Wells Fargo sanctioned $3.1mil. for misapplying borrower's payments

IN RE: MICHAEL L. JONES DEBTOR
MICHAEL L. JONES PLAINTIFF
v.
WELLS FARGO HOME MORTGAGE, INC. DEFENDANT

CASE NO. 03-16518
ADVERSARY NO. 06-1093

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF LOUISIANA SECTION A

Dated: April 5, 2012

CHAPTER 13
MEMORANDUM OPINION

        This matter is on remand from the United States Court of Appeals for the Fifth Circuit ("Fifth Circuit")¹ and the United States District Court for the Eastern District of Louisiana ("District Court").² The mandate required reconsideration of monetary sanctions in light of In re Stewart.³ The parties were afforded time to file additional briefs, after which the matter was taken under advisement.⁴ Wells Fargo Bank, N.A. ("Wells Fargo") also filed an Ex Parte Motion to Take Judicial Notice⁵ which will be addressed in this Opinion.

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I. Jurisdiction

        The bankruptcy court has jurisdiction over all property of the estate wherever located.⁶ Upon filing of the case, all actions to collect, enforce, or possess property of the estate are automatically enjoined.⁷ Proceedings to prosecute violations of the automatic stay are core proceedings.⁸ A proceeding to enforce the automatic stay by means of civil contempt is a "core proceeding" within the meaning of 28 U.S.C. § 157 and within the scope of the bankruptcy court's powers.⁹ A contempt order is purely civil "[i]f the purpose of the sanction is to coerce the contemnor into compliance with a court order, or to compensate another party for the contemnor's violation."¹⁰ The Court finds that it has jurisdiction over this proceeding for civil contempt.

II. Procedural Background

        This adversary proceeding was filed by Michael L. Jones, debtor, ("Jones" or "Debtor") in an effort to recoup overpayments made to WellsFargo on his home mortgage loan. The complaint requested return of the overpayments, reimbursement of actual damages, and punitive damages for violation of the automatic stay. At trial, the parties severed Debtor's request for compensatory and

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punitive damages from the merits of Debtor's claim for return of overpayments. On April 13, 2007, the Court entered an Opinion¹¹ and Partial Judgment¹² awarding Jones $24,441.65, plus legal interest for amounts overcharged by Wells Fargo. In addition, the Opinion found Wells Fargo to be in violation of the automatic stay because it applied postpetition payments made by Jones and his trustee to undisclosed postpetition fees and costs not authorized by the Court, noticed to Debtor or his trustee, and in contravention of Debtor's confirmed plan of reorganization and the Confirmation Order.¹³ Wells Fargo's conduct was found to be willful and egregious.¹⁴

        A second hearing on sanctions, damages, and punitive relief was held on May 29, 2007.¹⁵ At the hearing, Wells Fargo offered to implement several remedial measures designed to correct systemic problems with its accounting of home mortgage loans ("Accounting Procedures").¹⁶ The new Accounting Procedures were negotiated between the Court and Wells Fargo's representative. They were embodied in a subsequent Supplemental Memorandum Opinion,¹⁷ Amended Judgment,¹⁸

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and Administrative Order 2008-1. The Amended Judgment also awarded Jones $67,202.45 in compensatory sanctions for attorney's fees and costs.¹⁹

        Following its agreement, Wells Fargo reversed its legal position and appealed the Amended Judgment to the District Court.

        On appeal, the District Court affirmed the findings of this Court and increased the compensatory civil award to $170,824.96. However, becauseWells Fargo withdrew its consent to the nonmonetary relief ordered, the issue of punitive damages was remanded for further findings and consideration.²⁰ Wells Fargo appealed the District Court remand, but the Fifth Circuit dismissed the appeal for lack of jurisdiction.²¹

        For the reasons set forth in the Opinion dated October 1, 2009, this Court imposed the original sanctions ordered, the Accounting Procedures, in lieu of punitive damages ("Partial Judgment on Remand").²² Based on the findings of the District Court, this Court also entertained Jones' request for an increase in compensatory sanctions. Wells Fargo opposed the request, but settled the matter for an undisclosed stipulated amount.²³ Jonesappealed the denial of punitive damages.²⁴

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        On August 24, 2010, the District Court affirmed the Partial Judgment on Remand.²⁵ Again, Jones appealed the denial of punitive relief to the Fifth Circuit.

        On August 23, 2007, more than four (4) months after this Court entered its initial opinion in this case, Ms. Dorothy Stewart filed an Objection to the Proof of Claim of Wells Fargo in her bankruptcy case pending in this district. The Objection alleged in part that the amount claimed by WellsFargo in its proof of claim was incorrect because prepetition payments had been improperly applied.²⁶

        The Memorandum Opinion issued in the Dorothy Stewart case found that Wells Fargo misapplied her payments in a fashion identical to Jones²⁷As with the Jones decision, Wells Fargo's actions resulted in an incorrect amortization of Ms. Stewart's debt and the imposition of unauthorized or unwarranted fees and costs. Because Wells Fargo's failure was a breach of its obligations under the Partial Judgment on Remand, it was ordered to audit every borrower with a case pending in this district for compliance with the Accounting Procedures ("Stewart Judgment").²⁸

        The Stewart Judgment was affirmed by the District Court after Wells Fargo appealed.²⁹ Wells Fargo then appealed the Stewart Judgment to the Fifth Circuit.

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        The Fifth Circuit affirmed the findings and compensatory award contained in the Stewart Judgment.³⁰ However, the Fifth Circuit also found that the order requiring audits of debtor accounts was beyond this Court's jurisdiction. As a result, this portion of the relief was vacated . The Stewart appeal preceded hearing on the Jones' appeal. In light of Stewart, the Fifth Circuit remanded the Partial Judgment on Remand for consideration of alternative, punitive monetary sanctions.³¹

III. Facts

        The facts of this case are well documented in previous Opinions. Those facts are incorporated by reference.³² Only facts immediately relevant to remand will be restated. Wells Fargo willfully violated the automatic stay imposed by 11 U.S.C. § 362 when it:

[C]harged Debtor's account with unreasonable fees and costs; failed to notify Debtor that any of these postpetition charges were being added to his account; failed to seek Court approval for same; and paid itself out of estate funds delivered to it for payment of other debt.³³

        Jones has already been awarded $24,441.65 for amounts overcharged on his loan; legal interest from March 30, 2006, until paid in full; and $170,824.96 in actual attorney's fees and costs. In addition, the to the amounts included in judgments rendered to date, Jones also incurred additional legal fees of $118,251.93 and $3,596.95 in costs. The additional fees and costs are

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supported by Jones' Application for Award Of Fees And Costs Related To Remand filed in the record of this case.³⁴

IV. Motion to Take Judicial Notice

        Both the Partial Judgment on Remand and Administrative Order 2008-1 contemplated an internal review by Wells Fargo of all loan files to ensure the proper application of payments on home mortgage loans. Wells Fargo did not comply as evidenced by the Stewart decision. Instead,Wells Fargo continued to seek payment on prepetition monetary defaults calculated through the improper amortization of home mortgage loans.

