SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF KINGS: COMMERCIAL DIVISION

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THE PEOPLE OF THE STATE OF NEW YORK, Plaintiff, vs. JPMORGAN CHASE BANK, N.A., et al., Defendants. Index No. 2768/12 lAS Part 47 (Schmidt, J.)

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MEMORANDUM OF LAW IN SUPPORT OF MOTION TO DISMISS GOODWIN PROCTER LLP Richard M. Strassberg Joseph F. Yenouskas Maryana Zubok The New York Times Building 620 Eighth Avenue New York, New York 10018 Tel: (212) 813-8859 Attorneys for Defendants Bank of America, NA. and BAC Home Loans Servicing, LP

DEBEVOISE & PLIMPTON LLP Andrew J. Ceresney Mary Beth Hogan Philip A. Fortino 919 Third Avenue New York, New York 10022 Tel: (212) 909-6000 Attorneys for Defendants JP Morgan Chase Bank, NA., Chase Home Finance LLC and EMC Mortgage Corporation HOGAN LOVELLS US LLP Ira M. Feinberg David Dunn 875 Third Avenue New York, New York 10022 Tel: (212) 918-3515 Attorneys for Defendants Wells Fargo Bank, NA. and Wells Fargo Home Mortgage, Inc.

TABLE OF CONTENTS Preliminary Statement The Allegations of the Complaint.. I. II. III. IV. V. Argument I. A. B. C. D. E. II. A. B. C. D. III. IV. The Attorney General's Claims Should Be Dismissed Insofar As They Relate To Conduct During Foreclosure Proceedings Sections 349 And 63(12) Do Not Apply To Foreclosure Proceedings The Attorney General's Claims Relating To Foreclosures Are Barred By The Noerr-Pennington Doctrine The Attorney General's Claims Relating To Foreclosure Proceedings Are Barred By The Absolute Privilege For Statements In Litigation The Attorney General's Claims Relating To Past Foreclosures Are Barred By Res Judicata The Attorney General's Claims Relating To Foreclosures Are Barred By The Separation Of Powers Doctrine The Complaint Should Be Dismissed Because It Fails To Allege Any Conduct That Is Deceptive Or Misleading Part A Of The Complaint Fails To Allege Any Deceptive Or Misleading Conduct Because MERS Had Standing To Foreclose Part B Of The Complaint Fails To State A Claim Because The Alleged Conduct Was Not Materially Deceptive Or Misleading The Use OfMERS Certifying Officers Is Not Deceptive Or Misleading The Use ofMERS And The Resulting Failure To Record Assignments In The Public Record Is Not Inherently Deceptive The Allegations In Paragraph 111 Are Preempted By RESPA To The Extent They Are Directed At Servicers Executive Law Section 63(12) Does Not Provide An Independent Basis For A Cause Of Action Background on MERS Instituting Foreclosure Proceedings in MERS' Name Relying Upon Mortgage Assignments Executed by MERS Using MERS Certifying Officers The Failure to Record Assignments in the Public Record 1 5 6 7 8
9

9 10 .10 II 15 17 18 21 22 24 27 30 35 .45 46

V.

Many Of The Attorney General's Claims Are Barred By The ThreeYear Statute of Limitations

47 50

Conclusion

TABLE OF AUTHORITIES
CASES

Ad Visor, Inc. v. Pacific Tel. and Tel. Co., 640 F.2d 1107 (9th Cir. 1981) Alfred Weissman Real Estate, Inc. v. Big V Supermarkets, Inc., 268 A.D.2d 101 (2d Dep't 2000) Allstate Ins. Co. v. Foschio, 93 A.D.2d 328 (2d Dep't 1983) Andy Assocs. v. Bankers Trust Co., 49 N.Y.2d 13 (1979) Bain v. Metro. Mortgage Group Inc.,No. C09-0149-JCC, 2010 WL 891585 (W.D. Wash. Mar. 11, 2010) Bank of New York v. Myers, No. 18236/08,2009 Kings Cnty. Feb. 3, 2009) WL 241771 (Sup. Ct.

16 15 24 38,39 32 20, 32 20 37,44 31 12 48 20, 26, 50 7 29 46

Bank of New York v. Silverberg, 86 A.D.3d 274 (2d Dep't 2011) Bates v. Mortgage Elec. Registration Sys., Inc., No. 3:10-cv-00407-RCJVPC, 2011 WL 1304486 (D. Nev. Mar. 30, 2011) BBS Norwalk One, Inc. v. Raccolta, Inc., 60 F. Supp. 2d 123 (S.D.N.Y. 1999) Begelfer v. Najarian, 381 Mass. 177, 191 (1980) Beller v. William Penn Life Ins. Co., 8 A.D.3d 310 (2d Dep't 2004) Bucci v. Lehman Bros. Bank, FSB, No. PC-2009-3888, 2009 WL 3328373 (R.!. Super. Ct. Aug. 25, 2009) Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034 (9th Cir. 2011) Champion Home Builders Co. v. ADT Sec. Servs., Inc., 179 F. Supp. 2d 16 (N.D.N.Y. 2001) Cohen v. JP. Morgan Chase & Co., 608 F. Supp. 2d 330 (E.D.N.Y. 2009) Cohen v. Nassau Educators Fed. Credit Union, No. 15094-05, 2006 WL 1540324, at *4 (Sup. Ct. Nassau Cnty. May 10,2006), aff'd, 37 A.D.3d 751 (2d Dep't 2007)

34

Commonwealth Prop. Advocates v. MERS, No. 10-4182,2011 WL 6739431 (10th Cir. Dec. 23, 2011) """""""""""""""""""""""""""""""""""""'" Craig v. Graphic Arts Studio, Inc., 39 Del. Ch. 447 (Del. Ch. 1960) """"""""""""",, CWCapital Asset Mgmt. LLC v. Charney-FPG 114 41st St., LLC, 84 A.D.3d 506 (1st Dep't 2011) """""""""""""""""""""""""""""""""""""""" Daniels v. Southard, 23 Misc. 235 (Rensselaer Cnty. Ct. 1898) """""""" Darns v. Sabol, 165 Misc. 2d 77 (Sup. Ct. N.Y. Cnty. 1995) """"""""""""""""""",, Del Piano v. Mortgage Elec. Registration Sys., Inc., No. CIV. 11-00140 SOM/BMK, 2012 WL 621975 (D. Haw. Feb. 24, 2012) """""""""""""""""""".33 Deutsche Bank Nat 'I Trust Co. v. Pietranico, 33 Misc. 3d 528 (Sup. Ct. Suffolk Cnty. 2011) """""""""""""""""""""""""""""""" 7,20,25,29,41,42,43 DirecTV, Inc. v. Lewis, No. 03-CV-6241-CJS-JWF, 2005 WL 1006030""""""""""".12

7 31

.." 26 ,,"",, 22 21

DirecTV, Inc. v. Rowland, No. 04-CV-297S, 2005 WL 189722 (W.D.N.Y. Jan. 22, 2005)""" ..""""""""""""""""""""""".".""""."".""""""""""."""."

12, 16 12

DirecTV, Inc. v. Shouldice, No. 5:03-CV-62, 2003 WL 23200253 (W.D. Mich. Oct. 20, 2003) """"" ..."""""""""""""""".".""""."""""" ..,,"",,.,,"""",,.,,. Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961)""".""""""""""""""""""""""".""""""""."."".""""""""".""". Fairbanks Capital Corp. v. Nagel, 289 AD.2d 99 (1st Dep't 2001) " .."""""""""""".26 Foley v. Ir'Agostino, 21 AD.2d 60 (1st Dep't 1964)"""""""""""""""""""""""""".14 Fryer v. Rockefeller, 63 N.Y. 268 (1875) """"""""""""""""""""""""""""""""""". Gaidon v. Guardian Life Ins. Co. of Am., 96 N.Y.2d 201(2001) """"""""""""""""".48 Gaidon v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330 (1999) """"",,"""""""" Genesco Entm 't v. Koch, 593 F. Supp. 743 (S.D.N.Y. 1984)"""""""""" Getman v. Lippert, 171 A.D. 536 (3d Dep't 1916)"""""""""""""""" Grossman v. N. Y Life Ins. Co., 90 AD.3d 990 (2d Dep't 2011) Haft v. Dart Group Corp., 841 F. Supp. 549 (D. Del. 1993) ..""" .."

16

37

23,48

..""""""" ..".11 " .." 37 18

" .." ..""""",,

""""" .."""" 31

Hart v. Gen. Motors Corp., 129 AD.2d 179 (1st Dep't 1987) .......... "" ..""""""" ........ 31

Heithaus v. Heithaus, 229 AD.2d 421 (2d Dep't 1996) Hilmon v. Mortgage Elec. Registration Sys. Inc., No. 06-13055,2007 1218718 (E.D. Mich. Apr. 23, 2007) HSBC Bank, USA, NA .. v. Dammond, 59 AD.3d 679 (2d Dep't 2009) HSBC Bank USA, NA. v. Yeasmin, No. 34142/07, 2010 WL 2089273 (Sup. Ct. Kings Cnty. May 24, 2010) HSBC Bank USA, NA. July 1, 2011) v. Taher, 2011 WL 2610525 (Sup. Ct. Kings Cnty. WL

39 26 20 32 20 15, 16 16 39 28 28 33 26 7 48 32 38 7 32 12

I G. Second Generation Partners, L.P. v. Duane Reade, 17 A.D.3d 206 (1st Dep't 2005) Icahn v. Raynor, No. 150040/2010,2011 York Cnty. June 16, 2011) WL 3250417 (Sup. Ct. New

In re Brosnahan, 312 B.R. 220 (Bankr. W.D.N.Y. 2004) In re Escobar, 457 B.R. 229 (Bankr. E.D.N.Y. 2011) In re Gorman, No. 11-73029-ast, Oct. 27, 2011) In re Holden, 271 N.Y. 212 (1936) In re Huggins, 357 B.R. 180 (Bankr. D. Mass. 2006) In re Mortg. Elec. Registration Sys. Inc. (MERS) Litig., No. 09-2119-JAT, 2011 WL 4550189 (D. Ariz. Oct. 3,2011) Ito v. Dryvit Sys., Inc., 16 A.D.3d 554 (2d Dep't 2005) Jackman v. Hasty, No. 1:10-CV-2485-RWS, 2011 WL 5599075 (N.D. Ga. Nov. 15,2011) Jackson ex demo Merrick
V.

2011 WL 5117846 (Bankr. E.D.N.Y.

Post, 15 Wend. 588 (N.Y. Sup. Ct. 1836)

Jackson V. Mortg. Elec. Registration Sys., Inc., 770 N.W.2d 487 (Minn. 2009) James V. ReconTrust Co., No. CV-I1-CV-324-ST, (D.Or. Aug. 26, 2011) Joe Hand Promotions, Inc.
V.

