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Defending Your Company Against

Individual Cases
Common Claims and Response Strategies
Part 1

Sunny S. Huo
Severson & Werson
ssh@severson.com

MBA Legal Issues Conference


Hotel Del Coronado, San Diego
May 3, 2010
1:30 p.m.-2:45 p.m.
Overview
Overview

• Defaults and foreclosures continue to increase


• Cottage industry has sprung up in response:
• Attorneys representing borrowers
• “Pro per” borrowers filing with attorney/paralegal support
• “Loan modification” companies
• Common fact patterns:
• Borrower claims he/she did not understand the loan
• Borrower claims lender should never have made the loan
• Borrower challenges current ownership of the loan
• Alleged violations of multiple Federal & State lending statutes
(RESPA, TILA, FDCPA, ECOA, etc.)
Overview

• Common claims:
• Negligence / Breach of Fiduciary Duty – essentially “suitability”
• Breach of Contract / Implied Cov – impounding, forbearance
agreement, failure to mod
• Quiet Title / Chain of Title – produce-the-note, break in title chain,
ineffective power of attorney assignments
• Unfair Business Practices – predatory lending, suitability
• TILA – NoRC/TILD, claims rescission, basis for removal, not always
viable
• RESPA – fee overcharge, YSP, failure to respond to QWR (misuse)
• Fraud – misrep re loan terms or ability to maintain loan
Overview

• Strategic Considerations
• Is the claim meritorious?
• If so, what is the exposure? Is settlement viable?
• If not, can case be defeated at pleadings stage?
• Can case be defeated prior to trial?
• ADR options: sitting judge, retired judge, practitioner as mediator
• Early trial date

• Removal Consideration: delay could be the primary objective


• Suit filed with Federal claim in State Court, draws removal
• Amendment to avoid first Federal pleadings motion, removes Federal claims
• Opposition to second Federal motion demands remand
• Case remanded, plaintiff amends again to avoid first State pleadings motion
• Opposition to second State motion asks for leave to amend again
• 6 to 9 months elapses
Overview

• Response
• Research counsel’s PACER history
• Parse the loan file, title records, payment history, servicing notes
• Force preliminary injunction motion
• If Lis Pendens filed, file motion to expunge
Analysis
Negligence & Breach of Fiduciary Duty

• Theory: lender should not have made loan to borrower that borrower
cannot afford; lender should have known that stated income on a stated
income loan is false; lender should have known that property value was
inflated; lender should have placed borrower’s best interests first.

• Remedy: damages.

• Issues:
• Lenders are not required to “watch out for the best interests” of the
borrower
“The relationship between a lending institution and its borrower-client is not fiduciary in nature. A
commercial lender is entitled to pursue its own economic interests in a loan transaction. This right is
inconsistent with the obligations of a fiduciary which require that the fiduciary knowingly agree to
subordinate its interests to act on behalf of and for the benefit of another.” (Nymark v. Heart Federal
Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1093, fn. 1.)
• Borrower has choice to take the loan; borrower also has duty not to
submit false information (e.g., income) to lender on a 1003
• Parse loan file for 1003 and disclosures signed by borrower; also
check level of sophistication (e.g., other properties, employment)
Breach of Contract & Breach of Implied Covenant

• Theory: lender orally promised different loan terms; lender orally


promised to modify the loan; lender did not act in good faith in trying to
modify the loan

• Remedy: damages

• Issues:
• An agreement to repay what is already owed is not consideration
• An oral agreement cannot trump a written agreement
• An implied agreement cannot contradict a written agreement
• Use the loan documents
Breach of Contract & Breach of Implied Covenant
Quiet Title / Chain of Title

• Theory 1: because of other claims (e.g., fraud), borrower contends that


he/she is now entitled to full release of the lien

• Theory 2: foreclosing lender/MERS has not shown that they are the
proper entity to do so

• Remedy: equitable relief

• Issues:
• A borrower cannot obtain “clear title” until they repay the debt
• Mortgage Electronic Registration Systems, Inc. versus Mortgage Electronic
Registration System, Inc. (MERS v. Brosnan, 2009 WL 3647125)
• Use the loan documents
Quiet Title / Chain of Title
Unfair Business Practices / Predatory Lending

• Theory: catch-all claim tied to other allegations of “wrongdoing” or


statutory violations

• Remedy: varies by jurisdiction

• Issues:
• Laws are usually very flexible, so outright legal challenge is difficult
• Can be used to pursue class actions, but generally not viable in context of
“predatory lending” (too many unique facts)
• As a piggyback claim, however, it is vulnerable to defeat through challenges to
predicate claims (e.g., TILA violation or negligence)
• Address merits of all other claims and provide details as to how the loan
functioned
Takeaway:
While these complaints are often carbon copies,
the responses to them cannot be. Fully understand
the underlying loan transaction, and the defense
will make itself clear.
Thank you