From Bevilacqua to Fontenot, It’s Coast-to-Coast Confusion
Well, I’d have to say that the foreclosure crisis jumped the shark today, for me anyway. This unconscionable, tragic and devastating situation has gone from inexplicable to appalling. I mean, my God… look what the bankers in this country have done to us all.
And not one single aspect of this expanding nightmare, whether addressed by a state or federal government program, has even showed us a modicum of competence. You’d think by this point, someone would do something that outperforms ‘spectacular failure’ by accident, if not by design. Like, by now couldn’t we have one program that merely failed, as opposed to spectacularly failed?
If you’re one of those who has been running around trying to spread the blame the borrowers for some part of this nightmare… just shut up, would you… you sound like an idiot at this point. And I don’t care whether you’re at risk of foreclosure or not… this affects you every bit as much as someone who hasn’t made a payment in three years, so let’s see who you want to blame now.
Let’s start on the East Coast and work our way out west, shall we?
Yesterday, the Massachusetts Supreme Judicial Court issued its opinion today in Bevilacqua v. Rodriguez, a case examining the rights of property owners when buying foreclosed homes with toxic titles. In short, they have none.
As shocking as it may be to some, apparently if you start with MERS, mix in some robo-signing, have total disregard for the PSA, and entirely ignore each and every law along the way, well… you end up destroying the foundation of a society. On the positive side of the coin, however, you also end up with more money than Canada.
This ‘Spirit of America’ saga began last January with the landmark Ibanez decision, in which the Massachusetts Supreme Judicial Court invalidated two foreclosures conducted by US Bancorp and Wells Fargo Bank.
The court ruled that the foreclosure sales were invalid because notices of the sales named U.S. Bank and Wells Fargo as the mortgage holders but neither had yet been assigned the mortgages, and “thus had no interest in the mortgages being foreclosed at the time of the publication of the notices of sale or at the time of the foreclosure sales.”
Glenn Russell is a foreclosure defense attorney practicing in Massachusetts who I’ve become friends with over the last couple of years. He represented the La Race family, the other family that was involved in the Ibanez decision, so I called him to get his take on Bevilacqua… and to see if he knew how to pronounce that name, Bev-il-aq-ua… which thankfully he did.
Glenn told me that he views the decision as being the natural extension of the Ibanez decision.
According to Glenn…
“In Massachusetts if the lender or mortgagee doesn’t have the assignment of the mortgage at the time of the first publication of the foreclosure auction, then they’re not a holder of the mortgage and no sale can take place. In this case, US Bank didn’t receive the assignment until after the foreclosure sale, so they didn’t have anything to sell… when they sold it to Mr. Bevilacqua.”
The “try title” statute is the Massachusetts version of “quiet title” and it basically says I’ve got better title than anyone else, but in this case, the buyer never owned it in the first place, so there was nothing to discuss.
The Massachusetts Supreme Judicial Court agreed with, Land Court Judge Keith Long, the same judge who originally heard the Ibanez case, basically saying that since Mr. Bevilacqua never owned the property, he lacked standing to pursue a “try title” action in the state’s Land Court.
Judge Long provided his “Brooklyn Bridge” analogy, which says that if someone records a deed to the Brooklyn Bridge, and then brings a lawsuit to ask the court to uphold his ownership claim… but then the actual owner of the bridge doesn’t show up in court, the title to the bridge doesn’t just magically convey to its new owner.
The court also held that Bevilacqua lacked standing as a “bona fide good faith purchaser for value,” based on much the same rationale.
Judge Long was sympathetic to Mr. Bevilacqua’s situation. Apparently, Bevilacqua put several hundred thousand dollars into the property to convert it into condominiums. Judge Long wrote…
“I have great sympathy for Mr. Bevilacqua’s situation — he was not the one who conducted the invalid foreclosure, and presumably purchased from the foreclosing entity in reliance on receiving good title — but if that was the case his proper grievance and proper remedy is against that wrongfully foreclosing entity on which he relied.”
Well, that wasn’t too subtle… he’s saying Bevilacqua can go sue US Bank who botched the sale.
Now, the court did say that there were a couple of potential ways to fix the problem, one of which being that the owners could attempt to put their chains of title back together and hold new foreclosure sales in their names to clear their titles. Basically, Bevilacqua would be allowed to foreclose by virtue of having “an equitable assignment” of the mortgage foreclosed on by US Bank.
This approach is said to be quite expensive, but potentially doable, however, a decision in the Eaton v. FNMA case is imminent, and if the court in that case rules that foreclosing parties need to hold both the mortgage and the promissory note when they foreclose, well… that would be the end of the re-foreclosure fix mentioned above.
Another way to fix this problem would be to have US Bank re-do its foreclosure sale, but this approach does allow for the possibility of a competing bid entering the picture, among other things.
The third way to handle this situation would be to find the old owner, in this case Mr. Rodriguez, and get him to sign a quit claim deed and, I’d imagine, a whole pile of waivers of his rights.
