Defending Foreclosure

Defending
Foreclosures
supplemental
materials
April 21 - 22, 2009
des moines, iowa
IN THE CIRCUIT COURT, FOURTH

JUDICIAL CIRCUIT, IN AND FOR
DUVAL COUNTY, FLORIDA
WELLS FARGO BANK, N.A., Plaintiff,
CASE NO.:16-2009-CA-000632
DIVISION: CV-A
vs.
WILLIAM H. CORNING AKA WILLIAM CORNING, et. al,
Defendants.
_______________________________ /
MOTION TO DISMISS AMENDED COMPLAINT FOR FRAUD ON THE
COURT
COMES NOW the Defendant, William H. Corning, by and through his
undersigned counsel and pursuant to Florida Rules of Civil Procedure 1.140 hereby files
this Motion to Dismiss Plaintiffs Amended Complaint for Fraud on the Court. As
grounds in support thereof the Defendant would show that:
1)
On January 14th, 2009 the Plaintiff, WELLS FARGO BANK N.A., filed a
Mortgage Foreclosure Complaint.

2)
In this complaint the Plaintiff alleged among other things that it was the servicer
for the owner and acting on behalf of the owner, see Plaintiffs Complaint paragraph 4.
3)
The Plaintiff also attached to this complaint a purported assignment executed on
December 22nd, 2006 which allegedly assigned the Mortgage and note, that is the subject
of this claim, from Jacksonville Affordable Mortgages to Mortgage Electronic
Registration Systems, Inc. although MERS is not mentioned anywhere in the Mortgage
itself and is merely an information clearing house and does not hold notes or mortgages.
4)
The Plaintiff did not attach a copy of the Mortgage and note that is the subject of
Supplemental Materials 2
this claim to their original complaint even though it is required under the Florida Rules of
Civil Procedure.
5)
Upon receipt of the complaint, the Defendant filed a Motion to Dismiss based
upon the apparent conflict in the language of the Plaintiffs complaint, its failure to attach
a copy of the Mortgage and note and the lack of standing by the Plaintiff, as there was
nothing to show how WELLS FARGO BANK N.A. was associated with this case other
than bald allegations in the Plaintiffs complaint.
6)
On or about March 27th, 2009 the Plaintiff filed an Amended Mortgage
Foreclosure Complaint.
7)
In its amended complaint the Plaintiff has taken out the language about how it is
the servicer acting on behalf of the owner and is now stating that the Plaintiff is the
holder of the Mortgage Note and Mortgage and/or has the right to enforce the
Mortgage Note and Mortgage. See paragraph 4 of Plaintiffs Amended Complaint.
8)
Plaintiffs Amended Complaint does not have a copy of the same assignment that
was attached to its original complaint, but does purportedly have a copy of a Note
curiously dated June 29th, 2005.
9)
Also attached to Plaintiffs Amended Complaint is what is titled an Allonge to
Note, hereinafter referred to as Allonge.

10)
This Allonge is purporting to be an attachment to the Note that is the subject of
this claim and it has some interesting features such as stamped endorsements.
11)
The first stamped endorsement is pay to the order of: Everbank, without recourse
Jacksonville Affordable Mortgages, Inc and is signed by Jimmie Jones, Vice President.
12)
The second stamped endorsement is pay to the order of WELLS FARGO
BANK, N.A. without recourse by: Everbank signed by Bobbi OBrien Vice President
and on this endorsement is stamped in large letters VOID.
13)
The third endorsement is pay to the order of __________________, without
recourse by: Everbank and this is signed by Bobbi OBrien Vice President.
14)
What makes this Allonge so curious is the fact that the Mortgage and Note were
executed at the same time, July 25th, 2005, one month after the alleged assignment by
Allonge which is dated June 29th, 2005.
15)
So now the Plaintiff has submitted an Amended Complaint for Foreclosure
attaching a Mortgage and Note that were executed one month after the Note was
allegedly assigned and the original assignment which purported to assign the Note in
December of 2006 which was filed with Plaintiffs first complaint is nowhere to be
found.
16)
Florida Statute 117.107(9) states:

A notary public may not notarize a signature on a document
if the person whose signature is being notarized is not in the
presence of the notary public at the time the signature is
notarized. Any notary public who violates this subsection is
guilty of a civil infraction, punishable by penalty not exceeding
$5,000, and such violation constitutes malfeasance and
misfeasance in the conduct of official duties. It is no defense to
the civil infraction specified in this subsection that the notary
public acted without intent to defraud. A notary public who
violates this subsection with the intent to defraud is guilty of
violating s. 117.105. See also Florida Bar v. Farinas, 608 So.
2d 22 (1992)
17)
It is only necessary that the person whose execution is
acknowledged be known by the notary to be the person described in and

who executed the instrument (or that the notary have satisfactory proof
thereof) that such person acknowledge to and before the notary the
execution of the instrument. Walker v. City of Jacksonville, 360 So. 2d

52 (Fl. 1st DCA 1978).
18)
The Allonge is dated one month prior to the date of execution of
the Note and Mortgage, so the Allonge is fraudulent and if it is not then
there was nothing to transfer on the date of the Allonge and the Plaintiff
still has no standing. The Plaintiff has presented this Court with a fraud in
furtherance of their claim as the Allonge/assignment could not have taken
place prior to the execution of the Note and Mortgage. Further, Plaintiff
filed these documents willfully and intentionally in an attempt to mislead
this Court.*
19)
It is appropriate for the trial court to dismiss an action based on
fraud, provided that there is a blatant showing of Afraud, pretense,

collusion, or other similar wrongdoing.@ Distefano v. State Farm Mutual
Automobile Ins. Co., 846 So. 2d 572, 574 (Fla. 1st DCA 2003)
20)
Misrepresentations in the Plaintiffs complaint and its attachments
are willful fraud, interfering with the Court=s Aability to impartially

adjudicate a matter by improperly influencing the trier of fact or unfairly
hampering the presentation of the opposing party=s claim or defense.@Id.
21)
This Court should dismiss the pending action with prejudice and
award such other relief as the Court deems just and appropriate.
*While there is no evidence of Notary fraud on the face of the Note and Mortgage, either the
Allonge is fraudulent or the Notary is, they cannot exist together.
WHEREFORE, Defendant, William H. Corning, respectfully request this Court

dismiss Plaintiffs complaint with prejudice and such other relief as the Court deems just
and appropriate.
I HEREBY CERTIFY that a true and correct copy of the foregoing was served
upon the Plaintiff, Wells Fargo Bank through their attorney Jeff Gano, Florida Default
Group P.L 9119 Corporate Lake Drive 3rd Fl, Tampa, Fl 33634 via US Mail this ___ day
of ____ 2009.
RESPECTFULLY SUBMITTED
JACKSONVILLE AREA LEGAL AID
______________________________
Stephen F. Albee FBN 979686
April Charney, FBN 310425
Attorneys for Mr. Corning
126 West Adams Street
Jacksonville, Florida 32202
Telephone: (904) 356-8371, ext. 346
Facsimile: (904)224-1587
Steve.Albee@jaxlegalaid.org
Issue1
V 1 | Q1
2009
CMISfocus
The eMagazine for the Coalition for Mortgage Industry Solutions (CMIS)
focusTOPICS:
Tidbits, Facts, & Updates 2009
AFN Bankruptcy, Foreclosure, & REO Legal Watch
Bankruptcy Watch - Carolyn A. Taylor Partner HughesWattersAskanase

Foreclosure Watch Cynthia Nierer, Rosicki, Rosicki & Associates, P.C.
REO Property Preservation Watch Robert Klein, CEO Safeguard Properties
Sub-Prime Mortgage Crisis: The Legal Business Fallout, Pink Slips,

Attrition & Redeployment, By Andrew J. Sherman, Esq.
Hidden Gems: Reconciling New Laws, Rules & Best Practices Guidance:
$700B Plus Rescue Law: HR 1424; $300B Voluntary Short Refinance

Law: HR 3221; SEC & FASB New Guidance: FAS 157 Fair Value ; New
Principal Forgiveness Modifications without Loss Write-Offs!; Wilbur
Ross Solutions; CMIS/AFN DC Summit Webinar
Zone of Insolvency Meets the Zone of Coverage in the Mortgage

Meltdown By Richard Ivar Rydstrom, Esq., Chairman, Coalition for Mortgage
Industry Solutions
Conference & Webinar Corner:
The American Legal & Financial Network (AFN): On behalf of the members of
the AFN we invite you to attend its 7th Annual Leadership Conference. The theme
of this years event is New Growth for a New Beginning. The conference dates
are July 21, 22, 23, and 24. For more information go to: www.e-afn.org
Highlights in our next issue of CMIS Focus: Insurance Coverage
Traps; Operating in the Insolvency Zone, Home Affordable Modifications; Home

Affordable Refinances; Principal Reduction Mods, B.K. Cram Downs and more.
The AFN Bankruptcy, Foreclosure & REO Legal Watch

AFN key legal and practice updates
Bankruptcy Watch - Carolyn A. Taylor, Esq.
Foreclosure Watch Cynthia Nierer, Esq.
REO Property Preservation Watch Robert Klein, CEO Safeguard Properties
Tidbits, Facts, & Updates

