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Tennessee: Dismissal of Borrower Litigation Now More Difficult?

Posted By USFN, Friday, August 1, 2014
Updated: Tuesday, October 13, 2015

August 1, 2014


by J. Skipper Ray
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)

The Tennessee Court of Appeals issued an opinion late last year that will make it harder for mortgage lenders/servicers to win dismissal of borrower litigation alleging MERS related irregularities. Although the case, Berry v. Mortgage Electronic Registration Systems, Inc., 2013 Tenn. App. LEXIS 682, 2013 WL 5634472 (Tenn. Ct. App. Oct. 15, 2013), should not affect the ultimate outcome of lawsuits against lenders and servicers, it has given the debtors’ bar boilerplate language that guarantees survival of a motion to dismiss in Tennessee state courts.1 Lenders will still win the lawsuits that they would have won before, but litigation fees and costs incurred by mortgage lenders will be substantially higher.

In Berry, a borrower filed a complaint in Chancery Court to stop the foreclosure of her home. Her complaint alleged that she had attempted to negotiate a loan modification and/or refinancing and that the servicer wrongfully failed to modify/restructure her loan in violation of the Tennessee Consumer Protection Act (TCPA), the Home Affordable Modification Program (HAMP), and the duty of good faith and fair dealing.

The complaint also alleged various fraud claims relating to MERS’s involvement with the loan. Ms. Berry alleged that the lender and servicer had intentionally misrepresented MERS as a beneficiary of the deed of trust; that they had intentionally recorded documents in which employees of companies other than MERS falsely identified themselves as officers of MERS; and that they (MERS and the loan servicer) had engaged in a pattern and practice of fraudulent conduct. According to the court, these allegations implied that the servicer did not have the authority to foreclose due to the falsely identified MERS officers being involved with the transfer of the mortgage and, as a consequence, no legal/beneficial interest was transferred.

The servicer and MERS filed a motion for judgment on the pleadings, which the chancellor granted after hearing. The order stated that “many of the allegations ... [are] overly generalized and non-specific, while in other areas, the Amended Complaint is simply devoid of facts which could entitle Plaintiff to relief.” The Tennessee Court of Appeals, for the most part, agreed with the Chancery Court, but not entirely.

On appeal, the court affirmed the trial court’s ruling as to Ms. Berry’s TCPA, HAMP, and breach of duty of good faith and fair dealing claims. The court also addressed the issue of the alleged breach of the implied covenant of good faith and fair dealing and affirmed the trial court’s ruling on that issue as well. The court, however, reversed the trial court’s dismissal of the fraud claims.

In Tennessee, the plaintiff must demonstrate six elements for a cause of action for fraudulent or intentional misrepresentation. These six elements include: (1) the defendant made a representation of an existing or past fact; (2) the representation was false when made; (3) the representation was in regard to a material fact; (4) the false representation was made knowingly, recklessly, or without belief in its truth; (5) it was reasonable for the plaintiff to have relied on the misrepresented fact; and (6) the misrepresentation resulted in harm to the plaintiff.

The mechanism in place to prevent litigants from merely reciting these six elements in their complaint is Rule 9.02 of the Tennessee Rules of Civil Procedure. Rule 9.02 requires that when alleging fraud, the circumstances constituting the fraud must be stated with particularity. This is a heightened requirement when alleging fraud (as opposed to other causes of action), which is common in many states and that requires specific facts be alleged to support the fraud allegation.

In its decision, the appellate court re-printed the allegations from Ms. Berry’s amended complaint that it considered to be related to the claimed fraud. These allegations are included at the conclusion of this article, labeled Exhibit A.

Surprisingly, the court found that the allegations were “pled with sufficient particularity to survive a motion for judgment on the pleadings.”2 The court pointed to paragraphs six and seven of the amended complaint. According to the court, Ms. Berry alleged that the lender recorded her deed of trust knowing that it contained falsely-represented signatures.3 Regardless of the reasoning, the court of appeals held that her allegations regarding fraud were sufficiently pled.

The court’s ruling is very unfortunate for the mortgage servicing industry. As most who are familiar with the industry will be aware, the allegations from the amended complaint cited by the court are so broad that they could arguably be attributed to any mortgage loan wherein MERS was involved in the process. It’s not that they could be made as to any loan because they are always true, but because of how generic and non-specific they actually are. The allegations weren’t actually claim-specific to her loan, as they were the same old attacks on MERS’s involvement with the mortgage industry in general that have been made at length. Furthermore, neither Ms. Berry’s complaint nor her amended complaint specifically identified the documents that she was alleging had been “robo-signed.” Moreover, the complaint and amended complaint failed to attach any exhibits.