        As a result, in Stewart, this Court ordered Wells Fargo "to audit all proofs of claim [] filed in this District in any case pending on or filed after April 13, 2007, and to provide a complete loan history on every account."³⁵ Wells Fargo was ordered to amend the proofs of claim to comport with the loan histories. Wells Fargo appealed Stewart arguing that the Court was without authority to enforce the Accounting Procedures. Wells Fargodid not argue to the Fifth Circuit that the relief it challenged had already been performed. Quite simply if it had, its appeal would have been rendered moot.

        Wells Fargo now requests this Court take judicial notice of its compliance with Administrative Order 2008-1 as a mitigating factor in any assessment of punitive damages. To evaluate this claim, the problems found in this case and the remedies embodied in Administrative Order 2008-1 must be examined in detail.

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        In this case, Wells Fargo testified that every home mortgage loan was administered by its proprietary computer software. The evidence established:

        1. Wells Fargo applied payments first to fees and costs assessed on mortgage loans, then to outstanding principal, accrued interest, and escrowed costs. This application method was directly contrary to the terms of Jones' note and mortgage, as well as, Wells Fargo's standard form mortgages and notes. Those forms required the application of payments first to outstanding principal, accrued interest, and escrowed charges, then fees and costs. The improper application method resulted in an incorrect amortization of loans when fees or costs were assessed. The improper amortization resulted in the assessment of additional interest, default fees and costs against the loan. The evidence established the utilization of this application method for every mortgage loan in Wells Fargo's portfolio.

        2. Wells Fargo applied payments received from a bankruptcy debtor or trustee to the oldest charges outstanding on the mortgage loan rather than as directed by confirmed plans and confirmation orders. This resulted in the incorrect amortization of mortgage loans postpetition. Again, the improper amortization resulted in additional interest, default fees and costs to the loan. The evidence established the utilization of this application method for every mortgage loan administered by Wells Fargo in bankruptcy.

        3. When postpetition fees or costs were assessed on a loan in bankruptcy, Wells Fargo applied payments received from the bankruptcy debtor to those fees and charges without disclosing the assessments or requesting authority. The payments were property of the estate, they were applied contrary to the terms of plans and confirmation orders, and in violation of the automatic stay. This practice resulted in the incorrect amortization of mortgage loans postpetition. Again, the

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improper amortization resulted in the addition of increased interest, default fees and costs to the loan balance. The evidence established the utilization of this application method for every Wells Fargo mortgage loan in bankruptcy.

        Wells Fargo's practices led to the following conclusions:

        1. Applications contrary to the contract terms of Wells Fargo's standard form notes and mortgages resulted in an incorrect amortization of the loan. As a result, monetary defaults claimed by Wells Fargo on the petition date were incorrect.

        2. Misapplication of payments received postpetition resulted in incorrect amortization of Wells Fargo loans and threatened a debtor's fresh start, as well as, discharge.

        3. Application of postpetition payments to new, undisclosed postpetition fees or costs also threatened a debtor's fresh start and discharge.

        The Partial Judgment on Remand and Accounting Procedures were crafted to remedy the above problems. They were designed to protect debtors from incorrectly calculated proofs of claim, to verify that loans were properly amortized prepetition in accordance with the terms of notes and mortgages, and to ensure that postpetition amortizations were in compliance with the terms of confirmed plans and orders. Because the evidence established that the problems exposed with the Jones' loan were systemic, Administrative Order 2008-1 and the Partial Judgment on Remand required corrective action on existing loans in bankruptcy for past errors, as well as, ongoing future performance.

        There is nothing in the record supporting Wells Fargo's assertion that it has corrected its past errors. There is nothing in the record to assure future compliance with the terms of notes,

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mortgages, confirmed plans or confirmation orders. Therefore, Wells Fargo's request for judicial notice of compliance is denied.

        Wells Fargo has also requested judicial notice of the fact that after the completion of the first remand to this Court, it abandoned any challenge to the compensatory portions of the judgments in favor of Jones. This request has been granted. The overpayments on the loan and costs associated with recovery are limited to costs and legal fees incurred through the initial remand. Specifically, they are based on awards rendered prior to that remand and include additional fees and costs incurred by Jones through the remand, as set forth in the Application.

V. Law and Analysis

        This Court previously found that Wells Fargo willfully violated the automatic stay imposed by 11 U.S.C. § 362.³⁶ That ruling is not at issue. The only issue before the Court is the appropriate relief available. In light of the Fifth Circuit's ruling in Stewart, the application of the Accounting Procedures to all debtors in the district would be an improper exercise of authority beyond the bounds of this case. Because this relief was ordered in lieu of punitive sanctions, the mandate on remand directs that monetary relief be considered.

        Section 362(k) allows for the award of actual damages, including costs and attorneys' fees, as a result of a stay violation, and punitive damages "in appropriate circumstances." Punitive damages are warranted when the conduct in question is willful and egregious,³⁷ or when the defendant acted "with actual knowledge that he was violating the federally protected right or with

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reckless disregard of whether he was doing so."³⁸ There is no question that Wells Fargo's conduct was willful. As previously decided, Wells Fargoclearly knew of Debtor's pending bankruptcy and was represented by bankruptcy counsel in this case. Wells Fargo is a sophisticated lender with thousands of claims in bankruptcy cases pending throughout the country and is familiar with the provisions of the Bankruptcy Code, particularly those regarding the automatic stay.

        Wells Fargo assessed postpetition charges on this loan while in bankruptcy. However, it was not the assessment of the charges, but the conduct which followed that this Court found sanctionable. Despite assessing postpetition charges, Wells Fargo withheld this fact from its borrower and diverted payments made by the trustee and Debtor to satisfy claims not authorized by the plan or Court. Wells Fargo admitted that these actions were part of its normal course of conduct, practiced in perhaps thousands of cases. As a result of the evidence presented, the Court also foundWells Fargo's actions to be egregious. There is also no question that Wells Fargo exhibited reckless disregard for the stay it violated.

        The imposition of punitive awards are designed to discourage future misconduct and benefit society at large.³⁹ Sanctions are "not merely to penalize those whose conduct may be deemed to

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warrant such a sanction, but to deter those who might be tempted to such conduct in the absence of such a deterrent."⁴⁰

        The Supreme Court, in Pacific Mutual Life Ins. Co. v. Haslip, ruled that punitive damage awards must address both reasonableness and adequate guidance concerns to satisfy the Fourteenth Amendment's due process clause.⁴¹ The Fifth Circuit developed a two part test to help courts determine whether the requirements set forth under Haslip are met: "(1) whether the circumstances of the case indicate that the award is reasonable; and (2) whether the procedure used in assessing and reviewing the award imposes a sufficiently definite and meaningful constraint on the discretion of the factfinder."⁴²

        In BMW of North America, Inc. v. Gore, the Supreme Court examined three (3) factors in determining the propriety of a punitive damage award:

1) "the degree of reprehensibility;"
2) the ratio between the punitive damages and the actual harm; and
3) "the difference between this remedy and the civil penalties authorized or imposed in comparable cases."⁴³ 

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        A. Degree of Reprehensibility

        "[I]nfliction of economic injury, especially when done intentionally through affirmative acts of misconduct, or when the target is financially vulnerable, can warrant a substantial penalty."⁴⁴ Wells Fargo did not adjust Jones' loan as current on the petition date and instead continued to carry the past due amounts contained in its proof of claim in Jones' loan balance. It also misapplied funds regardless of source or intended application, to pre and postpetition charges, interest and non-interest bearing debt in contravention of the note, mortgage, plan and confirmation order. WellsFargo assessed and paid itself postpetition fees and charges without approval from the Court or notice to Jones.

