Mortgage Servicing Fraud
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William A. Roper, Jr.
A decision handed down by the Ohio Court of Appeals for the Eighth District exemplifies a rather treacherous peril for the unwary and particularly those borrowers who load up their answers with counterclaims, which might or might not be resolved within the context of the plaintiff's summary judgment.  I have recently seen this situation emerge in several other cases and had intended to post these and comment upon them before, but this seems to have been overlooked in the crush of recent activity key decision activity, as well as the ongoing distractions of dishonest persons who have sought to hijack Forum threads to victimize distressed borrowers for their personal profit.

The case is:
Deutsche Bank National Trust Company v. Germano, Case No. 2010-P-0081, 2011 Ohio 3122 (Oh. App. 8th Dist., 2011)
http://www.sconet.state.oh.us/rod/docs/pdf/11/2011/2011-ohio-3122.pdf
The situation in Germano is presented when a borrower raises one or more counterclaims in the answer to a judicial foreclosure.  Counterclaims in most places come in two varieties.  There are so-called "mandatory counterclaims" which usually are those which arise out of the same or closely facts alleged in a plaintiff's complaint.  There are also usually some "optional counterclaims", which might involve the same parties, but which are sufficiently separate from the facts underlying the plaintiffs' cause of action that it is not actually necessary to plead these counterclaims in the same suit, though the defendant may elect to do so.

In most jurisdictions, when a defendant fails to plead the mandatory counterclaims in his answer or amended answer, these are deemed waived and are usually then absolutely precluded by res judicata from being raised later in a separate collateral action.

By contrast, the optional counterclaims, being separate and optional, can be litigated separately at a later date as long as the suit is filed within the limitations period for the cause of action.

Closely related to mandatory and optional counterclaims are cross claims and third party complaints, where a defendent makes claims against another defendant or against a non-party to the action.

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Since mandatory claims are waived if not expressly alleged in the answer (or an amended answer), there is a tendency for a defendant to load up the answer with all matter of possible counterclaims which might be raised in defense.

It should be here noted that counterclaims are different than defenses, special defenses (e.g. conditions precedent) and affirmative defenses.

For example, a denial of execution of the instrument would be a defense.  (The borrower denies that the borrower signed the note and or mortgage which forms the basis for the suit.)

A denial that the plaintiff is the holder of the negotiable instrument would be a defense.  (The borrower denies that  the plaintiff is the holder as alleged.) 

A denial of default would also typically be a defense.  (The borrower denies that he or she failed to make the agreed payments.) 

As we have repeatedly discussed in other threads, standing is a special sort of defense pleaded in various ways in different jurisdictions, sometimes as a plea to the jurisdiction, sometimes as a motion to dismiss for failure to state a cause of action (or otherwise) and sometimes simply within the answer.

Similarly, a denial in capacity or a Rule 17 (or the equivalent) allegation that the plaintiff is not the real party in interest is a defense

Conditions precedent is usually a special defense, though it is often incorrectly described as an affirmative defense.

Note a distinguishing characteristic of defenses.  Instead of making allegation in which the borrower has some burden of proof, the defendant is typically DENYING essential and material allegations expressly or implicitly made by the plaintiff.  That is the denfendant is defending through denials.

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Payment would usually be a affirmative defense. (The borrower already paid off the loan.)

Accord and satisfaction would also be a affirmative defense. (The borrower entered into a agreement allowing the borrower to compromise and pay off less than all of what is owed in exchange for release from other liability, as with a properly agreed upon deed in lieu.)


Forgiveness would also be a affirmative defense. (The borrower borrowed $5,000 from a parent and the parent agreed to forgive the balance loan, but later changed their mind and sued.)

Prior to the enactment of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA) and it Federal preemption of state usury laws, usury would have been an affirmative defense.


What typically distinguishes affirmative defenses from regular defenses or special defenses is that the defendant usually has the burden of proof as to affirmative defenses, while the plaintiff usually bears the burden of proof as to the allegations in its complaint and as to regular defenses.

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By contrast, fraud, many TILA violations, FDCPA violations and most RESPA violations would tend to be counterclaims in most jurisdictions, though fraud could also be an affirmative defense.

Another exception might be an effective rescission of the loan under TILA, which seems more in the nature of an affirmative defense.

