Wednesday, April 11, 2012

Recent Decisions in the First Circuit Regarding Bankruptcy, February 2012 Cases, Part 3 of 3.

Contract involving government funds must be in writing to be enforceable:

2012 Bankr. LEXIS 654 (Bankr. D.P.R. 2/1/12)( Enrique S. Lamoutte, United States Bankruptcy Judge).
PROCEDURAL POSTURE: This case was before the court upon the motion for partial summary judgment filed by defendant, the State Insurance Fund Corporation (SIF), an instrumentality of the government of Puerto Rico, and the opposition thereto by plaintiff debtor. The SIF prayed for the dismissal of the first, second, third, and forth causes of action on the ground that debtor requested damages for contractual breaches of obligations which were not in writing.
OVERVIEW: The first, second, third, and fourth cause of action prayed for direct and indirect damages resulting from contractual breaches of a medical services contract on the part of the SIF and for dolus in inducing debtor to enter into the contract under false pretenses. As a general rule, the Commonwealth of Puerto Rico was considered as a private contractor when the effect and application of contractual provisions was considered. However, when public funds were involved, there were stricter requirements involved in contracting with instrumentalities of the government of Puerto Rico in order to protect the public interest of the People of Puerto Rico. One of the formal requirements was that the contract be in writing. The requirement that the contract be in writing was essential in order that the obligations contracted be effective. The contract between the parties involved an instrumentality of the government of Puerto Rico and the payment for the services rendered involved public funds. Therefore, the enforceable provisions in the contract had to be in writing. Obligations not reduced to writing were not enforceable against the government instrumentality.
OUTCOME: The court granted the motion to the extent that the only damages that could be claimed and established were for breaches to the written provisions in the contract. The court declined to dismiss

Borrower had no standing or success in challenging assignment between mortgagees:

O'BRIEN v. WELLS FARGO, N.A., 2012 U.S. Dist. LEXIS 15062 (D. Mass 2/8/12)(Richard G. Stearns, District Judge).
BACKGORUND: These cases were consolidated for the limited purpose of considering defendants' consolidated motion to dismiss for lack of standing. Defendants in both cases also filed motions to dismiss for failure to state a claim upon which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6).
These two actions reflect a nearly identical set of facts. Both cases arise from the allegedly invalid assignment of a mortgage from defendant Sand Canyon Corporation (Sand Canyon) to Wells Fargo Bank, N.A.  Plaintiffs contend that because the assignments of their mortgages were invalid, the foreclosures by Wells Fargo were invalid as well. Plaintiffs ask the court, inter alia, to enjoin Wells Fargo from proceeding with any eviction action (Count I); to quiet title by declaring them the "sole owners" of the properties (Count II); and to grant appropriate relief for Wells Fargo as Trustee's breach of the duty of good faith and reasonable diligence (Count III).

In making this determination, this court joins the company of numerous other sessions in this district that have decided the same issue. The same near uniformity of opinion can be found in the decisions of extraterritorial courts as well.  [*17] See Bridge v. Aames Capital Corp., 2010 U.S. Dist. LEXIS 103154, 2010 WL 3834059, at *3 (N. D. Ohio Sept. 29, 2010) (noting that "[c]ourts have routinely found that a debtor may not challenge an assignment between an assignor and assignee," and citing the following cases from other Circuits for the same proposition: Livonia Prop. Holdings v. Farmington Road Holdings, 717 F. Supp. 2d 724, 735-736 (E. D. Mich. 2010); Ifert v. Miller, 138 B.R. 159, 166 n.13 (Bankr. E. D. Pa. 1992); In re Cook, 457 F.3d 561, 567 (6th Cir. 2006); Liu v. T&H Mach., Inc., 191 F.3d 790, 797-798 (7th Cir. 1999); Blackford v. Westchester Fire Ins. Co., 101 F. 90, 91 (8th Cir. 1900)). The major treatise on this topic also agrees. See Richard A. Lord, 29 Williston on Contracts § 74:50 (4th ed. 2010) ("[T]he debtor has no legal defense [based on invalidity of the assignment] . . . for it cannot be assumed that the assignee is desirous of avoiding the assignment."). But see Rosa v. Mortg. Elec. Registration Sys., Inc.,     F. Supp. 2d    , 2011 U.S. Dist. LEXIS 110151, 2011 WL 5223349, at *9 n.5 (D. Mass. Sept. 27, 2011) (Saris, J.) ("The Defendants have also raised the question of the Plaintiffs' standing to challenge the validity of the assignment at issue here. Under Massachusetts  [*18] law, '[a]ny effort to foreclose by a party lacking 'jurisdiction and authority' to carry out a foreclosure . . . is void.' [Ibanez,] 458 Mass. [at] 647 (2011). The Plaintiffs appear to have standing under this principle, because the allegations, if proven, would render the foreclosure sale void, under Massachusetts law.") The Rosa decision is, at best as I can determine, an outlier on this issue.

