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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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September 2009

Kansas Supreme Court finds that MERS has no tangible interest in note and mortgage and was thereof not entitled to notice of foreclosure by senior lienholder.

In Landmark Nat. Bank v. Kesler, No. 98,489 (Kan., August 28, 2009) the senior mortgagee filed a foreclosure action but neglected to notice MERS or Sovereign, who held the junior mortgage. After the trial court entered judgment for the senior mortgagee, the property was sold at sheriff’s sale. Sovereign and MERS later appeared and asserted their interest in the property. They moved to set aside the default judgment on the grounds that MERS was a “contingently necessary party” under K.S.A. 60-219(a) and was entitled to notice of the proceedings. The trial court found that MERS was not a real party in interest and that Sovereign’s failure to register its interest with the Register of Deeds precluded it from asserting rights to the mortgage after judgment had been entered. The Kansas high court agreed that the trial court did not abuse its discretion in denying MERS’s motion to vacate the default. It acknowledged that MERS functions “solely as nominee” for the lender and its assigns. Finding no definition for “nominee” in the mortgage it looked to judicial interpretation and determined that “the relationship that MERS has to Sovereign is more akin to that of a straw man than to a party possessing all the rights given a buyer”. It found that the mortgage gives it no rights; it refers only to the rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. Consequently, MERS had no stake in the outcome of an independent action for foreclosure and therefore lacked a meritorious defense to warrant vacating the default. MERS’s contention that it was deprived of due process in violation of constitutional protections failed for the same reason: it lacked a tangible interest in the mortgage beyond a nominal designation as the mortgagor. The court observed that it lent no money and received no payments from the borrower. It suffered no direct, ascertainable monetary loss as a consequence of the litigation.

Five months earlier a Missouri court reached the same conclusion in Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619 (Mo.App. E.D. Mar 03, 2009) (NO. ED91369). There a tax sale purchaser brought an action to quiet title after the mortgagee’s assignee claimed it did not receive notice. The mortgage on the property was made by BNC Mortgage Inc. and BNC was the payee on the promissory note. BNC, however, was not the beneficiary on the deed of trust. MERS was identified as the beneficiary but solely as BNC’s nominee. MERS then purportedly assigned the loan to the assignee, Ocwen, who recorded the assignment. The court held that when MERS assigned the deed of trust it attempted to transfer to the assignee rights it did not possess. There was no evidence in the record that MERS held the promissory note or that BNC gave MERS the authority to transfer the promissory note. The court also observed that the promissory note did not make any reference to MERS. The note and the deed of trust both required payments to be made to the lender, not MERS. MERS therefore could not transfer the promissory note and the language in the assignment of the deed of trust purporting to transfer the promissory note was ineffective. As it held neither the promissory note, nor the deed of trust, the assignee lacked a legally cognizable interest and therefore lacked standing to seek relief from the trial court.

Even if the bona fide error defense were available to mistakes of law under the FDCPA it was not met where the debt collector relied solely on an industry news letter which expressly disclaimed that it constituted legal advise.

