You are on page 1of 15

Defending Your Company Against

Individual Cases
Common Claims and Response Strategies
Part 1

Sunny S. Huo
Severson & Werson

MBA Legal Issues Conference

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

• 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

• 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
• RESPA – fee overcharge, YSP, failure to respond to QWR (misuse)
• Fraud – misrep re loan terms or ability to maintain loan

• 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

• 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
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
“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
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