2011 WL 3841558

Mills, 567 F. Supp. 2d 719 (D.N.J. 2008)

Larabee v. Governor, 65 AD.3d 74 (1st Dep't 2009) Larabee v. Spitzer, 19 Misc. 3d 226 (Sup. Ct. N.Y. Cnty. 2008) LaSalle Bank Nat 'I Ass 'n v. Lamy, 12 Misc. 3d 1191(A), 2006 WL 2251721 (Sup. Ct. Suffolk Cnty. 2006) Lazides v. P & G Enterp., 58 AD.3d 607 (2d Dep't 2009) Lewis v. City ofN Y., 17 Misc. 3d 537 (Sup. Ct. Bronx Cnty. 2007) Livonia Props. Holdings, LLC v. 12840-12976 Farmington Rd. Holdings, LLC, 717 F. Supp. 2d 727 (E.D. Mich. 2010), aff'd, 399 Fed. Appx. 97 (6th Cir. 2010) Mancuso v. Rubin, 52 A.D.3d 580 (2d Dep't 2008) Marco Island Cable, Inc. v. Comcast Cablevision of the South, Inc., No. 2:04-CV-26-FTM-29DNF, 2006 WL 1814333 (M.D. Fla. July 3, 2006) Marinelli Assocs. v. Helmsley-Noyes Co., Inc., 265 A.D.2d 1 (1st Dep't 2000) Martinson v. Blau, 292 AD.2d 234 (1st Dep't 2002) Med. Soc'y. of NY. v. Oxford Health Plans, Inc., 15 AD.3d 206 (1st Dep't 2005) MERSCORP, Inc. v. Romaine, 8 N.y'3d 90 (2006) Montano v. County Legislature, 70 AD.3d 203 (2d Dep't 2009) ;

21 22 20 19 19

33 23

17 18 17 11 2,40 21

Mortgage Elec. Registration Sys., Inc. v. Coakley, 41 AD.3d 674 (2d Dep't 2007) 2,4, 7, 25, 26, 28, 29 New York Univ. v. Cont'l Ins. Co., 87 N.Y.2d 308 (1995) People ex rel. Spitzer v. Applied Card Sys., Inc., 27 A.D.3d 104 (3d Dep't 2005) People ex rel. Spitzer v. Gen. Elec. Co., 302 AD.2d 314 (1st Dep't 2003) People v. Apple Health & Sports Clubs, Ltd., 206 A.D.2d 266 (1st Dep't 1994) People v. Applied Card Sys. Inc., 11 N.y'3d 105 (2008) 11 22 24 14, 23 19

People v. City Model & Talent Dev., No. 09-22233,2010 (Sup. Ct. Suffolk Cnty. Sept. 28, 2010)

WL 3892246 49 14, 23 47 21 22 49 37 18 18 38 37 39 32 17 23 47,48 49 14, 23 47 24,29 23

People v. Concert Connection, Ltd., 211 AD.2d 310 (2d Dep't 1995) People v. FrinkAm., Inc., 2 AD.3d 1379 (4th Dep't 2003) People v. Grasso, 11 N.y'3d 64, 70 (2008) People v. Little, 89 Misc. 2d 742 (Yates Cnty. Ct. 1977), aff'd, 60 AD.2d 797 (4th Dep't 1977) People v. Pharmacia Corp., 27 Misc. 3d 368 (Sup. Ct. Albany Cnty. 2010) Provident Bankv. Comm. Home Mortg. Corp., 498 F. Supp. 2d 558 (E.D.N.Y. 2007) Pryor v. Pryor, 2002 WL 31487778 (N.Y.C. Civ. Ct. 2002) Pryor v. Pryor, 2003 WL 21960330, 2003 N.Y. Slip Op. 51190(U) (N.Y. Sup. App. Term Jul 09, 2003) Raynor v. Wilson, 6 Hill 469 (N.Y. Sup. Ct. 1844) Reed v. Barkley, 123 Misc. 635 (Sup. Ct. Ontario Cnty.1924) Riner v. Texaco, Inc., 222 A.D.2d 571 (2d Dep't 1995) Silving v. Wells Fargo Bank, NA., No. CV 11-0676-PHX-DGC, 2012 WL 135989 (D. Ariz. Jan. 18, 2012) Sinrod v. Stone, 20 AD.3d 560 (2d Dep't 2005) State of NY ex rel. Lefkowitz v. Parker, 38 AD.2d 542 (1st Dep't 1971), aff'd, 30 N.Y.2d 964 (1972) State v. Cortelle Corp., 38 N.Y.2d 83 (1975) State v. Daicel Chemical Ind., Ltd., 42 AD.3d 301 (1st Dep't 2007) State v. Magley, 105 A.D.2d 208 (3rd Dep't 1984) State v. Maiorano, 189 A.D.2d 766 (2d Dep't 1993) State v. Rachmani Corp., 71 N.Y.2d 718, 721 (1988) Stutman v. Chem. Bank, 260 A.D.2d 272 (1st Dep't 1999)

Suburban Restoration Co. Inc, v. ACMAT Corp., 700 F.2d 98 (2d Cir. 1983) Termine v. Cont'l Banking Co., 299 A.D.2d 406 (2d Dep't 2002) Tolisano v. Texon, 144 A.D.2d 267 (1st Dep't 1988) TSC Indus. v. Northway, Inc., 426 U.S. 438 (1976) Us. Bank, NA. v. Flynn, 27 Misc. 3d 802 (Sup. Ct. Suffolk Cnty. 2010) Us. Bank, NA. v. Willis, No. 10 C 5454, 2011 WL 3704428 (N.D. Ill. Aug. 22, 2011) Us. Nat 'I Bank Ass 'n v. Kosak, No. 1083-2007,2007 Ct. Suffolk Cnty. Sept. 4, 2007) Watts v Swiss Bank Corp., 27 N.Y.2d 270 (1970) Wells Fargo Bank Minn., NA. v. Mastropaolo, 42 A.D.3d 239 (2d Dep't 2007) Wells Fargo Bank, NA. v. Perry, 23 Misc. 3d 827 (Sup. Ct. Suffolk Cnty. 2009)
STATUTES

17 39 17 24 7 32 20 19 20 29

WL 2480127 (Sup.

12 U.S.C. § 2605 15 U.S.C. § 1641(f)(2) 15 U.S.C. § 1641(g)(I) 18 U.S.C. § 3057(a) CPLR § 3211(e) CPLR § 214(2) CPLR § 3013 CPLR § 3014 CPLR § 3026 CPLR § 3023 Del. Code Ann. tit. 8 § 122 :

45,46 34 34 21 20 48,49 14 14 14 14 31

Del. Code Ann. tit. 8 § 142 N.Y. Exec. Law § 63(12) Gen. Bus. Law. § 349 N.Y. D.C.C. § 1-201(20) N.Y. D.C.C. § 3-301 N.Y. D.C.C. § 9-203(g) N.Y. D.C.C. § 9-313 N.Y. Real Property Law Article 9 N.Y. Real Property Law § 291 Uniform Commercial Code Article 3
OTHER AUTHORITIES

31 passim passim 36 36 28 37 5 37 6, 7,8,9,10

N.Y. Com. Gen. Op. No. 8426 (Dec. 11, 1956) A.G. Informal Op. No 2001-2 (April 5, 2001)

38 40

PRELIMINARY STATEMENT

The defendant banks-JPMorgan Wells Fargo Bank, N.A.-and

Chase Bank, N.A., Bank of America, N.A. and

their affiliates (collectively, the "Servicer Defendants"),

each of whom is sued in its capacity as servicer of mortgage loans registered on the Mortgage Electronic Registration System ("MERS"),l respectfully submit this memorandum in support of their motion to dismiss the Complaint filed in this action by the New York State Attorney General. The Attorney General's Complaint is a broad-based challenge to the role of MERS. MERS was established in the mid-1990s with the active encouragement and support of government-sponsored entities2 in order to streamline the handling of

mortgage assignments and facilitate the development of a secondary market in mortgagebased securities. Generally speaking, when a MERS loan is originated, the mortgage identifies MERS as the mortgagee and the mortgage is recorded in the public land records of the relevant jurisdiction with MERS as the mortgagee. Subsequent transfers of beneficial interests in the underlying mortgage notes among MERS members are registered on MERS' nationwide electronic registry, which tracks changes in beneficial ownership interests and servicing rights. When such transfers take place, there is no need For the purposes of this brief, MERS will be used to refer to both Mortgage Electronic Registration Systems Inc., as well as the MERS System, as that term is defined in the Complaint. All other capitalized terms not defined herein have the meaning ascribed to them in the Complaint.
2

As the Complaint notes (Compl. ~ 12), the Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") are members ofMERS.

for formal mortgage assignments among MERS members (and therefore such assignments are generally not recorded in the public records established under the Real Property Law), because MERS acts as the nominee for both the original lender and its successors and assigns, and thus remains the mortgagee of record. Numerous courts nationwide, including courts in New York, have recognized the legitimacy of MERS' role as mortgagee of record. The Second Department has expressly held that MERS may act as the agent of the lender and its successors and may institute foreclosure proceedings on their behalf. See, e.g., Mortgage Elec. Registration Sys., Inc. v. Coakley, 41 AD.3d 674, 675 (2d Dep't 2007). And the Court of Appeals in MERSCORP, Inc. v. Romaine, 8 N.y'3d 90 (2006) held that county recorders are obliged to record MERS mortgages, assignments and discharges, expressly rejecting the Attorney General's opinion to the contrary. The Attorney General nevertheless alleges that the Servicer Defendants have engaged in deceptive acts in violation of Section 349 of the General Business Law and fraudulent and illegal acts in violation of Section 63(12) of the Executive Law with respect to thousands of mortgage loans they have serviced where the associated mortgages designated MERS as the mortgagee. The Complaint, however, fails to allege any cognizable claims arising from the Servicer Defendants' use ofMERS. It is

undisputed that foreclosures are expressly permitted under mortgage contracts when borrowers are in default, and the Attorney General does not allege that any foreclosures occurred where borrowers were not in default. For the reasons set forth below, each of

2

the Attorney General's claims fails as a matter oflaw, and the Complaint should be dismissed in its entirety. As an initial matter, most of the Attorney General's claims fail because the alleged conduct (even if it were true) falls outside the reach of the statutes on which the Attorney General relies. The bulk of the allegations against the Servicer Defendants pertain to their conduct in the course of foreclosure proceedings. But Section 349 applies

only to consumer-directed conduct, and Section 63(12) applies only to conduct "in the carrying on, conducting or transaction of business"; neither applies to litigation brought to resolve private contractual disputes. The Attorney General's foreclosure-related allegations relate to the Servicer Defendants' actions to vindicate the legal rights of the mortgage note holder in litigation against defaulted borrowers, and do not relate to the sale of goods or services or to the conduct of business. Insofar as the Attorney General's claims are based on alleged conduct relating to foreclosure proceedings (as most of them are), they are barred under the NoerrPennington doctrine, the absolute privilege for statements made in litigation, res judicata, and the doctrine of separation of powers. The Noerr-Pennington doctrine bars the

imposition of civil liability for constitutionally protected petitioning activity, which includes the filing and prosecuting of litigation, past, present or future. All claims based upon foreclosure-related conduct arising from completed litigation matters are also barred

by res judicata, because the Attorney General, standing in the shoes of borrowers, plainly asserts claims that the borrowers could have raised, but did not (or that were raised and rejected), in the course of foreclosure proceedings that are now final. The Attorney

3

General's claims also are precluded by separation of powers principles insofar as they center on alleged misconduct in the context of judicial foreclosure proceedings because the courts-not the Attorney General-have the authority to control and regulate the

judicial process and judicial proceedings. The Complaint also fails to state a valid claim because it fails to allege any materially misleading or deceptive conduct on the part of the Servicer Defendants, which is a required element of both the Section 349 and Section 63(12) claims. For example:

The Complaint alleges that the Servicer Defendants engaged in deceptive acts by instituting foreclosure proceedings in the name ofMERS. (Compl. ~ 21.) But the Second Department in Coakley (a controlling decision that the Complaint ignores) held that MERS has standing to bring a foreclosure action in appropriate circumstances. 41 A.D.3d 674. The Complaint contains no allegations that would undermine MERS' standing to bring such foreclosure proceedings as an agent of the note holder. The Complaint alleges that the Servicer Defendants engaged in deceptive and fraudulent acts by submitting defective mortgage assignments to courts in the course of foreclosure proceedings, undermining the plaintiffs' standing in those proceedings. Under well-settled New York law, however, the only requirement for standing in a foreclosure proceeding is that the plaintiff be the note holder or the holder's authorized agent. Any alleged misrepresentation or defect in the documentation of an assignment therefore would, be immaterial to the foreclosure action. And any standing argument that was not raised in the course of foreclosure proceedings has been waived as a matter of law, and cannot be revived by the Attorney General. The Complaint alleges that employees of the Servicer Defendants executed assignments as MERS Certifying Officers without disclosing the identity of their employer. However, the governing Delaware law permitted the employees of the Servicer Defendants to act as MERS Certifying Officers. The fact that these Certifying Officers were also employees of the Servicer Defendants is simply irrelevant to the foreclosure proceeding, and the Servicer Defendants had no duty to disclose it to borrowers.

