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, -vMORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., FIRST MAGNUS FINANCIAL CORPORATION, and AURORA BANK, FSB, et al., Defendants. FIRST AMENDED COMPLAINT Plaintiff EASTWINDS PARTNERSHIP files its First Amended Complaint against the defendant MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC. (“Defendant MERS”), defendant FIRST MAGNUS FINANCIAL CORPORATION (“Defendant FIRST MAGNUS”) and intervenor, AURORA BANK, FSB (“AURORA”) and alleges: INTRODUCTION 1. Since the founding of the American republic, each county in the United States has
maintained records of who owns the legal land within that county.1 Most states track changes in ownerships in land, including mortgages and deeds of trusts, by maintaining records indexed through the names of grantors and grantees.2 These grantor-grantee indexes allow individuals and businesses contemplating the purchase or financing of land to investigate – or hire a title insurer to investigate – whether a seller or mortgagor actually owns the land being offered for sale or for mortgage.
See 1 JOYCE PALOMAR, PATTON AND PALOMAR ON LAND TITLES §4 (3d ed. 2003). See 14 RICHARD R. POWELL, POWELL ON REAL PROPERTY §82.03[B] (Michael Allen Wolf ed., 2011)
A public, enduring, authoritative, and transparent record of all land ownership
provides vital information that has proven indispensable in facilitating mortgage finance. 3. For centuries, Floridian mortgage lenders eagerly recorded their mortgages and
any assignments of their mortgages with county recorders because state land title laws created incentives for recording and disincentives for not recording.3 4. For example, in Florida, the failure to record an assignment of mortgage, as with
the failure to record a deed or mortgage, renders them invalid as against subsequent purchasers or mortgagees for value and without notice.4 To clarify this legal principle, the 2012 Senate is amending the Florida Statutes.5 5. Florida law also provides that no conveyance, transfer, or mortgage of real
property, or of any interest therein, is good and effectual in law or equity against subsequent purchasers of the real property for a valuable consideration and without notice, unless the interest is recorded according to law.6 6. However, in the mid-1990s, some mortgage bankers decided they no longer
wanted to pay recording fees for assigning mortgages.7 To avoid the hassle and expense of paying county recording fees, these mortgage bankers formed a plan to create a single shell company that would pretend to own all the mortgages in the country.8 Even though not a single state legislature or appellate court had authorized this change in real property recording, investors interested in subprime and exotic mortgage-backed securities were still willing to buy mortgages recorded through this new system.9
See POWELL, supra note 8, § 82.01. See Manufacturers’ Trust Co. v. Peoples’ Holding Co., 110 Fla. 451 (1933); F.S. §701.02 (1) (2011). 5 See Senate Bill 1672 (2012). 6 See McCahil v. Travis Co., 45 So.2d 191 (Fla. 1950); F.S. §695.01(1) (2011). 7 See Phyllis K. Slesinger & Daniel McLaughlin, Mortgage Electronic Registration System, 31 IDAHO L. REV. 805, 812-12 (1995). 8 See R.K. Arnold, Viewpoint, INSIDE MERS, Jan./Feb. 2004, at 1 (“[O]ur mission is to capture every mortgage loan in the country.”).
This new system identified as the Mortgage Electronic Registration System
(“MERS System”) was created in 1993 with two primary purposes. The first purpose was to avoid the payment of county recording fees and the second purpose was to assist in the facilitation of structured finance. 8. Most residential mortgages in Florida are financed through securitization.
