Amicus Brief by National Foreclosure Defense Group for Eaton v FNMA

8/3/2019 Amicus Brief by National Foreclosure Defense Group for Eaton v FNMA

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FOR THE COMMONWEALTH OF MASSACHUSETTSNo. SJC 11041

HENRIETTA EATONPLAINTIFF-APPELLEEV.

FEDERAL NATIONAL MORTGAGE ASSOCIATION & ANOTHER

ON APPEAL FROM THE APPEALS COURT SlN(1LE JIJSTICF,

BRIEF OF AMICUS CURIAENATIONAI, FORECLOSUKE DEFENSE GROUPRobert NapolitanoCertified Paralegal

Certified Instructor Continuing Legal Education - State of NJNational Foreclosure Defense GroupP.O. BOX 88.44Red Bank, NJ 07701973 -710 -3394rriapolitano~nfdg.orqwww .nf dq .o r 2

Dated: January 2 7 , 2012


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iTABLE OF CONTENTS PAGE

TABLE OF AUTHORIIES . . . . . . . . . . . . iiSTATEMENT OF AMICUS INTEREST . . . . . . . .STATEMENT OF ISSUES PRESENTED . . . . . . .STATEMENT OF THE CASE AND FACTS . . . . . .ARGUMENT . . . . . . . . . . . . . . . . . .CONCLUSION . . . . . . . . . . . . . . . . . 5


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ii

TABLE OF AUTHORITIES. . . . . . . . . . . . . .pagecases :Bank of New York v - Silverberg, 011 NY Slip Op.05002 (2d Dept. 2011) ( n - 0 . r . ) . . . . . . . . . . . . . 10(fn)Fitzgerald v. Meianer, Inc., 38 Wis. 2d 571,157 N.W. 2d 595 (1968) . . . . . . . . . . . . . . . . 6 (fn)In th e Matter of Kemp Y . Countrywide Home Loans,( U . S . Bkxptcy. Ct. Dist. N.J. 2008) . . . . . . . . . .U . S . National Bank Ass'n. v . Ibanez(457 Mass. 637 [20111) . . . . . . . . . . . . . . . . 2S t a t u t e s and Rules:

Articles and Treatises:

CARDOZO LAW REVIEW, Vol. 28:5, page 2185et. aeq.,-"PREDATORY STRUCTURE D FINANCING" 11, 12, 13, 14Marguette Law Review Article, by Thomas E.Fairchild', - V o l . 51, 1967-1968 -"LIMITATION OF JUDQE-MADE LAW TOPROSPECTIVE EFFECT ONLY- 'PROSPECTIVEOVERRULING' OR 'SUNBURSTING'. . . . . . . . . . . . . . 5,6Michael D. Larson, "It's Buyer Beware WhenYou're Shopping for a Sub-p rime Loan" . . . . . . . 13(fn)

Mr. Fairchild served as Atto rney General fo r t h e State of Wisconsin, as a Justice for the Wisconsin SupremeCourt, and as a Federal Judge fo r th e 7'hCircuit Court of Appeals, for full C urriculum Vitae. se e f o o tn o te t o FirstPage of the Article.

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Rockwell P. Ludden, T h e MERS Mortgagein Massachusetts, G e n i u s , S h e l l Gameor Invitation to Freud . . . . . . . . . . . . . + . 9 , 10,13


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STATEMENT OF AMICUS INTEREST:I, Robert Napolitano, Founder o f National Foreclosure

Defense Group (NFDG), am a certified paralegal in the State ofNew Jersey, and certified in the eight States to teachForeclosure Defense Prin ciples and Practices as a ContinuingLegal Education (CLB) course to attorneys licenses in the State,as part of their continuing legal education requirements.

Since 2006, I have been involved in consulting and trainingattorneys, advocates and industry professionals, teaching andhighlighting the technical intricacies and nuances o the realestate mortgage financing industry. I have developed, alitigation support service specifically tailored for theconsumer mortgage banking industry.

