The financial crisis has brought with it a flood of lawsuits filed against mortgage lenders by borrowers facing imminent foreclosure. Ballard Spahr lawyers recently won a significant victory for its clients in one such case.

On  September 24, 2009, the U.S. District Court for the District of Arizona, in Cervantes v. Countrywide Home Loans, Inc., et al., dismissed all the federal and state law claims made by three such borrowers in a complaint filed against a group of defendants that included their mortgage lenders.

Two plaintiffs had obtained their mortgage loans from First Franklin and the third from Countrywide Home Loans. The deeds of trust securing each loan named the Mortgage Electronic Registration System (MERS) as beneficiary. In their complaint, the plaintiffs alleged violations of the Truth in Lending Act, Real Estate Settlement Procedures Act, Home Ownership and Equity Protection Act, Fair Housing Act, and Arizona Consumer Fraud Act, and asserted state law claims for conspiracy to commit fraud and conversion and intentional infliction of emotional distress.

The use of MERS by the mortgage industry to track mortgage ownership rights is being challenged in numerous cases, including class actions. The plaintiffs had alleged that the MERS system constituted a conspiracy under Arizona law to commit fraud through the "sham" naming of MERS as beneficiary on deeds of trust. In addition to rejecting the plaintiffs’ characterization of MERS' beneficiary status as a "sham," the court observed that the MERS system did not impact the plaintiffs' loan obligations and that plaintiffs had not alleged that it affected their decisions to enter into the loans.

On behalf of defendant National City Bank, Ballard Spahr lawyers also successfully argued that all claims based on First Franklin’s lending practices should be dismissed as to the bank for lack of standing. The court agreed that the plaintiffs had failed to show participation by the bank in originating any of the loans and could not hold the bank liable based solely on First Franklin's status as a bank division or subsidiary.

Except for the HOEPA claim, which was withdrawn, all of the plaintiffs' federal law claims were also dismissed as to the remaining defendants. The TILA and FHA claims were both dismissed as barred by the applicable statute of limitations, and the RESPA claims were dismissed on multiple grounds, including the absence of a private right of action for the defendants' alleged violation of the requirements to provide a settlement statement, a special information booklet, and a good faith estimate of settlement costs and the plaintiffs' failure to allege any damages resulting from the defendants’ alleged violation of the requirement to provide a notice of its transfer of servicing practices.

The plaintiffs' other state law claims fared no better. The Arizona CFA claim was also dismissed on statute of limitations grounds, and the claim for intentional infliction of emotional distress was dismissed for failing to allege any conduct "beyond all possible bounds of decency," necessary to establish such a claim. Finding that the plaintiffs had failed to specifically allege sufficient facts showing that the defendants had reached an agreement, the court dismissed their conversion claim, alleging that the defendants had conspired to deprive them of their property.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its skill in defending banks and other consumer financial services providers in individual and class actions filed in state and federal courts throughout the country. For further information, please contact group Chair Alan S. Kaplinsky (215.864.8544 or kaplinsky@ballardspahr.com) or David H. Pittinsky, lead Ballard Spahr litigator on Cervantes (215.864.8117 or pittinsky@ballardspahr.com).


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