ANOTHER ONE BITES THE DUST!! IN RE BRIGID In re: MARY BRIGID, Chapter 7, Debtor. MARY ANN RABIN, Plaintiff, v. MARY BRIGID, et al., Defendants. Case No. 08-18750, Adversary Proceeding No. 09-1062. United States Bankruptcy Court, N.D. Ohio.

SAFE!

Via: Livinglies

More and more Judges are finding ways to destroy the entire mortgage — a message to those “lenders” who refuse to reduce principal as settlement of the dispute.

Submitted by Max Gardner

In re: MARY BRIGID, Chapter 7, Debtor.
MARY ANN RABIN, Plaintiff,
v.
MARY BRIGID, et al., Defendants
.

Case No. 08-18750.

Adversary Proceeding No. 09-1062.

United States Bankruptcy Court, N.D. Ohio.

May 21, 2010.

MEMORANDUM OF OPINION

ARTHUR I. HARRIS, Bankruptcy Judge

This matter is currently before the Court on the cross-motions for summary judgment of the plaintiff-trustee, Mary Ann Rabin, and defendant RBC Mortgage Company. At issue is whether the trustee is entitled to avoid a mortgage because the notary’s certificate of acknowledgment failed to recite the name of the party whose signature was acknowledged, notwithstanding a postpetition attempt to correct this omission. For the reasons that follow, the Court holds that the mortgage was not executed in accordance with Ohio’s statutory requirements and can be avoided by the trustee as it relates to the undivided half interest of the debtor Mary Brigid. Accordingly, the trustee’s motion for summary judgment is granted, and RBC Mortgage’s motion for summary judgment is denied.

FACTS AND PROCEDURAL BACKGROUND

Unless otherwise indicated, the following facts are not in dispute. The debtor Mary Brigid and non-debtor Susan Radbourne are joint owners of the real property located at 3000 Yorkshire Road, Cleveland Heights Ohio, 44118. The deed was recorded on September 10, 1999, and provides “Mary Brigid, unmarried and Susan M. Radbourne, unmarried remainder to the survivor of them.” On July 9, 2003, RBC Mortgage extended a loan to Radbourne. The loan was secured by a mortgage of the real property, which was recorded in the Cuyahoga County Recorder’s office, Instrument No. 20030110552 on July 11, 2003.

Page 26 of the mortgage (Docket # 38 Ex. D ) provides in pertinent part:

BY SIGNING BELOW, Borrower accepts and agrees to the terms and 
covenants contained in this Security Instrument and in any riders 
executed by Borrower and recorded with it.

WITNESSES:

X/s/ Brent A. White             /s/ Susan M. Radbourne     
 Brent A. White                Susan M. Radbourne  — Borrower

                                 /s/ Mary Brigid            
                                    — Borrower

STATE OF OHIO

COUNTY OF Cuyahoga   

 On this 9  day of July 2003 , before me, a Notary Public in and for 
said County and State, personally appeared
 Susan M. Radbourne                                             
 Unmarried                                
 ___________________________________________________________________
the individual(s) who executed the foregoing instrument and 
acknowledged that he/she/they did examine and read the same and
did sign the foregoing instrument, and that the same is 
his/her/their free act and deed.

IN WITNESS WHEREOF, I have hereunto set my hand and official seal.

                                    /s/ Brent A. White         
                                    Notary Public

                                                          (Seal)

                                 *   *   *

On November 7, 2008, the debtor filed a petition under Chapter 7 of the Bankruptcy Code (case # 08-18750). On February 5, 2009, the trustee of the Chapter 7 estate initiated this adversary proceeding seeking to avoid the mortgage of RBC Mortgage as it relates to the debtor’s half interest pursuant to section 544 of the Bankruptcy Code and to determine the interests of all parties in the property.

The complaint named as defendants Mary Brigid, Susan Radbourne, Mortgage Electronic Registration System,  RBC Mortgage Company, Chase Home Finance, Huntington National Bank, the Cuyahoga County Treasurer, and the City of Cleveland Heights. The treasurer, City of Cleveland Heights, Mary Brigid, Susan Radbourne, and RBC Mortgage filed answers to the complaint. In its answer, the City of Cleveland Heights asserted a judgment lien in the amount of $1,316.80 at the rate of 5% interest from February 26, 2009, No. JL06258471. Radbourne asserted an undivided half interest in the property in question. She also brought a cross-claim for negligence against RBC Mortgage and requested a reservation of her right to purchase the real estate pursuant to Section 363(i). In its answer, RBC Mortgage asserted that the debtor held only bare legal title and that the trustee had constructive notice.

On June 4, 2009, all parties stipulated that the Cuyahoga County Treasurer has the first and best lien on the subject property for taxes and assessments. On December 27, 2009, the debtor’s deposition was taken, at which the debtor acknowledged signing the mortgage outlined above. On January 13, 2010, attorney David A. Freeburg filed an affidavit of facts regarding the acknowledgment of the mortgage by Mary Brigid. On January 14, 2010, the trustee filed a motion for summary judgment seeking to avoid the mortgage held by RBC Mortgage. On January 21, 2010, RBC Mortgage filed a cross-motion for summary judgment and a response. Briefing on the cross-motions for summary judgment is complete, and the Court is ready to rule.

JURISDICTION

Determinations of the validity, extent, or priority of liens are core proceedings under 28 U.S.C. section 157(b)(2)(K). The Court has jurisdiction over core proceedings under 28 U.S.C. sections 1334 and 157(a) and Local General Order No. 84, entered on July 16, 1984, by the United States District Court for the Northern District of Ohio.

SUMMARY JUDGMENT STANDARD

Federal Rule of Civil Procedure 56(c), as made applicable to bankruptcy proceedings by Bankruptcy Rule 7056, provides that a court shall render summary judgment, if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.

The moving party bears the burden of showing that “there is no genuine issue as to any material fact and that [the moving party] is entitled to judgment as a matter of law.” Jones v. Union County, 296 F.3d 417, 423 (6th Cir. 2002). See generally Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Once the moving party meets that burden, the nonmoving party “must identify specific facts supported by affidavits, or by depositions, answers to interrogatories, and admissions on file that show there is a genuine issue for trial.” Hall v. Tollett, 128 F.3d 418, 422 (6th Cir. 1997). See, e.g., Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986) (“The mere existence of a scintilla of evidence in support of the plaintiff’s position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff.”). The Court shall view all evidence in a light most favorable to the nonmoving party when determining the existence or nonexistence of a material fact. See Tenn. Dep’t of Mental Health & Mental Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir. 1996).

DISCUSSION

Under the “strong arm” clause of the Bankruptcy Code, the bankruptcy trustee has the power to avoid transfers that would be avoidable by certain hypothetical parties. See 11 U.S.C. § 544(a). Section 544 provides in pertinent part:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by —

Page 7

. . . .

(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

11 U.S.C. §544. Any transfer under section 544 is preserved for the benefit of the estate. See 11 U.S.C. § 551.

The mortgage provides that federal law and the law of the jurisdiction in which the property is located will control. Because the real property in question is located in Ohio, the Court will apply Ohio law to determine whether the trustee can avoid the mortgages using the “strong arm” clause. See Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1024 (6th Cir. 2001) (applicable state law governs determination whether hypothetical bona fide purchaser can avoid mortgage).

Under Ohio law, a bona fide purchaser is a purchaser who “`takes in good faith, for value, and without actual or constructive knowledge of any defect.'” Stubbins v. Am. Gen. Fin. Serv., Inc. (In re Easter), 367 B.R. 608, 612 (Bankr. S.D. Ohio 2007), quoting Terlecky v. Beneficial Ohio, Inc. (In re Key), 292 B.R. 879, 883 (Bankr. S.D. Ohio 2003); see also Shaker Corlett Land Co. v. Cleveland, 139 Ohio St. 536 (1942). The Bankruptcy

Code expressly provides that a bankruptcy trustee is a bona fide purchaser regardless of actual knowledge. See In re Zaptocky, 25,0 F.3d at 1027 (“actual knowledge does not undermine [trustee’s] right to avoid a prior defectively executed mortgage.”). Because actual knowledge does not affect the trustee’s strong-arm power, the Court need only determine whether the trustee had constructive knowledge of the prior interests held by the defendant RBC Mortgage.

Ohio law provides that “an improperly executed mortgage does not put a subsequent bona fide purchaser on constructive notice.” Zaptocky, 250 F.3d at 1028. Ohio courts have refused to allow a recorded mortgage to give constructive notice when the mortgage has been executed in violation of a statute. See In re Nowak, 10,4 Ohio St. 3d 466 (2004) (listing cases). The first question, then, is whether the mortgage was executed in compliance with, or substantially conforms to applicable statutory law. A second question, if the mortgage was not executed in compliance, is whether the December 27, 2009, acknowledgment by Mary Brigid and the January 13, 2010, affidavit filed by attorney Freeburg corrected the defect. A third question, if the lien remains defective, is what interest the trustee is entitled to avoid.

