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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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November 2011

ASSIGNEE OF A MORTGAGE FROM THE FDIC AS RECEIVER REQUIRED TO LITIGATE TILA RECISSION CLAIM.

In Fernandes v. JPMorgan Chase Bank, N.A., (N.D.I.L., No. 11-CV-652, October 13, 2011), the borrower of a second mortgage brought a complaint seeking rescission of the mortgage under the Truth In Lending Act (TILA) due the original creditor’s failure to provide material disclosures. The borrower also sought statutory damages for the disclosure violation and for the failure to respond to TILA rescission notice. The complaint was brought against the successor assignee of the FDIC who was appointed receiver of the originator after the originator failed; as well as against the FDIC. The assignee moved to dismiss the complaint on the ground that the claims were barred by the Purchase and Assignment Agreement (P&A) entered into between it and the FDIC-R. It argued that under the P&A it specifically did not assume any liability associated with borrower’s claims for relief. The District Court denied in part and granted in part the motion to dismiss. The Court began its analysis by concluding that the assignee was an assignee of the FDIC-R within the plain meaning of the term. The Court then reviewed several decisions where assignee liability was contested on the basis that it was not assumed under similar exclusion provisions in other P&A agreements. The Court found agreed that the right of rescission under TILA as against the assignee belongs to the the borrower, and thus the right ought not to be extinguished by contract between the original assignee (the FDIC-R) and its subsequent assignee without the consumer’s consent or input. The Court said it would be contrary to congressional intent to allow assignee liability for rescission under TILA to be contracted away. Accordingly, the Court denied the dismissal of the TILA rescission claim. On the issue of statutory damages for the originator’s alleged failure to provide the required disclosures, the Court held that the P&A insulated the assignee from damages and that such claims remain the liability of the FDIC-R under the P&A. However, the Court found that the borrower’s claim for statutory damages for the assignee’s failure to respond to the notice of rescission was based on the assignee’s actions after the P&A was entered. Because the claim for rescission was not barred the claim for damages as a result for failure to rescind is likewise not barred. Accordingly, the Court dismissed the claim for statutory damages against the assignee for the originator’s failure to provide disclosures, but denied dismissal of statutory damages for the failure to respond to the notice of rescission. Commentator note: it is interesting to note that this case did not touch on the applicability of TILA’s bar to assignee’s liability on the basis of involuntary assignment, even though the bar appears to be present based on the facts as described in the decision.

DEBTORS OWNING A VESTED REMINDER FEE INTEREST CAN CLAIM SUCH INTEREST UNDER NEW YORK’S HOMESTEAD EXEMPTION STATUTE

In Re Rasmussen, (E.D.NY., No. 10-CV-4173, September 14, 2011), the Debtors owned a vested reminder fee interest in a property in New York, which was subject to a life estate owned by the Mother of one of Debtors. The Debtors reside in the property, as their principal residence, together with the Mother, and paid the Mother monthly rent. The Debtors filed for Chapter 7 protection and claimed their vested reminder interest under the homestead exemption. Over the Chapter 7 Trustee’s objection the Bankruptcy Court ruled that the Debtors could claim their reminder interest as homestead because New York’s homestead exemption statute does not specify which types of ownership interests are exemptible. The Trustee appealed. In affirming the Bankruptcy Court’s decision, the District court found that New York homestead exemption exempts a debtor’s real property that is both owned and occupied as a principal residence. The District Court observed that the homestead exemption requires liberal construction in the Debtors favor to effectuate the exemption’s beneficial purpose. Base on such liberal construction, the District Court held that the Debtors owned the property because the vested reminder fee was an ownership interest, as it is descendible, alienable, and devisable. Although such future interest is not possessory, because it was undisputed that the Debtors are living the property as their principal residence the District Court held that Debtors also satisfied the occupancy requirement of New York’s homestead exemption.

DISCREPANCIES BETWEEN THE HUD-1 AND AN EARLIER TILA DISCLOSURE DEFEAT ASSIGNEE’S ARGUMENT THAT TILA VIOLATION WAS NOT “APPARENT ON THE FACE OF THE DISCLOSURES”.