4

Finally, the Complaint alleges that designating MERS as the legal holder of record of the mortgages denied borrowers information with respect to the ownership of the mortgage note that allegedly existed prior to MERS and that the state's public recording system as codified in Real Property Law Article 9 (hereinafter referred to as the "Recording Act") allegedly was designed to provide. But the Attorney General's theories are again legally incorrect. The Recording Act does not now, and never has, required recording of mortgages, and it was never the purpose of the Act to provide information to mortgagors regarding the holder of the notes secured by their properties. MERS' role was fully disclosed in the standard mortgage contract provided to borrowers from the outset of the loan for all mortgages in which MERS was the original mortgagee, and the Attorney General admits that these are the vast majority of the loans at issue. Moreover, federal law requires the Servicer Defendants to disclose the identity of the note holder upon any transfer and at the borrower's request, and there is no allegation that the Servicer Defendants failed to follow that federal law. Finally, even if the Complaint properly alleged the necessary elements of a cause

of action, many of the Attorney General's claims would be time-barred. A three-year statute oflimitations applies to his claims under both Section 349 and Section 63(12), and

accordingly, any claim based on conduct prior to February 3, 2009 is time-barred. For all these reasons, the Attorney General's view that the use ofMERS is deceptive or misleading cannot support a cause of action under New York law, and the Complaint should be dismissed.

THE ALLEGA nONS OF THE COMPLAINT

The Complaint arises from the activities of the Servicer Defendants in servicing residential mortgage loans in the State of New York. (CompI. '1111.) The Servicer Defendants provide a variety of services to the owners of mortgage loans, including collecting payments from borrowers on their behalf and bringing foreclosure proceedings in cases where borrowers default on their loans. This case pertains exclusively to the

5

Servicer Defendants' conduct with respect to the subset of such loans that are registered on MERS. (Id. ~ 25.) I. Background on MERS. MERS was established in the 1990s, to develop and implement a national electronic registry that tracks changes in beneficial ownership interests and servicing rights associated with residential mortgage loans. (Id. ~~ 31,33.) MERS was intended to

improve efficiency and to lower the cost of business in the primary and secondary mortgage markets. (Id. ~ 34.) 'MERS, which is an authorized agent of its members, serves as the mortgagee of record for loans registered on MERS. (See id. ~ 22.) In most instances, MERS is the named mortgagee, as nominee for the lender, in the original mortgage document-a so-called MERS as Original Mortgagee, or "MOM" mortgage.

(Id. ~ 40.) The standard mortgage contract used in MOM mortgages identifies MERS as a "separate corporation" that is acting as the "nominee for Lender and Lender's successors and assigns." (Id.)3 Notwithstanding that MERS holds the mortgage, the original lender remains the holder of the mortgage note and the beneficial owner of the mortgage. (See id. ~ 77.) Mortgage notes are negotiable instruments under Article 3 of the Uniform Commercial Code, and they can be and often are sold and resold after origination. (See id. ~ 61.) If the note is transferred to another MERS member, then MERS' registry is updated to

3

Less frequently, MERS may be assigned the mortgage later; in those instances, the mortgage is formally assigned to MERS and the mortgage recorded in MERS' name.

6

reflect the new beneficial owner, but the transfer is not recorded in the county land records because MERS, which is agent for both the selling and purchasing member firm, remains the holder of the mortgage. (See id. ~ 33.) Notably, courts in New York4 and elsewhere across the country have routinely approved the legality and efficacy of MERS. II. Instituting Foreclosure Proceedings in MERS' Name. Part A of the Complaint alleges that the Servicer Defendants engaged in deceptive and misleading conduct when they filed foreclosures in the name ofMERS. (Jd.

~~ 56-73.) The Complaint alleges, "upon information and belief," that MERS "often"
4

See Coakley, 41 A.D. 3d 674; Deutsche Bank Nat 'I Trust Co. v. Pietranico, 33 Misc. 3d 528,550 (Sup. Ct. Suffolk Cnty. 2011) ("It is clear from the wording of the mortgage loan documents that the intent of the parties is to designate MERS as the mortgagee and for MERS to serve as the common nominee or agent for MERS Member lenders and their successors and assigns.") (internal quotations omitted); us. Bank, N.A. v. Flynn, 27 Misc. 3d 802, 806 (Sup. Ct. Suffolk Cnty. 2010) ("a MERS assignment does not violate this State's long-standing rule that a transfer of a mortgage without a concomitant transfer of the debt is void"). Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1042 (9th Cir. 2011) ("[P]laintiffs have failed to show that the designation ofMERS as a beneficiary caused them any injury by, for example, affecting the terms of their loans, their ability to repay the loans, or their obligations as borrowers."); In re Mortg. Elec. Registration Sys. Inc. (MERS) Litig., No. 09-2119-JAT, 2011 WL 4550189, at *10 (D. Ariz. Oct. 3,2011) ("Plaintiffs maintain ... that Defendants falsely identified MERS as a beneficiary and falsely represented the identity ofMERS' corporate officers. Neither of these representations, standing alone, can be the factual basis for a finding of an unfair or deceptive act.") (quotations omitted); Jackson v. Mortg. Elec. Registration Sys., Inc., 770 N.W.2d 487, 490-501 (Minn. 2009) (discussing MERS at length and ruling that it may properly serve as mortgagee); Commonwealth Prop. Advocates v. MERS, No. 10-4182,2011 WL 6739431, at *7 (lOth Cir. Dec. 23, 2011) (affirming dismissal of challenge to MERS when "[t]he Deed of Trust explicitly gave MERS the right to foreclose on behalf of 'Lender and Lender's successors and assigns"') (internal quotations omitted).

5

7

lacked standing to foreclose because it did not hold the note and the mortgage at the time it initiated the action. (Id. ~~ 60,63.) In support ofthis conclusion, the Complaint

alleges that in some cases MERS was not the note holder at the time it brought the foreclosure proceeding. (Id. ~~ 63-64.) But the Complaint does not allege that the note

holder did not authorize MERS to foreclose on its behalf (which is permitted under New York law), or that MERS ever failed to deliver to the note holder any property obtained through foreclosure. The Complaint also does not allege that any borrower who was not in default was subjected to a foreclosure proceeding. III. Relying Upon Mortgage Assignments Executed by MERS. Part B of the Complaint alleges that the Servicer Defendants relied upon false, misleading and deceptive mortgage assignments executed by MERS to establish their standing to foreclose. (Id. ~~ 74-76.) In particular, the Complaint alleges that in "some instances" the assignments purported to transfer the mortgage note as well as the mortgage and that-notwithstanding case law to the contrary-MERS lacked the

authority to transfer the note. (Id. ~ 75.) Similarly, the Complaint alleges that mortgage assignments from MERS to the foreclosing party executed after the filing of the foreclosure complaint were deceptive and invalid (id. ~~ 80-82), notwithstanding the fact that such documents are not alleged to contain any misrepresentation about when they were executed. Finally, in some instances, MERS allegedly assigned mortgages to the

8

foreclosing party without authority to do so, and these assignments are allegedly void. (Jd. ~~ 83-85l IV. Using MERS Certifying Officers. Part C of the Complaint alleges that it was a deceptive practice for MERS to appoint employees of the Servicer Defendants (who were not MERS employees) as Certifying Officers ofMERS. (Jd. ~~ 97-104.) The Complaint does not-and cannot-

challenge the legality of the appointment of non-employees as MERS officers. But the Complaint nonetheless vaguely asserts that the practice was somehow deceptive, because MERS Certifying Officers signed documents on behalf of MERS without disclosing their employment by the Servicer Defendants to the court or the borrower-defendant foreclosure proceeding. V. (Id. ~~ 99-100.) in a

The Failure to Record Assignments in the Public Record. Part D of the Complaint alleges that simply by using MERS to register mortgages,

the Servicer Defendants have deceived borrowers in several ways. (Jd. ~~ 105-113.) First, the Complaint alleges that the Servicer Defendants have "eliminated" a borrower's ability to track property interest transfers through the traditional public records system (id. ~ 105), notwithstanding that neither the Recording Act nor any other provision of

6

Part B of the Complaint also alleges that the Servicer Defendants relied upon various documents executed by so-called "robe-signers" and upon documents that were not properly notarized. (Jd. ~ 86.) As part of the nationwide settlement of such "robosigning" claims, however, the Attorney General has agreed to release all claims against the Servicer Defendants based solely upon such conduct. This motion will not address those allegations further.

9

New York law requires that mortgages be recorded. The Complaint also alleges that MERS and its members deceived and misled borrowers regarding the "importance and ramifications of MERS' role with respect to their mortgage at the time the borrower obtain[ ed] the loan" (id. ~ 110), even as it acknowledges that the standardized mortgage document executed by borrowers-which was vetted and approved for loans guaranteed

by Fannie Mae, Freddie Mac and the Federal Housing Authority ("FHA")-expressly identified MERS as a separate legal entity that would hold the mortgage as the nominee of the original lender and of its successors and assigns. (Id. ~ 112.) Finally, Part E of the Complaint alleges that MERS' database was inaccurate, and places some of the blame for these inaccuracies on the Servicer Defendants, even though the Servicer Defendants made no representations to the public about the accuracy of that database.

ARGUMENT

1.

The Attorney General's Claims Should Be Dismissed Insofar As They Relate To Conduct During Foreclosure Proceedings. The majority of the allegations against the Servicer Defendants pertain to conduct

in connection with foreclosure proceedings.

(See Parts A-D of the Complaint.)

As set

forth below, these allegations (collectively, the "Foreclosure Allegations") cannot support a claim under either Section 349 or Section 63(12) for at least five independent reasons: (i) the Servicer Defendants' foreclosure-related activities were not consumer-oriented conduct or related to the conduct of business, and fall outside the scope of both statutes; (ii) the Noerr-Penington doctrine bars both causes of action; (iii) the absolute privilege

10

applicable to statements made in litigation bars the claims; (iv) the claims are barred by the doctrine of res judicata with respect to all foreclosures that are final; and (v) the claims are barred by the doctrine of separation of powers. Accordingly, the Court should dismiss the Complaint to the extent it relies upon any of the Foreclosure Allegations. A. Sections 349 And 63(12) Do Not Apply To Foreclosure Proceedings. 1. Section 349

Under well-settled New York law, the Foreclosure Allegations cannot form the basis of a claim under Section 349 because they relate to private disputes and do not arise from "consumer-directed" conduct. Section 349 makes unlawful deceptive acts or

practices in the conduct of any business, trade or commerce or in the furnishing of any service. As the Court of Appeals has held, this prohibition applies only to consumerdirected activity. See New York Univ. v. Cont'l Ins. Co., 87 N.Y.2d 308, 320 (1995). Consumer-directed activity includes the sale of goods or services by the defendant. See, e.g., Med. Soc 'yo of NY v. Oxford Health Plans, Inc., 15 A.D.3d 206, 207 (1st Dep't

2005) ("To [state a claim under § 349] ... plaintiff must show, inter alia, that defendants' challenged acts and practices are 'consumer-oriented.' 'Consumers' are 'those who

purchase goods and services for personal, family or household use"') (internal citations omitted); Genesco Entm 't v. Koch, 593 F. Supp. 743, 751 (S.D.N.Y. 1984) ("The typical violation contemplated by the statute involves an individual consumer who falls victim to misrepresentations made by a seller of consumer goods usually by way of false and misleading advertising."). These decisions properly give effect to the legislative purpose

11

of the statute, to ensure that "[c]onsumers have the right to an honest market place where trust prevails between buyer and seller." Mem. of Gov. Nelson Rockefeller, 1970 N.Y. Legis. Ann., at 472. Applying these principles, New York courts consistently have found Section 349 inapplicable where the conduct alleged was unrelated to a consumer transaction, but related instead to the enforcement of contractual rights, including through litigation. For example, in DirecTV, Inc. v. Rowland, No. 04-CV-297S, 2005 WL 189722 (W.D.N.Y. Jan. 22, 2005), the court held that Section 349 did not apply to the defendant's alleged mailing of letters threatening litigation. The court reasoned as follows: Defendant has not alleged that DirecTV engaged in its allegedly deceptive activity in the conduct of business trade or commerce. That is, DirecTV's litigation letters were not sent in the course of conducting business. Rather, DirecTV contacted Defendant [and others] ... by letter with the goal of enforcing its legal rights against an individual that it believed was illegally intercepting its television programming. As such, this Court finds that Defendant has failed to alleged [sic] conduct by DirecTV that is consumer-oriented. Id. at *3; accord DirecTV, Inc. v. Lewis, No. 03-CV-6241-CJS-JWF, at *10 (W.D.N.Y. Apr. 29, 2005).7 2005 WL 1006030,

