Thursday, February 21, 2013

1st Circuit: Borrower Has Standing To Challenge Mortgage Assignments When Invalid, Ineffective, Or Void; Transfers That Are Merely Voidable Are Immune From Protest

The National Law Journal reports:
  • In a case of first impression, the U.S. Court of Appeals for the First Circuit has ruled that a borrower has standing to challenge an assignment of her mortgage to a foreclosing bank. But the court found that the foreclosure itself was legal.

    A unanimous panel made the rulings on February 15, concluding that Aurora Loan Services' foreclosure on Oratai Culhane's property was legal. The court held that the framework of the Mortgage Electronic Registration Systems Inc. (MERS) "is faithful to the age-old tenets of mortgage law in Massachusetts."

    As part of a $548,000 mortgage refinancing Culhane undertook in April 2006, she signed a document making MERS mortgagee of record. MERS held legal title to the mortgaged property and could sell the mortgage as a so-called "nominee" for the lender.

    According to the opinion, "In an assignment dated April 7, 2009, MERS transferred the mortgage to Aurora."Aurora was thus the mortgagee of record when Culhane fell behind on her mortgage payments.

    Culhane first filed a temporary restraining order in Norfolk County Superior Court in Massachusetts in June 2011 to stop a foreclosure sale of the property, and Aurora quickly removed the case to federal court.

    In November 2011, Judge William Young of the District of Massachusetts issued a summary judgment ruling in favor of Aurora. He ruled that "equity requires that the holder of bare legal title to a mortgage have the capacity to assign it to the note holder or the note holder's loan servicer, so that a valid foreclosure may be effectuated. This analysis does not change because the mortgagee is MERS." Culhane appealed.

    Senior Judge Bruce Selya wrote the opinion in Culhane v. Aurora Loan Services, joined by Chief Judge Sandra Lynch and retired U.S. Supreme Court Justice David Souter, who heard the case by designation.

    Selya wrote that people with a Massachusetts mortgage have standing to challenge an assignment of the mortgage in comparable circumstances: "There is no principled basis for employing standing doctrine as a sword to deprive mortgagors of legal protection conferred upon them under state law. We hold, therefore, that a mortgagor has standing to challenge the assignment of a mortgage on her home to the extent that such a challenge is necessary to contest a foreclosing entity's status qua mortgagee."(1)

    But having found that Culhane had standing, Selya wrote, "there is no reason to doubt the legitimacy of the common arrangement whereby MERS holds bare legal title as mortgagee of record and the note holder alone enjoys the beneficial interest in the loan." He noted that "MERS was formed by a consortium of residential mortgage lenders and investors desiring to streamline the process of transferring ownership of mortgage loans in order to facilitate securitization."

    He added that the MERS framework "corresponds with longstanding common-law principles regarding mortgages."

    Culhane's lawyer, George Babcock of the Law Office of George E. Babcock in Pawtucket, R.I., said that the First Circuit's conclusion that a mortgagor has standing to challenge assignments is a "gigantic step that gives plaintiffs' attorneys something to sink their teeth into." "Anyone who takes a case like his has the opportunity to challenge assignments," he said.

    The problem with the Culhane case, he said, is that MERS was able to put certain documents into evidence at the trial level without objection.

    Rockwell Ludden of Ludden Kramer Law in Yarmouth Port, Mass. also represented Culhane.
For the story, see First Circuit: Borrower has standing to challenge mortgage assignment but still loses (requires free registration).

For the ruling, see Culhane v. Aurora Loan Services of Nebraska, No. 12-1285 (1st Cir. February 15, 2013).

(1) However, the three-judge panel continued by adding the following caveat:
  • We caution that our holding, narrow to begin with, is further circumscribed. We hold only that a mortgagor has standing to challenge a mortgage assignment as invalid, ineffective, or void (if, say, the assignor had nothing to assign or had no authority to make an assignment to a particular assignee).

    If successful, a challenge of this sort would be sufficient to refute an assignee's status qua mortgagee. See 6A C.J.S. Assignments § 132. Withal, a mortgagor does not have standing to challenge shortcomings in an assignment that render it merely voidable at the election of one party but otherwise effective to pass legal title. See, e.g., Serv. Mortg. Corp. v. Welson, 200 N.E. 278, 280 (Mass. 1936); Murphy v. Barnard, 38 N.E. 29, 31 (Mass. 1894); see also 6A C.J.S. Assignments § 132.
    In this case, the plaintiff's challenge to the assignment from MERS to Aurora is premised on the notion that MERS never properly held the mortgage and, thus, had no interest to assign. If this were so, the assignment would be void (not merely voidable). Consequently, the plaintiff has standing to challenge the validity of the assignment.
It then further added, in footnote 5 of the opinion, the following tidbit in connection with a February 12, 2013 ruling in a separate case:
  • We are confident that this holding is consistent with our recent decision in Juárez v. Select Portfolio Servicing, Inc., ___ F.3d ___, ___ (1st Cir. 2013) [No. 11-2431, slip op. at 14-15]. In all events, the standing determination in Juárez rested on the peculiar facts of that case.
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