Defending Against "Foreclosure Defense" Lawsuits
by Julia M. Wei, Esq, The Law Office of Peter N. Brewer
As foreclosure rates rise and the legislative bodies nationwide rush to address this, plaintiffs lawyers are also cashing in with "Foreclosure Defense" lawsuits.
Borrowers pay a fee to the "Foreclosure Defense" attorney to provide a so-called forensic audit of their loan documents. The attorney will often send a demand letter (Qualified Written Request under the Real Estate Settlement Procedures Act, codified as Title 12 section 2605(e) of the United States Code / Truth In Lending Act 15 U.S.C. section 1601) to obtain the loan documents and then file a cookie-cutter complaint shortly thereafter.
The foreclosure defense lawsuits come in three flavors:
(1) TILA rescission;
(2) Lost Promissory Note; and
(3) Everything But the Kitchen Sink (TILA, RESPA, HOEPA, FCRA, RICO, etc.)
The Truth-in-Lending-Act does indeed provide for rescission of the loan in certain circumstances, but of all the claims above, it is the least beneficial for borrowers as rescission actually requires the borrowers to pay back the loan proceeds. (However, there is some caselaw out there that indicating the Act does not actually specify that the borrower must pay the loan back before the Lender rescinds the loan and reconveys the deed of trust.)
The "Lost Promissory Note" lawsuit is reaching high levels of popularity, especially in the present backlash against mortgage-backed securities. The Foreclosure Defense gurus reason that the original note is long gone as it has been sold, or assigned or securitized in a stream of transactions. They further reason that without the original Note, the deed of trust is a "nullity" and there is no proof the borrower ever incurred the debt.
Under the Uniform Commercial Code, adopted in California as Commercial Code Section 3-309, the lender can still enforce the lost instrument if three prerequisites are satisfied:
(1) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred;
(2) the loss of possession was not the result of a transfer by the person or a lawful seizure; and
(3) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person who cannot be found or is not amenable to service of process
The most recent case discussing this code section actually addresses lost checks, and in that circumstance, the Court found it could allow the recipient of the lost check to enforce it so long as the payor (or bank) was adequately protected against a 2nd party who finds the check also seeking to cash it. [Crystaplex Plastics, Ltd. v. Redevelopment Agency, (2000) 77 Cal. App. 4th 990.]
The case of Huckell v. Matranga is illustrative in a circumstance where the beneficiary has lost the original promissory note. In that case, the Court found that Bank of America as Trustee was entitled to request a surety bond before issuing the reconveyance of the Deed of Trust. [Huckell v. Matranga (1979) 99 Cal.App.3d 471.]
Accordingly, there is no requirement that the original promissory note is required in order to conduct a trustee's sale, as the beneficiary can bond around the missing note. That said, a lawsuit on the lost promissory note can certainly slow things down and may be fairly effective in stalling institutional lenders. Private money lenders are less likely to have hypothecated the loans to such a degree as to cause confusion over the location of the note.
The "Everything but the Kitchen Sink" type of Complaint is freely available for download on the web from various bloggers. A wave of these complaints has swept California in both state and federal courts. In the state courts, these complaints are usually filed in conjunction with defending against an unlawful detainer action and then consolidated to stop the eviction. The case is then removed to federal court due to the "federal question" of the alleged violations.
Lenders, mortgage brokers, loan servicers, Realtors and appraisers are often named in these lawsuits. Many times, not all the defendants can even be served as they are either defunct, or in bankruptcy. Of course, as these complaints are filed merely in an effort to slow down the lender, the plaintiff's counsel rarely expends much effort to even get the complaints properly served on the defendants. The borrowers are not paying their mortgages and they may pay their attorney a one-time flat fee simply to file the lawsuit.
Accordingly, a vigorous and early defense is the best method to deal with these opportunistic lawsuits. In federal court, a 12(b)(6) motion to dismiss should be brought to test the sufficiency of the complaint. Alternatively, a Rule 11 motion for sanctions against the attorney may be the best approach. In that circumstance, the plaintiff and plaintiff's counsel has a "safe harbor" period in which to dismiss the lawsuit. There is also a state court equivalent, known as a C.C.P. Section 128.7 motion for sanctions.
Beyond that, once the parties engage in discovery, there will be close scrutiny on the loan documents. Can your documents withstand it?
Julia is an attorney with The Law Office of Peter N. Brewer. The firm serves the legal needs of homeowners, real estate and mortgage brokers and agents, property managers, loan servicers, title companies, developers, investors, other real estate professionals and their clients. You can contact the firm at: 350 Cambridge Avenue, Palo Alto, CA 94306, Ph: 650/327-2900, Fax: 650/327-5959, or on the Web at: www.brewerfirm.com.
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