7

Courts in other states have reached the same result, holding that similarly-worded consumer protection statutes require consumer-oriented conduct and do not apply to conduct in the course of litigation. See, e.g., DirecTi/, Inc. v. Shouldice, No. 5:03CV -62, 2003 WL 23200253, at *4 (W.D. Mich. Oct. 20, 2003) ("While DirecTV sells goods or services to consumers, the acts ... in this case were not 'trade or commerce,' .... Rather, DirecTV was seeking to enforce its legal rights against persons whom DirecTV believed were engaging in the illegal theft of DirecTV's product."); Joe Hand Promotions, Inc. v. Mills, 567 F. Supp. 2d 719, 723-26 (D.N.J. 2008) (company's letter to customer asserting that he violated federal law was not a 12

Under these precedents, the Attorney General's Section 349 cause of action must be dismissed to the extent it depends on the Foreclosure Allegations. The Complaint fails

to allege the existence of any consumer relationship between any of the Servicer Defendants and any borrower and makes no allegation that the Servicer Defendants provided any goods or services to borrowers. Rather, all of the Foreclosure Allegations relate to the Servicer Defendants' conduct in the course of foreclosure litigation against defaulting borrowers, where the borrowers were adverse parties and the Servicer Defendants were seeking to enforce mortgage terms on behalf of the owner of the loans in default. Such allegations bear no resemblance to consumer-related transactions between a buyer and seller of goods or services. Holding that Section 349 regulates the conduct of foreclosure litigation would ignore the purpose of the statute as well as the precedent limiting its application to consumer-oriented conduct. The application of Section 349 to conduct in foreclosure proceedings also would set a dangerous precedent. At bottom, the Attorney General is seeking to apply Section 349 to allegedly misleading and deceptive statements made in court filings. Due to the absence of any intent element in the statute, such a holding potentially would subject litigants to liability for making allegations in good faith that ultimately are determined to be untrue when the dispute is adjudicated. The CPLR contemplates that litigants will

deceptive act falling under the statute, but an assertion of the company's legal rights); Begelfer v. Najarian, 381 Mass. 177, 191 (1980) (reversing lower court's judgement allowing plaintiffs claim to proceed under Massachusetts consumer protection statute, because "[a] person is not engaged in trade or commerce merely by the exercise of contractual or legal remedies").

13

make allegations upon information and belief, CPLR § 3023, which is something that the Attorney General himself has done no fewer than nine times in the Complaint (see, e.g., CompI.,-r,-r1,51,60,63,65, 73,81,96, 118). Liberal pleading rules encourage parties to CPLR §§ 3013, 3014, & 3026; Foley v.

take disputes to court for orderly adjudication.

D'Agostino, 21 AD.2d 60, 65-66 (1st Dep't 1964). Any abuse of the legal process can
and should be addressed by the court through the imposition of sanctions, but the consumer protection statute is not an appropriate mechanism for countering allegedly improper litigation tactics. On the contrary, the specter of potential liability under Section 349 would have a chilling effect on litigants' pursuit of their legal rights in a wide variety of contexts. 2. Section 63(12)

Although the law under Section 63(12) is not nearly as well developed, the same fundamentalprinciples apply. First, like Section 349, Section 63(12) has a limited scope Section 63(12) applies only to

that does not encompass foreclosure proceedings.

persistent fraud or illegality "in the carrying on, conducting or transaction of business." And, like Section 349, Section 63(12) is "aimed at protecting consumers from deceptive and misleading practices." People v. Concert Connection, Ltd., 211 AD.2d 310, 320 (2d

Dep't 1995); People v. Apple Health & Sports Clubs, Ltd., 206 AD.2d 266, 267(lst Dep't 1994). New York courts also have expressly held that the Attorney General's attempt to regulate allegedly fraudulent conduct in litigation proceedings falls outside the scope of the statute. See State v. Magley, 105 AD.2d 208,209 (3rd Dep't 1984) ("The

14

statute limits what may be enjoined to the business activity or the fraudulent or illegal acts. The acts [the Attorney General] seeks to enjoin here are eviction proceedings, which in and of themselves are neither fraudulent nor illegal."). As discussed above, foreclosure proceedings are not "business" transactions, but rather litigation, and conduct in relation to such proceedings is not consumer-oriented. Moreover, for the reasons discussed above, application of Section 63(12) to regulate the allegations made in foreclosure proceedings would set a dangerous precedent and potentially chill litigants' pursuit of their legal rights. Accordingly, the Attorney General's Section 63(12) claim also must fail insofar as it relies upon the Foreclosure Allegations. B. The Attorney General's Claims Relating To Foreclosures Are Barred By The Noerr-Pennington Doctrine.

Both causes of action in the Complaint also must be dismissed to the extent that they are based upon the Foreclosure Allegations because the conduct alleged is protected under the First Amendment and the Noerr-Pennington Government for a redress of grievances"-including doctrine. The right to "petition the the right to file a lawsuit-is a

fundamental right, enshrined in the First Amendment of the United States Constitution and the State Constitution. See I G. Second Generation Partners, L.P. v. Duane Reade,

17 A.D.3d 206, 208 (1st Dep't 2005). Corporations as well as natural persons enjoy this right. See Alfred Weissman Real Estate, Inc. v. Big V Supermarkets, Inc., 268 A.D.2d 101, 107 (2d Dep't 2000) (dismissing complaint in favor of corporation because action was protected by First Amendment right to petition government). Recognizing that

15

potential civil liability could chill the exercise of these rights, the U.S. Supreme Court held in Eastern R.R. Presidents Coriference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961), that petitioning the government for redress could not provide a basis for liability under the antitrust laws. Since then, the so-called Noerr-Pennington doctrine has been

extended to preclude civil liability for filing of any type of lawsuit or other "petitioning activity." See I G. Second Generation Partners, 17 A.D.3d at 208 ("The filing of litigation falls within the protection of the Noerr-Pennington No. 150040/2010,2011 Noerr-Pennington doctrine"); Icahn v. Raynor,

WL 3250417, at *3 (Sup. Ct. N. Y. Cnty. June 16,2011) ("The

doctrine holds that parties may not be subjected to liability for

petitioning the government or a governmental agency, such as by filing litigation."). Since the rationale of this doctrine is that the filing of litigation is constitutionally protected activity, it applies to litigation that is currently pending or planned in the future, as well as to litigation that has been fully adjudicated. See id., 2011 WL 3250417, at *1, 3 (pending claim immune from liability under Noerr-Pennington); Ad Visor, Inc. v. Pacific Tel. and Tel. Co., 640 F.2d 1107, 1110 (9th Cir. 1981) (dissolving injunctions prohibiting prosecution of legal actions because injunction violated Noerr-Pennington doctrine). The Servicer Defendants' commencement and prosecution of foreclosure proceedings was an exercise of their First Amendment right to access the judicial system, to enforce their own rights or the rights of the principals for whom they acted. Under the Noerr-Pennington doctrine, this conduct is immune from civil liability, including claims

under Section 349 or Section 63(12). See DirecTV, Inc. v. Rowland, 2005 WL 189722 at

16

*3-4 (counterclaim brought under Section 349 barred by Noerr-Pennington

doctrine);

Suburban Restoration Co. Inc, v. ACMAT Corp., 700 F.2d 98, 102 (2d Cir. 1983) (under Noerr-Pennington doctrine, defendant's filing oflawsuit could not form basis for claim

under Connecticut Unfair Trade Practices Act); Marco Island Cable, Inc. v. Comcast Cablevision of the South, Inc., No. 2:04-CV-26-FTM-29DNF, 2006 WL 1814333, at *10

(M.D. Fla. July 3, 2006) (Noerr-Pennington doctrine precluded plaintiff from basing claim under Florida Deceptive and Unfair Trade Practices Act on defendant's litigation related conduct). C. The Attorney General's Claims Relating To Foreclosure Proceedings Are Barred By The Absolute Privilege For Statements In Litigation.

In order to ensure participants in litigation may speak freely, New York courts have held that statements made in judicial proceedings, "are absolutely privileged, notwithstanding the motive with which they are made, so long as they are material and pertinent to the issue to be resolved in the proceeding." Sinrod v. Stone, 20 A.D.3d 560,

561 (2d Dep't 2005). The Attorney General's claims are based in large part on allegedly deceptive statements made in connection with judicial foreclosure proceedings. Such

statements are protected by the absolute privilege and therefore cannot be subject to a claim of deceptive and fraudulent practices. See, e.g., Tolisano v. Texon, 144 A.D.2d 267, (1st Dep't 1988) (Smith, J. & Murphy, J., dissenting) (absolute privilege applies to wrongful death claim predicated on witness testimony), rev 'd and dissenting opinion adopted Tolisano v. Texon, 75 N.Y.2d 732, 733 (1989); Martinson v. Blau, 292 A.D.2d 234,234 (1st Dep't 2002) (affirming dismissal, on absolute privilege grounds, of "c1aims

17

for professional malpractice, breach of contract and prima facie tort, premised on the allegation that defendant gave false testimony" in prior action); Pryor v. Pryor, 2002 WL 31487778, at *3 (N.Y.C. Civ. Ct. 2002), affd. Pryor v. Pryor, 2003 WL 21960330, 2003 N.Y. Slip Op. 51190(U) (App. Term July 09, 2003) (dismissing false arrest claim based on allegedly false statements made in court proceeding, because "statements made during the course of a judicial proceeding are privileged"). D. The Attorney General's Claims Relating To Past Foreclosures Are Barred By Res Judicata.

To the extent the Attorney General's claims in the Foreclosure Allegations are based on completed foreclosure litigations, the Attorney General is seeking to relitigate foreclosure-related claims that were raised, or could have been raised, in cases previously

adjudicated (in some cases, years ago) in courts across the state. The Attorney General's attempt to do so is squarely barred by the doctrine of res judicata. The doctrine of res judicata holds that a valid, final judgment operates as an absolute bar to subsequent actions between the same parties, or their privies, when the claims are the same as those in the prior case. See Grossman v. NY Life Ins. Co., 90 A.D.3d 990,991 (2d Dep't 2011). Resjudicata "bars not only claims that were actually

litigated" in the prior proceedings "but also claims that could have been litigated." Marinelli Assocs. v. Helmsley-Noyes Co., Inc., 265 A.D.2d 1,5 (1st Dep't 2000) (emphasis added). Res judicata bars relitigation even where the plaintiff did not litigate any claims due to a default, and bars "all other claims arising out of the same transaction

18

or series of transactions ... even if based upon different theories or if seeking a different remedy." Lazides v. P & G Enterp., 58 A.D.3d 607, 609 (2d Dep't 2009). For res judicata purposes, the term "privity" "does not have a technical and welldefined meaning," Watts v Swiss Bank Corp., 27 N.Y.2d 270, 277 (1970), and must be determined flexibly to achieve a "fair result under the circumstances," taking into account the "core principle of res judicata, a party's right to rely upon the finality of the results of previous litigation." People v. Applied Card Sys. Inc., 11 N.y'3d 105, 123-24 (2008); see also Lewis v. City of NY., 17 Misc. 3d 537,543 (Sup. Ct. Bronx Cnty. 2007) ("[p]rivity has ... been held to exist where there is a relationship between the litigant in the current suit and the party to the prior suit such that the interests of the nonparty can be said to have been represented in the prior proceeding.") (internal quotation omitted). In Applied Card Systems, the Court of Appeals explicitly held that there was privity between the Attorney General and the citizens of New York on whose behalf he sought restitution, when the claims of those citizens had been resolved in a prior class action. 11 N.y'3d at 121-25. Here, as in Applied Card Systems, the Attorney General seeks to litigate claims that have already been resolved in (or barred by) prior foreclosure actions. Final judgments have been entered in favor of the Servicer Defendants in most of these actions. And the claims that the Attorney General wishes to raise here could have been made prior to judgment in those actions. These include:

19


Claims challenging the Servicer Defendants' standing in foreclosure proceedings filed in New York courtsr' Claims challenging the preparation and submission of allegedillegally invalid assignments in the context of foreclosure proceedings; and Claims challenging the use and authority of MERS Certifying Officers to execute documents used in foreclosure proceedings.i''

The Attorney General is barred by res judicata from raising again the same claims that were, or could have been raised, in those prior proceedings.

