Monday, August 12, 2013

Pennsylvania Appeals Court: OK To Void Assignee Bankster's Mortgage, Promissory Note When Homeowner Raised TILA Rescission, Other Issues Involving Originating, Now-Defunct Lender's Pre-Assignment Conduct As Foreclosure Defenses; FIRREA Liability Limitation Involving Certain Asset Transfers Between Financial Institutions Applies Only To Counterclaims

In Philadelphia, Pennsylvania, Law360 reports:
  • The Pennsylvania Superior Court ruled Thursday that federal law does not prevent judges from voiding mortgage agreements through counterclaims brought during foreclosure proceedings, affirming a lower court's ruling voiding the mortgage agreement for a woman whose closing agent absconded with nearly $80,000.

    In a precedential ruling, a three-judge panel found that while the federal Financial Institutions Reformation, Recovery and Enforcement Act — or FIRREA — prevented a Clearfield County judge from voiding a mortgage agreement as part of a declaratory judgment bid brought by a homeowner...(1)
For more, see Judges Can Void Some Foreclosed Mortgages, Pa. Court Says (requires subscription).

For the ruling, see Sass v. Amtrust Bank, 2013 PA Super 230 (August 8, 2013).

(1) When applicable, FIRREA (apparently? - as best as I can figure it, anyway) deprives courts of subject matter jurisdiction to impose liability on a successor financial institution for pre-assignment conduct by the predecessor institution without exhaustion of administrative remedies before the Federal Deposit Insurance Corporation (but don't quote me on this!).

In this case, the 3-judge panel first explained the distinction between defenses/affirmative defenses and counterclaims, and then decided whether the FIRREA limitations on imposing liability on a successor financial institution for pre-assignment conduct by the predecessor institution precluded a trial judge from voiding the homeowner's home mortgage and associated promissory note when a rescission defense (based on both the Truth In Lending Act and other theories) was raised by the homeowner/defendant against a financial institution in a foreclosure action:
  • Courts are well suited to determine whether the merits of a stated defense, affirmative defense, or counterclaim bring it within the ambit of the jurisdictional bar of the FIRREA, and may not premise a determination merely on the label a pleading may carry. See id.

    Thus, “[c]ourts should not allow parties to avoid the procedural bar of § 1821(d)(13)(D) by simply labeling what is actually a counterclaim as a defense or affirmative defense.” Id.

    Similarly, courts must retain a healthy degree of skepticism in applying the bar to assertions pled as defenses merely because their application would compromise the value of assets assumed by a successor bank under FIRREA.

    “[A] claim (or a counterclaim) is essentially an action which asserts a right to payment.” Id.

    Consequently, the court must consider whether the disputed assertion of a party’s pleading stems from the desire to establish a right to payment and collect on the resulting debt, or from an explanation of why the debt is not valid or collectible.

    Consistent with this rational, courts have generally accepted the proposition that a defense of rescission is an affirmative defense—not a counterclaim―as it does not seek payment of any sort, but operates to invalidate a contract based on circumstances that render enforcement unlawful. See id. at 394, n.26.

    Although the net effect of such a defense in reducing sums payable by a defendant may be equivalent to that wrought by a counterclaim for damages, the mechanism by which that effect is achieved is entirely distinct.

    While a counterclaim naturally sets off damages awarded to its claimant against those due on the underlying claim, the affirmative defense of rescission more directly nullifies the contractual basis for the claim.

    Thus, we need not hesitate in concluding that Sass’s assertion of an entitlement to rescission of the mortgage contract is an affirmative defense beyond the reach of section 1821(d)’s jurisdictional bar and subject fully to the jurisdiction of the trial court.

    That defense makes no claim on Nationstar for an award of damages, but merely posits that based on a multiplicity of circumstances, including the conduct of the closing agent in absconding with the proceeds of the loan and the failure of AmTrust to comply with various statutory prescriptions at closing, the terms of the contract cannot be enforced.

    Thus, the defenses and affirmative defenses so characterized in Sass I are exactly that and, as such, are not subject to the jurisdictional bar of section 1821(d).

    We conclude accordingly, that while the declaratory judgment action Sass commenced in Sass II is plainly barred by FIRREA, Sass’s attempts, by way of defense and affirmative defense to nullify, rescind, or otherwise invalidate the contract in response to Nationstar’s mortgage foreclosure action in Sass I are not.