Mortgage Wars Part 2--Attack of the Robo-Signers

 The first post in this series discussed successful and (largely) unsuccessful claims brought against mortgage servicers. In Ashley Martins v. BAC Home Loans Servicing, LP, No. 12-20559 (5th Cir. 6/26/13) [an enhanced version of this opinion is available to subscribers] (also discussed in part 1 of this series) and Reinagel v. Deutsche Bank National Trust Company, No. 12-50569 (5th Cir. 7/11/13) [enhanced version], which can be found here and here, the Fifth Circuit has an extensive discussion of standing to commence a foreclosure. In this era of mortgage securitization and MERS, there are legitimate issues being raised about whether the party claiming the right to foreclose actually has the right to do so. In this post, I will discuss the Fifth Circuit's rulings with regard to "robo-signing" in Martins and Reingagel. Part 3 will examine issues relating to ownership of the note and deed of trust and chain of title.

Some Relevant Facts

In 2003, the Ashley Martins signed a note in favor of BSM Financial and executed a deed of trust naming  the Mortgage Electronic Registration System (MERS) as the beneficiary of the deed of trust and as nominee for BSM. I have previously written about MERS here. In November 2010, MERS assigned the deed of trust to BAC Home Loan Servicing (BAC) by way of an assignment recorded with the County Clerk. The trustee under the deed of trust (or more likely the substitute trustee) gave notice of trustee's sale. A foreclosure sale was conducted on April 5, 2011 and the Federal National Mortgage Association (Fannie Mae) purchased the property. The Debtor alleged that the assignment of the mortgage from MERS to BAC had been "robo-signed."   

In May 2006, the Reinagels signed a home equity loan in favor of Argent Mortgage Company. Argent allegedly transferred the note to Deutsche Bank National Trust Company which contended that it was pooled in a mortgage securitization trust of which Deutsche Bank was the trustee. Although the loan was allegedly transferred to Deutsche Bank in 2006, documentation of the transfer was not executed until January 2008. At that time, a person purporting to act as the "authorized agent" of "Citi Residential Lending, Inc. . . . Attorney in Fact for Argent" executed an assignment of the deed of trust to Deutsche Bank and this assignment was recorded with Bexar County. A second assignment was executed in February 13, 2009 which purported to transfer both the note and deed of trust. The second assignment was once again signed by a person acting on behalf of Citi Residential Lending. When the Reinagels defaulted, Deutsche Bank commenced a judicial foreclosure proceeding. The state court approved the sale. However, the Reinagels brought suit to enjoin the foreclosure and obtained a temporary injunction. The case was then removed to U.S. District Court where the Court dismissed the complaint.

What is Robo-Signing?

In the Reinagel case, the Fifth Circuit described robo-signing as:

"Robo-signing"is the colloquial term the media, politicians, and consumer advocates have used to describe an array of questionable practices banks deployed to perfect their right to foreclose in the wake of the subprime mortgage crisis, practices that included  having bank employees or third-party contractors: (1) execute and acknowledge transfer documents in large quantities within a short period of time, often without the purported assignor's authorization and outside of the presence of the notary certifying the acknowledgment, and (2) swear out affidavits confirming the existence of missing pieces of loan documentation, without personal knowledge and often outside of the presence of the notary.

Reinagel, p. 5. Robo-signing has a long history. Thomas Jefferson complained that King Louis XIV "hunts one half the day . . . and signs whatever he is bid."    Letter from Thomas Jefferson to John Jay (Oct. 8, 1787), quoted in In re Obasi, 2011 Bankr. LEXIS 5011 (Bankr. S.D. N.Y. 2011) [enhanced version]. While King Louis's blind signing was limited by his hunting schedule and the use of a quill pen, today's robo-signers, aided by technology, are able to execute hundreds of documents in a single day.

Robo-signing allegations have led to enforcement actions brought by State Attorneys General among others. In one case, Bank of America, Wells Fargo, Citigroup, JP Morgan Chase Bank and Ally Financial agreed to a $25 billion settlement with forty state AGs. Diana Olick, Forty States Sign on to Foreclosure "Robo" Settlement. However, consumers have had a more difficult time advancing robo-signing claims as demonstrated by the Martins and Reinagel cases.

