Friday, January 22, 2016

Virginia Eastern District: to enforce an extended rescission right under TILA, borrower must allege facts showing such right was available

The other day, the federal District Court sitting in Alexandria held that, to enforce a TILA rescission made outside the 3-day cool-off period, a borrower must allege facts showing that the extended right of rescission was available to the borrower at the time of mailing the rescission notice, i.e., facts showing that the borrower meets the TILA requirements for the applicability of the extended right of rescission.

The District Court noted that, while the 3-day rescission right is absolute, the 3-year rescission right is conditional (on lender's failures) and quoted the U.S. Supreme Court's language from Jesinoski that TILA's "regime grants borrowers an unconditional right to rescind for three days, after which they may rescind only if the lender failed to satisfy the Act's disclosure requirements."

The Court did not explicitly address the borrower's contention that TILA's language that "security interest becomes void upon such a rescission" and Jesinoski's language that "section 1635(a) nowhere suggests a distinction between disputed and undisputed rescissions" so that "rescission is effected when the borrower notifies" make it unnecessary for the borrower to allege or prove entitlement to the extended rescission right where the lender fails to challenge the borrower's rescission notice within the 20 days prescribed by the Act.

The Act is ambiguous on this point, and the line could be drawn elsewhere.  But the court drew the line so as to strike a balance it deemed desirable, probably to avoid opening the floodgates of residential mortgage plaintiffs rescinding their loans outright and relying on the bank's failure to act upon rescission notices within 20 days.

The court's ruling was not totally unexpected.  For instance, if someone mails a rescission notice on a commercial loan, that borrower could not enforce such rescission in court because TILA would not apply to the commercial loan.  Similarly, even if a borrower mails a rescission notice within 3 days of closing (when the rescission right is still absolute), such a borrower arguably cannot enforce that rescission if the Act's rescission right provision did not apply in the first place.  This can happen if the loan was a purchase money loan so that no rescission right was available, or where there was no disclosure violation, so that the extended right never became available.

But what if the parties disagree on whether the extended right was available?  Who is right, who determines who's right, and who has the burden of proof?  If the borrower takes the position that the extended right was available due to a disclosure violation and rescinds, and the lender fails to challenge that rescission within 20 days, there's a good argument that rescission becomes final by operation of statutory law ("security interest becomes void upon such a rescission") and the lender cannot contest it outside the statutorily allotted 20 days.

Indeed, the lender in Jesinoski "argue[d] that if the parties dispute the adequacy of the disclosures—and thus the continued availability of the right to rescind—then written notice does not suffice".  But the Supreme Court disagreed and remarked that § "1635(a) nowhere suggests a distinction between disputed and undisputed rescissions".  The Court explained that "the fact that [rescission] can be a consequence of judicial action when §1635(g) is triggered in no way suggests that it can only follow from such action," and that TILA's neighboring provisions have "no bearing upon whether and how borrower-rescission under §1635(a) may occur."  Thus, a lender's disagreement with borrower's rescission cannot per se  undo a non-judicially effected borrower-rescission triggered by operation of §§1635(a) and (b), -- just like a borrower's mere disagreement with an effected not-judicial foreclosure sale cannot undo such a sale.

Nonetheless, because this result is not compelled by the plain text of the Act, courts have room for interpretation, and will likely interpret the Act as narrowly as possible (i.e., as much against the borrower as possible).  But that is for another day.

More troublesome was the district court's quotation from Gilbert that "to complete rescission and void the contract, ... more is required."  This language seems at odds with Jesinoski's pronouncements that "rescission is effected when the borrower notifies", that "a borrower need only provide written notice to a lender in order to exercise his right to rescind" yielding a "unilaterally rescinded transaction", as well as with TILA's self-executing language of voiding security interest.  It remains to be seen where the courts will draw the line post-Jesinoski and whether the Supreme Court will be compelled to revisit the issue in the near future.

Read the full memorandum opinion of the District Court here.

Wednesday, January 20, 2016

Dismissal for Bank's lack of standing affirmed on appeal in Florida

DENNIS M. CONLEY, et al., Appellees.

No. 4D14-2430


January 6, 2016

Appeal from the Circuit Court for the Fifteenth Judicial Circuit, Palm Beach County; Howard H. Harrison, Judge; L.T. Case No. 502009CA017365.

Melissa A. Giasi of Kass Shuler, P.A., Tampa, for appellant.

Brian K. Korte and Scott J. Wortman of Korte & Wortman, P.A., West Palm Beach, for appellee Dennis M. Conley.


        In this foreclosure case, the trial court granted the borrower's motion for involuntary dismissal because the bank did not present competent substantial evidence of its standing to foreclose. We affirm.

        The record in this case reveals that, at one time or another, at least six different banking entities claimed ownership of the borrower's note. The problem is not the number of entities claiming ownership, but the similarities of their names. Two of the entities are:

• JP Morgan Chase Bank; and
• JP Morgan Chase & Co.
Two others are:

• Bank of New York Company, Inc.; and
• The Bank of New York Mellon Trust Company, National Association
Page 2

We write to emphasize that when a nonholder in possession attempts to establish its right to enforce a note, and thus its standing to foreclose, the precise identity of each entity in the chain of transfers is crucial.