The Mortgage Was Not Properly Executed in Accordance with Ohio Revised Code § 5301.01

Ohio Revised Code § 5301.01 requires four separate acts to properly execute a mortgage: (1) the mortgage shall be signed by the mortgagor; (2) the mortgagor shall acknowledge his signing in front of a notary public, or other qualified official; (3) the official shall certify the acknowledgment; and (4) the official shall subscribe his name to the certificate of acknowledgment. OHIO REV. CODE ANN. § 5301.01(A) (2004); see Drown v. GreenPoint Mortgage Funding, Inc. (In re Leahy), 376 B.R. 826, 832 (Bankr. S.D. Ohio 2007) (listing four requirements provided by Ohio Rev. Code. § 5301.01).2 At issue in this case is whether the certificate of acknowledgment, which omitted the name of Mary Brigid, satisfies the third requirement to proper execution of a mortgage.

Certification of an acknowledgment is governed by Ohio Revised Code sections 147.53-147.58. Ohio Revised Code section 147.53 provides:

The person taking an acknowledgment shall certify that:

(A) The person acknowledging appeared before him and acknowledged he executed the instrument;

(B) The person acknowledging was known to the person taking the acknowledgment, or that the person taking the acknowledgment had satisfactory evidence that the person acknowledging was the person described in and who executed the instrument.

The Ohio Revised Code further provides that a certificate of acknowledgment is acceptable in Ohio if it is in a form prescribed by the laws or regulations of Ohio or contains the words “acknowledged before me,” or their substantial equivalent. OHIO REV. CODE § 147.54. Ohio’s statutory short form acknowledgment for an individual is as follows:

      State of ________

      County of ________

      The foregoing instrument was acknowledged before me this (date) by
      (name of person acknowledged.)

      (Signature of person taking acknowledgment)
      (Title or rank) (Serial number, if any)

OHIO REV. CODE § 147.55(A).

The trustee argues that the mortgage was improperly recorded because the certification of acknowledgment does not conform to section 5301.01 of the Ohio Revised Code with respect to the debtor. Specifically, the trustee asserts that the clause fails to identify the name of the debtor. The Court agrees. Recent case law, including a 2008 decision from the Sixth Circuit BAP, supports the trustee’s position that an acknowledgment is defective if it fails to identify the person whose signature is being acknowledged. See In re Nolan, 38,3 B.R. 391 (6th Cir. B.A.P. 2008)In re Sauer, 41,7 B.R. 523 (Bankr. S.D. Ohio 2009); Daneman v. Nat’l City Mortg. Co. (In re Cornelius), 408 B.R. 704, 708 (Bankr. S.D. Ohio 2009) (“The absence of the name of the mortgagee acknowledging election is the functional equivalent of no certificate of acknowledgment and renders an acknowledgment insufficient.”); Drown v. Countrywide Home Loans, Inc. (In re Peed), 403 B.R. 525, 531 (Bankr. S.D. Ohio 2009) affirmed at No. 2:09cv347 (S.D. Ohio Feb. 18, 2010); Terlecky v. Countrywide Home Loans, Inc. (In re Baruch), No. 07-57212, Adv. No. 08-2069, 2009 Bankr. Lexis 608 at *22 (Bankr. S.D. Ohio Feb. 23, 2009) (“An acknowledgment clause containing nothing relative to the mortgagor’s identity is insufficient; rather, an acknowledgment clause must either identify the mortgagor by name or contain information that permits the mortgagor to be identified by reference to the mortgage.”); In re Leahy, 37,6 B.R. at 832. See also Smith’s Lessee v. Hunt, 13 Ohio 260, 269 (1844) (holding that court was unable to infer name of grantor when acknowledgment was blank as to the grantor and, thus, the mortgage was defective and did not convey title).

The holdings in Nolan, Smith’s Lessee, and similar cases are also supported by case law interpreting almost identical statutory provisions for acknowledgment clauses in Kentucky and Tennessee. See, e.g., Gregory v. Ocwen Fed. Bank (In re Biggs), 377 F.3d 515 (6th Cir. 2004) (affirming bankruptcy court’s decision avoiding deed of trust under section 544 and Tennessee law when deed of trust omitted names of acknowledging parties); Select Portfolio Servs. v. Burden (In re Trujillo), 378 B.R. 526 (6th Cir. B.A.P. 2007) (affirming bankruptcy court’s decision avoiding mortgage under section 544 and Kentucky law when debtor was not named or identified in certificate of acknowledgment).

Because RBC Mortgage conceded that at the time of execution the mortgage was defective, and because no argument was made regarding substantial compliance, this Court holds that the mortgage failed to substantially comply with the filing requirements. Therefore, the mortgage was improperly executed with respect to the debtor because the certification of acknowledgment failed to indicate who appeared before the notary public as required under Ohio Revised Code section 5301.01.

RBC Mortgage’s Attempt to Validate the Defective Mortgage via Section 5301.45 is Ineffective

The Court rejects the argument of RBC Mortgage that Ohio Revised Code section 5301.45 and Bankruptcy Code section 546(a)(1) allow it to correct a defective acknowledgment and defeat the trustee’s strong arm powers by using the debtor’s testimony taken at a deposition postpetition. First, section 5301.45 simply does not apply to any situation other than the correction of pagination of acknowledgment clauses. Second, even if section 5301.45 did apply, the postpetition acknowledgment by the debtor was not voluntary. These issues are discussed more fully below.

1. Section 5301.45 is meant as a mechanism to correct pagination only

While older versions of the statutes at issue in this case date back as early as the 1800’s, the Court begins its analysis with the 1910 version of the Ohio General Code. See THE GENERAL CODE OF THE STATE OF OHIO (The Commissioners of Public Printing of Ohio 1910) (“Being an Act entitled `An Act to revise and consolidate the general statutes of Ohio”). Section 8510 of the 1910 Ohio General Code provided:

A deed, mortgage, or lease of any estate or interest in real property, must be signed by the grantor, mortgagor, or lessor, and such signing be acknowledged by the grantor, mortgagor, or lessor in the presence of two witnesses, who shall attest the signing and subscribe their names to the attestation. Such signing also must be acknowledged by the grantor,

mortgagor, or lessor before a judge of a court of record in this state, or a clerk thereof, a county auditor, county surveyor, notary public, mayor, or justice of the peace, who shall certify the acknowledgment on the same sheet on which the instrument is written or printed, and subscribe his name thereto.   (Emphasis added). This 1910 statute outlined the requirements to validate a deed, mortgage, or lease, including the necessity for two witnesses and that the acknowledgment page be on the same page as the instrument, and is the precursor to Ohio Revised Code section 5301.01.

The original version of what is now Ohio Revised Code section 5301.45 is provided in Local Laws and Joint Resolutions, 57 v 10, and was titled as section 8559 of the Ohio General Code. The current version of the statute is substantially identical to its 1910 version and provides in full:

When a deed, mortgage, lease, or other instrument of writing intended to convey or encumber an interest in real estate is not printed or written on a single sheet, or when the certificate of acknowledgment thereof is not printed or written on the same sheet with the instrument, and such defective conveyance is corrected by the judgment of a court, or by the voluntary act of the parties thereto, such judgment or act shall relate back so as to be operative from the time of filing the original conveyance in the county recorder’s office.

OHIO REV. CODE § 5301.45.

Thus, the state of the law regarding the formal requirements of a valid mortgage in 1910 was that although section 8510 required the instrument and acknowledgment clause to be on the same page, section 8559 allowed for correction of this deficiency through voluntary act of the parties or judgment by the court. However, the Ohio Supreme Court held in 1939 that certificates bound to an instrument substantially complied with the statute. The Court explained that:

When the provision now found in Section 8510, General Code, was enacted, more than a hundred years ago, deeds, mortgages and leases were usually and could easily be written in their entirety on a single sheet of paper. In recent years many of such instruments are so long that to write or print them on one sheet would require a roll of paper. Often, too, the acknowledgments are so numerous as to present the same difficulty. What the Legislature sought by the enactment of the provisions now found in Section 8510 was no doubt the prevention of fraud that might be readily perpetrated if the certificate of acknowledgment were on a sheet separate from the instrument itself. With respect to the lease in litigation this danger is eliminated because the certificates are bound to the other parts by rivets so as to make a unified whole.

S.S. Kresge Co., v. Butte, 136 Ohio St. 85, 89-90 (1939).

Noticeably missing from later versions of section 8510 (now 5301.01 of the Ohio Revised Code), is the requirement that the notary certify the acknowledgment on the same sheet as the instrument. See OHIO REV. CODE § 1.01 (“All statutes of a permanent and general nature of the state as revised and consolidated into general provisions, titles, chapters, and sections shall be known and designated as the `Revised Code'”); OHIO GENERAL CODE § 8510, OHIO REV.CODE § 5301.01. In fact, the current version of section 5301.07 specifically provides that no instrument conveying real estate is defective or invalid because “the certificate of acknowledgment is not on the same sheet of paper as the instrument.”

It appears that section 5301.45 was enacted to afford an opportunity for parties to physically affix separate pages of an instrument and an acknowledgment clause to enable substantial compliance with section 5301.01. The Ohio Jurisprudence 3d contains an analysis of the interplay between these statutes.

