Pham et al v. Bank of New York et al

Filing 38

MEMORANDUM OPINION re: 2 MOTION to Dismiss by Bank of New York; 16 MOTION to Dismiss by Mortgage Electronic Registration System, Inc.; 24 MOTION to Dismiss for Failure to State a Claim by Wittstadt Title & Escrow Company, LLC.. (See Memorandum Opinion For Details). Signed by District Judge T. S. Ellis, III on 4/10/12. (nhall)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
Alexandria Division

APR I 0
KEVIN HIEN PHAM and NATHALIE

MONGES,
Plaintiffs,

c

Case No. I:12cv2

v.

BANK OF NEW YORK, MORTGAGE
ELECTRONIC REGISTRATION

SYSTEMS, INC., WITTSTADT TITLE
& ESCROW COMPANY, LLC, and
JOHN DOE,
Defendants.

MEMORANDUM OPINION

This removed state-law action is the second round in a long-running effort by defaulting
borrowers to avoid foreclosure on their property. More than a year before the defaulting
borrowers initiated this action in state court, they had filed an earlier state-court action also

seeking to stay a then-impending foreclosure. The defaulting borrowers' first suit named some
of the same entities sued here and raised some of the claims asserted here.1 The first round was
rained out, so to speak, as the defaulting borrowers voluntarily non-suited the case before

defendants' dismissal motions could be decided. In this second round, the defaulting borrowers
name four defendants—the noteholder, the nominal beneficiary under the deed of trust, the

substitutetrustee, and an unnamed purchaser. The gravamen of the complaint is that the current
noteholder lacks authority under Virginia law to proceed with the foreclosure. Notwithstanding
llial two of the named defendants—the nominal beneficiary and the substitute trustee—are non-

Notably, the defaulting borrowers' complaint in the first action asserted many claims not
asserted here, including that the mortgage-loan documents there at issue were void as the

securitization of the loan constituted "illegal gambling" and a "pyramid scheme." See Complaint
HI66-81,Pham v. BankofN.Y., No. I:10cvl062 (E.D. Va. Sept. 23, 2010) (Doc. 1-1).

diverse, the noteholder in this case, as it did in the first case, removed this action on diversity
grounds. Thereafter, all named defendants moved for dismissal of the complaint for failure to
state a claim. In response, the borrowers argue that they have stated valid claims, but

preliminarily seek remand on the ground that the nominal beneficiary and the substitute trustee
are not diverse.

For the reasons that follow, the doctrine of fraudulent joinder compels the conclusion that
removal was proper because the citizenship of the nominal beneficiary and the substitute trustee
may be disregarded for purposes of the jurisdictional inquiry. And further, for the reasons also

set forth here, plaintiffs have failed to state a claim as to any defendant. Thus, plaintiffs' motion
to remand must be denied, and defendants' motions to dismiss must be granted.
I.

The undisputed facts pertinent to the instant motions may be briefly summarized.
Plaintiffs Kevin Hien Pham and Nathalie Monges, the borrowers, are citizens of Virginia
presently living at 6146 Calico Pool Lane in Burke, Virginia (the "Burke property"). Defendant

Bank of New York ("BNY"), the noteholder, is Delaware corporation with its principal place of
business in New York. Defendant Mortgage Electronic Registration Systems, Inc. ("MERS"),

the nominal beneficiary of the deed of trust, and Wittstadt Title & Escrow Company, LLC.

("Wittstadt"), the substitute trustee, are Virginia corporations. The alleged third-party purchaser,
John Doe, is not specifically identified because the Burke property has not yet been sold, and
hence the citizenship of this party is unknown.
On February 18,2005, Pham executed a promissory note (the "Note") and a deed of trust

securing it (the "Deed of Trust") in connection with the refinance of the loan secured by the
Burke property. The Note evidences Pham's promise to pay the original lender, Encore Credit

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Corporation ("Encore"), $350,000 to refinance Pham's mortgage loan. The Deed of Trust names
both Pham and Monges as the borrowers, Encore as the lender, Dewey B. Morris as the trustee,

and MERS as the nominal beneficiary. With respect to the beneficiary specifically, the Deed of
Trust states that MERS "is acting solely as a nominee for Lender and Lender's successors and

assigns." (Doc. 3-1 at 3; see also id. at 5). Additionally, the Deed of Trust provides that
"Borrower irrevocably grants and conveys to Trustee, in trust, with power of sale," the Burke
property, and also that "the Note (together with this Security Instrument) can be sold one or more
times without prior notice to the Borrower." {Id. at 5,14).
Sometime in 2009, plaintiffs ceased making payments on the Note, and the loan went into
default. Plaintiffs were advised that unless they cured the default, the Deed of Trust entitled the

noteholder to begin foreclosure proceedings. Plaintiffs did not cure the default, and a foreclosure

