Title to Loans Disputed in Court

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MORTGAGE EXPERT
10 · 09 · 11

Challenges to ownership title on mortgage loans are often made by borrowers hoping to stave off foreclosure, frequently with the Mortgage Electronic Registration Systems Inc. on the other side of the table. But title disputes are also arising amongst competing lien holders.

When National City Mortgage Co. realized that it had failed to notify junior lien holder The Chase Manhattan Bank as Indenture Trustee about an impending foreclosure sale, it filed a notice to have the sale set aside — which the court granted. But Chase then moved to vacate the set-aside order, which was also granted. The court reasoned that the notice issue involved an independent question of state law and was not properly before it.

The chain of events left Chase with a lien on the REO asset owned by National City — which would have otherwise owned the property free and clear. National City appealed the vacated order, and the U.S. Court of Appeals, Third Circuit, vacated the judgment and remanded the case.

“What happened here was the filing in federal court of a foreclosure action that traditionally is handled in state court,” the decision stated. “When matters became sticky before the marshal’s sale was complete under state law, the district court in effect abstained from deciding those contested matters. It should not have done so, for once it had jurisdiction and had acted, it had the duty not to fall back when unanticipated issues relating to the foreclosure sale process arose.”

Rusco Co. provided a $400,000 loan to Zane Morris in 2006 to use as an earnest money deposit in the purchase a Dallas property, though only $205,000 was actually drawn down. The $2.0 million property was financed with a $1.5 million first mortgage, which became part of MARM 2007-1, and $0.4 million second lien, both from American Home Mortgage Corp. The title search done by American Home didn’t reveal the Rusco loan because it was recorded before Morris gained an interest in the property and didn’t reflect in the grantor or grantee index for the property.

Title to the property was conveyed through a special warranty deed with vendor’s lien from the seller, J.P. Morgan Chase Bank, to Morris. When Morris defaulted on the Rusco loan and on the American Home notes, the two parties agreed to allow the property to be sold to a third party for $2 million, and the district court on cross motions for summary judgment was asked to determine the priority between American Home and Rusco to the proceeds.

The court found that American Home’s vendor’s lien was valid and superior to Rusco’s deed of trust, but Rusco’s deed of trust was superior to American Home’s first and second deeds of trust. The district court also ruled that American Home did not foreclose its vendor’s lien when it non-judicially foreclosed pursuant to its first deed of trust.

In a decision on American Home’s appeal, the U.S. Court of Appeals, Fifth Circuit, explained, “The court then judicially foreclosed the American Home Mortgage vendor’s lien and granted Rusco the excess proceeds over the amount required to satisfy the $1,547,050 vendor’s lien.” The district court denied a motion by American Home to reconsider arguing that its vendor’s lien secured both the first and second deeds of trust.

The decision was reversed by the federal appeals court, and the case was remanded with instructions to render judgment in favor of American Home for the $2 million in proceeds.

Mike Austin purchased an Arkansas property for $66,000 in November 2005 through a contract directly with the sellers and with no title investigation. When the sellers fell behind on an underlying note, a foreclosure notice was sent in 2006. They entered a loan modification agreement in April 2007 but defaulted again.

Austin recorded his contract on Dec. 27, 2007, after receiving notice of default and intention to sell the property. He also filed a lawsuit against the sellers and Deutsche Bank National Trust Co., which had acquired the note from another lender. The circuit court awarded Austin $40,732 in reimbursement expenses for alleged property repairs he made.

Deutsche successfully appealed the award to the Court of Appeals of Arkansas, arguing that Austin failed to timely plead a claim for unjust enrichment. Deutsche also claimed that it had a superior interest and it wasn’t unjustly enriched because of the repairs.

HSBC Bank USA, N.A., was designated trustee under the pooling and servicing agreement for Fremont Home Loan Trust 2005-E. A federal district court last year granted a motion for summary judgment to HSBC in its foreclosure action against Janelle Gabay, a Florida resident who financed a property in Maine for $750,000 during September 2005.

But Gabay, who defaulted on the note in September 2008, appealed to the Supreme Judicial Court of Maine, arguing that HSBC’s motion should have been denied.

Gabay claimed, “HSBC’s statement of material facts left unresolved genuine issues of material fact as to (1) whether HSBC is the owner and holder, pursuant to a valid endorsement, of the promissory note due to HSBC’s failure to present adequate evidence of such; (2) the order of priority among creditors; (3) the sufficiency of identification of the court costs that HSBC sought to collect; and (4) the identification of the premises to be foreclosed upon.”

Her appeal was successful, and the judgment was vacated, with “genuine issues of material fact” cited in the decision. The case was remanded for further proceedings.

The Court of Appeals of Texas, Fifth District, overturned a trial court’s judgment that found 21st Mortgage Corporation Inc. had no lien on a property. At issue was whether improvements to the property were considered a modular home or a manufactured home. 21st Mortgage had made the loan to a tenant who had since defaulted and vacated the premises.

“We conclude genuine issues of material fact remain to be decided and appellees are not entitled to summary judgment as a matter of law,” the decision stated. “Accordingly, we reverse the trial court’s judgment and remand for further proceedings consistent with this opinion.”

SheppardMullin reported last month that the California Court of Appeal affirmed a dismissal of a fraud claim in Vaca v. Wachovia Mortgage Corporation on the basis of statute of limitations. The case was filed against Wachovia and Wells Fargo after the plaintiff settled a case against her ex-husband who allegedly created false credit histories for their children in order to qualify for a loan with Wachovia. She alleged that Wachovia helped her former spouse with the fraud.