[Section 5301.45] assumes that the certificate of acknowledgment must be printed or written on the same sheet with the mortgage, or else the mortgage is defective; but there is now no statute specifically requiring the acknowledgment to be on the same sheet. The reason for the above provision, so far as acknowledgments are concerned, undoubtedly lies in the fact that under an earlier from of RC section 5301.01, it was required that the acknowledgment be on the same sheet of paper as that on which the conveyance was written. It seems likely that the omission from the statute in this respect was due to judicial construction of the former statute, in regard to which the courts, recognizing the ever-increasing length of instruments such as mortgages, held that the instrument was valid where the sheets were securely fastened together and a certificate of acknowledgment was on the last page. In some cases, emphasis was placed upon the sheets being so fastened together that the one bearing the certificate of acknowledgment could not be removed without showing evidence of mutilation.

69 O. Jur. 3d Mortgages § 102 (1986).

The Ohio Transaction Guide, a multi-volume set that has provided

practitioners with research tools and practice tips for over thirty years is instructive and consistent with this Court’s understanding of the intention of the statute. Section 188.30 of the Ohio Transaction Guide provides that “if a deed is not printed or written on the same sheet with the instrument, the conveyance may be corrected by the judgment of a court or by the voluntary act of the parties.” It continues by providing that “[a]lthough it is not necessary to the validity of the deed that the acknowledgment appear on the same sheet of paper as the deed, the usual practice is to convey the property with the necessary acknowledgments on the same sheet.” Thus, the original and later versions of section 5301.45 were designed as a mechanism for correcting failure to adhere to a repealed requirement of section 5301.01. This Court holds that section 5301.45 was enacted to amend mortgages and deeds where the execution and acknowledgment clauses were on separate pieces of paper, at a time in history when such documents were required to appear on the same page, and the parties wished to physically bind them together. Therefore, section 5301.45 cannot be used to correct the type of acknowledgment clause defect at issue in this case.

2. The debtor’s postpetition acknowledgment was not voluntary

Even if this Court were to find that section 5301.45 can be utilized to cure a defective mortgage certification clause under section 546(b)(1), the debtor’s postpetition acknowledgment was not voluntary. Specifically, the debtor testified at a deposition after being served with process and was required to answer questions under oath. This is not the type of voluntary behavior provided for by the statute, especially because both the deposition and “re-recording” of the mortgage took place after the trustee had initiated this adversary proceeding, and served the debtor with a summons and complaint.

In summary, this Court holds that section 5301.45 can only retroactively perfect a mortgage where the instrument and acknowledgment clause are on separate pages, the parties voluntarily act to attach those pages, and the mortgage is otherwise a validly executed document. Therefore, the Court rejects RBC Mortgage’s attempt to use section 5301.45 and the debtor’s postpetition deposition testimony to correct the type of acknowledgment clause defect at issue in this case.

The Trustee May Avoid the Debtor’s Undivided Half Interest in the Subject Property

Although it is well established that a trustee may avoid a debtor’s half interest when a mortgage is found to be valid as to one co-owner and defective as to the other co-owner, RBC Mortgage asserts that the title of the tenancy held by the debtor and Radbourne somehow mandates a different result. This Court finds that Radbourne and the debtor held the property as joint tenants, as evidenced by the deed’s use of the language to “Mary Brigid, unmarried and Susan Radbourne, unmarried, remainder to the survivor of them,” (emphasis added). Section 5302.20 provides that a deed showing a clear intent to create a joint tenancy with rights of survivorship “shall be liberally construed to do so.” OHIO REV. CODE § 5302.20. This Court finds that based on the clear reading of the deed in question, the intention of the parties was to create a joint tenancy with rights of survivorship.

Further, joint tenants hold “an equal share of the title during their joint lives unless otherwise provided in the instrument creating the survivorship tenancy.” OHIO REV. CODE § 5302.20. Although this statute provides that joint tenants are subject to a proportionate share of the costs related to ownership, it also provides that when a creditor of a survivorship tenant enforces a lien against the debtor’s interest, the interest “shall be equal unless otherwise provided in the instrument creating the survivorship tenancy.” OHIO REV. CODE § 5302.20. This proposition is supported by recent case law. In Simon v. CitiMortgage, Inc., (In re Doubov), 423 B.R. 505 (N.D. Ohio 2010), the bankruptcy trustee sought to avoid the debtor wife’s half interest in property that both spouses mortgaged as joint tenants. The trustee argued that a defective acknowledgment rendered the mortgage avoidable as to the debtor wife. Judge Morgernstern-Clarren held:

When the debtors granted the mortgage, they held the property under a survivorship tenancy. See Ohio Rev. Code §§ 5302.17, 5302.20. Under this form of ownership each survivorship tenant holds an equal share of the title to the property during their joint lives (unless the instrument creating the tenancy provides otherwise, which this one does not.) Ohio Rev. Code 5302.20(B). . . .

. . . .

Under Ohio law, a person is precluded from granting a mortgage on property in which he has no interest. See Ins. Co. Of N. Am. v. First Nat’l Bank of Cincinnati, 444 N.E. 2d 456, 459 (Ohio Ct. App. 1981). Additionally “a mortgagor can only bind the estate or property he has, and a `mortgagee can take no greater title than that held by the mortgagor.'” Stein v. Creter (In re Creter), Adv. No 06-2042, 2007 WL 2615214, at *4 (Bankr. N.D. Ohio Sept. 5, 2007) (quoting 69 Ohio Jur. 3d Mortgages and Deeds of Trusts § 17); see also Stubbins v. HSBC Mortgage Servs., Inc. (In re Slack), 394 B.R. 164, 170 (Bankr. S.D. Ohio 2008). When Mr. Doubov gave the mortgage to Citifinancial, he only held title to the property under a survivorship tenancy; that one-half interest is what he mortgaged.

In re Doubov, 42,3 B.R. at 513-14.

Similarly, when the debtor and Radbourne mortgaged the property, they did so as joint tenants with rights of survivorship. The instrument creating the tenancy did not provide for other treatment of ownership, and thus the debtor, as a matter of law, held an undivided half interest in the property at the time it was mortgaged. When Radbourne gave the mortgage to RBC Mortgage, she only held a half interest, and that is what RBC Mortgage received. This conclusion is supported by the fact that both the debtor and Radbourne answered the trustee’s complaint by claiming an undivided half interest in the property, and this Court declines to consider any argument by RBC Mortgage that the debtor owes Radbourne some equitable relief as a result of her filing for a petition for bankruptcy. This Court holds that the certificate of acknowledgment is defective and the trustee can avoid themortgage as it relates to the undivided half interest of Mary Brigid.

Unresolved Matters Including Radbourne’s Cross-Claim

While it appears that this decision resolves most of the claims at issue in this adversary proceeding, one matter not yet addressed in this decision is Radbourne’s cross-claim against RBC Mortgage. In her cross-claim, Radbourne alleges that she was damaged as a result of negligence by RBC Mortgage in the preparation of the loan documentation and closing of the loan transaction that are the subject of this adversary proceeding. In its cross-motion for summary judgment, RBC Mortgage also seeks summary judgment on Radbourne’s cross-claim. Radbourne has not filed a response.

The Court is reluctant to decide the merits of Radbourne’s cross-claim absent further argument from the parties on the question of jurisdiction to hear this claim. For example, even if the parties were to consent to the undersigned judge entering a final judgment on the cross-claim, the Court has serious doubts as to whether it has “related to” subject matter jurisdiction over a non-debtor’s tort claim against another non-debtor. See 28 U.S.C. § 1334; In re Dow Corning Corp., 8,6 F.3d 482 (6th Cir. 1996).

An action is “related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankruptcy estate.”  86 F.3d at 489 (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)). For example, any recovery to the non-debtor Radbourne is unlikely to affect the debtor’s estate, either positively or negatively. Accordingly, any party wishing to have this Court decide the cross-claim should be prepared to address the issue of subject matter jurisdiction at a status conference at 1:30 P.M. on June 8, 2010.

In addition, while not included as a separate count, the trustee does seek, in her prayer for relief, authority to sell the real property, including the interest of the non-debtor co-owner. Therefore, counsel shall be prepared to advise the Court at the status conference as to what additional steps are needed to resolve all remaining claims in this adversary proceeding. Until there is a final decision on Radbourne’s cross-claim and any other unresolved claims, this is not a final judgment for purposes of 28 U.S.C. § 158. See Bankr. Rule 7054 and Fed. R. Civ. P. 54(b).

CONCLUSION

For the reasons stated above, the Court holds that the certificate of acknowledgment is defective and the trustee can avoid the mortgage as it relates to the half interest of the debtor. Accordingly, the trustee’s motion for summary judgment is granted. While it appears that this decision is largely dispositive, until there is a final decision on Radbourne’s cross-claim, this is not a final judgment for purposes of 28 U.S.C. § 158. See Bankr. Rule 7054 and Fed R. Civ. P. 54(b). The Court will conduct a status conference at 1:30 p.m. on June 8, 2010. Counsel shall be prepared to advise the Court as to what additional steps are needed to resolve all remaining claims in this adversary proceeding.