According to the complaint in Nunez v. Aurora Loan Services, 11CV1121 DMS POR, (S.D. Cal. Oct. 25, 2011), the Plaintiff was promised a 4.75 percent interest rate when he agreed to refinance his home. He was advised that the monthly payment would be $2,999 but was informed at the closing that it could be reduced to $2,161. He was not told, however, that the loan with the lower monthly payment had an adjustable interest rate of more than 8.5 percent and a negative amortization feature. To induce him to sign the loan papers with these terms, Plaintiff was also presented with a “grossly inaccurate” disclosure under the Truth in Lending Act (“TILA”), which, among other things, understated the finance charge and total of loan payments by more than one million dollars each. Shortly after the signing, Defendant acquired the loan by assignment and later acquired the property through a non-judicial foreclosure following the Plaintiff’s default. The Plaintiff then sued the Defendant for violations of TILA. Among other defenses, the Defendant argued that it was immune from liability under TILA because the violations were not apparent on the face of the disclosures. U.S.C. §1641(a). Defendant contended that the allegations were insufficient to state a claim because the “final” TILA disclosure statement reflected the 8.66 percent rate. In this regard, Defendant relied on the unsigned TILA disclosure bearing the closing date. Defendant conceded that it received both disclosure statements (as well as the HUD-1 settlement statement) but had no duty “to investigate the discrepancy between these two different TILA disclosure statements”. The court disagreed. “[A] violation apparent on the face of the disclosure statement includes, but is not limited to … a disclosure which can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned ….” 15 U.S.C. § 1641(a). The court held that the Defendant could have discovered the violation by comparing the final HUD–1 statement, which showed the 8.66 percent rate, and the signed TILA disclosure, which showed the 8.5 percent rate. Also, the court noted that the Defendant received two TILA disclosures with the closing date, only one of which was signed by Plaintiff. The statements did not only differ in the interest rate listed, but the one which bore Plaintiff’s signature showed the finance charge and total of loan payments at an amount approximately one million dollars less than the final TILA disclosure statement which was not signed. “On the face of these two documents, they could not both be right. Either one of the two comparisons shows that a TILA violation was apparent on the face of the loan documents.”

TRY, OR QUIET, TITLE ACTION FAILS WHERE THE PLAINTIFF ACQUIRED ITS INTEREST IN A FORECLOSURE WHERE THE MORTGAGE HAD NOT BEEN ASSIGNED TO THE ASSIGNOR PRIOR TO THE COMMENCEMENT OF THE CASE

The Massachusetts Supreme Judicial Court held that a foreclosure buyer did not acquire good title to foreclosed property when the foreclosure was instituted by a party to whom the mortgage had not yet been assigned. In Bevilaqua v. Rodriguez, 460 Mass. 762, 955 N.E.2d 884 (October 18, 2011) the defendant borrower gave a mortgage to MERS as a nominee of the lender. As of the date the foreclosure commenced MERS had not assigned the mortgage to U.S. Bank N.A. Rather, U.S. Bank N.A. executed a foreclosure deed on that date referencing the mortgage and purporting to transfer the property pursuant to a foreclosure sale from U.S. Bank to U.S. Bank as Trustee under a servicing agreement. Nearly one month later MERS assigned the mortgage to U.S. Bank and a “confirmatory foreclosure deed” was then given by U.S. Bank to U.S. Bank as Trustee who subsequently quit-claimed the property to the plaintiff. After discovering that U.S. Bank as Trustee was not the mortgagee at the time the foreclosure was brought, the plaintiff then brought a try, or quiet, title action against the former owner of the property, seeking to compel him to bring an action to assert any adverse claims against the property or to bar him from enforcing those claims in the future. The lower court dismissed the complaint on the grounds that the plaintiff lacked standing. The reviewing court affirmed. Under Massachusetts law, the court held, in order establish standing in a try title action, the plaintiff must be a “person in possession” and must hold “record title” of the disputed property. The plaintiff argued that he held “record title” due to the fact that U.S. Bank granted him a quitclaim deed. However, the Court noted that a “single deed considered without reference to its chain of title” was insufficient to establish “record title.” In examining the chain of title, the Court noted that in the try title action, the plaintiff “has alleged that U.S. Bank was not the assignee of the mortgage at the time that it purported to foreclose on the property.” Therefore, “U.S. Bank’s lack of authority to foreclose at the time it purported to foreclose is fatal to [plaintiff’s] claim to ‘own’ the property.” Thus, the plaintiff has no plausible claim to title where he acquired a deed following an invalid foreclosure.