The Court's Ruling

The two courts each addressed different aspects of the "robo-signing" issue. The Martins Court concluded  simply that "BAC has offered sufficient evidence through its recorded assignment, that it was the rightful holder of the mortgage, and Martins failed to present evidence creating a genuine issue of fact." Martins, p. 3. It dismissed the allegation that the assignment was "robo-signed" as "hardly sufficient to maintain a claim for fraud, much less to avoid summary judgment."  

The Reinagel court offered a more thorough analysis. The Debtors sought to challenge the two assignments that were filed. They challenged the first assignment on the basis that it was executed on behalf of Argent by Dawn Reynolds, an authorized agent of Citi Residential Lending. However, Citi's agent stated that she was attorney in fact for Argent. Because the Debtors did not allege facts stating that the affiant lacked authority to act on behalf of either Citi or Argent, they did not state a claim that the assignment was unauthorized. The Court rejected the notion that the Debtor raised a fact issue merely because a stranger to the transaction claimed to be the attorney-in-fact of the original creditor. This presents a chicken and the egg problem. To find out whether Citi Residential was in fact the power of attorney for Argent, it would be necessary to conduct discovery. However, without specific facts establishing that Citi lacked authority, the complaint did not state a cause of action and it was impossible to conduct discovery. 

The Debtors did state specific facts with respect to the second assignment. They alleged that Brian Bly, who signed the assignment on behalf of Citi Residential Lending, was actually an employee of a third-party contractor, Nationwide Title Clearing, and that his signature was scanned into documents and then notarized as an individual. The court's opinion stated that even if Mr. Bly had fraudulently signed the assignment, this would make the assignment voidable at the election of the defrauded principal, but would not furnish a defense to the debtor. "Bly's alleged lack of authority, even if accepted as true, does not furnish the Reinagels with a basis to challenge the second amendment." Reinagel, at 14.

The court also dismissed the argument that scanning a signature onto a document that was later notarized as an original document did not render the document "void" as a forgery.

This argument is a red herring. Texas recognizes typed or stamped signatures -- and presumably also scanned signatures -- so long as they are rendered by or at the direction of the signer, and the Reinagels do not allege that Bly's signature was scanned onto the document without his authorization. Moreover, acknowledgments are valid as long as they are made in the presence of the notary and meet certain other formalities the Reinagels do not challenge here; there is no requirement that the affiant affix his signature in wet ink. Finally, even if Bly's acknowledgment is defective counsel for the Reinagels conceded during oral argument "that there is no dispositive law that says [an assignment of a deed of trust] has to be a notarized document." While mortgage assignments must be acknowledged to be recorded, Texas's recording statute protects only subsequent purchasers for value and without notice. That is, while defects in the acknowledgment might prevent Deutsche Bank from foreclosing had a third party purchased the underlying real estate from the Reinagels without actual knowledge of the mortgage,they do not affect Deutsche Bank's rights against the Reinagels.

Reinagel, pp. 15-16.

In a concurrence, Judge James E. Graves, Jr. questioned this reasoning.

I do not agree that the Reinagels' forgery argument is a red herring. Acknowledging a document at a different time or place than what was in fact the case is included in the Texas Penal Code's definition of "forge." (citation omitted). And forgery makes an assignment void, not voidable. (citation omitted). I disagree with the majority that, even if the acknowledgment was improper, it did not invalidate the second assignment because assignments  are not required to be notarized in Texas. This is immaterial--regardless of whether Bryan Bly was required to sign the original assignment in wet ink or to have his signature notarized, the Reinagels claim that his signature was notarized at a time or place different than where Bly actually was. This satisfies the definition of "forge" under the Texas Penal Code. The Reinagels, however, did not sufficiently plead or brief this argument, having raised it for the first time in their reply brief. (citation omitted). Because the Reinagels have waived the argument, I concur in the judgment.

