Opinion
Docket No.: CL14-8747
10-09-2015
TONISA D. BURGEST, Plaintiff, v. HSBC BANK, USA, NATIONAL ASSOCIATION AS TRUSTEE FOR HOLDERS OF GSAA HOME EQUITY TRUST 2005-15 AND COMMONWEALTH TRUSTEES, LLC Defendants.
OPINION AND ORDER SUSTAINING DEMURRERS
This matter comes before the Court on demurrers filed by each Defendant to the Complaint herein. The respective positions and multiple grounds in support of demurrer were extensively briefed and thoroughly addressed in oral argument. The Court sustains the demurrers on one ground only: the Court rules as a matter of law that the underlying transaction by which HSBC Bank acquired rights to Plaintiff's note and deed of trust was voidable and not void. Because the transaction had not been voided when HSBC took the actions of which Plaintiff complains, including the foreclosure sale of Plaintiff's residence, the causes of action articulated in the Complaint fail as a matter of law. The Court sustains the demurrers by both defendants with leave to amend granted on the narrow basis set forth herein only as to Counts I, III, and IV.
FACTUAL BACKGROUND
The facts involved in this controversy are pleaded in extraordinary detail in the Complaint, and the Court need not re-recite them herein with the same level of detail. To summarize, Plaintiff took out a mortgage loan from Countrywide Home Loans, Inc. in 2005, which loan was secured by a deed of trust against her Norfolk residence. The beneficiary of that deed of trust was Mortgage Electronic Registrations Systems, Inc. ("MERS"), a nominee for the lender, its successors, and assigns. Plaintiff acknowledges that as of November 27, 2007, the mortgage loan was in "arrears." She also admits that was in default prior to August of 2013.
By a document dated November 30, 2007 (Exhibit B to the Complaint) MERS assigned its beneficial interest in Plaintiff's deed of trust to HSBC, which the Complaint describes as a securitized trust operating under New York law. The Complaint alleges that the trust instrument by which HSBC operates forbids the purchase of any loan into the trust after a cut-off date and grace period unless the loan was current; and Plaintiff's loan was not. In 2011, HSBC transferred to Bank of America its claims to the note (Exhibit D to the Complaint). The Complaint alleges in paragraph 25, "Thereafter, HSBC claimed to purchase back the rights to the note." The Complaint does not, as HSBC strenuously argues, allege that HSBC lacked actual possession of the Note when it effected the appointment of a substitute trustee and a subsequent foreclosure; Plaintiff alleges instead that the attempt by HSBC to purchase back the note was void under New York law because that action breached the founding principles of the securitized trust.
This transaction by which HSBC reacquired rights to the note and deed of trust forms the basis of the Court's discussion herein; yet it is the one transfer that is not documented by copy of a recorded document. The Complaint does not specify by what means HSBC "claimed" to purchase back the obligation. --------
HSBC appointed Defendant Commonwealth Trustees LLC as a substitute trustee, and Commonwealth conducted a foreclosure sale on February 11, 2014. Plaintiff alleges that the purported appointment of the substitute trustee was invalid because HSBC was not the holder of the Note.
Although the record does not include any documentation of the transaction by which Bank of America purported to convey its interest in the loan documents back to HSBC, the parties have not disputed that such a transaction did take place. The note itself is part of the record as an exhibit to HSBC's motion craving oyer, which the Court sustained without objection; and the note is endorsed in blank. If HSBC is the holder of the note, as it argues, it had the right to enforce it. Plaintiff claims that HSBC was not the holder of the Note, not because it lacked possession but because it allegedly had no authority to reacquire a defaulted note into the securitized trust.
Plaintiff sues for breach of contract, for which she claims the remedy of rescission of the foreclosure sale and trustee's deed as well as compensatory damages against both defendants (Count I); theft of land (Count II); and actual and constructive fraud by HSBC, consisting of the false representation that it was the holder of the note and was acting properly through Commonwealth Trustees to foreclose on the home (Counts III and IV).
Plaintiff's counsel acknowledged at oral argument that her claims depended upon a determination that the purported acquisition of the note by HSBC was void and not merely voidable. As the Complaint alleges:
Because the purported repurchase by assignment of the Burgest mortgage loan to HSBC was void, HSBC (as the securitized trust) did not obtain re-purchase of the Burgest mortgage loan and lacked any interest in the Burgest mortgage loan when it subsequently (in December 2013 and in 2014) attempted to appoint Commonwealth Trustees as substitute trustee and had no standing in 2014 to seek a foreclosure sale of the home when it attempted to foreclose.Compl., ¶ 26(00).
