Ninth Circuit Issues Common Sense Decision on Applicability of Pleading Tender in Truth in Lending Rescission Case

Merritt v. Countrywide Financial Corp., 09-17678 (9th Cir. July 16, 2014).

     “Automatically to require tender in the pleadings before any colorable defense has been presented would encourage creditors to refuse to honor indisputably valid rescission requests, because doing so would allow the security interest to remain in place absent tender,” Judge Marsha Berzon wrote for majority. “The result would be to allow creditors to vary the statutory sequence simply through intransigence.”
Berzon added that “plaintiffs can state a claim for rescission under TILA without pleading that they have tendered, or that they have the ability to tender, the value of their loan.”
“Only at the summary judgment stage may a court order the statutory sequence altered and require tender before rescission,” she wrote, “and then only on a ‘case-by-case basis,’ once the creditor has established a potentially viable defense.”
Reviving the Merritts’ claims under the Real Estate Settlement Practices Act, which “prohibits kickbacks and unearned fees” in such transactions, the panel found that the one-year statute of limitations could be postponed under certain circumstances.


This is great for Truth in Lending rescission cases, because it limits Yamamoto’s applicability, which the district courts were expanding.

Also, for just the common law “tender rule,” this same reasoning should apply because as we have argued, a borrower should not have to tender anything at the pleading stage.  You shouldn’t have to tender an entire loan just to argue that someone has recorded false or fraudulent documents against your property, or that someone has fraudulently tried to foreclose non-judicially.  Discovery should happen before determining whether tender is even appropriate, or how much, or to whom.  Tender was supposed to apply to crafting a remedy, not to bar pleading a case.  As the Ninth Circuit put it in Merritt,

In addition, in many cases, it will be impossible for the
parties or the court to know at the outset whether a borrower
asserting her TILA rescission rights will ultimately be able to
return the loan proceeds as required by the statute. That
ability may depend upon the merits of her TILA rescission
claim or on other claims related to the same loan transaction.
See, e.g., Prince v. U.S. Bank Nat’l Ass’n, 2009 WL 2998141,
at *5 (S.D. Ala. Sept. 14, 2009) (denying creditor’s motion to
dismiss as based on “mere speculation” that plaintiffs would
be unable to tender, and indicating that court would address
the proper sequences for implementing the rescission, if
necessary, only after resolving the rescission claim on the
merits). For instance, if a TILA rescission claim is
meritorious and the creditor relinquishes its security interest
in the property upon notice of rescission as required by the
default § 1635(b) sequence, the obligor may then be able to
refinance or sell the property and thereby repay the original
lender. Cf. Burrows v. Orchid Island TRS, LLC, 2008 WL
744735, at *6 (C.D. Cal. Mar. 18, 2008) (declining to require
pleading of tender where the court inferred that borrower
would be able to tender by selling or refinancing the property
if rescission was found to be appropriate); Williams v. Saxon
Mortg. Co., 2008 WL 45739, at *6 n.10 (S.D. Ala. Jan. 2,
2008) (declining to condition rescission on tender as was
done in Yamamoto, because it was not clear that borrower
would not be able to refinance the loan). Or her complaint
may allege damages claims arising from the same loan
transaction, the proceeds of which, if successful, could then
be used to satisfy her TILA tender obligation. See Shepard,
supra, at 205 & n.200, 210.

Colorado Attorney General Goes After Foreclosure Mill Law Firms Aronowitz and the Castle Law Group

$13 Million Settlement with Aronowitz & Mecklenburg Secured
DENVER — Colorado Attorney General John Suthers today announced the filing of civil law enforcement actions against the two largest foreclosure law firms in Colorado. In separate filings, the Attorney General’s Consumer Protection Section charged The Castle Law Group, its principals and affiliated foreclosure-related businesses, as well as Aronowitz & Mecklenburg, its principals and affiliated foreclosure-related businesses with violating the Colorado Consumer Protection Act, the Colorado Antitrust Act, and the Colorado Fair Debt Collection Practices Act. The Attorney General filed a simultaneous proposed Final Consent Judgment settling the case against the Aronowitz defendants.
“These lawsuits come at the end of a lengthy and exhaustive investigation into allegedly fraudulent billing practices by these firms that inflated foreclosure costs,” said Attorney General John Suthers. “These inflated costs were passed on to homeowners trying to save their homes from foreclosure, successful bidders for properties at foreclosure sales, and to investors and taxpayers. The facts uncovered by our investigation are very disturbing and, frankly, reflect poorly on the legal profession.”

