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EDITOR’S NOTE: OK they never mentioned Donald Duck. But the point is the same. The appellate and trial courts, on virtually a daily basis are eviscerating not only the current foreclosure cases but casting a long shadow over the ones that have already been “completed.” It is clear that the designation of MERS was the designation of anon-entity. They might have well as not entered any name. Thus MERS could not foreclose and MERS could not not transfer what it did not have. The strategy of crating paper trails to give life to a fictional character and the illusion of securitization has been shattered in three states in about as many days.
KABOOM | NY Appellate Division | Bank of NY v Silverberg – MERS Does NOT Have The Right to Foreclose on a Mortgage in Default or Assign That Right to Anyone Else
Submitted by 4closureFraud on 06/13/2011 13:04 -0400
Appeals Court Clarifies MERS Role in Foreclosures
The ubiquitous Mortgage Electronic Registration Systems, nominal holder of millions of mortgages, does not have the right to foreclose on a mortgage in default or assign that right to anyone else if it does not hold the underlying promissory note, the Appellate Division, Second Department, ruled Friday. “This Court is mindful of the impact that this decision may have on the mortgage industry in New York, and perhaps the nation,” Justice John M. Leventhal wrote for a unanimous panel in Bank of New York v. Silverberg, 17464/08. “Nonetheless, the law must not yield to expediency and the convenience of lending institutions. Proper procedures must be followed to ensure the reliability of the chain of ownership, to secure the dependable transfer of property, and to assure the enforcement of the rules that govern real property.” The opinion noted that MERS is involved in about 60 percent of the mortgages originated in the United States.
From the ruling…
(Emphasis added by 4F)
Decided on June 7, 2011
SUPREME COURT OF THE STATE OF NEW YORK
APPELLATE DIVISION : SECOND JUDICIAL DEPARTMENT
ANITA R. FLORIO, J.P.
THOMAS A. DICKERSON
JOHN M. LEVENTHAL
ARIEL E. BELEN, JJ.
2010-00131
(Index No. 17464-08)
[*1]Bank of New York, etc., respondent,
v
Stephen Silverberg, et al., appellants, et al., defendants.
LEVENTHAL, J.This matter involves the enforcement of the rules that govern real property and whether such rules should be bent to accommodate a system that has taken on a life of its own. The issue presented on this appeal is whether a party has standing to commence a foreclosure action when that party’s assignor—in this case, Mortgage Electronic Registration Systems, Inc. (hereinafter MERS) —was listed in the underlying mortgage instruments as a nominee and mortgagee for the purpose of recording, but was never the actual holder or assignee of the underlying notes. We answer this question in the negative.
…
On appeal, the defendants argue that the plaintiff lacks standing to sue because it did not own the notes and mortgages at the time it commenced the foreclosure action. Specifically, the defendants contend that neither MERS nor Countrywide ever transferred or endorsed the notes described in the consolidation agreement to the plaintiff, as required by the Uniform Commercial Code. Moreover, the defendants assert that the mortgages were never properly assigned to the plaintiff because MERS, as nominee for Countrywide, did not have the authority to effectuate an assignment of the mortgages. The defendants further assert that the mortgages and notes were bifurcated, rendering the mortgages unenforceable and foreclosure impossible, and that because of such bifurcation, MERS never had an assignable interest in the notes. The defendants also contend [*3]that the Supreme Court erred in considering the corrected assignment of mortgage because it was not authenticated by someone with personal knowledge of how and when it was created, and was improperly submitted in opposition to the motion.
…
Here, the consolidation agreement purported to merge the two prior notes and mortgages into one loan obligation. Countrywide, as noted above, was not a party to the consolidation agreement. ” Either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation, and the mortgage passes with the debt as an inseparable incident'”
…
Therefore, assuming that the consolidation agreement transformed MERS into a mortgagee for the purpose of recording—even though it never loaned any money, never had a right to receive payment of the loan, and never had a right to foreclose on the property upon a default in payment—the consolidation agreement did not give MERS title to the note, nor does the record show that the note was physically delivered to MERS. Indeed, the consolidation agreement defines “Note Holder,” rather than the mortgagee, as the “Lender or anyone who succeeds to Lender’s right under the Agreement and who is entitled to receive the payments under the Agreement.” Hence, the plaintiff, which merely stepped into the shoes of MERS, its assignor, and gained only that to which its assignor was entitled (see Matter of International Ribbon Mills [Arjan Ribbons], 36 NY2d 121, 126; see also UCC 3-201 [“(t)ransfer of an instrument vests in the transferee such rights as the transferor has therein”]), did not acquire the power to foreclose by way of the corrected assignment.
