Alabama Judge Accepts New York Trust Theory, Dismisses Foreclosure Action for Failure to Comply With Pooling and Servicing Agreement (Updated)

Paul Jackson has been forced to eat a bit of crow. A judge in Alabama in a case called Horace v. LaSalle overturned a foreclosure action based on the failure of the trust to comply with the terms of the pooling & servicing agreement. As you see, the judge ruled that the borrower can assert rights under the Pooling and Servicing agreement as a third party beneficiary and that he was “surprised to the point of astonishment” that the trust had not complied with the terms of its PSA.

The ruling in favor of the borrower endorses an argument we have made since last year on this blog, that the pooling and servicing agreement stipulated a specific set of transfers be undertaken to convey the borrower note (the IOU) to the securitization trust within a specified time frame. New York trust law was chosen to govern the trusts precisely because it is unforgiving; any act not specifically stipulated by the governing documents is deemed to be a “void act” and has no legal force. So if a the parties to a securitization failed to convey a note to the trust within the stipulated timetable, retroactive fixes don’t work. In this case, the note had been endorsed by the originator, Encore, but not by the later parties in the securitization chain as required in the pooling and servicing agreement. See the order below:

Horace v. LaSalle Summary Judgment

You may recall that an Alabama judge in Jefferson County had ruled that borrower arguments based on the requirements of the pooling and servicing agreement were inoperative in an ejectment action. Adam Levitin and we had both argued that the ruling was narrow and would have limited applicability even in Alabama, because it was contesting an ejectment, not a foreclosure (Paul Jackson had argued the converse, that the ruling was fatal to the New York trust theory). This decision validates this view and the general viability of arguments based on the New York trust law, which was chosen by the overwhelming majority of real estate securitization trusts to govern the trust (note not the other aspects of the deal).

For background, the original case filing follows (hat tip April Charney):

Horace v. LaSalle Memo in Support of Motion for Summary Judgment

Housing Wire notes:

In other words, without proof the mortgage had been assigned to the trust, in this case Bear Stearns Asset Backed Securities, the trustee lacked standing to foreclose.

Specifically, the homeowner alleged LaSalle only “produced a collateral file that included the original, wet-ink, signed note in the case,” according to court records. That note contained a single endorsement, which came from the originator of the mortgage — Encore Credit Corp. While the loan was sent through the securitization process – going through two other parties before reaching as the trustee – the only assignment on record was to Encore.

Now this ruling is not definitive, since the New York trust theory has only been presented to a few judges. But this order certainly has more value as a precedent than the narrow ruling debated earlier in Congress v. US Bank.

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  1. Dan Daoust

    You’re going to have to address the Sachar decision at some point. The Bank of New York v. Sachar, No. 0380904/2009 (N.Y. Sup. Ct. Bronx County Mar. 3, 2011).

    1. Fred Garnett

      Sounds like the Judge didn’t “get it”. MERS foreclosure succeeds, partly because it was designed to do just that.

      1. Yves Smith Post author

        No, you have to convey the note correctly in a lien theory state (where the mortgage is a lien on the property, and not a deed of trust). The note has no independent force, it is a mere accessory to the note. So if you screw up on the note, it doesn’t matter what you’ve done with the lien.

      2. R Foreman

        Oh this is so sad for these bankers.. this will mean hundreds of billions in additional losses, legal fees, liability, and ongoing home maintenance costs.. and that on top of all the losses currently being hidden by creative accounting fraud; I’ve heard that number is in the $$TTrillions for each of the TBTF banks.

        That’s got to be tough knowing that you single-handedly brought down the western civilization financial system.. but hey, it was a sham ponzi scheme to begin with.. it needs to fall.

    2. Yves Smith Post author

      This is irrelevant to this decision. I made a mistake and posted the bank’s pleading rather than the judge’s order, which may have caused some confusion.

      And MERS has told everyone system wide to no longer foreclose in the name of MERS. And MERS has nothing to do with the conveyance of the note, which was the basis of the borrower’s argument.

  2. F. Beard

    Yea Alabama!

    The Lord does have a sense of humor. He hands out brains on BOTH sides of the Mason Dixon.