8

See Compl. ~ 62 (citing LaSalle Bank Nat 'I Ass 'n v. Lamy, 12 Misc. 3d 1191(A), 2006 WL 2251721, at *1 (Sup. Ct. Suffolk Cnty. Aug. 7, 2006); Compl, ~ 78 (citing Bank of New York v. Silverberg, 86 A.D.3d 274, 281-82 (2d Dep't 2011)) and United States Bank NA. v. Sarmiento, Index No. 11124/09 (Sup. Ct. Kings Cnty. Dec. 19, 2011)). These claims are also barred because "an argument that a plaintiff lacks standing, if not asserted in the defendant's answer or in a pre-answer motion to dismiss the complaint is waived pursuant to CPLR 3211(e)." Wells Fargo Bank Minn., NA. v. Mastropaolo, 42 A.D.3d 239, 244 (2d Dep't 2007). Consistent with that holding, the Second Department has also held that waived standing issues cannot be asserted as a basis for relief from a default in a foreclosure action. HSBC Bank, USA, NA. v. Dammond, 59 A.D.3d 679 (2d Dep't 2009). See also Deutsche Bank Nat 'I Trust Co. v. Pietranico, 33 Misc. 3d 528,534-35 (Sup. Ct. Suffolk Cnty. 2011) (collecting cases). See Compl. ~ 81 (citing six decisions where issue of proper assignment was raised); ~ 84 (citing two other cases where issue of proper assignment was raised). See Compl. ~ 87 (citing HSBC Bank USA, NA. v. Taher, 2011 WL 2610525, at *2 (Sup. Ct. Kings Cnty. July 1,2011)); Compl, ~ 101 (citing Bank of New York v. Myers, No. 18236108,2009 WL 241771 (Sup. Ct. Kings Cnty. Feb. 3,2009)) and Compl. ~ 103 (citing Us. Nat 'I BankAss'n v. Kosak, No. 1083-2007,2007 WL 2480127, at *2 (Sup. Ct. Suffolk Cnty. Sept. 4, 2007)). Each of these cases addresses the use of a MERS Certifying Officer to execute a mortgage assignment.

9

10

20

E.

The Attorney General's Claims Relating To Foreclosures Are Barred By The Separation Of Powers Doctrine.

Finally, the Attorney General's claims based upon the Foreclosure Allegations are barred by the separation of powers doctrine. The separation of powers, a fundamental principle of government in New York State, helps protect the integrity of the judicial system, since "[a] Judiciary free from control by the Executive and the Legislature is essential if there is a right to have claims decided by judges who are free from potential domination by other branches of government." Larabee v. Governor, 65 A.D.3d 74,85

(1st Dep't 2009) (quotations omitted); see also Montano v. County Legislature, 70 A.D.3d 203,210 (2d Dep't 2009) ("[I]t is a fundamental principle of organic law that each department of government should be free from interference, in the lawful discharge of duties expressly conferred, by either of the other branches" (alteration in original and internal quotations omitted»; Darns v. Sabol, 165 Misc. 2d 77,88 (Sup. Ct. N.Y. Cnty. 1995) (refusing to grant injunction where relief would violate separation of powers doctrine). This lawsuit-in which the Attorney General seeks damages from defendants for

actions allegedly taken in federal and state court proceedings, and injunctive relief which would regulate the conduct of court proceedings-infringes principles.'! directly on these key

The Attorney General, who is part of the executive branch, People v.

11

The Complaint also asserts claims arising from the defendants' alleged conduct in connection with federal bankruptcy cases, see, e.g., CompI. ~~ 11,20,73, 74-76, but jurisdiction over any such actions lies exclusively with the federal courts and federal prosecuting authorities. See,e.g., 18 U.S.C. § 3057(a).

21

Grasso, 11 N.y'3d 64, 70 (2008), is seeking improperly to interject himself into the conduct of litigated matters, but the courts have full authority to police actions in their courtrooms.
12

Judges must have the power to control actions taken in court without

interference from other branches attempting to usurp judicial authority and to regulate the same conduct. See Larabee v. Spitzer, 19 Misc. 3d 226,232 (Sup. Ct. N.Y. Cnty. 2008) ("Nothing is more essential to free government than the independence of its judges") (internal quotations omitted). The Complaint improperly seeks to usurp judicial power in violation of the separation of powers doctrine. Accordingly, it should be dismissed.

II.

The Complaint Should Be Dismissed Because It Fails To Allege Any Conduct That Is Deceptive Or Misleading. The Attorney General's causes of action under Section 349 and Section 63(12)

also should be dismissed in their entirety because the Complaint fails to allege any conduct by the Servicer Defendants that was materially deceptive or misleading. To state a claim under Section 349, the Attorney General must allege that defendants engaged in an act or practice that (i) was deceptive or misleading (ii) in a material way. See People ex rel. Spitzer v. Applied Card Sys., Inc., 27 A.D.3d 104, 10607 (3d Dep't 2005). The definition of deceptive acts or practices is an objective one: a

12

See People v. Little, 89 Misc. 2d 742, 745 (Yates Cnty. Ct. 1977), ajJ'd, 60 A.D.2d 797 (4th Dep't 1977) ("Under the inherent powers doctrine a court has all powers reasonably required to enable a court to perform efficiently its judicial functions, to protect its dignity, independence and integrity, and to make its lawful actions effective."); Daniels v. Southard, 23 Misc. 235,239 (Rensselaer Cnty. Ct. 1898) ("Courts of general jurisdiction have inherent authority to control and regulate their own process and records within proper limits.").

22

representation or omission that is likely to mislead a reasonable consumer acting reasonably under the circumstances. See Gaidon v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330,344 (1999). Failure to allege material deception warrants dismissal. See Mancuso v. Rubin, 52 A.D.3d 580,583 (2d Dep't 2008) (dismissing Section 349 claims because allegedly deceptive contract provisions were fully disclosed to plaintiff and not misleading in a material way); Stutman v. Chern. Bank, 260 A.D.2d 272, 273 (1st Dep't 1999) (imposition of mortgage fee not materially deceptive because it was "highly improbable that the allegedly misleading language had any effect on plaintiffs' decision to borrow from defendant"). Section 63(12) gives the Attorney General the authority to bring suit to challenge "repeated fraudulent or illegal acts ... in the carrying on, conducting or transaction of business." N.Y. Exec. Law § 63(12). As noted above, like Section 349, Section 63(12) is "aimed at protecting consumers from deceptive and misleading practices." People v. Concert Connection, 211 A.D.2d 310,320 (2d Dep't 1995); accord People v. Apple Health & Sports Clubs, Ltd, 206 A.D.2d 266,267 (1st Dep't 1994); see also Magley, 105 A.D.2d at 209 (Section 63(12) "was intended to prevent the perpetration of ongoing fraud
or illegality ... "); State of NY

ex ref. Lefkowitz v. Parker, 38 A.D.2d 542, 543 (1st Dep't

1971), aff'd, 30 N.Y.2d 964 (1972) (Attorney General could not use § 63(12) to obtain injunction requiring landlord to place tenants' security deposits in interest bearing account where no fraud or illegality was alleged). Although the statute is not limited to intentional fraud, the statute "has generally been interpreted to include those acts which may be characterized as dishonest and misleading." Allstate Ins. Co. v. Foschio, 93

23

A.D.2d 328,331 (2d Dep't 1983). To determine whether this standard is met, "the test for fraud is whether the targeted act has the capacity or tendency to deceive, or creates an atmosphere conducive to fraud." People ex ret. Spitzer v. Gen. Elec. Co., 302 A.D.2d 314,314 (1st Dep't 2003). Moreover, in determining whether an alleged omission is material under Section 63(12), the Court of Appeals has adopted an objective test, i.e., whether there is a substantial likelihood that the omitted information would have been "important" and "would have assumed actual significance" to the recipient. State v. Rachmani Corp., 71 N.Y.2d 718, 721, 726 (1988) (quoting TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976) (emphasis added by the Court of Appeals)). As discussed more fully below, although the Complaint is rife with allegations that various actions of the Servicer Defendants were "deceptive" or "misleading," these allegations are based on a misunderstanding of the applicable legal requirements or are conclusory and without any support in factual allegations. Accordingly, the Complaint does not state a cause of action under either Section 349 or Section 63(12), and should be dismissed in its entirety. A. Part A Of The Complaint Fails To Allege Any Deceptive Or Misleading Conduct Because MERS Had Standing To Foreclose.

In Part A of the Complaint, the Attorney General alleges that the Servicer Defendants violated Sections 349 and 63(12) by commencing foreclosure actions in the name ofMERS in cases where MERS did not have standing. (CompI. ~~ 56-67.) The Complaint, however, alleges no facts to support the conclusion that MERS lacked

24

standing to foreclose in any particular action that it commenced, much less that it "often" lacked standing. (Id. ~~ 21,60.) The Complaint's allegation that MERS "often" lacked standing (CompI. ~ 60) is based, apparently, on the claim-made "upon information and belief'-that "in many

[unspecified] instances," the Servicer Defendants failed to follow MERS' established procedures for transferring notes to the custody of a MERS Certifying Officer before the foreclosure action was filed. (ld. ~ 63.) In addition, where this procedure was followed, the Complaint alleges that it was inadequate to confer standing on MERS, because MERS Certifying Officers were, allegedly, not authorized to take custody of documents on behalf ofMERS. (Id. ~ 67.)

These allegations fail to state a claim because, even if it is assumed that they are true, they do not demonstrate that MERS lacked standing to foreclose. MERS' standing to foreclose is not dependent on whether MERS members followed MERS' procedures. Rather, whether MERS had standing to foreclose depends on the application of straightforward legal principles. Under well-settled New York law, the holder of a mortgage note has standing to foreclose. See Mortgage Elec. Registration Sys., Inc. v. Coakley, 41 A.D.3d 674,674 (2d Dep't 2007) (MERS had standing to bring foreclosure action where it was holder of note); Deutsche Bank Nat 'I Trust Co. v. Pietranico, 33 Misc. 3d 528, 545 (Sup. Ct. Suffolk Cnty. 2011) (holder of note has standing to foreclose,

25

whether or not the mortgage had been assigned to it).13 It is equally clear that a plaintiff who does not hold the note may bring a foreclosure action on the note holder's behalf, if authorized to do so as the holder's agent. See, e.g., Fairbanks Capital Corp. v. Nagel, 289 A.D.2d 99, 100 (1st Dep't 2001) (servicing agent may bring foreclosure proceeding where authority was delegated by note holder); CWCapital Asset Mgmt. LLC v. CharneyFPG 114 41st St., LLC, 84 A.D.3d 506, 507 (lst Dep't 2011) (same). Even assuming that MERS in some unspecified instances was not the note holder at the time it commenced a foreclosure, MERS was, at a minimum, an authorized agent of the holder and had the authority to foreclose. The Complaint itself alleges that for the "vast majority" of MERS loans, the mortgage document names MERS as the "nominee for Lender and Lender's successors and assigns"-that holders-and is, for all subsequent note

gives it "the right to foreclose and sell the Property." (CompI. ~ 40.) The

Second Department has recognized that this language supports the conclusion that MERS has standing to foreclose. Coakley, 41 A.D.3d at 675 ("Moreover, further support for MERS' standing to commence the action may be found on the face of the mortgage instrument itself. Pursuant to the clear and unequivocal terms of the mortgage instrument, ... MERS had the right to foreclose upon the premises in the event of a default").
14

13

The Attorney General repeatedly asserts that a foreclosure plaintiff must hold both the note and the mortgage at the time of foreclosure (CompI. ~~ 61-62, 73), but, as discussed below, this statement of the law is incorrect. See Section ILA, infra. Courts in numerous other jurisdictions likewise have recognized that the standard language contained in the MOM mortgage conveyed standing on MERS to foreclose 26

14

The factual allegations in the Complaint, therefore, are insufficient to allege a standing defect in any MERS foreclosure, much less all of them. As such, Part A of the Complaint does not allege any deception and cannot support either cause of action. B. Part B Of The Complaint Fails To State A Claim Because The Alleged Conduct Was Not Materially Deceptive Or Misleading.

