The possibility of a lawsuit against the escrow agent in the closing of the mortgage loan that was subject to securitization or claims of securitization raises several essential issues. In most cases the escrow agent is also the title agent. The title agent has it issued a title commitment and a title policy presumably based upon their research of the transaction and preceding transactions that were recorded in the public records of the county in which the property is located.
The exchange shown below raises the question of whether escrow had in fact ever been closed. I would raise one more question. Is there any way in which escrow could have been closed? Was the closing a sham? Of course this does not apply to all loan originations but it probably applies to the great majority of loans that are considered to have been originated by a pretender lender and closed by an escrow agent.
Consider the following fact pattern: the closing agent receives documentation that must be executed before the closing agent releases money from escrow to the borrower or releases money for the benefit of the borrower. In that documentation the name of the lender is clearly shown on the promissory note and presumably the mortgage or deed of trust.
In analyzing this transaction we must stop here and pause to consider what is happening. The originator at this point is offering to make a loan provided that the borrower first executes (signs) the closing documents which includes the note and mortgage or deed of trust. The issue as I have raised in court is what happens when the originator doesn’t make the loan? The additional question here is what happens when the originator never receives delivery of the note and mortgage? It seems to be well settled that recordation of an instrument does not constitute delivery of the instrument.
So we have an originator who did not make the loan and never received possession of the note and was clearly not the lender. If that is the case, I can see no legal basis for treating the transaction as though there was a closing at escrow. My opinion is there was no closing. The escrow agent had done the right thing, the note and mortgage would of been handed back to the borrower. And since the escrow agent is normally a title agent for one of the major title insurance companies, there appears to be a very deep pocket for damages if a cause of action can be brought against the escrow agent.
The key to any exploration of this cause of action would be getting the closing instructions in the closing documents, including the wire transfer receipts and the wire transfer instructions. The wire transfer receipt and instructions might represent the only documentation showing that a third-party was the actual lender in the transaction and that the originator and escrow agent failed to protect the actual lender by having the note and mortgage (or deed of trust) executed (signed) in favor of the party who supplied the funds at closing.
Any escrow agent who wasn’t “in on the game” would probably have reported to all of the proposed parties that the transaction cannot be closed without showing that the money wired into the account of the escrow account had indeed come from the originator or as a result of some legal relationship between the originator and the source of funds. Of course this leads to the issue of whether the parties would be admitting to a table funded loan which is predatory per se according to Reg Z.
In the case of Jacobitz v Thomsen, 238 Ill. App. 36, the appellate court correctly said “the note never became an obligation binding, as such, upon the defendants.”
As the facts are revealed in this massive fraudulent scheme, my initial comments back in 2007 when I started this blog appeared to be fully corroborated. Closing was never completed. It is not that the homeowner needs to rescind the transaction because that would be admitting that the transaction occurred. The point is that the transaction did not occur. And thus the point is that the homeowner never owed any money or any other obligation to the party designated as the “lender” or “mortgagee” or “beneficiary” (under the deed of trust).
The failure of lawyers and the courts to take notice of this fact has not just resulted in bogus foreclosure sales at bogus auctions. It has resulted in Wholesale fraud in which money was taken from investors under false pretenses and then used in ways that the investors never intended. The investors failed to receive the protection of a promissory note or an enforceable mortgage, which is the allegation that the investors are making when they sue the investment banks that sold them the bogus mortgage bonds.
Here is Dan Edstrom’s Response (Thanks Dan)
Excellent source of information for lawyers. Here is what I think is critical that you need to include and discuss.
My assumptions are that it is well established that escrow requires specific performance (at least this is true in CA, and probably all other states).
My assumptions are that the following is generally true in all states.
Without fulfillment of the conditions precedent to closing escrow, escrow cannot close (specific performance).