sale was scheduled. Attempting to halt the sale of the Burke property, plaintiffs filed an action in
state court, which was subsequently removed to this district, that contained many of the same
claims asserted here. See Complaint ffi| 104-12, Pham v. Bank ofN.X, No. 1:10cvl062 (E.D.
Va. Sept. 23,2010) (Doc. 1-1). Although defendants in that case moved to dismiss the

complaint, the motion was not resolved becauseplaintiffs voluntarily dismissed the case. See
Pham v. BankofN. Y., No. 1:1 Ocvl062 (E.D. Va. Nov. 29,2010) (Order).
On November 21,2011—almost one year after their initial action was dismissed—

plaintiffs filed the instant action in state court against defendants BNY, MERS, Wittstadt, and an

unnamed purchaser. In their four-count complaint, plaintiffs assertthe following:
(i) A request for declaratory judgment that BNY is not the secured
party under Va. Code § 8.01-184 and thus cannot enforce the Deed
of Trust;

(ii) A claim to quiet title on the allegations that BNY cannot
enforce the Deed of Trust and therefore cannot make entries in the

Burke property record, and that MERS cannot assign rights under
the Deed of Trust;

(iii) A request for declaratory judgment that BNY has no interest in
the Deed of Trust under Va. Code § 8.01-184; and,

(iv) A claim for wrongful foreclosure on the allegations that BNY
has no interest in the Deed of Trust and that Wittsdadt as trustee

breached its fiduciary duty to plaintiffs by attempting to foreclose
on behalf of an unauthorized party and relying on allegedly
inauthentic documents in doing so.

On January 3,2012, BNY removed the action to federal court pursuant to 28 U.S.C. §
1441 invoking diversity jurisdiction under 28 U.S.C. § 1332. BNY, MERS, and Wittstadt each

filed a motion to dismiss the complaint for failure to state a claim pursuant to Rule 12(b)(6), Fed.
R. Civ. P. Plaintiffs seek remand of this action on the ground that subject-matterjurisdiction is
lacking. The motions to dismiss and the motion to remand have been fully briefed and argued
and are now ripe for disposition.
II.

The threshold question, as always, must be whether subject-matter jurisdiction exists.

This action was removed to federal court on diversity grounds. See 28 U.S.C. § 1441(a). Yet,
the removal statutes are not independent grants of subject-matter jurisdiction, and remand is

required if"itappears that the district court lacks subject matter jurisdiction" over the action,3 as
where the parties-in-interest are not completely diverse and no other basis for subject-matter
jurisdictionexists. In this regard, plaintiffs arguethat the partiesare not completely diverseand

2Plaintiffs did not file a separate motion for remand, but rather incorporated arguments for
remand into their briefs in opposition to the motions to dismiss. Defendants' briefs addressed the
remand issue.

328 U.S.C. § 1447(c). Accord 28 U.S.C. § 1441(b)(2) ("A civil action otherwise removable
solely on the basis of the jurisdiction under section 1332(a)of this title may not be removed if
any of the parties in interest properly joined and served as defendants is a citizen of the State in
which such action is brought.").
-4-

therefore that remand is required. Defendants respond that because plaintiffs fraudulently joined
the non-diverse defendants—MERS and Wittstadt—those defendants' citizenship must be
disregarded for purposes of determining whether diversityjurisdiction exists. Thus, the question

presented is whether the doctrine of fraudulent joinder operates here to renderthe citizenship of
MERS and Wittstadt irrelevant for diversity purposes. If not, remand is required, but if so,
subject-matterjurisdiction exists under § 1332(a),and the matter may proceed in federal court.

The fraudulent-joinder doctrine allows a district court to "assume jurisdiction even if...
there are nondiverse named defendants at the time the case is removed" inasmuch as the court

may "disregard, for jurisdictional purposes, the citizenship of certain nondiverse defendants,

assume jurisdiction over a case, dismiss the nondiverse defendants, and thereby retain
jurisdiction." Mayes v. Rapoport, 198 F.3d 457,461 (4th Cir. 1999). As one court has aptly put
it, "[t]he term 'fraudulent joinder' is, in many ways, a misnomer, as it requires neither fraud nor
joinder." Trigo v. Travelers Commercial Ins. Co., No. 3:10cv28,2010 WL 3521759, at *3

(W.D. Va. Sept. 7,2010) (citing Mayes, 198 F.3d at 461 n.8 (noting that the term is "misleading"

in this respect)). In particular, although the fraudulent-joinder doctrine applies where "there has
been outright fraud in the plaintiffs pleading of jurisdictional facts," the doctrine also applies
where, instead, "there is no possibility that the plaintiff would be able to establish a cause of

action against the in-state defendant in state court[.]" Marshall v. Manville Sales Corp., 6 F.3d

