Property and consumer protection law collide in claim of unlawful foreclosure

These are going to be around for a while; this is the first one I've seen that may get to proceed, and it's because of problems on the property side.

Juárez v. Select Portfolio Servicing, Inc., No. 11-2431 (1st Cir. Feb. 12, 2013)

Juárez, pro se, sued defendants for allegedly illegally foreclosing on her home.  The district court dismissed her claim, but the court of appeals reversed. She sued US Bank as trustee of a MBS trust and SPS, the servicer.  She alleged that, after she took out a first loan of $280,000, the note and mortgage changed hands several times, from New Century Mortgage through several other entities, though none of the transactions were recorded.  One entity, Asset Backed Securities, set up a REMIC trust (which receives favorable tax treatment in return for complying with certain rules, including some possibly relevant here) for which US Bank was the trustee.  Juárez alleged that the pooling and servicing agreement (PSA) governing the trust, and the federal tax code, required that all assets in the trust be in the trust by Jan. 1, 2006 in order for the trust to become a static pool of loans and qualify as a REMIC. Juárez alleged that, to the contrary, the assignment of the loan to US Bank as trustee occurred after that date.

Juárez defaulted on her mortgages (a second is not involved in the case here), and US Bank foreclosed.  She argued that defendants didn’t hold the note and the mortgage at the time they began proceedings against her, making the foreclosure illegal in Massachusetts.  The “Corporate Assignment of Mortgage” to US Bank as trustee was recorded on Oct. 29, 2008, after the foreclosure had been completed, was dated Oct. 16, 2008, and stated that the date of assignment was June 13, 2007.

She alleged violation of Massachusetts laws governing foreclosure, as well as a count under Mass. Gen. Laws Chapter 93A for unfair and deceptive practices in the conduct of trade or commerce. The district court accepted the argument that the mortgage assignment showed that US Bank owned the mortgage when the foreclosure began, since it was a confirmatory assignment. In addition, New Century Mortgage’s bankruptcy didn’t, on its own, prevent it from assigning the mortgage, since in Chapter 11 it could continue operating in the normal course of business (which was, apparently, to assign notes & mortgages that it supposedly already had sold off, making "normal" something of an interesting description, but ok … perhaps discovery will address the identity of the person assigning on behalf of New Century and his/her authority to do so).  Without that, the Chapter 93A claim had to be dismissed too.

The court of appeals didn’t address Juárez’s first theory of invalidity (that the REMIC trust had to close by Jan. 1, 2006), because the complaint adequately alleged that no assignment had taken place by the time foreclosure proceedings began.  However, it expressed skepticism about the first theory since a number of other courts have found no standing on the part of a mortgagor to challenge the validity of an assignment under a PSA.  But questioning whether an assignment followed the terms of a trust’s governing documents is not the same as questioning whether that assignment took place before foreclosure began. Juárez did the latter, and if she was right, then there’d be the same problem there was in Ibáñez: in Massachusetts, you can’t foreclose by using a power of sale, as opposed to using the judicial foreclosure procedure, without being the actual owner of the mortgage at the time the foreclosure takes place. 

The complaint, read fairly, alleged a plausible claim that the “Assignment” took place after the foreclosure was finalized, and was not a confirmatory assignment (that is, that it didn’t confirm an existing valid assignment that simply hadn’t been in recordable form).  The discrepancy in dates “clearly and independently emerges from the document in question,” which was attached to the complaint.  Defendants argued that the document was clearly a confirmatory assignment, despite its title.  But without discovery, it wasn’t possible to agree with defendants.  A confirmatory assignment can’t confirm an assignment that wasn’t earlier validly made or backdate an assignment being made for the first time, as the Massachusetts SJC has explicitly held.  (Defendants also argued that Juárez was barred from litigating the legality of her foreclosure because she didn’t sue to enjoin it, but Ibáñez was also a case brought by mortgagors after the foreclosures had ended.)

Here, even “perfunctory” scrutiny of the assignment document revealed that it was executed after the foreclosure but purported to reference a pre-foreclosure assignment.  Nothing in the document indicated that it confirmed a 2007 assignment, used the phrase “confirmatory assignment,” referred to a previous assignment, etc.  It read as if it were an assignment executed Oct. 16, 2008, using the present tense/performative language (“hereby assigns” etc.).  There needed to be a valid written assignment which this confirmed; confirming its existence, or nonexistence, would require discovery.

Given that Juárez stated sufficient facts to make her unlawful foreclosure claim plausible, the Chapter 93A and fraud claims had to be revisited.  Fraud requires a knowingly false statement, made with intent to deceive, that was material and on which a plaintiff reasonably relied to her detriment.  And it must be pled with particularity.

Juárez alleged that defendants knew they didn’t legally own her mortgage and nonetheless claimed that they did in order to foreclose in advertising the property, repurchasing it, and subsequently selling it.  Further, she alleged reliance, but she didn’t allege details of her substantial injury. The court of appeals found it “possible” that an illegal foreclosure caused her substantial harm per se, or that if she’d known about the alleged falsity she would have contested the foreclosure.  But possibility isn’t enough under Rule 9(b)—she’d need to allege “much more” about her reliance, and also more “could also be alleged concerning who she was in contact with, when and what was said to her in the alleged misrepresentations.”  The dismissal was affirmed (but she should get leave to amend on remand).

The court of appeals reached a similar result on the Chapter 93A unfair/deceptive practices claims. Ordinarily, a breach of contract or similar dispute won’t constitute a violation.  The complaint needed to do more to allege sufficient “rancid” or “extortionate” unfairness or deceptiveness.  It wasn’t enough to allege an unlawful foreclosure.