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NOTHING PLUS NOTHING EQUALS NOTHING
On February 25, 2015 the Minnesota Supreme Court considered several of the conventional theories advanced by the banks in favor of their right to foreclose. And the Court also considered the procedural and substantive issues surrounding rescission in Minnesota whose statutes closely resemble rescission under the Federal Truth in Lending Act.
The court rejected the bank’s arguments and points out that even the dissent on the court made the same mistakes as the lower courts, which were obviously in a state of utter confusion. It should be noted that this decision was rendered approximately 1 month after the Jesinoski v. Countrywide decision. It is apparent that the Supreme Court of Minnesota was heavily influenced by the unanimous Supreme Court decision governing rescission under the Truth in Lending Act.
In the nearly 8 million foreclosures that have been allowed by the judicial system using deeply flawed reasoning, the banks have convinced the courts that piling up paperwork essentially creates rights even if none existed before. The Minnesota Supreme Court simply stated that nothing plus nothing equals nothing. If you start with nothing then any successor to any paperwork that was executed also gets nothing. This is well settled law.
The court also considered the issue of cancellation or rescission of a transaction in the light of a statute that is clear on its face. Since there are few appellate decisions since the Jesinoski was rendered in January, we must refer to the Supreme Court of Minnesota in this case as at least a starting point.
Starting with the fact that the statute was clear, the court concludes that no court had the authority or jurisdiction to “interpret” the statute. For at least 8 years before Jesinoski the banks convinced thousands of judges in hundreds of thousands of decisions to ignore a rescission or cancellation of the loan documents that was, according to the statute, effective upon mailing.
The banks convinced the courts to read into that statute the rules governing common law rescission, which clearly conflict with the statute. If the statute is clear then it is by definition not ambiguous. And if there is no finding of ambiguity in the statute, the court has established, whether it likes it or not, that it has no power or jurisdiction to change the outcome based upon the opinion of the judge as to which party should win. If the judge proceeds to interpret the statute anyway, it is a nullity. Here again we have the application of the simple formula proposed by the Supreme Court of Minnesota, to wit: nothing plus nothing equals nothing. In the case of TILA Rescission the issue is closed, to wit: the unanimous decision of the US Supreme Court in Jesinoski was that the statute is not ambiguous and thus not subject to interpretation by ANY judge.
The third line of defense by the banks slight of hand — they make the transaction so complex and convoluted that it is impossible for the judge or even the homeowner or his attorney to follow it. The judge then relies upon the more sophisticated party (the bank) to clear up the complexity. But as we have recently seen in several Florida cases, and now as we see in the Minnesota Supreme Court, the judicial system has made an about-face and is now questioning whether there is any substance behind the paperwork and the complexity raised by claims of securitization which have been revealed in most cases to be false. Like the unanimous US Supreme, there is unanimity of findings and conclusions by regulators, legal scholars, economists, financial experts, and litigators, with tens of billions of dollars in settlements that were made public and hundreds of billions of dollars in private settlements. The conclusion is that the securitization failed — i.e., that it never really happened.
The Minnesota Supreme Court plunged into the midst of the complexity offered up by the various transactions involved in this particular case. The court succeeded in simplifying the matter by applying well settled law with no need to interpret anything or redefine anything.
While the facts of this case vary from the usual rescission issues under the Federal Truth in Lending Act, the principles applied remain the same.
However, the court places heavy emphasis on the time limits imposed by the statute for the exercise of the cancellation or rescission of a transaction. It may be expected that most courts will do the same. But it is also true that both the majority and the dissent seem to be in agreement that if the rescission was recorded the issue would have been less in doubt than it appeared in the court record.
Because it wasn’t in issue. this court has not addressed procedural issues, to wit: who has the burden of proof on the issue of timeliness? Under TILA Rescission it is the real creditor (the only one with standing). How do we know that? We know it because the borrower is not required to prove or allege timeliness. The rescission is effective when mailed. Practice Hint: In an action to enforce the rescission, the grounds for rescission need not and should not be in the allegations — the issue is limited to the sending of the rescission letter and the fact that the party being sued is attempting to use the void note and mortgage.