REO Property Preservation: Lack of communication
between servicers and municipalities can result in substantial
fines and an order to make expensive repairs says Robert
Klein, CEO of Safeguard Properties, Brooklyn Heights,
Ohio. Mr. Klein is quoted in detail in an MBA News Link
article on this topic entitled: REO Properties a Sticking Point
for Servicers, Municipalities located at:
http://www.mortgagebankers.org/tools/FullStory.aspx?Articl
eId=1690
Principal Reduction & Re-Default Rates: Re-default rates
are rising for most, however American Home Mortgage
(AHM) with its aggressive principal reduction program has
seen a lowering of its re-default rates to some 20% while the
industry average is hovering around 45-55% (OCC, OTS).
AHM has proven that its leader, Wilbur Ross, expressed
viable principal reduction modification remedies in his
keynote discussion with Chairman Richard Rydstrom at the
CMIS Executive Summit in DC (2008). The next step would
be to activate the liquidity creating portion of the remedy
by selling insured pieces, and/or add a reduction or
quarantined device that does not result in capital ratio
impairment write-offs (www.qbiesam.com). Litton Servicing
reports use of principal reduction modifications in 33% of its
modifications to reach 31% DTI (long before the new
guidance on same). Ocwen is also reportedly using principal
reductions with regularity. The FDIC/IndyMac principal
forbearance modification model implemented by Chairman,
Sheila Bair is hopeful as a national model but the FDIC
projects that 30% of the restructured loans will re-default.
More than 50% of the modified loans in 2008 will redefault within 6 months (Office of the Comptroller of the
Currency). There should be national standards for servicers
to follow, but its not by itself the answer, says
Economy.coms Mark Zandi. He thinks the FDIC is on the
right track but needs to change much of the program to make
it suitable for wider use. Mortgage lenders and homeowners
wont take advantage of the program unless principal writedowns are shouldered at least in part by taxpayers. (Forbes,
Desmond, Feb 10, 2009). First American Loan
Performance data shows that principal reduction itself is not
the determining factor in reducing the re-default rate.
However, lowering the monthly payment sufficiently by
whatever means (i.e.: Interest Rate, 40 year term extensions,
Principal Reductions, etc.) will greatly reduce the re-default
rate. Both modifications with principal reductions of some 10
or 20% had re-default rates of 30% or 28% within 6 months,
respectively. However, when payments decreased by 20% or
more the re-default rate was only 21%. When payments
were lowered only 10-20% the re-default rate was 49%. Fitch
Ratings reports that servicers are expanding their loan
modification programs to include principal reductions. Diane
Pendley (Fitch) is quoted as saying Some combination of
payment reduction and either principal forbearance or
forgiveness may be the most effective approach to mortgage
modifications, as it may increase borrower ability and
willingness to repay the modified amounts (quoting
Servicing Management March 2009). Guest speaker at the
CMIS Executive Summit in DC (June, 2008), Richard H.

Neiman, Superintendent of Banks for the State of New York,
was a signatory to a joint letter sent to John Dugan (U.S.
comptroller of the currency), and John Reich (Director OTS)
along with The State Foreclosure Prevention Working Group
(12 state attorneys general, headed by Attorney General
Tom Miller), Sarah Bloom Raskin (Maryland
Commissioner), and Mark Pearce (Deputy Commissioner of
Banks, North Carolina). In a nutshell the letter stated that the
industry has done too little to modify unaffordable loans, as
reported by Servicing Management March 2009.
GSE Litigation Waivers: The Streamlined Loan
Modification program brought with it homeowner waivers
buried in its requirements. These litigation waivers required
homeowners to sign away their rights to sue including
predatory lending rights, in return for an acceptance into the
program. Rep. Barney Frank (D-Mass.) has objected to such
practices. Frank was quoted as saying: I can pretty much
guarantee you that we will have put an end to that within a
few days. Fannie Mae and Freddie Mac have discontinued
the waivers. This situation only emphasizes the great and
ripe need for a voluntary opt in settlement program
(www.optinsettlement.com) wherein all parties to the
mortgage transaction can receive adequate consideration for
reaching true borrower (monthly) affordability in return for
mitigation of lawsuit exposure and risks
(www.litigationfreezone.com).
Streamlined Modification Program: Treasury Guidance on
March 4, 2009 of the Home Affordable Modification
Program (HAMP) (www.financialstability.gov) effectively
discontinued the streamlined modification program. Freddie
Mac announced that HAMP replaced the streamlined
modification program. Freddie Mac announced on March 4,
2009 in its Single Family Advisory, that HAMP: Reduces the
monthly mortgage payment to no greater than 31 percent of
the borrower's gross monthly household income; Requires
free HUD-approved counseling for borrowers with monthly
total debt-to-income ratios equal to or greater than 55 percent;
Provides incentives to borrowers and Servicers for successful
modifications and ongoing timely payments.
Hope for Homeowners (H4H) Short Refinance Program:
The initial H4H program is widely regarded as a failure.
Less than two months after the programs unveiling,
however, application totals for H4H were dismal fewer than
100, according to reports. Efforts to revise it are under way
including H.R. 384. (Servicing Management Feb. 2009
Reinventing H4H: Can Further Tweaks Encourage
Participation?)
Law or Case Cites to Remember: This Court further holds
that the lender who has brought this proceeding to foreclose
the mortgage must demonstrate by a fair preponderance of the
evidence that the mortgage was not the product of unlawful
discrimination. [Since it is the lender-plaintiff who seeks
equitable relief from this Court, the onus is upon the lender to
satisfy the requisites of equity and come to this Court with
clean hands. Junkersfeld v. Bank of Manhattan Co., 250
A.D.646 (1st Dept. 1937). This is a threshold action is of no

moment.
"The judge further held that the foreclosure plaintiff "must
demonstrate by a fair preponderance of the evidence that the
mortgage was not the product of unlawful discrimination,"
and that "[i]f the lender is unable to do so, the foreclosure
proceeding will be dismissed and the lender left to its
remedies at law."
Interestingly, the judge also cited to EquiCredit Corp. v.
Turcois, 300 A.D.2d 344 (2d Dept. 2002), noting the ruling in
that case as "counterclaims alleging reverse redlining
practices in claimed violation of the Equal Credit Opportunity
Act and the Fair Housing Act dismissed for failure to show
that the mortgagors qualified for the loans in question as
required pursuant to these statutes."
Richard Rydstrom, Chairman
The CMIS/AFN June 2008

Executive Leadership Summit
Webinar is Available for Viewing
The AFN filmed the Executive Leadership Summit on June

17, 2008 for the Coalition for Mortgage Industry Solutions
(CMIS), hosted by Dickstein Shapiro in DC. The AFN
developed a Webinar of the Summit which aired over three
days on September 24-26, 2008. If you are interested in
viewing this webinar, send an email to Matt Bartel, Chief
Operating Officer, American Legal & Financial Network
(AFN) located at 12400 Olive Blvd., STE 555 St. Louis, MO
63141 Phone: 314-878-2360 Fax: 314-878-2236
mbartel@e-afn.org.
The breakdown for CMIS Webcast was as follows:
1. Introduction/ Welcome - (30min) Overview of the Crisis
and State of the Marketplace
Michael E. Nannes, Chairman, Dickstein Shapiro, LLP
Richard Rydstrom, Esq., CMIS
Andrew Sherman, General Counsel, CMIS

2. Keynote: w/Richard Rydstrom moderating (30min)
Wilbur L. Ross, Jr. , Chairman & CEO, WL Ross & Co.

LLC
3. Panel One: Impact on Capital Markets, Financial
Institutions, Consumer and Communities (1hr)
Moderator: David W. Dworkin, CEO and Founder,

Affiniti Network Strategies, LLC
Douglas G. Duncan, Vice President and Chief Economist,

Fannie Mae
Richard H Neiman, Superintendent of Banks, New York

State Banking Department
Rick Sharga, Vice President Marketing, RealtyTrac, Inc.

4. Luncheon Keynote Speaker (45 min)
Marc H. Morial, President and CEO, National Urban

League, former Mayor, City of New Orleans, Former President
of the U.S. Conference of Mayors
5. Panel Two: Loss Mitigation- Workouts that Work (and
Those that Don't) (1hr)
Moderator: Richard Rydstrom, Esq., CMIS
Bruce Dorpalen, Co-Founder, Director of Housing

Counseling, ACORN Housing Corporation
Arnold Gulkowitz, Partner, Bankruptcy Practice,

Dickstein Shapiro, LLP
Patricia A. Hasson, President, Consumer Credit

Counseling Services of Delaware
Steve Horne, President, Wingspan Portfolio Advisors,

LLC
Andrew Jakabovics, Associate Director for the Economic

Mobility Program, Center for American Progress
Laurie Maggiano, Deputy Director, Office of Single

family Asset management, U.S. Department of Housing and
Urban Development
6. Panel Three: Charting a Future Course- The Case for SelfRegulation (1hr 15min)
Moderator: William LeRoy, CEO, American Legal and

Financial Network (AFN)
R.K. Arnold, President and CEO MERSCORP, Inc.
Francis P. Creighton, Vice President of Legislative

Affairs, Mortgage Bankers Association
Henry E. "Hank" Hildebrand, Chapter 13 Trustee
Robert Klein, Chief Executive Officer, Safeguard

Properties
Hon. Raymond T. Lyons, U.S. Bankruptcy Court, District

of New Jersey
Debra L. Miller, Chapter 13 Trustee
George W. Stevenson, Chapter 13 and 7 Trustee
Carolyn A. Taylor, Partner, Hughes, Watters & Askanase

7. Closing Keynote (15 min)
Congressman Thaddeus McCotter (MI-11)

We express our gratitude to the support of our Panelists, Guest
Speakers, Keynote Speakers Wilbur Ross, Congressman
McCotter, Marc H. Morial (CEO NUL), our summit quests, and
participants, the CMIS Summit Executive Team, MortgageOrb
and John Clapp, and contributing SPONSORS:
American Legal & Financial Network (AFN)
Dickstein Shapiro, L.L.P.
Excel Innovations, Inc.
Kozeny & McCubbin, L.C.
Phelan, Hallinan & Schmieg, L.L.P.
Potestivo & Associates, P.C..
RealtyTrac
Safeguard Properties, Inc.
Trott & Trott, P.C.
Zucker, Goldberg
& Ackerman, L.L.C.
Supplemental Materials
9
New AFN Webinar Hidden Gems:

Reconciling New Laws, Rules &
Best Practices Guidance is Online
The rise in thefts is fueled by scrap metal prices that have

doubled and even tripled in some markets during the past
three years because of growing demand.
The opportunity to make money stealing and selling scrap
metals has been so compelling that thieves have risked death,
serious injury and jail time to strip metals from city streets,
cemeteries, new construction sites and, where it impacts our
industry the most, vacant homes.
Metal thefts not only are dangerous for criminals, they create
serious hazards for entire neighborhoods when thieves break
working water and gas lines and cut live electrical wires to
reach copper components.
Webinar Now Online

Join the AFN for a SPECIAL BROADCAST entitled
Hidden Gems: Reconciling New Laws, Rules & Best
Practices Guidance recorded on October 22, 2008, as
Richard Ivar Rydstrom delivers his 2nd update of the current
changes in law, rules, regulations, and best practices guidance
including new principal forgiveness solutions such as
QBieSam Modifications, which is receiving widespread
industry support.
CRITICAL ISSUES for discussion include:
1) $700B Plus Rescue Law: HR 1424
2) $300B Voluntary Short Payoff Refinance Law: HR 3221
3) SEC & FASB New Guidance: FAS 157 Fair Value
4) Wilbur Ross Solutions: Principal Forgiveness and New
Insurance Guarantees
5) New Principal Forgiveness Modifications without Loss
Write-Offs!
If you are interested in viewing this webinar, please click on
the clip from the Summit or send an email to Matt Bartel,
Chief Operating Officer, American Legal & Financial
Network (AFN) located at 12400 Olive Blvd., STE 555 St.
Louis, MO 63141 Phone: 314-878-2360 Fax: 314-878-2236
mbartel@e-afn.org.
///
Feature Articles
REO Property Preservation Watch Robert
Klein, CEO Safeguard Properties
Addressing copper theft to combat urban blight
By Robert Klein, CEO Safeguard Properties
Theft of copper and other metals in vacant houses contributes

significantly to urban blight. While metals stripped from one
home in less than an hour can bring hundreds of dollars
through a scrap dealer, the cost to repair the damages left
behind can run into the thousands.
Especially in struggling neighborhoods, when homes are
stripped of their metals, they are also stripped of any value
after thieves tear up floors and punch man-sized holes into
walls to gain access to copper pipes. Stolen plumbing often
causes severe water and flood damage, and the theft of
electrical wiring increases the risk of fire.
In fact, metal-stripped properties often end up with negative
value because demolition costs can range from $5,000 to
$10,000, depending on the market and the size and condition
of the property. Many property owners simply abandon these
homes, leaving neighbors and cities to deal with the resulting
nuisance and eyesore.
Deterring thieves and protecting properties
Cities, neighborhood groups and the mortgage industry have
tried many ways to deter metal thieves because of the
devastation they leave behind. Increasingly, cities and states
have begun to consider and enact legislation requiring scrap
dealers to obtain proof of ownership for certain high-theft
metal items, and to increase their record-keeping and
reporting.
Community and block organizations have strengthened
neighborhood watch groups and stepped up efforts to educate
neighbors and encourage them to be more vigilant in
watching for and quickly reporting suspicious behavior at
vacant homes in their neighborhoods.
Likewise, the mortgage and field services industries have
routinely taken steps to deter metal thieves and better protect
properties from the devastating damages they wreak.
First and most obvious, the simple fact that lenders and
servicers utilize field service companies to inspect, maintain
Across the country, in cities large and small, our company
and secure vacant properties is a strong deterrent. Thieves
has witnessed what newspapers and police blotters have
are less likely to target properties that appear to receive
reported -- significant increases in metal theft from vacant
regular attention, and that have been secured by field service
properties, with copper as a prime target.
professionals.
10
Field servicers are always seeking better ways to secure and

protect properties on behalf of their clients. For example,
Safeguard Properties recently announced a Good Neighbor
Door Hanger program to combat thefts and other problems at
vacant properties under management.
Under this program, once a property has been secured, in
addition to placing a sticker on the front door of the property
with emergency contact information, as is standard in the
industry, Safeguard will visit neighbors to let them know that
the company is managing the property. A door hanger with
24-hour emergency contact information is provided so
neighbors can alert Safeguard if an issue arises. It is hoped
that this program will encourage neighbors to be more
vigilant in watching vacant properties and providing an early
alert to report suspicious activities and deter thefts and
vandalism.
One of the best ways to protect a vacant property is to give
the appearance that it is occupied. While plywood boarding
placed over doors and windows that have been breached is
effective in keeping properties secure, it is not aesthetically
appealing and makes it more obvious that a property is
vacant.
Among the initiatives being tested in the industry is artistic
boarding, in which plywood boards are covered or painted to
give the appearance of actual window panes and doors so that
vacant homes are not as obvious and offer a more attractive
appearance among other homes in the neighborhood.
Similarly, the industry is upgrading the service packages on
post-foreclosure REO properties, as they languish longer on
the market and compete increasingly with traditional market
homes. For servicers and investors, these homes are even
more important to protect from the destruction caused by
metal thieves because additional dollars have been invested in
them to prepare them for market.
Upgraded services to REO properties include maintaining the
exteriors to a neighborhood standard to make them appear
occupied, thus deterring theft and vandalism.
The industry also has increased outreach efforts to open lines
of communications nationwide with code enforcement
officials. An important component in this initiative has been
to provide an easy way for code enforcers to obtain contact
information for mortgage lenders and servicers. An updated
listing for the majority of lenders and servicers is now
available through the Mortgage Bankers Association Web
site, under its Property Preservation Resource Center
(www.mortgagebankers.org/propertypreservation).
As a result, when properties experience problems, code
enforcers can more quickly identify the person responsible
for maintaining a vacant property on behalf of the mortgage
lender or servicer. This assures that issues can be addressed
quickly and that properties remain safe and secure.
Vacant property registration ordinances

A recent and growing effort by cities has been to enact vacant
property registration ordinances, largely in response to
increased vandalism and the blight that results when these
properties remain unattended. The ordinances allow city
officials to reach responsible parties and hold them
accountable when code violations occur.
While the industry supports the concept of the ordinances and
understands the need for cities to take action, based on our
experiences in the field, we believe many of the provisions in
ordinances enacted around the country actually have the
potential to create consequences that are more severe than the
problems they are attempting to address.
This is why mortgage servicers and field servicers have
formed a National Vacant Property Registration Committee
under the Mortgage Bankers Association to offer our
expertise to assure that cities enact the most effective
ordinances possible.
With respect to thefts of copper pipe and other metals, the
committee has attempted to discourage cities from enacting
provisions that draw more attention to the fact that a property
is vacant, or that require the installation of materials that are
particularly attractive to thieves.
For example, some ordinances require that a large sign be
posted in front of a vacant property, readable from the street,
identifying a point of contact in case of emergency. The sign
itself is more likely to draw criminal behavior, as it identifies
the property as vacant. Better alternatives already are in
place to identify contacts in a timely manner.
Other provisions under consideration have called for
responsible parties to install exterior lighting to vacant
properties, or to install metal panels as a more attractive
alternative to plywood on doors and windows. In both cases,
the lighting and the panels themselves are desirable items for
thieves to steal for their scrap value. Artistic boarding, as an
example, may be a better option to address the aesthetics and
security concerns at the same time.
It is unfortunate but true that even vacant properties under
management by field service professionals will become
targets of thieves looking to score large quantities of scrap
metal for fast profit.
However, working together as an industry, and by reaching
out to cities to address the challenge in a spirit of cooperation,
our hope is to help deter criminals and minimize damages so
that vacant properties can remain viable and return to family
homeownership as quickly as possible. There is no better
way to combat vacant blight and preserve and maintain the
integrity of neighborhoods across the country.
Robert Klein is CEO of Safeguard Properties, the largest
privately held mortgage field services company in the U.S.
-- o0o --
Bankruptcy Watch Carolyn A. Taylor, Attorney
he First Circuit Court of Appeals reversed the bankruptcy

court's award (affirmed by the district court) of $250,000 for
emotional distress and $ 500,000 in punitive damages against
Ameriquest in the Nosek case, concluding that the alleged
failure to "account for and properly distinguish between prepetition and post-petition payments" and "...(its) inability to
promptly credit (Nosek's) account from the suspense
account.. " neither violated Bankruptcy Code 1322(b) nor
the debtor's confirmed chapter 13 plan. A copy of the
opinion is attached.
The Massachusetts Bankruptcy Court relied upon its authority
under Bankruptcy Code 105(a) to enforce the Code and
court orders and to prevent abuse of the bankruptcy process
stating that a significant damage award was necessary to gain
the attention of this national mortgage company that uses the
"same accounting system is servicing all of its Chapter 13
debtors, which shows how widespread the problem could
potentially be."
In vacating the lower court judgments, the First Circuit held
that (i) the plain language of 1322(b) is permissive not
mandatory and offers the debtor flexibility in forming a plan
by listing elements that may be included, but does not impose
obligations on any party, including the lender; and (ii) while
the confirmed plan provided that the debtor "continue to
make the regular monthly payments in accordance with the
contract with the Mortgage," and pay the pre-petition
arrearage through the plan over sixty months, it did not place
any specific accounting or payment allocation obligations on
Ameriquest; and (iii) the debtor failed to demonstrate that
Ameriquest's accounting practices precluded a financially
advantageous refinance or caused her any economic harm
such as the imposition of late fees or finance charges or
threatened the right to cure a pre-petition default; and (iv)
absent specificity in the plan relative to payment application,
the Court 's legitimate concerns did not justify its the remedy
it invoked under 105.
Indeed, the harsh sanctions award* entered by the
bankruptcy court may have been excessive in view of the
specific facts in Nosek: this was the third bankruptcy case
filed by the debtor in a two year period; the two prior
bankruptcy cases were dismissed on the Trustee's motion for
failure to provide requested information; the debtor defaulted
under an Agreed Stay Relief Order in the third case and a
notice of stay termination was filed with the court;
Ameriquest maintained two accounting systems, one through
a computer program that tracked only contractual due dates
regardless of whether a payment was pre-petition or postpetition and the second done manually by a bankruptcy
specialist who accounted only for post-petition due dates; the
servicer's "suspense" account served as a "collection bucket"
to accept and hold partial payments that would otherwise be
returned to the borrower.; and the third amended plan filed
while the appeal was pending provided that the "Court
ordered payment by Ameriquest Mortgage in the amount of $

