Quiet Title — Not as Easy as It Sounds But It Could Lead to Successful Strategies and Tactics

Posted on February 18, 2020 by Neil Garfield
The failures to disclose material facts providing the real context of the “loans” deprived borrowers of choice between lenders and deprived them of the opportunity of bargaining for terms that were based upon the economic reality — that the main point of the loan origination was not the loan but rather the sale of unregistered securities. THAT is where the profit is and was and without that the loan would never have occurred. None of that profit was disclosed.

Contrary  to popular myth quiet title is not a magic bullet.

It’s a good move only after you have destroyed the case against the homeowner and only if you direct it at only the parties who have made claims against the homeowner. So it’s really an action for a declaration from the court as to the rights and duties of the parties to the case.

You can’t file a case against potential creditors unless you do service by publication and that can be tricky. And you would need to prove convincingly that the mortgage should never have been recorded in the first place. Securitized mortgages are subject to possible reformation by the real parties in interest who paid value in exchange for ownership of the debt. And theoretically at least, they exist — even if they are currently legally unable to enforce the debt, note or mortgage.

And while I am at it, let me remind the reader again that the following terms are all different in that they all mean different things:

  1. Debt — a legal obligation defined by common law and the Uniform Commercial Code
  2. Note — a legal instrument which if facially valid creates a legal obligation separate and distinct from any debt
  3. Mortgage — a legal instrument which if facially valid creates a lien or encumbrance upon land as security for the performance of either (a) a debt or (b) a note or (c) both a debt and a note.
  4. Deed of trust — same as mortgage except that mortgage requires due process of judicial foreclosure whereas DOT is an agreement to skip judicial foreclosure. [My opinion, not accepted by anyone one the bench, is that as soon as the nonjudicial foreclosure becomes contested, the action MUST convert to judicial in order to satisfy due process. ]
  5. “Loan” means nothing. It is used in general references to mean something in relation to the above terms without ever being specified. However the loan agreement generally means the note, the mortgage, the disclosures and the Federal and State lending laws that are incorporated either expressly or by common law doctrine. The existence of a note and mortgage is generally regarded as raising the legal presumption that a loan of money has occurred between the named originator and the borrower. That is a rebuttable presumption that generally only occurs through discovery during litigation.
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Here is the way to look at it from a legal perspective.
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The mortgage or deed of trust generally expressly state that they secure the obligations stated in the note. And the note creates a liability even if there was no consideration. This liability (arising solely from execution of the note) can be defeated if you can reveal lack of consideration during litigation. But the problem is that most borrowers received a loan of money —- or received the benefits of payments on their behalf for example to prior “lenders”, sellers etc.
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Technically speaking the mortgage or deed of trust does not state that it secures the debt. It says that it secures the obligations under the note. So theoretically if the debt is not owed to the “secured party” (“lender”) then it secures nothing and the people who advocate quiet title are right that this could mean the mortgage would be expunged from the title record or canceled or both. AND that in turn would mean that the mortgage should never have been recorded in the first place.
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But in the real world, it is highly unlikely that — after receiving financial benefits under circumstances where the homeowner intended to use his or her house as collateral, that any judge would simply say that the mortgage or deed of trust was void ab initio (from the start).
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More likely the judge would issue a declaration that the parties who were seeking to use the security instrument were not entitled to do so but that the mortgage could be subject to enforcement if it was the subject of reformation in which the right name was recited as mortgagee under a mortgage or the beneficiary under a deed of trust. So given the bias of courts, it seems very unlikely that full quiet title would be granted because it would quash the rights of unknown third parties who did actually pay value.
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Which brings us to the hidden question. Although there were certainly people who paid value, what did they buy? If they (investors who bought certificates) didn’t buy the debt owed by the residential borrowers, then the fact that they paid value becomes irrelevant.
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And so we next move onto the investment bank that sold them the certificates. The certificates essentially were IOUs. They could be described as bonds or notes. They represent an unsecured liability owed by the investment bank (dba an implied “trust”) to the investors who bought the certificates.
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So investors did not buy any interest in the debt, note or mortgage and many times the indenture to the certificates expressly waives any such right, title or interest.
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That leaves the investment bank posing as underwriter but actually acting as issuer of the certificates. So the money from sale of the certificates is the money of the investment bank.
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Then through a variety of conduits, the investment bank puts just enough money on loan closing tables as is necessary to generate —at least on paper — the dollar liability that is owed by the investment bank to the investors. But the borrowers execute no documentation and receive no disclosures to the effect that the investment bank was the actual lender through table funding or otherwise.
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This money is generally 20%-30% less than the amount of money paid by investors for the certificates. So right away the investment bank has received a yield spread premium of 20%-30% on invested dollars — which is realized only when the loan is closed. That YSP is never disclosed which makes virtually all loan closings materially deficient in disclosures. That Is compensation arising from the loan origination. It doesn’t exist but for the loan origination.
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Back to our subject. So the investment bank does not get revealed nor is any note or mortgage or deed of trust executed in favor of the investment bank.
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And there is the kicker. The originator whom we all know is not funding the loan is NOT an agent for the investment bank so this doesn’t even qualify as a table funded loan. The reason it is not an agent of the investment bank is that the investment bank has expressly created veils that prevent it from being named as the lender and therefore subject to Federal and State lending laws.
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So the investment bank cannot claim to be the owner of the obligation or debt, nor can it plead for relief under the note and mortgage or deed of trust — unless it admits a scheme to violate Federal and State lending laws.
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So the answer to that “problem” is that the investment bank uses veils (sham conduits) and “designates” sham entities to serve as claimant in foreclosures or, better yet for them, names nobody as designee but nonetheless states a name as though it was an entity like “US Bank, as trustee on behalf of the certificate holders of SASCO Trust 2006-1. ” Although US Bank exists, there is no legal entity that could be called “certificate holders of SASCO trust 2006-1” even though it sounds official.
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Some analysts including myself had previously erroneously concluded at times that the note was split from the mortgage. It wasn’t. The ownership of the debt was split from the payment of value. Under all current black letter law that means that it is illegal for anyone to claim ownership of the debt.
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BUT as I pointed out above, that still leaves open an action in equity in which the false or deficient loan origination documents could be reformed in a way that designates a party who may act as owner of the debt — but only after all the interests of all the stakeholders are taken into consideration.
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This might include liability for disgorgement of undisclosed profits, among other things.
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The failures to disclose deprived borrowers of choice between lenders and deprived them of the opportunity of bargaining for terms that were based upon the economic reality — that the main point of the loan origination was not the loan but rather the sale of unregistered securities. THAT is where the profit is and was and without that the loan would never have occurred. None of that profit was disclosed.

