Caraballo et al v. Homecommings Financial et al
Filing
53
OPINION AND ORDER re: 40 MOTION for Partial Summary Judgment filed by Carmen Torres, Rene Caraballo. For the foregoing reasons, Plaintiffs' motion for partial summary judgment is denied. The Clerk of the Court is directed to close th e motion at docket number 40. Counsel for the parties shall appear for a status conference on Friday, May 30, 2014, at 12:00 p.m. in Courtroom 706 of the Thurgood Marshall United States Courthouse, 40 Foley Square, New York, New York, 10007., ( Status Conference set for 5/30/2014 at 12:00 PM in Courtroom 706, 40 Centre Street, New York, NY 10007 before Judge J. Paul Oetken.) (Signed by Judge J. Paul Oetken on 5/21/2014) (lmb)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------------------------------X
:
RENE CARABALLO & CARMEN TORRES,
:
:
Plaintiffs,
:
:
-v:
:
HOMECOMINGS FINANCIAL, et al,
:
:
Defendants.
:
------------------------------------------------------------- X
12 Civ. 3127 (JPO)
OPINION AND ORDER
J. PAUL OETKEN, District Judge:
This is a predatory lending case involving a home in the Bronx, New York (the
“Property”) that Plaintiffs Rene Caraballo and Carmen Torres purchased with financing from
Defendants, a collection of financial services entities. 1 Plaintiffs have moved for partial
summary judgment declaring that the mortgage filed against the Property is void and
unenforceable. 2 For the reasons that follow, that motion is denied.
1
The named defendants in this case are: Homecomings Financial LLC (“Homecomings”),
Federal National Mortgage Association (“Fannie Mae”), Mortgage Electronic Registration
Systems, Inc. (“MERS”), Nationstar Mortgage (“Nationstar”), and ten John Does. Neither
Homecomings nor any John Does have ever appeared in this action. The remaining defendants,
Fannie Mae, MERS, and Nationstar, are jointly represented. Reference to “Defendants” in this
opinion will be to these represented defendants only.
2
In portions of the complaint not relevant to this motion for partial summary judgment, Plaintiffs
assert that the loan was an unfair, abusive, and illegal transaction, voidable under New York laws
and triggering damages under the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C.
§§ 2601 et seq.
1
I.
Background
A.
Origination of the Note and Mortgage
Plaintiffs acquired the Property on May 14, 2007 for a purchase price of $397,500. To
finance this purchase, Plaintiffs obtained a $397,500 purchase price loan from Defendant
Homecomings Financial LLC (“Homecomings”) and executed a Note for this amount (“the
Note”). The Note was secured by a Mortgage which identified Defendant Mortgage Electronic
Registration Systems, Inc. (“MERS”) as the mortgagee of record “solely as nominee for
[Homecomings] and [its] successors and assigns.” 3 The Note granted Homecomings a right to
be paid under the terms of the Note while the Mortgage purportedly granted MERS a security
interest in the Property. 4
B.
MERS
This case follows a flurry of litigation questioning the legal status of mortgages held by
MERS. In 1993, as mortgage securitization became widespread, mortgage-industry participants
created MERS to facilitate quick, low-cost transfers of mortgage interests. MERSCORP, Inc. v.
3
There is no evidence suggesting that Homecomings actually directed any of the actions that
MERS, its purported nominee, undertook with respect to the mortgage.
4
The language on Plaintiffs’ Mortgage states:
MERS is a separate corporation that is acting solely as a nominee for Lender and
Lender’s successors and assigns. . . . FOR PURPOSES OF RECORDING THIS
MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.
(Dkt. No. 39, Exh. E.) This language presents a tautology. It is true that the entity that is
recorded as the mortgagee becomes the mortgagee of record; such is the function of the
recording system. However, by recording the mortgage in its name, MERS purports to become
the mortgagee of record for all legal purposes. Reading the mortgage to suggest that MERS
could be the mortgagee of record, but only for purposes of recording the mortgage, would render
recording a sham—meaningful at only the instant of recording and no further. In truth, under the
current legal regime, recording a mortgage may not even be meaningful at the instant of
recording: the act of recording creates a placeholder in determining priority of security interests
in a property, but title to that interest has nothing to do with the mortgagee of record and
everything to do with ownership of the underlying note.
2
Romaine, 8 N.Y.3d 90, 96 (2006). Under the public recording system, each transfer of a note
triggered fees and the potential for “delays . . . by local recording offices, which were [subject to]
. . . complex local regulations and database systems that had become voluminous and
increasingly difficult to search.” Bank of New York v. Silverberg, 926 N.Y.S.2d 532, 535 (N.Y.