  3. leapfrog

    “Paul Jackson has been forced to eat a bit of crow.”

    Wonder how he will eat it? BBQ’d, fried or ala king? Great article, Yves. Its always a pleasure to get good news like this on a Friday.

    1. Tao Jonesing

      Paul Jackson has been forced to eat nothing.

      The guy is paid to advocate a position in the marketplace of ideas. He doesn’t need to believe in what he saying to get paid, he just has to say it.

      Our discourse is dominated by Modern Realists who don’t believe at all in what they’re saying but have great faith in the process of political speech. They say what the say not to describe reality but to shape it.

  4. Bill

    Logic wins for a change. We must actually know that you own the mortgage before we allow you to foreclose.

    You must actually prove that you own said mortgage so numbers one thru five in the securitization chain cant make the same claim. Wow, what will they think of next? A way to keep track of who owns what? They should call this place a county recording office. Wouldnt it be cool if you could go to the “county recorders office” and see who owns property? It would help with stuff like you know, buying and selling property. We should really get this “county recorders” idea out there.

  5. mike

    Now watch the Foreclosure Settlement Protection Team of the TBTF’s shift into high gear.

  6. MichaelC

    It may be unoriginal for you to to say that he and his pals are gonna be eating a whole bunch of crow turd sandwiches as this moves into the next phase, so I’ll do it.

    If this precedent puts the NY trust theory case in the spotlight, things should get very interesting, very fast.

    Settlement? Whoa!

    I love the money quote:

    “surprised to the point of astonishment”

    Surprising and astonishing jaded judges signals there’s (some) more hope that the third arm of gov’t isn’t completely coopted (yet).

    Thanks for crowing about this (sorry) so tenaciously.

  7. Hell-No!-No-More-Bailouts!

    I sure wish that CA would catch on that the banksters are the ones after the ‘free houses’.

    I have an “America’s Wholesale Lender” loan (that is a TRADE-NAME for CountryWide, mind you). It is of 2005 vintage. Ah, an interesting bouquet there.

    Anyway, the current servicer’s staff generated FC docs in 2009. Then in 2010 provided a Proof of Claim to the BK court showing the creditor as CWABS 2005-10 with BNY as trustee.

    The month AFTER that in 2010 also, the servicer’s staff generated and recorded a single-step assignment from AWL to CWABS 2005-10 with BNY as Trustee.

    Just as in the cases decided in other states, this assignment is completely at odds with both the New York Trust Law that governs the CWABS Trust and the IRS code.

    When the HELL will the IRS go after BNY for the taxes owed instead of beating up all the little guys?

    Lookinng at the statement of the loans supposedly held in that trust, at a glance I would say that a MAJORITY are not current. IF all of the ‘CountryWide’ mortgages were handled like we have seen documented in ‘KEMP’, then those also were not transferred until AFTER they are in default.

    BNY has one HUGE tax bill that it should be advancing to the certificate-holders (if this trust has not actually paid all of them off previously).

  8. CaitlinO

    I have a few questions about this. My thanks to anyone who can answer and my apologies if any of the questions are naive:

    1. When the judge said he was “surprised to the point of astonishment” that the trustee violated the terms of the trust was he deliberately being sarcastic?

    2. Is the judge’s reference to “Horace and other mortgagors similarly situated” his suggestion that this decision should apply to those other mortgagors?

    3. Does this decision mean that Encore, the original lender, should be collecting the mortgage payments and is the entity with the right to foreclose? Are they able/likely to take on these roles at this late date?

    4. Saying that LaSalle’s trust does not own the property and can never again try to foreclose is clearly not the same as saying that Horace owns the property. What needs to be done to establish ownership? What happens if Horace wants to sell someday?

    5. Haven’t hundreds or thousands of lawyers presented this same argument around the country to help clients avoid foreclosure? Why was this case successful while so few others have been? Is this kind of argument/decision too judge-dependent?

    1. MichaelC

      Nice try “Caitlan”, (sweet handle,by the way).

      3. is the key point, but u knew that already.

      I’m pretty sure the judge has determined that the MBS is not really MB and so it’s anyone’s guess at this point who can foreclose. That’s not really his concern, after all. He doesn’t give a #$@$ who can forclose, he’s just making it clear that the trust can’t.