Page 24

JUDGMENT

For the reasons stated in the separate Memorandum of Opinion, the Court holds that the certificate of acknowledgment is defective and the trustee can avoid themortgage as it relates to the half interest of the debtor. Accordingly, the trustee’s motion for summary judgment is granted. While it appears that this decision is largely dispositive, until there is a final decision on Radbourne’s cross-claim, this is not a final judgment for purposes of 28 U.S.C. § 158. See Bankr. Rule 7054 and Fed R. Civ. P. 54(b). The Court will conduct a status conference at 1:30 p.m. on June 8, 2010. Counsel shall be prepared to advise the Court as to what additional steps are needed to resolve all remaining claims in this adversary proceeding.

IT IS SO ORDERED.

—————

Notes:

1. This Memorandum of Opinion is not intended for official publication.

2. In Zaptocky, the Sixth Circuit identified “three major prerequisites for the proper execution of a mortgage: (1) the mortgagor must sign the mortgage deed; (2) the mortgagor’s signature must be attested by two witnesses; and (3) the mortgagor’s signature must be acknowledged or certified by a notary public.” Zaptocky, 250 F.3d at 1024. The differences between Zaptocky’s three requirements and Leahy’s four requirements are (A) the deletion in Leahy of Zaptocky’s second requirement — attestation by two witnesses — due to a change in the statute, and (B) the Leahy court’s breaking down of Zaptocky’s third requirement — certification of acknowledgment — into three separate parts.

—————

No Penalties for Mortgage Company with Worst Loan Mod Backlog

by Paul Kiel, ProPublica – May 28, 2010 1:53 pm EDT

Jeanenne Longacre said she received a letter from Saxon Mortgage saying she was approved for a loan mod, but the final terms never came. She says she lost her home because of Saxon's errors.
Jeanenne Longacre said she received a letter from Saxon Mortgage saying she was approved for a loan mod, but the final terms never came. She says she lost her home because of Saxon’s errors.

Last week, the government released data [1] showing that there’s a big problem at Saxon Mortgage, a subsidiary of Morgan Stanley. Of all the mortgage companies participating in the administration’s mortgage modification program, Saxon has the largest proportion of homeowners caught in modification limbo.

The program, which provides incentives for mortgage companies to modify loans to an affordable level, has been plagued by delays and disappointing results. About 1.2 million homeowners have begun a “trial” modification, which is supposed to last three months. But less than a quarter of them have emerged with a real, lasting modification. (Here’s our backgrounder on the program and problems with it [2].)

As of April, about 265,000 homeowners [3] were caught in trials that had lasted more than six months. Nowhere is that backlog worse than at Saxon, a mid-sized subprime servicer based in Texas that was acquired [4] by Morgan Stanley in 2006 and has had long-running customer service problems [5].

Few of Saxon’s trials have converted into lasting modifications. As of the end of April, Saxon had put 40,000 homeowners into trials, but only about 11,000, or 27 percent, had received a permanent modification. Far more had either been dropped from the program (16,000) or were still waiting for a final answer after being in the trial for longer than six months (10,000).

The Four Mortgage Servicers with The Biggest Trial Backlogs

Servicers Est. # “Aged” Trials % of Active Trials that are “Aged”
Saxon Mortgage Services 9,839 76%
JPMorgan Chase 85,678 72%
U.S. Bank 2,064 58%
CitiMortgage 26,375 48%
Total for Program 265,015 42%

A close look at Saxon provides a window into problems with the program itself, in particular a glaring lack of oversight from Washington. While the government set up the program, it relies on mortgage companies to actually perform modifications. So far Washington has shied away from penalizing those servicers that have failed to follow the program’s rules or underperformed. Indeed, despite widespread problems [3] among mortgage servicers and frequent tough talk [6] from Treasury officials, who have often threatened penalties, the government has yet to issue a single one.

A spokeswoman for Saxon said that the company has been regularly audited, as have other participants in the government’s program, and that the reviews had uncovered no “material issues.”

For homeowners, on the other hand, the consequences of servicer problems can be all-too-real. Some homeowners say they lost their home because of errors by Saxon.

The country’s largest mortgage servicers are attached to the biggest banks like Bank of America, JPMorgan Chase and Wells Fargo, but a number of mid-sized servicers like Saxon are stand-alone companies or subsidiaries of other banks. As of 2008, Saxon serviced over 340,000 loans.

According to the Better Business Bureau, Saxon Mortgage Services requests that consumers with a complaint contact Robin Chrostowski, Assistant Vice President of the Customer Solutions and Innovation Team, at 817-665-7862 or email CSIteam@saxonmsi.com to resolve the issues prior to filing a complaint with the Better Business Bureau.

 

The company already had problems before the administration launched its mortgage modification program in April 2009. As the Wall Street Journal reported last July [7], Saxon ranked last among 20 servicers in a Credit Suisse analysis of how many subprime loans each had modified. The Better Business Bureau had given the company an “F” [5] rating, based on a profusion of consumer complaints.

But the company was among the first to sign up for the government program when it launched in April, 2009. In the first few months, Saxon put tens of thousands of homeowners into trial modifications. In a November press release, Saxon CEO Anthony Meola boasted [8] that Saxon was leading all other servicers in the number of trials it had begun.

The Treasury Department had set the rules of the program [9] to encourage servicers to rapidly enroll homeowners. Servicers were allowed to accept homeowners on the basis of their “stated” income, what a Treasury official described [9] as “a wing and a prayer.” The financial information would be verified later, after the trial began. While well-intentioned, the policy resulted in an enormous backlog of trials—homeowners who had been given temporary modifications and were waiting months for a final answer — and Treasury changed the program rules this spring to require verified income information up front.

Consumer advocates say that homeowners who are denied modification after making several months of trial payments are often worse off than if they’d never started the trial at all [9], because the process damages their credit and they’re prevented from saving for the possibility of foreclosure.

At Saxon, many homeowners seem to be caught in that limbo because of mistakes and delays at the company. John Riggins, the CEO of the Fort Worth Better Business Bureau, said that the biggest complaints about Saxon are that the company has misapplied payments or lost documents sent as part of the modification process. Saxon employees often blame computer problems or a lack of staffing, according to the complaints, which number 208 in the past year.

Jennifer Sala, a spokeswoman for Saxon, said the backlog was not caused by a lack of capacity, but resulted from a “careful review process” that “can take a considerable amount of time.” She added, “We want to afford our customers every opportunity to avoid foreclosure.”

Saxon has hired about 330 new full-time employees in the past year, she said, increasing the staff by 50 percent. Riggins of the Better Business Bureau said that the complaint volume had improved since last year, but that major problems remained. Saxon has improved only from an “F” to a “D-.” rating [10].

There are other signs Saxon has been struggling to handle the volume. In April, it transferred the servicing rights [11] for about 38,000 loans to Ocwen, which specializes in servicing troubled loans. “Normally the reason for selling loans to Ocwen is you don’t want to hassle with them anymore and they’re delinquent,” said Guy Cecala, the publisher of Inside Mortgage Finance. Some of the loans transferred were in the middle of the modification process.

Sometimes the communications from Saxon can be bewildering. Barbara Niederstein of Fayetteville, Ga., said she has twice received letters saying she was being dropped from the program. Both letters cited missing documentation as a reason, but she says she was never told it was missing. Saxon has threatened to pursue foreclosure. Niederstein says that hours spent on the phone with a housing counselor and Saxon employees has at least postponed that for a month, even if the confusion has yet to be cleared up.

 Jeanenne Longacre and her husband Robert.

Jeanenne Longacre and her husband Robert.

Jeanenne Longacre says she lost her home because of Saxon’s errors. She says Saxon wrongly set the trial payments at a level Longacre and her husband could only muster for a few months, and then booted her from the program when she couldn’t keep up the payments. Her house was ultimately sold out from under her after she says she received an assurance the sale would be delayed.

For months, her husband had been struggling to find steady employment when Longacre lost her job with California Blue Cross in February 2009. They were behind on their mortgage payments and faced foreclosure.

The pair, in their 50s with grown children, had been in the house for 10 years, but had refinanced in 2006 into an adjustable-rate loan with New Century, the now-defunct subprime lender. The Longacres were underwater on their mortgage, with their Los Angeles home worth about half as much as they owed.

Longacre says Saxon’s first error with her modification came with the level of the couple’s payments. The modified mortgage payment was set at $3,400, about $1,400 lower than the couple’s payments had been, but at a level they could maintain only with the help of temporary severance she was receiving. That severance would run out in August, just two months after her trial began in June.

Sala, the spokeswoman for Saxon, said she could not discuss Longacre’s case because company policy prohibited discussing customer information.

Trials are supposed to test the homeowner’s ability to make the reduced payments for a prolonged period of time. But Longacre says she always knew they would be able to make the payments only for a few months. By the time August, September came around, we started struggling,” she said. “It’s ridiculous paying that kind of money when you don’t have it.”

