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Noonan and Lieberman keeps you current on litigation news with its regular Case Law Update focusing on important and emerging trends in federal and state case law. Case Law Update is edited by attorney James V. Noonan.

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March 2009

COURT WANTS TO KNOW WHY ASSIGNEE ACCEPTED ASSIGNMENT OF MORTGAGE AFTER IT WAS IN DEFAULT BEFORE IT WILL ALLOW ASSIGNEE TO FORECLOSE.

A mortgage assignee commenced a foreclosure action after the assignment of a mortgage that was already in default. The Supreme Court, Kings County, New York in Wells Fargo Bank, N.A. v. Saint Aubin, 22 Misc.3d 1120(A) (Feb. 10, 2009) dismissed its application to foreclose. The court said the required affidavit of merit and amount due was insufficient because the supporting “limited power of attorney” was not an original and the Plaintiff’s counsel failed to certify that the power of attorney had been compared with the original document and found to be a true and complete copy. Also, it found that even though the application contained a verified complaint an attorney’s verification is insufficient to meet the requirements for a default judgment. The court was most disturbed, however, by the fact that the assignee took the assignment of “this toxic loan 102 days after the alleged default of defendant.” The court said it needs to know (for what reason it didn’t say) whether the assignee performed due diligence in purchasing this nonperforming loan or whether this was a device for the originator to shift its loss to the bondholders of plaintiff’s mortgage loan trust. The court’s legal source was Nobel Laureate Paul Krugman’s, July 2, 2007-New York Times column, “ Just Say AAA” where he describes the collateralized debt obligations market as just a way of passing the risk of bad loans to the bond holders. So if the assignee is going to re-file the action, the court ordered it to provide “an explanation from an officer of plaintiff [ ] explaining why, in the midst of our national subprime mortgage financial crisis, plaintiff [ ] purchased from MERS . . . a nonperforming loan”.

WHETHER THE BORROWER HAS THE MEANS TO TENDER REQUIRES A FACTUAL DETERMINATION THAT CAN NOT BE RESOLVED ON A MOTION TO DISMISS.

In Moore v. Wells Fargo Bank, N.A., 2:08cv 413 (E..D.Va., Feb. 10, 2009) the plaintiff-mortgagor brought an action against the mortgagee seeking a declaratory judgment that the mortgagor had validly rescinded two mortgages when he served notice to rescind on the mortgagee. He also sought a finding of statutory damages based on the mortgagee’s repudiation of the mortgagor’s rescission notice. The District Court held that the rescission notice did not automatically void the mortgages. The court followed Fourth Circuit precedent holding that a mortgagor’s unilateral notification of cancellation does not automatically void the loan contract. Rather, it merely advances a claim seeking rescission and a loan contract will not be effectively voided until “the creditor acknowledges that the right to rescission is available, or … [an] appropriate decision maker has so determined. American Mortgage Network, Inc. v. Shelton, 486 F.3d 815, 821 (4th Cir.2007). However, the Court denied the mortgagee’s motion to dismiss on the issue of whether the mortgagor was entitled to rescind the mortgages because he had not plead he was capable of tendering the proceeds from the mortgage transactions upon rescission. This was a factual dispute that could not be resolved at the motion to dismiss phase. The Court rejected Defendant’s invitation to “take judicial notice” of the declining housing market in order to make a factual finding that Plaintiff was unable to tender, as “ Rule 12(b)(6) does not countenance … dismissals based on a judge’s disbelief of a complaint’s factual allegations.”

RESCISSION UNDER TILA REQUIRES THAT THERE BE A “CONSUMER CREDIT TRANSACTION”; THUS THERE WAS NO TILA VIOLATION FOR REFUSAL TO RETURN DEPOSIT FOR A LOAN THAT DID NOT CLOSE.

Following a telephone interview to gather financial information for a proposed loan, the Defendant in Weintraub v. Quicken Loans, Inc., No. 08-278 (E.D.Va., Feb. 5, 2009) provided the Plaintiffs a Deposit Agreement which required the Plaintiff to make a $500.00 deposit as part of the application for refinancing. Plaintiff paid the fee, signed all of the closing documents, but when the appraisal came back lower than expected the Plaintiff decided not to go through with the loan. The Defendant denied the Plaintiff’s refund request as the Deposit Agreement did not provide for a refund. Plaintiffs sued under TILA. The parties filed cross motions for summary judgment. Plaintiffs claim that Defendant’s failure to refund violated the rescission rules found in TILA. The threshold question was whether there was a “consumer credit transaction” that would give rise to the right to rescind. The court found that under TILA, Regulation Z, the Staff Commentary, and applicable case law, the right to rescind under TILA requires a consummated consumer credit transaction. TILA’s explanation of the effect of a “rescission” on the legal obligations of the parties shows that only completed credit transactions are eligible for rescission. In this case, where a refinancing application was withdrawn prior to closing, there was no completed credit transaction to unwind. Consequently, Plaintiffs had no right to rescind under TILA. Nor do they have a right to have their deposit returned.

TECHNICAL VIOLATION OF TILA WILL NOT WARRANT RESCISSION OR DAMAGES.

In Bonney v. Washington Mut. Bank, No. 08-30087 (D. Mass., Feb. 9, 2009) the Plaintiffs obtained a debt consolidation loan from Defendant’s predecessor which was secured by their residence. In connection with that loan they were provided a Notice of Right to Cancel which did not specify the date of the transaction or the date the rescission period expired. Nearly three years later, the Plaintiffs sent Defendant a rescission request based upon the allegedly deficient Notice which the Defendant denied. Plaintiff brought suit for rescission and damages. The court dismissed the case finding that the defect in the Notice was a purely technical violation of TILA, in circumstances where the Notice was in fact quite clear, could not provide the foundation for a statutory claim. Recognizing that TILA requires hyper-technical compliance, the court relied on several cases that rejected TILA claims where there was a technical violation in the disclosures. The court concluded that the omission of a transaction date from the form “would not be confusing to an average borrower, whether considered alone or in conjunction with the other omission” citing unreported cases which have reached the identical result.

WHERE THE BUYER AND SELLER HAD NO PRE-EXISITING DEBTOR-CREDITOR RELATIONSHIP THE TRANSACTION IS A SALE NOT AN EQUITABLE MORTGAGE AND TILA DOES NOT APPLY.

In Johnson v. Washington, —- F.3d ——, 2009 WL 446094 (4th Cir., (Va.),2009) the Plaintiff’s sold their home but continued to rent the property from the buyer and retained an option to repurchase. After falling behind on their payments they brought sued the buyer, alleging violations of the Truth in Lending Act (TILA), and various state law claims. The Plaintiffs’ central claim was that the transaction gave rise to an equitable mortgage under Virginia common law, thereby obligating the seller to comply with federal and state consumer protection statutes, such as TILA. The District and Appellate Courts disagreed. TILA only covers creditor and consumer transactions To show that defendants were required to comply with TILA the Plaintiffs had to show that their transaction created a lending relationship. The deed to the Plaintiffs was absolute on its face and there was no preexisting or contemporaneous debt between the parties. The requirement of a debt between the parties is more than a formality. Quoting the Supreme Court of Appeals of Virginia “[a] mortgage without a debt to support it is a legal solecism,” and “neither the intention of the parties nor their express contract can change the essential nature of things.’ Therefore there was no basis for finding an equitable mortgage and no obligation on the seller’s part to comply with TILA.