From the Complaint,

This action is the result of the State’s extensive two-year civil law enforcement investigation of foreclosure law firms, including Aronowitz & Mecklenburg (“Aronowitz” or “the law firm”), that have performed the vast majority of the roughly 275,000 residential foreclosures in Colorado since 2006. This investigation revealed that these law firms, including Aronowitz, unlawfully exploit the foreclosure process by misrepresenting and inflating the costs they incur for foreclosure-related services to fraudulently obtain tens of millions of dollars in unlawful proceeds. Although the law firms agreed to perform these routine foreclosures for a flat attorney fee, they viewed this fee as insufficient and devised a scheme to generate additional millions by inflating foreclosure costs. Homeowners, purchasers, investors, and taxpayers paid for and continue to pay for these fraudulent charges.

2. Defendants systematically and intentionally misrepresent, inflate, and charge unreasonable, unauthorized, unlawful, and deceptive costs for posting foreclosure notices, obtaining title products, preparing documents, and providing other foreclosure-related services. They do this primarily through affiliated vendors, which create invoices for foreclosure services at costs grossly inflated above the actual costs and above what unaffiliated vendors charge for the same services.

3. Defendants get away with this extensive fraud by taking advantage of the inherent lack of oversight in the foreclosure process. The mortgage servicers that hire the law firm on behalf of the loan’s investor rely upon the law firm to perform all the legal work in the foreclosure for an agreed-upon flat attorney fee (the “maximum allowable fee”) and to pass through only its actual, necessary, and reasonable costs. Servicers do not conduct market analyses of these foreclosure costs; rather, they rely on the law firm to comply with the law and investor guidelines by charging costs that are actual, reasonable, and the market rate.

4. Defendants also get away with charging excessive, unauthorized, and unlawful costs because no homeowner, purchaser, or taxpayer can challenge the law firm’s claimed costs. Nor may the public trustees, which administer the foreclosure process, or the courts, which authorize the foreclosure sale, challenge these costs. Thus, a homeowner seeking to save his home from foreclosure or a person purchasing a property at auction must pay whatever costs the law firm claims to have incurred in performing the foreclosure. If the property returns to the lender, the mortgage servicer assesses these costs to the investor or insurer, which are often borne by taxpayers.

5. The law firm abuses this system, which it knows is devoid of administrative or judicial oversight, to charge whatever costs it can get away with in order to generate significant revenue beyond the maximum allowable fee.

6. For example, in early 2009 when the Colorado legislature began considering a bill to allow for a brief foreclosure deferment that would require posting a notice similar to an eviction notice, Stacey Aronowitz began working with Caren Castle of The Castle Law Group (“Castle”), Aronowitz’s largest competitor, on what they could get away with charging. Stacey Aronowitz emailed a foreclosure lawyer in another state that also required a foreclosure posting and asked: “I am curious how much you get away with charging . . . .” She later emailed Caren Castle: “I just wanted our offices to try and get on the same page on what we are charging for all of this.” They agreed that Caren Castle would try to seek approval from Fannie Mae, the dominant investor in the foreclosure industry, to charge $125 for this new posting, not the $25 charged for similar eviction postings.

7. Accordingly, these two competitors, who handle 75 percent of Colorado foreclosure filings, coordinated to set the minimum price for posting at $125—an amount unrelated to the actual cost for such postings or the market rate charged by unaffiliated vendors. Once the bill requiring the foreclosure posting passed, Aronowitz and Castle secured financial interests in posting companies and claimed fraudulent and inflated costs of at least $125 per posting. This amount multiplied by tens of thousands of foreclosures resulted in a multimillion-dollar windfall to the posting companies and, directly or indirectly, to the law firm, Stacey Aronowitz, Robert Aronowitz and Joel Mecklenburg (collectively “Aronowitz Defendants”) and to Castle.