250,000 (would) fund 100% (of) this Chapter 13 plan."
Clearly, the reversal in the Nosek case is a welcome change
for lenders and servicers confronted with an increasing
number of bankruptcy judges who have not only expanded
their oversight role to proactively change mortgage servicing
practices but also extended their involvement through
conclusion of the bankruptcy case (notwithstanding earlier
stay termination ). [*originator/servicer-$250,000;
foreclosure law firm-$ 25,000; partner, foreclosure law firm-$
25,000; national outsourcing law firm-$ 100,000; current
servicer-$ 250,000; 2 associate attorneys in foreclosure law
firm and associate attorney in new law firm-warning.]
Carolyn A. Taylor Partner; HughesWattersAskanase
Three Allen Center 333 Clay, 29th Floor Houston, Texas
77002;Freddie Mac Designated Counsel (Texas)--Fannie
Mae Retained Attorney Network (Texas)--Direct: 713/3282804 ( Main: 713/759-0818Texas Super Lawyer, Texas
Lawyers Magazine (2004-2008) Member, Default Attorney
Group (Texas); America Legal & Financial Network (Texas).
Certified, Texas Board of Legal Specialization, Consumer
Bankruptcy Law (1985); Business Bankruptcy Law (1989)
-- o0o --
Foreclosure Watch Cynthia Nierer, Attorney
Standing - The issue de jour.

Whether you call it the sub-prime implosion or the bursting
of the bubbleit all equates to the same thing. Trouble for
the economytrouble for the mortgage industry. For over a
year now, the country and the mortgage industry have been
dealing with the repercussions of the housing boom and bust.
As mentioned earlier, all levels of government have headed
the call of their constituents and have (in one fashion or
another) attempted to right the wrong that has been done.
Whether you agree with it or not, well, thats not the issue.
The reality is, government has become involved in the
mortgage plight and that is the reality those in the mortgage
industry must accept in order to move forward.
Judicial scrutiny by the courts has been on an ever increasing
rise this past year. Unopposed motions are no longer just
accepted as accurate. Judges are raising issues sua sponte (on
their own)raising defenses not raised by the borrowers.
And, in some cases, changing the rules in the middle of the
inning. One needs to look no further than the issue of
standing to see the truth behind this. Across the country,
standing has become one of the hottest issues focused on.
Simply put, standing is the legal right to bring a lawsuit.
There are 3 basic requirements: 1) there must be an injury, 2)
the injury must be reasonably connected to the defendants
conduct and 3) there must be a likelihood of success. It is
important to note at this juncture that a party may only bring
a suit based upon his/her own rights. One cannot bring suit
based upon the rights of another.

So, with the above being saidwhat has that got to do with
foreclosures? Well, plenty. Loan transfers between
lenders/servicerswhether it is one loan or 100are not an
anomaly in this industry. It is a regular practice. Along with
loan transfers, it is no secret that not all lenders/servicers will
have a complete chain of mortgage assignments upon the
receipt of a loan(s) or even upon referring same out to a
foreclosure attorney. An assignment of mortgage is evidence
of the transfer of interest from one bank to another.
It is this assignment of mortgage that proves that the
lender/servicer now owns loan A. And, it is this assignment
of mortgage that proves that the lender/servicer has
standingthe right to bring suit against a defaulting
borrower. Take this example: Bank A gives a loan to
borrower. The loan is sold to Bank C. Borrower defaults.
Bank C refers the matter to their attorney for foreclosure.
Attorney commences the action in the name of Bank C. In
order to prove to the court that Bank C is the owner of the
mortgage and is the proper party plaintiff, the assignment of
mortgage evidencing the transfer must be provided to the
court.
Depending upon the jurisdiction, how and when a copy of the
assignment of mortgage must be provided to the court will
vary. Many times, same is not needed at the commencement
of the foreclosure action. The typical course of action has
been for the foreclosure to be initiated and, when required,
the assignment provided to counsel who then provides same
to the court. In many instances, the assignment of mortgage
would be dated sometime after the date of the actual transfer
of interest and the date the foreclosure action was
commenced. However, same usually contain an effective
date. This date was a date prior to the commencement of the
foreclosure action and was generally associated with the date
of the loan transfer.
It is important to remember that the assignment of mortgage
is proof positive to a judge that the party who initiated the
lawsuit had the right to do so and, as such, has standing. If
the plaintiff in the foreclosure action doesnt match the entity
in the assignment of mortgagewell, there is a real problem.
Yet, that is not the only situation that the mortgage industry is
running up against in courts across the nation. The issue is
generally not one of who is listed in the assignment (though
that is very important!) but when the assignment was
executed. And, in some cases, it goes a step further. Not
only is the question when was the assignment executed, but
when was it recorded.
Countrywide Home Loans, Inc. v. Taylor (NY Supreme

Court, Suffolk County, 843 N.Y.S.2d 495) the borrower
defaulted and the bank proceeded to move forward with a
foreclosure action. The borrower failed to appear in the
action and the bank moved forward with an application for an
Order of Reference. The judge, on this unopposed motion,
denied same as the plaintiff lacked standing.
In denying the motion, the judge noted that the assignment of
mortgage was dated after the commencement of the
foreclosure action but had an effective date prior to
commencement. He stated that the effective date within the
assignment of mortgage was insufficient to establish the
plaintiffs ownership interest at the time the action was
commenced. As such, the assignment needed to be fully
executed prior to the commencement of the foreclosure
action.
While the legal issue of standing is of great import, it is also
important to realize what else happened here. Standing is
typically an affirmative defense raised by the defendant
there was no answer filed by the defendant in this case. The
court itself raised this issue.
It is worth mentioning at this point that there is no statute in
New York which requires an assignment be dated prior to the
date the foreclosure is commenced. Moreover, there is an
Appellate Division case which actually holds to the contrary.
In Bankers Trust Company v. Hoovis, 263 A.D.2d 937, the
Appellate Division specifically held that without proof
showing otherwise, the effective date within the assignment
of mortgage (which was a date prior to the commencement of
the foreclosure action) is proper and plaintiff was found to
have standing. Yet, despite this, judges in the Supreme
Courts of New York continue to hold otherwise.
The level of judicial scrutiny and the relevance to the issue of
standing can be further seen in the case of Aurora Loan
Services, LLC v. Sattar, 17 Misc.3d 1109(A), Kings Co 2007.
Abdul Sattar gave a mortgage naming Mortgage Electronic
Registration Systems Inc. as mortgagee of record and as
nominee for First Magnus Financial Corporation. The
borrower defaulted and a foreclosure action was commenced.
The complaint stated that the note and mortgage had been
assigned to Aurora. Plaintiff made an application for an order
allowing service by publication as the borrower could not be
located.
Upon reviewing plaintiffs application, the judge conducted

his own investigation. He viewed the website for the
recording office and ascertained that there was no assignment
of mortgage on record to Aurora or any other entity. His
decision stated that in a foreclosure, the plaintiff must not
Across the nation we are seeing a plethora of decisions being
only establish the existence of the note and mortgage but
handed down and actions being filed claiming that the
ownership of same. Here the court found that Aurora lacked
lender/plaintiff initiating the foreclosure action lacked
standing to bring the lawsuit as there was no documentary
standing to do so. Below is just a sampling of same
evidence before the court supporting the claim that the
examples of what has been happening and an precursor to
mortgage had been assigned to Aurora. The judge also found
what is yet to come.
that commencing an action by the wrong plaintiff was
frivolous and a waste of judicial resources. He cautioned that
Take, for instance, one of the first cases in New York State to
any such 13
waste in the future would result in sanctions being
rock the mortgage industry on the issue of standing.
In
imposed against the attorney and the named plaintiff.