…
In sum, because MERS was never the lawful holder or assignee of the notes described and identified in the consolidation agreement, the corrected assignment of mortgage is a nullity, and MERS was without authority to assign the power to foreclose to the plaintiff. Consequently, the plaintiff failed to show that it had standing to foreclose. MERS purportedly holds approximately 60 million mortgage loans (see Michael Powell & Gretchen Morgenson, MERS? It May Have Swallowed Your Loan, New York Times, March 5, 2011), and is involved in the origination of approximately 60% of all mortgage loans in the United States (see Peterson at 1362; Kate Berry, Foreclosures Turn Up Heat on MERS, Am. [*6]Banker, July 10, 2007, at 1). This Court is mindful of the impact that this decision may have on the mortgage industry in New York, and perhaps the nation. Nonetheless, the law must not yield to expediency and the convenience of lending institutions. Proper procedures must be followed to ensure the reliability of the chain of ownership, to secure the dependable transfer of property, and to assure the enforcement of the rules that govern real property. Accordingly, the Supreme Court should have granted the defendants’ motion pursuant to CPLR 3211(a) (3) to dismiss the complaint insofar as asserted against them for lack of standing. Thus, the order is reversed, on the law, and the motion of the defendants Stephen Silverberg and Fredrica Silverberg pursuant to CPLR 3211(a)(3) to dismiss the complaint insofar as asserted against them for lack of standing is granted.
FLORIO, J.P., DICKERSON, and BELEN, JJ., concur.
ORDERED that the order is reversed, on the law, with costs, and the motion of the defendants Stephen Silverberg and Fredrica Silverberg pursuant to CPLR 3211(a)(3) to dismiss the complaint insofar as asserted against them for lack of standing is granted.
Full opinion below…
It is well worth the read…
www.4closureFraud.org
Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: bailout, Bank of America, bankruptcy, borrower, Chapter 13, creditor, disclosure, Eviction, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, Lender Liability, lost note, Mortgage, mortgage meltdown, predatory lending, quiet title, rescission, securitization, TILA audit, trustee |
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A California court has ruled that MERS business model is legal:
http://www.dsnews.com/articles/california-appeals-court-declares-mers-proper-beneficiary-2011-06-14
I guess if depends on location Carie. I see title insurance without exceptions on REO sales every day of the week
tn—aren’t there issues right now with title insurance companies not wanting to deal with houses with potentially clouded titles?
The people from Japan will either be fine because they will be found to be bona-fide purchasers, or they’ll be made whole from title insurance from their purchase.
And what about the clouded titles, fraud, etc., on all the houses these foreign investors are snapping up?
http://www.cnbc.com/id/43394876
When the truth comes out about how a lot of the houses were “stolen”—what then??? The people that were kicked to the curb, find out the truth, and someone from Japan thinks they own the house…is there a statute of limitations, and from what date did it start???
OOPS–this house: http://www.cnbc.com/id/43394876
I wonder if this house has clouded title???
Tnharry,
That by far is the craziest thing you wrote to me yet. Didn’t I already say I don’t do things like that. For one why copy write your name when you can just incorporate your name.
Like a lawyer will always say stay within the 4 corners of the document. You are typing all drunk writing outside of the lines. Also presenting yourself is proper and has nothing to do what you are trying to type about.
I am not about the Rodger Elvick, or Montana Freemen. Seems like your lost and don’t know what else to type about, but I will stop because this is a site about mortgages not someone trying to play there own flute. The ISSUE is mortgages if you want to stay on topic. Talk about how Long vs bullard has been used wrong and banks have no in rem rights and this was ruled on by the same judge in Freeman vs Alderson.
That will help a lot of people and helping is what people should be doing.
@Tony – you were caught up the other day on the semantics of pro se individuals representing themselves as opposed to presenting themselves. Tell me, do you also subscribe to the camp of signing all pleadings with all of the “true living soul, proper person, living flesh and blood” suffixes as well? I especially enjoy the pro se litigants who purport to copyright their own names. Some of these theories and strategies found on the internet unfortunately render what may be valid arguments as as the musings of conspiracy theorists. I’ve seen several of these people do more to harm their own cases than the defense counsel did.
That was very impressive!
Please I want to know the law firm that handled the appeal! Send me information about the law office. I have similar situation soon to go on appeal in NEW YORK.
@Tony – think back on your law school education and you’ll remember that statutes trump common law.
The tentacles are encroaching…Save yourself!!!
http://www.huffingtonpost.com/dylan-ratigan/america-for-sale-is-goldm_b_877285.html
@ dny
Yep, that is why I concluded with the comment about doing a quiet title. Since the action was dismissed, the pretenders either have to find a different way to start over that has not been hampered by the actions they have already taken or else appeal the dismissal of the existing case. Not being an attorney, I don’t even know the likelihood of attempts to overcome a dismissal. My guestimate is that it would be unlikely to occur.
IMHO, the banksters only appeal to the highest courts where they believe they have influence on the bench. Sorry to say it that way about the judiciary.
Cases where the borrowers appeal and finally prevail are the more typical ones that are getting to the higher courts.
Tnharry,
Do you really understand UCC or are you just talking out of thin air?
UCC is all about equity and not about property rights. This is the reason why the articles always get revised when they know it will attack them in the long run. Article 9 revised just for this whole housing and credit card mess etc.
UCC is never and will be the law of the land. You just can use the UCC against them to tell the banks your own web is weaving against you. I mean FAS is clearly about splitting the asset from the liability.
Then lets think here, what’s the asset and liability? Asset is servicing rights, the liability is the mortgage note and deed. Why because servicing rights does not have a liability to the home owner nor the so called investor. The servicer collects the money takes his share and passes the rest. Well of course they never pass the money to anybody they keep it but on paper it sounds like they do. I mean they pay for the right to service, why if you pay for the right to service would you give any money away and only keep .019% of the loan money?