8. Operating with no checks and unrestrained by market principles by selling foreclosure services to themselves, the Aronowitz Defendants charge around $350 to $750 in unlawful costs per foreclosure by making false, misleading, and deceptive statements of costs to homeowners, servicers, investors, and the public on reinstatements, cures, bids, and invoices, as follows:
● $125 to $150 for each of the two required foreclosure postings for a total of $250 to $275 per foreclosure when the market rate for each posting is $25;
● $250 to $275 for title search reports when the market rate is $100;
● $400 to $500 in “cancellation fees” for foreclosure title commitments ordered by the law firm during the foreclosure;
● $100 for a one-page form document that can be completed in secondsand is already compensated in the allowable foreclosure fee;
● $35 for a tax search/tax certification when the actual cost is $10 or less;
● $25 for a bankruptcy search that costs $3 or less; and
● $10 to $25 for a military status search that is free.

9. Defendants’ multimillion-dollar unjust enrichment came at a tremendous expense to the public. Not only does it harm desperate homeowners facing foreclosure and persons buying properties at auction, it reverberates to the public at large, as servicers hiring the law firm pass along these costs to taxpayer-funded investors or insurers. As Fannie Mae informed Aronowitz and other Colorado foreclosure law firms during a 2010 training, its credit losses are taxpayer-funded and every effort should be taken to reduce foreclosure costs because every dollar reduction in costs is significant when multiplied by a large volume of loans.

10. These inflated foreclosure costs also negatively impact housing and loan costs outside the foreclosure industry. Moreover, the law firm’s use of affiliated businesses charging inflated costs has adversely affected competition from businesses that could provide foreclosure services at a much lower market rate.

11. The increased cost of foreclosures and negative impact on competition wrought by Aronowitz’s and Castle’s use of affiliated vendors charging above the market rate for foreclosure services was recently highlighted when Fannie Mae suspended Aronowitz and Castle from handling any Fannie Mae foreclosures. Fannie Mae began referring its files to new law firms using unaffiliated vendors, which provide postings at $25, not $125, and title searches at $85 to $105, not $275. This development has already significantly reduced the costs per foreclosure. These unaffiliated vendors—which were effectively cut out of the foreclosure market by Aronowitz’s and Castle’s affiliated vendors—have since substantially increased their volume of work by providing services to new law firms at actual market prices.

12. Defendants’ conduct violates the Colorado Consumer Protection Act, the Colorado Antitrust Act of 1992, and the Colorado Fair Debt Collection Practices Act and harms homeowners and the public.

CitiGroup Fine Does Not Bring Enough Homeowner Relief

Truthout writes about the Citigroup civil fine announced yesterday:

Of the $7 billion total settlement, $4 billion will be in the form of a civil monetary payment to the Department of Justice, $500 million will go to state attorney’s general and the Federal Deposit Insurance Corporation, and an additional $2.5 billion will go towards “consumer relief.”

But make no mistake about it. This agreement is another win for the big banks.

Under the agreement, Citigroup will most likely get a $500 million tax write-off. And in pre-market trading on Monday, Citigroup stocks rose by nearly 4 percent, despite the $7 billion agreement.

This is nothing more than a slap on the wrist for Citigroup; basically a cost of doing business.

And as for the mere $2.5 billion in consumer relief, while it will be going towards loan modifications, principal reduction and refinancing for distressed homeowners, it’s nowhere near enough. And there are no guarantees it will make its way into the hands of the people Citigroup victimized, either.

If the Department of Justice was serious about holding Citigroup accountable for its actions, and helping the American people and economy recover from the Great Recession, then it would be taking a heck of a lot more than $7 billion, and giving that money directly to the American people.

It would be helping out American homeowners, instead of continuing to protect the big banks.

After all, it’s consumers buying things like houses who drive demand and grow the economy. Not the big banks on Wall Street.

Directly helping out American homeowners after a crisis isn’t some sort of radical idea or new thing we have to look at Sweden or Iceland to figure out, either.

We’ve done this sort of thing before, right here in the United States, and it worked very well.