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“Credit Bid” Comes Under Scrutiny in 9th Circuit

Posted on September 16, 2016 by Neil Garfield

As I have been writing and talking about the forced judicial sales, my opinion has always been that in most cases there is an absence of evidence that the party making the credit bid was in fact the creditor thus entitled to make a “credit bid” at the auction. The credit bid is an allowance for the creditor to bid up to the amount of the debt owed to them without paying cash at the sale. This has been ignored since I first started writing about it. I think the credit bid is void and fraudulent if a non-creditor submits a credit bid when it is not the creditor. In nonjudicial states this is an easier proposition than in judicial states where a Final Judgment has been rendered.

This case is also notable because it finally addresses the issue of the liability of the Trustee on a deed of trust, concluding that if the party claiming to be the beneficiary was in fact not the beneficiary, and there is no evidence to suggest otherwise, the trustee is potentially liable. It would be helpful to pursue discovery against the Trustee, since it is always a “substituted trustee” that is in fact under the thumb or owned by the parties who are making self-serving declarations of their status as “beneficiaries” under the deed of trust. THAT of course provides grounds to object and challenge the substitution of trustee and everything that follows. If the self-proclaimed beneficiary is a nonexistent entity or otherwise does not conform to the statutory definition of a beneficiary, then it has no power to substitute a new trustee. And everything that the trustee does after that point is void. In discovery look for the agreement that says the new Trustee is indemnified and held harmless for all claims, violations etc. It’s there — but you need to force the issue.

THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER. ALSO NOTE THAT THIS IS NOT YET PUBLISHED AND THEREFORE IS NOT MANDATORY AUTHORITY YET.
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see 9th Circuit decision, Jacobsen v. Aurora Loan Services, Case No. 12-17021

