Three counties sued MERS (“Mortgage Electronic Registration Systems, Inc.”) for violations of various statutes related to the recording of deeds of trust (the Texas equivalent of a mortgage). In a nutshell, MERS is listed as the “beneficiary” on a deed of trust while the note is executed in favor of the lender. “If the lender later transfers the promissory note (or its interest in the note) to another MERS member, no assignment of the deed of trust is created or recorded because . . . MERS remains the nominee for the lender’s successors and assigns.” The counties argued that this arrangement avoided significant filing fees. The Fifth Circuit affirmed judgment for MERS, finding (1) procedurally, that the Texas Legislature did not create a private right of action to enforce the relevant statute and (2) substantively, that the statute was better characterized as a “procedural directive” to clerks rather than an absolute rule. Other claims failed for similar reasons. Harris County v. MERSCORP Inc., No. 14-10392 (June 26, 2015).
Disputes between borrowers and mortgage servicers are common; jury trials in those disputes are rare. But rare events do occur, and in McCaig v. Wells Fargo Bank, 788 F.3d 463 (5th Cir. 2015), a servicer lost a judgment for roughly $400,000 after a jury trial.
The underlying relationship was defined by a settlement agreement in which “Wells Fargo has agreed to accept payments from the McCaigs and to give the McCaigs the opportunity to avoid foreclosure of the Property; as long as the McCaigs make the required payments consistent with the Forbearance Agreement and the Loan Agreement.” Unfortunately, Wells’s “‘computer software was not equipped to handle’ the settlement and forbearance agreements meaning ‘manual tracking’ was required.” This led to a number of accounting mistakes, which in turn led to unjustified threats to foreclose and other miscommunications.
In reviewing and largely affirming the judgment, the Fifth Circuit reached several conclusions of broad general interest:
- The “bona fide error” defense under the Texas Debt Collection Act allows a servicer to argue that it made a good-faith mistake; Wells did not plead that defense here, meaning that its arguments about a lack of intent were not pertinent to the elements of the Act sued upon by plaintiffs;
- The economic loss rule did not bar the TDCA claims, even though the alleged misconduct breached the parties’ contract: “[I]f a particular duty is defined both in a contract and in a statutory provision, and a party violates the duty enumerated in both sources, the economic loss rule does not apply”;
- A Casteel – type charge issue is not preserved if the objecting party submits the allegedly erroneous question with the comment “If I had to draft this over again, that’s the way I’d draft it”;
- The plaintiffs’ lay testimony was sufficient to support awards for mental anguish; and
- “[A] print-out from [plaintiffs’] attorney’s case management system showing individual tasks performed by the attorney and the date on which those tasks were performed” was sufficient evidence to support the award of attorneys fees.
A dissent took issue with the economic loss holding, and would find all of the plaintiffs’ claims barred; “[t]he majority’s reading of these [TDCA] provisions specifically equates mere contract breach with statutory violations[.]”
Garofolo paid off her home equity note, but did not then receive the cancelled promissory note and a release of lien from the servicer, as required by the Texas Constitution, and the terms of the note. She sued for forfeiture of principal and all interest paid under the Constitution; the servicer admitted not having sent the papers, but contended that having the provision in the note was sufficient to comply with the Constitutional requirement. The Fifth Circuit certified this issue to the Texas Supreme Court: “Garofolo’s construction appears to give rise to a drastic remedy, but Ocwen’s construction appears to render the requirement a virtual nullity except in the (hopefully rare) circumstance where a lender unscrupulously attempts to enforce a paid note resulting in recoverable damages.” Garofolo v. Ocwen Loan Servicing, LLC, No. 14-51156 (June 9, 2015).
Estes sued JP Morgan Chase, alleging violations of the Texas Constitution with respect to a home equity loan. The Fifth Circuit affirmed dismissal on a basic ground: “Estes’s complaint fails to allege any connection between himself and JPMC except that Estes ‘notified [JPMC] that the original promissory note had not been returned,’ and that ‘[m]ore than 60 days have passed since plaintiff notified [JMPC] of its failure to cancel and return the promissory note.’ Considering the allegations in Estes’s complaint, and taking those allegations as true, Estes has not alleged that JPMC possessed the Note at the relevant time. He also has not alleged that he made payments to JPMC, nor has he alleged any other facts from which the Court could reasonably infer that the Note was made payable to “bearer” or to JPMC, as the definition of “holder” set forth in Tex. Bus. & Com. Code § 1.201 requires.” Estes v. JP Morgan Chase Bank, N.A., No. 14-51103 (May 20, 2015, unpublished).