Back in 1933, in the wake of the Great Depression, FDR signed into law the Home Owners’ Loan Act of 1933, which created the Home Owners’ Loan Corporation(HOLC).

The HOLC’s main goal was to help refinance home mortgages that were in default or at risk of foreclosure because of the 1929 stock market crash and the previous collapse of the housing industry.

It did that by buying up old mortgages from the banks using government bonds – borrowed money.

In a statement released after the act was signed into law, FDR said that, “In signing the ‘Home Owners Loan Act of 1933,’ I feel that we have taken another important step toward the ending of deflation which was rapidly depriving many millions of farm and home owners from the title and equity to their property.”

By the mid-1930′s, the HOLC had helped to refinance nearly 20 percent of urban homes in America.

And by 1936, the final year that the HOLC was buying mortgages, it had helped to provide Americans with over one million new mortgages, and had lent out nearly $750 billion in today’s dollars.

That’s right; $750 billion in today’s dollars. That makes the $2.5 billion from the Citigroup agreement going towards consumer relief seem like nothing.

To this day, the HOLC is credited with relieving the financial burdens of millions of Americans, and helping to right the American economy.

If we’re serious about rebuilding the American economy, and helping out the millions of Americans who still struggle to keep a roof over their heads, then we need to be doing a lot more than just forcing one bank to handle $2.5 billion in consumer relief and trusting the bank to distribute it responsibly.

We need to stop caring so much about the well-being of Wall Street, and start caring about the American people and economy.

No American should have to go to bed tonight worrying if they’re going to become homeless tomorrow.

Non-Bank Servicers Like Ocwen and Nationstar are Mishandling Foreclosures and Modifications, Finds FHFA Report

This is another one in the “tell us something we don’t already know” archive of government reports but the FHFA published a special report on nonbank mortgage servicers yesterday.  “Specifically, the nonbank special servicers do not have the same capital requirements as a bank, which means they are more susceptible to economic downturns. Such downturns could substantially increase nonperforming loans that require servicer loss mitigation while at the same time impact the ability of the servicer to perform,” the report said.

This excerpt on the issue is from Structured Finance News:

Borrowers whose loans are backed by Fannie or Freddie “may not have their loans properly serviced” by nonbanks, says Russell Rau, a deputy inspector general for audits who wrote the 17-page report. Rau recommends that FHFA develop a formal framework that would include routine exams, reviews and testing to ensure nonbank servicers can meet current servicing requirements.

Since last year, regulators have ratcheted up their scrutiny of nonbank mortgage servicers after receiving thousands of complaints from borrowers for mishandled foreclosures, denied loan modifications and overcharging on fees. Benjamin Lawsky, the Superintendent of New York’s Department of Financial Services, has launched separate investigations into two nonbank servicers, Ocwen Financial (OCN) and Nationstar Mortgage (NSM).

The FHFA inspector general’s report describes the massive growth since 2008 of nonbank servicers, which it says are not subject to the same capital requirements as banks. The FHFA, Fannie and Freddie have been supportive of banks selling mortgage servicing rights to nonbanks largely to help struggling homeowners and to limit the GSEs’ own losses.

Despite receiving more scrutiny, some nonbank servicers do not have the infrastructure to properly service all of the loans they have acquired, the report found. Fannie and Freddie have been aware of operational problems and have sent teams to specific servicers only to find weak infrastructure and lax handling of borrower complaints.

“This rise in nonbank special servicers has been accompanied by consumer complaints, lawsuits, and other regulatory actions as the servicers’ workload outstrips their processing capacity,” the report found.

New Lawsuit by Hedge Funds Against Securitization Trustees Filed in New York State Court Last Week

Here’s a new lawsuit to watch. It was filed in New York’s state court, called the Supreme Court (trial court) division in New York.   I would wager that the Defendants will try to remove it to federal district court soon.