If escrow never closed you have failure of delivery of an instrument. The conclusive presumption of delivery avails an alleged note holder nothing if escrow did not close. In CA it is stated this way:
No delivery of the note, within the meaning of section 3097 of the Civil Code, took place. As the court says in Sousa v. First California Co. (1950), 101 Cal.App.2d 533, 539 [225 P.2d 955],“Only after strict compliance with the condition imposed … does the escrow holder begin to hold for the party thereby entitled. …” Bogan v. Wiley (1949), 90 Cal.App.2d 288, 292 [202 P.2d 824], holds, “No rule is better settled than the one that the payee gets no property in a negotiable instrument until its delivery.” And Todd v. Vestermark (1956), 145 Cal.App.2d 374, 377 [302 P.2d 347], states: “… a delivery or recordation by or on behalf of the escrow holder prior to full performance of the terms of the escrow is a nullity. No title passes.”
You could state what you listed in your article a different way (that the payee provided no consideration at loan closing): [EDITOR’S NOTE: POSSESSION VERSUS AUTHORITY OR RIGHT TO ENFORCE THE INSTRUMENT]
Yet these respondents recognize the rule that a security interest serves as an incident to the debt (Civ. Code, 2909), and on oral argument before this court admitted “if we didn’t have a promissory note, and if it … wasn’t an obligation … [t]here would be nothing for that security to secure; so it couldn’t exist.” Moreover, as the decisions have held, the mere recordation of a deed of trust by the escrow holder, in accordance with the trustor’s instructions, does not establish delivery. Thus in Jeannerette v. Taylor (1934), 2 Cal.App.2d 568 [38 P.2d 831] (petition for hearing in Supreme Court denied), the “title company, following plaintiff’s instructions, recorded a deed to the property which she had signed and acknowledged, the defendant being named therein as the grantee. Following this the title company … mailed the recorded deed to defendant.” The court then stated: “The evidence shows that this was done without express authority. … No one who had possession of the deed was authorized by plaintiff to deliver the same to the defendant. The delivery to the title company was for the limited purpose of recordation. No authority was thereby conferred to make delivery, and its act in mailing the instrument to the defendant did not have the effect of passing title …” (Pp. 569-570.)
Holder and Holder in due course may not apply if there was no consideration and escrow never closed:
Since Builders did not become a holder in due course, the conclusive presumption of delivery avails respondents nothing. (Civ. Code, 3097.) The cited case of Baker v. Butcher (1930), 106 Cal.App. 358, 367 [289 P. 236], does not apply; respondent Walker’s admission 231*231 that his rights depend upon the status of Builders as a holder in due course proves fatal.
The following quote seems to agree with what you are saying, that the Plaintiff can sue based on the obligation or the contract:
Respondents fourthly and finally contend that the conception of the payment of $4,022.14 as a condition precedent to delivery necessarily must void the entire transaction or work an unjust enrichment to appellants. In essence this contention suggests that appellants must rescind the contract in order that no unjust enrichment accrue to them; that, having elected to accept certain contractual benefits, they must ignore Henderson’s breach of his duties. Yet respondents seek to collect upon a note under which appellants are not obligated for want of delivery; respondents’ rights properly rest only upon the underlying contract or in quasi-contract. Thus, as is stated in Jacobitz v. Thomsen, supra (1925), 238 Ill.App. 36–“the note never became an obligation binding, as such, upon the defendants. … The reversal in this case, however, will be without prejudice … to any right Thullen may have to recover from defendants whatever sum, if any, may be due from them under the terms of the original contract … or the value of work, labor and materials furnished. …” (Pp. 38-39.) Gray v. Baron, supra (1910), 13 Ariz. 70, 74, likewise points out–“Under the terms of the escrow agreement and the facts … there was no such delivery of the note … and … the judgment entered by the court for the plaintiff requiring the payment of the note … [must be reversed as] outside of the issues set forth in the pleadings. … The theory of the trial court seems to have been that the plaintiff had established a cause of action based upon the breach of a contract to purchase the stock. The error of the trial court was … in attempting to enforce such a cause of action … in an action based simply upon the promissory note, and not one based upon the breach of the contract to purchase.”