Securitization is a financing method involving the issuance of securities against a dedicated cash flow stream, such as mortgage payments, that are isolated from other creditors’ claims. 9. Securitization is accomplished when a financial institution assembles a pool of
mortgage loans. The loans were originated by either an affiliate of the financial institution or purchased from an unaffiliated third-party originator. The pool of loans is sold by the financial institution to a special-purpose subsidiary that has no other assets or liabilities other than the pool of loans. Finally, the special-purpose subsidiary sells the loans to a passive, specially created single-purpose vehicle, typically a Real Estate Investment Conduit (“REMIC”) Trust10 that issues Mortgage Backed Securities (“MBS”) for sale to investors. 10. If mortgage documents were never correctly passed through to the trust when it
was established, then the trust may not own the underlying mortgages it purports to own. The legal maneuver of MERS recording assignments of mortgages purportedly to pass the asset to the REMIC trust could violate the REMIC status since the trust would be acquiring assets long after the 90 day period has expired. Such a violation in turn could trigger a sizable tax burden for investors.11
Most mortgage trusts were set up as REMIC Trusts. Under the Internal Revenue Code, REMIC confers a special tax status in which the cash flows to the trust are not taxed. Investors in the trust pay taxes. The tax exempt nature is important. If the trusts were in fact to be taxed, the taxes would distort the yields required by investors, the trustee and servicer would be subject to personal liability and investors would have a claim for rescission of the mortgage backed security, meaning that the securitization would be unwound, with investors receiving back their original payments at par (possibly with interest at the judgment rate). If this happened wide scale, there is not enough capital in the financial system to pay for the rescission claims for the claims would be in the trillions of dollars. To qualify as a REMIC under the IRS code, the trust (1) must be passive and (2) cannot acquire any new assets 90 days following the trust’s creation. 11 During the period of time 01/01/2012 through 01/20/2012 MERS has recorded assignments of mortgages that purport to pass assets to REMIC trusts long after the 90 day period has expired. In April 2011, the IRS launched a review of the tax-exempt status of REMICs in response to mounting evidence that banks violated tax requirements by mishandling the transfer of mortgages to REMICs.
Every loan, irrespective of whether it is securitized, has a servicer. Sometimes
that servicer is a first-party servicer, such as when a portfolio lender services its own loans. Other times it is a third-party servicer that services loans that it does not own. 12. The activities of the third-party servicers and the legal rights of the certificate
holders are set forth in a document called a “Pooling and Servicing Agreement”. Any legal issues that arise under the Pooling and Servicing Agreement are interpreted by the laws of the state in which the REMIC trust operates. 13. The mortgage contract consists of two documents, a promissory note (the “note”
or the “mortgage loan”) and a security instrument (the “mortgage”). The note is the IOU that contains the borrowers’ promise to repay the money loaned. The mortgage is the document that connects the IOU with the real property. The mortgage gives the lender an economic ownership interest in the real property, in that if the borrower does not pay according to the terms of the note, then the lender can foreclose and have the property sold according to the terms of the mortgage and applicable state and federal law. 14. In Florida, the transfer of a note involves a “negotiation”12 and when a note
secured by a mortgage is negotiated, equitable transfer of the mortgage occurs without any formal execution of the assignment of the mortgage.13 JURISDICTION 15. The Plaintiff brings this action pursuant to Florida Statutes §65.011 and Florida
Statutes §86.011. 16. The Defendant MERS is a Delaware corporation with its principal place of
business located in Vienna Virginia.
See F.S. §673.2011(1) The term “negotiation” means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder. (2011). 13 See Johns v. Gillian, 134 Fla. 575, 184 So. 140 (1938).
The Intervenor came into existence on April 1, 2009 and is the progeny of
Lehman Brothers Bank, FSB. Lehman Brothers Bank, FSB was a wholly owned subsidiary of Lehman Brothers Financial Holdings, Inc. a defunct investment bank. 18. The Intervenor purportedly “owns and holds the note” as master servicer for the
real party in interest, the owner of the mortgage. ALLEGATIONS 19. On August 2, 2006 the Defendant MERS and non-party First Magnus Financial
Corporation recorded a mortgage dated July 27, 2006 in Official Records Book 206080 at Page 0902 of the public records of Palm Beach County. 20. The mortgage identifies First Magnus Financial Corporation as “Lender” and the
Defendant MERS as “nominee” for Lender and Lender’s successors and assigns. The Defendant MERS is also the “mortgagee” under the mortgage. Accordingly, MERS is both “agent” and “principal” and the fact that MERS cannot be both “nominee” and “mortgagee” with respect to the same right is axiomatic.14 21. The Plaintiff is a subsequent purchaser of the fee for valuable consideration
without knowledge of any unrecorded interests in the fee or the subject mortgage. 22. Prior to the purchase of the fee the Plaintiff, as nominee for the Mortgagor,
remitted a request for an estoppel letter to the Defendant MERS and First Magnus Financial Corporation. 23. The Plaintiff also requested a date, time and place to inspect and photocopy the
original Mortgage Note. 24. The Defendant MERS and First Magnus Financial Corporation ignored the
See RESTATEMENT (THIRD) OF AGENCY §§1.01 - .02 (2006).