Perhaps counter-intuitively, the party being sued (servicer, Trustee etc) for permanent injunction from using the void note and void mortgage may NOT raise issues of timeliness of the rescission because they have no standing to do so. The actual creditor, if there is one, would be the only party able to do that. That would be an action for wrongful rescission. Note that in Jesinoski, Justice Scalia makes the point that the statute makes no distinction between disputed and undisputed rescissions. Hence “effective when mailed” means exactly that and the loan contract, note and mortgage are all canceled and void. If the issue of timeliness was still “out there”, then the rescission would not be effective upon mailing — which is exactly the point Justice Scalia was making. He didn’t say that the creditor could not file a lawsuit to vacate the rescission based upon timeliness. But that lawsuit would need to allege, first and foremost that the pleader had standing as a party who is being financially injured by the rescission. As I see it, no other party could raise those issues because they lack standing.
The most interesting point about this is that the lawsuit for enforcement of the rescission will not likely be against the creditor because the creditor is unknown. We only have access to the information given to us by self-appointed intermediaries who are claiming a right to enforce the note and mortgage. But since the rescission is effective upon mailing by operation of law, the effect is to make the note and mortgage void (as well as canceling the loan contract — if there is one). So the only defense from intermediary parties sued (to prevent them from using the note and mortgage) to the lawsuit for injunction or enforcement of the rescission is that the rescission was already vacated by a court of competent jurisdiction, which is essentially never the case. This is why rescission is such an effective discovery tool as well, to wit: in order to challenge the “wrongful” rescission the challenge must be made by the party who has something to lose — like the current liability to disgorge all the money paid by the borrower, deduct all finance charges, and pay to the borrower all the money paid to third parties as compensation for origination of the loan.
Hence the lesson drawn from this case is that the rescission should probably be recorded in the county property records as quickly as possible. In Florida it would appear that this would be done by attaching a copy of the rescission letter to the notice of interest in real property and then recording the entire instrument with the exhibit. Combining the two issues of timing and recording, it would appear that if anything in the notice of rescission or cancellation of the transaction refers to the date of consummation of the transaction, that the rescission could be void on its face for not complying with the statutory time periods for action by the borrower. A reference to the date of consummation in the letter giving notice of the rescission or cancellation of the transaction would also appear to be an admission that the transaction was in fact consummated.
The lesson to take away from that analysis is that the date on which the documents were signed is not necessarily the date of consummation. The date of consummation would be when the loan was funded and the liability of the borrower first arose as a result of the funding. IN our first year of law school we are taught that the liability of the borrower does not commence when he signs paperwork; the liability arises when the borrower gets the money. If the funding didn’t come from the party claiming to have rights to enforce the loan by virtue of what was written on the note or the mortgage or deed of trust, then we go back to nothing plus nothing equals nothing. No loan plus assignment of loan equals no successor, no servicer and no owner of the loan.
That would mean that the borrower would prevail under either one of two theories, which you see developed in this case in Minnesota. It is either No Consummation or Rescission. Either the borrower is entitled to nullification of the entire transaction and nullification of the instruments that should never have been released from the closing table and were procured by at best a failure to disclose and at worst an intentional misrepresentation, or the borrower would prevail for having cancelled or rescinded the transaction.
The forth line of defense from the banks has always been that the borrower is seeking a “free house.” No such thing occurs in the event of either nullification of the original instruments or cancellation of rescission of the original instruments. The party to whom the money is actually owed still has claims and might even have claims for an equitable interest in the mortgage that was recorded. But it does not have claims to simply exercise the rights of the creditor as expressed in the note and mortgage because the actual creditor has no legal interest in the note or in the mortgage. AND THAT would require a court order AFTER a party enters the picture and alleges that it is the actual creditor and can prove it.
No money plus note plus mortgage equals no valid lien and no foreclosure. It is positively astounding that after 8 million foreclosures we are still arguing about a well settled principle of law, fairness, equity and justice — in order for the paper to be used there had to be an actual transaction with the parties IN THAT CHAIN.
The banks have bootstrapped their misuse of investor money together with false claims of securitization to create the illusion that some or all of them had some actual rights; but nowhere have they ever come forward and done what any creditor would do when challenged about the transactions: “here they are, with canceled checks and wire transfer receipts. Next question?”