        The net effect of Wells Fargo's actions was an overcharge in excess of $24,000.00. When Jones questioned the amounts owed, Wells Fargorefused to explain its calculations or provide an amortization schedule. When Jones sued Wells Fargo, it again failed to properly account for its calculations. After judgment was awarded, Wells Fargo fought the compensatory portion of the award despite never challenging the calculations of the overpayment. In fact, Wells Fargo's initial legal position both before this Court⁴⁵ and in its first appeal⁴⁶ denied any responsibility to refund payments demanded in error! The cost to Jones was hundreds of thousands of dollars in legal fees and five (5) years of litigation.

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        While every litigant has a right to pursue appeal, Wells Fargo's style of litigation was particularly vexing. After agreeing at trial to the initial injunctive relief in order to escape a punitive damage award, Wells Fargo changed its position and appealed. This resulted in:

1. A total of seven (7) days spent in the original trial, status conferences, and hearings before this Court;
2. Eighteen (18) post-trial, pre-remand motions or responsive pleadings filed by Wells Fargo, requiring nine (9) memoranda and nine (9) objections or responsive pleadings;
3. Eight (8) appeals or notices of appeal to the District Court by Wells Fargo, with fifteen (15) assignments of error and fifty-seven (57) sub-assignments of error, requiring 261 pages in briefing, and resulting in a delay of 493 days from the date the Amended Judgment was entered to the date the Fifth Circuit dismissed Wells Fargo's appeal for lack of jurisdiction;⁴⁷ and
4. Twenty-two (22) issues raised by Wells Fargo for remand, requiring 161 pages of briefing from the parties in the District Court and 269 additional days since the Fifth Circuit dismissed Wells Fargo's appeal.

        The above was only the first round of litigation contained in this case. After the District Court remanded based on Wells Fargo's change of heart, Wells Fargo appealed the decision to remand. When that was denied, it took the legal position that the remand did not afford this Court the right to impose punitive damages in lieu of the Accounting Procedures it had both proposed and consented to undertake. That position if valid, would have allowed Wells Fargo to propose alternative relief to escape punitive damages; when the offer was accepted, challenge the relief it proposed; and avoid any punitive award, a position as untenable as it was illogical.

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        Following this Court's ruling on remand, Wells Fargo appealed to the District Court once again, unsuccessfully. Yet another appeal to the Fifth Circuit was abandoned, but the same issues were then challenged by litigating and appealing the Stewart case.⁴⁸

        Wells Fargo has taken the position that every debtor in the district should be made to challenge, by separate suit, the proofs of claim or motions for relief from the automatic stay it files. It has steadfastly refused to audit its pleadings or proofs of claim for errors and has refused to voluntarily correct any errors that come to light except through threat of litigation. Although its own representatives have admitted that it routinely misapplied payments on loans and improperly charged fees, they have refused to correct past errors. They stubbornly insist on limiting any change in their conduct prospectively, even as they seek to collect on loans in other cases for amounts owed in error.

        Wells Fargo's conduct is clandestine. Rather than provide Jones with a complete history of his debt on an ongoing basis, Wells Fargo simply stopped communicating with Jones once it deemed him in default. At that point in time, fees and costs were assessed against his account and satisfied with postpetition payments intended for other debt without notice. Only through litigation was this practice discovered. Wells Fargoadmitted to the same practices for all other loans in bankruptcy or default. As a result, it is unlikely that most debtors will be able to discern problems with their accounts without extensive discovery.

        Unfortunately, the threat of future litigation is a poor motivator for honesty in practice. Because litigation with Wells Fargo has already cost this and other plaintiffs considerable time and

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expense, the Court can only assume that others who challenge Wells Fargo's claims will meet a similar fate.

        Over eighty (80%) of the chapter 13 debtors in this district have incomes of less than $40,000.00 per year. The burden of extensive discovery and delay is particularly overwhelming. In this Court's experience, it takes four (4) to six (6) months for Wells Fargo to produce a simple accounting of a loan's history and over four (4) court hearings. Most debtors simply do not have the personal resources to demand the production of a simple accounting for their loans, much less verify its accuracy, through a litigation process.

        Wells Fargo has taken advantage of borrowers who rely on it to accurately apply payments and calculate the amounts owed. But perhaps more disturbing is Wells Fargo's refusal to voluntarily correct its errors. It prefers to rely on the ignorance of borrowers or their inability to fund a challenge to its demands, rather than voluntarily relinquish gains obtained through improper accounting methods. Wells Fargo's conduct was a breach of its contractual obligations to its borrowers. More importantly, when exposed, it revealed its true corporate character by denying any obligation to correct its past transgressions and mounting a legal assault ensure it never had to. Society requires that those in business conduct themselves with honestly and fair dealing. Thus, there is a strong societal interest in deterring such future conduct through the imposition of punitive relief.

        Both parties agree that a legal remedy to address stay violations exists under section 362(k)(1), which provides that "an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate

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circumstances, may recover punitive damages."⁴⁹ Wells Fargo argues that the Court has already imposed an adequate legal remedy because Debtor has been reimbursed for his actual damages, i.e. his attorney fees. "Punitive damages may be recovered when the creditor acts with actual knowledge of the violation or with reckless disregard of the protected right."⁵⁰ It has also been held that "where an arrogant defiance of federal law is demonstrated, punitive damages are appropriate."⁵¹ Either standard justifies the assessment of punitive damages in this case.⁵² Due to the prevalence and seriousness of Wells Fargo's actions, punitive damages are warranted.

        B. Ratio Between Punitive Damages and Actual Harm

        "[E]xemplary damages must bear a 'reasonable relationship' to compensatory damages."⁵³ "[T]he proper inquiry 'whether there is a reasonable relationship between the punitive damages award and the harm likely to result from the defendant's conduct as well as the harm that actually has occurred.'"⁵⁴ The Supreme Court has stated that it "cannot, draw a mathematical bright line

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between the constitutionally acceptable and the constitutionally unacceptable that would fit every case."⁵⁵ Instead, punitive damages must address both "reasonableness" and "adequate guidance" concerns to satisfy the Fourteenth Amendment's due process clause.⁵⁶

        In Eichenseer v. Reserve Life Insurance Co.,⁵⁷ the Fifth Circuit awarded $1,000.00 in compensatory damages and $500,000.00 in punitive damages for wrongful denial of an insurance claim. Specifically, the Fifth Circuit found that the insurance company acted with "reckless disregard ... for the rights of the insured," and that "[i]ts actions were far more offensive than mere incompetent record keeping or clerical error."⁵⁸ The Fifth Circuit also considered that this was not the first instance which a court assessed punitive damages against the insurance company, and if the previous award did not deter sanctionable conduct, a larger award was necessary.⁵⁹

        Norwest Mortgage, Inc., n/k/a Wells Fargo, was assessed $2,000,000 in exemplary damages in Slick v. Norwest Mortgage, Inc.⁶⁰ for charging postpetition attorneys fees to debtors' accounts without disclosing the fees to anyone.⁶¹ Four years after the ruling in Slick, Jones found that WellsFargo continued to charge undisclosed postpetition fees despite that multi-million dollar damage assessment. Following Jones, Wells Fargo was involved in at least two (2) additional challenges

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to the calculation of its claims in this Court. In both cases the evidence revealed that Wells Fargo continued to improperly amortize loans by employing the same practices prohibited by Jones. ⁶² In short, Wells Fargo has shown no inclination to change its conduct.