My CLE course involves a curriculum fo r industryprofessionals, which cove rs the process of securitization, therole of the player's involved, lender vulnerabilities and theirpractical application in a foreclosure defense practice.

T believe that I can bring to this Court some perspectiveand guidance on an issue raised by this Court, i.e., first,whether an y ruling should be giv en retroactive effect, at leastto the limited extent of allowing a Conaumer who was foreclosedupon by a foreclosure judgment where the action was

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jurisdictionally defective or "lack of standing", and where theconsumer may have defenses and claims by reason of such defects,with particular emphasis on the relationship betweensecuritization and the rights of consumers to challenge anyimmunities that the Trust may put forth from the liabilities ofthe Originator guilty of predatory lending.

As indicated in the Amicus brief filed by Marie McDonnell,CFE, for Eatin, the Borrower, it is recognized that lenders, ortheir assignees who participated in an essentially fraudulentrecording process as members of MERS, (and often involving thesecuritization of Mortgage Notes into Mortgage Backed Securitiesheld in Trusts, that were separated from the Mortgages), did 8 0at the expense of the consumer, where they brought foreclosureaction based upon the fraudulent misrepresentation that theywere the real party in interest, as holder of both the note andmortgage at the time of foreclosure, and at the same time,sought to immunize themselves from predatory lending practicescommitted by the originator, under claims of having "holder indue course" status under applicable UCC provisions.

This Court has already ruled in the seminal case of U . S .National Bank Ass'n. v . Tbanez (457 Mass. 637 [ Z O l l l ) , (a casein which Ms. McDonelL also submitted an Amicus Brief) that in asecuritized trust situation, i.e., where the mortgage note has

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been securitized and purportedly ended up in a trust, that theforeclosing Trust must show its legal authority to foreclose, orits 'legal standing". Following Ibanes, it is my belief thatwhere a foreclosing party, such as a Securitized Trust, or anyplaintiff who represented that it has ownership of both the Noteand Mortgage by sworn allegations in the complaint,representing that it has such standing, when in fact it did not,then the consumer/borrower who lost his or her home as a resultof such a" foreclosure, should be allowed to seek damages, atleast within the statute of limitations period f o r consumerfraud, which is four years in this state, for any predatorylending practices committed by the originator.

ISSUES PRESENTED:

I. - What are the principles, or standards under case lawprecedent, for giving a ruling retroactive effect, i.e., whatare the governing principles and standards found in case lawprecedent, allowing retroactivity to a ruling here, where largenumbers o f consumers were victims of predatory loans, andforeclosures obtained that were defective, where the foreclosingparty has liability f o r those practices but avoided such claims?

11. Whether, a ruling here, to the effect that aforeclosing party lacked standing to foreclose, (whether a

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securitized trust, or any party that fraudulently obtained aforeclosure in this State), should have limited retroacti veapplication and effect, under those case law principles andstandards (Point I, supra.), thereby allowing Consumer/Borrowerswho were lost their homes through such foreclosure, to recoverdamages for consumer fraud violations, including predatorylending practices, at least within the 4-ye ar statute oflimitations, where the foreclosure was obtained by a party wholacked standing, particularly the Securitized trust, and who didnot have holder in due course status and thus had assigneeliability for predatory lending practices done by theoriginator.

STATEMENT OF THE CASE AND PACTS:

I adopt the statement of facts and the case, as presentedby Ms. McDonnell in her Amicus Brief, particularl y withreference to her findings and statistical analysis, showin g therampant nature, of the number of mortgage foreclosures that weretainted either with invalid assignments, or splitting of theNote and Mortgage.

Thus, Ma. McDonnell opined that such foreclosures shoul d beheld invalid, either because the assignments wer e invalid, oreven i f valid, if the mortgage ow nership of the mortgage and

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note were "split". Added to that, by the very natu re of thesecuritization process, noted in Ibanez, in the least, where theMortgage A88ignments go through MERS, while the Notes areassigned under the parameters of the Trust Agreement, rarely ifever are these instruments not "split", i.e. owned together bythe foreclosing Trust, OF Mortgage Servicer, (as the case maybe).

