THIS IS FROM REUBEN NIEVES. IT IS A GOOD PIECE OF WORK AND HE WANTS COMMENTS AND CONTRIBUTIONS. HE HAS A FINELY MADE POINT HERE AND IT IS SELF-EXPLANATORY.
I have always said that the power of sale raises constitutional questions — namely, that no person should be deprived of life, liberty or property without due process of law. The fiction is that you can waive that right by contract. That premise is questioned here. But in addition, this piece raises the stronger point that even if one were to conclude that it is possible to contract away your most basic constitutional rights (like agreeing to be a slave), the manner in which it is being applied in the era of securitized loans is clearly unconstitutional.
There is also the fiction that use of the power of sale is not state action and THAT evades the issue of constitutionality. The answer to that argument is that if there is no state action then there is no sale, there is no new owner, and there is no new deed. The proponents speciously argue that you can take one part of the foreclosure process out of the courts and call that private while the rest is state action rubber stamping a foreclosure sale without due process under a set of presumptions that in most cases no longer apply.
The arguments for judicial economy and waste of money that lay at the foundation of the statutes permitting non-judicial sale simply are not present anymore. The obvious identities of the proper parties, accounting for the entire transaction, and the inevitability of the foreclosure by default without any real meritorious defenses that existed when these statutes were passed, do not pass even the smell test in today’s environment.
But the court need not reach the constitutional question. It is also a matter of breach of contract, jurisdictional standing and procedural due process. Once the borrower OBJECTS to the sale on the grounds that he denies the default, or denies the default as to the pretender lender, or denies the standing of the would-be forecloser as a creditor at all, the question should be resolved in the courts with all the usual trappings of proper pleading by the party seeking affirmative relief (the one seeking foreclosure). The requirements of good faith pleading and joining issues to be tried according to the normal rules of evidence should apply.
As it stands now, the power of sale is being used as an end-run around the requirements that the borrower even owe anything, much less to the party seeking foreclosure.
PLEASE KEEP US IN THE LOOP OF THIS DISCUSSION.
REUBEN NIEVES: As an addendum to my prior comment on the unconstitutionality of a power of sale provision in a mortgage contract with respect to federally chartered bank corporations created for public and national purposes I am submitting my research to this site and invite any opposition or legal commentator to dispel or affirm my research
The issue is one of First Impression because the Supreme Court of the United States has never decided whether a federally chartered bank corporation created under an act of Congress to provide an important public and national purpose could use a non- judicial procedure that allows the taking of a property interest without a hearing thus violating the 5th Amendment. The Court, however, has made numerous decisions which would have been relevant in determining whether non-judicial procedures were applicable given the nature of these corporations. Though several appellate courts have had occasion to determine the constitutionality of non-judicial procedures in the form of a trustee sale provision, none have vetted the corporations seeking this remedy. The issue goes to the core of the nature of federally chartered corporations created under special law for public and national purposes. This issue deals with the right of these corporations to put such a provision in a contract and rests on whether the act of foreclosure is a governmental act or a proprietary act. It is an issue which, in the context of the current economic crisis and massive foreclosures, sweeps the breadth of this nation like a plague destroying families and communities as it spreads, swelling the homeless population in its wake. This issue involves a constitutional right affecting the lives of millions of families across this nation.
It would allow homeowner a level playing field with the banks to negotiate loan modification. If the bank had to take them to court, the homeowner could raise affirmative defenses and a right to a jury trial. I ask that you look at the arguments proffered in this letter to make your decision and that you act quickly.
ARGUMENT
I. BANK’S USE OF NON-JUDICIAL FORECLOSURES
IS NOT WITHIN THE SCOPE OF A LAW OF CONGRESS
To resolve the issue of the constitutionality of a trustee sale by National banks and federal savings associations , we must first identify the nature of the corporations . NATIONAL BANKS AND FEDERAL SAVINGS ASSOCIATIONS are federally chartered corporations created under acts of Congress (The Homeowner Loan Act (HOLA) and the National Bank Act(NBA) for a public and national purposes. In Conference of Federal Savings and Loan Associations et al v. Alan L. Stein et al. 604 F.2d 1256 (9th Circuit) (1979) the court related the history of HOLA and the reason for its’ creation:
The Home Owners’ Loan Act of 1933, 12 U.S.C. §§ 1461 Et seq. (HOLA), was the result of congressional dissatisfaction with state law and practice in the financing of home construction.