That would be a losing investment no matter how big of volume you do. Before you or anyone go on and try to say different read the ruling in DBNTC vs FDIC about QFC and NON QFC and see why the servicing rights are deemed NON QFC’s, and it is ok for onewest to have them and why the so called trustee DBNTC can’t get them back. Only can get money from the transaction only.Why the so called trustee put all of the Indymac trusts in probate claiming the trust are now dead and they are not liable for any wrong doing. They did that because the servicing rights is the only thing that they can transfer while acting under a cloud that you still have to pay the so called mortgage. This is why the lawyers on the other end always say there is no privity with them and you are not a party to the contract. This is also why there is no assignment of mortgage filed, what MERS is really listed for and why state attorneys never went after MERS in the first place: It is only a system to track servicing rights and only servicing rights.
This is why the”MERS is the mortgagee of record” was never really designed for the fight it has received. Attack MERS you find fake trust, attack fake trust you find fake mortgage assets. Doesn’t anyone see it weird that FDIC said “the only thing valuable at Indymac is there servicing portfolio?” How could it be Indymac’s if the so called trust owns it? How could the FDIC give it to someone unless Indymac owned it?
Side education note:
all of Indymac’s so called trust, when its just one big fake trust hence the word “series” and why the series is registered in Delaware. The only state where you can register one name call it a series and never have to register any other name again long as you say it is under your Delaware Corp.
Before you type a good game I suggest you understand history and law and not what you might learned in “law school”. I went to law school too, and a wise old teacher once told me that, if you really want to understand law read the books before being an attorney was available to everyone. This is something that you might want to do yourself.
I talk no conspiracy or theories, only facts that could and can be used in today’s life and do very well with. I am not in foreclosure nor getting any financial gain from this housing crisis. I lobby congress in person at both house and senate about these issues all the time and hope with GODS help that they wake up.
2010, Second Amended Complaint:
In one of my numerous replies to the BS papers of the defense I said,
“Naming MERS as a beneficiary is the same as naming Santa Claus or God”
The court is now outraged at my audacity to ask for justice!
So… I guess if this FAKE PARTY is okay, I will now convey all my rights title and interest over to another third party. They want a clouded title? It’s going to rain!
“I hereby convey all my rights and interest in title to Richard FINE & Jack Sprat, as trustees for the beneficial use of Humpty Dumpty, and Miss Muffet.”
As to my comical case,
The Judge is either not being impartial (ya think) or has bought into the Illuminati plan.
The defendants were allowed to throw papers on my doorstep in 55 mile per hour winds, and on a date they knew I was in Las Vegas, and when I showed the Court my hotel receipt? Forget case law- forget California Code, Forget what she has ruled on hundreds of times. It DOES NOT MATTER TO THE COURT if you are right. It does not matter if they ADMIT to a DOUBLE LOAN SCHEME.
It does not matter that the Notary Journal has duplicated name, after name, after name, It does not matter that you insist your signature was forged, it does not matter that the original loans were made six months prior without your knowledge, and that you legally rescinded the “refinanced” loans, of which documents have not been recorded ( as the destroyed them and forged your name to a different set)
The court system is corrupt!
Concerned: I doubt BoNY Mellon will want to risk an appeal to the Court of Appeals, which could seal the fate of MERS forever in NYS, and provide yet another state high court ruling to be referenced in another state.
MSoliman: Unfortunately, the “financial institution’s” need (or mere desire?) to pass notes around like “a whiskey bottle at a frat party” bumps up against the public’s reasonable expectation for certainty in county-based official land records. The deed of trust / mortgage is NOT a bearer instrument.
Fed Home Loan v IMH Assets Corp
http://www.scribd.com/doc/57821487/1-Federal-Home-Loan-Bank-of-Boston-v-IMH-Assets-Corp
Fed Home Loan is suing everybody, look at the list of Defendants.
Calif case:
http://www.scribd.com/doc/57731963/ZULUETA-Initial-Brief
http://www.scribd.com/doc/57732078/ZULUETA-Answer-Brief-Deutsche-Bank
http://www.scribd.com/doc/57733286/ZULUETA-Bankruptcy-Court-Transcript
QT in Utah, Harvey v Garbett
http://www.scribd.com/doc/56607051/Harvey-v-Garbett-Quiet-Title-Case-in-Draper-Utah
@Tony – c’mon, the entire UCC is based on the idea of transferability of notes and negotiable instruments.
foreclosureinfosearch,
Your wrong about deed and note never separate. Since the beginning before there were court of equity, the common law is that you can never transfer a note. The reason being is that if someone pays off the obligation it is paid for period. The law does not care who did it. It was when they force the chancery courts with the common law courts that the merchants get these rulings that they can transfer a note.
Remember equity just means fairness, there is no law in it. The chancellor would make a decree on there own authority. This is why the banks always say like a kid your honor they promised to pay. So the judge would say yes your right, go grab a house for free.
People must study history of the law to understand why courts do what they do. Instead of popping up on blogs trying to look big or trying to sell something for 19.95. Then you will be able to play there game and defeat them in this. I am not talking about conspiracy theories, I am talking about the very same case load that they try to use on the non elite.
@Concerned – you’re exactly right and Neil’s exactly wrong again…..NY Supreme Court is the trial court and the lowest of the courts of record with two courts above it for appellate purposes.
