Tale of Two Judges

Foreclosing lenders in Ohio, displeased by the one-to-two-year backlog of foreclosures at the state court level, have increasingly turned to federal district courts located in that state to foreclose on delinquent residential mortgage loans when they believe that diversity jurisdiction requirements can be met. As reported in last Thursday's The New York Times, foreclosures in federal district courts in Ohio by servicers of residential loans that have been securitized recently hit a snag when federal district court judges balked at the failure of servicers to produce documentation that demonstrated that they were the owner and holder of the note and mortgage as of the date the foreclosure complaint was filed. The court's rules require "an affidavit documenting that the named plaintiff is the owner and holder of the note and mortgage," and the courts have interpreted that requirement to mean more than an affidavit, standing alone. They're requiring that the plaintiff produce an assignment of the note and mortgage dated prior to the date of the foreclosure complaint.

It's a matter of establishing diversity jurisdiction. If you can't show that you are a party that suffered some actual injury, you don't satisfy the requirements of Article III of the U.S. Constitution in this respect. This is all set out fairly concisely and dispassionately in an opinion by Judge Kathleen O'Malley. She observes that the plaintiff either hasn't produced an assignment, or has produced an assignment dated after the date of commencement of the foreclosure action. Therefore, she dismissed the foreclosures without prejudice, which permits the refiling of those actions where an assignment to the plaintiff can be obtained.

The opinion that's received most of the press, however, is that of fellow judge Christopher A. Boyko. Judge Boyko appears to believe that the plaintiff's counsel talked down to him, because one of his footnotes is about as scathing as any I've seen since former federal district court judge Joe Kendall dismissed a government counterclaim against a former client of mine more than a decade ago with the pronouncement "A deal's a deal!" 

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Plaintiff’s, “Judge, you just don’t understand how things work,” argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process. Typically, the homeowner who finds himself/herself in financial straits, fails to make the required mortgage payments and faces a foreclosure suit, is not interested in testing state or federal jurisdictional requirements, either pro se or through counsel. Their focus is either, “how do I save my home,” or “if I have to give it up, I’ll simply leave and find somewhere else to live.” In the meantime, the financial institutions or successors/assignees rush to foreclose, obtain a default judgment and then sit on the deed, avoiding responsibility for maintaining the property while reaping the financial benefits of interest running on a judgment. The financial institutions know the law charges the one with title (still the homeowner) with maintaining the property. There is no doubt every decision made by a financial institution in the foreclosure process is driven by money. And the legal work which flows from winning the financial institution’s favor is highly lucrative. There is nothing improper or wrong with financial institutions or law firms making a profit — to the contrary , they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns. Unlike the focus of financial institutions, the federal courts must act as gatekeepers, assuring that only those who meet diversity and standing requirements are allowed to pass through. Counsel for the institutions are not without legal argument to support their position, but their arguments fall woefully short of justifying their premature filings, and utterly fail to satisfy their standing and jurisdictional burdens. The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the Court to stop them at the gate. The Court will illustrate in simple terms its decision: “Fluidity of the market” — “X” dollars, “contractual arrangements between institutions and counsel” — “X” dollars, “purchasing mortgages in bulk and securitizing” — “X” dollars, “rush to file, slow to record after judgment” — “X” dollars, “the jurisdictional integrity of United States District Court” — “Priceless.”

None of the foregoing snark is necessary to support the grounds for the dismissal of the foreclosure actions. It is evidence, however, that you had either a condescending plaintiff's counsel, a hypersensitive judge, or both. It also demonstrates, once again, that "He who sits at the right hand of the Father" is not, in federal district court, Jesus Christ, but the district court judge. That's a lesson I learned early in my legal career (by personal observation of another counsel's misfortune). Talking down to a federal district court judge has got to be as dumb a course of action as one could adopt, if that's, in fact, what occurred.

There's been much back-and-forth over the past few days on various discussion boards about these decisions, especially Judge Boyko's. Some assert that this is evidence of massive documentation deficiencies in the mortgage backed securitization arena. As one commentator alleged in the linked New York Times article, notes may have been "assigned" to more than one loan pool, with no actual written "assignment" ever prepared. Other consumer representatives claim that they've seen instances of what appear to be the mass production of fraudulent assignments, with one claiming that "[w"]e have one woman, with VERY unique name, acting as Notary, officer, and various other positions in six different states for over 20 different companies.  Also, dozens of different 'gestations' of her 'mark' which is a simple initial to her first name." That consumer advocate vows that they will wage a scorched earth policy that challenges every bit of evidence of assignment presented, and that "EVERYTHING a lender and their counsel will now do will be questioned in our answers and NOTHING will be accepted as fact until proven up via hard evidence since so many complaints, pleadings, affidavits, and accountings are boilerplate and produced by OTHERS, not the actual LENDER or their servicer, sub servicer or special servicer!"

You think that these foreclosures are generating any hard feelings?

This is obviously a rear guard action to buy time, or create so much difficulty for foreclosing lenders that they'll adopt the "Sheila Bair Method": wholesale modifications of loans at low rates instead of foreclosure. To me, it's merely delaying the inevitable. Sooner of later, the servicers will get an assignment for each loan, and unless the federal district courts want to get bogged down in trivia, which I predict they won't, the threats will turn out to be hollow. If, on the other hand, foreclosing counsel or any servicers are falsifying assignments by the gross, and defense counsel can prove that in only a couple of cases, then pin your ears back, because judges like Boyko are primed to make the lenders pay, and pay dearly.

This one could get nasty.