Upon information and belief, the mortgage loan that is the subject matter of this
litigation was negotiated by First Magnus Financial Corporation with the intent of transferring ownership of the note and mortgage to a REMIC Trust. 26. Upon information and belief, the REMIC Trust operates under the laws of the
State of New York and accordingly, New York substantive law governs and a Pooling and Servicing Agreement defines the rights of security holders and the rights and obligations of the trustee and servicers. 27. Upon information and belief and pursuant to the REMIC Trust documents, the
mortgage and note must have been transferred to the REMIC trust prior to the 3rd month beginning after the start up day of the REMIC Trust. 28. Upon information and belief the REMIC Trust never had possession of the note,
has no rights to payment and no rights to payment under the written language of the mortgage. 29. Upon information and belief the Intervenor AURORA as the REMIC Trust’s
servicer and agent has no rights to defend this action as no power of attorney exists in the official records of Palm Beach County, no power of attorney has been filed in this action, and no assignment has been recorded in the official records of Palm Beach County, Florida. 30. In Florida, the failure to record an assignment of mortgage, as with failure to
record a deed or mortgage, renders them invalid as against subsequent purchasers or mortgagees for value and without notice.15 31. Florida Statutes §695.01 (1) provides that no conveyance, transfer, or mortgage of
real property, or of any interest therein, shall be good and effectual in law or equity against
See Manufacturers’ Trust Co. v. People’s Holding Co., 110 Fla. 451 (1933).
creditors or subsequent purchasers for a valuable consideration and without notice, unless same be recorded according to law (2011).16 32. Florida Statutes §701.02 (1) provides that an assignment of mortgage upon real
property or of any interest therein, is not good or effectual in law or equity, against creditors or subsequent purchasers, for a valuable consideration, and without notice, unless same is recorded according to law (2011).17 33. If the defendant MERS is merely an agent of the actual Lender, the source of its
authority to list itself as a Mortgagee under state land title recording acts is unclear. The Florida statutes do not have provisions authorizing financial institutions to use the name of a shell company, nominee, or some other form of an agent instead of the actual debtor to the creditor. After all, the point of these statutes is to provide a transparent, reliable record of actual – as opposed to nominal – land ownership. 34. Conversely, if the defendant MERS is actually a mortgagee, then while MERS
may have authority to record mortgages in its own name, both MERS and financial intuitions investing in MERS-recorded mortgage run afoul of long-standing precedent on the inseparability of promissory notes and mortgages. 35. The United States Supreme Court announced the classic statement of this rule:
“The note and mortgage are inseparable . . . an assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.”18 36. Upon information and belief the note and mortgage have been separated in
furtherance of a scheme to avoid the payment of county recording fees and to purposefully conceal the true owner of the note and mortgage.
See McCahill v. Travis Co., 45 So.2d 191 (Fla. 1950). This section also applies to assignments of mortgages resulting from transfers of all or any part of the debt, note or notes secured by mortgage. F.S. 701.02(2) (2011).
Carpenter v. Longan, 83 U.S. (16 Wall.) 271, 274 (1872)
COUNT I DECLARATORY JUDGMENT (F.S. § 48.23 (2011)) 37. through 36. 38. 39. This is an action for declaratory judgment and supplemental relief. Florida Statues §48.23(1)(d) provides that the recording of a lis pendens The Plaintiff repeats and re-alleges the allegations contained in paragraphs 1
constitutes a bar to the enforcement against the property described in the notice of all interests and liens unrecorded at the time of recording of the notice unless the holder of any such unrecorded interest or lien intervenes in such proceedings within 30 days after the recording of the notice.19 40. The Plaintiff contends that the mortgage instrument recorded in the name of a
nominee does not provide sufficient notice of the existence of a lien; does not provide sufficient notice of the actual economic ownership of interests in the real property; and that an unrecorded assignment of a mortgage is such an interest contemplated under Florida Statutes §48.23(1)(d) such that the recording of a notice of lis pendens constitutes a bar to the enforcement of such interest unless the holder intervenes within 30 days. 41. The Intervenor AURORA contends that that the mortgage instrument recorded in
the name of a nominee does provide sufficient notice of the existence of a lien; does provide sufficient notice of the actual economic ownership of interests in the real property; and that an unrecorded assignment of a mortgage is not such an interest contemplated under Florida Statutes §48.23(1)(d) such that the recording of a notice of lis pendens does not constitute a bar to the enforcement of such interest unless the holder intervenes within 30 days. 42.
Plaintiff is in doubt about plaintiff’s rights under the statute.
F.S. §48.23(1)(d) (2011); Khilena Adhin, Tenita Isaacs, et al., v. First Horizon Home Loans, et al, (Fla. 5th DCA 2010).