2.Sponsors registrants and assignors with recourse to repurchase are attempting it foreclosure succeeds , repurchase upon whcih the basis in assets calculation will violate securities laws; Re material information released in the recovery of the securities value.
3. I beleive there is no capacity to recall changes from charging assets under Derecognition and for which a pari passu is other than equably, ratably or conducted without preference.
Opinion : Securities issued in a form allowing the owner’s name to be imprinted on the certificate and allowing the issuer to maintain records as to the identity of the owners further bring into question the MERS Controversy and limiting conditions for granting a successor institution any right of right to liquidation in foreclosure. .
The court fails to address this issue –
The entire recovery is hampered by IASB and FASB problematic demands and issue commonly seen as a prohibition on this foreclosure recovery with reference to securities registered under the Securities Act of 1933.
The note is a companion to deed and I will assure you from first hand experiences-
it is never SEPREATED FROM THE DEED !
Take the win none the less Kudos!
1.I contend that the foreclosure is alleging to be in good standing at the Par Bond amount or for what the original transferring agent MERS records its bond selling at its face value.
MSoliman
No clue
@ CHERYL
Someone posted a comment over on the article on 4closurefraud.org where they pointed out that there is one court that is still higher that this case could still be appealed to by BNY Mellon, et al: the NY Appeals Court.
Now, unless BNY Mellon appeals to the ruling AND gets it overturned, I read this as BNY and CW having a very difficult time of trying to start over. That ‘corrected’ assignment that was produced after the litigation had started does NOT help the pretenders.
I suspect the Silverbergs need to Quiet Title.
OK, So explain this to me…. the final outcome. Does that mean they have to try and get papers in order to try and foreclose again, or did they win the house free and clear??
More MERS stuff—
http://en.wikipedia.org/wiki/Landmark_National_Bank_v._Kesler
On this, leapfrog and I agree – don’t slander Donald Duck like that
Hey, I just thought of something…instead of giving loveable ole’ Donald Duck a bad name, it should be said that MERS is like Snidely Whiplash or Boris Badenov or Gargamel or …?
Thanx concerned
I’m in CA too and I’m in the Rickie Walker district, where Judge Sargis didn’t think very highly of MERS:
http://stopforeclosurefraud.com/2010/08/04/mers-california-case-rickie-walker-case-california-mers-bk-ed-2010-full-series-of-filings-for-convenience/
P.S. I heard that the appeals court (Gomes case) was a very narrow ruling, not exactly the “victory” that MERS’ apologists are bloviating on about; but I’m not an attorney, so couldn’t tell you the finer points.
It’s not a State issue, it’s a judicial issue. The judges who are ignorant about how the mortgage fraud began and how it’s unfolding, that make the difference. It takes one smart, honest and righteous judge to make the correct decision and the rest should follow. I know Ca sucks big time when it comes to foreclosure, I live in Ca and I feel the pain, but now that this judge made this ruling, things should change here in Ca as well. MERS is MERS no matter where we are! The standing should apply to every mortgage associated with MERS.
Do you know what ‘xxx’ your loan is inside of? Do you know who really is in court as Plaintiff? Did you get a name affidavit signed?
Read Special Servicing Agreement.
Special Servicer “REO Broker’ c/o Special Servicer ‘Corporation as Lender’ of real Servicer (Note Holder in Due Course) as Lender (real lender) holding unsecured note transaction between seller and purchaser ‘registered in an electronic database’ is all MERS is.
Securities & Exchange Commission’s Regulation of Asset-Backed Securities: … function such as Master Servicer, administrator, primary Servicer, Special Servicer, affiliated Servicer and unaffiliated Servicer. The SEC noted there is …
http://www.mortgagebankers.org/files/…/WhitePaper-_Final_REGAB.pdf – Similar
PDF] MEMORANDUM The company is one of the nation’s largest commercial loan servicers with over $294 billion in outstanding balances. As special servicer …www.sec.gov/comments/s7-08-10/s70810-195.pdf
Investment Company Act of 1940 — Section 3(c)(5)(C )
Capital Trust, Inc
February 3, 2009
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT
Our Ref. No. 2007-121113
File No. 132-3
In your letter, dated January 29, 2009, you request that we concur with your view that certain subordinate participations in commercial real estate first mortgage loans, as described below, that are held by Capital Trust, Inc., a public company incorporated in the state of Maryland that has elected treatment as a real estate investment trust for federal tax law purposes (the “Company”), would be considered qualifying interests, as defined below, for purposes of the exclusion from the definition of investment company in Section 3(c)(5)(C) of the Investment Company Act of 1940 (“Act”).