Of course, this isn’t the first lawsuit related to fall-out from the financial crisis and housing collapse.  Pimco and other giants in the hedge fund industry have sued many times to try to recover for the harm caused by their investments in mortgage-backed-securities, and the Big Banks’ (Bank of America, Citi, etc.) refusal to honor their purchase back obligations when they knew, and failed to disclose, to the investors, that their representations and warranties regarding the quality and underwriting of the underlying loans being transferred into the Trusts were false.  Nothing new there.  There have been high profile lawsuits and settlements by investors and by the bond-insurers who insured the deals, like AMBAC. But three days ago, Pimco and others sued the trustees of the MBS Trusts.  The Trustees of these Trusts are typically large banks, commonly Deutsche Bank, U.S. Bank, N.A., Bank of New York Mellon, and the like.  The trusts claim that their responsibilities are much more passive and limited than those of a common law trustee.  Mainly, they claim that all they do is furnish payments on the certificates to the investors.  But the truth is, they have conflicts and interests that impact the investors, because they are predisposed to honor the investment banks, servicers, and depositors (often all related entities and subsidiaries of the underwriting investment bank, which would have been Lehman, or Goldman Sachs, or Bear Stearns). The investors are claiming  that they were owed a higher duty by the securitization trustees. From the Wall Street Journal at

Trustees are appointed by bond issuers to ensure that interest and principal payments are funneled to investors in the bonds. Their role requires they ensure that mortgage servicing firms are following the rules that govern the treatment of loans with defects, or if a homeowner defaults. But the trustees have long argued their responsibilities are limited to functions such as overseeing how payments are directed to investors and providing routine reports on bond servicing, said Ron D’Vari, chief executive of NewOak Capital, a capital markets advisory firm that consults on bond litigation. Trustees believe that a broad oversight role for them “is a misconception of the investors,” Mr. D’Vari said. The suits filed Wednesday allege that the trustees were aware that the bonds were filled with defective loans due to “pervasive” evidence of systemic abuses by loan originators and shoddy construction of bond deals by issuers, according to the lawsuits. In some cases, the trustees were directly informed by bondholders and bond insurers of violations by lenders and issuers, the lawsuits say. The investors say that trustees were conflicted because the issuers that appointed them often had stakes in the firms that serviced the loans.

Ninth Circuit Reverses MERS Multi-District Litigation Dismissal of False Foreclosure Documents Claims in ARIZONA!!!

In a huge multi-plaintiff, multi-jurisdictional MERS case, the Ninth Circuit reversed the federal district court’s dismissal of the plaintiffs’ claims related to false documents recorded to effect foreclosure in Arizona:

Writing in 2011, the MDL Court dismissed Count I on
four grounds. None of these grounds provides an appropriate
basis for dismissal. We recognize that at the time of its
decision, the MDL Court had plausible arguments under
Arizona law in support of three of these grounds. But
decisions by Arizona courts after 2011 have made clear that
the MDL Court was incorrect in relying on them.
First, the MDL Court concluded that § 33-420 does not
apply to the specific documents that the CAC alleges to be
false. However, in Stauffer v. U.S. Bank National Ass’n,
308 P.3d 1173, 1175 (Ariz. Ct. App. 2013), the Arizona Court
of Appeals held that a § 33-420(A) damages claim is
available in a case in which plaintiffs alleged as false
documents “a Notice of Trustee Sale, a Notice of Substitution
of Trustee, and an Assignment of a Deed of Trust.” These are
precisely the documents that the CAC alleges to be false

Second, the MDL Court held that appellants’ claims
under § 33-420 are time-barred. However, in Sitton v.
Deutsche Bank National Trust Co., 311 P.3d 237, 241 (Ariz.
Ct. App. 2013), the Arizona Court of Appeals held that
damages claims under § 33-420(A) are subject to a four-year
statute of limitations. The allegedly false documents upon
which the CAC relies date from no earlier than February 15,
2008. Appellants’ complaint was filed within the four-year
statute of limitations for even the earliest purported false
document. The Arizona courts have not made a comparably
definitive pronouncement as to the limitations period for
claims brought under § 33-420(B), whether brought as
separate claims or joined to damages claims. But at least one
case has suggested that a § 33-420(B) claim asserts a
continuous wrong that is not subject to any statute of
limitations as long as the cloud to title remains. State v.
Mabery Ranch, Co., 165 P.3d 211, 227 (Ariz. Ct. App. 2007).