        When necessary to deter reprehensible conduct, courts often award punitive damages in an amount multiple times greater than actual damages. In Haslip, the Supreme Court upheld as reasonable punitive damages that were more than four (4) times the amount of compensatory damages and two hundred (200) times the amount of out-of-pocket expenses when the trial court found that the conduct was serious and deterrence was important.⁶³ The Supreme Court found, "While the monetary comparisons are wide and, indeed, may be close to the line, the award [] did not lack objective criteria."⁶⁴

        The Supreme Court found it proper for the underlying court to examine as a factor in determining the amount of punitive damages, the "financial position" of the defendant.⁶⁵ Wells Fargo is the second largest loan servicer in the United States. With over 7.7 million loans under its administration at the time this matter went to trial, it possesses significant resources. Previous sanctions in Slick, Stewart, Fitch and even this case have not deterred Wells Fargo. As recognized in Eichenseer, if previous awards do not deter sanctionable conduct, larger awards may be necessary.

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        C. Comparison of Punitive Damages and Civil or Criminal Penalties

        Fairness requires that a person receive "fair notice not only of the conduct that will subject him to punishment, but also the severity of the penalty."⁶⁶ In determining the appropriate punitive damage amount, "substantial deference" must be given to "legislative judgments concerning appropriate sanctions for the conduct at issue."⁶⁷ Other courts have recognized that this comparison may be difficult in bankruptcy cases:

Obviously, this latter guidepost poses something of a problem as there is not a complex statutory scheme designed to respond to violations of the automatic stay other than the Bankruptcy Code itself. Significantly, § 362(h)⁶⁸ specifically provides for the award of punitive damages. Thus, creditors must be presumed to be on notice that if they violate the automatic stay they will be liable for punitive damages.⁶⁹ 

        As previously set forth, Wells Fargo is a sophisticated lender and a regular participant in bankruptcy proceedings throughout the country. It is represented by able counsel and it well versed in the Bankruptcy Code and the provisions of the automatic stay. Wells Fargo was on notice by the language of section 362(k) that it could be subject to punitive damages, and it was on notice through jurisprudence that those damages could be severe.

VI. Conclusion

        Wells Fargo's actions were not only highly reprehensible, but its subsequent reaction on their exposure has been less than satisfactory. There is a strong societal interest in preventing such future

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conduct through a punitive award. The total monetary judgment to date is $24,441.65, plus legal interest,$166,813.00 in legal fees and $3,951.96 in costs. Other fees and costs incurred by Jones through the first remand were also incurred and are not included in the foregoing amounts. Because the Court cannot reveal the sealed amount stipulated to by the parties when they settled Jones' Application for Award of Fees and Costs Related to Remand ("Application"),⁷⁰ the Court will use Jones' Application itself as evidence of fees and costs actually incurred up to the date of the Application. The Application and supporting documentation establish that an additional $118,251.93 in attorneys' fees and $3,596.95 in costs was also incurred by Jones.⁷¹ The amounts previously awarded plus the additional amounts incurred establish that the cost to litigate the compensatory portion of this award was $292,613.84. After considering the compensatory damages of $24,441.65 awarded in this case, along with the litigation costs of $292,613.84; awards against Wells Fargo in other cases for the same behavior which did not deter its conduct; and the previous judgments in this case none of which deterred its actions; the Court finds that a punitive damage award of $3,111,154.00 is warranted to deter Wells Fargofrom similar conduct in the future. This

        Court hopes that the relief granted will finally motivate Wells Fargo to rectify its practices and comply with the terms of court orders, plans and the automatic stay.

        New Orleans, Louisiana, April 5, 2012.

        Hon. Elizabeth W. Mangner

        U.S. Bankruptcy Judge

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Notes:

        ^1. 5th Cir. case no. 10-31005; Wells Fargo Bank, N.A. v. Jones (In re Jones), 439 Fed.Appx. 330 (5th Cir. 2011).

        ^2. USDC, EDLA case no. 07-3599.

        ^3. Wells Fargo Bank, N.A. v. Stewart (In re Stewart), 647 F.3d 553 (5th Cir. 2011).

        ^4. Docket no. 455. The parties indicated that the Court should use the briefs they previously filed in connection with the Motion for Sanctions rather than submitting entirely new briefs. Docket nos. 78, 96. The parties were allowed to supplement these initial briefs.

        ^5. Docket no. 459.

        ^6. 28 U.S.C. §§ 157(a) and 1334(e) and 11 U.S.C. § 541.

        ^7. 11 U.S.C. § 362.

        ^8. Budget Service Co. v. Better Homes of Virginia, Inc., 804 F.2d 289, 292 (4th Cir. 1986); Milbank v. McGee (In re LATCL&F, Inc.), 2001 WL 984912, *3 (N.D.Tex. 2001).

        ^9. 11 U.S.C. § 105(a); Matter of Terrebonne Fuel and Lube, Inc., 108 F.3d 609 (5th Cir. 1997); In re Johnson, 57,5 F.3d 1079 (10th Cir. 2009); MBNA America Bank, N.A. v. Hill, 436 F.3d 104, 108-109 (2nd Cir. 2006); In re Nat. Century Financial Enterprises, Inc., 423 F.3d 567, 573-574 (6th Cir. 2005).

        ^10. Lamar Financial Corp. v. Adams, 918 F.2d 564, 566 (5th Cir. 1990).

        ^11. Docket no. 69; In re Jones, 36,6 B.R. 584 (Bankr.E.D.La. 2007).

        ^12. Docket no. 68.

        ^13. Docket no. 69.

        ^14. Id.

        ^15. Jones also filed a Motion for Sanctions, Including Punitive Damages. Docket no. 77.

        ^16. Tr.T. 5/29/01, 48:18-23; 63:2-21; 83:4-10; 92:24-93:4. Docket no. 126.

        ^17. Docket no. 153; Jones v. Wells Fargo Home Mortgage, Inc., (In re Jones), 2007 WL 2480494 (Bankr.E.D.La. 2007).

        ^18. Docket no. 154.

        ^19. Id.

        ^20. USDC, EDLA case no. 07-3599, docket nos. 76, 77; Wells Fargo Bank, N.A. v. Jones, 391 B.R. 577 (E.D.La. 2008).

        ^21. 5th Cir. case no. 08-30735.

        ^22. Docket nos. 390, 392; Jones v. Wells Fargo Home Mortgage, Inc., (In re Jones), 418 B.R. 687 (Bankr.E.D.La. 2009).

        ^23. Docket no. 417.

        ^24. Docket no. 424.

        ^25. USDC, EDLA case no. 07-3599, docket no. 139; Jones v. Wells Fargo Bank N.A., 2010 WL 3398849 (E.D.La. 2010). See also USDC, EDLA case no. 09-7635, docket no. 11.