229, 232 (4th Cir. 1993) (citation omitted). Furthermore, "the doctrine is potentially applicable
to each defendant named by the plaintiffin the original complaint or anytime prior to removal"
and thus does not depend on joinder subsequent to the filing of the complaint. Mayes, 198 F.3d

at 461 n.8. Indeed, "the [removal] statute does not allow a district court to retain jurisdiction
once it permits a nondiverse defendant to be joined in the case." Id. at 462. In short, application

of the fraudulent-joinder doctrine focuses not, as its name might suggest, on whether the plaintiff
knowingly seeks to add an improper party as a non-diverse defendant after removal, but rather on
whether the plaintiff properly named a non-diverse defendant before removal.
Because there is no suggestion that plaintiffs' naming of the non-diverse defendants was

fraudulent in fact,4 the determination whether the non-diverse defendants are properly named,
and thus whetherthe fraudulent-joinder doctrine applies, depends on whether there is a
reasonable possibility that plaintiff can recover against these defendants. In this respect, the

citizenship of these defendants may be disregarded only if there is "no possibility" that plaintiffs
can recover against these non-diverse defendants on the basis of the stated claims. See Hartley v.
CSXTransp. Inc., 187 F.3d 422,424 (4th Cir. 1999). Application of the "no possibility"
standard requires a searching inquiry beyond the pleadings, with all genuinely disputed facts and

legal uncertainties resolved in plaintiffs' favor. See id. at 425; AIDSCounseling & Testing Ctrs.

v. Group WTele., Inc., 903 F.2d 1000, 1004 (4th Cir. 1990). Nonetheless, the "no possibility"
standard is not to be taken "literally," nor is it to be applied "mechanically." Linnin v.

Michielsens, 372 F. Supp. 2d 811, 819 (E.D. Va. 2005). Instead, the conclusion is properly
reached that "a defendant is fraudulently joined if there is no 'reasonable basis for predicting that
state law might impose liability on the facts involved.'" Boss v. Nissan N. Am., Inc., 228 F.

App'x 331,335 (4th Cir. 2007) (per curiam) (quoting Great Plains Trust Co. v. Morgan Stanley
Dean Witter & Co., 313 F.3d 305,312 (5th Cir. 2002)); accord Linnin, 372 F. Supp. 2d at 819
(holding that the fraudulentjoinder doctrine applies where the complaint shows "no reasonable
basis for the district court to predict that the plaintiff might be able to recover against an in-state

4On this point, it is notable that the complaint in this action omits any federal claims and asserts
only state-law claims, whereas the complaint in the first, rained-out action asserted several

federal claims, including claims under die Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692
etseq. and the Truth in Lending Act, 15 U.S.C. §§ 1601 etseq.

defendant"). In sum, subject-matter jurisdiction on the basis of diversity exists here unless the

inquiry into plaintiffs' likelihood of recovery against the non-diverse defendants "identifies [a]
glimmer of hope for the plaintiff[s]." Hartley, 187 F.3d at 426.

Here, it is pellucidly clear that there is no such "glimmer of hope" for these plaintiffs in
their efforts to recover against MERS and Wittstadt because the claims merely recast a "show me
the note" theory, which has been widely rejected as "contrary to Virginia's non-judicial
foreclosure laws." Gallant v. Deutsche Bank Nat'I Trust Co., 766 F. Supp. 2d 714, 721 (W.D.
Va. 2011) (citation omitted). Accord Minix v. Wells Fargo Bank, 81 Va. Cir. 130,2010 WL

7765589, at *4 (Fairfax Cnty. Aug. 24, 2010) (cautioning that courts should not "be creating a

judicial foreclosure procedure when the legislature has mandateda non-judicial procedure to be
appropriate") (citation omitted). Plaintiffs' claims against MERS and Wittstadt rest on the
speculative allegation that the noteholder (i) did not authorize MERS to assign the Deed of Trust

and (ii) did not authorize Wittstadtto begin foreclosure after plaintiffs had defaulted. Butjust as
a noteholder is not "required to come to a court of law and prove its authority or standing to

foreclose on a secured property,"5 so too a nominal beneficiary ora substitute trustee, for the
same reason, should not be required to prove in court that it has the noteholder's authority. To

conclude otherwise would allow borrowers to compel judicial intervention in any foreclosure

proceeding where a deed of trust has changed hands or a substitute trustee has been appointed.
This result would be plainly contrary to Virginia law, which allows a trustee to foreclose on a

loan in default, even if the original note cannot be found, without first seeking a court order. See
Horvath v. Bank ofN Y, N.A., 641 F.3d 617, 623 (4th Cir. 2011) (rejecting the argument that the

noteholder "shouldhave had to prove that it had standing to enforce the note before appointing

5Gallant, 766 F. Supp. 2d at 721.
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[the substitute trustee] to conduct a foreclosure" and citing Va. Code § 55-59(7)). In sum,

because Virginia law unequivocally disallows a "show me the note" claim against a noteholder,

it also disallows similar "show me the noteholder's authority" claims against MERS and
Wittstadt here.