Still, Longacre kept paying. After August, the third month of the trial, came and went with no news, Longacre began calling Saxon regularly to find out what was happening. For months, she says she couldn’t get an answer. She was occasionally asked to send in a new document, but then the wait would continue.

Finally, she spoke to a negotiator in January this year, the eighth month of her trial. He told her she’d be approved for a permanent modification and that the payment, based on her family’s verified income, would be much lower, just $1,300 a month.

“I was so excited,” Longacre said. “I thought a miracle had happened.”

But her excitement was short-lived. She received a letter from Saxon in early February [12] saying she’d been approved for the modification, but the final terms never came. When she called to ask about that, she says she was told she had to make the trial payments for January and February or she’d face foreclosure.

The couple had missed those payments because their money had finally run out, she says. But even though Saxon had set their permanent modification at a level far below her trial payments, she was dropped from the program for not making all of her trial payments.

In March, she received a notice that Saxon would auction her home on April 1. She hired a lawyer to negotiate on her behalf, and it seemed like foreclosure had been temporarily avoided when a Saxon employee said the sale would be postponed until May in order to provide more time to work out another solution.

Longacre thought the auction had been deferred until a man knocked on her door in early April, saying that he represented the new owners of her home and was offering her money to vacate. The home had sold for $302,000, less than half of what the Longacres owed on the mortgage.

“That home was the only thing we had. I put it everything that I own into that home.” She currently lives in an apartment with her husband.

As we reported earlier this month, mistaken foreclosures can result from a lack of communication within the servicer itself [13]. In Longacre’s case, she says she was not provided a denial letter or given an opportunity to otherwise avoid foreclosure, as the federal program’s guidelines require.

Consumers advocates say the program does not offer an effective recourse for homeowners to redress servicer wrongs. Treasury officials say [13] that homeowners in Longacre’s position should call the HOPE Hotline, which is staffed with housing counselors, for help. Advocates say that’s been ineffective, and have long complained [14] about the lack of a formal appeals process for homeowners.

Longacre’s case also reflects on a problem faced by the hundreds of thousands of homeowners who’ve been caught in prolonged trials: whether they must keep paying after the three-month period expires, and whether mortgage companies can deny modifications if homeowners miss payments while they’re in limbo.

The Treasury Department has given conflicting answers for that question.

The program’s guidelines say [15] that borrowers remain eligible for a permanent modification “regardless of whether the borrower failed to make trial period payments following the successful completion of the trial period.”

Despite that apparently clear meaning, a Treasury spokeswoman told ProPublica homeowners were required to continue the payments “even if the period was extended to allow additional processing.”

Cohen, of the National Consumer Law Center, said that’s not how consumer advocates have understood the program’s rules. “The program rules are clear: a homeowner is required to make trial payments only until the effective date of the permanent modification, which is three months after the beginning of the trial period.”

Four other Saxon customers told ProPublica that they’d been disqualified for missing the extended trial payments. Sala, Saxon’s spokeswoman, said the company follows the program’s guidelines. It’s unclear if there will be any consequences for Saxon for any errors or rule violations. The Treasury has hired [16] Freddie Mac [17] to audit the servicers participating in the program, and so far, as Saxon’s spokeswoman has said, auditors have not flagged any “material issues” at the company. The Treasury spokeswoman said some information from the compliance reviews will eventually be made public, but none was available now.

 Write to Paul Kiel at paul.kiel@propublica.org

Housing Market Update: When Will House Prices Recover?

Since they all seem to be talking out of their asses…let me be frank and speaketh Le Face! Not in 5 yrs…not in 10 years…maybe in 20 years from now!

Seeing the inventory of shadow “hidden” reo’s there is no near in sight!

Now why give any loans today? The housing market is going down, these homes will continue to head under water? Buy today…Loose Tomorrow mentality? Especially the FHA loans??

5465.0

Description: A sign advertising new homes for sale is seen on March 24 in Davie, Florida. (Getty Images)

May 27, 2010 | From theTrumpet.com
Not any time soon.

Remember when all those government economists and National Association of Realtors analysts were saying that housing prices wouldn’t recover until the first half of 2009? Then it was by 2010? Now the truth is coming out. No one knows when housing prices will recover—if ever.

According to mortgage-bond legend Lewis Ranieri, don’t expect a meaningful rebound in house prices for at least three to five years: “There is another big leg down and the question is how long does it stay.”

Don’t be quick to dismiss what Ranieri says, because he is possibly the one individual who is arguably just as responsible for America’s great housing bubble as former Federal Reserve Chairman Alan Greenspan (who lowered interest rates to record lows to try to get us to spend our way out of a recession), the politicians (who forced banks to lend to unqualified individuals) and the investment ratings agencies (that rated subprime mortgages as triple-A safe).

Ranieri was the high-flying Salomon Brothers trader who first packaged mortgages into bundles that could be sold and traded as securities on a national and international level. He was the man who institutionalized mass mortgage investing. His innovations back in the 1980s helped reduce the cost of mortgages for millions of people. But they also paved the way for the junk subprime lending that helped fuel the housing bubble.

Now Ranieri is saying to get set for more trouble ahead. Over the next 18 months, at least 3 million more properties will join the 5 million already in some stage of distress. “It’s an immense problem” that risks “flooding the market,” he said.

The market for mortgage-backed securities has virtually dried up since 2008. With so many people falling behind on their payments, investors have not been able to rely on the steady streams of income that mortgage bonds historically produce. Plus, with house prices plummeting, investors don’t even have the protection of collateral.

With such adverse conditions, investors don’t want to touch American mortgages with a 10-foot pole.

Normally this lack of investment demand would drive up mortgage rates and weed out weaker borrowers—thus allowing the housing market to return to investable conditions.

However, due to government intervention to prop up the housing market, there has been an unforeseen side effect. America’s pool of mortgages has actually become riskier for investors.

In an effort to prop up house prices in America and thus keep the big banks solvent, the government began massively encouraging more people to invest in homes: It changed tax laws, it used taxpayer money to modify loans for people who had borrowed too much, it offered first-time home buyers credits, and then extended the buyers’ credits again once they expired.

It even used taxpayer dollars to ramp up subprime lending—the same kind of risky lending that got the banks into trouble in the first place.

It was one massive taxpayer-backed effort to increase the pool of home buyers and thus demand for houses and house prices.

But the scheme largely backfired.

The government subsidies and handouts did encourage more people to buy homes—but mostly people who couldn’t normally afford homes on their own.

Look at the numbers. About 95 percent of the money used to buy homes in America today comes from the government. And guess which government organization issues the most loans. Is it Fannie Mae and Freddie Mac, the two government mortgage giants notorious for their low lending standards? No, it is a new government agency with even lower standards.

Meet the Federal Housing Authority (fha). You can get an fha-backed loan for a house with as little as 3.5 percent down. This is the most common loan in America today. If you include the government’s $8,000 first-time buyer’s credit (that just expired), the government was actually paying people to borrow taxpayer dollars to purchase homes.

“This is a market purely on life support, sustained by the federal government,” admits fha president David Stevens. “Having fha do this much volume is a sign of a very sick system.”

The fha backed more loans during the first quarter of this year than the $6 trillion Fannie Mae and Freddie Mac mortgage giants did! Those were your dollars being given to subprime borrowers.

If you were an investor, would you want to lend money to someone who could not save up a down payment? Would you lend to a family that required two incomes to afford the loan and still couldn’t save up a down payment?

Thus, the government is stuck with all the mortgages. It can’t stop giving money for loans, or the market will collapse, the economy will head down again and politicians will look incompetent. Yet at the same time, how long can the government afford to provide money for 95 percent of all home-buying activity in the country?

With America’s ballooning budget deficits, the days of government handouts may soon come to an end. When they do, don’t be surprised if house prices fall a whole lot further.

So when will a recovery come? No one knows for sure, but even Lewis Ranieri will likely be proved an optimist.

For the real reason America’s housing market exploded, and how to fix it, read “The Cause of the Crisis People Won’t Face.” •

Police killers identified as activists on mission to spread anti-government message “MORTGAGE FRAUD”

In the final moments of their lives, West Memphis Police Department veterans Brandon Paudert and Bill Evans encountered Thursday an old white Plymouth Voyager minivan carrying 16-year-old Joe Kane and his 45-year-oldJerry R. Kane, right, and son Joseph T. Kane, left, have been identified as the two suspects killed in a gunbattle Thursday that left two West Memphis police officers dead.father, Jerry R. Kane — a man who unbeknownst to them harbored extreme anti-government views. He also had a record of previous trouble with police and a philosophy, which he credited to the Bible, of applying overwhelming violence to “conquer” foes.

Increasingly surreal revelations Friday about the Kanes gradually led to a late-evening confirmation by Arkansas State Police that Jerry Kane of Chester, Ohio, and Joe, of unknown residence, were indeed the dead suspects they believe killed Evans and Paudert — the son of the town’s chief of police.

The Kanes later wounded Crittenden County Sheriff Dick Busby and Deputy Chief W.A. Wren in the conclusive shootout at Walmart in which father and son were killed.