        ^26. USBC, EDLA case no. 07-11113, docket no. 24.

        ^27. Id. at docket no. 61; In re Stewart, 39,1 B.R. 327 (Bankr.E.D.La. 2008).

        ^28. Id. at docket no. 62.

        ^29. In re Stewart, 200,9 WL 2448054 (E.D.La. 2009).

        ^30. In re Stewart, 64,7 F.3d 553 (5th Cir. 2011).

        ^31. Id.

        ^32. Docket nos. 69, 153, 390; USDC, EDLA case no. 07-3599, docket no. 76; USDC, EDLA case no. 09-7635, docket no. 11.

        ^33. Jones, 366 B.R. at 600.

        ^34. Docket no. 396.

        ^35. In re Stewart, 39,1 B.R. 327 (Bankr.E.D.La. 2008).

        ^36. Docket nos. 153, 154; In re Jones, 200,7 WL 2480494 (Bankr.E.D.La. 2007).

        ^37. In re Ketelsen, 88,0 F.2d 990 (8th Cir. 1989).

        ^38. In re Sanchez, 37,2 B.R. 289 (Bankr. S.D.Tex. 2007) (citations omitted).

        ^39. See City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 266-267, 101 S.Ct. 2748, 2759 (1981) ("[punitive damages by definition are not intended to compensate the injured party, but rather to punish the tortfeasor whose wrongful action was intentional or malicious, and to deter him and others from similar extreme conduct."); Restatement (Second) of Torts § 908 (1979) (the purpose of punitive damages is not compensation of the plaintiff but punishment of the defendant and deterrence).

        ^40. National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 643, 96 S. Ct. 2778, 2781, 49 L. Ed. 2d 747 (1976).

        ^41. Pacific Mutual Life Ins. Co. v. Haslip, 499 U.S. 1, 17, 111 S.Ct. 1032, 113 L.Ed.2d 1 (1991).

        ^42. Eichenseer v. Reserve Life Ins. Co., 934 F.2d 1377, 1981 (5th Cir. 1991).

        ^43. BMW of North America, Inc. v. Gore, 517 U.S. 559, 575, 116 S.Ct. 1589, 1598-1599 (1996).

        ^44. Id. at 1599.

        ^45. Docket no. 50, pp. 11-17.

        ^46. Docket no. 97, p. 2.

        ^47. See Jones, 391 B.R. at 582.

        ^48. Wells Fargo was also sanctioned in two other cases for similar behavior since the Partial Judgment was entered on April 13, 2007. See In re Stewart, 39,1 B.R. 327 (Bankr. E.D.La. 2008); In re Fitch, 39,0 B.R. 834 (Bankr. E.D.La. 2008).

        ^49. See also In re Fisher, 14,4 B.R. 237, n.1 (Bankr. D.RI 1992) (noting that the compensatory and punitive damages provided for a willful stay violation under section 362 is a legal remedy).

        ^50. In re Dynamic Tours & Transportation, Inc., 359 B.R. 336, 343 (Bankr. M.D.Fla. 2006) (citation omitted).

        ^51. Id. at 344.

        ^52. Further, the District Court found that "[t]he Bankruptcy Court clearly had the authority to impose punitive damages against Wells Fargo pursuant to Section 362 because the Bankruptcy Court determined that Wells Fargo's conduct was egregious."

        ^53. Id. at 1601.

        ^54. Id. at 1602 (quoting TXO Production Corp. v. Alliance Resources Corp, 509 U.S. 443, 453, 113 S.Ct. 2711, 2717-2718 (1993) (emphasis in original)). In TXO, the Supreme Court compared the punitive damage award and the damages that would have ensued had the offending party succeeded.

        ^55. Haslip, 111 S.Ct. at 1043.

        ^56. Id.

        ^57. Eichenseer, 934 at 1381.

        ^58. Id. at 1382-1383.

        ^59. Id. at 1384.

        ^60. Slick v. Norwest Mortgage, Inc., 2002 Bankr.Lexis 112 (Bankr.S.D.Ala. 2002).

        ^61. Id. at 32.

        ^62. In re Stewart, 39,1 B.R. 321 (Bankr. E.D.La. 2008); In re Fitch, 39,0 B.R. 834 (Bankr. E.D.La. 2008).

        ^63. Haslip, 111 S.Ct. at 1046.

        ^64. Id.

        ^65. Id. at 1045.

        ^66. BMW, 116 S.Ct. at 1598.

        ^67. Id. at 1603.

        ^68. This provision is now section 362(k).

        ^69. In re Johnson, 200,7 WL 2274715, *15 (Bankr.N.D.Ala. 2007) (quoting In re Ocasio, 27,2 B.R. 815 (1st Cir.BAP 2002).

        ^70. Docket no. 396.

        ^71. Evidence of the fees and costs incurred is attached to the Application.

11th Circuit: MERS is not a "creditor"

JONI LEE SHOUP, on behalf of herself and all others similarly situated, Plaintiff - Appellant,
v.
MCCURDY & CANDLER, LLC, Respondent - Appellee.

No. 10-14619

UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT

March 30, 2012

[DO NOT PUBLISH]
D.C. Docket No. 1:09-cv-02598-JEC
Appeal from the United States District Courtfor the Northern District of Georgia

Before DUBINA, Chief Judge, CARNES, Circuit Judge, and FORRESTER,^* District Judge.

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PER CURIAM:

        Joni Shoup filed a lawsuit against McCurdy & Candler, LLC alleging a violation of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692e. The district court dismissed her complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), and Shoup appeals, contending that her complaint stated a valid claim for statutory damages under the FDCPA because McCurdy & Candler's initial communication letter falsely said that its client, Mortgage Electronic Registration Systems, Inc. (MERS), was Shoup's "creditor."

I.

        Shoup bought a home in Georgia in 2003. To finance her new home, she entered into a mortgage contract with America Wholesale Lender. The contract stated that America Wholesale Lender was the "Lender," but it also described MERS as "the grantee under" the mortgage contract and as "a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns."

        Shoup defaulted on her mortgage, and MERS' law firm, McCurdy & Candler, sent Shoup an initial communication letter. That letter was entitled, "NOTICE PURSUANT TO FAIR DEBT COLLECTION PRACTICES ACT 15 USC 1692," and stated that its purpose was "an attempt to collect a debt." The letter identified MERS as "the creditor on the above referenced loan." (Emphasis

Page 3

added.)

        Soon after receiving that letter, Shoup filed a complaint against McCurdy & Candler under the FDCPA. She alleged that MERS is not a "creditor" as defined in the FDCPA because it did not offer or extend credit to Shoup and she does not owe MERS a debt. Instead, according to the complaint, MERS is "a company that tracks, for its clients, the sale of promissory notes and servicing rights." Shoup, therefore, alleged thatMcCurdy & Candler violated the FDCPA by falsely stating in the initial communication letter that MERS was Shoup's "creditor."¹

        McCurdy & Candler filed a motion to dismiss under Rule 12(b)(6), which the district court granted. Finding that MERS was a "creditor" under the FDCPA, the court concluded that Shoup's complaint did not state a claim for statutory damages under the FDCPA. The court also concluded that, even if MERS was not a "creditor," calling MERS one was harmless. This is Shoup's appeal.

II.

