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Securitization Fail-Litigation Update

posted by Adam Levitin

The wheels of litigation move slowly, but there are a couple of recent securitization fail litigation decisions that are worthy of note. First, in the Congress case, a wrongful foreclosure action in Alabama (see my previous blogging on it here), the Alabama appellate court reversed and remanded, a victory for the homeowner. The reversal and remand was on a rather narrow ground, namely that the trial court applied too demanding a standard when evaluating the homeowner's argument that the allonge in the case had been fabricated. Yet this means that this securitization fail case is still alive. It's also interesting to see how suspicious some courts have become about mysteriously appearing allonges and the like.

Second, the Illinois Court of Appeals for the 2d District just issued a ruling in a commercial mortgage foreclosure case, Bank of Am. Nat'l Ass'n v. Bassman FBT, 2012 Ill. App. LEXIS 487 (Ill. App. Ct. 2d Dist. 2012), with some wide reaching implications for securitization fail arguments. It's mainly a choice of law opinion, but there are two interesting things about the case. First, the Illinois court very clearly understood the securitization fail standing argument made by the defendants and was taking it seriously. Second, the Illinois court applied New York law to the interpretation of the PSA. This is critical because once the argument shifts to New York trust law, its 90% of the way there. The Illinois court got hung up on a question of whether a conveyance to a trust in contravention of the trust documents is void or voidable. This is a twist I haven't seen before. The Illinois court was uncertain about the answer (it doesn't help that it was dealing with century old cases that weren't necessarily careful about their phrasing), and decided against the defendants because they had the burden of proof in the appeal. All in all, however, this case goes a long way to legitimating the securitization fail argument.  


I guess my question is what is the endgame if the courts accept the securitization fail argument? Is it free houses for the homeowners or trying to locate the originating lender the note was made to as the rightful party to enforce? Something in between? I ask because I don't see the courts going with the free house option if they have any choice (bad for the economy as major banks who are too big to fail take a hit, plus moral hazard issues), but I don't know where it goes from there if the courts do want to allow somebody to foreclose on a house that is not being paid for.

Prove up the Note in accordance with UCC and proceed with equitable action on the Note.

The security (house) for the indebtedness may have become a nullity by failure to comply with laws that apply to the security interest.

Were a house is taking in lieu of payments, the Note's obligation is discharged and where a payment stream has been created from the Note and the security securing being most likely also securitized, such payment stream being made payable to a investment vehicle would be moot.

For the investors that hold a payment stream interest would failure involving the Note trigger a Credit Default Obligation?

I agree that is a possiblity, but my point is that if the courts nullify the security instrument on the house, that, as a practical matter in most (clearly not all) states, is a free house because most states will allow a homestead exemption to protect the house. Additionally, if the Note is unsecured, then the debt is dischargeable in bankruptcy (a choice that is probably not a difficult choice to make for a homeowner who is already in default and has bad credit to show for it.) This would be an especially viable option for a Chapter 13 where there wouldn't be the risk of the Trustee taking the house. Net result of either action is a hit on the capital/assets of the banks which leads us back to a too big to fail argument.

There is no free house.

Homeowner signed a Note, Deed (the house as security to the Note). Securitization Fail does not negate either.

What would happen (IMHO) is that if a court determines a Note never made the trust (the Fail), the bank would have to buy the Note back at the price prescribed in the PSA, reverse all payments to the trust (bond holders), and bring the Note back to the last owner that meets any UCC requirements. This could be the SPV used for BK remoteness that was the last owner before the Trust, or could go father back.

Once they clean that up, the owner as defined under a reasonable UCC definition would then foreclose on the house.

There may be states that do not allow reversal of Deed transfers, but in Oregon, they do not prohibit reversals (i.e. if there is a recorded transfer to the trust, it can be reversed).

Messy? Yes. Free house? No.

Why then should we push the courts to let these cases run their course?

1) It's the law. Fundamentally, there is no good argument for letting the banks break the law. If every Note had to be litigated to get to a "fail" status, there is no systemic risk of bank failure. Very few homeowners are positioned to get to a place where a court could reasonably conclude there is a cause of action. (to do this, a homeowner needs reasonable "proof" that the Note was not properly endorsed, sold to trust). So this will be a street fight forever (no one is going to declare wholesale that all Notes never made the trust).

2) By putting banks on notice that courts will hear cases that have sufficient evidence/proof that a Note may not have made it to the trust, banks will be motivated to settle with homeowners who can bring these cases. This can be generous cash for keys, short sales, modifications.