Jerry Kane traveled the country with his son giving seminars on what he called “mortgage fraud” and offering advice on foreclosure strategies. A website promoting those seminars provided a trove of information — audio files and YouTube videos and links to various documents — detailing his world views.

One particularly chilling YouTube clip involves Kane fielding a question about a “rogue” Internal Revenue Service agent: “Violence doesn’t solve anything, OK. It’s not violence that we’re after. The Bible even tells us that if you’re going to go and make war against somebody, you have to kill their sheep and their goats and their chickens and their babies and their wives. OK?”

In the YouTube video he said, “You have to kill them all. So what we’re after here is not fighting, it’s conquering. I don’t want to have to kill anybody, but if they keep messing with me, that’s what it’s going to have to come out. That’s what it’s going to come down to, is I’m going to have to kill. And if I have to kill one, then I’m not going to be able to stop, I just know it.”

In that video, he and Joe joke about using a bat to “take care of” a problem with an IRS agent.

In an Internet broadcast dated May 6, Jerry Kane talks about New Mexico police arresting him in April at a “Nazi checkpoint where they were demanding papers or jail.”

A woman identifying herself as Donna Lee, who lives in Clearwater, Fla., told The Commercial Appeal she was the common-law wife of Jerry Kane, and that, looking at news footage, she could identify the minivan, a black dog she called Olie escaping the van after the shootout and, finally, the lifeless body of her stepson, Joe, in front of the minivan.

At least one neighbor in Clearwater confirmed the presence of Joe and Jerry there over the past few months, although a background check showed Jerry had lived in central Ohio for much of his life — in Springfield much of the past two decades.

Other relatives confirmed similar details to The Commercial Appeal, including that another dog, named Missy Kate, was also traveling in the van. The West Memphis Animal Shelter confirmed that another dog, which had been killed, had indeed been found.

Another friend said the Kanes also traveled with a box of ashes of Jerry’s late wife, who was Joe’s mother. Lee also said Jerry Kane owned an AK-47 and carried it with him on trips because he liked taking it to shooting ranges.

But Lee insisted that Jerry and Joe Kane were doing good work, helping people with financial troubles keep their homes. A memorial website devoted to the Kanes sprang up early Friday expressing similar sentiments and featuring messages from many people clearly holding great affection — and even admiration — for father and son.

Ohio police records describe Kane as a burly man, 6-foot-2 and 230 pounds, who for a time wore a black beard. Since 1983, Kane was arrested or cited six times in Clark County, Ohio, on charges ranging from passing bad checks to criminal trespass, drunken driving and driving with expired tags.

Kane was charged with felonious assault in 2004 after allegedly shooting a 13-year-old boy in Springfield with a “handgun-style BB gun.”

Material on the website promoting Kane’s foreclosure-advising business displays classic rhetoric experts say is associated with anti-government groups. Topics discussed on the site include microchips inserted into people’s bodies, plots involving the H1N1 vaccine and the contention that U.S. dollars don’t constitute real money.

“It’s a classic Patriot or Sovereign Citizen website,” said Mark Potok, director of the nonprofit Southern Poverty Law Center.

In that YouTube clip about the “rogue” IRS agent, in which Jerry described his view of the proper use of violence, his son is shown laughing and offering to deal with the agent himself: “If you pay for the bat, I’ll take care of the problem.” Later, the son describes his view on violence: “They drew first blood. You are self-defending.”

Jerry Kane asks of the audience: “Can anybody tell that my son has never been to school? … He slipped though the cracks.”

Potok said a check of the Southern Poverty center’s databases found no mention of Kane, but that he clearly was at least influenced by extreme right-wing organizations. “Without question, Jerry Kane was mouthing some of the core ideas of anti-government, Patriot movement,” Potok said.

The white van in Thursday’s shootout was registered to a New Vienna, Ohio, organization called House of God’s Prayer. Potok said a former FBI informant says the building where the church was housed also once served as the headquarters for the Aryan Nations, a white supremacist group. “That was an incredibly violent bunch of people up there,” Potok said.

Lee rejected any suggestion that Jerry and Joe held racist views. She said Jerry Kane tried “to help everyone, it did not matter what their color.”

— Zack McMillin: 529-2564 — Marc Perrusquia: 529-2545

Florida-based freelancer Trevor Aaronson contributed to this story.

Florida AG investigating LPS subsidiary: Jacksonville Business Journal

Monday, May 17, 2010, 1:50pm EDT  |  Modified: Monday, May 17, 2010, 1:51pm

Jacksonville Business Journal – by Christian Conte Staff Writer

The Florida Attorney General’s Office has launched a civil investigation similar to one launched by a Florida U.S. Attorney’s Office against Fidelity National Financial Inc. and Lender Processing Services Inc., along with an LPS subsidiary, relating to possible forged documents in foreclosure cases.

According to the Attorney General’s website, DOCX LLC, based in Alpharetta, Ga., “seems to be creating and manufacturing ‘bogus assignments’ of mortgage in order that foreclosures may go through more quickly and efficiently. These documents appear to be forged, incorrectly and illegally executed, false and misleading. These documents are used in court cases as ‘real’ documents of assignment and presented to the court as so, when it actually appears that they are fabricated in order to meet the documentation to foreclosure according to law.”

The Attorney General’s Economic Crimes Division in Fort Lauderdale is handling the case.

Fidelity National Financial (NYSE: FNF), based in Jacksonville, provides title insurance, specialty insurance, claims management services and information services. Lender Processing Services (NYSE: LPS), also based in Jacksonville, provides mortgage processing services, settlement services, mortgage performance analytics and default solutions.

Fidelity National acquired DOCX, which processes and files lien releases and mortgage assignments for lenders, in 2005.

The U.S. Attorney’s office launched its investigation of DOCX in February.

LPS stated in its 2009 annual report that there was a “business process that caused an error in the notarization” of mortgage documents, some in the foreclosure proceedings in “various jurisdictions around the country,” according to a filing with the U.S. Securities and Exchange Commission.

While the company said it fixed the problem, the annual report stated it spurred an inquiry by the Clerk of Superior Court in Fulton County, Ga., and most recently, LPS was notified by the U.S. Attorney’s Office for the Middle District of Florida, based in Tampa, that it is also investigating the “business processes” of DOCX.

cconte@bizjournals.com | 265-2227
Read more: Florida AG investigating LPS subsidiary – Jacksonville Business Journal:

RELATED STORY: MISSION: VOID LENDER PROCESSING SERVICES “ASSIGNMENTS”

Even More Embarrassment for Banks: Foreclosure Fraud

Even More Embarrassment for Banks: Foreclosure Fraud

Oppenheim Law

cartoon_bank_bailoutWhat could be more embarrassing for the already floundering banks than the fact that their foreclosure, loan modification and short sale systems are a complete mess?

Well, a recent court decision in a mortgage foreclosure lawsuit in Pasco County, FL, revealed the banks, besides being disorganized, are apparently not above stooping to commit fraud in order to file foreclosure actions against homeowners.   You can view the Court’s order by clicking here.

Many homeowners probably don’t know the bank has to prove it has standing to bring a foreclosure action.  Standing is the constitutional right for a party to appear to bring a case in court.  Without standing, a party has no right to be in court. But in reality, the bank must prove that they in fact own and hold both the mortgage and promissory note, and thus have the right to foreclose.

This becomes a problem for banks because they are so disorganized that the documents are often lost or misplaced. An even bigger problem occurs when the original mortgage lenders sell the mortgages and notes and convert them into a securitized trust. When these mortgages are assigned to another bank or a securitized trust, the assignment of mortgage must be executed and notarized. Within these assignments, foreclosure defense attorneys are finding all kinds of problems that are leading to foreclosure cases being thrown out of court.

Fraud in the Court

A problem found in an assignment of mortgage that was recently thrown out by the court was especially astounding. The Plaintiff, U.S. Bank, filed a foreclosure action on December 6, 2007, based on an alleged assignment of mortgage dated as of December 5, 2007.

However, during the course of the litigation, the homeowner’s attorney noticed that the Notary’s commission was dated to expire on May 19, 2012. Pursuant to Florida law, notary stamps are only valid for 4 years. So, the notary that signed the assignment back on December 5, 2007 could not have had a notary stamp that expired in May of 2012.

This fact was confirmed by a sworn affidavit by the Notary Bonding Company’s representative, confirming that this Notary’s stamp was not issued until April 2008, five months after the purported date of assignment on the mortgage.

Based on this evidence, the judge found that the assignment was “fraudulently backdated in a purposeful, intentional effort to mislead the defendant and this court.”

On these grounds, the Judge found the defendant homeowner was the prevailing party because the Plaintiff lacked standing to file the lawsuit on December 6, 2007, and granted the Defendant’ attorney’s fees as well.

Defending is Better than Default

This news brings hope to many homeowners and shows defending the foreclosure action is better than doing nothing at all.  Additionally this teaches us we should never accept anything on its face and scrutinize every document produced by the banks to support their foreclosure complaint.

An argument can be made that Judges should be examining the authenticity of the documents produced by the Plaintiff before entering default and granting summary judgment against homeowners. However, in all likelihood, mistakes such as these are slipping through the cracks with the unprecedented number of foreclosure actions each judge has on their docket.