Plaintiffs insist, however, that the decision of the Supreme Judicial Court in Ibanez is to the contrary. In Ibanez, the Court observed that [o]ne of the terms of the power of sale that must be strictly adhered to is the restriction on who is entitled to foreclose. The "statutory power of sale" can be exercised by "the mortgagee or his executors, administrators, successors or assigns." [Mass. Gen. Laws ch.] 183, § 21. Under [Mass. Gen. Laws ch.] 244, § 14, "[t]he mortgagee or person having his estate in the land mortgaged, or a person authorized by the power of sale, or the attorney duly authorized by a writing under seal, or the legal guardian or conservator of such mortgagee or person acting in the name of such mortgagee or person" is empowered to exercise the statutory power of sale. Any effort to foreclose by a party lacking "jurisdiction and authority" to carry out a foreclosure under these statutes is void. Chace v. Morse, 189 Mass. 559, 561, 76 N.E. 142 (1905), citing Moore v. Dick, 187 Mass. 207, 211, 72 N.E. 967 (1905). See Davenport v. HSBC Bank USA, 275 Mich. App. 344, 347-348, 739 N.W.2d 383 (2007) (attempt to foreclose by party that had not yet been assigned mortgage results in "structural defect that goes to the very heart of defendant's ability to foreclose by advertisement," and renders foreclosure sale void).
Ibanez, 458 Mass. at 647. 13 Plaintiffs argue that because the assignments were defective, the foreclosures were void from the beginning "and may not be enforced." See RP Mach. Enters., Inc. v. UPS Capital Bus. Credit, 2007 U.S. Dist. LEXIS 63823, 2007 WL 2475871, at *4 (D. Mass. Aug. 29, 2007), quoting Massachusetts Mun. Wholesale Elec. Co. v. Town of Danvers, 411 Mass. 39, 54, 577 N.E.2d 283 (1991) ("It is well-established under Massachusetts law that a 'contract which is void ab initio, or void from the beginning, may not be enforced.'").

In Peterson, Judge Zobel distinguished Ibanez on facts that are very similar to those here. Judge Zobel noted that in Ibanez, it was the banks that sought a declaratory judgment acknowledging that they held clear title to the two properties on which they had foreclosed. "Importantly, in Ibanez, the land court was specifically tasked with evaluating the sufficiency of the assignment process - the banks, as foreclosing parties and actual parties to the mortgage assignments had standing to seek court review of the validity of the assignment process. I do not read Ibanez to provide an independent basis for mortgagors to collaterally contest previously executed mortgage assignments to which they are not a party and that do not grant them any interests or rights." 2011 U.S. Dist. LEXIS 123216, 2011 WL 5075613, at *3-4.

Operating from this premise, plaintiffs maintain that they are able to circumvent the standing barrier to a challenge of the assignments. The logic is flawed. Even assuming that plaintiffs have standing, and further assuming that the assignments were invalid (rendering the foreclosures void), plaintiffs would still be unable to maintain a quiet title action because the underlying debts would remain in force. Construing the assignments as invalid, and the foreclosures as void, would have an impact only on the relationship between the parties to the assignment contract — Sand Canyon and Wells Fargo. Plaintiffs' proposed remedy would simply return Sand Canyon and Wells Fargo to the position each was in prior to the act of assignment.  The remedy would thus have no effect on plaintiffs as defaulting mortgagors. The likely outcome would be the issuance of confirmatory assignments by Sand Canyon, and, if necessary, the re-foreclosure (and re-purchase) of the properties by Wells Fargo.  See Kiah, 2010 U.S. Dist. LEXIS 121252, 2011 WL 841282, at *7 ("To the extent the assignment is defective, Ibanez would require, at most, that a confirmatory assignment be executed and recorded.").
For the foregoing reasons, defendants' motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1) is ALLOWED. The Clerk will remand plaintiffs' actions to the state court in which they were initially filed and close the federal cases.  If the court determines that it has no jurisdiction over a removed case, it has no power to enter a dismissal with prejudice. Mills v. Harmon Law Offices, 344 F.3d 42, 45 (1st Cir. 2003). The only proper recourse is a remand to the state court. Hudson Sav. Bank v. Austin, 479 F.3d 102, 108-109 (1st Cir. 2007).

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