….. The Federal Home Loan Bank Board (the Bank Board) was created with extremely broad powers to promulgate rules and regulations. 12 U.S.C. § 1464(a) provides in part:
…[T]he Board is authorized, under such rules and regulations as it may prescribe, to provide for the organization, incorporation, examination, operation, and regulation of associations to be known as ‘Federal Savings and Loan Associations’ * * * and to issue charters therefore, giving primary consideration to the best practices of local mutual thrift and home-financing institutions in the United States.” [bold added]
A. BANKS CAN BE A GOVERNMENTAL
ACTOR IN VIOLATION OF THE 5TH AMENDMENT
National banks and federal savings banks are agencies of the United States created to promote its fiscal policies. National banks and federal savings banks benefit by not paying state taxes, avoiding state predatory lending laws through the concept of Federal preemption, allowing them to export high interest for the credit card thus avoiding the state usury laws. Federal Savings banks also have the same benefits and are no less instrumentalities of the federal government than national banks whose purpose is to promote its fiscal policies. Alexander Hamilton argued that the Central Bank was necessary to the nation in cases of emergency such as the financing of war… Hamilton believed that there was a symbiotic relationship between agriculture, commerce, and manufacturing, and that progress in each of these sectors was necessary for America’s economic development. (In the Report of Credit II, Dec. 1790)
B. A PARTY MUST STATE FACTS
SUFFICIENT TO STATE A EITHER A
5th or 14th AMENDMENT DUE PROCESS CLAIM
Non-judicial foreclosures have been the subject of a flurry of cases including the most current Apao v. San Diego Home Loans, Inc.,324 F3d 1091, Ninth Circuit (2002) a California corporation. Margaret Apao lost her home to a foreclosure and sale under Hawaii’s non-judicial foreclosure statute. The federal district court dismissed the complaint for failure to state a claim and that the sale was a purely private remedy. Apao appealed to the Ninth Circuit. The Ninth Circuit affirmed the district court’s decision on the grounds that previous decisions of appellate courts upheld the constitutionality of similar non-judicial procedures. The Ninth Circuit held in Apao that the case of Charmicor v. Deaner, 572 F2nd 694 “was controlling” although the consumers in Apao attempted to distinguish it. In Charmicor, the consumers claimed that the statute offended due process by failing to provide a pre-sale hearing and that it offends civil rights statutes and the equal protection clause by discriminating against appellant’s shareholders, who are black. The court in Charmicor noted that the “complaint failed to state a claim for relief under the civil rights statutes, because the record was utterly barren of any facts or allegations that could support a claim under the equal protection clause”, the Ninth Circuit affirmed. The court in these cases made no reference to several Supreme Court decisions which examined the nature of corporations created under an act of Congress and were content with the notion that Congress could adopt the local customs on debtor creditor relations without further analysis. The fact of the matter is that the issue should be determined under federal law.
C. NATIONAL BANKS ARE PUBLIC
NOT PRIVATE CORPORATIONS
In Easton v. Iowa,188 U.S.220 (1903) the Court said of national banks:
. . .[W]e cannot concur in the suggestions that national banks, in respect to the powers conferred upon them, are to be viewed as solely organized and operated for private gain.
The Court in Easton went on to say at 188 U.S. 220 at p. 230 that the principles enunciated in McCullough v Maryland, 17 U.S. 316(1819), and in Osborn v Bank of United States, 22 U.S.738 (1824), though expressed in respect to banks incorporated directly by acts of Congress, were still applicable to the later and present system of national banks. The Court cited with approval the holding of the latter as expressed by Chief Justice Marshall:
The bank is not considered as a private corporation whose principal object is individual trade and individual profit, but as a public corporation created for public and national purposes. That the mere business of banking is, in its own nature, a private business, and may be carried on by individuals or companies having no political connection with the government, is admitted, but the bank is not such an individual or company. It was not created for its own sake or for private purposes. It has never been supposed that Congress could create such a corporation.[bold and italics added]
The court in Easton goes on to say:
‘National banks are instrumentalities of the Federal government, created for a public purpose, and as such necessarily subject to the paramount authority of the United States. It follows that an attempt by a state to define their duties or control the conduct of their affairs is absolutely void, wherever such attempted exercise of authority expressly conflicts with the laws of the United States, and either frustrates the purpose of the national legislation or impairs the efficiency of these agencies of the Federal government to discharge the duties for the performance of which they were enacted.