        At bar, the plaintiff is:

The Bank of New York Mellon Trust Company, National Association fka The Bank of New York Trust Company, N.A. as Successor to JPMorgan Chase Bank N.A. as Trustee for RASC 2004KS4 [hereinafter "the Bank of New York Mellon"].
In pursuit of this foreclosure, the Bank of New York Mellon presented an original note bearing a special indorsement in favor of "JP Morgan Chase Bank, as Trustee."1 At trial, a witness for the Bank of New York Mellon testified that the note was deposited into a trust with JP Morgan Chase Bank as the original trustee. The witness also testified that the Bank of New York Mellon became the successor trustee in April of 2006.

        An excerpt of a Pooling and Servicing Agreement (PSA) was placed into evidence. The PSA created the Residential Asset Securities Corporation Series 2004-KS4 Trust and listed JPMorgan Chase Bank as the trustee. The witness agreed that the PSA did not establish that the Bank of New York Mellon had any interest in the note.

        A 200+ page document was placed into evidence entitled "Purchase and Assumption Agreement by and between the Bank of New York Company, Inc. and JPMorgan Chase & Co." (emphasis added). This purchase agreement was dated April 7, 2006. The witness was under the impression that the agreement established that the plaintiff purchased the trust assets of JP Morgan Chase Bank. However, the document contradicts his testimony. Neither the plaintiff (the "Bank of New York Mellon Trust Company, N.A.") nor the indorsee on the note and trustee of the RASC 2004KS4 Trust ("JP Morgan Chase Bank") are parties to the purchase and assumption agreement.

        "When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person." § 673.2051(1), Fla. Stat. (2014). Where a bank is seeking to

Page 3

enforce a note which is specially indorsed to another, the bank is a nonholder in possession. Murray v. HSBC Bank USA, 157 So. 3d 355, 358 (Fla. 4th DCA), review dismissed, 171 So. 3d 117 (Fla. 2015). A nonholder in possession may prove its right to enforce the note through:

(1) evidence of an effective transfer;
(2) proof of purchase of the debt; or
(3) evidence of a valid assignment.
See Lamb v. Nationstar Mortg., LLC, 174 So. 3d 1039, 1040 (Fla. 4th DCA 2015). A nonholder in possession must account for its possession of the instrument by proving the transaction (or series of transactions) through which it acquired the note. Murray, 157 So. 3d at 358.

        At bar, the plaintiff attempted to prove its right to enforce the note through proof of purchase of the debt. The plaintiff's proof of purchase, however, is an agreement between two entities that have no relationship to either the plaintiff or the indorsee. At most, the agreement establishes that somehow JP Morgan Chase & Co. became the trustee for the RASC 2004KS4 Trust and transferred/sold its interest in the trust to a company called The Bank of New York Company. The Agreement does not connect the indorsee of the note (JP Morgan Chase Bank) to the plaintiff (the Bank of New York Mellon).

        This issue was discussed in Verizzo v. Bank of New York, 28 So. 3d 976 (Fla. 2d DCA 2010). There, the Bank of New York attempted to foreclose on a note indorsed to JPMorgan Chase Bank, as Trustee. Id. at 977. At summary judgment, the Bank of New York produced an assignment between MERS and the Bank of New York. Reversing summary judgment, the court found:

The promissory note shows that Novastar endorsed the note to "JPMorgan Chase Bank, as Trustee." Nothing in the record reflects assignment or endorsement of the note by JPMorgan Chase Bank to the Bank of New York or MERS. Thus, there is a genuine issue of material fact as to whether the Bank of New York owns and holds the note and has standing to foreclose the mortgage.
Id. at 978 (emphasis added).

        At bar, there is nothing in the record connecting the indorsee, JP

Page 4

Morgan Chase Bank, to the plaintiff, the Bank of New York Mellon.2 The plaintiff thus failed to prove the series of transactions through which it acquired the note from the original lender. Murray, 157 So. 3d at 358-59. For this reason, the Bank of New York Mellon did not establish its standing as nonholder in possession with the rights of a holder, and the defendant's motion for involuntary dismissal was properly granted.


WARNER and FORST, JJ., concur.

* * *
        Not final until disposition of timely filed motion for rehearing.



        1. The original lender was Home Loan Corporation dba Expanded Mortgage Credit. The note bears two special indorsements: (1) Home Loan Corporation ? Residential Funding Corporation; (2) Residential Funding Corporation ? JP Morgan Chase Bank, as Trustee.

        2. We have not overlooked the plaintiff's other evidence (an "officer's certificate" and an assignment). The officer's certificate incorrectly identifies the parties to the purchase and assumption agreement and cannot be relied on by the plaintiff to establish the chain of transfers. The assignment, which purports to assign the mortgage from MERS to the plaintiff in May of 2009, is ineffective because according to the testimony and the PSA, MERS had no interest to assign after 2004 when the loan was placed in the trust.