Facts
You state that the Company engages primarily in commercial real estate financing by originating and purchasing commercial real estate debt and related instruments for its own accounts as well as the accounts of investment vehicles that the Company manages. You state that among the types of investments the Company makes are investments in A/B commercial mortgage loan financing arrangements (“A/B financings”). You explain that in an A/B financing, the principal balance of a single commercial mortgage loan is divided between two or more mortgage lenders as a means of spreading the credit risk associated with the mortgage loan between the lenders. You state that unlike a mortgage loan participation where each loan participant has a pari passu interest in the mortgage loan, an A/B financing is a senior/subordinated structure. The senior participation, called the “A-Note,” has priority over the junior participation, called the “B-Note,” with respect to the allocation of payments made on the mortgage loan.1 You explain that all periodic payments made by the borrower on the underlying mortgage loan are allocated first to the A-Note holder, as senior lender, in accordance with the terms of the A/B financing and then to the B-Note holder, as junior lender. Similarly, you explain that in the event of a default on the mortgage loan, all collections or recoveries on the loan are allocated first to the A-Note holder until the A-Note holder has been fully paid before any payments are made to the B-Note holder. You further state that any losses incurred with respect to the loan are allocated first to the B-Note holder and then to the A-Note holder. You state that the loan is fully secured by a mortgage on the underlying commercial property and the value of the underlying commercial property at the time of the A/B financing always exceeds the combined principal balance of the B-Note and the A-Note.
You state that in the typical A/B financing in which the Company invests, a lender enters into a mortgage arrangement with a borrower and then participates the mortgage loan to form an A/B financing structure. The lender, who holds legal title to the mortgage loan and is listed as the lender of record, retains the A-Note but sells the B-Note to the Company. You state that the Company as B-Note holder obtains the right to receive from the A-Note holder the Company’s proportionate share of the interest and the principal payments made on the mortgage loan by the borrower at the time such payments are made, and the Company’s returns on its B-Note investment are based on the principal and interest payments made by the borrower.
You state that in some A/B financings, the B-Note holder’s participation interest is evidenced by a separate note issued by the borrower to the B-Note holder and which is directly secured by the mortgage.2 You explain that in these types of A/B financings, the Company as B-Note holder is in contractual privity with the borrower with respect to the underlying mortgage loan and thus payment on the B-Note should not be affected in the event of the bankruptcy of the A-Note holder.3 You state that in other A/B financings in which the Company invests, the B-Note holder holds a participating beneficial ownership interest in the mortgage loan and mortgage loan proceeds. The participation interest, however, is not evidenced by a separate note from the borrower and thus the Company as B-Note holder is not in contractual privity with the borrower.4 You note that the Company arguably could have difficulty obtaining payment in the event that the A-Note holder files for bankruptcy.5 You state that, with the exception of the bankruptcy issue, the two types of A/B financings are similar in all other material respects.
You state that the Company as B-Note holder enters into an agreement with the A-Note holder that sets forth the rights and obligations of the parties (“Agreement”). You explain that under the Agreement, the A-Note holder is afforded the sole and exclusive authority to administer and service the mortgage loan so long as the mortgage loan is a performing loan. The Agreement, however, provides the Company as B-Note holder with approval rights with respect to any decisions relating to material modifications to the loan agreements, or in connection with any material decisions pertaining to the administration and servicing of the mortgage loan.
You state that the Agreement also grants the Company as B-Note holder the right to control the administration and servicing of the loan in the event that the loan becomes a non-performing loan (“control rights”).6 You state that these control rights include the right to appoint a special servicer to manage the resolution of the non-performing loan, including any proposed foreclosure or workout of the loan.7 You state that the Company generally will have the right to advise, direct, or approve certain actions to be taken by the special servicer, including those with respect to any modification or forgiveness of principal or interest in connection with the defaulted loan, any proposed foreclosure of the mortgage loan or acquisition of the underlying property by deed-in-lieu of foreclosure or any proposed sale of a defaulted mortgage loan. You state that the special servicer is generally obligated to follow the Company’s decisions unless the special servicer believes that doing so would violate any applicable law or provisions of any agreement applicable to the financing arrangement. In addition, you state that the special servicer is subject to the limitations prescribed by a “servicing standard,” which requires the special servicer to act in the best interests of both the A-Note holder and the Company as B-Note holder and in a commercially reasonable manner. The Company, however, for any reason has the right to terminate and replace the special servicer.
You also state that the Company as B-Note holder has the right to receive written notice with respect to the performance of the mortgage loan and all reasonably requested information in connection with the exercise of the B-Note holder’s rights. You further state that the Company also has the right to cure any monetary and non-monetary defaults on the mortgage loan. Finally, you state that the Company may purchase the A-Note at a price of par plus interest in the event that the loan becomes non-performing.
