This month we consider whether a bank is vicariously liable to a borrower for the violation of the Real Estate Settlement Procedures Act of 1974 (RESPA), Pub.L. No. 93-533, 88 Stat. 1724, by a loan servicer; whether a mortgage signed by the mortgagor but that did not name the mortgagor in the text is effective against the mortgagor; and whether, after the expiration of Illinois statute of limitations, a secured creditor may exercise its remedial rights in the collateral if the underlying debt has not been satisfied.
SPECIAL NOTE: In my March 2019 FLASHPOINTS, I directed attention to Moore v. Wells Fargo Bank, 908 F.3d 1050 (7th Cir. 2018). A decision in the Eleventh Circuit one month later, Ranger v. Wells Fargo Bank N.A., No. 17-11131, 2018 WL 6523213 (11th Cir. 2018), applied the same legal principles but reached a different result on the matter of damages.
Bank Is Not Vicariously Liable for RESPA Violation by Loan Servicer
In Christiana Trust v. Riddle, 911 F.3d 799 (5th Cir. 2018), the issue was whether Bank of America was liable under RESPA for the failure of Ocwen Loan Servicing, LLC, to comply with the Act. The court ruled that it wasn’t.
Mary Sue Riddle procured a $127,000 home equity loan from Bank of America in December 2006. She granted the bank a deed of trust on her property in San Angelo, Texas.
The bank sent her a letter in September 2012 stating that Ocwen was appointed as the loan servicer. In January 2015, the bank assigned the loan and the related security instrument to Christiana Trust. And in April 2015, Ocwen advised Riddle that BSI was assuming the rule of loan servicer.
Riddle’s loan became delinquent and Christiana filed a foreclosure complaint in October 2016. Riddle responded to the foreclosure with an answer and counterclaim against Christiana and a third-party complaint against Ocwen, BSI, and Bank of America. When challenged by a Bank of America motion to dismiss, Riddle filed an amended complaint asserting violations of RESPA.
Riddle argued that Bank of America was vicariously liable for RESPA violations committed by Ocwen because Ocwen was Bank of America’s servicing agent. The court rejected that argument.
First, the appeals court said that in order for there to be vicarious liability on the part of the bank there had to be a principal-agent relationship between the bank and either Ocwen or BSI. But no agency relationship had been pleaded in Riddle’s amended complaint.
Second, in a decision that the court characterized as one of first impression in the circuits, and indeed it was the first circuit to consider the issue, it said there was no statutory basis for imposing vicarious liability on Bank of America. Its exact language was as follows: “The text of this statute plainly and unambiguously shields Bank of America from any liability created by the alleged RESPA violations of its loan servicer.” 911 F.3d at 806. Specifically, the court noted that 12 U.S.C. §2605(f) rejects traditional concepts of vicarious liability and makes each party responsible for their failures to comply. The statute provides that
[a] servicer of a federally related mortgage shall not
* * *
. . . fail to comply with any other obligation found by the Bureau of Consumer Financial Protection . . . to be appropriate to carry out the consumer protection purposes of this chapter. 12 U.S.C. §2605(k)(1).
What’s the point? This initial decision of a federal court of appeals seems to follow the statutory language but may face a contrary ruling from one or more other circuit courts.
Mortgage Signed by Mortgagor That Doesn’t Name Mortgagor Is Enforceable
In Bank of New York v. Rhiel, No. 2017-0870, 2018 WL 6778145 (Ohio), the Supreme Court of Ohio was asked by the Bankruptcy Appellate Panel of the United States Court of Appeals for the Sixth Circuit to answer the following certified questions:
1. [Is] an individual who is not identified in the body of a mortgage, but who signs and initials the mortgage, . . . a mortgagor of his or her interest?
2. Is a mortgage signed and initialed by an individual whose name is not identified in the body of the mortgage, but whose signature is properly acknowledged pursuant to Ohio Revised Code §5301, invalid as a matter of law such that parol evidence is not admissible to determine the intent of the individual in signing the mortgage? 2018 WL 6778145 at *2.
The Ohio court answered:
We hold that the failure to identify a signatory by name in the body of a mortgage agreement does not render the agreement unenforceable as a matter of law against that signatory. As a matter of general contract interpretation, it is possible for a person who is not identified in the body of a mortgage but who has signed and initialed a mortgage to be a mortgagor of his or her interest. 2018 WL 6778145 at *5.