Cases such as the above, have definitely affected the handling
of foreclosure actions in jurisdictions where such holdings
have been handed down. Having a complete assignment
chain prior to the commencement of a foreclosure action is
becoming the norm in many jurisdictions. In some, having a
complete and recorded assignment chain is becoming the
standard. In the above cases, the courts raised the standing
issue on behalf of borrowers. However, the issue of standing
is by no means being ignored by borrowers and/or their
attorneys. Within the past year we have seen the filing of
several class action lawsuits directly dealing with the issue of
standing and assignments of mortgage.
Take the class action lawsuit, Whittiker v. Deutsche Bank
National Trust Company, et al. (US District Court, Northern
District of Ohio, Eastern Division; Docket# 1:08-cv-00300DDD). The borrower/plaintiffs allege that the defendants
(bank and foreclosure attorneys) filed foreclosure actions
without the benefit of valid, recorded assignments of
mortgage (the borrower/plaintiffs claim that recording of the
assignment is required). The main contentions in the
complaint are that: 1) defendants violated the Federal Fair
Debt Collection Practices Act, 15 U.S.C. Section 1692e by
making misleading representations concerning defendants
ability to sue and interest in the debt, and 2) that same is in
violation of the Ohio RICO (R.C. Section 2923.32) in that by
knowingly filing complaints where they did not own the note
and mortgage, defendants conduct equates to a pattern of
corrupt activity.
This case is still pending and at the time of this writing it is
still in the discovery stages. The ultimate outcome is
extremely important to the mortgage industry. The borrowers
are not just looking for a motion to be denied or a case
dismissed. They are seeking actual and statutory damages,
including treble damages. In addition, they are requesting the
appointment of a receiver to recover from the bank the
charges collected from the borrowers, any interests in real
property it acquired illegally, reimbursement of any fees
paid to the law firms and to determine the allocation of the
funds and property interests.
Similarly, Graham v. Kochalski, LLC, et al. (United States
District Court, Southern District of Ohio, Eastern Division;
Docket# 2:08-cv-00120-GCS-TPK) is another pending class
action lawsuit of great concern to the mortgage default
industry. This class action lawsuit began with a foreclosure
action commenced against Graham. While the bank and its
attorney represented that the bank was the holder of the note
and mortgage (and had standing to sue) borrower/plaintiffs
allege that the bank did not have a valid, recorded assignment
of mortgage. The suit alleges violation of the Ohio Consumer
Sales Practices Act (Ohio Rev. Code Section 1345.01) and
the Fair Debt Collection Practices Act (15 U.S.C. Section
1692).
Similar to Whittiker, above, this case is still pending. The
outcome can have a major impact on the mortgage industry as
well as the individual defendants. As above, the

borrower/plaintiffs are seeking actual and statutory damages.
No discussion of standing would be complete without
including MERS. In the class action lawsuit, Jackson, et al.
v. Mortgage Electronic Registration Systems, Inc., et al.
(U.S.District Court Minnesota, Docket# 0:08-cv-00305-JNEJJG), the borrower/plaintiffs alleged that MERS violated
state law by failing to record all assignments of mortgage
prior to commencing a non-judicial foreclosure as per Minn.
Stat. Section 580.02 (2006). Additionally, the plaintiffs claim
to have been served with a Notice of Foreclosure Sale naming
MERS as the mortgagee. They allege that said Notice failed
to list all assignments of mortgage as required by statute
(Minn. Stat. Section 580.04).
The District Court certified the following question to be
resolved by the Supreme Court: When MERS serves as
mortgagee of record as nominee for a lender and that lenders
successors and assigns, and the original lender subsequently
sells, assigns, or transfers its rights under the mortgage, has
there been an assignment of the mortgage that must be
recorded pursuant to Minn. Stat. Section 580.02 (2006)
before MERS can commence a foreclosure by
advertisement? Oral argument before the Supreme Court is
currently scheduled for September 10, 2008. Not only is the
concern about foreclosures going forwardbut what about
all the foreclosure sales already held and the properties that
were transferred?
It is extremely important to realize exactly what the above
represents. Standing is a legal requirement and must be
complied with. Yet, more than a legal issuethe above cases
represent and signify the judicial mindset across the nation.
Cynthia A. Nierer, Esq., Rosicki, Rosicki & Associates, P.C.,
51 East Bethpage Road, Plainview, New York 11803
T#:516-741-2585, Ext. 241, F#:516-470-0972
Please Come Visit Us At Our Website: WWW.Rosicki.com
-- o0o -SUB-PRIME MORTGAGE CRISIS: THE LEGAL
BUSINESS FALLOUT
PINK SLIPS, ATTRITION & REDEPLOYMENT
By Andrew J. Sherman and
Dickstein Shapiro LLP
Michael Milken, the director of low-grade bond
research at Drexel, Burnham and Lambert, once remarked that
investment in the corporate debt markets often reflected a herd
instinct i.e. investors stuck solely to investment grade
securities. This herd instinct, according to him, was flawed in
several ways. His attribution to the instinct of investors as herd-
like was made while he advocated the use of junk bonds1 as a
issuance of securities out of a pool of mortgage loans without
debt instrument. Encouraging investors to look at qualitative
any backing of governmental funds. The contagion gripped the
considerations such as managements ability and its vision of the
financial markets9 and the herd instinct manifested itself in a
future rather than sticking to the size, historical record and
situation where investors jumped in significant numbers to take
industry position of the company, he was successful in fueling
advantage of the booming housing market that prevailed in the
the growth of the junk bond market.2 A similar event occurred
early years of the new millennium. Capital markets engaged in
in the early part of the 21st century when the housing boom3
technological innovations for the riskier category of investors;10
encouraged a heavy spiraling in sub-prime mortgage lending4.
something like a diverse maturity mortgage product11 which
This increase saw a parallel increase in the securities offered
led to pooling of mortgage loans with varied credit rating into
through a pooling of such sub-prime mortgage loans through the
securities. Many conditions conducive to sub-prime lending and
process of securitization.5 Investors moved from buying
securitization of such loans induced investors to take the risk of
pooled mortgage loans securitized and sold on the backing of
investing in such loans. The expectations contained in these risks
full faith and credit of government6 and quasi-government
did not materialize and fears of a looming economic crisis that
agencies7 to what is referred to as non-agency transactions i.e.
might result from numerous delinquencies for such loans lay
one where the willing investor undertakes the risk of the
large not just in the United States, but all over the world.
underlying mortgage loan.8 Such a transaction consisted of
A sub-prime borrower has been defined by the 2001

Interagency Expanded Guidance for Subprime Lending
Programs as one who displays a range of credit risk

Junk bonds are essentially high yielding bonds rated below
investment grade; usually having a lower credit rating of BB+ or
characteristics on a general basis which includes, inter alia, two
less according to the rating of Standard & Poor
2
Mitchell, Cunningham & Haas, Corporate Finance &
or more 30-day delinquencies in the last 12 months, judgment,
Governance, p 342, 3d edition, Carolina Academic Press
3
See below, Reasons Behind the Increase in Sub-Prime Loans
4
foreclosure, repossession or charge-off in the prior 24 months,
Subprime lending is lending at a higher rate than the prime rate
i.e. the interest rate normally charged for prime borrowers.
bankruptcy in the last 5 years or a debt service-to-income ratio
The borrowers in a subprime lending are referred to as
subprime borrowers; generally borrowers with poor credit
of 50% or greater12. The reasons for an increase in lending to
history. A sub-prime borrower is one who has a high debt-toincome ratio, usually an impaired credit history, or other
characteristics that are correlated with a high probability of
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=997079#Pap
default relative to borrowers with good credit history. For further
erDownload
explanation, see below, n. __
5
9
Securitization is the creation and issuance of debt securities
See Securitization: When it goes Wrong, The Economist,
whose payments of principal and interest derive from cash flows
September 20, 2007, available at
generated by separate pools of assets. From an accounting
http://www.economist.com/finance/displaystory.cfm?story_id=9
perspective, securitization can be explained as the process of
830765 (last visited April 10, 2008)
10
removing loans from the balance sheet of lenders and
Investors have different risk-return profiles based on their
transforming it into debt securities that can be purchased by
liability structures and objectives of their respective investors or
investors. In the case of mortgages, securitization is the process
stakeholders. There might be a yield-hungry investor looking for
of turning pools of home loans into bonds, which are generically
a BBB rated security and his portfolio might be diversified
referred to as mortgage- backed securities (MBS).
enough to account for the high risk in that security
6
11
Government National Mortgage Association (Ginnie Mae)
Gangwani, Sunil, Speaking of Securitization, Deloitte &
7
Federal Home Loan Mortgage Corporation (Fannie Mae) and
Touche, July 20, 1998, available at
Federal National Mortgage Association (Freddie Mae)
http://www.vinodkothari.com/gangwan2.pdf (last visited April
8
Fabozzi, Frank J. and Kothari, Vinod, "Securitization: The
10, 2008)
12
As contained in Cadwalader, Wickersham & Taft,
Tool of Financial Transformation" . Yale ICF Working Paper
Memorandum:
No. 07-07, available at
Supplemental Materials 15 Recent Interagency Expanded Guidance on
1
such borrowers are varied.13 First and foremost, favorable
limited documented proof of income and assets, relaxed monthly
conditions existed for the residential housing market in the
payments, adoption of hybrid subprime adjustable rate
period between 2002 and 2005. Interest rates were low when
mortgages18, use of stated income loans19, the ability to have
compared to historical averages and home prices were
take a double mortgage on ones home20 and use of technology
appreciating in most markets.14 For example, the appreciation
for approval of mortgage loans21 and were some of the key
rate in the third quarter of 2004 in the US housing market was a
factors that were conducive to the rapid increase in subprime
staggering 17.27% and the average appreciation rate in the years
lending. In addition to such factors that enabled mortgage
2004 and 2005 remained around 13-14%.15 This created an
lending to be easier, there was a marked increase in
equity cushion for the subprime borrowers with the result that
securitization of subprime loans. Specifically, the number of
they always had the option of refinancing their loans or pulling
asset-backed securities increased. For example, in 2005, the
their equity out of the properties if they experienced financial
number of mortgage backed securities issued was to the tune of
problems. Further, the underwriting criteria became more
$508 billion.22 Such securities were usually high yield securities
borrower-friendly. For example, a subprime borrower having a
which generated vast amounts of liquidity23 increasing the
credit score16 between 450 and 680 could obtain a mortgage loan
volume of credit available to subprime borrowers. Indeed, this
with almost no down-payment. The reason for a change in the
led to an exponential increase in the work that structured finance
underwriting criteria can be attributed to the challenge of
lawyers were involved in keeping them very busy.
maintaining the affordability of home purchases. As noted
Originally, mortgages essentially characterized a
above, the significant acceleration rate in house prices made
relationship between a homeowner and a lender which could be
house purchase less affordable for many buyers.17 In order to
a bank or a savings institution. The lender would decide whether
maintain, and even increase, loan origination, lenders offered
to grant the loan, collect regular interest and/or principal
mortgage loans on borrower-friendly criteria. Additionally,
payments or foreclose in case of defaults. In modern times,
mortgage loans are pooled according to their characteristics in a