ARGUMENT :

There is a body o f governing principles from the case law,both in other states, or federally, and even in interpreting theconstitution, that may be recognized by this Court.

In an excellent Law Review Article in the Marquette LawReview, by Thomas E. Fairchild', Vol. 51, 1967-1968 entitled:"LIMITATION OF JUDGE-MADE LAW TO PROSPECTIVE EFFECT ONLY-'PROSPECTIVE OVERRULING' O R 'SUNBURSTING' (copy annexed asExhibit A ) , there is a complete analysis and recitation of abody of federal and state case law a8 to when prospective effectshould be given, with the apparent presumption being that a case

be given retroactive effect, unless oth erwise stated.

M r. Fairchild served as Attorney General fo r th e State of Wisconsin, a s a Justice for the Wisconsin SupremeCourt, an d as a Federal Judge fo r the 7"' ircuit Court of Appeals, for full Curriculum Vitae, see footno te to FirstPage of the A rticle.

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Thus, in that Marquette Law Review Article, supra., it isnoted that "prospective overruling" is applied in the followingcircumstances (Article, pp.254-255):

"Whatever explanation may be made of prospective overruling interms of judicial philosophy, clear it is that use of thetechnique makes change less disruptive, and thereby makes anappellate court less apprehensive about making a change when itconsiders a new rule to be more sound than the old"

Mr. Fairchild notes that Appellate Courts that render aruling "prospective only", have done so on a "selective" basis,while preserving "retroactivity" as Blackstone law would have itchoosing "varied formulae" for prospective limitation, i.e., notmaking a prospective limitation all encompassing, butsituational only (Article, pg. 2 5 6 ) :

"High courts which have used the technique of prospectiveoverruling have done so selectively. One and the same court willpermit the new law announced in some of its overruling decisionsto be as completely retroactive as Blackstone would have it, andin other situations would choose varied formulae f o r limitationto prospective operation, depending upon the court's estimate asto the disruption which would be caused or avoided by greaterbreadth of retroactivity or closer limitation to purelyprospective o p e r a t i o n . m2

Mr. Fairchild then cites the standards, or issues involvedin making a determination as to whether to apply a rulingretroactively, or prospectively, noting that there should be aCiting Fitzgerald v. Meisner, Inc., 3 8 Wis. 2d 571, 157 N.W. 2d

595 (1968), where the Wisconsin Supreme Cou r t held that adecision which changes or overrules a law should be appliedretroactively, unless there are compelling judicial reasons tothe contrary.

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presumption o f retroactivity, unless there are judicial reasonsto the contrary: (Article pg. 2 5 7 ) :" I suggest that a decision to 'sunburst' (apply a rulingprospectively) is reached after considering a number of factors-(1) How explicitly or how long ago was the old rule announced orrecognized, and how deeply does the new rule modify the old? (2)Is the old rule of a type which people rely upon in makingdeliberate choices of conduct or dealing? ( 3 ) Was the olddecision erroneous when made,or have conditions changed so thatit has subsequently become unjust? (411s the new rule adoptedprimarily because it tends to prevent injustice . . . ? ( 5 ) Whatis the extent of disruption which would result from retroactiveapplication? ( 6 ) Have recent decisions suggested the probabilityof the change in rule?"

I suggest this Court peruse the entire Article to notecases where retroactive effect is given, given theimpracticality of analysis here under the 15-page limitation.