Let us use a simple example.  Suppose that the borrower sent the alleged servicer three (3) proper Qualified Written Requests (QWR) and never received an answer.

So the borrower grabs one of the many defensive pleadings posted by Ann here at the Forum or found elsewhere on the Internet.  The borrower adds an allegation found in some of these sample pleadings that the plaintiff has violated RESPA by failing to answer the QWRs.

Success on these counts MIGHT entitle the borrower to damages, but will usually not be a bar to the plaintiff's recovery should it prove its other allegations as to its foreclosure complaint.

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Now consider what happens when the plaintiff seeks a summary judgment on only its causes of action and does not ask the court for a summary judgment on the counterclaims.  This could arise by accident or inadvertence.  It could also arise by design

Or the court could rule in favor of the plaintiff on the foreclosure counts, but find that there remain disputes as to material facts as to the counterclaims and therefore DENY a plaintiff its requested relief on the counterclaims.

But this creates a rather horrid, and possibly overlooked delimma for the borrower.

A judicial order of foreclosure arising out of summary judgment would usually be a final appealable order which a defendant borrower could appeal to the Court of Appeals.
 
But is the counterclaims remain unresolved, then the summary judgment is NOT a final order disposing of ALL THE CLAIMS.  And therefore the order is NOT subject to appeal.  Nor is the order likely to be stayed UNLESS the borrower (a) can afford a supersedeas bond for the full amount of the judgment, and/or (b) the borrower files for bankruptcy.  But in many places, bankruptcy might also suspend the appellate process.  Ooops!

Any appeal of the foreclosure judgment might have to await a trial or other final disposition of the counterclaims.  And the subject property could be SOLD in the interim.  There is also a recent line of Ohio cases, wrongly decided in my view, in which it has been held that an appeal of a judgment of foreclosure must be dismissed as moot if the property was actually sold during the pendency of the appeal!

So the borrower facing an incomplete disposition of ALL its claims needs to carefully consider what to do about the counterclaims.  FAILURE TO THINK THIS THROUGH CAN DOOM THE APPEAL.  THAT IS, THE APPELLATE COURT CAN POINT TO THE PENDENCY OF THE UNRESOLVED COUNTERCLAIMS AND DISMISS THE APPEAL BASED UPON THE ABSENCE OF A FINAL APPEALABLE ORDER.

And while the borrower is recovering from confusion, the servicer is very likely to schedule the sale of the property.  The borrower who retained an attorney for the appeal might find themselves financially exhausted with NOTHING whatsoever to show for the effort.

THIS REFLECTS JUST HOW TREACHEROUS IT CAN BE TO SIMPLY USE PLEADINGS FOUND ON THE INTERNET WITHOUT AN UNDERSTANDING OF THE IMPLICATIONS OF VARIOUS ALLEGATIONS.

There is probably an easy out for litigants like John Germano, who litigated this appeal pro se.  Upon LOSING the summary judgment, Mr. Germano probably could have voluntarily dismissed his other counterclaims.  Of couse, in so doing, he LOSES his other causes of action.  Whether this would have been a good idea in his case depends upon the unique facts of his case and the nature and strength of the unresolved counterclaims.

My prediction is that the servicer will proceed with a sale of Mr. Germano's property and then come back later and ask for a dismissal of the remaining counterclaims.  If Mr. Germano can obtain a determination of these claims as quickly as possible, by defensive summary judgment or by scheduling a trial, perhaps he can have his cake and eat it, too.  But I am skeptical.

IF he was going to proceed on his counterclaims, he ought to have already done so.  The order of foreclosure was dated October 12, 2010.  Mr. Germano has now had eight months to bring his counterclaims to hearing or trial.

It is noteworthy that the Court of Appeals decision is NOT a determination on the merits.  Mr. Germano could still either immediately obtain a determination of the counterclaims OR voluntarily dismiss these and then still files a NEW notice of appeal.  If he raised and preserved valid and robust issues in the original summary judgment proceeding, then he could still prevail in another appeal.

But, at least in Ohio, appealing the judgment of foreclosure when other counterclaims remain unresolved seems to be a shortcut to dismissal of the appeal.