WHEREFORE, plaintiff demands a judgment declaring the rights of the parties and for COUNT II DECLARATORY JUDGMENT (F.S. § 695.01(1) (2011)) 43. through 36. 44. 45. This is an action for declaratory judgment and supplemental relief. Florida Statutes §695.01(1) provides that no conveyance, transfer, or mortgage of The Plaintiff repeats and re-alleges the allegations contained in paragraphs 1
real property, or any interest therein shall be good and effectual in law or equity against creditors or subsequent purchasers for a valuable consideration and without notice unless the same be recorded according to law. 46. The Plaintiff contends that an unrecorded assignment of mortgage is an economic
interest in real property contemplated by Florida Statutes §695.01(1) and that the unrecorded interest is not good and effectual in law or equity against the interest of the Plaintiff. 47. The Intervenor AURORA contends that that an unrecorded assignment of
mortgage is not an economic interest in real property contemplated by Florida Statutes §695.01(1) and that the interest is good and effectual in law or equity against the interests of the Plaintiff. 48. Plaintiff is in doubt about plaintiff’s rights under the statute.
WHEREFORE, plaintiff demands a judgment declaring the rights of the parties and for supplemental relief. COUNT III DECLARATORY JUDGMENT (F.S. 701.02(1) 2011) 49. through 36. 9 The Plaintiff repeats and re-alleges the allegations contained in paragraphs 1
This is an action for declaratory judgment and supplemental relief. Florida Statutes §701.02(1) provides that an assignment of mortgage upon real
property or of any interest therein, is not good or effectual in law or equity, against creditors or subsequent purchasers, for a valuable consideration, and without notice, unless the assignment is recorded according to law. 52. The Plaintiff contends that Florida Statutes §701.02(1) applies to subsequent
purchasers of the real property by virtue of the Supreme Court of Florida’s holding in Manufacturers’ Trust Co. v. People’s Holding Co., 110 Fla. 451 (1933); the plain meaning of the statute and Senate Bill 1672 seeking to amend F.S. §§701.02(1) – (6) and F.S. §702.01. 53. The Intervenor AURORA contends that Florida Statutes §701.02(1) only applies
to estop an earlier assignee/purchaser of the same mortgage and not subsequent creditors or purchasers of the real property by virtue of the Second District Court of Appeal’s holding in JP Morgan Chase v. New Millennial, LC, 6 So.3d 681 (2009). 54. Plaintiff is in doubt about plaintiff’s rights under the statute.
WHEREFORE, plaintiff demands a judgment declaring the rights of the parties and for supplemental relief. COUNT IV QUIET TITLE 55. through 36. 56. Florida. This is an action to quiet title to real property located in Palm Beach County, The Plaintiff repeats and re-alleges the allegations contained in paragraphs 1
The Plaintiff owns the following described real property in Palm Beach County,
Florida: Lot 10 Plat Thereof of Eastwinds Landing, according to the Plat thereof, as recorded in Plat Book 62, Page 94 Public Records of Palm Beach County, Florida. 58. 59. The Intervenor AURORA has no right to payment under the note and mortgage. The Intervenor AURORA cannot enforce the mortgage against the rights of the
Plaintiff in the real property. 60. The Intervenor AURORA cannot direct the Defendant MERS to enforce the
mortgage against the rights of the Plaintiff in the real property. 61. A “cloud on title” is a defect or potential defect in the owner’s title to a
piece of land arising from some claim or encumbrance, such as a lien, an easement, or court order. Black’s Law Dictionary 233 (9th Ed. 2010). 62. The Intervenor claims an interest in the property adverse to the Plaintiff by virtue
of an unrecorded interest in the mortgage. 63. The claim of the Intervenor is without any right whatsoever because the interest in
the mortgage was not recorded, was intentionally concealed and is no good in equity in law Plaintiff, a subsequent purchaser of the real property for a valuable consideration without notice of the unrecorded interest in the mortgage. 64. The mortgage, not being enforceable by the Intervenor AURORA or the
Defendant MERS and no assignment of mortgage appearing in the public records, the mortgage is acting as a cloud on title. WHEREFORE the Plaintiff prays that the Court remove the cloud from the title to the land and forever quiet the title in the Plaintiff and those claiming under him since the
commencement of this action, adjudging the Plaintiff to have a good fee simple to said land free from the unrecorded interest of the Defendants and the Intervenor AURORA.