A fifth issue emerges which the court could have avoided but instead met the issue head on. “It is of course elementary that delivery of a deed is essential to a transfer of title…Delivery of a deed is complete only when the grantor has put it beyond his power to revoke or reclaim it…An undelivered deed cannot transfer legal title even to a bona fide purchaser, because lack of delivery renders the deed void…In this case, although Graves physically transferred a quick claim deed to Wayman, delivery did not occur because Graves never put the deed beyond his power to revoke or reclaim it.”
The court concluded that since “Graves retained the power to revoke or reclaim the deed during the statutory cancellation period…which made deliver impossible during the cancellation period,” that delivery was never completed. The court concluded “without delivery of the deed to Wayman, the common law treats the quick claim deed as void.”
The reason this is important is that it is a hidden issue in all of the closings that have occurred, especially over the last 10 years, where loans were ostensibly approved and funded. The note is released for anyone to do anything they want to do with it usually within a few days or a few weeks from the date that the borrower executed the mortgage instruments. The mortgage itself is not only released but it is recorded. The problem with that is that it is incontestable that the borrower retains a right to rescind for the first 3 days on any grounds at all, and that the 3 days starts to run from the date of consummation.
If the party on the note as payee and on the mortgage as mortgagee did not consummate the transaction with the borrower and instead was a sham nominee or party to a table funded loan, then it would follow that the 3‑day period under the Truth in Lending Act had not commenced running. It would also follow that the 3‑year limitations in the Truth in Lending Act had also not commenced running. And the reason is the Minnesota court’s statement that “nothing plus nothing equals nothing.” It is obvious to the Minnesota Supreme Court, and should be obvious to the rest of us, that it would be completely inappropriate for a third party to the transaction to act as though the endorsements and assignments of improperly executed and improperly drafted instruments would somehow create rights that did not exist before.
If the banks would want to assert rights in connection with the meeting at which the borrower executed the usual pile of documents it would first need to acknowledge the fact that it was the real party in interest and to prove that fact. This would amount to an admission of a pattern of conduct that is described by Regulation Z as predatory per se. Anything that is predatory per se, is obviously against public policy. Anything that is against public policy is obviously evidence of unclean hands. A party with unclean hands may not obtain equitable relief. Since foreclosure is the most extreme remedy under civil law, and is a remedy generally considered to be equitable in nature, then it follows that no party with unclean hands should be allowed to foreclose.
The idea that any of this produces a free house for the borrower is wrong. In the first place, the borrower has invested a great deal of money usually in connection with the property on which there is a claim of an encumbrance. In many cases the property has been in the family for generations and would not be subject to mortgage but for the knock on the door from one of the tens of thousands of loan agents that were selling loan products from door to door. But assuming that the current system of foreclosures becomes subject to the conclusions of the courts in the judicial system that foreclosure is impossible, that does not mean that the source of funding may not make a claim upon the homeowner for repayment of the money that was used to fund the origination or acquisition of the loan.
In fact it is quite obvious now that we know that at least half of all the people who went into foreclosure were asking for modifications, that the losses attendant to the actual loans could have been minimized at the same time as keeping homeowners in the homes and enabling them to recapture over time their equity. In fact the evidence is clear that most homeowners would be happy to execute entirely new and valid paperwork with a party who was in fact the real creditor.
The Minnesota court decides that even if you are a bona fide purchaser because you paid valuable consideration for the mortgage in reliance on what appeared to be the facts, you still get nothing if you paid for something where the grantor did not possess an interest that could be conveyed. This is bad news for the banks. They introduce undated endorsements and undated assignments and powers of attorney and various other instruments in court laying paper upon paper upon paper making it appear, that the greater weight of the evidence shows that they are in fact possessed of the claim to enforce the note and mortgage.
Nothing could be further from the truth. If their chain upon which they are relying in their foreclosure is based on a non‑existent transaction or an incomplete transaction, then they have no power to do anything anymore than the original party did. The only exception to this might be in the event that a party was introduced as a holder in due course. But that would mean that the party described as a holder in due course paid real value for the rights expressed in the note, under circumstances where it was acting in good faith and without knowledge of the borrower’s defenses. Such an allegation might be made, but appears impossible for the banks to prove.