can allege TILA violations may be interested in a
2010 decision in District Court No. Div California, case no. 09-
03424. The DC upheld a bk court ruling that ‘tender’ (of the amt allegedly due on the Note) was not the first consequence of a rescission under TILA, and the homeowners were allowed to proceed on the action without tender. This essentially stayed the
foreclosure pending resolution of the TILA claim.
Other law mandates whom may declare the default and that is the
rub for the imposters. Many of the imposters’ motions to dismiss allege ‘the rules for foreclosure were all followed’, so the homeowner has no recourse. (Procedurally, these are of course no more than legal conclusions, and not facts to support a dismissal. )
I guess the laws were followed, except that it was not by parties entitled to do so, so then again, I guess they weren’t.
Our attorney says “….. erroneous interpretation of the legal obligations under the note. The homeowner is the obligor under the Note and whether or not a trustee or servicer makes a payment to the secondary market investors in no way reduces the amount due under the note. By this reasoning, any FHA, Fannie Mae or Freddie Mac or VA guaranteed loan payment would discharge the borrower.”
Anyone care to respond?
Tom,
Thank you for your reply! That is exactly the issue. On the surface it seems very odd that the servicers and trustees are required and obligated to make payments whether or not they receive them from the homeowner. But it is actually much more complicated. For instance, in securitization the trustee holds bare legal title to the property (allegedly – and assuming the loans were lawfully conveyed to the trust in the first place). But the trustee does not hold beneficial / equitable title. Who does? They sold the payment stream (revenue) to the investors who purchased mortgage backed securities (whether residential or commercial). So the investors have the rights to the payments (whether residential, commercial or a GSE transaction). Is the trustee entitled to payments? No. Now what happens when the investors receive their payments even though the alleged obligor never paid them? Have the investors been harmed by non-payment? If so, at what point have they been harmed? When is a loss calculated? What percentage of the payment have they been harmed on when you take into consideration reserve funds, insurance, credit default swaps, etc? Who owns the collection rights to the loans? Who owns the servicing rights? If a servicer makes the payment for the homeowner does the servicer have the power of sale? If the servicers and trustees are lending their credit, acting as a guaranty or binding themselves as a surety, is that lawful? If it is lawful, what does the Office of the Comptroller of the Currency say about it? If the servicers and trustees (as National Banks) do not have appropriate risk measurements in place and do not have adequate controls in place, can they still lend their credit, act as a guaranty and bind themselves as a surety? Speaking of Fannie, Freddie and Ginnie – if I have a loan and YOU guarantee payment, and actually pay the “lender”, why would I need to make a payment? Who has been harmed by non-payment, at what point have they been harmed and who has the right to enforce the “loan”? In the good old days none of this mattered because you had a lender (usually a bank) and a borrower and the payments went directly from the borrower to the lender. The Prospectus Supplement and/or the PSA typically states (this is not exact and is from memory) “if all of the credit enhancements fail the investors will be forced to rely on the payments from the mortgage borrowers” …
This is a complex subject and goes much deeper. But of course we are not lawyers and this is not legal advice. In the end will it make any difference to a judge? I don’t know as it really depends on how good the lawyer is who makes these arguments in court. But the reason I use these arguments is mainly for a different purpose. I will end the reply here but also remember – the secondary market was an illusion. This was all a single transaction (the “loan” closing and the securitization). In nearly every case the loan would never have been made if the loan wasn’t securitized – and conversely the securitization wouldn’t have happened without the loan. They were all table funded (presumption of being predatory under regulation “Z”) and the agreements were in place in nearly every single case we have seen. They did not “loan” the money and waive the note on the secondary market saying “Who wants to buy this loan”? That just didn’t happen.
See my response. I think the attorney is full of hooey.
I’d like to address these issues, but first I need an answer to something. Are you two talking about the trustee of the ‘securitization trust’? You must be. But, that trustee does not have either equitable or legal title “to the property”, unless by property you do not mean the borrower’s home. The deed of trust trustee, and only that trustee as a matter of law holds any interest in the home for the benefit of the party with the beneficial interest in the note. Period. There is nothing in the world other parties may attempt to agree to to change this.
Dan is right – it is complicated. Well, maybe not after all. The thing is is that a note is regulated by the UCC. Anyone who guaranteed the payment on the note without joining, at least, the borrower to that guarantee, acts as a volunteer. Volunteers are not entitled to reimbursement, at least not under the UCC. I know of no other legal premise which would create an obigation from the borrower to the guarantor. From the hip, I also don’t agree that payment to the investor does not reduce the debt obligation to the investor; thus the borrower’s obligation on the note has in fact been reduced and it has been reduced by a volunteer. That is a risk those people took on when making any voluntary, outside the contract – the note – guarantees. And they are not entitled to reimbursement from the borrower for the funds they advanced by their voluntary guarantees.
I wonder if any other payment made to the investors, and I’m no expert on this, when PAID to the investor would reduce the amount owed by the borrower. Like say, good old private mortgage insurance (on loans generally over 80% loan to value) or pool insurance. I don’t know the answer to this one. Maybe another reader does: If the investor receives insurance proceeds, does that not retire the debt dollar for dollar?
But, if the investor is a holder in due course and you got me because of the secutization / transformation of the notes to securities on which I am similarly not an expert, then the borrower maybe has no defense to the note balance in regard to payments that SHOULD have been made to the investors on account of any type insurance but which the investors never saw a dime of.