If the Illinois 2nd District Court believed that there was "tension" and a split in the scattered New York Court decisions regarding the meaning of section 7-2.4's use of the word "void", could the Court have just cited the Practice Commentantaries to sec. 7-2.4 as an aid to interpretation instead of surveying century old imprecisely drafted opinions? Under NY law it appears that practice commentaries to a statute are an aid to interpretation that courts in NY may consider "authorative" in the absence of precise textual guidance or binding authority. Collette v. St. Luke's Hospital, 132 F.Supp.2d 256 (2001)("In determining the appropriate interpretation of such statutory language, courts have found “significan[ce]” in the observations articulated in “the Practice Commentary accompanying the statute”, Scaduto v. Restaurant Assocs. Indus., Inc., 180 A.D.2d 458, 459, 579 N.Y.S.2d 381, 382 (1st Dep't.1992), see also People v. Williams, 66 N.Y.2d 629, 632, 495 N.Y.S.2d 355, 357 (1985), and have considered such commentaries as “authoritative”. Jacobson v. Chaglassian, 90 Civ. 3535, 1992 WL 233891, at *2, 1992 U.S.Dist. LEXIS 13504, at *5 (S.D.N.Y. September 9, 1992). See also Leibowitz v. Bank Leumi Tr. Co. of New York, 152 A.D.2d 169, 176, 548 N.Y.S.2d 513, 517 (2d Dep't.1989)."

That an Illinois Court has recognized that New York Trust Law applies in Illinois securitization fail cases is huge. I will cite the opinion in my motions and try to argue that the Court kind of "kicked the can" on the "void"/"voidable" issue and seemed to imply that it was open to change its mind if presented with some persuasive authority.

Why so hung up on a free house? These houses have been paid for countless times; not a matter of a homeowner getting a free house but whether a bank will get another opportunity to sell it a few dozen times more! Homeowners were the ones screwed; not investors, not banks; it was a set up from the inception designed to make fortunes off of "Marks" targeted homeowners; now banks want to continue their SCAM. so many want to see these thugs prosper off of stealing as opposed to working for their money.

This Court is getting warmer and I believe they understand the implications of this. That is why it danced around the "void" vs "voidable" argument.

Here's the language in the specific NY Code:

New York Code - Estates, Powers and Trusts Article 7 § 7-2.4 “Act of trustee in contravention of trust if the trust is expressed in the instrument creating the estate of the trustee, every sale, conveyance or other act of the trustee in contravention of the trust, except as authorized by this article and by any other provision of law, is void”.

Also, regarding whether or not a borrower is a party to an asset backed security - the OCC has stated that they are. See page 8 at link below.


I read the instant matter in the OP and there are cases that have been plead better. See below. This was done by a Pro Se with outcome yet to be determined.


What is ironic is that Defendant Bassman will likely be stuffed with a 1099 and Plaintiff trust will likey skate on IRS 806 A-G taxes that are triggered when loans are back-filled to trusts after they are closed.

Davies v. Deutsche Bank 9th Circuit Appeal.

PSA arguments,
15 U.S.C. 1641(g) first impression.
MERS Audit Trail, Deutsche Bank subpoena.
Lender at origination not a MERS member.
Dismissed at the Motion for Judgment on the Pleadings. BK.

Opening Brief

Reply Brief


The 9th Circ. granted a stay against Deutsche Bank [BAP denied it].

Full filings including BAP presentation and denial of Emergency Motion.


Having been involved in a number of these cases in TN, it still baffles me the lengths the courts will go to, either on procedural grounds or on evidentiary grounds, to avoid deciding or addressing the substantive issues of these cases.

Part of the real problem seems to be that long before the note and deed of trust gets shipped off to any trust, the original note is destroyed, and now in many of these cases the original note can not be produced. Perhaps even worse is that photoshopped copies of the note are being produced and alleged to be the real thing.

Setting aside the question under UCC 3-309 of whether a copy of the note can be proven to be enforcebable, ( substantial burden of proof by the way under 309) copies also raise the question of valid endorsements.

Theoretically these securitized notes should be endorsed by the original lender to fannie mae, then to the trust, then back to fannie mae if fannie mae acquires the note via a guarantee, and then finally to the servicer who is attempting to foreclose.

When the notes are scanned into a computer after the closing of the sale and then shredded, which seem to be the modus oeprandi, I don't know how endorsements can be tracked.

Determining holder status on a copy of a note is probably down right impossible in a securitized situation because of the lack of endorsements.

Yet lenders come into court and complain that the homeowner just wants a free house. And judges are not about to give away free houses. So they go overboard trying to find a procedural or evidentiary way of making the cases go away. It just keeps happening because that is all the courts can do unless the case has a truly unique set of facts that can be easily differentiated from the common foreclosure situation.