Subprime Lending, February 8, 2001, available at
http://www.cwt.com/assets/client_friend/CF02-08-01.pdf (last
visited April 10, 2008)
13
18
For example, in the year 2001, the origination of sub-prime
ARMs had a relatively low fixed introductory teaser rate and
mortgage loans was to the tune of $190 billion. It increased to
sub-prime borrowers qualified for the low rate.
19
Stated income loans permitted borrowers to provide limited
$335 bn in 2003 reaching an all-time high in 2005 where the
documentation to support their income
figure stood $625 billion. Along with increase in origination, the
20
The usual mortgage was for the remaining purchase price of
ratio of originations to actual loans issued increased from 46% in
the property after paying downpayment. In many cases, a second
2001 to 75% in 2006.
14
Office of Federal Housing Enterprise Oversight, News
mortgage loan was offered for the downpayment (piggyback
Release, House Prices Weaken Further in Most Recent Quarter,
loan). It was often a home equity loan
21
For example, New Century Financial Corporation used an
November 29, 2007, available at
automated internet-based loan submission and pre-approval
http://www.ofheo.gov/media/pdf/3q07hpi.pdf (last visited April
system called FastQual and the period between 2000 and 2004
10, 2008)
15
witnessed an annual growth rate of 59% in mortgage loans
Id., p 4 (OFHEO House Price Index for USA)
22
16
Source: Inside Mortgage Finance 2007, as cited in Ashcraft,
Credit score is a numerical expression based on credit report
Adam B. & Schuermann, Till, Understanding the Securitization
information representing creditworthiness of the buyer
17
Krinsman, Allan N., Subprime Mortgage Meltdown: How did
of Subprime Mortgage Credit, Staff Report, Federal Reserve
it Happen and How will it End, The Journal of Structured
Bank of New York (March, 2008), available at
Finance, Vol. XIII, No. 2 (Summer, 2007), available at
http://www.newyorkfed.org/research/staff_reports/sr318.pdf
(last visited April 10, 2008)
http://www.stroock.com/SiteFiles/Pub533.pdf (last visited April
23
Liquidity
10, 2008)
16is the ability to convert an asset to cash
way that can enable such a pool to be sold to potential investors
rational investor to invest in an appropriate combination of
through the process of securitization. This process includes a
investments considering risk and returns from the investments.
number of various parties24 in addition to the traditional
The key is to understand that the more diversified the pool, the
borrower homeowner and lender bank/savings institution.
lower the probability that a loan will be delinquent and the
The first stage is the traditional mortgage lending. The borrower
higher the attractiveness of the security created out of the pool.
obtains a loan from the lender bank or savings institution (which
The transfer of such mortgage loan receivables must adhere to
shall be, and is commonly, referred to as originator). Usually,
an accounting technique approved by the Financial Accounting
brokers advertise the mortgage loans to prospective borrowers,
Standards Board to perfect a true sale, or what is descriptively
evaluate the creditworthiness of the borrower, and undertake the
referred to as an irreversible transfer27. Generally, the
process of loan applications to mortgage lenders. In some
determinants of a true sale are enlisted in FASB 14028. Law
subprime mortgage deals, the pool of loans is purchased from
firms were also involved in counseling originators or arrangers
the originator by the arranger/issuer. An arranger/issuer is
to ensure the true sale of receivables in accordance with the
usually an investment bank which has an expertise in dealing
law and accounting policies.
with securitizing such a pool. This party is responsible for
Once the mortgage loans are pooled and a true sale is
structuring the deal in consultation with credit rating agencies,
ensured, the pooling takes form of a debt instrument which is
creating a special purpose bankruptcy-remote vehicle and
tradable i.e. that can be sold to private and institutional investors.
undertaking necessary formalities with the SEC including
The two major forms of debt instruments used in the sub-prime
sometimes, underwriting issuance of securities by the trust to
mortgage debt securitization were MBS (mortgage-backed
investors. Most law firms having a Structured Finance practice
securities) and CDOs (collateralized debt obligations) where the
group or a concentration on structured finance in their Finance
latter has different sub-categories. Mortgage backed securities
group represented investment banks in structuring the deal.
(MBS) are referred to as first-tier securitizations29 in which the
Next, the originator identifies a pool of mortgage loans that
collateral consists of mortgage loans pooled into a special
satisfy certain characteristics making them acceptable to be
purpose vehicle that issues various classes of securities as
securitized. The underlying basis for creating a pool of mortgage
described above. This is in contrast to CDOs that have as the
loans is a probability risk distribution analysis.25 This is done in
underlying collateral an investment in the cash flows of the
a way so that the probability of suffering extreme losses due to a
explain that an investor can reduce portfolio risk simply by

holding instruments which are not perfectly correlated. In other
huge number of loans becoming delinquent is low. This concept
words, investors can reduce their exposure to individual asset
risk by holding a diversified portfolio of assets. Diversification
can be analogized, though not in complete conformity, with the
will allow for the same portfolio return with reduced risk.
27
See Fabozzi & Kothari
28
diversification objective of the portfolio theory26 that guides a
The Financial Accounting Standards Board (FASB) is an
organization whose primary purpose is to develop generally
accepted accounting principles (GAAP) within the United
24
These parties are described in the Section on the Securitization
States.
29
Adelson, Mark & Jacob, David, Risk Management Lessons
Process
25
See Fabozzi & Kothari
from the Sub-prime Problem, p. 2 (March, 4, 2008), available at
26
See Harry Markowitz, Portfolio Selection, Journal of Finance,
http://www.securitization.net/pdf/Publications/Adelson_RiskMn
gmnt_Mar08.pdf
7 (1), 77-91 (1952). The diversification objective seeks
to
17
assets rather than a direct investment in the underlying collateral.
how markets perceived the value of their underlying collateral
Additionally, in other CDOs, the collateral underlying them
i.e. how markets perceived the value of such cash-flows or
consist of mortgage backed securities as well. Thus, sometimes
mortgage-backed securities. The mark to market basis of
in a CDO, the asset transferred to an SPV in order to create a
valuation leads to a highly over-rated figure on the accounting
security instrument, is an MBS itself.30 In such cases, a CDO
statements of the investors and when the figures stand corrected
will be issued through a securitization process, the difference
through an adjustment bringing them closer to their inherent
being that instead of a true-sale of mortgage loans, a sale of
value, it results in such write-downs.35 One can envisage the role
such mortgage-backed securities will take place. Therefore, in
of law firms in creation of such securities advising originators
contrast to ordinary sub-prime mortgage MBS instruments,
and investment banks at various stages as well as drafting
CDOs are second-tier securitizations31 and their dealing occurs
offering circulars for the securities offered to investors. The
in what is referred to as a credit derivative market.32 A
issuer/arranger underwrites the sale of securities, with the pool
significant difference between a traditional MBS and CDO is
of subprime mortgage loans acting as collateral, to an asset
that while the underlying collateral in an MBS is a fixed pool of
manager who is an agent for the ultimate investor. Asset
real estate mortgages, CDOs are backed by varied categories of
managers have two roles: they conduct the credit analysis and
collateral that are permitted to be traded within established
maintain the records for the regulators and auditors. Asset
parameters.33 One of the problems with CDOs, that understated
managers are the gatekeepers of safety and quality for the
the risks inherent in the sub-prime mortgage crisis, was that
portfolio managers in the credit arena.36 Asset managers also
some institutions investing in such CDOs lacked the competency
retained law firms to assist them with their agency relationship
to monitor credit performance and estimate expected cash flows.
with the investor.
Furthermore, from a valuation point of view, since CDO
Causes of the crisis
instruments are held on a mark to market basis34, the paralysis in
The crisis can be explained by an analogy of a stone
the credit markets and the collapse of liquidity in these products
thrown in still water causing a ripple effect. As the United States
has led to substantial write-downs in 2007 and are still
and many parts of the world have noticed, the ripple assumed a
continuing. This meant that CDOs were valued on the basis of
much larger form than expected and, as widely believed and
30
substantiated, it has not stopped yet. The most striking and
Kothari, Vinod, Securitization of Banking Assets, CBOs,

