The Tennessee Court of Appeals issued an opinion late last year that will make it harder for mortgage lenders/servicers to win dismissal of borrower litigation alleging MERS related irregularities.
Although the case, Berry v. Mortgage Elec. Registration Sys., 2013 Tenn. App. LEXIS 682, 2013 WL 5634472 (Tenn. Ct. App. Oct. 15, 2013), should not affect the ultimate outcome of lawsuits against lenders and servicers, it has given the debtors’ bar boilerplate language that guarantees survival of a motion to dismiss in Tennessee state courts.
Lenders will still win the lawsuits they would have won before, but litigation fees and costs incurred by mortgage lenders will be substantially higher.
In Berry, a borrower filed a complaint in Chancery Court to stop the foreclosure of her home. Her complaint alleged that she had attempted to negotiate a loan modification and/or refinancing and that the servicer wrongfully failed to modify/restructure her loan, which is in violation of the Tennessee Consumer Protection Act (TCPA), the Home Affordable Modification Program (HAMP), and the duty of good faith and fair dealing.
The complaint also alleged various fraud claims relating to MERS’s involvement with the loan. Berry alleged that the lender and servicer had intentionally misrepresented MERS as a beneficiary of the deed of trust; that they had intentionally recorded documents in which employees of companies other than MERS falsely identified themselves as officers of MERS; and that they (MERS and the loan servicer) had engaged in a pattern and practice of fraudulent conduct. According to the Court, these allegations implied that the servicer did not have the authority to foreclose due to the falsely identified MERS officers being involved with the transfer of the mortgage and, as a consequence, no legal/beneficial interest was transferred.
The servicer and MERS filed a motion for judgment on the pleadings, which the Chancellor granted after hearing. The order stated that “many of the allegations ... [are] overly generalized and non-specific, while in other areas, the Amended Complaint is simply devoid of facts which could entitle Plaintiff to relief.” The Tennessee Court of Appeals, for the most part, agreed with the Chancery Court, but not entirely.
The Court affirmed the trial court’s ruling as to Berry’s TCPA, HAMP, and Breach of Duty of Good Faith and Fair Dealing claims. The Court also addressed the issue of the alleged breach of the implied covenant of good faith and fair dealing and affirmed the trial court’s ruling on that issue as well. The Court, however, reversed the trial court’s dismissal of the fraud claims.
In Tennessee, the plaintiff must demonstrate six elements for a cause of action for fraudulent or intentional misrepresentation. These six elements include: the defendant made a representation of an existing or past fact; the representation was false when made; the representation was in regard to a material fact; the false representation was made knowingly, recklessly, or without belief in its truth; it was reasonable for the plaintiff to have relied on the misrepresented fact; and the misrepresentation resulted in harm to the plaintiff.
The mechanism in place to prevent litigants from merely reciting these six elements in their complaint is Rule 9.02 of the Tennessee Rules of Civil Procedure. Rule 9.02 requires that when alleging fraud, the circumstances constituting the fraud must be stated with particularity. This is a heightened requirement when alleging fraud (as opposed to other causes of action), which is common in many states and that requires specific facts be alleged to support the fraud allegation.
The Court, in its opinion, re-printed the allegations from Berry’s amended complaint that it considered to be related to the claimed fraud. These allegations are attached as Exhibit A.
Surprisingly, the Court found that the allegations were “pled with sufficient particularity to survive a motion for judgment on the pleadings.” The Court pointed to paragraphs six and seven of the amended complaint. According to the Court, Ms. Berry alleged that the lender recorded her deed of trust knowing that it contained falsely-represented signatures. Regardless of the reasoning, the Court of Appeals held that her allegations regarding fraud were sufficiently pled.
The court’s ruling is very unfortunate for the mortgage servicing industry. As most that are familiar with the industry will be aware, the allegations from the amended complaint cited by the Court are so broad that they could arguably be attributed to any mortgage loan wherein MERS was involved in the process. It’s not that they could be made as to any loan because they are always true, but because of how generic and non-specific they actually are. They weren’t really claims specific to her loan, as they were the same old attacks on MERS’s involvement with the mortgage industry in general that have been made ad nauseam. Furthermore, neither Berry’s complaint nor her amended complaint specifically identified which documents she was alleging to have been robo-signed. Not only that, but the complaint and amended complaint failed to attach any exhibits.
Regardless of whether you are of the opinion that the allegations rise to the level of particularity required by Rule 9.02, the fact is that the Tennessee Court of Appeals has ruled specifically that they do, so there is direct precedent on the issue for the debtors’ bar to rely upon. In fact, it would arguably be malpractice for a borrower’s attorney to not include the language (or language substantially similar) in a complaint being filed for the purpose of setting aside or stopping a foreclosure of a loan in which MERS was involved.