Third, the MDL Court held that appellants lacked
standing to sue under § 33-420 on the ground that, even if the
documents were false, appellants were still obligated to repay
their loans. In the view of the MDL Court, because
appellants were in default they suffered no concrete and
particularized injury. However, on virtually identical
allegations, the Arizona Court of Appeals held to the contrary
in Stauffer. The plaintiffs in Stauffer were defaulting
residential homeowners who brought suit for damages under
§ 33-420(A) and to clear title under § 33-420(B). One of the
grounds on which the documents were alleged to be false was
that “the same person executed the Notice of Trustee Sale and
the Notice of Breach, but because the signatures did not look
the same, the signature of the Notice of Trustee Sale was
possibly forged.” Stauffer, 308 P.3d at 1175 n.2. The trial
court dismissed on the pleadings. The Arizona Court ofAppeals reversed the dismissal under both §§ 33-420(A) and
(B). It wrote:
Appellees argue that the Stauffers do not have
standing because the Recorded Documents
have not caused them any injury, they have
not disputed their own default, and the
Property has not been sold pursuant to the
Recorded Documents. The purpose of A.R.S.
§ 33-420 is to “protect property owners from
actions clouding title to their property.” We
find that the recording of false or fraudulent
documents that assert an interest in a property
may cloud the property’s title; in this case, the
Stauffers, as owners of the Property, have
alleged that they have suffered a distinct and
palpable injury as a result of those clouds on
their Property’s title.
Id. at 1179 (citation omitted).
The Court of Appeals not only held that the Stauffers had
standing based on their “distinct and palpable injury.” It also
held that they had stated claims under §§ 33-420(A) and (B).
The court held that because the “Recorded Documents
assert[ed] an interest in the Property,” the trial court had
improperly dismissed the Stauffers’ damages claim under
§ 33-420(A). Id. at 1178. It then held that because the
Stauffers had properly brought an action for damages under
§ 33-420(A), they could join an action to clear title of the
allegedly false documents under § 33-420(B). The court

The third sentence in subsection B states that
an owner “may bring a separate special action
to clear title to the real property or join such
action with an action for damages as
described in this section.” A.R.S. § 33-420.B.
Therefore, we find that an action to clear title
of a false or fraudulent document that asserts
an interest in real property may be joined with
an action for damages under § 33-420.A.
Id. We therefore conclude, based on Stauffer, that appellants
have standing to sue.
Fourth, the MDL Court held that appellants had not
pleaded their robosigning claims with sufficient particularity
to satisfy Federal Rule of Civil Procedure 8(a). We disagree.
Section 33-420 characterizes as false, and therefore
actionable, a document that is “forged, groundless, contains
a material misstatement or false claim or is otherwise
invalid.” Ariz. Rev. Stat. §§ 33-420(A), (B) (emphasis
added). The CAC alleges that the documents at issue are
invalid because they are “robosigned (forged).” The CAC
specifically identifies numerous allegedly forged documents.
For example, the CAC alleges that notice of the trustee’s sale
of the property of Thomas and Laurie Bilyea was “notarized
in blank prior to being signed on behalf of Michael A. Bosco,
and the party that is represented to have signed the document,
Michael A. Bosco, did not sign the document, and the party
that did sign the document had no personal knowledge of any
of the facts set forth in the notice.” Further, the CAC alleges
that the document substituting a trustee under the deed of
trust for the property of Nicholas DeBaggis “was notarized in
blank prior to being signed on behalf of U.S. Bank National
Association, and the party that is represented to have signed

the document, Mark S. Bosco, did not sign the document.”
Still further, the CAC also alleges that Jim Montes, who
purportedly signed the substitution of trustee for the property
of Milan Stejic had, on the same day, “signed and recorded,
with differing signatures, numerous Substitutions of Trustee
in the Maricopa County Recorder’s Office . . . . Many of the
signatures appear visibly different than one another.” These
and similar allegations in the CAC “plausibly suggest an
entitlement to relief,” Ashcroft v. Iqbal, 556 U.S. 662, 681
(2009), and provide the defendants fair notice as to the nature
of appellants’ claims against them, Starr v. Baca, 652 F.3d
1202, 1216 (9th Cir. 2011).
We therefore reverse the MDL Court’s dismissal of
Count I.