Mr. Germano would be well counseled to consult a good Ohio lawyer!  AND HE NEEDS TO READ THE RULES, READ THE CASES ON THE RULES AND THEN READ THE RULES AGAIN!

NOTE 1: Apologies to Mr. Germano for using him as an example for this post.  I do NOT mean to be insensitive to his plight or to his disappointment at the outcome of this appeal.

NOTE 2: A similar thing happened to me in a non-foreclosure related matter once.  I appealed an order later to learn that the order was NOT a final order.  Interestingly, even the trial court judge was surprised.  He seemed to think that he had issued a final order!

NOTE 3:  I AM NOT AN ATTORNEY AND THIS IS NOT LEGAL ADVICE!

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Bill
I'm a little confused about this case. 

It appears his counter claims included a breach of the mortgage and failure to credit payments.

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He asserts, inter alia,

claims of breach of the mortgage contract and failure to credit his account accurately

 

From my understanding, these would NOT be counter claims, rather defenses that he should have been using to DEFEAT the SJ that was granted.  Is that correct? 

 

 

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William A. Roper, Jr.
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Bill said:
From my understanding, these would NOT be counter claims, rather defenses that he should have been using to DEFEAT the SJ that was granted. Is that correct?


Bill:

Without access to the pleadings, motion, responses, and evidence of record, it is a little hard to tell.  And the character of the allegations is dependent both on how they are framed and the unique facts being alleged and urged.

Let me give you an example.  Suppose that Smith is the maker of a valid note and mortgage to Oppressive Subprime Lender (OSL) granting a security interest in Blackacre, which loan is being serviced by Predatory Mortgage Servicing (PMS).  For simplicity, further suppose that this loan has never been sold into securitization and that OSL is still the owner and the holder.

Suppose that Smith runs into some legitimate financial difficulties and stops making payments.  After becoming delinquent and being declared in default, Smith discovers that PMS has failed to properly apply two payments that Smith actually made.

But by the date of the motion for summary judgment, Smith hasn't made any payments for one year.

Although Smith's allegation within a counterclaim that PMS hasn't correctly applied his payment might be true, even if the court reached this finding, this would not defeat the plaintiff's allegation that Smith is in default, if such allegation is otherwise supported by proper evidence.  That is, making every inference in the borrower's favor in the SJ proceeding, even IF the court agreed that two payments had been misapplied, this doesn't establish a dispute as to the fact of the default, nor would this conclusion preclude the entry of a summary judgment.

A judge, could correctly enter a SJ on the plaintiff's behalf intending to get to the precise amount of the damages later after hearing further evidence as to the disputed payments.

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One could envision a similar fact situation in which the defendant alleges that payments have not been applied properly as set forth within the note or deed of trust.  Section 3 of the note and Section 2 of the mortgage, deed of trust or other mortgage security instrument set forth the contractual provision for application of payments and payments are usually supposed to by applied first to interest, then to principal and then to other various valid charges.

Sometimes, the Lender elects to apply the payments differently.  They might apply the payment first to a late charge, for example.  Then, they assert that the payment has not been paid in full and claim that the borrower is in default of the monthly P&I payment.  Moreover, they will sometimes do this without informing the borrower and late charges will cascade from month to month.  This is a rather common form of mortgage servicing fraud.

The borrower might justifiably claim that the Lender/servicer has breached the express terms of the loan instruments.  And if the failure to pay cascaded late fees was the ONLY basis for the allegation of default, then it would seem that the allegation of misapplication of payments goes directly to the issue of the fact of default.

A skilled attorney would probably actually plead it that way.  That is, one could set out as spcifically as required under a jurisdiction's pleading rules the facts of the misapplication and make separate allegations (a) of a denial of the fact of default due to such misapplication and (b) a breach of contract count as a counterclaim in respect of the failure to properly apply the payments.

If one simply set forth the argument as a counterclaim rather than a defense as to default, then this argument would be less likely to be understood by the court and might be waived if not set forth with the requisite particularity.

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Bear in mind, I have NOT read Mr. Germano's pleadings or seen the record.  Maybe he did a terrific job of doing this and it may very well be that summary judgment was improperly granted.  But the Court of Appeals doesn't reach the issues of the appeal due to the lack of a final appealable order.  And I was simply seeking to use this case as some instruction on the perils of what might be described as "orphaned" counterclaims.