The Mortgage Electronic Registration Systems Inc.’s assertion that a $180,000 purchase-money mortgage on a Wisconsin property closed in December 2006 and originated by New Century Mortgage Corp. was superior to a $45,000 home-improvement lien from M&M Construction LLC was confirmed in a summary judgment by a trial court. This ruling was despite that the M&M lien — which was subsequently acquired by Solutions Properties — was filed prior to New Century’s lien.

But the Court of Appeals of Wisconsin disagreed with the judgment, reversed the ruling and remanded the case. The court concluded that factual disputes precluded summary judgment and that the circuit court erred by determining that Solutions Properties was on notice of an adverse claim as a matter of law.

In Higgs v. Pendergast, et al, U.S. Magistrate Judge Janet F. King ruled on Aug. 11 that MERS’ assignment was valid and, under Georgia law, the note did not need to be transferred to CitiMortgage Inc. in order for Citi to enforce the security deed, MERSCORP Inc. announced Friday. The U.S. District Court for the Northern District of Georgia adopted the magistrate’s final report and recommendation on Sept. 29. The plaintiff’s complaint was dismissed with prejudice.

“The fact that the assignment was executed by an employee of CitiMortgage — a MERS System member who had been appointed as an assistant secretary of MERS — in or of itself did not make the assignment fabricated or fraudulent as the plaintiff alleged,” MERS stated.

In Smith v. Fannie Mae et al, U.S. District Court Judge Royal Furgeson rejected the plaintiffs’ arguments that challenged the validity of the MERS deed of trust assignment, the Reston, Va.-based company said Wednesday. The court also rejected the plaintiffs’ allegations of negligence, wrongful foreclosure and a violation of the Texas Deceptive Practices Act.

The judge said that the plaintiffs’ claims were premised on the erroneous theory that MERS could not be a beneficiary and could not lawfully assign its interest in the loan to Bank of America. The judge also found that the borrowers were not a party to the mortgage assignment and had no standing to contest the MERS assignment.

“The court concludes that the plaintiffs’ deed of trust expressly provided that MERS held the deed of trust for the benefit of the original noteholder and its successors and assigns,” MERS said.

The U.S. District Court for the District of Arizona dismissed with prejudice 72 cases against MERS in multi-district consolidated litigation that alleged various violations of Arizona, Nevada, Oregon and South Carolina laws MERS announced Wednesday. The court reportedly relied on the Ninth Circuit Court of Appeals decision in Cervantes v. Countrywide Home Loans, et al.

The court also denied as untimely a motion to certify a question to the Nevada Supreme Court on whether the identification of MERS as the beneficiary under a deed of trust while the note is retained by the lender results in a split of the note and deed of trust rendering the note unsecured.

“The court’s dismissal of these 72 cases against MERS, including six class actions, is an extremely significant ruling and shows that claims being made against MERS and MERSCORP alleging fraud, or that security interests are unenforceable, or alleging that foreclosures are inappropriate due to MERS’ presence as a party, are meritless,” MERSCORP Vice President for Corporate Communications Janis Smith said in a statement. “The court’s clearly-worded order affirms the validity of the MERS business model and the exercise of powers associated with it.”

Other recent favorable rulings reported by MERS include:

Court Case Citation Case No. Date of Ruling
California Appellate Court, Second District Calvo v. HSBC Super. Ct. No. BC415545 Sep. 13
California Appellate Court, Fourth District Robinson v. Countrywide Super.Ct.No. RIC526427 Sep. 12
U.S. District Court for the Northern District of Georgia Jenkins v. McCalla Raymer Case No. 1:10-cv-03732-CAP Aug. 31
Alabama Supreme Court Henderson v. Mortgage Electronic Registration Systems, Inc. Case No. CV-2008-900805.00 Sep. 9
United States Court of Appeals for the Ninth Circuit Cervantes v. Countrywide Home Loans, Inc., et al. Case No. 09-17364 Sept. 7
U.S. District Court for Alabama’s Eastern Division Freddie Mac v. Brooks Case No. 3:11-cv-00313-WHA-SRW Aug. 22
Macomb County Circuit Court Harris v. America’s Wholesale Lender Case No. 2011-0659-CH June 8
U.S. Fourth Circuit Court of Appeals Larota-Florez v. Goldman Sachs Mortgage Case No. 1:09-cv-01181-CMH-IDD July 28
U.S. District Court for the District of Oregon Beyer v. Bank of America Case 3:10-cv-00523-MO Aug. 2
U.S. District Court for the District of Oregon Barker v. GMAC Mortgage Case 3:11-cv-00579-MO Aug. 3
U.S. District Court for the District of Oregon Neilson v. Wells Fargo Case 3:10-cv-01516-MO Aug. 9
Utah Court of Appeals Commonwealth Property Advocates, LLC v. Mortgage Electronic Registration Systems, Inc. and CitiMortgage, Inc., et al Case No. 20100888-CA July 14
U.S. District Court in the Eastern District of Michigan Southern Division March v. Countrywide Home Loans Servicing Case No. 2:10-cv-12650-MOB-MAR July 12
U.S. District Court in the Eastern District of Michigan Southern Division Williams v US Bank Nat’l Ass’n Case 5:10-cv-14967-JCO-VMM June 9
19th Judicial Circuit of Virginia Graves v. MERS Case No. CL-2010-17101 June 29
Montana’s Thirteenth Judicial District Court Waide v. U.S. Bank and MERS Cause No. DV 10-1763 June 28
Fifth Judicial District, County of Clackamas Somers v. Deutsche Bank Case No. CV 11020133, Case No. FE110027 July 6
U.S. Bankruptcy Court in Massachusetts’ Central Division In re Marron Case No. 10-45395 June 29

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