Regardless of whether one shares the opinion that Ms. Berry’s allegations rise to the level of particularity required by Rule 9.02, the fact is that the Tennessee Court of Appeals has ruled specifically that they do. Accordingly, there is direct precedent on the issue for the debtors’ bar to rely upon. In fact, it could arguably be malpractice for a borrower’s attorney to not include the language (or language substantially similar) in a complaint being filed for the purpose of setting aside or stopping a foreclosure of a loan in which MERS was involved.

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July/August e-Update

1 In Tennessee this would be a motion to dismiss pursuant to Rule 12.02 of the Tennessee Rules of Civil Procedure, which would be referred to as a 12(b)(6) motion to dismiss in many other jurisdictions. Even though the Berry case involves a motion for judgment on the pleadings, the logical assumption is that its holding would also allow survival of a motion to dismiss, since, in Tennessee, it is more difficult for a defendant to obtain dismissal via a 12.02 [12(b)(6)] motion than by a motion for judgment on the pleadings.
2 Again, if the allegations, according to the court of appeals, are sufficient to survive a motion for judgment on the pleadings, it is a logical assumption that they would survive a motion to dismiss. In Tennessee, a defendant has a higher burden to meet to obtain dismissal via a motion to dismiss, as opposed to prevailing on a motion for judgment on the pleadings. In other words, if the court finds that allegations are of such sufficiency that they will survive a motion for judgment on the pleadings, it is difficult to envision a scenario where the same pleadings would be dismissed via a motion to dismiss.
3 The court’s reference here is confusing. The only specific document referenced in paragraphs six and seven of the amended complaint was in fact a deed of trust. However, it apparently worked in Ms. Berry’s favor to not attach any exhibits to her complaint or amended complaint. A review of the actual deed of trust recorded in the Shelby County property records has revealed that it only contained signatures of Ms. Berry and the notary who acknowledged her signature. It did not contain any signatures of individuals purporting to be MERS employees or officers.

Exhibit A

2. Defendants . . . claim to be holders of the deed of trust on this property and have started foreclosure proceedings against the Plaintiff [].

3. MERS acted as nominee on behalf of Mortgage Lenders Network USA.

4. Defendants through the actions of MERS purported to hold title to the property.

5. Defendants intentionally recorded, and continue to record documents wherein employees of companies other than MERS falsely identify themselves as being “officers and/or vice presidents” of MERS, or in some instances, of the Federal Deposit Insurance Corporation or other entity which has no knowledge of the actions of these supposed authorized signatories or certifying officers. These so-called certifying “officers and/or vice presidents” have no employment relationship with MERS and are not, in fact, officers or vice presidents of MERS.

6. The designation of MERS as a beneficiary or nominee of the lender on a deed of trust was an intentional and knowing false designation by MERS in numerous ways, namely: 1) neither MERS nor the “lender” so designated was the true lender; 2) MERS was not the nominee of the true lender of the funds for which the promissory note was executed; 3) MERS did not collect or distribute payments, pay escrow items, hold client funds on deposit, pay insurance for clients or borrowers, or pay taxes; 4) MERS had no right to collect money on the note or to receive any proceeds or value from any foreclosure.

7. Plaintiff further alleges that Defendants engaged in a pattern and practice of fraudulent conduct including but not limited to: (a) underwriting fraudulent mortgages; (b) shuffling mortgages and deeds of trust through the mortgage securitization chain without following proper legal procedures like the simple act of passing along paperwork; (c) concealing or doctoring basic facts when securitizing the mortgages and selling them to investors, large lenders and their partners on Wall Street causing them to lose billions of dollars in losses by being forced to buy back faulty mortgages, some of which have already defaulted; (d) misleading investors who purchased mortgage-linked securities with the promise that the underlying mortgages conformed to basic underwriting standards, and that proper procedures were followed in the chain of securitization and a tax-exempt status.

8. Plaintiff submits that robo signers are illegal because fraud cannot be the basis of clear title, and foreclosures following robo signed deeds of trust purporting to transfer the mortgage and note are void as a matter of law. Clear title may not arise from a fraud (including a bona fide purchaser for value). In the case of a fraudulent transaction the law is well settled. It is well established that an instrument wholly void, such as an undelivered deed, a forged instrument, or a deed in blank, cannot serve as the basis for good title, even under the equitable doctrine of bona fide purchase. Consequently, the fact that purchaser acted in good faith in dealing with persons who apparently held legal title, is not in itself sufficient basis for relief. As a general rule that courts have power to vacate a foreclosure sale where there has been fraud in the procurement of the foreclosure decree or where the sale has been improperly, unfairly or unlawfully conducted, or is tainted by fraud, or where there has been such a mistake that to allow it to stand would be inequitable to purchaser and parties.

9. Plaintiff submits that robo signed documents are void — without any legal effect.

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