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It is probably worth noting that in the former example given above, voluntary dismissal and abandonment of the counterclaim might have the undesirable consequence that the borrower ends up getting $crewed out of two months of payments.

Whether this is important probably depends upon a couple of other circumstances not defined in my example.

IF the borrower has a mortgage for $200,000 and a house worth $100,000, then a foreclosure sale is NOT going to produce any excess to be quarreled about.  The borrower in such a circumstance is so deeply underwater that the correct application of the misapplied payments serves only to slightly enlarge the amount of a deficiency judgment (in places where deficiency judgments are allowed and pursued).

By contrast, if the borrower had a $200,000 property with a $100,000 mortgage, the foreclosure sale would usually produce some excess cash proceeds, some of which might be returnable to the borrower, after paying off the costs of the sale, attorneys' fees and junionr liens.  In this instance, the correct applicatoin of the two payments would actually have some effect on the realized value.

But this latter circustance actually rarely arises.  Those with a significant equity cushion will usually find a path out of financial adversity without resorting the a judicial foreclosure.  Litigating the matter through foreclosure is going to also result in a loss of value associated with both the distress price from the sale and the cost of legal fees.  Accordingly, it is usually uneconomic to be litigating about the misapplied payments within a foreclosure setting.

A better strategy where the borrower has substantial equity in the property would usually be a distress sale, paying the amount requested to clear the lien and then to afterwards sue the lender in small claims court for the amount stolen through misapplication of payments.  Such a suit would usually be unecononomic for the servicer to defend.  
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William A. Roper, Jr.
I mentioned in my original post that I had seen prior cases where an appeal was dismissed after summary judgment due to lack of a final appealable order.  I located a couple of these and wanted to share them to show that this is not a single isolated case.

Here are a couple of prior Ohio cases where an appeal was similarly dismissed:
MERS v. Lambert, No. 90247, 2008 Ohio 3040, 2008 Ohio App. LEXIS 2531 (Oh. App. 8th Dist., June 12, 2008)
http://www.sconet.state.oh.us/rod/docs/pdf/8/2008/2008-ohio-3040.pdf
http://scholar.google.com/scholar_case?case=15427142619560122758
See also MERS v. Lambert, No. 94681, 2011 Ohio 461, 2011 Ohio App. LEXIS 396 (Oh. App. 8th Dist., Feb. 3, 2011)

Huntington National Bank v Troon Management, Ltd., No. 10AP-655, 2011 Ohio 1194, 2011 Ohio App. LEXIS 1031 (Oh. App. 11th Dist. March 15, 2011)
http://www.sconet.state.oh.us/rod/docs/pdf/10/2011/2011-ohio-1194.pdf
http://scholar.google.com/scholar_case?case=5871738341822341045
NOTE:  Some show the style of this case as "Huntington National Bank v. Prep Academies, Inc.", though the Ohio appellate courts expressly specified that it should be styled as first shown above.

In these cases, the appellant was represented by counsel, showing that the mistake of lack of an appealable order can arise even when an attorney is bringing the appeal.

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William A. Roper, Jr.
Here are three more similar and earlier cases, which also illustrate the problem of unresolved claims:
Greenbriar at River Valley Phase Homeowners Assoc., Inc. v. Powermark Homes, Inc., No. 96007, 2011 Ohio 2157, 2011 Ohio App. LEXIS 1836 (Oh. App. 8th Dist., May 5, 2011)
http://www.sconet.state.oh.us/rod/docs/pdf/8/2011/2011-ohio-2157.pdf
http://scholar.google.com/scholar_case?case=15490302503866856337

First Collateral Services v Russell, No. 03CA8, 2005 Ohio 4908, 2005 Ohio App. LEXIS 4447 (Oh. App. 4th Dist., 2005)
http://www.sconet.state.oh.us/rod/docs/pdf/4/2005/2005-ohio-4908.pdf
http://scholar.google.com/scholar_case?case=2190554679309702677