Analysis
Section 3(c)(5)(C) of the Act
Section 3(a)(1) of the Act, in relevant part, defines an investment company as any issuer that is, or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of Government securities and cash) on an unconsolidated basis.8 Section 3(c)(5)(C) of the Act, in relevant part, provides an exclusion from the definition of investment company for any issuer that is “primarily engaged in … purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” We previously have taken the position that an issuer may not rely on the exclusion provided by Section 3(c)(5)(C) unless at least 55% of its assets consist of “mortgages and other liens on and interests in real estate” (called “qualifying interests”) and the remaining 45% of its assets consist primarily of real estate-type interests.9 To meet the 45% real estate-type interests test, an issuer must invest at least 25% of its total assets in real estate-type interests (subject to reduction to the extent that the issuer invests more than 55% of its total assets in qualifying interests) and may invest no more than 20% of its total assets in miscellaneous investments.10
We generally take the position that a qualifying interest is an asset that represents an actual interest in real estate or is a loan or lien fully secured by real estate. Thus, for example, we have not objected if an issuer treats as qualifying interests, among other things, fee interests in real estate,11 mortgage loans fully secured by real property,12 notes secured by a pool of whole mortgage loans,13 second mortgages secured by real property,14 and leasehold interests secured solely by real property.15 We also take the position that an asset that can be viewed as being the functional equivalent of, and provide its holder with the same economic experience as, a direct investment in real estate or in a loan or lien fully secured by real estate, may be considered to be a qualifying interest for purposes of Section 3(c)(5)(C).16
We take the position, however, that an asset is not a qualifying interest for purposes of Section 3(c)(5)(C) if it is an interest in the nature of a security in another person engaged in the real estate business.17 For this reason, we generally take the position that an issuer that is engaged primarily in purchasing or otherwise acquiring participations or fractionalized interests in individual or pooled mortgages or deeds of trust is not entitled to rely on Section 3(c)(5)(C).18 We have, however, taken the position that an issuer that holds mortgage participation interests may nevertheless rely on Section 3(c)(5)(C) if the mortgage participation interests have attributes that would classify them as being interests in real estate rather than as being interests in the nature of a security in another person engaged in the real estate business. For example, in several instances we have taken the position that a trust that held participation interests in construction period mortgage loans acquired from mortgage lenders may rely on Section 3(c)(5)(C).19 We explained that each mortgage participation interest held by the trust was an interest in real estate because the participation interest was in a mortgage loan that was fully secured by real property and the trustee had the right by itself to foreclose on the mortgage securing the loan in the event of default.20
B-Notes as Qualifying Interests
You argue that the B-Notes that you describe in your letter should be considered to be qualifying interests for purposes of Section 3(c)(5)(C). You argue that each B-Note has attributes that, when taken together, would allow it to be classified as an interest in real estate rather than an interest in the nature of a security issued by a person that is engaged in the real estate business (i.e., the A-Note holder), notwithstanding that the B-Note holder does not have the right by itself to foreclose on the mortgage loan, which was a condition to the granting of relief in prior letters.21
In support of your position, you argue first that a B-Note is a participation interest in a mortgage loan that is fully secured by real property, and is not a loan extended to the A-Note holder. You state that the B-Note is not an interest in the A-Note holder with payment depending on the profits generated by the A-Note holder’s operations. Rather, you explain that payment on the B-Note is based on the interest and principal payments made by the borrower on the underlying mortgage loan.22 As such, you state that the Company invests in a B-Note only after performing the same type of due diligence and credit underwriting procedures that it would perform if it were underwriting the entire mortgage loan.23 You state that the A-Note holder does not guarantee payment of the B-Note holder’s share of interest and principal payments received from the borrower on the underlying mortgage loan.24 Accordingly, you argue that the B-Note holder looks to the borrower for payment on its B-Note and not to the A-Note holder.
You also state that the Company as B-Note holder has rights with respect to the administration and servicing of the mortgage loan that further suggest that the B-Note is an interest in real estate. Although the A-Note holder has the exclusive authority to administer and service the mortgage loan as long as the loan is a performing loan, you represent that the Company as B-Note holder has approval rights in connection with any material decisions pertaining to the administration and servicing of the loan, including decisions relating to leasing and budget requests from the borrower. You also represent that the B-Note holder has approval rights with respect to any material modification to the loan agreements.
Finally, you argue that that the Company as B-Note holder has effective control over the remedies relating to the enforcement of the mortgage loan, including ultimate control of the foreclosure process, in the event that the loan becomes non-performing. You state that the Company has such rights notwithstanding the fact that the Company does not have the unilateral right to foreclose on the mortgage loan, or that the special servicer is required to act in the best interests of both the A-Note holder and the B-Note holder under the special servicing standard. In particular, you represent that the Company as B-Note holder has the right to select the special servicer, and often appoints its wholly owned subsidiary to act in that role. You state that in the event that the mortgage loan becomes non-performing, the Company is able to pursue the remedies it desires by advising, directing or approving the actions of the special servicer. If the Company is dissatisfied with the remedy selected by the special servicer, you represent that the Company may: (1) terminate and replace the special servicer at any time with or without cause; (2) cure the default so that the mortgage loan is no longer non-performing; or (3) purchase the A-Note at par plus accrued interest, thereby acquiring the entire mortgage loan.
Conclusion
Based on the facts and representations in your letter, we agree that the B-Notes which you describe in your letter are interests in real estate and not interests in the nature of a security in another person engaged in the real estate business.25 In taking this position we note in particular your representations that: (1) a B-Note is a participation interest in a mortgage loan that is fully secured by real property; (2) the Company as B-Note holder has the right to receive its proportionate share of the interest and the principal payments made on the mortgage loan by the borrower, and that the Company’s returns on the B-Note are based on such payments;26 (3) the Company invests in B-Notes only after performing the same type of due diligence and credit underwriting procedures that it would perform if it were underwriting the underlying mortgage loan; (4) the Company as B-Note holder has approval rights in connection with any material decisions pertaining to the administration and servicing of the loan and with respect to any material modification to the loan agreements; and (5) in the event that the loan becomes non-performing, the Company as B-Note holder has effective control over the remedies relating to the enforcement of the mortgage loan, including ultimate control of the foreclosure process, by having the right to: (a) appoint the special servicer to manage the resolution of the loan; (b) advise, direct or approve the actions of the special servicer; (c) terminate the special servicer at any time with or without cause; (d) cure the default so that the mortgage loan is no longer non-performing; and (e) purchase the A-Note at par plus accrued interest, thereby acquiring the entire mortgage loan.27
We therefore concur with your view that the B-Notes described in your letter may be considered qualifying interests for purposes of the exclusion from the definition of investment company provided by Section 3(c)(5)(C). Please note that our views are based upon the facts and representations contained in your letter and that any different facts or representations may require a different conclusion.