I only suggest that under one or more of these standards,this ruling should clearly be given retroactive application, tofour years back, coinciding with the statute of limitations

1.Tbe rule that there should be an identity, or merger inownership of the mortgage and note is of ancient origin,finding precedent as long ago a8 the l g t h century, notedbelow;

2.Thare was little if any reliance upon the o l d rule, if itexisted at all, that there need not be a unity ofownership;

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3. The new rule is adopted to prevent rampant fraud inbringing foreclosure actions without ownership of the Note,and exposing the borrower to potential liability should thetrue owner of the note show up and seek recovery against theborrower who had already satisfied his indebtedness in theforeclosure;

4. Limiting Recovery to borrowers who have been defrauded tothose having consumer fraud claims within the statute oflimitations period would, by creating a settlement fund orall claims, only going back only 4 years, so as to limit anydisruption in the housing market; indeed if anything it wouldimprove the situation by removing uncertainty with respect tothere being clean title, a concern expressed by this Court.

Thus, under New Jersey Law, the States UniformCommercial Code Provisions govern the enforceability of theMortgage Note, and presumably these UCC provisions are uniformin most, if not all states, including Massachusetts, providingthat one must be the holder of the note at the time offoreclosure, a circumstances not found in securitized mortgages.See In the Matter of Kemp v . Countrywide Home LoanB, (U.S.Bkrptcy. Ct. Dist. N . J . 2 0 0 8 , copy annexed as Exhibit B)(In

One of the conditions for a former homeowners obtaining a recovery was that he provide a release of any claimsto title by reason of a fraudulent foreclosure, thereby removing such uncertainty.

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Kemp, there was a MERS recording and transfer of the underlyingMortgage, whereas the Mortgage Note was securitized andpurportedly going a different path to Bank of New York, asTrustee under the Trust Agreement. The Kemp court, applying UCCprovisions, denied Countrywide enforceability throughforeclosure where there were rampant defects with the Noteassignments, and Proof of the Note's ownership wer e Lacking, andthe "holder'' status wa s not proven to be with it.

Indeed, in an article by Rockwell P. Ludden, "The MERSMortgage in Massachusetts, Genius, S h e l l Game OK Invitation toFraud", (copy annexed as Exhibit C) the discussion concerns thelegal problems and propensity for fraud where ME RS ia a part ofthe Mortgage Assignment process, particular ly wi th Securi tizedmortgages. It is pointed out that where there is a MERS mortgageassignment, there is universally a problem with a party'sstanding to foreclose, where the mortg age and note wereseparated in the discrete assignments. There, the fu nd me nt al ,and long standing principle requirin g a unity of instrum ents asa prerequisite to foreclosure, is stated succinctly, intestimony given Congress by the CEO of MERSCORP, as to thefunction of M E RS:

"A fundamental legal principle is that the mortg age followsthe note; which means that as the note chang es hands, themortgage remains connected to it legally, even though it is9


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not physically attached. In other words, the promissorynote is enforceable against the property because of themortgage, but the mortgage instrument itself is notindependently enforceable as a debt. This principle is notchanged when MERS is the mortgagee because of the agencyrelationship between MERS and the lender."'The point is that the requirement that the Note and

Mortgage be together in one person or entity as a prerequisitefor enforcing the debt, is not a new rule, but one deeplyentrenched in American Jurisprudence. Thus, we are not changingan old rule upon which people depended in their financialdealings, but clarifying what has been established and simplyapplying it to the new facts arising in the securitizationprocess.

As pointed out in the Mass. MERS article, citing the Ibanezholding, it is a long settled principle in this State that where

MERS is involved in the Mortgage assignment process, thetransfer of the debt does not carry with it a transfer of theMortgage so as to provide the necessary "reconnection" requiredfor a foreclosure action (MERS article, page 8 ) .

4 See also Bank of New xork v. Silverberg, 011 NY Slip Op. 05002 (Zd Dept.2011) ( n . o . r . 1 (Answering in the negative: The principal issue ripe fordetermination by this Court, . . . is whether PIERS, as nominee and mortgageefor purposes of recording, can asaign the right to foreclose upon a mortgaget o a p l a i n t i f f in a foreclosure a c t i o n a b s en t MERS'S right to, or p o s s e s s i o nof, the a c t u a l underlying promissory note.

