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From Banking and Finance Law Daily, December 8, 2014

State-law recovery theories against bank for denied loan modification fizzle

By Thomas G. Wolfe, J.D.

Although a mortgage borrower asserted multiple statutory, tort, and property law theories of recovery under Tennessee law and a federal claim against a bank for failing to grant her request to obtain a modified repayment plan under the federal Home Affordable Modification Program (HAMP), the borrower’s claims did not gain traction. Accordingly, in affirming the federal trial court’s dismissal of all of the mortgage borrower’s claims against the bank, the U.S. Court of Appeals for the Sixth Circuit sought to clarify the approach for addressing similar civil actions that are “scattershot affairs, tossing myriad—sometimes contradictory—legal theories at the court to see what sticks” (Thompson v. Bank of America, N.A., December 5, 2014, Siler, E.).

Background. In 2006, as part of a mortgage loan transaction with lender American Mortgage Express Corp. (AME), borrower Lorrie Thompson executed a $354,800 promissory note. A “Prepayment Addendum” to the promissory note indicated that Thompson understood that AME was authorized to “transfer the Note, the related Mortgage, Deed of Trust, or Security Deed…and this Addendum.” In addition, other closing documents provided that a full or partial interest in the note could be sold without notice to the borrower and that the lender could appoint a successor or substitute trustee.

Eventually the note was transferred to Countrywide Bank, N.A. In turn, Countrywide Bank transferred the note internally to Countrywide Home Loans, Inc. In 2008, Bank of America purchased Countrywide and took possession of the note, which contained a “signed, undated stamp endorsed from Countrywide Home Loans to blank.”

In 2012, Bank of America offered to short-sell Thompson’s house in lieu of foreclosure. In response, Thompson communicated that she would rather pursue a “modification of her repayment terms under the HAMP program.” According to Thompson, during the course of several months, she received and complied with “numerous, often redundant, document requests” pertaining to her application for a HAMP modification. However, despite Thompson’s documentation transmittals, Bank of America never granted Thompson’s request for HAMP relief; the bank denied the modification request on the grounds of “insufficient documentation.”

Complaint. After her HAMP request was denied, Thompson filed a lawsuit against Bank of America, Mortgage Electronic Registration Systems, Inc. (MERS), and various other defendants in the U.S. District Court for the Middle District of Tennessee. Included among her many alleged violations of Tennessee statutory and common law were: (1) a claim to quiet title; (2) a slander-of-title claim; (3) fraud in the inducement; (4) common-law fraud; (5) fraudulent misrepresentation; (6) negligent misrepresentation; (7) intentional interference with contractual relations; and (8) negligent hiring and supervision. Also, Thompson set forth a claim under the federal Equal Credit Opportunity Act (ECOA).

In summarizing the core issues and features comprising her multi-count complaint, the Sixth Circuit noted that “Thompson contended that “because her mortgage note was immediately ‘securitized’ (sold to a pool of anonymous investors through a mortgage trust),” Bank of America “falsely induced her into signing the mortgage by pretending it was an actual lender. She alleges her title has become clouded on account of the transfer and securitization of the note.” Moreover, the court observed that Thompson alleged that Bank of America “fraudulently induced her to seek modification of her repayment plan while either knowing it lacked authority to modify her repayment terms or else intending to drive her into foreclosure by giving her the run-around.”

According to the court, Thompson maintained that the securitization of her loan “severed whatever contractual relationship she might have had with her lender,” with the effect that Bank of America was incapable of granting her a loan modification. As relayed by the court, Thompson’s theories characterized Bank of America as either lacking the authority to grant her a loan modification or the bank had a policy to avoid granting modifications because the bank preferred to foreclose on properties. In addition, the borrower contended that she was victimized by fraud at the time she bought her property, and that the investors who acquired and sold her note through the process of securitization may have paid off some or all of her debt.

Key principles involved. In addressing the mortgage borrower’s multiple theories of recovery underlying her statutory, tort, and property law claims, the federal appellate court emphasized several key operating principles under Article 3 (Negotiable Instruments) of the Tennessee Uniform Commercial Code: (i) a promissory note is a negotiable instrument, unless it contains a conspicuous statement that it is not negotiable; (ii) a note can be sold or assigned to another party who then receives the right to enforce the instrument; (iii) an assignment of a note is enforceable regardless of whether it is recorded; (iv) an instrument may be enforced by the holder of the instrument; and (v) when an instrument carries a blank endorsement, it becomes payable to the “bearer”—whoever possesses the note.

Similarly, the Sixth Circuit stressed several other key principles under Tennessee and federal law: (i) securitizing a note does not sever the note from the deed of trust because, under Tennessee law, whoever holds the note owns the deed; (ii) while federal securities law permits the creation of mortgage-related securities, “the pooling of mortgages into investment trusts is not some sort of illicit scheme that taints the underlying debt”; (iii) securitization of a promissory note does not alter the borrower’s obligation to repay the loan; and (iv) generally, most courts have upheld the use of MERS in the transfer of mortgage notes.

Court’s conclusion. Applying these principles to the borrower’s multiple claims, the Sixth Circuit noted, “Many of Thompson’s arguments boil down to her claim that she believed she would have a traditional borrower/lender relationship with AME, and that AME [now Bank of America] would have authority to modify the terms of the loan if modification was mutually agreeable (or, as Thompson argues, required under the HAMP program)…But Thompson’s expectations were not realistic under the express terms of the note and deed of trust and under the laws pertaining to negotiable instruments and securities.”

Accordingly, in addressing each of Thompson’s many Tennessee claims with more particularity, the Sixth Circuit determined that the borrower failed to adequately and substantively plead those claims. Likewise, in connection with the borrower’s federal ECOA claim, the Sixth Circuit determined that she failed to state a cognizable claim because her allegation that Bank of America “refused to modify her repayment terms under HAMP” did not fall within the definitional scope of an “adverse action” under ECOA.

In affirming the dismissal of the mortgage borrower’s claims, the Sixth Circuit determined that it had “no basis upon which to declare [Thompson] the sole title holder and enjoin the defendants from pursuing the collection of payments or foreclosing the property.”

The case is No. 14-5561.

Attorneys: Carol A. Molloy (The Law Office of Carol A. Molloy) for Lorrie Thompson. Edmund Scott Sauer (Bradley Arant Boult Cummings) for Bank of America, N.A., BAC Home Loan Servicing, LP, Bank of America Corp., Mortgage Electronic Registration Systems, Inc., and Bank of New York Mellon as Trustee.

Companies: American Mortgage Express Corp.; BAC Home Loan Servicing, LP; Bank of America, N.A.; Bank of America Corp.; Bank of New York Mellon; Countrywide Bank, N.A.; Countrywide Home Loans, Inc.; Mortgage Electronic Registration Systems, Inc.

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