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Mortgage Servicing and Loan Modifications: 11.4.2.3.3 The Merrill doctrine as a limitation on liability of government agency loan owners

Special issues arise when a servicer acts on behalf of a loan owner that is a federal governmental entity. Most often, this occurs when one of the government-sponsored enterprises (GSEs), such as Fannie Mae or Freddie Mac, owns the borrower’s mortgage loan. In these situations, a court-created rule known as the Merrill doctrine may limit application of otherwise controlling agency principles.

Home Foreclosures: 5.1 Introduction

Few events are more devastating to a family than the loss of a home to foreclosure. Children may be forced to change schools and leave friends. A family may be distanced from workplaces and social support. The homeowner’s equity is often lost as a result of a foreclosure sale, and it is not unusual for the foreclosed homeowner to find that they are personally liable for a large deficiency. Wages may be threatened to pay the deficiency judgment, further contributing to the family’s financial distress.

Unfair and Deceptive Acts and Practices: 10.2.2 Liability of Agents and Employees

While a UDAP claim will normally name a corporation as defendant, there may be reasons to add the corporation’s agents as defendants as well. UDAP statutes reach individuals as well as corporations.19 Both employees and non-employee agents of the corporation can be liable.20 If both the agent and the corporation committed the deceptive acts, each is liable for the entire UDAP award.21

Mortgage Servicing and Loan Modifications: 11.5.1.1 Overview

A federal forum is potentially available whenever the homeowner has a claim under federal law, such as the Truth in Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), Fair Debt Collection Practices Act (FDCPA), Fair Credit Reporting Act (FCRA), or federal Racketeer Influenced and Corrupt Organizations Act (RICO). State courts also have jurisdiction over claims under these federal statutes.

Home Foreclosures: 8.6 Bond Requirements

The Federal Rules of Civil Procedure and many state rules of civil procedure permit courts to issue preliminary injunctions or temporary restraining orders only if the movant gives security in an amount the court considers proper.408 Federal Rule of Civil Procedure 65(c) allows a court to grant preliminary injunctive relief “only if the movant gives security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.”

Home Foreclosures: 8.5.1.4 Supplemental Jurisdiction

A number of potential state law claims are available in unfair lending or abusive servicing cases—breach of contract, fraud, UDAP, state collection statutes, and other specialized statutes dealing with mortgage brokers and lenders.

Mortgage Servicing and Loan Modifications: 11.5.1.1b Standing

In foreclosure and mortgage servicing cases, homeowners may raise a combination of federal and state claims (e.g., RESPA, TILA, FDCPA, state UDAP and breach of contract). In addition to asserting a federal claim or diversity jurisdiction, borrowers wanting to maintain an action in federal court must demonstrate that an actual case or controversy exists.335 Standing is fundamental to this case or controversy requirement.

Mortgage Servicing and Loan Modifications: 11.5.1.3 Removal of Actions

When a case has been filed in state court, the defendant may remove the case to federal court if federal jurisdiction standards are satisfied and removal procedures are followed. The party seeking removal bears the burden of establishing federal jurisdiction, including Article III standing, and generally there is a presumption against removal jurisdiction.355 Standing is an essential element of the federal court’s subject matter jurisdiction.

Mortgage Servicing and Loan Modifications: 11.5.3 Personal Jurisdiction over Out-of-State Defendants

Given the rise of mortgage securitization, it is now very common for out-of-state entities to be involved in cases related to residential home mortgages. If the homeowner brings an affirmative action against out-of-state entities, the court must have personal jurisdiction over those defendants. For cases brought in both state and federal court, jurisdiction over out-of-state parties will be governed by the state long-arm statute.392 Courts must also determine whether exercise of jurisdiction satisfies due process requirements.

Home Foreclosures: 10.3.2.1 Generally

The process required to undo a completed foreclosure will depend on the foreclosure method used by the lender. If the foreclosure was conducted by power of sale, the foreclosed homeowner usually must initiate a suit to set aside or void the sale. Because foreclosure is entirely extra-judicial in most states that allow power of sale foreclosures, there is no existing action in which claims to invalidate the completed foreclosure can be raised.

Home Foreclosures: 8.7.5.5 Where Homeowner Is Defendant in Federal Court Case

According to the Supreme Court’s formulation, the doctrine applies only to federal cases “brought by” state court losers.552 Occasionally, though, the homeowner will be the defendant rather than the plaintiff in the federal suit. For example, if the homeowner attempts to rescind the loan under the Truth in Lending Act after the state foreclosure judgment is entered, the creditor may bring an action in federal court seeking a declaratory judgment that the rescission is invalid.

Home Foreclosures: 17.4.2.2.2 Exercising the right of rescission

Rescission works through a sequential, three-step process.

First, the consumer sends written notice of rescission, which operates automatically to void the security interest in the real property and to eliminate the consumer’s obligation to pay the finance charges (even if accrued) and other charges. In the case of a foreclosure rescue scam, once a sale-leaseback transaction is deemed to be an equitable mortgage, the agreements underlying that transaction would be voided, including any fees or costs the homeowner agreed to pay.

Home Foreclosures: 8.7.5.4.1 Where federal plaintiff was not a party to the state court action

The Supreme Court has made it clear that the Rooker-Feldman doctrine does not apply if the federal plaintiff was not a party to the state case.538 Even if the federal plaintiff is in privity with a party to the state case for preclusion purposes, the doctrine does not apply.539 Thus, a prior state court judgment against one of two co-owners of a home will not trigger the doctrine to bar a federal suit by the other co-owner.540 Likewise, th

Home Foreclosures: 8.7.5.9.3 Constitutional challenges as independent claims

A challenge to the constitutionality of a statute on which an earlier state court decision was based is not a challenge to that decision itself, so is not barred.615 In Feldman, the Supreme Court did not bar plaintiff’s claim attacking the constitutionality of a rule that the state court had enforced.616 Likewise, in Skinner, the Supreme Court held that the doctrine did not bar a prisoner’s challenge to the constitutionality of a state statute on which state courts had based tw

Home Foreclosures: 8.7.6 Res Judicata and Collateral Estoppel

Younger abstention, the Anti-Injunction Act, Colorado River abstention, and the Rooker-Feldman doctrine all apply only in federal court (although state courts may have similar doctrines). But even if an action gets beyond those obstacles, or is filed in state court, the plaintiff may still have to contend with res judicata or collateral estoppel if there is a prior state foreclosure or post-foreclosure eviction judgment.