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I submit that one cannot overesti mate how toxic anddangerous the mortgage securitization process has been to thesoundness and viability o f sub-prime mortgage financing, (wheremost predatory practices occurred), not to menti on the obviousthat it was the primary cause of the housing financial crisesand meltdown of the world's economy, which cannot beunderstated.

Here, it is submitted that the consumer ought recover anydamages from a party who fore closed without standing, where thedefrauded consumer can mak e predatory le nding claims against anyparty in the securitization chain, under theories discussedbel ow for ''assignee liability" .

I respectfully refer the Court to an excellent Law ReviewArticle, published by the Benjamin Cardozo Law School'6 CARD020LAW REVIEW, Vol. 28 : 5 , page 2185 et seq., en titled "PREDATORYSTRUCTURED FINANCING", written by Christop her Peterson, anAssociate Professor o f Law at the University of Florida,Frederic G. Levin College of Law (pertinent portions citedherein are annexed as Exhibit D). It is a comprehensivetreatise, citing applicable law, regar ding the relationshipbetween Securitiza tion and Predatory Lending (Chapt. 11, pp.2213-2225); Indirect Assignee Liability for Predatory ConsumerLending Practices, including Applying Common la w Theories for

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imputing Liability (to the Trust or Servicer) for suchpractices(Chapter 111, pp.2225-2253). Specifically, discussed isthe relationship between Securitization and Predatory Lending,as a means by which Securitized Trusts attempted to immunizethemselves from the predatory practices of Mortgage LoanOriginators, at the expense of the Consumer, by claimingimmunity from these claims and defenses as Holders in dueCourse, where there is emerging theories to denigrate their

holder in due course status, and hold them responsible.I suggest this Court review the entire law review article,

as limited space means a limited presentation of what it saysabout the cause-effect relationship between securitization ofsub-prime loans, and the vulnerability of consumers to predatorypractices in the origination of sub-prime loans.

I would like to cite one paragraph in that treatise whichbest capsulate the reason that the securitization of sub-primeloans (those not purchased by Fannie Mae and other GSEs) madethem prone to lax underwriting standards, and hence predatorypractices, thereby giving mortgages to people they knew couldill afford them, or without disclosing the real c o s t s and termsof the loan: (Article, Exhibit D, at pp- . 2214-2215):

Unlike prime lenders, sub-prime lenders usually securitizetheir loans. That means that sub-prime lenders have much more

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leeway when it comes to setting rates and underwritingstandards. As a result, rates, fees and program gui delines varydrastically depending upon which broker or lender a consumervi si ts f5 In the rush to originate new loans, some lenders haveeven ignored their own underwriting guidelines6. Unlike primeloans, where access to the secondary market is guarded by theplay-it-safe GSE's, the secondary subprime market is filled w i t haggreeeive investors and businesses looking to maximize theirprofits by any possible m e a n s . "

Then, after delineati ng the wealt h and breadth of federaland state laws protecting the consumer against predatory lendingpractices (pp.2225-2232) whi ch would be available to thedefrauded cons umer in this State, the Article suggests the needfor holding the Trust liable, whiling posing a number of legaltheories f o r supporting that proposition:(At pp , 2232-2233):

'While the law governing predatory lending is primarilyfocused on holding predatory lenders (originators and theirbrokerslfor their terms and practices, it does contemplateholding secon dary mortg age market participants liable f o rpredatory lending practices in some situations. However, thecomplexity and seemingly random organizational structure ofpredatory lending assignee liability law strongly suggests thatsecondary market accountability has been somethi ng o f anafterthought for courts, legislatures and administrativeagencies." (Parenthe sis mine) .