Nor is there a "glimmer of hope" for the quiet-title claim against MERS based on MERS'

assignment of the Deed of Trust; this claim, for several reasons, has no reasonable possibility of

succeeding.6 First, plaintiffs clearly fail to allege superior title, as they must to prevail on a
quiet-title claim, given plaintiffs' admission that the Note is in default and that plaintiffs refuse to
make payments. See Tapia v. U.S. Bank, N.A., 718 F. Supp. 2d 689, 700 (E.D. Va. 2010)
(dismissing a quiet-title claim on this basis) (citing Maine v. Adams, 277 Va. 230,672 S.E.2d

862 (2009)). Furthermore, because under Virginia law "deeds of trust and mortgages are

regarded in equity as mere securities for the debt, and whenever the debt is assigned the deed of
trust or mortgage is assigned or transferred with it," MERS' assignment of the Deed of Trust was
unnecessary to reflect the subsequent noteholder's interest therein and therefore was no more

than a formality. Horvath, 461 F.3d at 623 (quoting Williams v. Gifford, 139 Va. 779,124 S.E.
403,404 (Va. Special Ct. App. 1924)). Finally, consistent with the decisions of other Virginia
courts that have considered deeds of trust containing grants of authority similar to those in the

Deed of Trust here, the Deed of Trust gives MERS, as the nominal beneficiary and as an agent of

the noteholder, express authority to assign it. See, e.g., Larota-Florez v. Goldman Sachs Mortg.
Co., 719 F. Supp. 2d 636,640 (E.D. Va. 2010), aff'd, 441 F. App'x 202 (4th Cir. 2011) (per

6Notwithstanding plaintiffs' unsupported argument to the contrary, it is, in any event, doubtful
that plaintiffs have standing to challenge the assignment because plaintiffs were not party to the
assignment, which involved only the former noteholder, the subsequent noteholder, and the
noteholder's agent. See, e.g., Wolfv. Fed. Nat'IMortg. Ass'n, — F. Supp. 2d —, 2011 WL
5881764, at **5-6 (W.D. Va. Nov. 23,2011).
-8-

curiam). AccordSincere v. BACHomeLoansServicing, LP,No. 3:llcv38,2011 WL 6888671,

at *5 (W.D. Va. Dec. 30,2011) (citing Graves v. Mortg. Elec. Regis. Sys., Inc., No. CL-2010-

17101,2011 WL 3681735 (Va. Cir. Fairfax Cnty. June 29,2011), cert, denied, No. 111738, slip,
op. (Va. Dec. 20,2011)). In sum, because plaintiffs cannot obtain relief from MERS on the basis

of the stated claim, MERS' citizenship is appropriately disregarded for purposes of determining
diversity jurisdiction.

Finally, there is no "glimmer of hope" for the wrongful-foreclosure claim against
Wittstadt based on Wittstadt's foreclosure efforts as substitute trustee; this claim also has no

reasonable possibility of succeeding. First, Virginia does not recognize a cause of action for
wrongful foreclosure. See Sheppardv. BACHome Loans Servicing, LP, No. 3:1 lcv62,2012 WL
204288, at *7 (W.D. Va. Jan. 24, 2012). Additionally, although the trustee under a deed of trust

is the agent of both the debtor and the creditor, Virginia law provides that the trustee's duties are
'"limited and defined by the instrument under which he acts,'" and the Deed of Trust here—like
the deed of trust in Sheppard—contains "no duty ... requiring the trustee to ensure either that it

was properly appointed or that the entity invoking the sale is the secured party with authority to
foreclose." Sheppard, 2012 WL 204288, at *7 (quoting Warner v. Clementson, 254 Va. 356,
361,492 S.E.2d 655,657 (1997)). Thus, because plaintiffs' only claim against Wittstadt lacks
any legal merit, Wittstadt's citizenship is properly disregarded for purposes of determining
diversity jurisdiction.

Put simply, MERS and Wittstadt are merely agents of the real party at interest here, i.e.,
the noteholder. A nominal beneficiary and a substitute trustee under a deed of trust act at the
noteholder's direction, and even if there were some reason to believe that such direction was not

given here, Virginia law does not give plaintiffs a cause of action to complain. It follows that

-9

plaintiffs have no reasonable possibility of recovering against MERS or Wittstadt. Thus, these

non-diverse defendants' citizenship is disregarded under the fraudulent-joinder doctrine for
purposes of the jurisdictional inquiry.