The Court follows the greater weight of the case law that has examined this very legal issue under New York law and rules that such transaction was not void but voidable.
DISCUSSION
Plaintiff contends that HSBC was not the holder of the note because its purported reacquisition of this defaulted note violated the founding principles of the securitized trust. Under New York law, the validity of ultra vires actions taken by trustees is governed by Section 7-2.4 of New York Estate, Power and Trust Law ("section 7-2.4"). This section provides that:
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.N.Y. Est. Powers & Trust Law § 7-2.4 (Consol. 2015).
The language of section 7-2.4 expressly provides that an act by a trustee is "void" if it contravenes the trust instrument and is not otherwise authorized under New York law. Plaintiff emphasizes the clarity of that statutory language and relies heavily on two New York trial court decisions that applied section 7-2.4 as written, finding that trustees' ultra vires actions were void ab initio. Dye v. Lewis, 67 Misc. 2d 426, 427, 326 N.Y.S.2d 172, 175 (N.Y. Sup. Ct. 1971); Wells Fargo Bank, N.A. v. Erobobo, 39 Misc.2d 1220(A), 972 N.Y.S.2d 147 (N.Y. Sup. Ct. 2013), overruled on other grounds, 127 A.D.3d 1176, 9 N.Y.S.3d 312 (N.Y. App. Div. 2015), appeal denied 2015 N.Y. Slip Op. 82800 (N.Y. Aug. 27, 2015). This approach has sporadically appeared in other New York trial court decisions, e.g., Auroa Loan Services LLC v. Scheller, No. 2009-22839, 43 Misc. 3d 1226(A), 2014 N.Y. Misc. LEXIS 2276, at *7 (N.Y. Sup. Ct. May 22, 2014); In re Dana, 119 Misc. 2d 815, 820, 465 N.Y.S.2d 102, 105 (N.Y. Sup. Ct. 1982); and at least one other jurisdiction has adopted this position. Glaski v. Bank of America, 218 Cal. App. 4th 1079, 1096-97, 160 Cal. Rptr. 3d 449, 464 (Cal. Ct. App. 2013).
Crucially, however, other New York trial courts have rejected the literal reading of section 7-2.4 that Plaintiff asks this Court to apply. Many courts applying this statute have concluded that a trustee's ultra vires action is voidable, rather than void. The Supreme Court of the State of New York, Appellate Division has held that a trust beneficiary may ratify an act by a trustee that would otherwise be ultra vires under the terms of the trust instrument. Mooney v. Madden, 193 A.D.2d 933, 597 N.Y.S.2d 775, 776 (N.Y. App. Div. 1993); see also, U.S. Bank N.A. v. Duthie, 45 Misc. 3d 1218(A), 2014 N.Y. Misc. LEXIS 4874, at *10 (N.Y. Sup. Ct. Nov. 17, 2014) (citing Rajamin v. Deutsche Bank Nat'l Trust Co., 757 F.3d 79, 90 (2d Cir. 2014); Berezovskaya v. Deutsche Bank Nat'l Trust Co., No. 12 CV 6055 (KAM), 2014 U.S. Dist. LEXIS 127532 (S.D.N.Y. Aug. 1, 2014) ("[L]ike the United States Court of Appeals, Second Circuit, this court declines to follow the holding in Auroa as acts may be ratified by the trust's beneficiaries and are voidable . . . .") (quotation marks omitted); Martinez v. Estate of John P. Carney, 940 Misc. 3d 1219(A), 2013 N.Y. Misc. LEXIS 3272, at *21 (N.Y. Sup. Ct. May 31, 2013) ("EPTL § 7-2.4 . . . makes voidable any . . . action by the trustee that is in contravention of the trust) (emphasis added).
