naked capitalism

New York filed a lawsuit against various units of JP Morgan, Bank of America, Wells, MERSCORP and MERS over their use of MERS in foreclosures. This civil suit alleges that the use of MERS has “resulted in a wide range of deceptive and illegal practices,” most importantly, over 13,000 foreclosures in MERS name where MERS “often” lacked standing to foreclose. The suit claims that an undetermined number of foreclosures that were not made in the name of MERS were also deceptive by virtue of MERS “certifying officers” making improper assignments prior to the foreclosure. The suit includes the use of robosigners who failed to review the review the underlying records as required, and served to disguise gaps in the chain of title.

The section of the filing with background on MERS will be familiar to most NC readers, but it does include the juicy factoid that MERS members have saved over $2 billion in recording fees.

NYS MERS Final Summons and Complaint 2/3/12

The suit states that 1800 foreclosures were filed in New York in MERS’ name since 2006, of which 95 were made by Bank of America, 85 by Chase, and 110 by Wells. Given the numerous reports of MERS sloppiness and dubious corporate governance (cited in this case) it is quite probable that these foreclosures were defective. However, these are not large numbers by themselves. New York does not have a statue like that of Alabama which multiplies the actual damages (the loss of the home) in the event of wrongful foreclosure. If you take 100 homes and multiply that by $250,000, you get $25 million. Now the suit would presumably enlarge the number of foreclosures by identifying other homes on which the use of MERS had resulted in wrongful foreclosures, but query how the attorney general would do that efficiently (as in the facts of particular foreclosures are so varied as to make this a labor-intensive exercise). The attorney general might be able to establish defective pattern and practice by deposing servicer employees or records, which would make for an easier way to establish that a much larger number of foreclosures were defective, but how threatening a suit this is in some measure depends on how easy it would be to establish bad practices at the servicers (note these suits will be settled; the question is whether the AG begins meaningful discovery to enable him to include more homes as being candidates for damages). The suit does discuss a number of defective practices, such as MERS falsely claiming to be the holder or even the owner of the note in court filings (MERS never owns the note), creating improper affidavits and notarizations, assigning mortgages when it lacked authority to do so, and failing to disclose the identity of the true owner of the note. It finally alleges that the MERS database is not accurate, current, or reliable.

The causes of action are:

Repeated and persistent fraud and illegal acts

Deceptive acts or practices

I wonder if any New York lawyers among our readers are familiar with the case law regarding these causes of action.

The juice in this suit seems to be in the assertion of $5,000 per violation, which is arguably every wrongfully filed document that somehow relied on MERS. How many in a typical case? This could get you to big numbers pretty pronto, but I’d imagine the banks will try to shift the liability onto their foreclosure mills.

While the filing of this case would seem to suggest that Schneiderman does not plan to abandon his efforts to pursue mortgage abuses in New York by virtue of joining the Federal foreclosure task force. It would also seem to point up the peculiarity of the mortgage settlement. One reader had said earlier in comments, quite vociferously, that his employer would not sign on to a settlement if MERS-related claims were not included. The Schneiderman suit seems to show that there is a backdoor way for AGs to have their cake (sign the settlement) and still file robosigning-related suits as long as use MERS as the hook. (I’m going on the assumption that Schneiderman might sign the settlement; he has suddenly gotten coy on that subject).

Or is this an attempt to blow up the settlement having gotten the Feds to sign up to an investigation by demonstrating (if the press leaks are accurate) that leaving MERS claims out of the release still leaves them on the hook for robosigning abuses via MERS? If I were a major bank, I’d be freaked out by this suit, since it would seem to offer an easy roadmap for other states and may expose the fact that, from the banks’ perspective, the release provided in the settlement is not broad enough.

At a minimum, this lawsuit would seem to make it far less likely that the settlement will be signed Monday, as is now scheduled; I’d take a delay as a sign that the banks were blindsided by this suit and have gone back to the table.

By contrast, if the banks still go ahead, I’d take it as a sign that they don’t consider this sort of suit to be a major threat (as in the damages associated with it would not be that large and they can treat it as yet another cost of doing business). In other words, the filing of this suit would be a way of Schneiderman later justifying his signing up for the Federal task force, even if it gets slow walked (“see, this is the best I could do. This is a serious abuse, but it’s actually a hard slog for an AG to get meaningful damages for this sort of thing”).

We’ll know much more about what this suit likely means when we see if it has impacted the signing of the settlement. Stay tuned.

Update: Per Dave Dayen’s report, this Schneiderman filing is a carve-out from the settlement and hence does NOT represent a precedent as far as the other state AGs are concerned. It thus may not have broader ramifications as far as the settlement talks are concerned, save maybe making some of the AGs that were thinking of not signing on worry that they look bad by joining the deal.

In addition, the long section on What MERS Did That is Bad has first a discussion of foreclosures in the name of MERS, then a discussion of bad practices that took place in foreclosures that used MERS but did not have MERS as the plaintiff in the foreclosure (out of time assignments, MERS certifying officers making assignments when they did not have authority, robosigining, etc).

While this is all heinous, the big concern I have here is how you prove how many bad actions a particular bank engaged in. The case asserts $5,000 damages per violation to New York State (see the Relief section at the very end) and $2,000 in cost per consumer per violation under another statue.

The problem is…there seems to be a clean case against the banks for the foreclosures done in the name of MERS. On the other ones, how do you prove how many violations took place in a particular foreclosure? How do you identify MERS v. non MERS foreclosures? If MERS name is not in the filing (as a plaintiff) is it that easy to find MERS footprints in particular foreclosures? And even if you do that, the banks will still try to shift liability to the foreclosure mills they used.

In other words, pinning MERS liability on particular banks (who have the deep pockets, MERS is an itty bitty company with no meaningful assets) may require quite a lot of discovery. That is a big hurdle to the Schneiderman getting as juicy a settlement as this case might seem to deserve. Remember, he has complained of being resource constrained; that was his reason for joining the Federal investigation.

I’d like to be proven wrong, since the banks may be eager to get this out of the way quickly and will pay up to dispose of a continuing embarrassment. But Schneiderman has told them in public he doesn’t have a lot of manpower to throw at this, and this does seem to be a labor intensive suit.

Thus this suit is not likely to lead to banks reconsidering their posture in the settlement. But by filing it before the settlement was due to be inked, he may be trying to encourage other dissenting AGs to ask for similar carve-outs, which would send everyone back to the negotiating table. So again, stay tuned, albeit for different reasons than I first thought.