foreclosure defending your company against individual cases common claims and response strategies

8/8/2019 Foreclosure Defending Your Company Against Individual Cases Common Claims and Response Strategies

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Defending Your Company Against Individual Cases

Common Claims and Response Strategies

Sunny S. Huo

Severson & Werson

[email protected]

MBA Legal Issues Conference, Chicago

May 5, 2009

1:30 p.m.-2:45 p.m.


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Overview


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Overview

Economic downturn has increased defaults and foreclosures

Some borrowers respond to foreclosure actions by filing civil lawsuits

Specialist Firms

Copycat Firms

Pro Per actions

Some suits appear to be designed to delay the foreclosure process or to

leverage favorable loan modifications

Common fact patterns:

Misrepresentation in origination re loan terms

Lender made loan without accounting for suitability / affordability

Lender misplaced payment or improperly impounded for taxes / insurance

Lender refuses to negotiate loan modification in good faith

Lender breached (oral) loan modification/forbearance agreement

Lender did not comply with foreclosure notice requirements

Odds & Ends


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Overview

Common claims: TILA failure to provide Notice of Right to Cancel or TIL

RESPA fee overcharge, fee split, nondisclosure of YSP, failing to respond to QWR

Unfair Business Practices suitability, predicated on statutory violations

Fraud misrepresentation re loan terms (interest rate, negative amortization,prepayment penalty, ability to refinance later, assurances re property value increase,

etc.)

Negligence failure to properly apply payments, suitability

Breach of Fiduciary Duty suitability, negotiating modifications, forbearance

agreement

Breach of Contract impounding for taxes, forbearance agreement

Breach of Implied Covenant negotiating modifications, forbearance agreement

Quiet Title lender cannot produce note, fraud, TILA rescission

FDCPA default and foreclosure notices

Odds & Ends RICO, ECOA, FHA, produce the note, vapor money theories


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Overview

Strategic Considerations

Can case be removed? Should case be removed?

Is the claim meritorious?

If so, what is the exposure? Is settlement viable?

If not, can case be defeated at pleadings stage?

Can case be defeated prior to trial?

ADR options: sitting judge, retired judge, practitioner as mediator

Early trial date

How do these cases generally play out

Early settlement

Case defeated after successive pleadings motions Case defeated during discovery process

Case defeated via summary judgment

Case defeated for lack of prosecution

Court-assisted settlement


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Analysis


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RESPA Qualified Written Request

Sent to current lender/servicer before suit is filed. Often in the form of a

massive list of demands and questions.

Motive: trigger damages, statutory penalty and attorneys fees under 12

U.S.C. i 2605(f).

Response: does letter comply with 12 U.S.C.i

2605(e)(1)(B)?

A qualified written request shall be a written correspondence, other than

notice on a payment coupon or other payment medium supplied by the

servicer, that

(i) includes, or otherwise enables the servicer to identify, the name and

account of the borrower; and(ii) includes a statement of the reasons for the belief of the borrower, to

the extent applicable, that the account is in error or provides sufficient

detailto the servicer regarding other information sought by the borrower.


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Fraud

Usually based on alleged misrepresentation of loan terms such as

interest rate, impound account or prepayment penalty.

Motive: punitive damages, jury factor

Response:

Go through the loan file verycarefully Pleadings attack under Rule 9 or State law equivalent if not pled with

specificity (i.e., plaintiff cannot simply lump all of the defendantse.g.,

broker and servicer for subsequent purchasertogether)

Pleadings attack or MSJ if there are signed written disclosures (defeats

reasonable reliance element)

Pleadings attack or MSJ if borrower understood nature of transaction

(fraud in the inducement does not void loan, it merely renders loan

voidable and subject to rescission)

Rescission is not a means to create highly favorable loan terms for the party seeking

rescission. Instead, it is a means to return the parties to the status quo ante, as if the

loan never existed. Nichols v. Greenpoint Mortg. 2008 WL 3891126 * (C.D.Cal. 2008).


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Negligence and Breach of Fiduciary Duty

Claim is based on allegation that lender owed borrower a duty not to

place them in an unaffordable loan or a duty to offer them a more

favorable loan modification to avoid foreclosure.