Defendants claimed that a foreclosure sale produced an unfair windfall for Fannie Mae on a substantial commercial property. They alleged that Fannie Mae had a practice of making unfairly low bids on Gulf Coast properties. The Fifth Circuit observed: “As the district court held, evidence regarding Fannie Mae’s other foreclosure practices throughout the Gulf Coast region would not impact whether the subject property was sold for the amount at which it would have changed hands between a willing buyer and seller having knowledge of the relevant facts. At most, such evidence might have suggested that Fannie Mae’s conduct throughout the region affected the fair market value of the subject property. So long as the property was sold for fair market value, however, evidence of the various market forces influencing that value is not relevant to this case.” Fannie Mae v. Lynch, No. 14-60864 (June 2, 2015, unpublished).
In Barzelis v. Flagstar Bank, F.S.B., No. 14-10782 (Apr. 22, 2015), the Fifth Circuit addressed the preemption of state-law mortgage claims under “HOLA,” the Home Owners’ Loan Act of 1933, a statute governing federal savings associations. The Court held:
1. Notice and cure. “It may be the case, for example, that a state law regulating interest-rate adjustments to protect borrowers is preempted by HOLA. But that does not prevent a bank and a borrower from voluntarily agreeing to substantially the same protections in their contract . . . .”
2. Misrepresentation. “[W]here a negligent-misrepresentation claim is predicated not on affirmative misstatements but instead on the adequacy of disclosures or credit notices, it has a specific regulatory effect on lending operations and is preempted.”
3. Debt collection. Consumer protection laws “‘that establish the basic norms that undergird commercial transactions’ do not have more than an incidental effect on lending and thus escape preemption.”
Continuing an earlier post about how to sign documents, the issue of effective consent again appeared in Berry v. Fannie Mae, No. 14-10474 (April 17, 2015, unpublished). A mortgage servicer sent a trial payment plan to a borrower, which said: “This Plan will not take effect unless and until both the Lender and I sign it and Lender provides me with a copy of this Plan with the Lender’s signature.” Rejecting an argument that the servicer’s letter acknowledging the borrower’s signature waived this language, the Court enforced it and affirmed dismissal of the borrower’s claims. A similar analysis led to a similar result in Williams v. Bank of America, No. 14-20520 (May 7, 2015, unpublished).
While affirming the dismissal of the borrowers’ other claims related to a foreclosure, the Fifth Circuit reversed as to a claim for wrongful foreclosure, reasoning: “Under Texas law, a claim for wrongful foreclosure generally requires: (1) ‘a defect in the foreclosure sale proceedings;’ (2) ‘a grossly inadequate selling price;’ and (3) ‘a causal connection between the defect and grossly inadequate selling price.’ In their Third Amended
Complaint, Plaintiffs allege that JPMC failed to comply with the notice procedures required for a foreclosure sale,and that, as a result, they lost the opportunity to obtain cash or to find a buyer for the Property before JPMC foreclosed. Plaintiffs also specifically allege that the Property sold for a grossly inadequate sales price.” Guajardo v. JP Morgan Chase Bank, N.A., No. 13-51025 (Jan. 12, 2015, unpublished) (citations omitted). Notably, while the pleading describes the type of notice required and avers that it did not occur, it does not provide detail about the sales price and why it was not adequate.
Two rulings for mortgage servicers offer points of general interest to start the New Year:
1. This allegation does not satisfy Twombly, with respect to the intent requirement of the Texas fraudulent lien statute: “the transactions by the Defendants jointly and severally were designed to defraud the Plaintiff out of her property.” The Fifth Circuit found that “this allegation is, at most, a legal conclusion that [Defendant Law Firm] acted with the requisite intent; it lacks any ‘factual content’ that would ‘allow the court to draw the reasonable inference that the intent element was met.” Trang v. Taylor Bean & Whitaker Mortgage Corp., No. 14-5028 (Jan. 7, 2015, unpublished).
2. Footnote 1 of the Trang opinion reviews the apparent split in authority on whether a lien assignment falls within the scope of that statute.
3. A borrower seeking refinancing of a mortgage loan is not a consumer under the Texas DTPA. “[T]he refinancing that Perkins sought from BOA is “directly analogous to the [auto] refinancing services sought by the claimant in Riverside [National Bank v. Lewis, 603 S.W.2d 169 (Tex. 1980)].” Perkins v. Bank of America, No. 14-20284 (revised March 4, 2015).