Part B of the Complaint alleges that the Servicer Defendants engaged in deceptive and misleading acts by relying upon allegedly defective mortgage assignments executed by MERS to establish standing to sue. (CompI.,-r,-r74-76.) Though not set forth in the Complaint, these cases presumably were those in which MERS was not the plaintiff, but rather the foreclosure proceeding was commenced by the servicer in its own name (as the agent of the note holder) or in the name of the note holder. The Complaint alleges that the mortgage assignments were defective either because MERS lacked the authority to make the assignment (id. ,-r,-r 77-79) or the assignment post-dated commencement of the foreclosure litigation (id. ,-r,-r 80-82). This claim does not support the Attorney General's causes of action because, contrary to the assertions in the Complaint, no mortgage

as the agent of the note holder. See, e.g., Bucci v. Lehman Bros. Bank, FSB, No. PC-2009-3888, 2009 WL 3328373, at *4 (R.I. Super. Ct. Aug. 25,2009) (plaintiffs had "specifically granted 'the Statutory Power of Sale' to MERS, as nominee for Lender and Lender's successors and assigns"); HUman v. Mortgage Elec. Registration Sys. Inc., No. 06-13055,2007 WL 1218718, at *3 (E.D. Mich. Apr. 23, 2007) (borrower, "having expressly given to MERS the right to foreclose as nominee for the lender, cannot now contend that MERS did not have the right to institute foreclosure proceedings."); In re Huggins, 357 B.R. 180, 184 (Bankr. D. Mass. 2006) (mortgage language "expressly authorizes the exercise of sale powers by a mortgagee or person authorized to sell, precisely the position occupied by MERS").

27

assignment is necessary to confer standing to sue on the note holder (or the note holder's authorized agent). Therefore, the alleged defects in the assignment of the mortgages, if they occurred, would be immaterial and not actionable under either Section 349 or Section 63(12). The Attorney General repeatedly alleges that a party must be both the holder of the mortgage note and the mortgage in order to foreclose, and cites numerous cases reciting this rule. (See Compl. ~~ 61-62, 73.) But to the extent those cases are cited for the proposition that assignment of the mortgage to the plaintiff is a prerequisite for standing to foreclose on the mortgage, that proposition has no basis in the law. Although it is true that to foreclose, a party must have a legal or equitable interest in both the note and the mortgage, it is a long-standing rule in New York (and elsewhere) that when a note is transferred, the mortgage securing it passes with the note. See N.Y. D.C.C. § 9-203(g); Coakley, 41 A.D.3d at 674 (MERS had standing to foreclose when it "was the lawful holder of the promissory note ... and of the mortgage, which passed as an incident to the promissory note"); In re Escobar, 457 B.R. 229, 241 (Bankr. E.D.N.Y. 2011) ("where the movant claims rights as a secured creditor by virtue of an assignment of rights to a promissory note secured by a lien against real property, it must provide satisfactory proof of its status as the owner or holder of the note"); In re Gorman, No. 11-73029-ast, 2011 WL 5117846, at *4 (Bankr. E.D.N.Y. Oct. 27, 2011) ("New

York law has long recognized that the rights under a mortgage lien are held by the holder of the note, and are beneficially transferred to the assignee of a promissory note if the note is properly transferred, even without ... assignment of the mortgage."). As such, a

28

party who properly acquires the note need not obtain a separate written assignment of the mortgage prior to commencing a foreclosure action. Coakley, 41 A.D.3d at 674; see also Wells Fargo Bank, NA. v. Perry, 23 Misc. 3d 827,829 (Sup. Ct. Suffolk Cnty. 2009) (allonge indorsement provided plaintiff with a "sufficient claim of ownership of the subject mortgage," and "indorsement of a mortgage note that constitutes a negotiable instrument effectively transfers any mortgage given as security for said note as an incident thereof'); Pietranico, 33 Misc. 3d at 549 ("[T]he focus, under the 'principalincident' rule, should be on the mortgage note and not ... upon the mortgage as a security instrument. ... It is the interest in the note that is controlling and it is irrelevant if a nominee for the beneficial owner of the note is listed as the mortgagee of record. "). In light of the well-established principle that the mortgage follows the note, the alleged defects in MERS' mortgage assignments do not support the conclusion that the plaintiff lacked standing to foreclose. If a document is superfluous, then any alleged misrepresentations or defects in that document are immaterial and cannot support a claim

under Sections 349 or 63(12). See, e.g., Champion Home Builders Co. v. ADT Sec. Servs., Inc., 179 F. Supp. 2d 16,27 (N.D.N.Y. 2001) (an "essential element" of a claim under Section 349 is that a consumer-oriented practice was "deceptive or misleading in a material respect") (emphasis added); Rachmani, 71 N.Y.2d at 721, 726. Accordingly, the Complaint should be dismissed insofar as it is based upon the allegations in Part B.

29

C.

The Use OfMERS Certifying Officers Is Not Deceptive Or Misleading.

In Part C of the Complaint, the Attorney General alleges that MERS' practice of appointing employees of the Servicer Defendants and others as Certifying Officers of MERS has deceived borrowers and courts. (CompI. ~~ 97-104.) This allegation is without merit and should be dismissed. The MERS Certifying Officer system is a sensible, straightforward business practice. After a lender or loan servicer becomes a MERS member, MERS generally executes a corporate resolution appointing officers of the lender or loan servicer to be Certifying Officers ofMERS.15 MERS Certifying Officers may then take actions in the name of MERS pursuant to these corporate resolutions, such as assigning mortgages, releasing liens, and taking appropriate actions in bankruptcy proceedings. The Attorney General has not alleged any plausible theory under which this practice misleads borrowers. When a duly appointed Certifying Officer represents himself or herself as an officer of MERS, there is no misstatement of fact-under

15

See CompI. ~ 17 (stating that MERS has "designated over 20,000 MERS member employees as MERS 'certifying officers' to act on the company's behalf'); ~ 47 ("Defendant Servicers alone have well over 1000 employees who serve as MERS certifying officers"); ~ 48 ("MERS issues pro forma 'corporate resolutions' designating these individuals as 'certifying officers' ofMERS"); ~ 97 ("MERS has created a system where all the actions it purportedly takes on behalf of its members are carried out, not by MERS employees, but by the member's own employees, or in many cases by employees of third party vendors that provide foreclosure-related servicers to members").

30

Delaware law, which is controlling on this issue, the Certifying Officer is an officer of MERS, even ifhe or she is not a MERS employee.l" First, MERS' appointment of non-employee officers-far as the Complaint alleges (Compl. ~ 104)-is from being "bizarre,"

authorized by controlling law. Under

Delaware law, a corporation may name officers through a resolution of its board of directors to carry out any actions deemed necessary in furtherance of the corporation's business. Del. Code Ann. tit. 8 §§ 122, 142. A corporation may appoint non-employees of the corporation, and individuals can simultaneously be officers of more than one corporation. See Haft v. Dart Group Corp., 841 F. Supp. 549, 572 (D. Del. 1993) (a "corporate officer is not, as a matter of law, also a corporate employee merely by virtue of his office"); Craig v. Graphic Arts Studio, Inc., 39 Del. Ch. 447, 449 (Del. Ch. 1960) ("Delaware had adopted the view that a corporate officer or director is entirely free to engage in an independent competitive business, so long as he violates no legal or moral duty with respect to the fiduciary relation that exists between the corporation and himself."). It is no surprise, then, that courts around the country have repeatedly

16

Delaware law governs MERS' ability to appoint officers because MERSCORP, Inc. is incorporated in Delaware. See BBS Norwalk One, Inc. v. Raccolta, Inc., 60 F. Supp. 2d 123, 129 (S.D.N.Y. 1999) ("Under New York law, issues relating to the internal affairs of a corporation are decided in accordance with the law of the state of incorporation.") (citing Hart v. Gen. Motors Corp., 129 A.D.2d 179 (1st Dep't 1987», aff'd, 205 F.3d 1321 (2d Cir. 2000).

31

recognized that duly appointed MERS ~ertifying Officers have the authority to act on MERS' behalf.
17

Second, the Attorney General's alleged "deception by omission" claim is frivolous. The Attorney General alleges that the Servicer Defendants failed to disclose that the MERS Certifying Officer was an employee of the servicer, but omission of this information was not deceptive or misleading. When MERS Certifying Officers sign documents on behalf of MERS, the only representation being made is that they are officers ofMERS. Since Certifying Officers are MERS officers, regardless of what other

positions they may hold, that representation is wholly and unquestionably true. See Bain v. Metro. Mortgage Group Inc., No. C09-0149-JCC, 2010 WL 891585, at *6 (W.D. Wash. Mar. 11,2010) (dismissing challenge to MERS Certifying Officer system under . aws . state consumer protection I ) 18

17

See, e.g., James v. ReconTrust Co., No. CV-11-CV-324-ST, 2011 WL 3841558, at *12 (D. Or. Aug. 26,2011) (officer can "wear two hats on behalf of both BACHLS and MERS"), adopted in part and rejected in part on other grounds, 2012 WL 653871 (D. Or. Feb 29, 2012); Silving v. Wells Fargo Bank, NA., No. CV 11-0676PHX-DGC, 2012 WL 135989, at *6 (D. Ariz. Jan. 18,2012) (Certifying Officer's dual role insufficient to state plausible claim that she was not properly authorized to execute deed transfer on behalf of MERS); Jackman v. Hasty, No.1: 1O-CV-2485RWS, 2011 WL 5599075, at *3 (N.D. Ga. Nov. 15,2011) ("The evidence thus shows that Defendants ... , although not employees of MERS, were duly appointed agents ofMERS who had authority to assign the Security Deed and Note to LaSalle on behalf of MERS. LaSalle thus had legal authority to foreclose on the Property. "); Bank, NA. v. Willis, No. 10 C 5454, 2011 WL 3704428, at *3 (N.D. Ill. Aug. 22, 2011) (Certifying Officer's dual role "merely establish[es] that [she] holds many different positions with both Ocwen and MERS and executes documents in various capacities.").

us.

18

The two cases the Attorney General cites in the Complaint-HSBC Bank USA, NA. v. Yeasmin, No. 34142/07,2010 WL 2089273, at *6 (Sup. Ct. Kings Cnty. May 24, 32

In an effort to avoid this obvious conclusion, the Attorney General claims that the Certifying Officer may have an undisclosed conflict of interest. (Compl. ~ 99.) But the Attorney General fails to identify any such conflict. In addition, to the extent that the Certifying Officer had any conflict of interest arising from his or her role as both an employee ofthe servicer and an officer of MERS, the conflict would pertain only to the performance of his or her duties on behalf of one of those entities. Since the Certifying Officer owes no duty to the borrower, he or she has no obligation to disclose any such conflict to the borrower, and the borrower has no standing to challenge any act undertaken by a MERS Certifying Officer on the basis of such a theoretical conflict. See In re Holden, 271 N.Y. 212,218 (1936) ("The assignments were valid upon their face ... No one could question the validity of the assignments except the assignors, and that they might never do."); see also Livonia Props. Holdings, LLC v. 12840-12976 Farmington Rd. Holdings, LLC, 717 F. Supp. 2d 727, 737 (E.D. Mich. 2010), aff'd, 399 Fed. Appx. 97 (6th Cir. 2010) (plaintiffs could not challenge mortgage assignments because "[a ]fter the assignments, Borrower's rights and duties under the Loan Documents remain the same, the only change being to whom those duties are owed. Borrower cannot now step into the shoes of an assignor to assert its contract rights."). Unsurprisingly, other courts have rejected the theory of deception alleged by the Attorney General. See Del Piano v. Mortgage Elec. Registration Sys., Inc., No. CIV. 11-00140 SOM/BMK, 2012 WL

2010), and Bank of N. Y v. Myers, No. 18236/08,2009 WL 241771, at * 1 (Sup. Ct. Kings Cnty. Feb. 3, 2009)-merely establish that MERS Certifying Officers often serve as officers ofMERS members. (See Compl. ~~ 53,101.) They provide no support for the Attorney General's claim that the MERS Certifying Officers system is deceptive, misleading or otherwise violated any law.