Because complete diversity exists among the remaining, proper parties, subject-matter

jurisdiction over this action exists pursuant to § 1332(a). Plaintiffs' additional arguments to the

contrary lack merit. First, plaintiffs' citations to the orders in Ghandi v. Bank ofNew York1 and

Mohammadi v. EMC Mortgage Corp} are unavailing because those orders did not set forth the
reasons for remand, which might have been informed by factual backgrounds or procedural
postures distinct from those present here. Additionally, plaintiffs contention that the amount in

controversy does not exceed $75,000 is easily rejected because success of plaintiffs' claims
against BNY, which contends that it has a 100% interest in the Note and the Deed of Trust,

would eliminate BNY's right to receive payments on a $350,000 promissory note and its right to
invoke the power of sale with respect to property valued at over $300,000. In other words,

because the "object[s] ofthe litigation,"9 i.e., BNY's interest in the Note and the Deed ofTrust,
are valued at well over $75,000, it plainly does not "appear to a legal certainty that the claim is
really for less than the jurisdictional amount." St. Paul Mercury Indem. Co. v. RedCab Co., 303

U.S. 283,289 (1938). Accordingly, because subject-matterjurisdiction over the plaintiffs'
action exists pursuant to § 1332(a), the motion to remand must be denied, and the Rule 12(b)(6)
motions must be decided.

7No. 1:1 lcvl365 (E.D. Va. Feb. 21, 2012) (Order) (remanding the case); No. 1:1 lcvl365 (E.D.
Va. Mar. 26,2012) (Order) (denying motion for reconsideration of remand).

8No. 1:12cv221 (E.D. Va. Mar. 26, 2012) (remanding the case).

9Hunt v. Wash. State Apple Adver. Comm %432 U.S. 333,347 (1977).
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IV.

Dismissal pursuant to Rule 12(b)(6), Fed. R. Civ. P., is appropriate where the complaint
does not "contain sufficient factual matter, accepted as true, to 'state a claim to relief that is

plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662,129 S. Ct. 1937, 1949 (2009) (quoting
Bell All. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). To survive a Rule 12(b)(6) motion to

dismiss, a complaint must contain "more than an unadorned, the-defendant-unlawfully-harmedme accusation." Iqbal, 129 S. Ct. at 1949. In this respect, it is also true that "the tenet that a

court must accept as true all of the allegations contained in a complaint is inapplicableto legal
conclusions." Id. (emphasis added). Accord Eastern Shore Markets v. J.D. Assocs. Ltd. P'ship,
213 F.3d 175, 180 (4th Cir. 2000). Thus, "[t]hreadbare recitals of the elements of a cause of

action, supported by mere conclusory statements, do not suffice." Iqbal, 129 S. Ct. at 1949.
Instead, the complaint must allege facts that, if true, plausibly satisfy each element of the claims
for which relief is sought. Id. at 1950. Accordingly, a motion to dismiss must be granted if the

complaint does not allege a sufficient factual basis to create a plausible inference that plaintiff is
entitled to relief.

Based on the current record,10 BNY is the current noteholder and also was the noteholder
during the actions of which plaintiffs complain. At the motions hearing, BNY made part of the
record a scan of the original "wet ink signature" Note, which according to counsel's
representations is in the trustee's possession in a secure facility. The scanned copy of the Note,

10 The record on a motion to dismiss includes "documents incorporated into the complaint by
reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 308, 322 (2007).
-11 -

which bears an undated endorsement-in-blank from Encore (the original lender),11 appears
identical to the copy that Wittstadt sent to plaintiffsjust after the notice of foreclosure had

issued. {See Doc.1-3 at 31-35; Compl. U32). A prospectus supplement indicates that in March

2005, Encore transferred the Note, along with manyother mortgage loans, to a mortgage loan
trust and named BNY as the indenture trustee of that trust. {See Doc. 1-3 at 42-43). The loan
servicer's June 29,2009 response to plaintiffs' Qualified Written Request ("QWR") indicated
that "[t]he current Note holder is The Bank of New York, as indenture trustee, for Encore Credit

Receivables Trust 2005-1." (Doc. 1-3 at 18). MERS effected a formal assignment of the Deed
of Trust to BNY in August 2009, after plaintiffs had ceased making payments. (Doc. 1-3 at 40).
Wittstadt's November 4,2011 foreclosure notice identified BNY as the noteholder and further

noted Wittstadt had "been requested by the holder of the note ... to commence immediate action
to foreclose against said property for default in the payment of the Note." (Doc. 1-3 at 25). In
sum, the documents in the record establish that BNY currently possesses the Note and was the

noteholder (i) when MERS assigned the Deed of Trust to BNY in August 2009, (ii) when BNY

appointed Wittstadt as substitute trustee under the Deed of Trust in October 2011, and (iii) when

Wittstadt initiated foreclosure on the Burke property inNovember 2011,12
Plaintiffs' bald assertion that the Note and other documents in the record are not authentic

is, put gently, unworthy of credence. See UnitedStates ex rel. Constructors, Inc. v. Gulf Ins.