      Neither can any agents for the trust. Oops!

      Wrap your “naive” little head around that, then try to reargue points 4&5.

      Forgive my snark if you are genuinely new to this.

      1. CaitlinO

        Nice try at what?

        If I had already known something, I wouldn’t have asked.

        Where do you see arguments in 4 and 5? They read as questions to me.

        Yes, I’m new to this. I’m a professor at a university but my specialty is neither economics, finance nor the law. I’ve been reading NC for years and absolutely consider myself a student in this area, as well as many many others.

        If you don’t want to respond, then don’t.

        1. enjointhis

          Hi Caitlin;

          I’ll try to provide a few constructive comments, although you shouldn’t take what I provide for legal advice.

          1. Yes. He was slapping the hands of the lenders’ attorneys.

          2. Not really. Principles of collateral estoppel bar how far this decision can be binding. But he’s certainly suggesting to other Alabama judges (and judges everywhere, really) that the outcome is appropriate.

          3. Yes, maybe. To effectuate a transfer of a note, you have to endorse the actual, physical note. Most of these are stored in some random warehouses and will be poorly indexed, thereby making it really hard to find. A endorses to B, B endorses to C, C endorses to D, and so forth. But without the actual, physical endorsement (or chain of endorsements) D can’t collect on the note. Can “A” enforce the note? As a precept of law, probably yes (if the endorsements haven’t been made). But “A” has contractually assigned its rights to enforce the note to “B” (or maybe “C” or “D”). Hence the snarl.

          4. There’s the point. Horace obviously owes money to somebody. The question is to whom? And can that creditor actually foreclose on the property to collect the money? That’s the $64k question.

          5. I wish. I’m one of those lawyers who has successfully (more or less) argued the proposition (opposing party settled on very favorable terms when issue was pressed). But these fights are (a) quite difficult to raise, which makes them (b) quite expensive, and (c) when you’re behind in your mortgage payments, you don’t often have much luck finding lawyers with the (i) knowledge base, and (ii) willingness to fight the fight. Mine involved lots and lots of effort to get around the stonewalling.

          — ET!

          1. R Foreman

            > 4. There’s the point. Horace obviously owes money to somebody. The question is to whom? And can that creditor actually foreclose on the property to collect the money? That’s the $64k question.

            The loan was originally made via fractional-reserve ponzi, and proceeds probably used to pay off prior liens, so the originator who screwed up the loan creation should eat the loss.. that would be the bank/servicer.

            What the bankers want you to believe is that the homeowner should eat all the loss of everything they’ve already paid in, plus they (banks) should get paid default insurance (probably multiple times through different insurers), and then they take the house back and sell it as if they’d done nothing wrong and the title is clear as rainwater.

    2. dejavuagain

      “Haven’t hundreds or thousands of lawyers presented this same argument around the country to help clients avoid foreclosure? Why was this case successful while so few others have been? Is this kind of argument/decision too judge-dependent?”

      I do not think this argument has been made by hundreds or thousands of lawyers – if so, you could show us hundreds or thousands of decisions that specifically decide the point. This theory requires is somewhat advanced, and requires an understanding of New York Trust law, and, the understanding of the issues has only surfaced in recent months, thanks in part to Yves. Finally, any defending trust believing the law to be unclear, would ask to have the NY courts decide the issue – but, that would be most unfortunate if the trust lost – it would be suicide for the trustee.

      Most neutral lawyers having an understanding of the structure of these deals and the relevant law, and I assume you are one, would find the NY Trust argument to be very convincing.

      It is possible, by the way, the there is no longer a lien, and, the claim, if any, is an unsecured claim.

      Most importantly, the investors have a slam dunk case to receive 100% of their money back on the loan from the trustee and the lawyers and accountants providing opinions and representations to the investors.

    3. Yves Smith Post author

      Please read the case. It’s very well argued. The attorney is very clear that the borrower owes someone the money, presumably EMC, not the trust that showed up to foreclose.

      Re 4, they want a mod. Presumably they eventually do a quiet title action to clear up the title.