Our conclusions, upon principle and authority, are that Congress, having power to create a system of national banks, is the judge as to the extent of the powers which should be conferred upon such banks, and has the sole power to regulate and control the exercise of their operations…[bold, underline and italics added]
In view of the holding in Osborn which Justice Marshall held that banks were public and not private bank corporations, which was approved and held applicable to later national bank corporations not directly created by Congress by the Supreme Court in Easton, why should we now consider national banks private corporations? And why not consider them “agencies of the Federal government” as referred to in Easton? And why should the same reasoning not apply to FEDERAL SAVINGS ASSOCIATIONS .
In Osborn at p. 22 U.S. 823 the court said of these national banks:
The charter of incorporation not only creates it, but gives it Every faculty which it possesses. The power to acquire rights of any description, to transact business of any description, to sue on those contracts, is given and measured by its charter, and that charter is a law of the United States. Take the case of a contract, which is put as the strongest against the Bank. . . [H]as this being a right to make this particular contract? .. . .[T]his question, too, depends entirely on a law of the United States [underline added]
The court in Osborn at p. 823, made it clear that federally chartered corporations created under acts of Congress could “. . .acquire no right, make no contract, bring no suit, which is not authorized by a law of the United States. It is not only itself the mere creature of law, but all its actions and all its rights are dependent on the same law”.[underline and bold added]
In an excerpt from Shoshone Mining Co. v. Rutter, 177 U.S. 505,509,510 ,citing Osborn, the court said:
A corporation has no powers and can incur no obligations except as authorized or provided for in its charter. Its power to do any act which it assumes to do, and its liability to any obligation which is sought to be cast upon it, depend upon its charter, and when such charter is given by one of the laws of the United States there is the primary question of the extent and meaning of that law;[underline & bold added]
In Runyan v. Lessee of Coster, 39 U .S. 122 , p. 129 (1840) the court Said:
…[T]hat a corporation “possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence. That corporations created by statute must depend for their powers and the mode of exercising them, upon the true construction of the statute.
… The corporation must show that the law of its creation gave it authority to make such contracts.” . [underline and bold added]
Did the law of its creation (HOME OWNER LOAN ACT or NATIONAL BANK ACT ) give National banks and federal savings associations the right to make this contract with this provision?
Can it then be said that the provision in a mortgage contract requiring a mortgagor to transfer his rights to a trustee with a power of sale for the non-payment of a mortgage is authorized by the federal charter? Is this not the right to foreclose on an owner without resort to judicial process and a hearing? Is this not the right to deprive a person of procedural due process? We must then ask the question: Is the act of the national or federal savings association in foreclosing non-judicially within the scope of a law of Congress? Can the government by way of a federal charter authorize a right to a bank to do what it is forbidden to do itself? It is fundamentally clear that the government can impart no greater power through a charter than they possess themselves. The power to deny a person of procedural due process is denied to the government under the 5th Amendment and is equally denied to the banks. As John Locke said nearly 300 years ago: “…Nobody can transfer to another more power than he has in himself “ [John Locke, TWO TREATISE OF GOVERNMENT, BOOK II] The courts in Osborn and Shoshone and Runyan show us that the conduct of banks in pursuit of non-judicial foreclosures must be done under the authority of the federal charter which is a “law of the United States” and therefore “under color of federal law”. Thus National banks and federal savings associations Mortgage fsb could be considered a “governmental actor” like the assumption made by the First Circuit in Gerena v Puerto Rico Legal Services, Inc., 697 F. 2d 447(1st Cir. 1983)
D. CONGRESS CANNOT AUTHORIZE OR
DELEGATE A RIGHT OR POWER THAT
IT CANNOT EXERCISE ITSELF
If all the acts, rights and obligations of corporations with federal charters must be done under the authority of the federal charter and a law of the United States, including rights created in contract, how can Congress authorize a provision that it could not exercise itself? The provision can only be validated by what it represents and the constitutional implications it may give rise to. In United States v Grimaud, 220 U.S. 506 (1911) the Supreme Court decided that very issue and the court citing Justice Marshall at 220 US pg. 517 said.
