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From Banking and Finance Law Daily, February 21, 2017

Homeowners can’t avoid seeking administrative decision on mortgage defect claims

By Richard A. Roth, J.D.

Two married homeowners have failed to convince the U.S. Court of Appeals for the Fourth Circuit that their claims arising out of refinancing their mortgage loan and subsequent default and foreclosure were exempt from the administrative claims process established by the Financial Institutions Reform, Recovery and Enforcement Act. Of the 14 separate counts at issue, 11 should have been submitted to the Federal Deposit Insurance Corporation for consideration, the court said. The remaining three simply failed to describe causes of action against the banks and servicer being sued (Willner v. Dimon, Feb. 16, 2017, Diaz, A.).

Dealings with WaMu. According to the homeowners, they refinanced their original mortgage using Washington Mutual Bank in 2006, with only the husband signing the note. The wife, however, did sign the trust deed that secured the loan. Less than two months later, the note was transferred to a WaMu affiliate, which securitized it.

WaMu was placed in receivership two years later, and JP Morgan Chase Bank took over essentially all of WaMu’s assets and liabilities. Chase did not assume any liability for acts or omissions of WaMu—that liability remained with WaMu’s receiver, the FDIC.

Loan default. Nearly two years after WaMu failed, the homeowners tried to refinance their loan through Chase. After being told their income was insufficient, they tried to sell the home. That effort failed as well. An effort to modify the loan through the Making Home Affordable Program also failed. To forestall Chase’s foreclosure, the husband filed for bankruptcy.

The homeowners eventually sued Chase, securitization trustee U.S. Bank, the loan servicer, and Chase’s president and CEO Jamie Dimon, raising a variety of claims arising from the WaMu refinancing and subsequent servicing and foreclosure avoidance efforts.

FIRREA requirements. FIRREA is in part intended to create a path to a comparatively quick and definitive resolution of claims related to a failed bank. It generally requires that claims against the bank’s assets or arising from the bank’s acts or omissions must be filed with the receivership before a specified date, referred to as the "bar date." If the claims are not filed in time, courts do not have subject matter jurisdiction over subsequent suits against either the receivership or third parties.

Since the homeowners never filed their claims with the FDIC, those claims would be barred if they were subject to FIRREA, the court made clear.

Claims arising from WaMu’s acts. The homeowners tried to convince the court that two of the counts were exempt from FIRREA because they related to actions of Chase or U.S. Bank, not WaMu. The argument failed because the two counts—claiming that neither the trust deed nor the note created a right to foreclose—dealt with WaMu’s actions. It was irrelevant that the claims were formally pleaded against Chase and U.S. Bank, the court said. What mattered was that they were "functionally pleaded" against WaMu, which meant they should have been filed with the receivership.

The homeowners’ assertion that the two counts seeking a declaratory judgment were exempt from FIRREA because a request for a declaratory judgment was not a claim fared no better. A declaratory judgment request was a claim under FIRREA, the court said, because it related to an action that was within the receiver’s power and would restrain or affect that power.

Affirmative defenses. An argument that a request for declaratory judgments that the note and trust deed were unenforceable was exempt from FIRREA because the request amounted to an affirmative defense to a foreclosure also was rejected. It was true that the duty to exhaust the administrative claims process did not apply to affirmative defenses, the court conceded. It also was true that whether an assertion constituted an affirmative defense under FIRREA was not dependent on who was the plaintiff in the suit.

However, these claims were not affirmative defenses, the court decided. The declaratory judgment requests were claims under FIRREA, and anything that sought a remedy that constituted a claim could not be an affirmative defense.

Ten of the 14 counts were resolved by this ruling, the court added.

When did claims accrue? The homeowners argued that applying FIRREA to their attack on the validity of the note and trust deed violated their due process rights because the claim did not accrue until after the bar date. Again, the court disagreed.

The homeowners had notice that WaMu was in receivership before the bar date. Since FIRREA did not include a discovery rule that tolled the time limits, the homeowners were obligated to file their claims with the receivership, according to the court.

The remaining claims, which alleged constructive fraud and negligence in servicing the notes by Chase, U.S. Bank, and Dimon simply failed to set out any violations of state law, the court concluded.

The case is No. 15-1678.

Attorneys: Benjamin Stark Softness (Kellogg, Huber, Hansen, Todd, Evans & Figel) for Michael A. Willner and Marguerite Evans Willner. Brent J. McIntosh ( Sullivan & Cromwell) for James Dimon, JP Morgan Chase Bank, N.A., Select Portfolio Servicing, Inc., and U.S. Bank National Association.

Companies: JP Morgan Chase Bank, N.A.; Select Portfolio Servicing, Inc.; U.S. Bank National Association; Washington Mutual Bank

MainStory: TopStory ConsumerCredit Loans MarylandNews Mortgages NorthCarolinaNews SouthCarolinaNews Receiverships VirginiaNews WestVirginiaNews

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