11 Because Encore ceased to exist as an entity some time in 2007, it naturally follows that Encore
placed the blank endorsement on the Note on or before its dissolution in 2007.

12 Given this, plaintiffs' reliance on the dissent in Jones v. Brandt is misplaced as that case,
which considered whether a power of attorney implicitly authorized the attorney-in-fact to
substitute the payable-on-death beneficiary of the testator's certificate of deposit, is clearly
inapposite. 274 Va. 131, 645 S.E.2d 312 (2007). Even assuming, arguendo, the issues here
were analogous to those in Brandt, the record evidence in this case establishes that Encore
endorsed the Note in blank before BNY acquired it.
-12-

Co., 313 F. Supp. 2d 593,596 (E.D. Va. 2004) (noting that "[i]n the event of conflict between

the bare allegations of the complaint and any attached exhibit, the exhibit prevails") (citing
Fayetteville Investors v. Commercial Builders, Inc., 936 F.2d 1462,1465 (4th Cir. 1991)). With

respect to whether the Note bears a valid endorsement in blank, it is clear that the photocopied
Note attached to the response to plaintiffs' QWR did not reflect the endorsement because the

endorsement appears on the backof the signature page of the original Note, which was not

photocopied. Indeed, the background markings on the copy of the endorsement page clearly
reflect a mirror imageof the Note's signature page, as happens when a photocopier captures the

back side ofa two-sided page.13 Additionally, the bare allegations in the complaint that the
inclusion of MERS as beneficiary in the Deed of Trust and the appointment of a substitute
trustee were somehow "fraudulent" find no support in any specific factual allegations in the
complaint or indeed in any record evidence. Moreover, no factual allegation or record evidence

supports plaintiffs' speculative assertion that certain documents in the record are signed by
individuals lacking authority to do so. Finally, this record discloses no factual basis for

concluding that any other entity besides BNY possesses the Note.14 In short, plaintiffs have not

13 In this respect, the copy ofthe Note proffered by BNY also appears identical to the copy ofthe
Note that BNY attached to its motion to dismiss the first action, which BNY filed on September
27, 2010. {See Doc. 3-2, l:10cvl062).

14 This observation underscores the absurdity ofplaintiffs' assertion that BNY is not the
noteholder. If it is true that BNY does not possess the Note, then it must also be true that another
entity either possesses the Note or is entitled to rights as lender under the Note. That entity
cannot be Encore because Encore no longer exists. Given this, plaintiffs' assertion that BNY

does not possess the Note depends on the incredible allegation that some unidentified entity
acquired the Note from Encore, and yet has sat idly by as plaintiffs have ceased making
payments and BNY has begun asserting rights reserved for the noteholder. The assertion is also

tantamount to the outlandish claim that BNY, MERS, and Wittstadt have conspired to deprive an
unnamed entity of its rights under the Note and the Deed of Trust.
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alleged, forecasted, or adduced any evidence that any document in this record is inauthentic or
otherwise suspect.

To resolvethe motions to dismiss, well-settled Virginia law as surveyed by the Fourth
Circuit in Horvath v. Bank ofNew York, NA. is controlling here. 641 F.3d 617 (4th Cir. 2011).
In Horvath, the plaintiff in that case—represented by the lawyer for plaintiffs in this matter—

made several arguments in support of its position that BNY, which at that time was the
noteholder, lacked authority under Virginia law to foreclose on the plaintiffs property even

though the loan was indisputably in default. The Fourth Circuit found plaintiffs positionwholly
unpersuasive, stating that "it is difficult to see how [plaintiffs] arguments couldpossibly be
correct" given that "BNY possessed the note at the time it attempted to foreclose on the

property." Id. at622 (emphasis added).15 The Fourth Circuit began its analysis by noting that
"Virginia has attempted to enhance commerce within the state by ensuring that negotiable
instruments" such as promissory notes "are freely transferable." Id. at 621. Specifically, a

promissory note endorsed in blank "may be freely transferred," and "[w]ho ever possesses an
instrument endorsed in blank has full power to enforce it." Id. at 621-22 (citing Va. Code §§
8.3A-104, 8.3A-201(b), 8.3A-203(b), & 8.3A-205(b)). Thus, the Fourth Circuit concluded that

"once Horvath defaulted ... Virginia law straightforwardly allowed BNY to take the actions that
it did," which included appointing a substitute trustee and directing that trustee to initiate
foreclosure proceedings. 641 F.3d at 621-22 (emphasis added).