distinct explanation can be referred to the fact that because of the
CLOs and CDOs, available at
http://www.vinodkothari.com/bankloan.htm (last visited April
soaring of house prices and significant reduction in interest rates
10, 2008)
31
See Adelson & Jacob
32
earlier in the decade, sub-prime lending became big business for
See supra., n 70
33
See Stern, Jeffrey, Esq. and Klingenberg, Erik D., Esq.,
35
Collateralized Debt Obligations: New Technology for MBS and
See for example, Outlook Sags Under Weighty Writedowns,
Other Real Estate Assets, available at
available at
http://www.securitization.net/pdf/mbscbo.pdf (last visited April
http://www.securitization.net/knowledge/article.asp?id=137&aid
=7899 (last visited April 10, 2008)
10, 2008). Such parameters include geographic and industry
36
Rossow, Katy, The Role of Research in Money Market
concentration limits and debt service coverage requirements.
34
Mark to market valuation means assigning a value to a
Investing, available at
financial instrument based on the current market price for that
http://www.geassetmanagement.com/us/geaminst_talking_cash_
4q06.html
instrument.
lenders. This encouraged people to invest in more risky and
mortgages have had a big impact on the markets for mortgage-
exotic instruments37 persuading themselves that risks were not
backed securities and on the financial institutions and investors
as large as warnings indicated. It is debatable whether this
who purchased securities based on subprime mortgages.41 The
behavior was guided more by greed for such instruments
markets in those risky and opaque and complex natured
knowing fully well the risk involved or whether the risks
instruments dried up and became illiquid i.e. it became
perceived werent what they materialized to be. To add to the
increasingly difficult to sell such instruments because of lack of
chain of events, interest rates increased from an alarming 1% to
willing investors and get cash to keep the wheels of liquidity
around the 5% mark. A low U.S. federal-funds rate in response
churning.42 Once investors realized that subprime mortgage-
to the dot-com crash in the earlier part of the 21st century, and
backed securities could lose money, they began shunning all
especially the 1% rate set in mid-2003 to counter potential
complex securitization products. The impact of this crisis then
deflation, lowered interest rates on adjustable-rate mortgages
extended beyond mortgage-backed securities to the general
(ARMs) and may have contributed to the rise in U.S. home
securities market, which many regarded as highly-liquid and
prices that continued to rise for two years subsequent to the peak
secure, and to credit markets generally which caused, what is
of ARM originations.38 After the initial teaser period, which
referred to as, the credit crunch.43 This summarizes the chain
enabled sub-prime borrowers with poor credit history to obtain
of events that triggered the sub-prime mortgage crisis.
those loans, the monthly payment is based on a higher interest
Impact of the crisis
rate, usually equal to an interest rate index plus a margin rate
The impact of the financial losses incurred by mortgage
fixed for the lifetime of the loan. The increase in the US federal
lending institutions that dealt with lending sub-prime loans to
funds rate resulted in interest rates on both fixed- and adjustable-
borrowers, investment banks that arranged the sale of the pooled
rate mortgage loans moved upward due to an increase in the
mortgage loans to a special purpose vehicle and investors who
index rate reaching multi-year highs in mid-2006.39 Due to this,
held securities in their portfolio has been huge. Hedge funds and
some of the debt instruments i.e. securities diminished
banks around the world purchased bonds, or risk related to
significantly in value and the market for such debt began
bonds, backed by bad home loans in the form of C.D.O.s.44 It
disappearing rapidly and investors were left holding debt to
41
See Rosengren, Eric, CEO, Federal Reserve Bank of Boston,

Subprime Mortgage Problems: Research, Opportunities and
Policy Considerations, p 2, available at
http://www.bos.frb.org/news/speeches/rosengren/2007/120307.p
df (last visited April 10, 2008)
37
42
I would classify MBS on sub-prime mortgage loans as risky
Interview with Mervyn King, the Governor of Bank of
instruments and CDOs as exotic ones on the basis of the
England, (November 6, 2007), available at
description set out above.
http://news.bbc.co.uk/2/shared/bsp/hi/pdfs/06_11_07_fo4_king.
38
Alan Greenspan, The Roots of the Mortgage Crisis, December
pdf (last visited April 10, 2008)
43
12, 2007, available at
See Schwartz, Steven, Markets, Systemic Risk, and the
http://opinionjournal.com/editorial/feature.html?id=110010981
Subprime Mortgage Meltdown, (March 18, 2008), available at
http://www.huffingtonpost.com/steven-schwarcz/marketssystemic-risk-a_b_92198.html (last visited April 10, 2008)
39
44
See Bernanke, Ben S., supra n ___
See Anderson, Jenny & Timmons, Heather, Why a US
40
Bank of America in sub-prime hit (November 13, 2007),
Subprime Mortgage Crisis is felt around the world, August 31,
available at http://news.bbc.co.uk/2/hi/business/7093464.stm
2007, available at
http://www.nytimes.com/2007/08/31/business/worldbusiness/31
19
which it is almost impossible to attach a value.40 The losses on
has run up to billions of dollars and billions in other currencies
cost of obtaining a loan from the banks.48 Because of the huge
due to losses that incurred to global participants in the US sub-
losses suffered by mortgage lenders and investment banks, banks
prime market. An estimate observes that banks may face up to
in general became wary of offering credit to subprime
$300 billion of losses from the subprime credit crisis over the
borrowers. Because the debt instruments were both riskier and
next 18 months. The impact of such huge losses was not just
more opaque and complex, in particular the CDOs, the markets
confined to its reflection on the financial statements of the
in those instruments became illiquid and the ability to sell the
affected banks. Large financial institutions and investment banks
instruments and realize cash was diminished. The liquidity in
acquired subprime mortgage originators and servicers at a
those markets dried up.49 This multi-dimensional drying up of
strikingly low price. Countrywide Financial Corp., for example,
liquidity characterized by diverse concerns led to what is
was acquired by Bank of America for a price of $4 billion which
referred to as credit/liquidity crunch. While this universal
was 53% of its valuation. Indeed, in absence of an interested
caution in the credit market may not necessarily have bad
acquirer, Countrywide was very well on its way to bankruptcy.
effects, and may even promote responsible lending, it is
Many hedge funds were wound up by investment banks45 and
characterized by an increased pessimism about the
diverse remedies were used to obtain additional capital for the
creditworthiness of the participants in such a market. This has
huge amount of losses which included issuance of new shares
resulted in banks hoarding liquidity and making access to credit
and selling a portion of the stock to other entities. Those banks
difficult.
that simply could not be saved had to file for Chapter XI
Legal business fallout
bankruptcy proceedings.46
This led to what is symbolically referred to as credit
The fallout due to the credit crisis in legal business

around the world is perhaps selective. Indeed, a feeling would
crunch. Credit crunch or credit crisis means a financial
permeate across the global legal field that the credit crisis has
environment where investment capital is in short supply. It is a
affected the overall legal business. However, it might well seem
period where growth in debt money slows down which
counter-intuitive. It is pertinent to note that lawyers in general
subsequently leads to a drying-up of liquidity in an economy. In
shall attract the same demand as they did while participating in
such a situation, the banks will not or cannot lend and investors
the subprime mortgage loans and its securitization market. The
cannot or will not buy debt.47 It is characterized by a reduction
difference is that there was a strong need then for transactional
(usually a sudden reaction, therefore, resulting in a crisis) in
lawyers engaged in the structured finance practice, whereas now,
the availability of loans or an increase (usually, sudden) in the
the need is for lawyers active in corporate restructuring and
litigation of the contentious issues arising from the crisis; in

derivatives.html?_r=1&fta=y&oref=slogin (last visited April 10,
2008)
45
48
For example, Bear Stearns wound up two of its hedge-funds
There are a number of reasons why banks may suddenly
following losses in the US sub-prime mortgage market. See, Fed
increase the costs of borrowing or make borrowing more
Caution shakes global shares, available at
difficult. This may be due to an anticipated decline in value of
http://news.bbc.co.uk/2/hi/business/6905652.stm (last visited
the collateral used by the banks when issuing loans, or even an
April 10, 2008)
increased perception of risk regarding the solvency of other
46
Example, New Century Financial
banks within the banking system.
47
49
See Macfarlane, supra
Mervyn20
King interview
other words, practice areas where business is boosted by a bad
Thus, they are encouraged to be productively engaged in other
economy. Firms are likely to engage in practice
practice areas till market sorts itself out. On the other hand, a
diversification, practice enhancements, and strategic
managing partner at another US based law firm, also actively
redeployment of certain individuals. Essentially, law firms
involved in securitization products, does concede a drop in
relying on major Wall Street banks are being hit the hardest right
activity and a slowdown. However, he remarks that although
now. Associates who specialized in private equity a year or so
starting over in a new practice area can understandably cause
ago may be finding that corporate governance, bankruptcy or
some jitters, good lawyers can readily meet the challenge. It is,
litigation are better practice areas, or countercyclical practices
indeed, a testing time for lawyers and law firms.
for them right now. For example, the statistics indicate a boom
Lay-offs might well be inevitable and arguably perhaps
for the bankruptcy practice. In 2007, bankruptcy filings rose 38
the only feasible way for law firms heavily engaged in structured
percent, according to the Administrative Office of the U.S.
finance; however, there are strategic offshoots of adopting the
Courts. The number of filings in 2007 totaled 850,912, up from
pink slip strategy. As a leading US law journal reports, law firms
617,660 in 2006. Filings involving business debt rose 44 percent
are hesitant to engage in lay-offs because of the adverse public
compared with 2006, from 19,695 to 28,322.
relations consequences and a fear that they will soon find
The financial reason for fallout is simple - fees may not
themselves short of associates, once the economy improves.
be as large; deals may not be as large or complex, markets in
Redeployment, they believe, is expected to produce a long-term
securities like MBS and CDOs and even a significant portion of
benefit attaining two goals with one strategy; retain the services
asset-backed securities are becoming illiquid after a tremendous
of associates and counsels while ensuring adequate supply in the
boom until a year ago. Because the transactional work in the
busier practice areas. Despite these consequences, lay-offs have
structured finance practice group is severely hit and a recession
occurred when law firms have faced inevitability. Strikingly, one
looms large, there is not enough work to ensure periodic fees to
of the world's highest-grossing law firm dismissed six senior
keep the wheels churning for those firms where concentration
associates who worked on mortgage-backed securities in its
was heavily skewed in favor of structured finance.
structured finance practice in November last year. Two other
It must be noted at the outset that not all firms are
firms asked associates and salaried lawyers to take sabbaticals or
engaged in laying off their associates and counsels. Indeed, as
transfer to other departments, a move that is often seen to
a senior partner of a US law firm, well-known for its active
precede job cuts. Most lay-offs have occurred through associates
involvement in the CDO market, remarks that encouraging its
and counsels leaving the firm through attrition rather than being
associates and counsel to take sabbaticals or consider a change
handed pink slips. This can be attributed to the business
in their practice group is not the quintessential pink slip layoff.
decisions taken by these firms. For example, some firms were
Law firms around the world are cognizant of the fact that due to
bullish in their views about the growing market a couple of
the fundamental disruption in the credit markets, there isnt
years ago. They went on what can be colloquially called a
enough work to keep structured finance lawyers fully busy.
hiring spree to handle the high volume of work. A spokesman
of a major international law firm remarks that the firm had built
shook the United States in the1990s, many firms cut too deep
up capabilities in anticipation of increasingly higher levels of
and paid a price when the economy came back. There is a
business activity but instead the market experienced a significant
sensible need to maintain a base of bench strength which is a
fall-off. Some firms who have not engaged in lay-offs are
balancing act that the personnel management of law firms must
considered to have learnt their lessons from previous
ensure to face the tides of the economy. The advice really is to
downturns that the United States has experienced.
ensure the right balance. Viewing this fallout similar to
However, those facing a lay-off due to the inevitability
perceiving a glass half-full rather than half-empty, the slowdown
have been responsible with the otherwise negative morale effect
comes as a challenge to law firms to engage in some strategic
that the lay-off brings. Some firms are very thoughtful about
restructuring and having appropriate cushion for their long-term
how they engage in lay-offs and have partners designated to help
survival and, thereby, growth.
situate every person with another job. Firms recognize the