Attorney Jeff Loeb, of the prestigious Boston law firm Rich May, appears to be representing Mr. Bevilacqua, but more than likely he was actually retained by Chicago Title, or if not, then another title insurance company.
Smart money says the Jeff will be looking high and low for Mr. Rodriguez to see if he can get him to sign a waiver of his rights… you know for $500… or in this case maybe they’d throw a grand at him, which is I’m told, the standard operating procedure in cases such as this. Nice guys, right?
Chicago Title is part of Fidelity who is the parent of LPS…. so there’s a rich history of doing business the old fashioned way.
So… Attention Massachusetts Homeowners:
If you have lost your home to foreclosure, and it has been sold since then…
Go to the Registry of Deeds and look up the property records to determine when your mortgage was properly assigned, and if it hadn’t yet been assigned at the time of the first publication of the sale, then they bought nothing… so, go get your house back.
In fact, call Glenn Russell and talk to him about it. I happen to know that he’d like to handle such a case.
NOW LET’S GO WEST…
So, while the Massachusetts Supreme Judicial Court was busy agreeing with Judge Long of the Land Court that the laws governing the transfer of real property actually do apply even to a foreclosure sale and even after the buyer had put a couple hundred grand into the property, the California Court of Appeals was busy ruling that the only law that matters as far as they’re concerned is the law requiring borrowers to make their payments.
In Fontenot v. Wells Fargo, the court ruled that, “MERS‘s status was not reasonably subject to dispute.” And even worse, the court ruled that, there is “overriding basis for rejecting a claim based solely on the alleged invalidity of the MERS assignment.”
And further… “if MERS indeed lacked authority to make the assignment, the true victim was not plaintiff but the original lender, which would have suffered the unauthorized loss of a $1 million promissory note.”
Here’s a brief overview of the story, taken from the court’s decision, which, as if it weren’t bad enough, is certified for publication. (Both this decision and the Massachusetts decision are found at the bottom of this article.)
Plaintiff Arlene Fontenot sued Wells Fargo Bank, Mortgage Electronic Registration Systems, and three other entities after she defaulted on a secured real estate loan and lost the property to foreclosure.
She alleged the foreclosure was unlawful because Wells Fargo had breached an agreement to forbear from foreclosure, and MERS made an invalid assignment of an interest in the promissory note relating to the property.
Wells Fargo and MERS filed demurrers based in part on recorded documents they contended demonstrated plaintiff‘s claims to be without factual foundation. The trial court took judicial notice of the requested documents and sustained the demurrers without leave to amend. We affirm.
In December 2007, MERS assigned the deed of trust to defendant HSBC Bank. Several months later, Wells Fargo was alleged to have foreclosed on the property and sold it, although the complaint otherwise contained no explanation of Wells Fargo‘s relationship to the secured transaction.
The complaint asserted a single cause of action against all defendants for―Wrongful Foreclosure. Within that cause of action, plaintiff alleged several different imperfections in the foreclosure process, including improper or ineffective transfers of the promissory note and security. Plaintiff sought an award of damages, as well as an order voiding the foreclosure sale and her debt.
The court granted MERS‘s request for judicial notice and sustained its demurrer without leave to amend, noting, ―The only apparent grounds for suing MERS are the allegations that the deed of trust improperly named MERS as nominee and beneficiary, and that there was no physical delivery of the note to HSBC. . . . Those claims do not state a cause of action against MERS as a matter of law.
Plaintiff raises four primary grounds for reversing the trial court‘s rulings sustaining the two demurrers.
- With respect to MERS, she argues the trial court erred in taking judicial notice of the various recorded documents.
- The purported assignment of the note by MERS to HSBC in the assignment of deed of trust was invalid because MERS did not possess an interest in the note.
- Because the assignment of the note to HSBC was invalid, plaintiff argues, Wells Fargo had no authority to foreclosure.
- With respect to Wells Fargo, she argues the trial court erred because she stated a claim either for breach of the forbearance agreement, as amended by the March letter, or promissory estoppel.
On review from an order sustaining a demurrer, the court examined the complaint de novo, which has got to mean something like “anew,” to determine whether it alleges facts sufficient to state a cause of action under any legal theory.
Rather, MERS was the beneficiary under the deed of trust because, as a legally operative document, the deed of trust designated MERS as the beneficiary. Given this designation, MERS‘s status was not reasonably subject to dispute. The other matters noticed by the trial court similarly could be inferred from the text or legal effect of the documents themselves, needing no outside confirmation. We find no abuse of discretion.
Plaintiff‘s claim against MERS challenges an aspect of the ―MERS System, a method devised by the mortgage banking industry to facilitate the securitization of real property debt instruments. Members of the MERS System assign limited interests in the real property to MERS, which is listed as a grantee in the official records of local governments, but the members retain the promissory notes and mortgage servicing rights. The notes may thereafter be transferred among members without requiring recordation in the public records.