        We review de novo the grant of a motion to dismiss under Rule 12(b)(6) for failure to state a claim, "accepting the allegations in the complaint as true and construing them in the light most favorable to the plaintiff." Belanger v. Salvation

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Army, 556 F.3d 1153, 1155 (11th Cir. 2009). "A complaint must state a plausible claim for relief, and 'a claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'"Sinaltraninal v. Coca-Cola Co., 578 F.3d 1252, 1261 (11th Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009)) (alteration omitted). We also review de novo matters of statutory interpretation. Belanger, 556 F.3d at 1155.

        Under the FDCPA, "[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt," 15 U.S.C. § 1692e, which includes "[t]he use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer," id. § 1692e(10). The statute defines "creditor" as "any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another." Id. § 1692a(4). And "[t]he FDCPA provides that 'any debt collector who fails to comply with any provision of this subchapter with respect to any person is liable to such person' for [actual and statutory] damages and costs." Bourff v. Lublin, __ F.3d _, slip op. at 6, No. 10-14618 (11th Cir.

Page 5

Mar. 15, 2012) (quoting 15 U.S.C. § 1692k(a)).

        Our decision in this case is controlled by our recent decision in Bourff. In that case a law firm sent a letter to the plaintiff in "AN ATTEMPT TO COLLECT A DEBT." Id. at _, slip op. at 3 (quotation marks omitted). That letter identified a loan servicer as "the creditor on the above-referenced loan." Id. at _, slip op. at 3 (quotation marks omitted). The plaintiff's complaint alleged that the loan servicer was not a "creditor" under the FDCPA, id., and that the law firm violated the FDCPA's "prohibition on false, deceptive or misleading representations by falsely stating in its collection notice that [the servicer] was the 'creditor' on [the plaintiff's] loan," id. at _, slip op. at 5 (some quotation marks omitted). The allegation that the loan servicer was not a "creditor" was enough to state a plausible claim for relief under the FDCPA. Id. at _, slip op. at 6-7.

        Here, viewing the allegations in the complaint in the light most favorable to Shoup, she has alleged that MERS did not offer or extend credit to her and that she does not owe a debt to MERS. Because the FDCPA defines a "creditor" as "any person who offers or extends credit creating a debt or to whom a debt is owed," 15 U.S.C. § 1692a(4), Shoup has alleged that MERS is not a "creditor" under the FDCPA. Finally, because the complaint alleges that McCurdy & Candler's initial communication letter falsely identified MERS as her "creditor," the complaint

Page 6

states a plausible claim for relief under the FDCPA. See Bourff, _ F.3d at _, slip op. at 6-7. And because the FDCPA provides a claim for statutory damages based on any violation of the statute, see 15 U.S.C. § 1692k(a)(2), McCurdy & Candler's alleged violation of the FDCPA is not harmless. See Muha v. Encore Receivable Mgmt., Inc., 558 F.3d 623, 629 (7th Cir. 2009) ("Were the plaintiffs seeking actual damages rather than just statutory damages, they would have to present some evidence that they were misled to their detriment."); Baker v. G.C. Servs. Corp., 677 F.2d 775, 780 (9th Cir. 1982) ("The statute clearly specifies the total damage award as the sum of the separate amounts of actual damages, statutory damages and attorney fees. There is no indication in the statute that award of statutory damages must be based on proof of actual damages."). The district court erred in dismissing Shoup's complaint under Rule 12(b)(6).

        REVERSED AND REMANDED.

--------

Notes:

        ^*. Honorable J. Owen Forrester, United States District Judge for the Northern District of Georgia, sitting by designation.

        ^1.Shoup also brought her claim on behalf of a putative class and sought class certification. The district court did not rule on that issue, so it is not before us on appeal.

Hawaii Federal District Court: Deutsche Has No Standing As Securitization Trustee

DEUTSCHE BANK NATIONAL TRUST COMPANY,
AS TRUSTEE MORGAN STANLEY ABS CAPITAL I INC. TRUST 2007-NC1 MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 2007-NC1, Plaintiff,
v.
LEIGAFOALII TAFUE WILLIAMS, fka LEIGAFOALII TAFUE KOEHNEN;
PAPU CHRISTOPHER WILLIAMS; REAL TIME RESOLUTIONS, INC.; CAROLYN RUTH KOEHNEN,
AS TRUSTEE OF THE CAROLYN R. KOEHNEN REVOCABLE LIVING TRUST U/A,
DATED APRIL 14, 1986; and JOHN DOES 1-5, Defendants.

CIVIL NO. 11-00632 JMS/RLP

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF HAWAII

Dated: March 29, 2012

ORDER GRANTING DEFENDANTS WILLIAMSES'MOTION TO DISMISS COMPLAINT FILED 10/20/11, DOC. NO. 13
ORDER GRANTING DEFENDANTS WILLIAMSES' MOTION TODISMISS COMPLAINT FILED 10/20/11, DOC. NO. 13
I. INTRODUCTION

        On October 20, 2011, Plaintiff Deutsche Bank National Trust Company, as Trustee Morgan Stanley ABS Capital I Inc. Trust 2007-NC1 Mortgage Pass-Through Certificates, Series 2007-NC1 ("Plaintiff" or "Deutsche

Page 2

Bank") filed this foreclosure action against Leigafoalii Tafue Williams, fka Leigafoalii Tafue Koehnen ("Lei Williams") and Papu Christopher Williams ("Papu Williams") (collectively, the "Williamses"); Real Time Resolutions, Inc. ("Real Time"); and Carolyn Ruth Koehnen, as Trustee of the Carolyn R. Koehnen Revocable Living Trust U/A, dated April 14, 1986 ("Koehnen"). Plaintiff asserts that it is holder of a Mortgage and Note on real property located at 45 Lama Street, Hilo, Hawaii 96720 (the "subject property") and that Lei Williams, the mortgagor, defaulted such that Plaintiff is entitled to foreclose.

        Currently before the court is the Williamses' Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1), in which they argue, among other things,¹ that Plaintiff has no standing to foreclose because it has not established that it was validly assigned the Mortgage and Note. Based on the following, the court agrees that Plaintiff has not established its standing to foreclose and therefore GRANTS the Williamses' Motion to Dismiss.

Page 3

II. BACKGROUND

A. Factual Background

        As alleged in the Complaint, on August 17, 2006, Lei Williams entered into a mortgage transaction with Home 123 Corporation ("Home 123") for $280,000, secured by the subject property.² Compl. ¶¶ 10-11. Although the mortgage requires the lender's written consent prior to the transfer of any legal or beneficial interest in the subject property, on October 31, 2007 Lei Williams conveyed the subject property to herself and Papu Williams as tenants by the entirety without written notice to the lender. Id. ¶¶ 12-13.

        The Complaint asserts that by instrument dated January 13, 2009 and recorded in the State of Hawaii Bureau of Conveyances on January 21, 2009, the Mortgage and Note were assigned from Home 123 to Plaintiff. See id. ¶ 14; Compl. Ex. 4. Lei Williams has allegedly failed to pay the Note in accordance with its terms, resulting in her owing $358,409.37 as of October 1, 2011. Compl. ¶ 19. Plaintiff therefore asserts that it is entitled to foreclose on the Mortgage and, if appropriate, obtain a deficiency judgment. Id. ¶ 21. Plaintiff further asserts that Lei Williams' transfer of the subject property to Papu Williams and herself as

Page 4

tenants by the entirety was fraudulent and should be voided to the extent necessary to satisfy the amounts due and owing under the Mortgage and Note. Id. ¶¶ 25-27.