Federal Home Loan Mortgage Corp. v. Wuest, No. 11549, 64 Ohio App.3d 513 (Oh App., September 21, 1989)
http://scholar.google.com/scholar_case?case=9817912122435992662
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William A. Roper, Jr.
Appeals were dismissed in these two Ohio foreclosure cases under different circumstances, but the discussion of these decisions adds to our understanding of the Ohio law and principles discussed in the other cases shown above:
Worthington v Wells Fargo Bank Minnesota, N.A., No. 10 CA 40, 2010 Ohio 4541, 2010 Ohio App. LEXIS 3835 (Oh. App. 5th Dist. September 22, 2010)
http://www.sconet.state.oh.us/rod/docs/pdf/5/2010/2010-ohio-4541.pdf
http://scholar.google.com/scholar_case?case=13705482148491774087

Wachovia Bank N.A. v Cermak, No. 2010-P-0062, 2011 Ohio 523, 2011 Ohio App. LEXIS 471 (Oh. App. 11th Dist. February 4, 2011)
http://www.sconet.state.oh.us/rod/docs/pdf/11/2011/2011-ohio-523.pdf
http://scholar.google.com/scholar_case?case=288198060940627540
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ka

There was a new decision out of the Ohio 8th Court of Appeals today which is a bit off the topic of Mr. Roper's thread above, but which is somewhat related.  The decision was in the case Wells Fargo Bank, N.A. v. Allen:

 

Wells Fargo Bank, N.A. v. Allen, 2012-Ohio-175 (Ohio 8th Dist. 2012)

http://www.sconet.state.oh.us/rod/docs/pdf/8/2012/2012-ohio-175.pdf

 

This decision is similar to the cases discussed in Mr. Roper's thread above in that the appellant's appeal was dismissed by the appellate court for want of a final appealable order.  The case differs in that this dismissal is based upon failure to dispose of and ascertain all liens rather than due to unresolved counterclaims.

 

This decision ought to be a cautionary lesson for defendants anyway.

 

Very often, when a Judge makes a decision, he invites the prevailing party to draft a judgment to be circulated for approval as to form by other parties.  Rather than writing his own order or judgment, the judge then merely signs the form judgment submitted.

 

This case should be a reminder that when a plaintiff prevails either in summary judgment or at trial that the defendant should take some care to study any proposed judgment to assure that it constitutes a final appealable judgment.

 

If it does not contain language disposing of all claims and all parties, then the defendant ought to be considering three avenues. 

 

First, if the draft judgment has been presented to the defendant as to form and this language is omitted, the defendant ought to suggest inclusion of this language showing finality.

 

Second, if the court has already signed what purports to be a final judgment lacking the requisite language, then the defendant ought to carefully study the Rules and submit a timely motion to correct or alter the judgment.

 

Third, while it is probably a good idea in an abundance of caution to go ahead and file a notice of appeal (if the order turns out to be final, if the defendant FAILS TO FILE the notice of appeal, then the appellate court loses jurisdiction and the judgment becomes final), to any extent that a defendant is in doubt as to the finality of the judgment, he ought to seek an additional judicial order disposing of the remaining issues.

 

For example, in the case of unresolved counterclaims, the defendant would either seek a determination of such counterclaims of voluntarily dismiss these counterclaims.  In the case of unresolved matters relating to other defendants or prior liens, the defendant would seek a judicial determination of these issues.

 

This can all be counter-intuitive and may even confuse many mediocre lawyers!

 

Since a defendant disagrees with the outcome of the case and the judge's decision, there is a tendency for the defendant not to want to help make the judgment better.  But if the judgment is not final, it is not usually appealable.  So even if one disagrees with the court's decision, it is critical to assure that the language of the judgment contain some language reflecting finality.

 

Some additional implications may not be obvious, but follow from this decision.  If a trial court grants a non-final judgment, which includes an order of sale, while not disposing of ALL the issues, a sheriff's sale might go forward and the defendant might even be dispossessed in an ejectment action.

 

The order of sale might even be confirmed.  The defendant is deprived of ownership and even deprived of possession, without an avenue of appeal UNTIL the final issues are resolved.  The final issues in this case would be a determination of lien priority, etc.

 

This could be particularly treacherous for a pro se litigant.  Sitting on one's hands would be the worst choice.  By filing a timely notice of appeal and working proactively to assure the entry of a real final order, a defendant can avoid this appellate purgatory!

 

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