Ordinarily, the owner of a promissory note secured by a deed of trust is designated as the beneficiary of the deed of trust. Under the MERS System, however, MERS is designated as the beneficiary in deeds of trust, acting as ―nomine for the lender, and granted the authority to exercise legal rights of the lender.
This aspect of the system has come under attack in a number of state and federal decisions across the country, under a variety of legal theories. The decisions have generally, although by no means universally, found that the use of MERS does not invalidate a foreclosure sale that is otherwise substantively and procedurally proper.
Our Courts of Appeal in California have only recently addressed MERS‘s role, but both published decisions have come down on the side of MERS.
As the court reasoned, Civil Code section 2924, subdivision (a)(1), which states that a trustee, mortgagee, or beneficiary, or an agent of any of them, may initiate foreclosure, does not include a requirement that an agent demonstrate authorization by its principal.
The court also found no substantive basis for the challenge, noting, as here, the plaintiff had agreed in the deed of trust that MERS could proceed with foreclosure and non-judicial sale in the event of a default. Because the deed of trust did not require MERS to provide further assurances of its authorization prior to proceeding with foreclosure, the plaintiff was not entitled to demand such assurances.
Plaintiff contends the trial court erred in sustaining Wells Fargo‘s demurrer because she adequately alleged either a claim for wrongful foreclosure, based on Wells Fargo‘s refusal to accept performance under the forbearance agreement as amended by the March letter, or a claim for promissory estoppel. The trial court declined to consider the allegations regarding the March letter because plaintiff did not attach a copy of the letter to the complaint.
Finally, plaintiff contends the deed of trust was ambiguous because it designated MERS as both the ― nominee for the beneficiary‘ and as the ―beneficiary. An entity cannot be, plaintiff argues, both an agent and a principal.
The record does not support the claimed ambiguity. Contrary to plaintiff‘s assertion, the deed of trust did not designate MERS as both beneficiary of the deed of trust and nominee for the beneficiary; rather, it states that MERS is the beneficiary, acting as a nominee for the lender.
There is nothing inconsistent in MERS‘s being designated both as the beneficiary and as a nominee, i.e., agent, for the lender. The legal implication of the designation is that MERS may exercise the rights and obligations of a beneficiary of the deed of trust, a role ordinarily afforded the lender, but it will exercise those rights and obligations only as an agent for the lender, not for its own interests.
Other statements in the deed of trust regarding the role of MERS are consistent with this interpretation, and there is nothing ambiguous or unusual about the legal arrangement. Plaintiff‘s argument appears to be premised on the unstated assumption that only the owner of the promissory note can be designated as the beneficiary of a deed of trust, but she cites no legal authority to support that premise.
There is a further, overriding basis for rejecting a claim based solely on the alleged invalidity of the MERS assignment.
Plaintiff‘s cause of action ultimately seeks to demonstrate that the non-judicial foreclosure sale was invalid because HSBC lacked authority to foreclose, never having received a proper assignment of the debt.
In order to allege such a claim, it was not enough for plaintiff to allege that MERS‘s purported assignment of the note in the assignment of deed of trust was ineffective. Instead, plaintiff was required to allege that HSBC did not receive a valid assignment of the debt in any manner.
Plaintiff rests her argument on the documents in the public record, but assignments of debt, as opposed to assignments of the security interest incident to the debt, are commonly not recorded. The lender could readily have assigned the promissory note to HSBC in an unrecorded document that was not disclosed to plaintiff.
To state a claim, plaintiff was required to allege not only that the purported MERS assignment was invalid, but also that HSBC did not receive an assignment of the debt in any other manner. There is no such allegation.
Prejudice is not presumed from ―mere irregularities in the process. Even if MERS lacked authority to transfer the note, it is difficult to conceive how plaintiff was prejudiced by MERS‘s purported assignment, and there is no allegation to this effect.
Because a promissory note is a negotiable instrument, a borrower must anticipate it can and might be transferred to another creditor. The assignment merely substituted one creditor for another, without changing her obligations under the note.
Plaintiff effectively concedes she was in default… and she does not allege that the transfer to HSBC interfered in any manner with her payment of the note… nor that the original lender would have refrained from foreclosure under the circumstances presented.
If MERS indeed lacked authority to make the assignment, the true victim was not plaintiff but the original lender, which would have suffered the unauthorized loss of a $1 million promissory note.
And there you have it. Ladies and gentlemen… I give you the California Court of Appeals… and that, as they say is that. As I understand it, from an attorney friend of mine, this decision is now essentially the law throughout the State of California.
California courts do not care whether the note was assigned correctly, they do not care about MERS being involved as a beneficiary… all they care about is whether borrowers made their payments or not.
If you’re planning on making either of these arguments in a California court, according to the lawyers I’ve talked to, it better be in bankruptcy court because if not… it’s does look like an easy road to hoe. And if someone tells you that it’s easy to win your case in California based on an improper assignment or the role played by MERS, just tell them “FonteNOT.”
So… I have a solution for California’s homeowners… move to Massachusetts?