Of course what you are left with is a real estate industry that is based on defective notes and on deeds of trusts that, when MERS is involved, now produce a private recording system making the public recording system worthless. MERS as beneficiary or nominee on a deed of trust gives no notice to the public whatsoever of who owns the note and who needs to be paid in order to get a valid release.

It is a trust me situation, if ever there was one, but the courts seem to be saying we just have to trust the banks because we can't let people get houses for free.

John S @12:57 - If the banks had to buy all of these houses at the value they sold for during the bubble, it would probably take the banks down. The banks would have to buy half the houses in Phoenix and Miami at 2-3 times present value, for starters. It's just not realistic.

The more I investigate the patents and the chronological timeline, loan number sequence and trust construction, the more I am convinced these were not mortgages - they were securities before the borrower signed. Sold without a license, without disclosure and without borrower participation. Void the documents.

Level the playing field. The bank gave me money, took my personal, private information and sold it treating me like a shill. I gave them money, they made X amount more and they didn't share. They inflated my appraisal and crashed the economy defrauding the investors and me. Give me my keys please and leave us alone.

The last I knew, there was an issue of whether these were Article 3 notes. Has that been resolved?


I think Livonia is a huge problem. Judge Lawson does a great job of distinguishing it in Talton v. BAC Home Loans, 2012 U.S. Dist. LEXIS 36216, *16.

The Livonia states "there is ample authority to support the proposition that 'a litigant who is not a party to an assignment lacks standing to challenge that assignment,'"Livonia Properties, 399 F. App'x at 102 (quoting Livonia Properties Holdings, LLC v. 12840-12976 Farmington
Road Holdings, LLC, 717 F. Supp. 2d 724, 736-37 (E.D. Mich. 2010))"

Judge Lawson says: "but when read carefully the case does not stand for such a general and unqualified position. The Court believes, therefore, that Livonia Properties does not compel the conclusion that a foreclosure plaintiff can never attack the foreclosure by challenging the validity of an underlying assignment.
The Livonia Properties opinion contains a number of
caveats to its general statement about lack of standing that would permit a plaintiff to challenge the validity of an assignment in different circumstances. First, immediately after observing the general [*21] rule that a third party cannot challenge an assignment, the court noted that "[a]n obligor 'may assert as a defense any matter which renders the assignment absolutely invalid or ineffective, or void.'" Livonia Properties, 399 F. App'x at 102 (quoting 6A C.J.S. Assignments § 132 (2010)). The court stated that this rule exists to protect obligors "from having to pay the same debt twice." Ibid. The court found that the rule was not implicated in that case because the defendant owned the original note as well as the mortgage and the district court reviewed copies of the original note and was satisfied that it was authentic. Ibid."

Let's take Livonia down.

Here in Illinois, Bassman is not being seen as a victory in the securitization argument but a defeat. The reason is that the home-owner has been told that he or she does not have standing to raise the securitization-fail argument because it simply isn't any of his or her business. At least that's the take that most foreclosure defense attorneys are taking from this case.

I may be in the minority among Illinois foreclosure defense attorneys, but my reading of Bassman is that the Court's recognition of the applicability of N.Y.Est. Powers & Trusts Law sec. 7-2.4 to Illinois foreclosure cases involving securitization trusts has nothing to do with a borrower's standing to invoke the PSA as a defense. Rather, the Court clearly states that:

"We are cognizant that we have already concluded that defendants are not entitled to rely on the PSA's choice-of-law provision; however, we do not view the application of New York law under these circumstances as an invocation by the defendants..."

The Court goes on to say that "by participating in transactions under the PSA, it is the plaintiff's actions, rather than defendants', that make New York law applicable to this issue."

I agree with David Leibowitz(by the way a superb Illinois bankruptcy/foreclosure defense attorney) that a securitization-fail argument based on failure to transfer the note per terms of the PSA appears a dead end after Bassman. But Bassman is open to the New York trust law statutory argument that any act by the Trust in contravention of the PSA is void. The Bassman Court, despite the clear and unambiguous statutory language of section 7-2.4, got hung up on whether the statutory term "void" really means void or voidable. It is important to recognize that the Bassman Court signals a willingness to revisit this issue if it is properly briefed and presented to the Court:

"As an Illinois court, we, of course, cannot change New York law, and defendants make no attempt to reconcile these contradictions. It was defendants' burden to answer these questions about the nature of New York law...Absent clear answers about the nature of New York law, the burden of persuasion is dispositive. Defendants have not demonstrated that the transactions are void or that the trial court erred. Therefore, we are compelled to reject defendants' argument on this issue."

Some hope for a different result in a future case I think.

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