Courts in other jurisdictions considering this issue have likewise concluded that unauthorized actions by a trustee are voidable, notwithstanding the statute's use of the term "void." See, e.g., Rajamin, 757 F.3d at 90; Ferguson v. Bank of N.Y. Mellon Corp., No. 14-20585, 2015 U.S. App. LEXIS 17265, at *8-10 (5th Cir. Oct. 1, 2015) (holding that, despite the statute's use of "void," "New York courts . . . instead have treated a trustee's act in violation of the trust as voidable but not void"); Berezovskaya, 2014 U.S. Dist. LEXIS 127532, at *25-26; Davis v. Countrywide Home Loans, Inc., 1 F. Supp. 3d 638, 644 (S.D. Tex. 2014); Calderon v. Bank of Am., N.A., 941 F. Supp. 2d 753, 767 (W.D. Tex. 2013); Wood v. Germann, 331 P.3d 859, 861 n.5 (Nev. 2014); Dernier v. Mortg. Network, Inc., 195 Vt. 113, 125-27, 87 A.3d 465,474 (2013); Bank of Am., N.A. v. Bassman FBT, LLC, 2012 Ill. App. 2d 110729 ¶¶ 18-21, 981 N.E.2d 1, 8-10 (2012).
The discussion of this issue by the United States Court of Appeals for the Second Circuit is persuasive:
While a few other courts have reached conclusions about [section 7-2.4] similar to that of the Erobobo court, we are not aware of any New York appellate decision that has endorsed this interpretation of § 7-2.4. And most courts in other
jurisdictions discussing that section have interpreted New York law to mean that a transfer into a trust that violates the terms of a PSA is voidable rather than void.Rajamin v. Deutsche Bank Nat'l Trust Co., 757 F.3d at 90 (citations omitted).
* * *
In sum, we conclude that as unauthorized acts of a trustee may be ratified by the trust's beneficiaries, such acts are not void but voidable; and that under New York law such acts are voidable only at the instance of a trust beneficiary or a person acting in his behalf. Plaintiffs here are not beneficiaries of the securitization trusts; the beneficiaries are the certificateholders. ... The law of trusts provides no basis for plaintiffs' claims.
New York trial courts deciding whether section 7-2.4 renders a trustee's ultra vires action void or merely voidable have ruled both ways. The Court of Appeals of New York has not interpreted this statute, so the conflict remains unresolved. However, "such matters are for New York courts to reconcile—not this one." Bassman FBT, 2012 Ill. App. 2d ¶ 21, 981 N.E.2d at 9. In the absence of a decision resolving this question by the Court of Appeals of New York, the Court is persuaded by the majority view interpreting section 7-2.4 to provide that trustee actions in contravention of the trust instrument are voidable, rather than void.
This conclusion compels the Court to hold that HSBC's purported reacquisition of the note was not void per se. Plaintiff thus cannot attack the repurchase of the note and the appointment of Commonwealth on this ground. Because this ground forms the basis of Plaintiff's claims for breach of contract (Count I) and fraud (Counts III and IV), the Court sustains the demurrers of both defendants to those counts.
The Court cannot rule, however, as a matter of law based on the pleadings that HSBC was the holder of the Note with attendant rights to appoint a substitute trustee and direct a foreclosure, because the Complaint alleges otherwise: "HSBC instructed Commonwealth Trustee to foreclose on the home. However, HSBC was never the holder of the note and had no authority to instruct anyone to foreclose on the home." (Compl. ¶ 29).
With this clear allegation that HSBC was not the holder, and interpreting the Complaint in the light most favorable to Plaintiff, the Court acknowledges that Plaintiff might have another basis to contest HSBC's claim to be the holder of the Note. Therefore, the Court grants leave to Plaintiff to amend its first, third and fourth counts to permit Plaintiff to clearly allege any such basis.
Count II, alleging theft of land, does not state a cognizable cause of action. The Court's research revealed no authorities recognizing a cause of action for "theft of land" under Virginia law. This count is dismissed without leave to amend.
CONCLUSION
Defendants' Demurrers to Counts I, III and IV are sustained. Plaintiff is granted leave to amend to state any facts upon which she relies to support her allegation that HSBC was not the holder of her deed of trust note at the time of the foreclosure. Any amended pleading must be filed within 21 days. The demurrer to Count II is sustained without leave to amend.
Counsel are directed to file any written objections to this Order within ten days. Further endorsements are waived pursuant to Rule 1:13.
The Clerk is DIRECTED to send a copy of this Order to all counsel of record.
Entered: 9 OCTOBER 2015
/s/_________
Mary Jane Hall, Judge