 Reinagel, p. 24. 

The majority opinion did wag a finger at potential robo-signers, letting them know that it was not giving carte blanche for bad behavior.

Our holding is a narrow one: we merely reaffirm that under Texas law, facially valid assignments cannot be challenged for want of authority except by the defrauded assignor. We do not condone "robo-signing" more broadly and remind that bank employees or contractors who commit forgery or prepare false affidavits subject themselves and their supervisors to civil and criminal liability.

Reinagel, p. 21.

The Significance of Robo-Signing

As the Martins and Reinagel cases demonstrate, allegations of robo-signing are not likely to succeed when contesting a lender's chain of title. As long as there is a chain of title (something that will be addressed in Part 3), the borrower cannot defeat that chain of title with allegations of robo-signing.

While robo-signing is a trendy buzzword, it is important to remember why it matters. Robo-signing refers to the rote, mechanical signing of large quantities of legal documents without personal knowledge. For purposes of transferring title, this might be acceptable, assuming that the party had authority to act on behalf of someone who had title to transfer. After all, if one lender is transferring a thousand loans to another lender, does the person doing the signing really need to review each assignment to make sure that it was supposed to be included in the package?   If the affiant errs, the consequence is that his principal may have given away more than he meant to.

The more troubling circumstance appears where an apparent stranger to the transaction appears and inserts himself into the chain of title. Would have the Fifth Circuit have been as sanguine if the assignment had been executed by Micky Mouse as attorney in fact for Argent?   What if a known fraudster, such as Bernie Madoff, signed an assignment to himself as power of attorney for the original creditor?   Would this overcome the presumption of facial validity?   Finally, what if Deutsche Bank, who was the assignee in this case, had signed an assignment to itself as power of attorney for the original creditor?   Under the Fifth Circuit's ruling, this would be facially valid in the absence of proof that Deutsche Bank did not actually hold a power of attorney. Thus, if Deutsche Bank had acquired a portfolio of loans from Argent without obtaining proper assignments, there would be nothing to prevent Deutsche Bank from creating its own chain of title so long as it used the magic words "as attorney in fact for" and the original creditor did not object.

The facially valid rule limits the debtor to raising a challenge where the chain of title is broken or there are two competing parties. In the Reinagel case, if Citi Residential had signed the assignements on behalf of Argent without adding "as attorney in fact" the chain of title would be broken, or to put it in the Fifth Circuit's terms, the assignment would be facially defective. Additionally, if both Argent and Deutsche Bank were demanding payment and threatening to foreclose, then the borrower could complain.

It is important to remember that the robo-signing controversy arose from affidavits, not assignments. When a robo-signer executes hundreds of affidavits without personal knowledge, he is committing a fraud upon the court. As the Court in Midland Funding, LLC v. Brent, 644 F.Supp.2d 961 (N.D. Ohio 2009) [enhanced version] stated:  

In finding assertions in the affidavit to be false and misleading, this Court is not concluding that all the information in the affidavit is incorrect. Brent has provided no evidence that the amount of the debt, the fact that it is unpaid, or other vital account information, is false. As discussed infra, the actual account information is probably either correct or likely thought correct in good faith by Midland and MCM (and likely a bona fide error if so).

However, this Court finds that the affidavit as a whole is both false and misleading . . . notwithstanding the fact that some of the data in it are correct. It is unclear to this Court why such a patently false affidavit would be the standard form used at a business that specialized in the legal ramifications of debt collection. 

644 F.Supp.2d at 969. The Court ultimately found that use of the affidavit was "false, deceptive and misleading" and a violation of the Fair Debt Collection Practices Act. Id. at 970.

This is the real danger of robo-signing. When a creditor requests relief from a court based upon an affidavit signed by a person who, in the Midland Funding case, pulled a stack of affidavits off the printer and signed them without reading them, the creditor is lying to the court. The difference is that an affidavit made without knowledge or investigation is no better than an unsworn pleading, but has dressed itself up as something authoritative. Fortunately, the courts do not apply the "facially valid" rule to affidavits.

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