App. Div. 2d Dep’t 2011). MERS allowed member companies to avoid these fees and delays by
“appoint[ing] MERS to act as their common agent on all mortgages they register in the MERS
system.” Id. (citing Romaine, 8 N.Y.3d at 96). With MERS as the mortgagee of record, MERS
members could exchange property interests without the need to publicly record the transfers. In
short, “MERS is a private, contractual superstructure that is grafted onto the public landrecord[ing] system.” Adam J. Levitin, The Paper Chase: Securitization, Foreclosure, and the
Uncertainty of Mortgage Title, 63 Duke L.J. 637, 677 (2013).
“By May of 2007, . . . sixty million loans . . . [representing] more than half of the nation’s
existing residential loans [were] recorded under MERS’s name.” Christopher L. Peterson,
Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78
U. Cin. L. Rev. 1359, 1373-74 (2010). MERS’s workforce of around fifty employees “perform
[only] corporate and technology support functions.” Levitin, 63 Duke L.J. at 679. This
workforce “does not lend money, . . . receive payments on promissory notes, . . . [or] service
loans by collecting loan payments.” Silverberg, 926 N.Y.S.2d at 536. Rather, MERS is an
umbrella organization that holds mortgages in name only as a purported nominee of its members.
The servicing and foreclosure of MERS-registered mortgages is performed by a force of over
20,000 “employees of mortgage servicers, originators, debt collectors, and foreclosure law
firms” who are nominally designated MERS employees, although they receive no income or
benefits from MERS. Christopher L. Peterson, Two Faces: Demystifying the Mortgage
3
Electronic Registration System’s Land Title Theory, 53 Wm. & Mary L. Rev. 111, 120-21
(2011).
“MERS’s members are nominally required to report transfers of mortgage servicing
rights to MERS, but MERS does not actually compel reporting.” Levitin, 63 Duke L.J. at 678.
One study found that MERS’s records failed to correctly identify beneficial ownership of 58
percent of its mortgages. Id. at 679 n.168. “This leaves borrowers and the local county or
municipal recording offices unaware of the identity of the true owner of the note . . . .”
Silverberg, 926 N.Y.S.2d at 536.
When the collapse of the mortgage market triggered a nationwide flood of foreclosure
actions, many questions were raised about the legal rights that are conferred by MERS-recorded
mortgages. This case asks one such question: specifically, whether any entity holds a valid
security interest in a property after the MERS-assigned mortgage securing that property is
purportedly separated from the underlying note.
II.
Legal Standard for Summary Judgment
Summary judgment is appropriate when “there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56. A fact is
material if it “might affect the outcome of the suit under the governing law,” Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986), and a dispute is genuine if, considering the record as a
whole, a rational jury could find in favor of the non-moving party, Ricci v. DeStefano, 557 U.S.
557, 586 (2009) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587
(1986)).
The initial burden on a party moving for summary judgment is to provide evidence of
each element of his claim or defense illustrating his entitlement to relief. Vt. Teddy Bear Co. v.
4
1-800 Beargram Co., 373 F.3d 241, 244 (2d Cir. 2004). If the movant makes this showing, the
burden shifts to the non-moving party to identify specific facts demonstrating a genuine issue for
trial, i.e., that reasonable jurors could differ about the evidence. Fed. R. Civ. P. 56(f); Anderson,
447 U.S. at 250-51. The court should view all evidence “in the light most favorable to the nonmoving party and draw all reasonable inferences in its favor,” and a motion for summary
judgment may be granted only if “no reasonable trier of fact could find in favor of the
nonmoving party.” Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir. 1995) (citation omitted). At the
same time, the non-moving party cannot rely upon mere “conclusory statements, conjecture, or
speculation” to meet its burden. Kulak v. City of New York, 88 F.3d 63, 71 (2d Cir. 1996) (citing
Matsushita, 475 U.S. at 587).
III.
Discussion
Plaintiffs seek a declaration that: (1) “none of the Defendants, or any other third party,
has any right or standing to maintain any action to foreclose or exercise any rights under the
Mortgage”; and (2) “the Mortgage filed against the Property is void and is therefore
unenforceable against Plaintiffs or the Property.” (Dkt. No. 22, “Am. Compl.” at 8-9). To win
declaratory relief on summary judgment, Plaintiffs must demonstrate that, as a matter of law, the
MERS-registered mortgage is invalid and that no other security interests in the Property flow
from Plaintiffs’ loan and Note obligations.
It bears noting at the outset that Plaintiffs rely on many cases in which the validity of
MERS-registered mortgages was challenged from a significantly different procedural posture.