Defendants removed, averring: “The real property at issue has a current fair market value of $87,500.” The district court denied remand. Plaintiffs appealed, and the Fifth Circuit entertained her argument because it went to the existence of subject matter jurisdiction. Taking judicial notice of county appraisal records that valued the property at $62,392, the Court remanded for the gathering of more evidence about the amount in controversy. Statin v. Deutsche Bank, No. 14-20200 (Dec. 19, 2014, unpublished). The Court noted the recent Supreme Court case of Dart Cherokee Basin Operating Co. v. Williams, No. 13-719 (U.S. Dec. 15, 2014), which confirmed that while “defendants to not need to attach evidence supporting the alleged amount in controversy to the notice of removal,” “once the notice of removal’s asserted amount is ‘challenged,’ the parties ‘must submit proof and the court decides, by a preponderance of the evidence, whether the amount-in-controversy requirement has been satisfied.'”
Can a note be endorsed with a photocopied signature? Yes. Whittier v. Ocwen Loan Servicing, LLC, No. 13-20639 (Dec. 3, 2014, unpublished) (citing Tex. Bus. & Com. Code § 1.201(b)(37)) (“Signed” includes using any symbol executed or adopted with present intention to adopt or accept a writing.”)
Can a “deed of trust . . . upon a homestead exempted from execution,” which “shall not be valid or binding unless signed by the spouse of the owner,” be signed in separate but identical documents? Yes. Avakian v. Citibank, N.A., No. 14-60175 (Dec. 9, 2014) (citing Duncan v. Moore, 7 So. 221, 221-22 (Miss. 1890)) (“There is much force in the argument of defendant’s counsel that the statute does not require a joint deed of husband and wife for the conveyance of the husband’s homestead . . . that the substantial thing is the written evidence of such consent; and that this may be as certainly shown by a separate instrument as by signing the deed of the husband.”)
The borrowers’ complaint in a wrongful foreclosure case sought: “‘an order canceling the Mortgage’ on property that is worth more than $200,000 while also stipulating that they will not recover more than $75,000.” Accordingly: “Given our established rule that the amount in controversy in cases like this is determined by the value of the property, it is irrelevant whether the stipulation is binding. A party cannot sue over a mountain but stipulate that it is a molehill.” Solis v. HSBC Bank USA, No. 14-40489 (Nov. 17, 2014, unpublished).
Among other theories, the borrowers in Shaver v. Barrett Daffin LLP alleged that a servicer “was unjustly enriched by failing to apply credit default swap payments and other payments to their loan balance.” No. 14-20107 (Nov. 5, 2014, unpublished). This argument — apparently addressed for the first time by the Fifth Circuit in this opinion — was rejected by the Court, which noted similar results in other jurisdictions.
A mortgage servicer sued two individuals, alleging a conspiracy to defraud; the defendants argued that the servicer lacked standing because the notes in question were not properly conveyed. The case settled during trial, and as part of the settlement “the parties stipulated to several facts, including the fact that the Trusts were the owners and holders of the Loans at issue.” An agreed judgment followed. BAC Home Loans Servicing, L.P. v. Groves, No. 13-20764 (Nov. 3, 2014, unpublished).
The defendants then moved to vacate under FRCP 60(b), arguing that the plaintiff lacked standing. The district court denied the motion and the Fifth Circuit affirmed. It first noted that “the court will generally enforce valid appeal waivers, [but] a party cannot waive Article III standing by agreement . . .” Further noting that “parties may stipulate to facts but not legal conclusions,” the Court held: “That is exactly what happened here. [Defendants] conceded facts that establish [plainitiff’s] status; thus, the district court appropriately reached the resulting legal conclusion that [plaintiff] has standing.”
Earlier this year, the Texas Supreme Court answered certified questions from the Fifth Circuit about the treatment of home equity loans under the Texas Constitution; that opinion summarizes: “To avoid foreclosure, homeowners and lenders often try to restructure underwater home mortgage loans that are in default by capitalizing past-due amounts as principal, lowering the interest rate, and reducing monthly payments, thereby easing the burden on the homeowners. But home equity loans are subject to the requirements of Article XVI, Section 50 of the Texas Constitution. The United States Court of Appeals for the Fifth Circuit has asked whether those requirements apply to such loan restructuring. We answer that as long as the original note is not satisfied and replaced, and there is no additional extension of credit, as we define it, the restructuring is valid and need not meet the constitutional requirements for a new loan.” Sims v. Carrington Mortgage Services, LLC, No. 13-0638 (Tex. 2014). Following that Court’s recent denial of rehearing, the Fifth Circuit has now formally accepted the answer and ruled accordingly.