naked capitalism

Judge Arthur Schack might be the American Securitization Forum’s worst nightmare if more people started paying attention to his rulings. The Brooklyn judge has gotten a lot of media coverage for his lack of patience with “dog ate my homework” excuses from bank plaintiffs in foreclosure cases, as manifested by how often he has dismissed cases with prejudice (meaning those parties cannot return to court on the same matter).

But Schack is treated as a curiosity, a maverick. His colorful, rambling decisions reinforce that perception, which is useful from the banks’ perspective: he can be depicted as an outlier rather than as someone who has looked hard at securitization practices and does not like what he sees.

Judge Schack has been relentless in making sure that plaintiffs in foreclosures have their ducks in a row. And his rulings have extensive citations, which means they have the potential to be more influential than typical lower court decisions.

In another blow to securitization industry efforts to minimize the recent Massachusetts Supreme Judicial Court decision in Ibanez (or perversely, spin it as a victory), some of Judge Schack’s earlier decisions come to conclusions similar to those of Ibanez. This confirms the view of Georgetown law professor Adam Levitin, who has argued that Ibanez has the potential to influence the decisions of courts in other title theory states (very rough definition: in a title theory state, the lender holds a deed of trust, which means he owns the property until the borrower pays off the mortgage in full. By contrast, in a lien theory state, the borrower owns the property, but gives the lender a lien against the property which he can exercise to foreclose on the real estate if the borrowers defaults. Title theory states are generally also non-judicial foreclosure states).

If one judge in New York has independently come to Ibanez-like conclusions, the odds are high that other judges in title theory states may have similar reasoning in some of their rulings. This lowers the bar for higher courts to look to Ibanez as a guide. (Update/clarification: NY is a lien theory state, but the use of this sort of reasoning has even more serious implications for title theory states)

In a 2008 decision, Schack goes through a reasoning process similar to the Massachusetts high court, looking whether the chain of assignments of the lien holds up. Note that this much attention paid to the assignment of the lien, as opposed to the borrower note (the IOU), runs contrary to the American Securitization Forum assertion that the mortgage (confusing the name for the lien, which is called a deed of trust in some states) always follows the note (we had indicated here that there were states where this was not the case. Ibanez and its aftermath may demonstrate that we were incorrectly advised as to how many states might take the view that the handling of the lien itself was the primary consideration in determining the right to foreclose).

Judge Schack Decision Wells Fargo v Farmer

This is actually pretty simple. The note and mortgage were supposed to have gone from Argent Mortgage to Ameriquest to Wells Fargo. The judge wanted some evidence that this had actually taken place, as well as of Litton’s status as servicer, and had dismissed the case once, instructing the plaintiffs as to what questions they had to answer.

Judge Schack tries methodically to follow the paper trail and finds it to be wanting. He had questioned the fact that the same party had signed the assignment by Argent and Ameriquest. Without going into the details, no one could produce the corporate resolutions authorizing the same officer to sign for both companies, and Schack rejected the attempted retroactive fix.

Note that separately Judge Schack also made some comments in support of the New York trust theory advanced on this blog. We have said that New York trust law requires that a negotiable instrument like a note be endorsed to a specific party; endorsement in blank or mere endorsement to a trustee, as opposed to a particular trust, does not cut it. Judge Schack is very unhappy that Wells Fargo hasn’t said which trust owns the note, and looks to trust law to question the notion that Litton can be acting on behalf of an unspecified trust:

Since the court does not know for whom WELLS FARGO is the trustee, the court has no way to know if the above-named March 1, 2005 Agreement refers to the instant mortgage….Further, to determine if Ms. Lyman had the authority to execute her affidavit on behalf of plaintiff WELLS FARGO, the court required an inspection of the March 1, 2005 Servicing Agreement….Further, the second December 8, 2008 [sic, it's 2004] assignment, from AMERIQUEST to “Wells Fargo Bank, N.A., as Trustee”, fails to name a beneficiary for the Trustee. It is axiomatic that “[t]here are four essential elements of a trust: (1) a designated beneficiary; (2) a designated trustee; (3) a fund or other property sufficiently designated or identified to enable title thereto to pass to the trustee; and (4) actually delivery or legal assignment of the property to the trustee, with the intention of passing legal title to such property to the trustee [NY citations follow]…

Therefore, since the AMERIQUEST to WELLS FARGO assignment is silent as for whom WELLS FARGO is the Trustee, plaintiff has failed to demonstrate how the May 5, 2005 limited power of attorney from WELLS FARGO to LITTON authorizes an “affidavit of merit and amount due” by Debra Lyman, Vice President of Litton.

Whoops.

Even more striking, Schack not only deems all the transfers to be invalid, but he reaches the logical conclusion that few judges have been wiling to put in writing: the note and mortgage are owned by a party early in the securitization chain, meaning outside the trust:

Both the December 8, 2004 defective assignments – ARGENT to AMERIQUEST andAMERIQUEST to WELLS FARGO – are voided and cancelled. ARGENT is the owner of the FARMER loan.

Double whoops.

The second case, from August of last year, is fun to read because Judge Schack takes some well deserved pot shots at the plaintiff for ignoring his instructions by coming back to court 290 days after his deadline for responding to his questions and then having the gall to do a combination of ignoring them and providing unsatisfactory answers. And he also dances on its head for having a MERS certifying officer play multiple roles (“Ms. Selman is a milliner’s delight by virtue of the number of hats she wears”) and by changing its story as to how the assignment took place (first by MERS, later by “actual assignment and delivery”).

Forgive any funky formatting:

Judge Schack Decision Bank of New York v. Mulligan

Here the parallel to Ibanez is the efforts of the plaintiffs to rely on a pooling and servicing agreement and a loan schedule to prove transfer. And like Ibanez, the documentation is so deficient that that effort goes nowhere:

The alleged proof presented of physical delivery of the subject MULLIGAN mortgage is a computer printout [exhibit G of motion], dated April 30, 2009, from [*4]Countrywide Financial, which plaintiff’s counsel calls a “Closing Loan Schedule,” and claims, in ¶ 21 of his affirmation in support, that this “closing loan schedule is the mortgage loan schedule displaying every loan held by such trust at the close date for said trust at the end of January 2006. The closing loan schedule is of public record and demonstrates that the Plaintiff was in possession of the note and mortgage about nineteen (19) months prior to the commencement of this action.” There is an entry on line 2591 of the second to last page of the printout showing account number xxxxxxxxxx, which plaintiff’s counsel, in ¶ 22 of his affirmation in support, alleges is the subject mortgage. Plaintiff’s counsel asserts, in ¶ 23 of his affirmation in support, that “[t]he annexed closing loan schedule suffices to proceed in granting Plaintiff’s Order of Reference in this matter proving possession prior to any default.” This claim is ludicrous. The computer printout, printed on April 30, 2009, just prior to the making of the instant motion, has no probative value with respect to whether physical delivery of the subject mortgage was made to plaintiff BNY prior to the August 9, 2007 commencement of the instant action… Plaintiff’s BNY’s claim that the gobblygook computer printout it offered in exhibit G is evidence of physical delivery of the mortgage and note prior to commencement of the action is not only nonsensical, but flies in the face of the complaint and amended complaint…

I suspect readers can point to other lower court rulings that echo key elements of the Ibanez ruling. This is starting to get interesting, and for a change, in a good way.