Motive: damages, jury factor

Response:

Lenders do not owe a duty of care

Lenders do not owe a fiduciary duty

The relationship between a lending institution and its borrower-client is not fiduciary in

nature. A commercial lender is entitled to pursue its own economic interests in a loan

transaction. This right is inconsistent with the obligations of a fiduciary which require

that the fiduciary knowingly agree to subordinate its interests to act on behalf of and forthe benefit of another. Nymark v. Heart Federal Savings & Loan Assn., 231

Cal.App.3d 1089, 1093, fn. 1 (1991)


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Breach of Contract and Brach of Implied Covenant

Borrower claims lender breached oral modification or forbearance

agreement or lenders conduct re negotiating loan modification or

forbearance breaches the implied covenant of good faith and fair

dealing

Motive: damages, jury factor

Response:

Oral agreement to repay what is already owed is not enforceable

"The object of the action is to finally settle and determine, as between the parties, all

conflicting claims to the property in controversy, and to decree to each such interest or

estate therein as he may be entitled to." (Peterson v. Gibbs (1905) 147 Cal. 1, 5 )

Implied Covenant cannot contradict written agreementi.e., cannotdeprive the lender of the right to foreclose upon default or to impound

for taxes and insurance

The implied covenant cannot be read to prohibit a party from doing that which the

agreement expressly permits. (Carma Developers (Cal.), Inc. v. Marathon

Development California, Inc. (1992) 2 Cal.4th 342, 374-75.)


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Quiet Title

Borrower seeks quiet title due to lenders alleged failure to provide

disclosures, misrepresentations regarding the loan term, or failure to

comply with the foreclosure statutory requirements.

Motive: massive windfall for borrower if successful

Response: Gross misunderstanding of the law

"The object of the action is to finally settle and determine, as between the parties, all

conflicting claims to the property in controversy, and to decree to each such interest or

estate therein as he may be entitled to." (Peterson v. Gibbs (1905) 147 Cal. 1, 5 )

Quiet Title not available until debt is repaid

A trustor cannot quiet title without discharging his debt. The cloud upon his titlepersists until the debt is paid. (Aguilar v. Bocci(1974) 39 Cal.App.3d 475, 477.)


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FDCPA

Claim based on contention that lenders collection efforts violate the

FDCPA or the state version of same

Motive: damages, attorneys fees

Response:

The FDCPA does not apply because defendant acquired the loanbefore it was in default.

15 U.S.C. i 1692a(6)(F)(iii); Bailey v. Sec. Natl Servicing Corp., 154 F.3d 384, 387

(7th Cir. 1998) (The plain language ofi 1692a(6)(F) tells us that an individual is not a

debt collector subject to the Act if the debt he seeks to collect was not in default at the

time he purchased (or otherwise obtained) it)

Proceeding against a secured property is not considered a debtcollection activity under the FDCPA.

15 U.S.C. i 1692a(6)(F)(iii); Putkkuri v. Recontrust Co., 2009 WL 32567, *2 (S.D.Cal.Jan 05, 2009) (The Complaint fails to state a claim under the FDCPA or the

[Rosenthal Act] because Plaintiff challenges the lawfulness of foreclosure proceedings

on her home pursuant to a deed of trust)


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Odds & Ends

Racketeer Influenced and Corrupt Organizations Act (RICO)

Favorite pet theory of certain law firms

Flaw: racketeering activity consists of certain specifically enumerated criminal acts

listed in 18 U.S.C. i1961 and ordinary loan origination and foreclosure activities do

not fall within those definitions

Fair Housing Act (FHA) Requires discriminatory activity related to purchase or rental

Two year statute of limitations (42 U.S.C. i 3613(a)(1)(A))

Analyze loan: no facts to support FHA claim

Equal Credit Opportunity Act (ECOA) Requires discriminatory activity related to application for credit

Two year statute of limitations (15 U.S.C. i 1691e(f))

Analyze loan: no facts to support ECOA claim


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Odds & Ends

Lender must produce original note to foreclose

Base on Florida law

See http://www.theledger.com/article/20090405/NEWS/904055015/1001?Title=Lawyer-s-

Crusade-To-Save-Homes-From-Foreclosure

Does not apply in California

Pursuant to section 2924(a)(1) of the California Civil Code, the trustee of a Deed of Trust

has the right to initiate the foreclosure process. Cal. Civ. Code i 2924(a). Production of the

original note is not required to proceed with a non-judicial foreclosure. (Putkkuri v.ReconTrust Co., 2009 WL 32567, at *2 (S.D. Cal. 2009).)

Vapor Money

Borrower does not need to repay loan because lender did not provide legal tender

Variation on the Freeman claim / also attempted by Heineman & Johnson

Advancing these claims smack of bad faith

Nixon v. Individual Head of St. Joseph Mortgage Co., 615 F.Supp. 898, 990 (C. D.Ind.1985)

$70,000 Sanction Order by Judge Alsup

Kenney Family Trust v. World Savings, et al. (N.D. Cal. Case No. C 04-03724 WHA)

Available from the MBA website


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Thank you

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