33

621975, *10 (D. Haw. Feb. 24, 2012) ("Del Piano baldly asserts that Murray, who was employed by One West Bank:, an HSBC agent, had a conflict of interest or engaged in fraud in signing a document on behalf of MERS, the assignor. .. She cites no authority

for this proposition and does not indicate how she could have been harmed by Murray's signing on behalf ofMERS."). The Attorney General also alleges that the execution of documents by MERS Certifying Officers deceives borrowers because it obscures which entity owned their loans. (CompI. ~~ 24,98-99.) But the document itself says to whom the mortgage is

being assigned, and thus the identity of the signer does not obscure the owner of the loan. Moreover, there are numerous other mechanisms in place for borrowers to identify the owner of their loans: • Borrowers receive notifications of changes in ownership whenever their loans are sold pursuant to Truth in Lending Act ("TILA"), 15 U.S.C. § 1641(g)(1); Federal law provides that borrowers are entitled to request the name, address and telephone number of the owner of their loans from the servicer pursuant to TILA, 15 U.S.c. § 1641 (f)(2); and Borrowers who are defendants in a judicial foreclosure proceeding can serve discovery requests to identify the name of the loan owner.

The Complaint does not allege that the Servicer Defendants have failed to satisfy their duties to provide borrowers with information about the ownership of their loan under TILA or that a MERS Certifying Officer signing of a document somehow prevented a borrower from accessing correct information about the ownership of their loan through one of the means available to them. See Cohen v. Nassau Educators Fed. Credit Union, No. 15094-05,2006 WL 1540324, at *4 (Sup. Ct. Nassau Cnty. May 10,2006), aff'd, 37

34

A.D.3d 751 (2d Dep't 2007) ("One cannot claim to have been misled when the misrepresentations consist of material which could have been discovered through the exercise of due diligence."). For these reasons, the execution of documents by MERS Certifying Officers is not deceptive, and the Complaint must be dismissed to the extent it is based upon a challenge to such documents.

D.

The Use ofMERS And The Resulting Failure To Record Assignments In The Public Record Is Not Inherently Deceptive.

In Part D of the Complaint, the Attorney General alleges that the Servicer Defendants, through the use of MERS, have concealed important information from borrowers and the public; Paragraphs 105 through 109 allege that the Servicer Defendants' use ofMERS and failure to record mortgage assignments have effectively eliminated the ability of borrowers and the public to track transfers of property interests, and prevented borrowers from ascertaining the true owner of their mortgage loan. Paragraphs 110 through 113 allege that the disclosures made to borrowers at the time of mortgage origination are inadequate and fail to disclose sufficient information about MERS'role. law. 1. The Failure To Record Mortgage Assignments Is Not Deceptive Or Misleading. For the reasons stated below, these claims must be dismissed as a matter of

The Attorney General's claim that the Servicer Defendants' use ofMERS deceives borrowers who otherwise would be able to rely upon public land records to

35

identify the current owner of his or her mortgage loan rests on two assumptions: (i) that, absent MERS, the public land records would be a reliable source for a borrower to consult in order to determine the owner of his or her loan; and (ii) that the purpose of the Recording Act encompasses providing borrowers with information on ownership of a mortgage loan. Both assumptions are wrong-the public land records, as a matter of fact,

have never afforded a reliable means of determining the owner of a mortgage note, and the recording system was not designed for this purpose. First, public land records have never been an authoritative source for information about the ownership of a loan, because the holders of mortgage notes have never been required to record their interest. To the extent that the Attorney General's claim is premised on the need for transparency with respect to the ownership of a note, the land records do not provide (and have never provided) information to a borrower (or anyone else) regarding the holder of the note. A note does not represent an interest in real property-rather, it evidences debt that may be secured by a mortgage-and therefore

does not fall within the scope of the Recording Act at all. Although the Attorney General barely mentions it, a residential mortgage loan note is governed by the provisions of the New York Uniform Commercial Code.19 Unlike mortgages, which are interests in real

19

A note is a negotiable instrument, freely transferable by endorsement or by physical delivery to a new party, who upon possession becomes the "holder" of the note. Under the UCC, a "holder" is defined as a person "in possession" of a negotiable instrument. N.Y. U.C.C. § 1-201(20). If the document is payable to "bearer"meaning the person in possession of an "instrument, document of title, or certificated security payable to bearer or indorsed in blank" (including a note indorsed in blank)-the person in possession is the "holder." ld. And under the UCC, "the 36

property that are perfected upon recording, the security interest in a note (and therefore the right to enforce the associated mortgage, if there is one) is perfected by possession of the note. See Provident Bankv. Comm. Home Mortg. Corp., 498 F. Supp. 2d 558,564 (E.D.N.Y. 2007); N.Y. D.C.C. § 9-313. With respect to the recording of the mortgage (as distinct from the note), Section 291 of the Real Property Law provides that "[a] conveyance of real property ... may be recorded in the office of the clerk of the county where such real property is situated .... " (emphasis added). In light of this permissive language, New York courts have long held that the holder of a mortgage has no obligation to record it. See Getman v. Lippert, 171 A.D. 536, 537 (3d Dep't 1916) ("The Recording Act of this State does not require a deed of real property to be recorded. The grantee mayor may not record his deed as he chooses. The statute is permissive only."); see also Fryer v. Rockefeller, 63 N.Y. 268, 274 (1875) ("The recording acts are not so large in scope, as that a deed not recorded, or not entitled to record, is void and ineffectual"); Reed v. Barkley, 123 Misc. 635,637 (Sup. Ct. Ontario Cnty.1924) (claim that deed was void because of failure to record was "entirely erroneous"); Bates v. Mortgage Elec. Registration Sys., Inc., No.3: 10-cv00407-RCJ-VPC, 2011 WL 1304486, at *2 (D. Nev. Mar. 30,2011) ("[I]n most if not all states under the modern America recording system-there record the assignment of a mortgage."). is simply no requirement to

Recordation of an interest in land simply serves

to protect one's interest in real property by putting the world at large on constructive holder of an instrument" is entitled to enforce it, whether or not he is the owner. N.Y. D.C.C. § 3-301.

37

notice of the claimed interest; but recordation is not required to validate one's interest. Every law student studying for the bar exam understands this better than [the relator] cares to [... ]"). The New York Comptroller General has explained: "There is no legal obligation upon any property owner to record his deed. If a vendee wants to risk the consequences of the lack of a public record, that is his affair." N.Y. Com. Gen. Op. No. 8426 (Dec. 11, 1956). The fact that recording of mortgage interests is not and has never been mandatory is fatal to the Attorney General's claim, because it means that the land recording system has never been a reliable indicator of the beneficial ownership of mortgage notes. Second, contrary to the Attorney General's assertion, the Recording Act was not intended to "provide homeowners ... a reliable public record reflecting transfers in real property interests" (Compl. '1[105). Rather, New York's Recording Act was created for two purposes: (1) to "protect the rights of innocent purchasers who acquire an interest in property without knowledge of prior encumbrances," and (2) to "establish a public record which would furnish potential purchasers with notice, or at least' constructive notice', of previous conveyances and encumbrances that might affect their interests." Andy Assocs. v. Bankers Trust Co., 49 N.Y.2d 13,20 (1979) (emphasis added). Put differently, "[t]he object of the recording acts is to prevent frauds-to prevent the person having title to

land from selling it more than once, and thereby defrauding one or more of the purchasers." Jackson ex demo Merrickv. Post, 15 Wend. 588, 594 (N.Y. Sup. Ct. 1836);

see also Raynor v. Wilson, 6 Hill 469 (N.Y. Sup. Ct. 1844) (recording statute "was made to protect innocent purchasers against the fraud of sellers; to prevent those who once had

38

title to land from making successive sales, and thereby defrauding one or more purchasers"). This purpose is accomplished by incenting lienholders to file their interests

or risk losing their claim. Moreover, the Court of Appeals has explained that the Recording Act must be construed "in such a way as to effect its underlying purpose." See Andy Assocs., 49 N.Y.2d 13 at 24. As a result, the Recording Act is irrelevant in cases that do not involve protection for subsequent innocent purchasers. For instance, the failure to record a transfer of ownership has no bearing in cases involving personal injuries that occurred on property; the record owner is not liable if she in fact no longer owns the property, even if she failed to record the documents transferring her interest. See Termine v. Cont'l Banking Co., 299 A.D.2d 406,406-07 (2d Dep't 2002) (company not liable despite failure to record deed transferring real property, since Recording Act was designed to protect innocent purchasers); Riner v. Texaco, Inc., 222 A.D.2d 571,571 (2d Dep't 1995) (personal injury plaintiff "not a member of the class for which the [recording statute] was designed"). Similarly, the failure to record a mortgage does not affect its priority over a

judgment. See Heithaus v. Heithaus, 229 A.D.2d 421, 422 (2d Dep't 1996) ("judgment creditors do not benefit from the protection of the New York Recording Act"); In re Brosnahan, 312 B.R. 220, 224-25 (Bankr. W.D.N.Y. 2004) (unrecorded mortgage takes priority over judgment, since "recording act relates to subsequent purchasers in good faith and for a valuable consideration, and not to judgment creditors"). For the same reasons, there is no basis for the Attorney General's claim that the alleged failure to comply with the Recording Act resulting from use of MERS deceives

39

borrowers.r" The Recording Act was enacted to protect innocent subsequent purchasers and prevent frauds from multiple conveyances; it was not passed to provide borrowers information on the holder of the mortgage and note on their property. Because borrowers are not members of the class the Recording Act was intended to protect, the Attorney General's claims that borrowers are deceived by the use ofMERS for recording purposes must be rejected. This conclusion is reinforced by the Court of Appeals' decision in MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90 (2006), where the Court expressly held that MERS mortgages satisfy the requirements of the Recording Act and must be accepted for filing. In Romaine, the Clerk of Suffolk County had stopped recording mortgages in MERS' name based on an Attorney General opinion taking the position that recording a MERS instrument failed to satisfy the Recording Act and frustrates the legislative intent of the Recording Act. See 8 N.y'3d at 97 (discussing N.Y. Att'y Gen., Informal Op. No 2001-2 (April 5, 2001)). But the Court of Appeals expressly rejected that view, and held that MERS mortgages complied with the requirements of the Recording Act and that the Clerk was, therefore, required to record them. Id. The fact that the Court of Appeals has held that MERS mortgages meet the requirements of the Recording Act undermines any argument that the use of MERS

20

The Attorney General also alleges that the failure to register property transfers "deprives potential future purchasers and other lien holders of important chain of title information." (CompI. ~ 109.) But any failure to provide information to potential future purchasers and future lien holders cannot be deceptive, as any such innocent purchasers would be protected by the Recording Act.

40

subverts the purposes of that statute. The bottom line, as one court recently observed, is that "[i]t has never been the case that the true owners of interests in real estate could be determined using land records." Pietranico, 33 Misc. 3d at 544. A borrower, therefore, can have no reasonable expectation that he or she will be able to learn this information from public land records. Accordingly, the use ofMERS is not deceptive or misleading. 2. The Attorney General Fails To Allege A Claim Against The Servicer Defendants Based Upon Disclosures Made At Origination.