All of the above quotes come from Borgonova vs. Henderson, 182 Cal.App.2d 220 (1960), attached.
Getting back to the conditions precedent, here are some that I have seen. But keep in mind that all of the loan closing documents I have seen are different. Some bring up certain conditions different from others (your mileage may vary). The following are all from one loan closing (notice the impossibility of meeting the conditions precedent):
BORROWERS CLOSING INSTRUCTIONS
You are authorized to deliver and/or record the above and close in accordance with the estimated closing statement contained herein (subject to adjustment);
and when you can procure/issue a 06-ALTA Loan w/Form 1 – 1992 coverage from Policy of Title Insurance from Fidelity National Title Insurance Company with a liability of $500,000.00 on the property described in your Preliminary Report No. 4008203, dated August 16, 2005, a copy of which I/we have read and hereby approve.
SHOWING TITLE VESTED IN:
[borrowers names …]
FREE FROM ENCUMBRANCES EXCEPT:
6. A First Deed of Trust, to record, securing a note for $500,000.00 in favor of Mortgage Lenders Network USA, Inc..
LENDERS CLOSING INSTRUCTIONS
Named Lender who provided the closing instructions: Mortgage Lenders Network USA, Inc.
Residential Funding Corporation has a security interest in any amounts advanced by it to fund this mortgage loan and in the mortgage loan funded with those amounts. You must promptly return any amounts advanced by Residential Funding Corporation and not used to fund this mortgage loan. You also must immediately return all amounts advanced by Residential Funding Corporation if this mortgage loan does not close and fund within 1 Business Day of your receipt of those funds.
Closing Agent/Attorney acknowledges the foregoing instructions and understands that failure to properly follow set of instructions may result in legal recourse by MORTGAGE LENDERS NETWORK USA, INC.
Identified conditions precedent in this case that may not have been met:
- No exception on Borrowers Closing Instructions for the security interest claimed by Residential Funding Corporation (who by the way was the sponsor of thousands of attempted securitization transactions) in the Lenders Closing Instructions
- No exception on Borrowers Closing Instructions for the security interest claimed by MERS on the Security Instrument (Deed of Trust in this case), which states “Borrower understands and agrees that MERS holds only legal title to the interests granted by the Borrower in this Security Instrument…”
- Approximately $329,000 was sent to Ocwen Loan Servicing to pay off an earlier 1st lien. Ocwen was not the payee, beneficiary, mortgagee or assignee and was not listed on any recorded document. A few weeks after closing, Ocwen recorded a full reconveyance stating that they were the beneficiary. However, Ocwen was a stranger to the chain of recorded documents. In this case the Borrower contends that payment was sent to the wrong party (the alleged note holder, beneficiary and assignee was New Century Mortgage Corporation) and the reconveyance is a wild deed. Thus Residential Funding sent approximately $329k to Ocwen and the Borrower never received the benefit of the bargain as this money was never given to the Borrower or used for the Borrowers benefit. Thus the encumbrance remains.
- The payee provided no money to escrow and the escrow company had full knowledge of this (in fact every other party had knowledge of this fact except the homeowner who was the least sophisticated party present).
In my opinion if the borrower was fooled at loan closing, the escrow should not have closed. That is unless the escrow company was fooled also. But they were not fooled – they knew everything.
Remember also that the homeowner never sees MERS or the above loan closing instructions until they are put before the Borrower on the day of signing. Up until about 2010 I would say that there was no homeowner who could have remotely understood what any of the above meant.
Filed under: CORRUPTION, evidence, expert witness, foreclosure, foreclosure mill, GARFIELD KELLEY AND WHITE, GTC | Honor, investment banking, Investor, MBS TRUSTEE, MODIFICATION, Mortgage, Motions, originator, Pleading, securities fraud, Servicer, STATUTES, TRUST BENEFICIARIES, trustee | Tagged: closing of escrow, escrow agent, title agent, title insurer |