Nearly all of Plaintiffs’ cases focus on standing. New York courts have held that a foreclosing
party lacks standing if it was assigned only a MERS-registered mortgage but not the underlying
note at the commencement of the suit. See, e.g., Silverberg, 926 N.Y.S.2d at 533 (“The issue
5
presented on this appeal is whether a party has standing to commence a foreclosure action . . . .
We answer this question in the negative.”) (emphasis added). But see Mortgage Elec.
Registration Sys., Inc. v. Coakley, 838 N.Y.S.2d 622, 623 (N.Y. App. Div. 2d Dep’t 2007)
(standing requirements are met if MERS, or any other entity, held both the mortgage and the note
at commencement of the suit). But here, no foreclosure action has been filed. The question
before this Court is not whether a particular entity had standing to foreclose on the Property at
the commencement of this suit, but rather to determine, based on the undisputed facts currently
before the Court, whether any entity will ever have standing to foreclose on the Property at any
point in the future.
First, the Court considers the validity of the MERS-registered Mortgage and its purported
assignment. The Mortgage was purportedly assigned by MERS to Nationstar Mortgage
(“Nationstar”) on July 19, 2013—fifteen months after this case was filed on April 20, 2012.
Nationstar is a servicer and Attorney-in-Fact for Fannie Mae, the purported owner of the Note,
according to Defendants. This assignment was recorded with the Register of the City of New
York on August 13, 2013.
Plaintiffs contest the validity of this assignment on legal grounds. Under New York Law,
mortgages are incidental to the notes they secure. Merritt v. Bartholick, 36 N.Y. 44, 45 (1867).
“A transfer of the mortgage without the debt is a nullity, and no interest is assigned by it.” Id.
Therefore, because MERS never held the Plaintiffs’ Note—and therefore never possessed a valid
mortgage to the Property—MERS’s assignment of the Mortgage to Nationstar did not transfer
either a valid mortgage or the right to foreclose on the Property. Cf. Silverberg, 926 N.Y.S.2d at
6
536-37. 5 The provenance of the MERS-registered mortgage is a red herring: split mortgages
may invalidate the standing of the purported mortgagee but they do not invalidate the existence
of a lien on validly secured property.
Next, the Court turns to the rights that are attached to ownership of the Note. When a
note is transferred, “the mortgage passes as an incident to the note.” Silverberg, 926 N.Y.S.2d at
537. In MERS cases, a new mortgage, which travels with the note, must be created by operation
of law; this legal fiction ensures that the holder of the note also holds the right to foreclose on the
mortgage, even if the physical deed of mortgage records a spurious ownership interest held by a
party that does not hold the note. Under this system, the entity that legally owns the Plaintiffs’
Note also holds the right to foreclose on the Property based on the Mortgage.
In a legal regime where mortgage-related rights follow the note-holder by operation of
law, problems can arise when note-owners, who are not subject to recording statutes, cannot be
clearly identified. 6 If ownership of a note is unclear, it becomes difficult to determine who, or
what entities, have valid security interests in the mortgaged property.
5
In Silverberg, the court held that because MERS never possessed the note, it never possessed
the right to foreclose on the mortgage, even though it was registered in MERS’s name. And
because MERS could assign only the rights that it actually possessed, the assignee also lacked
the right to foreclose. Silverberg, 926 N.Y.S.2d at 536-37. The operative principle was that “the
foreclosure of a mortgage cannot be pursued by one who has no demonstrated right to the debt.”
Id. at 537.
6
Notes, having their origin in commercial paper, may be assigned in blank and are designed to
facilitate free exchange of value. Horvath v. Bank of New York, N.A., 641 F.3d 617, 624 (4th
Cir. 2011) (“One of the defining features of notes is their transferability . . . .”); Chauncey v.
Arnold, 24 N.Y. 330, 332 (1862) (“Commercial paper, under the custom of merchants and the
statute of Queen Anne, has always been considered as forming an exception to many of the rules
of the common law; and there is no feature in which there is a wider departure than the one
relating to the issuing of paper in blank.”). In contrast, mortgages, which create property
interests, have historically triggered heightened reporting standards and could not be assigned in
blank because that would obscure title. Chauncey, 24 N.Y. at 332 (noting that mortgages, in
direct contrast to commercial paper, may not be transferred in blank). As the two instruments are
7
Plaintiffs’ Note was originated by Homecomings, a company which entered bankruptcy
on May 14, 2012 (almost a month after the original Complaint in this case was filed on April 20,
2012) and became defunct on December 17, 2013. 7 Homecomings has never appeared in this
action. The remaining Defendants assert that Homecomings made a valid assignment of the
Note to Fannie Mae before filing for bankruptcy. However, Defendants have offered no
evidence that such an assignment took place. 8 Under these circumstances, the Court has no basis
for finding that a valid assignment of the Note occurred.