In January 2006 an owner of defaulted debt sent a letter to each class member announcing it just purchased the debt and identified the debt collector it retained. The letter contained all of the required disclosures but was accompanied by a second document titled “ Privacy Notice of Financial Information”. The notice, purportedly sent in compliance with the Gramm-Leach Bliley Act, Pub.L. 106-102, 113 Stat. 1338 (1999), stated that “[t]o the extent permitted by law, we may collect and/or share all the information we obtain in servicing your account. We collect information about you to service your account with the highest quality”. It also said “[w]e may share information about you (whether you are a customer or former customer) to the [certain] third parties”. The Plaintiff class complained in Ruth v. Triumph Partnerships, (NO. 08-3458) (7th Cir., August 17, 2009) that this violated the FDCPA because the notice falsely stated that the defendants, by law, could disclose certain nonpublic information about the debtor without the debtor’s permission, and would do so unless the debtor expressly “opted out.” The Plaintiff submitted that these statements were false because the FDCPA prohibits debt collectors from sharing nonpublic information about a debtor without the debtor’s explicit consent. Among other reasons, the district court granted summary judgment to the defendants under the bona fide error defense. The Seventh Circuit reversed the district court finding that, although the availability of the defense to errors of law is unsettled in the Seventh Circuit, it was not met in this case. If it is available it is only available to debt collectors who can establish that they reasonably relied on either: (1) the legal opinion of an attorney who has conducted the appropriate legal research, or (2) the opinion of another person or organization with expertise in the relevant area of law. The defendants did not meet this threshold. The court was unimpressed by the collector’s reliance on an industry pamphlet titled “Questions and Answers about New Federal Privacy Regulations As They Apply to Debt Buyers and Other ‘Financial Institutions.’ ” The pamphlet “[fell] far short of a legal opinion” on which it was reasonable for the defendants to rely. It did not even purport to give advice about the FDCPA; it was focused on compliance with federal regulations implementing the privacy provisions in the Gramm-Leach-Bliley Act. Also, the pamphlet specifically disclaimed that it was providing legal advice, and directed the reader to consult an attorney before taking any action. Finally, the pamphlet did not provide any advice about how a disclosure notice should be worded to comply with the FDCPA. The judgment was reversed and the district court was instructed to enter judgment for the Plaintiff class.

Eleventh Circuit holds that foreclosure proceedings are not debt collection activities under the FDCPA.

In a recent unpublished opinion by the United States Court of Appeals for the Eleventh Circuit, Warren vs. Countrywide Home Loans, No. 08-16171 (11th Cir., August 14, 2009) the Court chose to follow the reasoning used by many district courts (citations omitted) that “an enforcer of a security interest, such as a [mortgage company] foreclosing on mortgages of real property….falls outside the ambit of the FDCPA except for the provisions of section 1692f(6)”. The court rejected the Plaintiff’s argument that the lender violated the FDCPA by failing to respond to his request for verification of his debt before proceeding with a foreclosure sale of his home; and found that there was no violation of Section 1692g(b) of the FDCPA because foreclosing on a security interest was not a debt collection activity under 15 U.S.C.S. sec 1692a(6) and 1692f. Therefore, if a person enforcing a security interest was not a debt collector, the enforcement of the security interest through the foreclosure process was not a debt collection for the purposes of the FDCPA. “In short, since foreclosing on a home is not debt collection for purposes of Section 1692(g), Warren did not and could not state a claim under that provision based upon Countrywide’s foreclosure sale of his home.”

TILA rescission claim dismissed because the notice of right to cancel, while incorrect, was sufficient as a matter of law to advise borrower of his right to rescind.

The borrower, in Dahn v. Fifth Third Bank, NO. 3:09-CV-184-JPG-PMF) (S.D.Ill., August 20, 2009) argued that the notice of right to cancel was inaccurate because it deviated from the model form contained in Appendix H of 12 C.F.R. Pt. 226. He argued that the notice was unclear because the section where the borrower could sign to verify his receipt of the notice was dated with a date other than the date he actually received the notice and that this inaccuracy voids the notice. He also claimed that when he was first presented with the documents, the blanks had not been filled in. The court agreed with the lender that the notice was adequate. It found that the notice contained the entire substance of model form H-8 which, according to the statute, contains all the necessary disclosures. The court also rejected the argument that the form was confusing to the ordinary consumer because it says too much such. The borrower pointed specifically to the existence of the verification section that contained the unsigned statement to acknowledge receipt of the notice on the transaction date. But in the complaint he says he did not receive it on that day. The Court found that this error did not render the form defective or unclear to the ordinary consumer. “The mere existence of a verification section does not create confusion. The verification section itself is simple and does not conflict with any other part of the notice. Furthermore, this type of verification is contemplated by TILA as an acceptable means of creating a presumption that the consumer received a disclosure. See 15 U.S.C. § 1635©”. The court found it was not necessary when the plaintiff admitted he received the notice. Furthermore, any error in the date printed in the verification did not cause any inaccuracies in the disclosure form. The borrower did not sign the verification acknowledging the lender provided it to him on the correct date, so the inaccurate date was of no consequence. “It is as if there was no verification section at all or as if borrower refused to sign it because the date was wrong”.