Wrongful foreclosure. We reverse the district court’s grant of summary judgment in favor of Aurora on the wrongful foreclosure claim. In California, the elements of a wrongful foreclosure action are (1) the trustee or mortgagee caused an illegal, fraudulent, or willfully oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust; (2) the party attacking the sale was prejudiced or harmed; and (3) in cases where the trustor or mortgagor challenges the sale, the trustor or mortgagor tendered the amount of the secured indebtedness or was excused from tendering. Sciarratta v. U.S. Bank Nat’l Ass’n, 202 Cal. Rptr. 3d 219, 226 (Ct. App. 2016). The district court erred by granting summary judgment on the ground that it found nothing wrong with the foreclosure sale.
First, the district court failed to review the record in the light most favorable to the non-movants when the district court assumed that the form of Aurora’s bid at the foreclosure sale was a cash bid. On appeal, the parties now agree that the form of the bid was a credit bid.
Second, a genuine dispute of material fact remains regarding whether Aurora properly made a credit bid. California law permits “present beneficiary of the deed of trust” to credit bid at the foreclosure sale. Cal. Civ. Code § 2924h(b). However, it is not uncontroverted that Aurora was the present beneficiary of the deed of trust. A deed of trust is “inseparable from the note it secures.” Yvanova v. New Century Mortg. Corp., 365 P.3d 865, 850 (Cal. 2016); see also Domarad v. Fisher & Burke, Inc., 76 Cal. Rptr. 529, 536 (Ct. App. 1969) (“[A] deed of trust has no assignable quality independent of the debt, it may not be assigned or transferred apart from the debt, and an attempt to assign the deed of trust without a transfer of the debt is without effect.”). The record contains evidence that Aurora did not “own” O’Brien’s loan before the foreclosure. ER 19-20, 136-38, 181. However, the record also contains evidence that Aurora is “currently in possession” of the original promissory note, which was endorsed in blank, although it is not clear from Aurora’s declaration when Aurora became the holder of the note.[4] [ER 179-80; 185-195]. It appears that there remains a question of fact whether Aurora was the “beneficiary” of the deed of trust at the time of the foreclosure and thus whether it was entitled to make a credit bid at the foreclosure sale, and we remand for the district court to address this issue in the first instance.
Moreover, in order to prevail on their claim of wrongful foreclosure, Plaintiffs must also show that they suffered prejudice or harm as a result of irregularities or illegalities in the foreclosure sale. Sciarratta, 202 Cal. Rptr. 3d at 226. Because the district court granted summary judgment to Aurora on a different ground, the court did not address the element of prejudice or harm. In the circumstances, we also deem it prudent to remand this claim to the district court to consider the prejudice question in the first instance. We therefore reverse the district court’s grant of summary judgment on the wrongful foreclosure claim and remand for further proceedings.[5]
AFFIRMED IN PART AND REVERSED AND REMANDED IN PART. The parties shall bear their own costs on appeal.
[**] The Honorable James V. Selna, United States District Judge for the Central District of California, sitting by designation.
[*] This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3.
[1] The district court did not address standing. However, “[w]e may affirm on any ground supported by the record, even it if differs from the rationale used by the district court.” Buckley v. Terhune, 441 F.3d 688, 694 (9th Cir. 2006) (en banc).
[2] We GRANT both parties’ requests for judicial notice.
[3] In their reply, Plaintiffs suggest that their cancellation of instruments claim survives their contention that the note and deed of trust were void ab initio. Because this argument was first raised in the reply brief, we deem it waived. Delgadillo v. Woodford, 527 F.3d 919, 930 n.4 (9th Cir. 2008).
[4] Note that in today’s modern mortgage world, the “owner” of the underlying debt (that is, the entity who will receive the ultimate economic benefit of payments from the note, less a servicing fee) and “holder” of the note (the party legally entitled to enforce the obligations of the note) are not always one and the same. See, e.g., Brown v. Wash. State Dep’t of Commerce, 359 P.3d 771, 776-77 (Wash. 2015) (discussing modern mortgage practices and the secondary market for mortgage notes; “Freddie Mac owns [borrower’s] note. At the same time, a servicer . . . holds the note and is entitled to enforce it.“)(emphasis added). It thus appears possible that the “beneficiary” under the deed of trust would follow with the note (and with the entity “currently entitled to enforce [the] debt”), rather than the income stream. See Yvanova, 365 P.3d at 850-51; see also Hernandez v. PNMAC Mortg. Opp. Fund Investors, LLC, 2016 WL 3597468, *6 (Cal. Ct. App. June 27, 2016) (unpublished) (if the foreclosing party “could properly and conclusively establish . . . that it did hold the Note at the [time of foreclosure], that would be dispositive and preclude a wrongful foreclosure cause of action because a deed of trust automatically transfers with the Note it secures—even without a separate assignment.”)(citing Yvanova).
[5] We also reverse the district court’s grant of Cal-Western’s motion to dismiss the wrongful foreclosure claim. The trustee must conduct the foreclosure sale “fairly, openly, reasonably, and with due diligence” “to protect the rights of the mortgagor and others.” Hatch v. Collins, 275 Cal. Rptr. 476, 480 (Ct. App. 1990). Here, the complaint alleges that Cal-Western’s acceptance of a void credit bid was unlawful. If the credit bid was void and the acceptance of the credit bid was unlawful, Cal-Western failed to conduct the foreclosure sale with due diligence, and thus the complaint states a claim against Cal-Western.

 

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