B. Procedural Background

        On October 20, 2011, Plaintiff filed this action asserting claims for breach of contract and fraudulent transfer.

        On December 19, 2011, the Williamses filed their Motion to Dismiss pursuant to Rule 12(b)(1). Plaintiff filed an Opposition on February 13, 2012, and the Williamses filed a Reply on February 7, 2012. A hearing was held on March 27, 2012.

III. STANDARD OF REVIEW

        Federal Rule of Civil Procedure 12(b)(1) authorizes a court to dismiss claims over which it lacks proper subject matter jurisdiction.

        A Rule 12(b)(1) jurisdictional attack is either facial (attacking the sufficiency of the complaint's allegations to invoke federal jurisdiction) or factual (disputing the truth of the allegations of the complaint). Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004). In a factual attack "[w]here the jurisdictional issue is separable from the merits of the case, the judge may consider the evidence presented with respect to the jurisdictional issue and rule on that issue, resolving factual disputes if necessary." Thornhill Publ'g Co., Inc. v. Gen.

Page 5

Tel. & Elecs. Corp., 594 F.2d 730, 733 (9th Cir. 1979). In such case, "no presumptive truthfulness attaches to plaintiff's allegations, and the existence of disputed material facts will not preclude the trial court from evaluating for itself" the existence of subject matter jurisdiction. Id.

        Where, however,

the jurisdictional issue and substantive issues are so intertwined that the question of jurisdiction is dependent on the resolution of factual issues going to the merits, the jurisdictional determination should await a determination of the relevant facts on either a motion going to the merits or at trial.

Augustine v. United States, 704 F.2d 1074, 1077 (9th Cir. 1983). Where "the jurisdictional issue and substantive claims are so intertwined that resolution of the jurisdictional question is dependent on factual issues going to the merits, the district court should employ the standard applicable to a motion for summary judgment." Autery v. United States, 424 F.3d 944, 956 (9th Cir. 2005) (quoting Rosales v. United States, 824 F.2d 799, 803 (9th Cir. 1987)); see also Augustine, 704 F.2d at 1077; Careau Grp. v. United Farm Workers, 940 F.2d 1291, 1293 (9th Cir. 1991). "The Court 'must therefore determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact . . . .'" Autery, 424 F.3d at 956 (quoting Suzuki Motor Corp. v. Consumers Union of U.S., Inc., 330 F.3d 1110, 1131 (9th Cir. 2003) (en banc));

Page 6

see also Roberts v. Corrothers, 812 F.2d 1173, 1777 (9th Cir. 1987) ("In such a case, the district court assumes the truth of allegations in a complaint or habeas petition, unless controverted by undisputed facts in the record.").

IV. DISCUSSION

        Standing is a requirement grounded in Article III of the United States Constitution, and a defect in standing cannot be waived by the parties. Chapman v. Pier 1 Imports (U.S.) Inc., 631 F.3d 939, 954 (9th Cir. 2011). A litigant must have both constitutional standing and prudential standing for a federal court to exercise jurisdiction over the case. Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 11 (2004). Constitutional standing requires the plaintiff to "show that the conduct of which he complains has caused him to suffer an 'injury in fact' that a favorable judgment will redress." Id. at 12. In comparison, "prudential standing encompasses the general prohibition on a litigant's raising another person's legal rights." Id. (citation and quotation signals omitted); see also Oregon v. Legal Servs. Corp., 552 F.3d 965, 971 (9th Cir. 2009).

        The Williamses factually attack Plaintiff's prudential standing to foreclose, arguing that there is no evidence establishing that Plaintiff was validly assigned the Mortgage and Note on the subject property. The issue of whether Plaintiff was validly assigned the Mortgage and Note is inextricably intertwined

Page 7

with the merits of the Plaintiff's claims seeking to foreclose on the subject property -- that is, Plaintiff must prove that it was assigned the Mortgage and Note before it has the ability to foreclose. As a result, the court determines whether the evidence presented, viewed in a light most favorable to Plaintiff, establishes a genuine issue of material fact that Plaintiff was validly assigned the Mortgage and Note. See Autery, 424 F.3d at 956.

        The basis of Plaintiff's standing to foreclose on the subject property (at least as alleged in the Complaint) is a January 13, 2009 assignment of the Mortgage and Note from Home 123 to Plaintiff. The assignment, attached to the Complaint, provides:

This Assignment, made this 13th day of January, 2009, by and between Home 123 Corporation, a California corporation, hereinafter called the "Assignor", and Deutsche Bank National Trust Company, as trustee for Morgan Stanley ABS Capital I Inc., MSAC 2007-NC1, whose principal place of business and post office address is c/o Saxon Mortgage Services, Inc., 4708 Mercantile Dr. N., Forth Worth TX 76137-3605, hereinafter called the "Assignee."WITNESSETH:In consideration of the sum of ONE DOLLAR ($1.00) and other valuable consideration paid by the Assignee, the receipt of which is hereby acknowledged, the Assignor does hereby, without recourse, sell, assign, transfer, set over and deliver unto the Assignee, its successors and assigns, the mortgage and note hereinafter described . . . .

Page 8

Compl. Ex. 4.

        The Williamses argue that this assignment cannot be valid because Home 123 was in bankruptcy liquidation as of January 13, 2009. Specifically, Home 123 filed for Chapter 11 bankruptcy in 2007, Home 123 filed a liquidation plan in March 2008, and the bankruptcy court confirmed the liquidation plan in July 2008. In re New Century TRS Holdings, Inc., 407 B.R. 576, 579-80 (Bankr. D. Del. 2009). Effective August 1, 2008, the liquidation plan:

was created with Alan M. Jacobs as trustee. Also on that date, the Creditors' Committee was dissolved; the Plan Advisory Committee (the "PAC") was formed; debtors' officers and directors ceased serving and were replaced by Jacobs; debtors' assets were distributed to the liquidating trust; and NCFC's outstanding common and preferred stock, as well as all notes, securities, and indentures, were cancelled.

Id. at 585-86 (citations omitted). Given this liquidation, it appears that Home 123 could not have validly assigned the Mortgage and Note to Plaintiff on January 13, 2009. And in Opposition, Plaintiff presents no evidence (or even argument) explaining how this January 13, 2009 assignment is valid despite Home 123's bankruptcy and liquidation. In fact, Plaintiff argues -- without factual support -- that NC Capital Corporation ("NC Capital") first bought the Note from Home 123 and Plaintiff subsequently received it through a securitized trust. See Pl.'s Opp'n at 20. And at the hearing, Plaintiff's counsel inexplicably stated that discovery is

Page 9

required to determine the Note's assignment, even though all facts concerning any valid assignment should certainly be known to Plaintiff without having to conduct discovery. In other words, even Plaintiff, who is master of its Complaint and by all accounts should know the basis of its claims, apparently disclaims the allegations in the Complaint and at this time cannot establish its legal right to enforce the Mortgage and Note.