Horvath is, in all pertinent respects, factually indistinguishable from the case at bar.
First, the key terms of the note and deed of trust at issue in Horvath are identical to terms of the

15 See also Hr'g Tr. 11:9-24, Bernardo v. Nat 7 City Real Estate Servs., LLC, No. 1:10cv80 (E.D.
Va. Apr. 30, 2010) (Brinkema, J.) (calling the argument to this effect "smoke and mirrors ...
given the nature ofVirginia law" and "basic, fundamental contract law as well as lender law as it
relates to real estate transactions in Virginia").
-14-

Note and Deed of Trust at issue here. The note in Horvath and the Note here bothstate thatthey
are freely transferrable. Compare 641 F.3d at 619 (reciting language from the note that "the

Lender may transfer this note" and that "[t]he Lender or anyone who takes this Note by transfer
and who is entitled to receive payments under this Note is called the 'Note Holder'") (emphasis
removed) with (Doc. 1-3 at 20) (containing identical language). Both notes bear endorsements in

blank. The deed of trust in Horvath and the Deed of Trust here both providethat "[t]he Note or a
partial interest in the Note (together with this Security Instrument) can be sold one or more times
without prior notice to Borrower." Compare 641 F.3d at 619 with (Doc. 3-1 at 5). Both deeds of

trust named MERS as the nominal beneficiary "for Lender and Lender's successors and assigns."
Compare 641 F.3d at 620 with (Doc. 3-1 at 3). Next, in Horvath and in the case at bar, the note

was transferred to a mortgage-securitization trust naming BNY as trustee, and BNY acquired
each note pursuant to a trust agreement. See 641 F.3d at 620. Finally, in Horvath and in the

case at bar, BNY appointed a substitute trustee that would later initiate foreclosure

proceedings.16 See id.
In light of Horvath's reading of Virginia law and of mortgage instruments identical in all

material respects to those at issue here, it must be concluded that in this case, the "Lender" and
"Note Holder" under the Note and the Deed of Trust, the "[p]erson entitled to enforce" an
instrument under Va. Code § 8.3A-301, the "party secured by the deed of trust" under Va. Code
§ 55-59(9), and the "beneficiary" under Va. Code § 55-59.1(B) all refer to the entity possessing

16 It should be noted that unlike inHorvath, where the substitute trustee actually conducted a sale
of the secured property, no foreclosure sale has yet occurred here.
15

the Note, namely, BNY.17 See Horvath, 641 F.3d at 623 (observing that in the case there at bar,
"BNY held 100 percent of the monetary obligations due from [plaintiff] by virtue of being the
holder of the note [plaintiff] signed, bringing its actions squarely within the scope of [Va. Code]
§ 55-59(9)"); id. at 624 (noting that "[t]he better reading" of the deed of trust there at issue "is to

read the term 'Lender' as applying not only to [the original lender] but to any subsequent
purchaser of the deed of trust" and that "common sense suggests that things couldnot be any
otherway") (emphasis added). Thus, as the noteholder, BNY was authorized under the plain
terms of the Note and the Deed of Trust and under well-established Virginia law (i) to direct
assignment of the Deed of Trust to itself, (ii) to appoint a substitute trustee, and (iii) to invoke the
power of sale given plaintiffs' default and thereby to direct the trustee to initiate foreclosure.
To summarize, the claims against MERS and Wittstadt plainly fail for the reasons stated

supra, and the remaining claims fail because neither BNY nor the hypothetical John Doe
purchaser has exceeded their legal rights in connection with the mortgage loan at issue. The
Fourth Circuit's holding in Horvath that Virginia law grants the noteholder authority to exercise

certain rights under a deed of trust compels this result, particularly given that Horvath is
factually indistinguishable from this case. This authority is fatal to plaintiffs' claims for

declaratoryjudgment, quiet title, and wrongful foreclosure against BNY and to the contingent,
unripe claim against the John Doe purchaser. Plaintiffs' arguments to the contrary are plainly

meritless18 as they are directly contrary to Virginia law as surveyed by the Fourth Circuit in

17 See also Bernardo Hr'g Tr. 16:24-17:3 (Brinkema, J.) (rejecting the argument that only the
loan trust is entitled to receive payment and adding that "[y]ou don't have the law that supports
you right now").

18 In particular, these meritless arguments include, inter alia, plaintiffs' contentions that (i) the
Deed of Trust is ambiguous as to the duties of MERS, (ii) BNY must demonstrate its status as a
bona-fide purchaser before invoking the power of sale, (iii) MERS is not a "true" beneficiary
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Horvath. Indeed, plaintiffs cite no cases, and none has been found, in which a court faced with

similar facts and similar claims to those present here has concluded that those claims are valid

under Virginia law. Thus, because plaintiffs' claimsare based exclusively on untenable legal
theories, the complaint must be dismissed in its entirety.
V.