It then describes the various legal theories of assigneeliability that find their roots in the UCC (pp. 2233-2238):under consumer protection federal statutes (pp. 2238-2243; state

. - .Bee footnote 177, pg. 2215, Citing e.g. Michael D. Larson, "It's Buyer

Bew are Whe n You're Shopping or a Sub- Prim e Loan", at wmv.bankrate.com, andother citations listed in that footnote.' See Footnote 178, pg. 2215

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and local predatory lending laws (pp. 2243-2247); and common lawtheories o f imputing liability for predatory lending (pp.2244-2256) (e.g. aiding and abetting, conspiracy).

Whether in a particular case the courts o f this state wouldallow a consumer to impute a predatory practice to theSecuritized trust, or hold any other assignee liable for thepredatory practices of the originating lender or its broker is amatter to be decided on a case by case basis. It should sufficefor this court to allow a consumer who was a victim of apredatory practice within the 4-year statutory Limitation periodto assert a claim, f o r damages, and then show the elements forholding the foreclosing party liable under any available theory.It is also suggested that since most parties who broughtforeclosures within that time span were members of MERS and usedthat vehicle to claim the right to foreclose as Assignees of themortgage, without the note, that it is both fitting and properto establish a settlement fund through MERS. with this Court,from which members would contribute, notices to affected partieswould be sent, advising them of their right to assert any claim,perhaps limiting the monetary amount. There should also be anindemnity fund in favor o f the consumer should some third partyin the future produce the original note and seek recoveryagainst the consumer who already paid.

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CONCLUSION:.............. . . . . . . . . . . .

Making any ruling retroactive to the extent suggested andthen establishing a settlement fund for claims o f defraudedmortgage consumers would accomplish two purposes: (1) providingrelief to those consumers victimized by predatory loans, whocould not avail themselves of a chance at recovery, while; (2)stabilizing the mortgage finance and housing industry byremoving any toxicity upon clean title by having the borrowerrelease any claims against the lender.

Respect Lly submitted,J , ,/Y ..74-(:.-.. -+ ... .--

Robert NapolitanoCertified Paralegal andCertified Instructor/ ContinuingLegal Education - State of NJNational Foreclosure Defense GroupP . O . Box 8844R e d Bank, NJ 07701973-710 [email protected]

CERTIFICATION OF COMPLIANCE WITH COURT RULES

I, Robert Napolitano, duly certifies under penalties of perjurythat the within Brief, filed Amicus Curiae, complies with theRules of the Court that pertain to filing of Briefs including,but not limited to: Mass. R. A . P. 16(a)(6) (pertinent findings

1s
mailto:[email protected]://www.nfdg.org/http://www.nfdg.org/mailto:[email protected]


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OK memorandum of decision); Mass. R . A. P . 16(e) (references tothe record); Mass. R. A. P. 16(E ) (reproduction of statutes,

rules, regulations) : Mass. R. A. P. 16(h) (length of briefs)Mass. R. A . P. 18 (appendix to the briefs); and Mass. R. A. P.20 (form o f briefs, appendices, and other papers).

. . . . . .. .. -. . . ._ . . . . . . .- ... - . .. .

Dated: January 28, 2012-,,,I- ''.-,,..,/

,....c,';. , ~,.~...,.," ---.R o b e r t Napolitano

Certificate o f Mail ServiceI , R o b e r t Napolitano, duly certifies under penalties of perjurythat on September 2 1 , 2012, I served by F i r s t Class Mail, myBrief, Amicus Curiae, upon each of the parties, or theirattorneys, at th e following last known business addresses:

H. Esme Caramello, Esq.Attorneys for Henrietta Eaton, Appelleec/o Harvard Legal Aid Bureau23 Everett StreetCambridge, MA 02138Tel: (617) 495-4408Joseph P. Calandrelli, E s q .Attorneys for Fed1 National Mortgage Assn &Green Tree Servicing LLCc/o Prince Lobel T y e , LLP100 Cambridge Street, Suite 2200Boston, MA 02114Tel: (617) 456-8096Fax: (617) 456-8100 L-;:;>

Amicus Brief by National Foreclosure Defense Group for Eaton v FNMA

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