      Re 5, no this argument has not been made in thousands of cases. In fact, it’s only been made by this attorney, NIck Wooten. It takes expert witnesses to make this argument, your typical borrower’s counsel doesn’t do that.

      What has been taking place is a SIMILAR argument, but not one based on NY Trust, and very rarely on the PSA: “Judge, these people showed up but the can’t present a note endorsed to them” or “The person on the note and the person on the lien aren’t the same”.

      1. CaitlinO

        Yves –

        Thank you for the responses. I read the argument and, as a layperson, felt that the fact that the lawyer argued this from both the PSA and the law of gifts standpoints made it doubly convincing.

        It completely escaped me that the plaintiff wanted a mod – I hadn’t known about quiet title claims but that makes sense.

        I apparently thought, from reading here and at 4closurefraud, that the problem with the trusts and the inability to establish standing to foreclose if the notes were not properly endorsed per the PSA was more widely understood. I thought that the similar argument you referenced was really the same argument as that given in this case. Well, minus the law of gifts angle. That’s why I thought it must have been presented in court in numerous other cases.

        I would guess that now this decision was won, more lawyers will take the approach used by Wooten.

        1. Yves Smith Post author

          We’ve been talking about it here since last summer, and the idea is taken seriously enough to have been discussed in some of the Congressional hearings last fall and at some length in one of the Congressional Oversight panel reports. But actual cases move slowly, and because it takes expert witnesses, few attorneys have tried it, since broke borrowers usually cannot afford them. I am pretty sure Wooten (a night school Alabama lawyer who is a maniac at doing research) developed the theory, certainly I haven’t seen anyone else arguing it. The Congress case that was decided earlier came to trial last May and the judge took forever to rule. I’m told this is a two year old case.

          Mod discussions are pretty much never part of the pleadings, although they do often get discussed at the actual trial.

  9. Opinionated Bloviator

    If the Rule of Law is selectively enforced depending on political donations and this is allowed to stand, then the United States is FINISHED as a first world country and as such will continue to drift down the economic food chain until it hits Argentina or Mexico.

    Rule of Law – it’s the only thing that separates us from Zimbabwe and Somalia.

  10. Cosmo

    What happened to mortgage and title insurance? Where are the guarantors? guarantees? How did this all get so sloppy for so long? Anyone with a criminal mind could attempt to bypass the process, but why would anyone actually do it? Did it only happen because the banks set up MERS, or was that a CYA fabrication after the crimes were committed?

    1. financial matters

      Good questions. It seems that MERS was at least originally set up with poor legal groundwork hoping that it would become established just by being so big. It was set up to facilitate doing multiple transfers of a property more easily. It’s sloppiness became a perfect vehicle for fraud and the whole process became riddled with it. The judges that have the fortitude to give it a good look seem to be truly amazed as was this federal bankruptcy judge…

      United States Bankruptcy Judge Robert Grossman has ruled that MERS’s business practices are unlawful. He explicitly acknowledged that this ruling sets a precedent that has far-reaching implications for half of the mortgages in this country.

      In the scathing opinion, Judge Grossman variously labeled MERS’s positions as “stunningly inconsistent” with the facts, “absurd, at best”,and “not supported by the law”. The ruling is a complete repudiation of every argument MERS has made about the legality of its procedures

  11. WTF

    OBloviator, why is this NOT the rule of law? Ever hear of the “Law Of Frauds?” How does this decision NOT adhere to the Law Of Frauds?

  12. Fraud Guy

    I enjoy following the financial advice offered to the general public in the popular press, the stuff generated by Suzie Orman and her ilk. I note that I have yet to see any of these sages tell the public about the potential upside in contesting a foreclosure. The silence is deafening.

    1. Yves Smith Post author

      Sorry, this is really annoying, I updated the post and put the order in, I did have the pleadings and not the order by mistake. Richard Smith edited the post and it appears undid my correction. I know that wasn’t intentional, but I had updated this post with the order and it’s somehow reverted. Fixing

  13. pdaly

    I live in Massachusetts and, according to the local registry of deeds, the assignment of my mortgage is to MERS–assignment occurred the day after I closed with my local bank (which hold the second mortgage–it apparently has not reassigned the second mortgage).