Rochelle Kauffman Plesset
Senior Counsel
Endnotes
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1 You state that when a commercial mortgage loan is divided into more than two participations, the participation may be designated as an A-Note, a B-1 Note, a B-2 Note, a B-3 Note, etc. For purposes of this letter, in cases in which there are more than two participations, the term “B-Note” is used to refer to the most junior participation.
2 You explain, however, that the B-Note is different from a second mortgage loan because the B-Note represents a participation interest in a single mortgage loan, whereas a second mortgage loan represents the issuance and administration of a separate loan. You also explain that the separate note issued by the borrower evidences a participation in a mortgage loan and not an interest in a whole, unparticipated mortgage loan held by a single mortgagee.
3 You explain that since a B-Note evidenced by a separate note is an actual note conveying to the B-Note holder a portion of the mortgage that is secured by the recorded mortgage, the B-Note holder’s right to receive its share of the interest and principal payments made by the borrower on the underlying mortgage loan should not be part of the A-Note holder’s estate in the event that the A-Note holder becomes bankrupt.
4 You state that in these cases the original lending transaction already may have been structured as a single note mortgage financing at the time the Company is given the opportunity to acquire a participating interest in the mortgage loan. You explain that it would be difficult to later provide for the issuance of two separate notes because it would require that the borrower and the mortgage lender modify the documentation of the original lending transaction.
5 You suggest that in the event of the A-Note holder’s bankruptcy, the status of the B-Note holder is unclear under the United States Bankruptcy Code if the B-Note holder does not hold a separate note. You explain that it is possible that in such an event, the B-Note holder could be treated as an unsecured creditor of the A-Note holder, notwithstanding your view that the B-Note holder is holding a participation interest in a mortgage loan and not a loan from the A-Note holder. See infra notes 22, 24.
6 You state that the B-Note holder may exercise its control rights under the terms of the Agreement either directly or indirectly by appointing a third party (called an operating advisor) to administer its rights. You also state that generally the B-Note holder retains these control rights only so long as its position in the mortgage loan is deemed to have “value,” based upon an appraisal. You state that the B-Note has “value,” for this purpose, if the initial principal amount of the B-Note (adjusted for prepayments, debt write-downs and appraisal reduction amounts applied to the B-Note) exceeds 25% of the initial principal amount of the B-Note (adjusted for prepayments). You state that an “appraisal reduction amount,” for this purpose, generally is the amount by which the full outstanding mortgage indebtedness exceeds 90% of the appraised value of the underlying real property. If the appraisal indicates that the B-Note does not have “value,” the B-Note holder’s control rights are forfeited to the A-Note holder.
7 You state that the Company’s wholly owned subsidiary, CT Investment Management Co., often serves as special servicer for many of the Company’s real estate debt financing investments.
8 Section 3(a)(2) defines “investment securities” to include all securities except (A) Government securities, (B) securities issued by employees’ securities companies, and (C) securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exclusion from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Act.
9 See, e.g., Citytrust, SEC Staff No-Action Letter (Dec. 19, 1990); Greenwich Capital Acceptance Inc., SEC Staff No-Action Letter (Aug. 8, 1991).
10 See, e.g., id.
11 See, e.g., United Bankers, SEC Staff No-Action Letter (Mar. 23, 1988).
12 See, e.g., United States Property Investment N.V., SEC Staff No-Action Letter (May 1, 1989).
13 See, e.g., Premier Mortgage Corp., SEC Staff No-Action Letter (Mar. 14, 1983).
14 See, e.g., Prudential Mortgage Bankers & Investment Corp., SEC Staff No-Action Letter (Dec. 4, 1977); The State Street Mortgage Co., SEC Staff No-Action Letter (July 17, 1986).
15 See, e.g., Health Facility Credit Corp., SEC Staff No-Action Letter (Feb. 6, 1985).
16 See Capital Trust Inc., SEC Staff No-Action Letter (May 24, 2007) (a Tier 1 mezzanine loan under certain conditions may be considered to be a qualifying interest where the loan can be viewed as being the functional equivalent of, and provide its holder with the same economic experience as, a second mortgage which is a qualifying interest for purposes of Section 3(c)(5)(C)).
17 See, e.g., The Realex Capital, SEC Staff No-Action Letter (Mar. 19, 1984) (Section 3(c)(5)(C) is not available to an issuer that invests solely in limited partnership interests in an underlying limited partnership that would own and operate a building).
18 MGIC Mortgage Corp., SEC Staff No-Action Letters (Oct. 6, 1972 and Aug. 1, 1974).
19 See Northwestern Ohio Building and Construction Trades Foundation, SEC Staff No-Action Letter (Apr. 20, 1984); Baton Rouge Building and Construction Industry Foundation, SEC Staff No-Action Letter (Aug. 31, 1984); Dayton Area Building and Construction, SEC Staff No-Action Letter (May 7, 1987).