If the investors didn’t receive the insurance proceeds, it’s probably because people who were not the legal or intended beneficiaries of such insurance kept the dough (with the exception of default swaps, which is not technically insurance, where the Wall Street creeps were the known beneficiaries of the swaps. I think). That could be another reason pretend lenders are pretending its their note – to collect on the insurance themselves and then they also go after the collateral. OK, I’m a liar-pretender. Say I got 300k from insurance or maybe double insurance: 1 x 300k from pmi because the note is defaulted, and 1 x 300k from pool insurance. (I have no idea what that number would be) I aIso don’t know who the heck is actually getting the pool insurance payouts, but I would like to know. I also made out like a bandit on the default swap. And, I also go after the property. I got, say 250k when it sold after I foreclosed. I got 850k plus the default swap dough, and I have to pay the investor 2k per month on the note. Not bad. OR, I got the 600k (2x 300k) plus the default swap dough, I foreclose and sell the house and the investor finally gets SOME money from the sale of the house.
No one discusses that I have seen the insurance money and where the heck it has gone or should have gone In the old days, private mortgage insurance “PMI” inurred to the benefit of the lender in the event of the borrower’s default. But, back then, the lender was a much more readily identifiable party.
Now, in the old days with a “lender”, whether or not under the UCC, any insurance payments recerived by the lender would work to retire the debt (note)t, I dont’ know, either. Seems to me it would. BUt like I said, I’m no expert on that one. The volunteer isms may not be in play as to insurance proceeds – I just don’t know.
Insurance like a negotiable instrumentt is its own story in a sense and I don’t know how an insurance payout , like PMI, impacts the note. But I do know SOMEone is getting insurance payouts.
ANY payment to the investors by a volunteer is a reduction to the amount the borower owes. I just dont’ know how the insurance payments would work in that regard IF the investors ever saw a dime of it., and that appears dubious.
The “why should I make a payment since the servicer (say) is”, now that’s one for the books. That one will make us WORK.
In the world we live in now, apparently, volunteerism has become a part of the game. But, signifcantly, the borrower is not part of that game.
The borrower only agreed to pay the note and now hasn’t so the volunteer who assumed that risk is now making the payment to the note – owner.
But, you ask, what has any of this to do with ‘why should I make a payment’? You still owe the note. Dang. This is a toughie for me. The note is not in default as to its beneficial interest owner, so he can’t call default. OMG! That’s what it’s all about! (duh I admit)
You still owe the note and the volunteer is making the payments and the volunteer doesn’t want to, but in a voluntary third party contract assumed the risk and agreed to make them if you didn’t.
There’s always unjust enrichment..
I don’t remember when unjust enrichment kicks in generally nor how the volunteer status and assumpton of risk would impact a determination in that regard. But the volunteer status and assumtion of risk are not neglible and are probably major defenses to unjust enrichment.
Unjust enrichment is an equitable remedy, not one based on statue, per se.
I don’t know the answer to that question of yours yet, but I do know this: if a servicer were to prevail on the basis of unjust enrichment or any other equitable relief, it would not lead to foreclosure on your home related to the note. Any unjust enrichment award would be
based on something, a reimbursement claim essentially, which has nothing to do with enforcement of the note.
Dan I have to think about your assessment that the guarantors have been added as obligors “under the note”. A) I don’t know when the guarantee was made relevant to the date of the note , so while there is no doubt they are obligors, is it “under the note”? and B) does it matter how they are obligors. And you’re very right. Suppose the true balance on a note is 205K because the servicer has made the last 14 payments. But, the servicer turns in a claim for 210k to the court. That’s fraud. If the home were sold for 300k, the borrower would be entitled to any amount over the 205k not 210k, not considering other legitimate costs. You must be able to split hairs with these guys, because believe me , they hold classes on it. .
John,
Excellent information. Read your note (or somebody else’s if you don’t have one) – the section where it says “PERSONS OBLIGATED UNDER THIS NOTE” … Also keep in mind UCC 3-602(a) – the payment by discharge rule … This is all about honesty and integrity. Most PSA’s say that the servicer will keep track of advances on a loan-by-loan basis in a SEPARATE ACCOUNTING” … When was the last time a servicer brought this information in voluntarily to ANY court of law?
It is without a doubt in my mind that the servicer and trustee are obligated under the note AND that Fannie and Freddie are FULLY obligated also.
Thanks,
Dan
Dan, why is the servicer to keep track of advances on ANY ledger? Is it so that the servicer may recover these costs at some point? From the proceeds of sale?
I’d like to make a call to arms for Andrew Cameron Baxter, whom I am not, by the way. It was his case which was cited at LL because the judge ordered ther other guys to produce the loan file at the next hearing. I have Andrew’s comments as well as a link ot the audio of the hearing. I have spent hours on it today and could use some help. In short , servicer filed poc. BONY Melon filed for stay relief. Denied.
BONY came back with 2nd mtn for relief, this time alleging to join but not using those words and not having filed a mtn to do so, both the scvr who filed proof of claim and MERS! (not!) The loan is allegedly owned by a trust , with BONY Melon as trustee. Hearing. Brought in loan file with orig note. Court not allow Baxter to meaningfully review the file. Baxter says (I’m not sure if he knows for sure) psa requires note end to trust or trustee or what not and an assignment to have been done at that time also. Note end’d in blank, no assignment. in file. Anyone want to help?
Also can I post here? I stink at computer stuff. Dan , email me at [email protected] – like to send you some stuff.
What I mean is , Mr Baxter needs a lawyer. Yesterday. AZ.
HEY! Dan, do you know if the entity which guaranteed the payment stream is supposed to be bk remote per the contract which gave rise to the guarantee?
I just read (and posted) the April 2010 depo of Mers’ officer Hutlman and it appears there have been 3 MERS, Inc’s! The last and current one became eff as a business on Jan 1, 1999. It looks like a 3rd was needed because a bk remote entity had to play nominee in the deeds of trust, and Mers 1 and Mers II were not bk remote.
And have you seen the youtube video about the sweet deal OneWest got with our taxpayer dollars? Grrrrrr…..