Defendants further contend that Fannie Mae transferred physical possession of the Note
to its servicer, Nationstar, and that Nationstar therefore holds mortgage-like rights. However,
physical possession of the Note is sufficient to transfer mortgage rights under only limited
circumstances: where there is an allonge or indorsement in blank on the face of the Note, the
integrally connected, their disparate legal treatment has created knotty theoretical problems.
These problems have multiplied as increasingly complex financial innovations have blurred the
lines between securities and property rights. Although Chauncey has not been overruled, the
current practice of MERS registration, combined with the rule that mortgages follow notes, has
created a system where title, in the form of security interests, can be transferred in blank without
being publicly recorded. The rules of commercial paper, once considered “an exception to many
of the rules of the common law,” now govern our system of commerce and extend into the realm
of property. Chauncey, 24 N.Y. at 332; see also Peterson, 53 Wm. & Mary L. Rev. at 135-36
(discussing Chauncey’s implications on MERS).
7
The present case, like many others involving subprime mortgages, has been complicated by the
fact that “[i]n recent years, mortgage servicing and origination companies have gone in and out
of business in cycles recalling the permanence of a strobe light.” Peterson, 53 Wm. & Mary L.
Rev. at 126. Homecomings’s bankruptcy proceedings were administered as a part of In Re:
GMAC-RFC Holding Company LLC, No. 12-bk-12029, Chapter 11 (S.D.N.Y. Bkcy).
8
At oral argument, counsel for the Defendants admitted that if a valid assignment of the Note
took place, there should be evidence of such an assignment, but that no such evidence was
available in this case. Counsel also averred that a line entry in a computerized MERS record
suggests that Homecomings assigned the Note to Fannie Mae, but MERS, in its capacity as his
client, refused to authorize submission of that entry to the Court as evidence. The Court will not
consider counsel’s representations as a substitute for admissible evidence.
8
Note may be transformed into bearer paper, and mere physical possession will imbue the holder
of the Note with mortgage-related rights. Compare N.Y. U.C.C. Law § 3-204(2) (McKinney)
(“An instrument payable to order and indorsed in blank becomes payable to bearer and may be
negotiated by delivery alone . . . .”); and Coakley, 838 N.Y.S.2d at 623 (finding the “MERS was
the lawful holder of the promissory note” where “[t]he record shows that the promissory note
was indorsed by First National over to the First National Bank of Nevada, then indorsed by First
National Bank of Nevada in blank, and ultimately transferred and tendered to MERS”) (emphasis
added); with 80 N.Y. Jur. 2d Negotiable Instruments, § 264 (“delivery without indorsement” is
insufficient). Here, the parties agree that Plaintiffs’ Note lacks the indorsements that are
necessary to imbue the holder of the Note with any rights in the Property.
Therefore the parties are at an impasse. For years now, Plaintiffs have not made
payments on their Note and yet, perhaps due to the title problems explored above, no foreclosure
action has ever been brought against the Property. Given the facts, it appears that Defendants (at
least Nationstar, Fannie Mae, and MERS) lack standing to enforce the Mortgage. However,
because Plaintiffs secured their Note with a mortgage, and because mortgage rights follow that
Note by operation of law, therefore, even if the Note has descended into a bankruptcy-entangled
morass of questionable provenance, the right to foreclose follows that Note, like Orpheus to
Eurydice, even into the depths of clouded title. 9
Plaintiffs have asked for a declaration that the mortgage is invalid and cannot be enforced
by any entity. However, each party has set forth facts that would give some Defendant the right
to enforce the Mortgage: under Defendants’ version of the facts, Fannie Mae or Nationstar could
foreclose; under Plaintiffs’ version, Homecomings, or its successor entity, has that right.
9
Perhaps it is also possible that if we turn to look too closely upon the Note, it too will vanish.
9
Questions of fact remain, to be sure, but they are not material to the relief sought on summary
judgment; under either version of the facts, Plaintiffs’ motion fails.
IV.
Conclusion
For the foregoing reasons, Plaintiffs’ motion for partial summary judgment is denied.
The Clerk of the Court is directed to close the motion at docket number 40.
Counsel for the parties shall appear for a status conference on Friday, May 30, 2014, at
12:00 p.m. in Courtroom 706 of the Thurgood Marshall United States Courthouse, 40 Foley
Square, New York, New York, 10007.
SO ORDERED.
Dated: May 21, 2014
New York, New York
10
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?