20 Id. We have also granted no-action relief to an issuer that acquired whole mortgage loans or pools of whole mortgage loans and then sold participation interests in such assets. Relief was conditioned on the issuer retaining a continuing percentage ownership interest of at least 10% in each of the whole mortgage loans or pools of mortgage loans which it had fractionalized; the issuer alone was the formal record owner; and the issuer throughout the life of the participation had complete supervisory responsibility with respect to the servicing of the mortgage loans and had sole discretion regarding the enforcement of collections and the institution and prosecution of foreclosure or similar proceedings in the event of default. We stated that these conditions were intended to ensure that the issuer would “have a substantial continuing ownership interest in … [the underlying whole mortgages and pools of such mortgages] and [the] unrestricted control over the enforcement of the lien and other matters with respect to such mortgage loans so that the interest retained by the [issuer] would be an interest in real estate within the meaning of Section 3(c)(5)(C) of the Act rather than an interest in the nature of a security in another person engaged in the real estate business.” MGIC Mortgage Corp., SEC Staff No-Action Letter (Aug. 1, 1974).
21 See, e.g., id.
22 You suggest, however, that in the event that the A-Note holder becomes bankrupt and the B-Note holder is treated as an unsecured creditor of the A-Note holder, the B-Note holder may not receive its full payment on the B-Note notwithstanding the fact that the borrower has been making full and timely payments on the underlying mortgage loan. See supra note 5. You state that in the event that this will occur, the B-Note will no longer be considered an interest in real estate and thus will no longer be treated as a qualifying interest for purposes of Section 3(c)(5)(C).
23 You explain that, like the procedures for investing in whole mortgages, the procedures that the Company performs prior to investing in B-Notes include hands-on analysis of the underlying collateral for the loan, market analysis, tenant analysis, financial analysis, visits to the property, borrower background checks, and lease and contract review. You also note that the Company performs its own independent analysis and does not rely on the A-Note holder’s analysis or conclusion on the creditworthiness of the mortgage loan borrower.
24 In addition, you state that the following additional factors indicate that the B-Note is a mortgage loan participation interest and not a loan extended to the A-Note holder: (1) there is no difference in term to maturity contained in the B-Note and the underlying mortgage loan; (2) the total payments made by the borrower on the underlying mortgage loan do not exceed the aggregate payments made on the A-Note and the B-Note; and (3) there is no difference in scheduled payment terms between the borrower and the A-Note holder, and between the A-Note holder and the Company, except for the priority in the allocation of interest and principal payments granted to the A-Note holder by virtue of its position as senior participant. Furthermore, you state that, although there is a difference in the interest rate due on the underlying mortgage loan and the B-Note, the difference is due to the legitimate risk premium that the B-Note holder receives on assuming first loss. You state that your view that the B-Notes described in your letter are true participations and not loans extended to the A-Note holder is based on an evaluation of the factors that the courts have considered in similar cases. See, e.g., In re Churchill Mortgage Investment Corp., 233 B.R. 61 (Bankr. S.D.N.Y. 1999); In re Sprint Mortgage Bankers Corp., 164 B.R. 224 (Bankr. E.D.N.Y. 1994).
25 You have not asked for, and we are not expressing, a view on whether an A-Note, as you describe in your letter, is a qualifying interest for purposes of Section 3(c)(5)(C) notwithstanding the fact that, as you represent, the B-Note holder has effective control over the remedies relating to the enforcement of the mortgage loan, including ultimate control of the foreclosure process, in the event that the loan becomes non-performing.
26 See supra note 22.
27 As indicated above, while the right to foreclose is an important attribute to consider when determining whether an asset should be considered a qualifying interest, we believe that, in addition to this attribute, other attributes of an asset need also be considered when making such a determination. We note, however, that at this time we are not withdrawing any previous no-action positions that have not addressed this point.
Incoming Letter
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The Incoming Letter is in Acrobat format.
http://www.sec.gov/divisions/investment/noaction/2009/capitaltrust020309-3c5c.htm
MERS has to go. It does not work and helped to cause this horrible economic downturn. As the mortgage mess goes, so does the economy.
I need to explain my ‘gone against standing’ reference: I meant to convey that the judges ruled that the pretenders did not have standing.
@ The A Man,
In CA, you need to take it to the BK courts. In those, the decisions are going the opposite way.
There have also been 9th district BK Appellate decisions that have gone against standing.
Southern District BK court has has decisions from two judges that smacked the pretenders.
MERS admitted never holding or owning my note. Came right out and admitted it in no uncertain terms. MERS is indeed a fiction. It doesn’t have any employees. It is a computer system, and it is not even used like THEY say it’s supposed to be used.
MERS is a paper tiger. Or digital tiger. It doesn’t exist. It’s like that law review article that was posted sometime last year said, and I paraphrase:
MERS’ business model is so unorthodox that it is arguably fraudulent on its face.
I mean, if one of us tried to record official documents regarding real property naming a website or a server as a beneficiary/mortgagee, knowingly in violation of all legal statute and precedent, we’d be put under the jail. Not MERS, though–they get to file and re-file court docs until the judge can hold his or her breath long enough to sign the steaming pile of crap that a lot of these rulings have been.
So how do we deal with it here in California. Are the Laws really that much Different?
MERS just won in the Appeals court here in California