It will not be contended that Congress can delegate to the courts, or to any other tribunals, powers which are strictly and exclusively legislative. But Congress may certainly delegate to others powers which the legislature may rightfully exercise itself. [underline bold & italics added]
E. A POWER OF SALE PROVISION UPON DEFAULT IS
ULTRA VIRES AND NULL AND VOID
As the Supreme Court said in Concord First Nat’l Bank v Hawkins 174 U.S. 364 p. 371:
The doctrine of ultra vires, by which a contract made by a corporation beyond the scope of corporate powers is unlawful and void and will not support an action, rests as the Court has often recognized and affirmed, upon three distinct grounds: the obligation of anyone contracting with a corporation to take notice of the legal limits of its powers, the interest of the stockholders not to be subject risks which they have never undertaken, and above all, the interest of the public that the corporation shall not transcend the powers conferred upon it by law.[bold added]
The powers of a corporation are express and incidental. Runyan at p. 129 supra. If Congress cannot confer the power to foreclose non judicially to National banks and federal savings associations then the provision is ultra vires and void.
II. THE LENDING FUNCTIONS OF
OF NATIONAL BANKS AND FEDERAL SAVINGS ASSOCIATIONS ARE GOVERNMENTAL
In Federal Land Bank v. Bismarck Co. of St. Paul, 314
U. S. 95 (1941) the court was faced with determining
whether the lending functions were proprietary or governmental. The court said:
The argument that the lending functions of the federal land banks are proprietary, rather than governmental, misconceives the nature of the federal government with respect to every function which it performs. The federal government is one of delegated powers, and from that it necessarily follows that any constitutional exercise of its delegated powers is governmental. Graves v. New York ex rel. O’Keefe, 306 U. S. 466, 306 U. S. 477. It also follows that, when Congress constitutionally creates a corporation through which the federal government lawfully acts, the activities of such corporation are governmental. (cites)
As part of their general lending functions, the land banks are authorized to foreclose their mortgages and to purchase the real estate at the resulting sale. They are “instrumentalities of the federal government, engaged in the performance of an important governmental function.”(cites)
In Federal Land Bank v. Board of Kiowa County., 368 U.S. 146 the court said :
“the Federal Government performs no ‘proprietary’ functions. If the enabling Act is constitutional and if the instrumentality’s activity is within the authority granted by the Act, a governmental function is being performed.”
It is well settled that the enabling Act, Home Owner Loan Act (HOLA) is constitutional . Pittman v. Home Owners’ Loan Corp., 308 U. S. 21. Like federal land banks, the lending functions including foreclosures of federal savings assn’s/federal savings banks, such as National banks and federal savings associations Mortgage fsb, a federal instrumentality , should be treated as governmental just as the court in Bismarck held. Federal Land Bank v. Bismarck Co. of St. Paul, 314 U. S. 95, p. 102 (1941)
A. GOVERNMENT CANNOT EVADE ITS MOST SOLEMN CONSTITUTIONAL OBLIGATIONS BY SIMPLY RESORTING TO THE CORPORATE FORM
Can Congress divest itself of its identity with a corporation created and participated in for a public purpose sufficiently to allow the corporation to use a procedure that does not allow a hearing? That question was asked and answered in Lebron v National Railroad Passenger Corporation. 513 U.S. pgs 374, 375 when the court said:
c) There is a long history of corporations created and participated in by the United States for the achievement of governmental objectives. Like some other Government corporations, Amtrak’s authorizing statute provides that it “will not be an agency or establishment of the United States Government,” [cite]
(d) Although § 541 is assuredly dispositive of Amtrak’s governmental status for purposes of matters within Congress’s control–e. g., whether it is subject to statutes like the Administrative Procedure Act-and can even suffice to deprive it of all those inherent governmental powers and immunities that Congress has the power to eliminate-e. g., sovereign immunity from suit-it is not for Congress to make the final determination of Amtrak’s status as a Government entity for purposes of determining the constitutional rights of citizens affected by its actions. The Constitution constrains governmental action by whatever instruments or in whatever modes that action may be taken…
(e) Amtrak is an agency or instrumentality of the United States for the purpose of individual rights guaranteed against the Government by the Constitution. This conclusion accords with the public, judicial, and congressional understanding over the years that Government-created and -controlled corporations are part of the Government itself.(cites) ; A contrary holding would allow government to evade its most solemn constitutional obligations by simply resorting to the corporate form, Bank of United States v. Planters’ Bank of Georgia, 9 Wheat. 904, 907, 908 (other cites).