Thus, these kinds of problems truly exemplify why it is in every homeowner’s best interest to defend their foreclosure and not assume the court system will automatically protect their interests.

OTS Consumer Complaint Form BANK REGULATORS

THE OCC IS THE BEST FOR THE DBNTC TRUSTS. This is a helpful way to get the masses to contact the regulators.

Too Big To Jail? Executives Unscathed As Regulators Let Banks Report Criminal Fraud: HUFFINGTON POST

Huffington Post Investigative Fund |  David Heath First Posted: 05- 3-10 09:24 PM   |   Updated: 05- 3-10 09:44 PM

Republished from the Huffington Post Investigative Fund.

The financial crisis has spawned hundreds of criminal prosecutions for alleged fraud. Yet so far, defendants have been mostly minor players such as real-estate agents, mortgage brokers, borrowers and a few low-level bank employees. No senior executives at large financial institutions face criminal charges.

Too Big To JailThats in stark contrast to prosecutions during the savings and loan scandal two decades ago, when the government’s strategy targeted and snagged some of banking’s most powerful players. The approach back then succeeded in sending scores of S&L executives to prison, as well as junk-bond king Michael Milken and business tycoon Charles Keating Jr.

One explanation for the difference may be that key bank regulators — who did the detective work during the S&L crisis and sent more than 1,000 criminal referrals to prosecutors — have this time left reporting fraud up to the banks themselves.

Spokesmen for two chief regulators, the Comptroller of the Currency and the Office of Thrift Supervision, say that they have not sent prosecutors a single case for criminal prosecution.

An OTS spokesman said the agency, much like the banks themselves, does not see much evidence of criminal fraud inside the financial institutions. The spokesman, Bill Ruberry, citing the agency’s enforcement director, said, “There may be some isolated cases, but certainly there’s no widespread patterns.”

That surprises William K. Black, a former OTS official who helped coordinate criminal investigations during the S&L crisis.

“Dear God,” Black said when told bank regulators haven’t made any criminal referrals. “Not a single one?”

Black sees many signs the the government is less aggressive than during the S&L era — and could result in more bad behavior.

“This crisis was not bad luck,” he said. “It was done to us. When you bring those convictions, you hope that at least for a while to deter.”

Banks have reported massive amounts of fraud to the Treasury Department but have not held themselves — or their top executives — responsible, instead pinning blame on borrowers, independent mortgage brokers, and others.

That may account for the dearth of prosections against big fry. For instance, in California, among states where the mortgage meltdown hit hardest, the Huffington Post Investigative Fund identified 170 mortgage fraud prosecutions in federal courts. Only two are against employees of a regulated lender.

An Investigative Fund analysis shows that two-thirds of the 170 prosecutions are against mortgage brokers, real-estate professionals or borrowers — the same groups blamed by the banks when they report suspicious activities to regulators.

Besides the absence of criminal referrals, other plausible factors for the lack of major prosecutions may include a skittishness among prosecutors about filing cases they could have trouble winning, and a severe decline in investigative resources. The FBI dramatically shifted resources away from white-collar crime after the 2001 terrorist attacks.

To be sure, there are also notable differences between the S&L and current financial crisis, in the behavior of lenders during both periods, and between civil allegations of fraud and proving that someone committed a crime — all of which could account for the lack of big prosecutions.

But interviews with several law enforcement authorities suggest another explanation: A lack of active assistance to prosecutors by bank regulators who played key roles during the S&L crackdown. Those regulators sent detailed reports to prosecutors of known and suspicious criminal activity.

“Only the regulators can make a lot of these cases,” Black said. “The FBI can make a few, but the regulators are the ones that understand the industry.”

Under intense political pressure in the late 1980s, the Justice Department and thrift regulators developed a strategy to thoroughly investigate failed S&Ls for evidence of fraud and to focus their resources on the highest ranking executives.

In the early years, between 1987 and 1989, there were more than 300 prosecutions. Some bank executives were already behind bars. In 1989, Woody Lemons, chairman of Vernon Savings and Loan in Texas, was sentenced to 30 years.

In June 1990, then-OTS director Timothy Ryan told Congress that his agency had established criminal-referral units in each of 12 district offices. In addition, more than 30 OTS employees were assigned as full-time agents of grand juries or assistant US attorneys to help prosecutions. And the agency prioritized prosecutions to a Top 100 list, targeting senior S&L executives and directors.

While data on criminal referrals during the S&L crisis is spotty, the Government Accountability Office reported that in the first ten months of 1992 alone — a random snapshot — financial regulators sent the Justice Department more than 1,000 cases for criminal prosecution.

One study showed that 35 percent of criminal referrals in Texas — ground zero for the S&L problems — were against officers and directors.

This time, prosecutors are relying more heavily on banks to report suspicious activity to the Treasury Department. Banks are required to report known or suspected criminal violations, including fraud, on Suspicious Activity Reports designed for the purpose. In effect, the reports, which can be many pages in length, provide substantive leads for criminal investigations.

Black scoffs at the strategy of leaving it to banks to ferret out all the fraud. “Institutions will not make criminal referrals against the people who control the institutions,” said Black.

A white-collar criminologist and law professor at the University of Missouri-Kansas City, he argues that there’s ample evidence of fraud. Insiders working for lenders openly referred to loans they made without proof of income as “liar loans.” Many banks actively sought inflated appraisals in their rush to make as many loans as possible. As previously reported by the Investigative Fund, such lending practices contributed to the demise of Washington Mutual.

Not everyone agrees that such a case can be successful. Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. An investor in loans who documents fraud can force a bank to buy the loan back. But convincing a jury that executives intended to make fraudulent loans, and thus should be held criminally responsible, may be too difficult of a hurdle for prosecutors.

“It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said.

So far, only sporadic news reports suggest that the Justice Department has ongoing criminal investigations against major banks such as Washington Mutual and Countrywide, as well as investment bank Goldman Sachs.

Fewer Cops on the Beat

The Justice Department, in response to written questions from the Investigative Fund, acknowledged the absence of criminal referrals from financial regulators. Months into the financial crisis, a new Financial Fraud Enforcement Task Force, formed by President Obama last fall, was trying to work out communication problems between Justice and the regulatory agencies, according to the head of the task force, Robb Adkins. Adkins has said that criminal referrals from regulators have been “too often the exception to the rule.”

At a Congressional hearing in December, Assistant Attorney General Lanny Breuer was asked why there have been no criminal cases brought yet against CEOs. “Don’t for a moment think [these cases] aren’t being investigated,” Breuer replied. “They are complicated cases. It took a long time in hatching them and developing them. But they will be brought.”

The system that tracks Suspicious Activity Reports, or SARs, detected a dramatic increase in mortgage fraud starting in 2003, when reports of mortgage fraud nearly doubled within a year from 5,400 to 9,500. By 2007, the number had exploded to 53,000. During those same years, many mortgage lenders dramatically lowered their lending standards. Banks often required no proof of income. Borrowers could even get loans without be able to repay them.

Yet in their reports, banks overwhelmingly have blamed others for fraud. Whenever a borrower’s income was wrong on a loan application, the banks fingered borrowers 87 percent of the time and independent mortgage brokers 64 percent of the time, according to a 2006 Treasury analysis of the SARs. But the bank’s own employees were almost never blamed — only about four times in every 1,000 reports.

That might explain why so few prosecutions have targeted bank insiders.

Another reason for fewer prosecutions against bank employees is that the Federal Bureau of Investigation has far fewer agents working on the current crisis. Deputy Director John Pistole testified before Congress last year that the bureau had 1,000 people working on the S&L crisis at its height. That compares to about 240 agents working on mortgage fraud cases last year.

The FBI dramatically shifted its resources away from white-collar crime and to terrorism after the Sept. 11 attacks.

“We just didn’t have the cops on the beat” during the recent crisis, said Sen. Ted Kaufman, the Delaware Democrat who conducted a hearing on the lack of criminal prosecutions. “I was around during the savings and loan crisis [as a Congressional aide] and we had a lot more folks working it when it went down.”

Even with additional funding from Congress, which Kaufman helped push through, the FBI is budgeted to have 377 people working mortgage fraud cases this year, about a third as many as during the S&L investigations.

Charges Harder to Prove?

Charges in the recent banking crisis may be harder to prove, said Robert H. Tillman, who teaches at St. John’s University and who analyzed data about S&L prosecutions. Savings and loan executives who were convicted often personally approved large commercial loans for projects doomed to fail. Some would use federally insured deposits to pay themselves excessive salaries or to lend money to their own real estate projects. A few even took kickbacks.

This time, lending executives may have encouraged the making of bad loans, but they generally did not personally approve the loans, Tillman said. They didn’t send emails telling the troops to make fraudulent loans but paid big commissions to loan offers who made risky loans. Then the executives were able to reap huge bonuses for making the company look so profitable.

So far, the biggest cases have been civil lawsuits brought by the Securities and Exchange Commission, including most recently a highly publicized securities fraud case against Goldman Sachs and one of its vice presidents, Fabrice P. Tourre. News reports suggest that a referral from the SEC’s enforcement division to the Justice Department has led to a criminal inquiry.