Vodrick and Marcy Perry, who were married, took title to real estate in Ohio as joint tenants with right of survivorship. The property was encumbered by a mortgage held by Bank of New York Mellon. Vodrick and Marcy later filed for Chapter 7 bankruptcy relief. A trustee was appointed who contended the mortgage did not encumber Marcy’s interest in the property.
The trustee’s position was founded on the fact that only Vodrick had signed the note even though both Marcy and he had signed the mortgage before a notary public.
Perusing the documents, the Ohio court noted that in the first section defining the “borrower” only Vodrick was named. But the description of the mortgaged property was not limited to just Vodrick’s partial interest.
Vodrick and Marcy initialed every page of the mortgage, including the page with the legal description. The only error was that Marcy was not named as a borrower in the text of the mortgage.
On the basic legal issue, the Ohio Supreme Court noted there were conflicting lower court opinions. One held that an Ohio mortgage does not encumber a party’s interest in real estate if the duly executed and notarized mortgage does not mention that party’s name; the other held that a spouse who signs a mortgage encumbers his or her interest even if his or her name does not appear in the text of the mortgage. The answer, said the court, is to refer to parol evidence to determine the signatory’s intent in signing the mortgage.
Diving even deeper into the question, the court decided that the inclusion of the mortgagor’s name in the body of a mortgage was not a formal requirement in Ohio and that not being identified by name in the body of a mortgage did not negate a signatory’s intent to be bound by it.
What’s the point? The Ohio Supreme Court adopted a commonsense approach to the issue and provided a precedent for other instances in which an innocent omission of a mortgagor’s name in the text of a mortgage could imperil the security for the debt. Even though the subject of the dispute is real property, the Ohio Supreme Court is willing to allow parol evidence to determine the intent of the signatories.
Security Instruments Are Enforceable Even if Statute of Limitations Has Run if Underlying Debt Has Not Been Satisfied
In In re Gouletas, 590 B.R. 494 (Bankr. N.D.Ill. 2018), Bankruptcy Judge Timothy A. Barnes made his way through a thicket of complicated facts and procedural challenges to emerge with a reaffirmation of certain principles of security for debt. His conclusion hinged on the possible effect of the expiration of the ten-year Illinois statute of limitations for written instruments on the enforceability of security instruments.
The procedural posture was an adversary proceeding in the Chapter 7 bankruptcy case for Nicholas S. Gouletas. The plaintiff was 800 South Wells Commercial, LLC, and the defendant was Gouletas. The relief sought was a declaration of nondischargeability of a debt owed to the plaintiff and a denial of a discharge to Gouletas.
The legal issues stemmed from Gouletas’s assertion of the statute of limitations as an affirmative defense to the plaintiff’s enforcement of its rights in the collateral security.
The plaintiff’s cause of action arose from a security agreement executed more than ten years prior to the commencement of the adversary proceeding. Gouletas argued the ten-year lapse vitiated the enforceability of the security agreement and was a bar to the commencement of the adversary proceeding. But prior to the adversary proceeding, the creditor had reduced its claim against Gouletas to judgment. At the time of adversary proceeding there was no bar to enforcement of the judgment.
Gouletas’s defense was rejected by the court. The court began by carefully noting that unlike statutes of repose, “statutes of limitation simply deny recourse with the courts” and that in Illinois the expiration of the statute of limitations does not extinguish the underlying debt. 590 B.R. at 503. It said:
As statutes of limitations bar only the remedy of lawsuits on contracts and do not nullify contracts themselves, courts have rejected the theory that statutes of limitation on contract claims have a collateral effect in lawsuits where the running of the statute could not be raised directly as an affirmative defense. 590 B.R. at 504.
It also said that “the running of a statute of limitations, even had it occurred, would not deprive [plaintiff] of its rights under or property acquired by virtue of the Security Agreement.” And, said the court, “In this matter, there are no claims before the court for a statute of limitations to bar. In the absence of such claims, the Security Agreement . . . remains effective and controls the parties’ rights.” Id.
Continuing, the court remarked that even if there were a statute of limitations that limited the plaintiff’s rights under the security agreement, the security itself would continue to be enforceable as long as the underlying debt it secured remained unpaid.
What’s the point? This opinion reinforces the rules that enforcement rights stemming from a security agreement on which the statute of limitations has run remain effective if the debt those rights secure remains unsatisfied. A creditor may not sue on the time-barred debt but still can enforce its remedies with respect to the security.
For more information about financial services, SEE COMMERCIAL AND INDUSTRIAL LOAN DOCUMENTATION — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.