        The Complaint's assertion that Plaintiff obtained the Mortgage and Note through the January 13, 2009 assignment is further called into doubt by the fact that Plaintiff brings this action as "Trustee Morgan Stanley ABS Capital I Inc. Trust 2007-NC1 Mortgage Pass-Through Certificates, Series 2007-NC-1" -- suggesting (as Plaintiff now argues) that Plaintiff may have received the Mortgage and/or Note through a Pooling and Servicing Agreement ("PSA") in 2007. From the evidence presented by the Williamses (Plaintiff presented no evidence on standing in Opposition), Home 123 generally sold mortgages to its affiliate NC Capital, who then resold the mortgages for inclusion into securitized trusts. See Williamses' Ex. G at 4 ¶¶ 9, 11. And NC Capital and Morgan Stanley ABS Capital I Inc., with Plaintiff as trustee, entered into a PSA dated January 1, 2007. See Williamses' Ex. U. The PSA requires NC Capital to deliver to Plaintiff assignments of mortgage for each mortgage loan, and for Plaintiff to certify

Page 10

"receipt of a Mortgage Note and Assignment of Mortgage for each applicable Mortgage Loan." Id. at 41-42.

        This evidence presents two problems for Plaintiff. First, if Plaintiff did indeed obtain the Mortgage and Note through a 2007 PSA, then the 2007 PSA is yet another reason why the January 13, 2009 assignment is a nullity and the Complaint's assertion that Plaintiff obtained the Mortgage and Note from Home 123 is untrue. Second, the evidence presented does not actually establish that Plaintiff received the Mortgage and Note through the PSA -- there is no evidence on the record establishing what mortgages were included in the PSA. Thus, although Plaintiff might have obtained the Mortgage and Note through this PSA, there is no evidence showing or even suggesting that this is indeed the case. As a result, there is no evidence -- at least on the record presented before the court -- creating a genuine issue of material fact that Plaintiff was assigned the Mortgage and Note on which it now seeks to foreclose.

        In opposition, Plaintiff argues that the Williamses are not parties or beneficiaries to the assignment such that they cannot challenge it. In making this argument, Plaintiff relies on caselaw from this court rejecting that a plaintiff/mortgagee can assert claims raising assignment irregularities and/or noncompliance with a PSA. See Fed. Nat'l Mortg. Ass'n v. Kamakau, 2012 WL

Page 11

622169, at *3-4 (D. Haw. Feb. 23, 2012) (relying on Velasco v. Sec. Nat'l Mortg. Co., --- F. Supp. 2d ----, 2011 WL 4899935, at *4 (D. Haw. Oct. 14, 2011), to reject "slander of title" claim challenging assignment of the note and mortgage because where the borrower is not a party or intended beneficiary of the assignment, he cannot dispute the validity of the assignment); Abubo v. Bank of New York Mellon, 2011 WL 6011787, at *8 (D. Haw. Nov. 30, 2011) (rejecting claim asserting violation of a PSA because a third party lacks standing to raise a violation of a PSA and noncompliance with terms of a PSA is irrelevant to the validity of the assignment).

        Plaintiff's argument confuses a borrower's, as opposed to a lender's, standing to raise affirmative claims. In Williams v. Rickard, 2011 WL 2116995, at *5 (D. Haw. May 25, 2011), -- which involved the same parties in this action and in which Lei Williams asserted affirmative claims against Deutsche Bank -- Chief Judge Susan Oki Mollway explained the difference between the two:

[Lei Williams is] confused about the doctrine of legal standing. [Lei Williams] believe[s] that, because Deutsche Bank and Real Time have not proven that they have standing to enforce the loan documents, they lack standing to seek summary judgment on the affirmative claims asserted against them. Had Deutsche Bank or Real Time filed affirmative claims to enforce the notes and mortgages, they would have had to establish their legal right to enforce those documents. However, Williams has sued Deutsche Bank and Real Time, and

Page 12

the banks are merely seeking a determination that they are not liable to Williams for the claims Williams asserts against them. The banks need not establish that they are the legal owners of Williams's loans before they defend against Williams's claims. "Standing" is a plaintiff's requirement, and Williams misconstrues the concept in arguing that Defendants must establish "standing" to defend themselves.

(emphasis added). In this action, the proverbial shoe is on the other foot -- Deutsche Bank asserts affirmative claims against the Williamses seeking to enforce the Mortgage and Note, and therefore must establish its legal right (i.e., standing) to do so. See, e.g., IndyMac Bank v. Miguel, 117 Haw. 506, 513, 184 P.3d 821, 828 (Haw. App. 2008) (explaining that for standing, a mortgagee must have "a sufficient interest in the Mortgage to have suffered an injury from [the mortgagor's] default"). As explained above, Deutsche Bank has failed to do so. The court therefore GRANTS the Williamses' Motion to Dismiss.

        This dismissal is without prejudice. See Ramming v. United States, 281 F.3d 158, 161 (5th Cir. 2001) ("The court's dismissal of a plaintiff's case because the plaintiff lacks subject matter jurisdiction is not a determination of the merits and does not prevent the plaintiff from pursuing a claim in a court that does have proper jurisdiction."); Frigard v. United States, 862 F.2d 201, 204 (9th Cir. 1988) ("Ordinarily, a case dismissed for lack of subject matter jurisdiction should be dismissed without prejudice so that a plaintiff may reassert his claims in a

Page 13

competent court."). Although the court considered materials outside of the Complaint and applied the summary judgment standard in determining whether Plaintiff had established its standing, the Williamses brought a Motion to Dismiss for lack of subject matter jurisdiction and not a motion for summary judgment. See Atkins v. Louisville and Nashville R. Co., 819 F.2d 644, 647 (6th Cir. 1987) (stating that even where the court considered materials outside the pleadings, it made clear that dismissal was without prejudice and did not contemplate the entering of summary judgment);Thompson v. United States, 291 F.2d 67, 68 (10th Cir. 1961) ("A motion for summary judgment lies whenever there is no genuine issue as to any material fact. It is not a substitute for a motion to dismiss for want of jurisdiction."). Thus, this dismissal does not prevent Plaintiff from performing due diligence (as it should have done before filing the instant Complaint) to determine whether and how it validly received the Mortgage and Note and bringing a new action seeking foreclosure.

Page 14

V. CONCLUSION

        Based on the above, the court GRANTS the Williamses' Motion to Dismiss. The court DISMISSES the Complaint without prejudice. The Clerk of Court is directed to close the case file.

        IT IS SO ORDERED.

        DATED: Honolulu, Hawaii, March 29, 2012.

        J. Michael Seabright
        United States District Judge

Deutsche Bank Nat'l Trust Co., as Trustee Morgan Stanley ABS Capital I Inc. Trust 2007-NC1 Mortg. Pass-Through Certificates, Series 2007-NC-1 v. Williams et al., Civ. No. 11-00632 JMS/RLP, Order Granting Defendants Williamses' Motion to Dismiss Complaint Filed 10/20/11, Doc. No. 13

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Notes:

        ^1. Because the court finds that Plaintiff has failed to establish its standing to bring this action, the court need not reach the Williamses' other arguments for dismissal.

        ^2. According to the Complaint, Real Time and Koehnen are second and third mortgage holders, respectively. See Compl. ¶¶ 5-6.