Given the absence of any authority supporting plaintiffs' claims, it is not easy to see how
plaintiffs' counsel could have had a good-faith belief that all of the theories he has advanced in

this matter "are warranted by existing law or by a nonfrivolous argument for extending,
modifying, or reversing existing law or for establishing new law" under Rule 11(b)(2), Fed. R.
Civ. P. Indeed, plaintiffs' counsel's experience in other foreclosure-avoidance actions should
have made clear that the claims and theories advanced here and in those cases lack merit. In this

district alone, all of the many foreclosure-avoidance actions plaintiffs' counsel has initiated have

been voluntarily dismissed, remanded, or ultimately unsuccessful on the merits.19 In the Fourth

Circuit, plaintiffs' counsel has fared no better;20 to the contrary, the Fourth Circuit has never
under the Deed of Trust, (iv) MERS may act only as "necessary" under law, (v) only the original
lender may foreclose, and (vi) BNY must produce to plaintiffs its lost-note affidavit prior to
initiating foreclosure.

19 See, e.g., Munozv. BAC Home Servicing, LP, No. I:llcv582 (E.D. Va. Aug. 1, 2011) (Order);
Gibson v. Wells Fargo Bank, N.A., No. 1:10cv304, 2011 WL 221188 (E.D. Va. Jan. 19,2011);
Bolouri v. BankofAm., N.A., No. I:10cv225,2010 WL 3385177 (E.D. Va. Aug. 24,2010);
Larota-Florez v. Goldman Sachs Mortg. Co., 719 F. Supp. 2d 636 (E.D. Va. 2010); Zambrano v.
HSBCBank USA, Inc., No. I:09cv996, 2010 WL 2105164 (E.D. Va. May 25, 2010); Ruggia v.
Wash. Mutual, 719 F. Supp. 2d 642 (E.D. Va. 2010).

20 See Horvath, 641 F.3d at 626 (observing that appellant's "arguments onthis score stem more
from his views of what the law ought to be than from what it actually is" and declining "to
accept his invitation to rewrite Virginia law"); Bernardo v. Nat 7 C/7y Real Estate Servs., 435 F.
App'x 240 (4th Cir. 2011) (per curiam) (concluding that "the current holder of the note[ ]has
authority to foreclose" and rejecting arguments to the contrary in light of Horvath). See also
Gibson v. Wells Fargo Bank, N.A., — F. App'x —, 2012 WL 11237 (4th Cir. Jan. 4,2012) (per
curiam) (affirming in light of Horvath); Shafer v. Citibank, N.A., 447 F. App'x 466 (4th Cir.
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concluded that any of his foreclosure-avoidance theories was meritorious. It is therefore

unsurprising that plaintiffs' counsel has been specifically and repeatedly admonished for his

practice ofadvancing meritless claims in foreclosure-avoidance actions,21 and yet, asthis case
shows, he continues to assert substantiallysimilar claims based on many of the same arguments.
Nonetheless, as a matter ofjudicial grace, an order to show cause under Rule 11(c)(3), Fed. R.
Civ. P., will not issue sua sponte.
An appropriate order will issue.

Alexandria, Virginia
April 10,2012

T.S. Ellis, HI

United States Djfstxict Judge

2011) (per curiam) (same); Zambrano v. HSBCBank USA, Inc., 442 F. App'x 861 (4th Cir.
2011) (per curiam) (same); Ruggia v. Wash. Mutual, 442 F. App'x 816 (4th Cir. 2011) (per
curiam) (same); Bolouri v. Bank ofAm., N.A., 442 F. App'x 816 (4th Cir. 2011) (per curiam)
(same); Tapia v. U.S. Bank, N.A., 441 F. App'x 166 (4th Cir. 2011) (per curiam) (same);
Pazmino v. LaSalle BankNA., 447 F. App'x 467 (4th Cir. 2011) (per curiam) (same); LarotaFlorez v. Goldman Sachs Mortg. Co., 441 F. App'x 202 (4th Cir. 2011) (per curiam) (same).

21 For example, inearly 2010 Judge Brinkema, ruling from the bench inBernardo v. National
City Real Estate Services, observed that counsel for plaintiffs here had "a zero success track
record with these theories" and opined that "a prudent attorney might sort of cool it for a while
until you see where the law is going." Bernardo Hr'g Tr. 20:22-25. Judge Brinkema also
warned that "[d]own the road, you may have to worry about Rule 11 sanctions[.]" Id. 22:3-4.
Months later, the Circuit Court for Fairfax County ordered these plaintiffs' counsel to pay a
$9,885.00 sanction on the ground that he and his firm "continue to propound the same arguments
in materially identical proceedings for the improper purpose of delaying his clients' eviction
from their former homes, to the detriment ofjudicial efficiency and all other parties involved."
Minix, 81 Va. Cir. 130,2010 WL 7765589, at *4.
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