September 9, 2013
by Nikolaus S. Schuttauf
Brennan, Recupero, Cascione, Scungio & McAllister, LLP – USFN Member (Rhode Island)
In an opinion issued September 3, 2013, the U.S. District Court for the District of Rhode Island ordered the stay that had been preventing 825 foreclosures from proceeding be dissolved. [In re Mortgage Foreclosure Cases Misc., 2013 U.S. Dist. LEXIS 125474 (D. R.I. Sept. 3, 2013)]. The order was a victory for members of MERS, which included many national banks, mortgage companies, and mortgage servicers (MERS Members). The MERS Members had vehemently opposed the stay — filing 22 motions to dismiss since June 2013.
In its recent decision, the district court found that the borrowers had no likelihood of success on their claims based upon Rhode Island law. The borrowers had asserted that the assignments of their mortgages are invalid for three primary reasons: (1) the disconnect between the holder of the mortgage and the holder of the note rendered the mortgage invalid; (2) MERS’s “robo-signing” rendered the assignments of the mortgage invalid; and (3) the MERS practice of assigning mortgages was invalid under Rhode Island law. The district court noted that the Rhode Island Supreme Court had already considered these arguments in Bucci v. Lehman Brothers Bank, FSB, 68 A.3d 1069 (R.I. 2013), and that the court had decisively ruled in favor of the MERS Members on each of the three claims. Because the borrowers had no likelihood of success on these claims, Judge McConnell ordered the stay dissolved.
The U.S. Court of Appeals for the First Circuit had issued a decision scolding the U.S. District Court for the District of Rhode Island for issuing a stay that prevented MERS Members from excercising their nonjudicial rights to foreclose upon a mortgage in default in Rhode Island. [Fryzel v. Mortgage Elec. Registration Sys., 2013 U.S. App. LEXIS 12068, 2013 WL 2896794 (1st Cir. R.I. June 14, 2013)]. That decision was a victory for the lenders, who appealed to the First Circuit after the Rhode Island District Court refused to lift the stay.
In the wake of the burst in the U.S. housing bubble, numerous Rhode Island borrowers who defaulted on their mortgage obligations brought suit in the district court to prevent foreclosure or eviction. These borrowers maintain that the assignments of their mortgages are invalid, leaving the assignees without the right to foreclose. Many of the mortgages at issue were assigned by MERS to various loan servicers and lending institutions. The lenders argued that Rhode Island law provides that homeowners lack standing to challenge the validity of mortgage assignments and the effect those assignments have on the underlying obligation.
When a motion to dismiss the first of these cases was heard by a magistrate in June 2011, the magistrate recommended that the case be dismissed, agreeing with the lenders that Rhode Island law clearly provided that borrowers have no standing to contest the validity of the assignment of their mortgage. On March 29, 2012, the district court ignored the magistrate’s recommendation and issued a stay preventing the lenders from exercising their rights to nonjudicial foreclosure and requiring the lenders to enter into mediation with the borrowers. Since the stay was issued, the number of cases filed and affected by it has swelled to almost 800. After the district court denied the lenders’ attempt to lift the stay, the lenders appealed to the First Circuit.
In an opinion authored by retired U.S. Supreme Court Justice David Souter, the First Circuit found that the stay was effectively a preliminary injunction, noting the “nature of an order is the product of its operative terms and effect, not its vocabulary and label.” The stay forbids the mortgagees from exercising their rights to nonjudicial foreclosure, and threatens court-imposed sanctions for any lender that violates the stay. The First Circuit concluded that the stay’s “character as an injunction is unmistakable.”
Because the district court took the position that the stay was merely administrative and not a preliminary injunction, the district court had failed to comply with Rule 65 Federal Rules of Civil Procedure. Rule 65 requires that the lenders receive “notice” of the preliminary injunction before it issued, including a hearing “followed by findings that the party to be favored has a substantial likelihood of success in the pending action, would otherwise suffer irreparable harm and can claim the greater hardship in the absence of an order, which will not disserve the public interest if imposed.”
The First Circuit ordered the district court to conduct a proper preliminary injunction hearing as soon as possible and to make written findings on the hearing, “especially on the critical requirement of the mortgagors’ likelihood of success in challenging foreclosure.” The First Circuit noted that “the injunction has so far had no point except to keep mediation alive while allegedly defaulting borrowers remain in their mortgaged houses.” The First Circuit also admonished the district court for imposing a stay of indefinite time and with no cost limitations. The First Circuit ordered that, in the event the stay remains in effect for any of the cases, the district court impose time and cost restrictions upon the stay.
The District Court heard arguments on the preliminary injunction on July 10, 2013.
While the stay has now been dissolved, the district court expressed the hope that the MERS Members would “continue to forego their right to foreclosure and evict,” noting: “It is in all parties’ and the Court’s best interest to have the parties talk to each other in a meaningful way and to attempt to amicably resolve these matters, without the threat and/or negative consequences of having Plaintiffs’ homes taken away from them due to foreclosure or eviction.”
Whether the MERS Members will ultimately choose to proceed with foreclosures or continue negotiations is unknown at this time. What is certain, however, is that there is now no impediment to the MERS Members proceeding with foreclosures if they so choose.
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