The Attorney General next asserts that MERS and its members "deceive and mislead borrowers about the importance and ramifications of MERS' role with respect to their mortgage at the time the borrower obtains the loan." (CompI. '1[110.) These allegations, too, must be dismissed. As an initial matter, it is unclear that the allegations in Paragraphs 110-113 are directed at the Servicer Defendants. These paragraphs concern the adequacy of the disclosures that a borrower receives when a loan is originated; in particular, the Attorney General alleges that mortgages originated by MERS members fail to explain the role of MERS, the relationship between MERS and the lender, and MERS' practice of using Certifying Officers. (Id. '1['1[110,112-13.) But the Complaint does not contain any allegations regarding the origination of loans by the Servicer Defendants. Rather, the Servicer Defendants have been named solely in their capacity as servicers who "service[ ] tens of thousands of residential real estate loans in the State of New York" and file "foreclosure-related proceedings in the State of New York." (Id. 'l[1l.) Because the

41

Complaint does not allege that the Servicer Defendants had any role in originating the mortgage loans at issue, the Attorney General's allegations regarding the alleged inadequacy of the disclosures made at that time necessarily fail as against the Servicer Defendants. Nor does the allegation in Paragraph 111 appear to apply to the Servicer Defendants. In Paragraph 111, the Attorney General alleges that when MERS becomes

mortgagee through a later assignment, the borrower receives no disclosure regarding MERS' role (although the Complaint does not allege that the assignment to MERS is not recorded in the public land records). This allegation does not reference the Servicer Defendants, however, and the Complaint makes no allegations as to who, other than MERS, the Attorney General claims should provide such disclosures. Without any alleged facts specific to the Servicer Defendants, this allegation, too, fails against them. To the extent that Paragraphs 110 and 112-13 are directed against the Servicer Defendants, they fail to assert any viable claim. Contrary to the Attorney General's assertions, the documentation that he references in the Complaint provides borrowers with a wealth of disclosures about MERS. MOM mortgages are uniform security instruments approved by Fannie Mae and Freddie Mac. See Pietranico, 33 Misc. 3d at 548. Such mortgages explicitly inform the borrower/mortgagors that MERS is "a

separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns," and that "FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD." See id. at 539 (emphasis

in original). By executing the mortgage, the borrower agrees to "mortgage, grant and

42

convey the Property to MERS (solely as nominee for Lender and Lender's successors in interest) and its successors in interest subject to the terms of this Security Instrument." Id. The mortgage outlines the various rights of the lender, including the right to "bring a lawsuit to take away all ... remaining rights [of the mortgagor] in the Property and have the Property sold." Id. at 540. Critically, when executing MOM mortgages, the borrowers expressly acknowledge that: MERS (as nominee for Lender and Lender's successors and assigns) has the right: (A) to exercise any or all of those rights, including but not limited to, the right to foreclose and sell the Property; and (B) to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument. Id. at 539; see also Cornpl. ~ 40. The borrower also expressly acknowledges that "[t]he Note, or an interest in the Note, together with this Security Instrument, may be sold one or more times. I might not receive any prior notice a/these sales." Pietranico, 33 Misc. 3d at 540 (emphasis added). These disclosures are not "minimal," as the Attorney General claims. (Compl, ~ 112.) The borrower is informed of the supposed "real risks and consequences posed by allowing MERS to serve as mortgagee of record" (id. ~ 112)-that MERS can foreclose

and sell the property, that MERS can release and cancel the mortgage, and that MERS can bring a lawsuit against the borrower. And the borrower is informed that the note and mortgage may be sold, without prior notice to the borrower.

43

The Attorney General alleges that these disclosures are, nonetheless, inadequate because they failed to disclose several specific facts. First, the Complaint alleges that the disclosures did not state that MERS acts as the mortgagee of record for millions of mortgages and acts as the agent for most major lending institutions. (Id. ~ 113.) The

Attorney General, however, offers no reason why this information should be disclosed. This information-which, incidentally, always has been readily available in the public

domain, see Bates, 2011 WL 892646 at*4 (dismissing challenge to MERS and providing an overview of some of the voluminous publicly available information about MERS)-is simply irrelevant to the role that MERS plays with respect to a particular borrower's mortgage. Second, the Complaint faults the disclosures for not stating that MERS was

designated as an agent so that "standard recording protocols" could be avoided and that the borrower would be deprived of "access to important information relating to future transfers of his or her mortgage." (Id.) But this allegedly "omitted" disclosure is not

true. As discussed above, the use of MERS does not deprive the borrower of information about future transfers because such information is not required to be made available in the public land records at all, and borrowers have many other sources to obtain this information. See Section II.B, supra. Finally, the Attorney General claims that the disclosures should have explained that MERS conducts its business through nonemployee officers. (CompI. ~ 113.) This claim must fail for the same reasons that the use ofMERS Certifying Officers is not deceptive or misleading-quite simply, the fact

that Certifying Officers may be employees of another entity is permissible and immaterial to a borrower. See Section II.C, supra.

44

3.

The Complaint Fails to Allege A Violation By The Servicer Defendants With Respect To Maintenance Of The MERS Database.

Finally, Part E of the Complaint alleges that, at times, the MERS database contained inaccurate information concerning individual loans. These allegations, if true, are insufficient to state a claim against the Servicer Defendants under either Section 349 or Section 63(12). The Complaint does not allege that the Servicer Defendants made this database available to any member of the public nor that they represented to any consumer that the database was an accurate record. There is no basis for finding that the Servicer Defendants engaged in any deceptive conduct in connection with maintenance of the database. Accordingly, any claim against the Servicer Defendants based on the inaccuracy of the MERS database must be dismissed. III. The Allegations In Paragraph 111 Are Preempted By RESP A To The Extent They Are Directed At Servicers. To the extent that the allegations in·Paragraph 111 are intended to assert that the Servicer Defendants are liable for failing to make more extensive disclosures regarding MERS, those allegations are preempted by federal law. The Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.c. § 2605, details the disclosures that servicers must make at various times, including when the servicing of a loan is transferred. Section

2605(h) contains an express preemption provision applicable to the disclosures that must be made to borrowers, which states that "[ n]otwithstanding any provision of any law or regulation of any State, a person who makes a federally related mortgage loan or a servicer shall be considered to have complied with the provisions of any such State law

45

or regulation requiring notice to a borrower ... if such person or servicer complies with the requirements under this section ... " 12 U.S.C. § 2605(h). Section 2605 does not require that servicers make disclosures regarding MERS, and the Attorney General has not alleged that the Servicer Defendants have failed to make the disclosures required under RESP A. But compliance with RESP A is a "complete defense" to any cause of action under Section 349. See Gen. Bus. Law. § 349( d) (no violation of § 349 if "the act or practice is subject to and complies with the rules and regulations of ... any agency of the United States"); Cohen v. JP. Morgan Chase & Co., 608 F. Supp. 2d 330,350 (E.D.N.Y. 2009) (Section 349 claim foreclosed if mortgage fee is legal under RESPA). And any claim under Section 63(12) is preempted by RESP A. Thus, to the extent that the Attorney General alleges that the failure of the Servicer Defendants to make such disclosures is deceptive or misleading, this allegation must be dismissed. IV. Executive Law Section 63(12) Does Not Provide An Independent Basis For A Cause Of Action. For all the reasons outlined above, the Attorney General's Complaint does not state a cause of action against the Servicer Defendants under either Section 349 or Section 63(12). But it is also important to point out that separate analysis of the Section 63(12) claim is unnecessary. If the Attorney General's Section 349 is dismissed in whole

or part, then the Section 63(12) claim must also be dismissed, to the same extent. This is because Section 63(12) does not establish an independent cause of action, but merely provides the Attorney General with standing to seek remedies for independent wrongs.

46

See State v. Corte lie Corp., 38 N.Y.2d 83, 85 (1975) ("The applicable statutes cited above [including section 63(12)] did not 'make' unlawful the alleged fraudulent practices, but only provided standing in the Attorney-General to seek redress and additional remedies for recognized wrongs which pre-existed the statutes. Statutory provisions which provide only additional remedies or standing do not create or impose new obligations."); People v. FrinkAm., Inc., 2 A.D.3d 1379, 1380 (4th Dep't 2003) ("Section 63(12) does not create any new causes of action, but does provide the Attorney General with standing 'to seek redress and additional remedies for recognized wrongs' based on the violation of other statutes"). As the Second Department has explained, Section 63(12) is merely "the procedural route by which the Attorney-General may apply to the Supreme Court to enjoin repeated illegal or fraudulent acts." State v. Maiorano, 189 A.D.2d 766, 766 (2d Dep't 1993). Accordingly, notwithstanding the fact that the Complaint purports to bring two causes of action, if the Attorney General's Section 349 claim is dismissed, his Section 63(12) claim also must be dismissed because the Complaint alleges no other independent cause of action. V. Many Of The Attorney General's Claims Are Barred By The Three-Year Statute of Limitations. The Attorney General's claims under Section 349 and Section 63(12) purport to reach back to 2006. (See, e.g., CompI. ~~ 56-57.) But the Attorney General cannot

47

obtain relief for acts or conduct occurring before February 3, 2009, because his claims are subject to a three-year statute of Iimitations.r' Claims brought under Section 349 are subject to a three-year limitations period. See Gaidon v. Guardian Life Ins. Co. of Am., 96 N.Y.2d 201,210 (2001); Beller v. William Penn Life Ins. Co., 8 A.D.3d 310 (2d Dep't 2004); Ito v. Dryvit Sys., Inc., 16 A.D.3d 554 (2d Dep't 2005). Under New York law, actions to recover damages for a liability created by statute are subject to the three-year limitation period specified in CPLR § 214(2)_22 In Gaidon, the Court of Appeals held that the three-year statute applies to causes of action "which, although akin to common-law causes, would not exist but for the statute," 96 N.Y.2d at 209, and that this statute applies to claims under Section 349 because "General Business Law § 349 is a creature of statute based on broad consumerprotection concerns." Id. (internal quotations omitted). The Attorney General's Section 63(12) claims also are subject to a three-year statute oflimitations. Claims brought under Section 63(12) may be subject to a threedepending on the nature of the claims asserted.

year or a six-year statute oflimitations,

Cortelle, 38 N.Y.2d at 87-89. Where a complaint alleges with particularity each element of a common law fraud cause of action, the Section 63(12) claim is subject to the six-year statute applicable to common law fraud. Id. But where, as here, the Section 63(12) claim is based on allegations that are insufficient to allege a common law fraud, the three-year
2!

This action was filed on February 3, 2012. CPLR § 214(2) provides that a three-year statute oflimitations applies to any "action to recover upon a liability, penalty or forfeiture created or imposed by statute."

22

48

statute under CPLR § 214(2) applies. Id. at 86; State v. Daicel Chemical Ind., Ltd., 42 A.D.3d 301, 303 (1st Dep't 2007) (dismissing Attorney General's Section 63(12) claim as barred by three-year statute of limitations because Attorney General did not "allege all the elements of common-law fraud"); People v. City Model & Talent Dev., No. 09-22233, 2010 WL 3892246, at *3 (Sup. Ct. Suffolk Cnty. Sept. 28,2010) (applying three-year statute of limitations to Section 63(12) claims where Attorney General did "not plead the elements of fraud but only statutory violations which do not rise to the level of fraud"); People v. Pharmacia Corp., 27 Misc. 3d 368,373 (Sup. Ct. Albany Cnty. 2010) (applying three-year statute of limitations to Section 63(12) claim, because Attorney General's allegations "fall well short of alleging fraud actionable at common law"). The Complaint here does not adequately plead the elements of an action for common law fraud. Accordingly, the Court must dismiss the Attorney General's claims to the extent they are based upon foreclosures, bankruptcy proceedings, mortgage assignments and other conduct that occurred prior to February 3, 2009. This includes the great majority of the claims asserted by the Attorney General against the Servicer Defendants. (See, e.g., CompI. ~~ 64-90).23 Further, to the extent that Paragraphs E, F

and G of the Attorney General's prayer for relief seek disgorgement, damages and penalties for conduct prior to February 3, 2009, such requests must be denied.

23

For example, all of the allegedly deceptive mortgage transfers and foreclosure actions in the cases listed in Paragraph 81 occurred between 2006 and 2008.

49

CONCLUSION

For the foregoing reasons, the Servicer Defendants respectfully request that the Court dismiss the Complaint in its entirety./" Dated: April 20, 2012 DEBEVOISE & PLIMPTON LLP GOODWIN PROCTER LLP

_"'~::_n0"-1r-':--'~='f,,,,-~~e::'_·~-=}:":=e::...J.-~~-L/e=~-~--7/'I-!_f_-'j___:G=~""-.~-",,,-=e:~,-,,-':C;_0_::_:~Ch~f.:,t~~!
Mary Beth Hogan' Philip A. Fortino 919 Third Avenue New York, New York 10022 Tel: (212) 909-6000 Attorneys for Defendants JP Morgan Chase Bank NA., Chase Home Finance LLC and EMC Mortgage Corporation Joseph F. Yenouskas Maryana Zubok The New York Times Building 620 Eighth Avenue New York, New York 10018 Tel: (212) 8l3-8859

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Attorneys for Defendants Bank of America, NA. and BAC Home Loans Servicing, LP

HOGAN LOVELLS US LLP

David Dunn Ira M. Feinberg

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iJ

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875 Third Avenue New York, New York 10022 Tel: (212) 918-3515 Attorneys for Defendants Wells Fargo Bank, NA. and Wells Fargo Home Mortgage, Inc.

24

The Servicer Defendants join in all of the arguments made by the MERS Defendants in their Motion to Dismiss, to the extent they are not made herein.

50

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