Like Amtrak, national banks and federal savings associations are federal instrumentalities and members in banking systems created for a public purposes and controlled by the director of The Office of Thrift Supervision and the director of the Comptroller of the currency. Like Amtrak it is not for Congress to make the final determination of the status of these corporations as government entities for purposes of determining the constitutional rights of citizens affected by its actions. Consumers are citizens whose constitutional rights are affected when non- judicial foreclosures are exercised by federally chartered corporations like National banks and federal savings associations . To paraphrase an old saying, “that with great power comes great obligations.” This is no less true when Congress confers enumerated and incidental powers on a corporation it creates for an important governmental function. It must follow that with the immunities from taxation and state laws that frustrate the activities of corporations for which an act of Congress was enacted, the constitutional obligations of the government must also attach. For as Justice Scalia said in Lebron, at p. 399:
But it does not contradict those statements to hold that a corporation is an agency of the Government for purposes of the constitutional obligations of Government rather than the “privileges of the government,” when the State has specifically created that corporation for the furtherance of governmental objectives, and not merely holds some shares but controls the operation of the corporation through its appointees.
In this case control of the operations is exercised by the director of the Office of Thrift Supervision and the director of the Office of the Comptroller of Currency independent federal regulatory agencies vested with plenary authority to administer the Home Owners’ Loan Act of 1933 (HOLA) and the National Bank Act, The Director of the OTS is appointed by the President, by and with the advice and consent of the senate. (12 USC §1462c) The Director of the Comptroller of the Currency is appointed by the President, by and with the advice and consent of the senate.(12 USC § 2) The issue of the government’s control over the operations of federal savings associations is clarified by the court in Fidelity Fed. S. & L. v. De la Cuesta, 458 U.S. 141 (1982) at p. 161 when the court said:
The broad language of § 5(a) expresses no limits on the Board’s authority to regulate the lending practices of federal savings and loans. As one court put it, “[I]t would have been difficult for Congress to give the Bank Board a broader mandate.” [cites] And Congress’ explicit delegation of jurisdiction over the “operation” of these institutions must empower the Board to issue regulations governing mortgage loan instruments.
In National Banks the governments control was made clear in Easton when the court said:
Our conclusions, upon principle and authority, are that Congress, having power to create a system of national banks, is the judge as to the extent of the powers which should be conferred upon such banks, and has the sole power to regulate and control the exercise of their operations…[bold, underline and italics added]
B. THE POWER TO FORECLOSE IS AN
INCIDENTAL POWER OF THE NATIONAL BANKS
AS WELL AS FEDERAL SAVINGS BANKS
The history of national banking legislation has been “one of interpreting grants of both enumerated and incidental `powers’ to national banks” as well as federal savings associations[which include savings banks]. Bank of America et al v City of San Francisco et al 309 F.3d 551 (Ninth Circuit) (2002) Consider this hypothetical. The California legislature would makes a law that as a matter of public policy foreclosures of any kind will not be permitted on a homeowner’s primary residence. The OTS is charged with the supervision of the Home Owner Loan Act like the Office of the Controller of Currency is ”charged with supervision of the National Bank Act” NationsBank of N.C.N.A. v Variable Annuity Life Ins. Co. 513 U.S. 252, 256(1995) The OTS and the OCC would promulgate rules allowing the banks to foreclose on the homes that have defaulted and in concert with the banks claim that the power to foreclose was an incidental power of national banks and also federal savings banks and therefore would preempt state law. The State would challenge that decision in court. Both Acts are silent on the necessity of banks foreclosures to secure the residential property in the event of default. The Acts, however, do bestow upon banks the authority to exercise by its board of directors, or duly authorized officers or agents, subject to law, all such incidental powers as necessary to carry on the business of banking. . .”12 U.S.C.§24(Seventh). The OTS authority to preempt state laws affecting its lending practices lies in 12 cfr §560.2. Because these sections are not explicit on the limits of “incidental powers”, an inquiry as to whether the NBA or HOLA would support the use of either one or both methods of foreclosures (Judicial foreclosures and/or non-judicial foreclosure) would be necessary. The holding in United States v. Grimaud, 220 U.S. 506(1911) would apply. The NBA or HOLA could authorize the former but not the latter because the government could not exercise the power to foreclose non-judicially itself.