    My question. Any ideas how I can force MERS to assign an actual bank or investment portfolio to register as the owner of my mortgage?

    I want them to pay registration fees to my local registry of deeds if and when MERS reassigments my mortgage to a different mortgage backed security, and I want reassurance that my servicer is supposed to be receiving my monthly payments.

    If I default on my mortgage that is one way, but I was wondering if there is a way to do this without defaulting? As a citizen of a nonjudicial state, are there actions home owners in good standing can take to force banks to pay their fair share and to dismantle MERS with a thousand cuts?

    1. Title State

      Borrower in “good standing”? With defects, you aren’t in any standing. The folks who have defaulted are in good standing, especially if current with their other creditors.

      1. R Foreman

        Yeah pdaly, looks like you’ll just have to default, file a quiet title action, take your free house, and be happy about it.. too bad, so sad for you.

    2. CaitlinO

      My understanding is that you are able to request that information in writing from your servicer. Be careful, though. Barry Ritholtz (I believe) had a blog entry up some time ago about a congresswoman who put in such a written request and the servicer responded by filing a nasty report at the credit bureaus, lowering her score. This kind of retaliatory behavior is supposed to be illegal, but it was what she claimed happened. Sorry, maybe others can remember the woman’s name or state, but it has escaped me now.

  14. Title State

    I want reality to emerge in a state like Maryland, where a judge could rule similary.

  15. Michael Haltman

    Very interesting. It is a topic I have given a CLE class on and one that poses a huge risk to the originators.

    60 Minutes is going to be going into it tomorrow night although they are a little bit late to the party.

    Some of my thoughts are at my company blog here ( Keep up the great work. I read Naked Capitalism every day.


  16. Conscience of a Conservative

    The banks dug themselves into a hole. They know the process is flawed and wish to hell they could do a “jimmy”. Clearly the promised money saved from using MERS was illusory, but they made a faustian bargain and now have to present false claims in court and pretend they have the right to foreclose.

    Talk to any banker and they will point out(correctly so) that the borrowers are not paying, and in many cases have their lawyers drag out the system promising to pay at the last second, etc. Reasonable people will not claim that people who don’t pay their mortgages should be gifted a home. But in my opinion this issue is a red herring. The real issue is “rule of law”, only the right parties should be allowed to foreclose and after following due process.

    What concerns me is that monies owed on these loans are ultimately intended for the investors in the trust. The bankers took the short cuts and ignored the PSA not the investors. In many cases these bonds are owned by municipalities, insurance companies, pensions, etc.

    It’s also concerning that parties representing home owners are arguing or massive principal reductions for what seems to be no other reason than under-water home owners, arguing that being under water is very correlated to borrower default, but just like high cholesterol is correlated to heart disease it does no mean that all people with high cholesterol will get a heart attack.

    As a society we seem to be encouraging people to stop paying their mortgages, letting the banks off at every turn(even bailing them out) and punishing investors at every turn. This is no recipe for a healthy financial system.

  17. indio007

    I’m pretty tired of the “free house” shtick.
    Even if the alleged borrower paid a single dollar that they labored for, the house would not be free.

    The bank never had even a nickel at risk due to Public Law 106–122 which allows the FED to issue new notes backed by the mortgage itself. This is a self-funding “loan”. So whatever notes the seller received, where backed by the house they just sold.

    The transaction is simply a conversion of the note of one maker into the note of another.

  18. pdaly

    Thanks for the answers. I don’t believe that my house can be owned free.
    I assume the debt remains, just that it becomes unsecured debt. I don’t know that a homeowner could file for a quiet title whether defaulting or not.

    I was asking is essence whether anyone has been successful at placing mortgage payments in escrow, to be payed to the rightful note holder if and when that bank/investment company/individual appeared with note in hand–and after they paid the relevant recording fees to the local registry of deeds.

    In addition to wanting to be certain that my servicer is legally entitled to the money I am sending, I want the banks’ money to flow back to local towns and cities, money that dried up for the local town when MERS was allowed to register as note holder.

    In addition, If my mortgage was wrapped into a mortgage backed security, but my note was never transfered during the tax free window, would I be able to find this out? Would I be able to help investors sue the banks for lying?

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