Typically, federal authorities deal with massive financial scandals by picking a few cases they are confident they can win, said Henry Pontell, an expert on fraud at the University of California — Irvine.

This time, the administration may have been more focused on saving failing banks — and an entire financial system — than in prosecuting bank executives, Pontell said. Giving billions in bailout dollars to executives who encouraged fraudulent practices not only could complicate a case, it could prove embarrasing, he added.

§ 152. Concealment of assets; false oaths and claims; bribery

 

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§ 152. Concealment of assets; false oaths and claims; bribery

How Current is This?
A person who­
(1) knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or, in connection with a case under title 11, from creditors or the United States Trustee, any property belonging to the estate of a debtor;
(2) knowingly and fraudulently makes a false oath or account in or in relation to any case under title 11;
(3) knowingly and fraudulently makes a false declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, in or in relation to any case under title 11;
(4) knowingly and fraudulently presents any false claim for proof against the estate of a debtor, or uses any such claim in any case under title 11, in a personal capacity or as or through an agent, proxy, or attorney;
(5) knowingly and fraudulently receives any material amount of property from a debtor after the filing of a case under title 11, with intent to defeat the provisions of title 11;
(6) knowingly and fraudulently gives, offers, receives, or attempts to obtain any money or property, remuneration, compensation, reward, advantage, or promise thereof for acting or forbearing to act in any case under title 11;
(7) in a personal capacity or as an agent or officer of any person or corporation, in contemplation of a case under title 11 by or against the person or any other person or corporation, or with intent to defeat the provisions of title 11, knowingly and fraudulently transfers or conceals any of his property or the property of such other person or corporation;
(8) after the filing of a case under title 11 or in contemplation thereof, knowingly and fraudulently conceals, destroys, mutilates, falsifies, or makes a false entry in any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor; or
(9) after the filing of a case under title 11, knowingly and fraudulently withholds from a custodian, trustee, marshal, or other officer of the court or a United States Trustee entitled to its possession, any recorded information (including books, documents, records, and papers) relating to the property or financial affairs of a debtor,

shall be fined under this title, imprisoned not more than 5 years, or both.

Loan registry raises legal questions: MERS

Excellent Article on MERS

Loan registry raises legal questions

Foreclosures » Courts, legal scholars question company’s role.

By Tony Semerad

Updated: 04/24/2010 11:18:14 PM MDT

 

A small real estate data-management company is the focus of a widening legal controversy that could affect millions of U.S. foreclosures, including thousands filed against distressed homeowners in Utah.

The nation’s largest lenders created Mortgage Electronic Registration Systems (MERS), of Reston, Va., in 1994 as a loan registry designed to save millions of dollars on paperwork and recording fees. By registering mortgages with the private computer-tracking system and, in effect, putting loans under MERS’ name, lenders could avoid having to file public documents each time a mortgage was bought and sold.

The arrangement served its purpose well as markets went up. By MERS’s own estimates, it saved mortgage lenders more than $1 billion during a decade, and the efficiencies it brought to mortgage trading played a key role in the growth of mortgage-backed securities and the housing boom.

But with the economic downturn and crush of foreclosures, MERS is now showing up on tens of thousands of foreclosure notices sent to delinquent homeowners, including nearly 3,000 sent in Utah since July 2008, most of them in Salt Lake County.

Here and nationally, the company’s legal status as a party in these actions is increasingly being challenged.

“This is one of the buried, yet-to-emerge bombs in the whole mortgage crisis,” said Christopher Peterson, a University of Utah law professor and author of the first scholarly analysis of MERS and its legal underpinnings, to be published this spring in the University of Cincinnati Law Review . “This has the potential to fundamentally affect the trajectory of our recovery.”

‘A tax evasion broker’ » MERS officials vigorously disagree, but Peterson contends the MERS system has violated a deep-seated principle of American law — transparency in land-ownership transactions — by effectively removing much of that information from the public record. In so doing, Peterson says, MERS also has served as “a tax evasion broker,” denying counties millions of dollars in recording fees — revenue that might otherwise have funded essential public services.

And now, by allowing actual lenders to pursue foreclosures under MERS’ name instead of their own, Peterson says the company is acting as a “foreclosure doppelganger.”

“Throughout history, executioners have always worn masks,” the U. professor writes in his article, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System .

“In the American mortgage lending industry, MERS has become the veiled man wielding the home foreclosure ax.”

‘Lucky ones …are …with MERS’ » A MERS official played down the controversy, saying that without MERS, the current real estate meltdown would be much worse. Its process makes mortgage data more accurate and reliable, while reducing errors and keeping costs low, spokeswoman Karmela Lejarde said.

Lenders initiate foreclosures under the name of MERS, which functions as an industry utility, she said. Parties to a MERS action have full access to the ownership trail through the MERS registry, Lejarde said.

“We’re all for systematic tracking and transparency,” she said. “It’s the lucky ones whose loans are registered with MERS and are able to track down what happened.”

As more and more homeowners and their lawyers fight foreclosure, courts are having to weigh in, and in some cases, their interpretations conflict. Given the numbers at stake — the MERS registry holds an estimated 60 million U.S. mortgages — many in the industry have a sense of foreboding.

“This could be the scam from hell,” Salt Lake County Recorder Gary Ott said.

Legal issues aside, MERS has complicated and even thwarted efforts by some homeowners in foreclosure as they seek to contact and negotiate with whomever legitimately holds their loan.

“They don’t know who their investor is and the lender won’t always tell them,” said Kristin Johnson, chairwoman of the Housing Education Coalition of Utah and a foreclosure-prevention counselor. “If you don’t know who their investor is, how do you get resolution for the homeowner?”

Peterson and others warn the system may also be derailing efforts to track down and prosecute shady lending practices.

Representatives of the Utah lending community say use of the loan registry has been standard operating procedure, endorsed of government backed agencies such as Fannie Mae and Freddie Mac, which were instrumental in MERS’ creation.

And all of the participants in the mortgage boom — home buyers, lenders, loan servicers and real-estate companies — benefited from savings that MERS generated, according to Julia Borst, president of the Utah Mortgage Lenders Association, a trade group for lenders.

In terms of using technology to modernize the processing of mortgages, “it all makes sense for this to have been set up,” said Cleon Butterfield, chief financial officer for the Utah Housing Corporation, a state-backed lending agency.

Yet, virtually everyone agrees the company’s role has been radically transformed by the mortgage collapse.

“MERS was intended to be a repository of all these records, but it turned into something else,” said Rick Sharga, senior vice president for RealtyTrac, which tracks foreclosures nationwide. “They became the foreclosing party of record and it’s hard to argue logically that a registry should be a foreclosing party of record.”

‘Patch-up job’ » Amid the current explosion in foreclosure actions across the country, courts in Nevada, Florida, Minnesota and elsewhere have upheld MERS standing as a foreclosing party. MERS also points to a 2009 federal case in Utah that affirmed its authority to exercise certain legal powers accorded to the lender, including the right to foreclose.

But several MERS foreclosures have bogged down when parties could not produce the original loan or “blue-ink” documents on judicial demand. In September, the Kansas Supreme Court ruling took a dim view of the idea of a “nominee” of the lender filing foreclosures — a position that some observers see as hostile to the MERS approach.

The New York Times quoted University of Missouri law professor Patrick Randolph as saying, “The entire structure of MERS as recorded nominee could collapse in Kansas, and that could lead to a patch-up job where they would have to run around and re-record the mortgages.”

Homeowners in Delaware, meanwhile, have filed a class-action lawsuit against MERS, over what they claim are fraudulent fees charged by lenders seeking to foreclose under the MERS name.

Lejarde, the MERS spokeswoman, said the company’s practices have not been significantly affected by the cases.

It’s a bloody mess » In Utah, where foreclosure rates are dramatically outpacing the national average, cases already are bubbling up in state and federal courts that raise issues regarding MERS’ role.

“There is a flaw in the system that was set up by the stakeholders,” said Salt Lake City attorney Walter Keane, who is pushing several such cases. “Anyone could use these arguments.”

Some predict severe economic consequences if MERS’ role in foreclosures is undercut. Lenders will have no choice but to tighten credit if their ability to foreclose on delinquent loans is hampered, said Borst, of the Utah Mortgage Lenders Association.

With bank bailouts, federal regulators are hammering on foreclosing banks to be consistent from state to state, she said. Combine that with a coming foreclosure surge and state courts taking divergent positions on who has the right to foreclose, Borst said, “and it’s a bloody mess. There’s no other way to put it.”

tsemerad@sltrib.com

Loan registry raises legal questions

What is MERS?

MERS, or Mortgage Electronic Registration Systems, is a small Virginia-based company created by the lending industry in 1994 to register and track home mortgages.

The registry allowed lenders to avoid having to file public documents and pay fees each time a mortgage changed hands, but with the real estate collapse, MERS now is initiating millions of foreclosure actions nationally, prompting legal questions about its role.

The Salt Lake Tribune