C. NATIONAL BANKS AND FEDERAL SAVINGS ASSOCIATIONS MORTGAGE FSB CAN BE
CONSIDERED “AGENCIES” OF THE GOVERNMENT
In Acron Investments, Inc. et al v Federal Savings and Loan Insurance Corporation , 363 F.2nd 236 (9th Circuit, 1966) the court was given the task of determining if the Federal Savings & Loan Insurance Corporation (FSLIC) was an “agency”. After reviewing all the relevant code sections the court concluded that the corporation was an “agency” under 28 USC 451 because the control of the government over the corporation was more than custodial or incidental. In Acron at paragraphs 27 & 28 the court said:
…[T]he Reviser’s Note under 18 U.S.C. § 6 states that “The phrase `corporation in which the United States has a proprietary interest’ is intended to include those governmental corporations in which stock is not actually issued, as well as those in which stock is owned by the United States. It excludes those corporations in which the interest of the Government is custodial or incidental.” (Emphasis added.) 28 …Since the control which Congress and the United States exercise over the Corporation is clearly more than “custodial or incidental,” it would appear that the Corporation fits within the definition of “agency” of 28 U.S.C. § 451 and thus within the terms of 28 U.S.C. § 1345. [bold added]
Under the Ninth Circuit’s own test national banks and federal savings associations are “agencies”. Any doubt as to government’s control over the “operations” as being “custodial or incidental” is dispelled in Fidelity Fed. S. & L. v. De la Cuesta, 458 U.S. 141 (1982) at p. 161 when the court said:
The broad language of § 5(a) expresses no limits on the Board’s authority to regulate the lending practices of federal savings and loans. As one court put it, “[I]t would have been difficult for Congress to give the Bank Board a broader mandate(cites) And Congress’ explicit delegation of jurisdiction over the “operation” of these institutions must empower the Board to issue regulations governing mortgage loan instruments
With respect to National Banks the holding in Easton would apply as the court said:
Our conclusions, upon principle and authority, are that Congress, having power to create a system of national banks, is the judge as to the extent of the powers which should be conferred upon such banks, and has the sole power to regulate and control the exercise of their operations…[bold, underline and italics added]
CONCLUSION
The subject corporations cited share a common heritage with National banks and federal savings associations. They are corporations federally chartered and created under acts of Congress for important public and national purposes for which the Supreme Court has ruled on that premise in a number of cases that their activities were governmental. Thus in Bismarck the Court ruled that the lending functions were governmental not proprietary; and that foreclosure was part of the general lending functions. In Lebron, the Court ruled that the corporation was part of the government for the purpose of determining its constitutional obligations toward the rights of citizens affected by its actions.
The Ninth Circuit and other appellate courts have yet to apply the settled principles enunciated by these Supreme Court cases which lead to one conclusion— that National banks and federal savings associations’ use of a Trustee Sales(non-judicial foreclosures) must be a governmental acts and a 5th amendment violation of due process.
Constitutional powers conferred on a corporation should not be used to produce an unconstitutional result. The fallacy is that state law cannot determine the manner of foreclosure, but federal law with respect to the corporations created under acts of Congress. And federal law cannot authorize a non-judicial foreclosure , nor can the Constitution allow it.
Respectfully submitted,
___________¬¬¬¬¬¬¬¬________ Date:___________, 2010
Reuben Nieves
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