reason for this legal restructuring and are much less likely
today to cloak this action as a quality failure on the part of the
associates. A question that can perhaps throw some light on
improving the overall efficiency in firms around the world can
be raised at this point: could the slowdown be a dazed little
silver lining? A client head of a firms private equity group
remarks that firms might also be using this slowdown as an
opportunity to raise the performance bar and clean out the
bottom 5 percent of their performers. While, firms might run the
risk of playing foul when they engage in lay-offs only when
alarm bells went ringing, it might turn out to be a slight blessing
in disguise with an appropriate change in workforce leading to
overall efficiency.
ABOUT THE AUTHOR
ANDREW J. SHERMAN is a Partner in the Washington, D.C.

office of Dickstein Shapiro LLP, with over 400 attorneys nationwide.
Mr. Sherman is a recognized international authority on the legal and
strategic issues affecting small and growing companies. Mr. Sherman
is an Adjunct Professor in the Masters of Business Administration
(MBA) program at the University of Maryland and Georgetown
University where he teaches courses on business growth, capital
formation and entrepreneurship. Mr. Sherman has been General
Counsel to Entrepreneurs Organization since 1987. Mr. Sherman is
also the founder of Grow Fast Grow Right, an education and training
company for executives of middle market companies
(http://www.growfastgrowright.com). Mr. Sherman is the author of
seventeen (17) books on the legal and strategic aspects of business
growth and capital formation. His most recently published books
include the recent three-part Kaplan business growth series, Grow Fast
Grow Right (November 2006), as well as Build Fast Build Right and
Start Fast Start Right, published by Kaplan in the Spring of 2007. Other
recent titles include The Complete Guide to Running and Growing A
A prevailing view is that more layoffs are likely in the

works. Some firms will be looking at layoffs as the impact of the
capital markets continues to be felt. However, one must note the
Business, published by Random House in November of 1997 and

Mergers and Acquisitions: A Strategic and Financial Guide for Buyers
and Sellers, published by AMACOM in March of 1998, the second
edition was published in November 2005 and Parting Company,
published by Kiplingers in May of 1999, Raising Capital, published by
optimistic reality of being in the legal world depending on
Kiplinger's in Spring of 2000 and Raising Capital (2nd Edition),
the economy, there's always going to be a boom in some areas
published by AMACOM in February 2005 and Fast Track Business

Growth, published by Kiplinger's in January of 2002.
and some slower areas, but nothing comes to a standstill. The
[2009: Mr. Sherman can be reached at Jones Day 51 Louisiana Ave.
key advice, and seconded by authors of this article, comes from
NW, Washington, DC 20001-2113 Direct: 202.879.3686 Fax:
chairman of a national law firm consultancy. In the crisis that
202.626.1700 ajsherman@jonesday.com ]
-- o0o --
Zone of Insolvency Meets the

Zone of Coverage in the Mortgage Meltdown
Liability Lessons from the Official
Take-Under of Bear Stearns!
By Richard Ivar Rydstrom, Esq.,
Chairman, Pro Council Advisory; Chairman,
Coalition for Mortgage Industry Solutions
rrydstrom@gmail.com
Part I Issues Overview - All Sides
It was beyond another historic day on Wall Street. The
Federal Reserve (Fed) hadnt made a similar move for over

50 years. Rumor had it that Bear Stearns was to file
bankruptcy that Monday, March 17, 2008, but the Fed
invoked an arcane regulation which effectively "forced" the
take over of Bear Stearns by suitor JP Morgan Chase. This
move was guaranteed by the unknowing taxpayer to the tune
of $29 billion when the Fed granted access to the Discount
Window and accepted collateral in amounts and quality
which remains secret, uncertain and unknown. Maybe we
should call it what it is: a take-under and lateral pass. Over
that infamous weekend the Fed, JP Morgan Chase and Bear
Stearns agreed to a $2 per share buyout; against a recent $84
per share book value. As late as January 2007, Bear Stearns
had a $171 share price. JP Morgan Chase will pay $236
million (with the downside put option guarantee or backing
of the Fed), including an option on the building. The building
is said to be worth more than the deal price alone.
What are the legal ramifications? What laws come into play
from such conduct?
Lawsuits > Corporate Duties > Business Judgment Rule >
Insurance Litigation
The Fed apparently fashioned a credit guarantee take-under
(with lateral pass) template for the investment banks, which
wipes out common equity while passing the revised and
taxpayer guaranteed going-concern to the suitor. It
circumvents, and operates outside of the bankruptcy fiefdom,
at fire sale prices; at least initially.
Lawsuits >
Investor, shareholder, counterparty, creditor and employee
lawsuits are likely to skyrocket around the Bear Stearns takeunder or this type of resolution model. For example, JP
Morgan Chase will have access to $6-7B allocated to a
litigation fund. These lawsuits will further define the gray
lines that exist in "zone of insolvency" litigation (i.e.:
conflicting duties owed by directors and officers to
shareholders, creditors, employees and other interested
parties). The emerging and heightened duties owed when

making decisions in the zone of insolvency will focus much
litigation around the decision-making-process. The broad
issue may be defined as: what duties are owed to whom,
when insolvency is foreseeable? A flood of coming lawsuits
will determine whether or not (fiduciary) duties were owed to
shareholders, creditors, employees, counterparties or other
interested parties, which required the filing of an actual
bankruptcy instead of the perfection of a secret take-under
fire sale. Other issues that must be answered may include:
whether or not Directors and Officers (Board of Directors)
owe a heightened or fiduciary duty to shareholders, creditors,
employees, counterparties or other interested parties when
facing insolvency which requires inclusion of such parties in
the decision making process?
Corporate Fiduciary Duties >
Similarly with all jurisdictions, directors and officers manage
the corporation (entity) for the shareholders. For example, in
California, Corporations Code 300 states in pertinent part:
(a) the business and affairs of the corporation
shall be managed and all corporate powers shall be
exercised by or under the direction of the board.
The board may
delegate the management of the day-to-day
operation of the business
of the corporation to a management company or
other person provided
that the business and affairs of the corporation
shall be managed and
all corporate powers shall be exercised under the
ultimate direction
of the board.
When the company is clearly solvent, the duty of care (to act
prudently) and the duty of loyalty (to refrain from selfdealing) are clearly focused on the entity and the
shareholders. As found in most jurisdictions, by way of
example, California Corporations Code 309 (a) defines the
statutory duty of care and loyalty as:
(a) A director shall perform the duties of a director,
including duties as a member of any committee of
the board upon which the director may serve, in good
faith, in a manner such director believes to be in the
best interests of the corporation and its
shareholders and with such care, including
reasonable inquiry, as an ordinarily prudent person in
a like position would use under similar
circumstances. [Emphasis added]
Extension of Duties Owed > Threshold Question: Zone of
Insolvency >
Historically in California and Delaware, the general rule is

that directors owe a fiduciary duty of care and loyalty to the
entity and its shareholders; but not to creditors or warrant
holders (Simons
v Cogan (Del 1988) 549 A2d 300. However,
23
in times of insolvency, or when operating within the zone of

insolvency, a question remains: whether or not additional
duties or heightened duties arise to others, namely creditors.
In times of historic illiquidity, credit impairment, and
economic downturn, compounded by the existence of historic
levels of securitized mortgage backed securities (MBS)
facing serious devaluation, credit rating downgrades and
uncertain insurance coverage, managers (and the Board of
Directors) must discern whether they are in the zone of
insolvency, and whether or not they owe duties to more
remote constituencies, such as creditors, counterparties and
employees. To make this determination, they must ascertain
whether they are solvent or operating within the zone or
vicinity of insolvency (Geyer v Ingersoll Publications (Del
Ch 1992) 621 A2d 784). With no clear definitions of the
zone of insolvency, directors and officers are very often
operating within the zone, whether they recognize it or not.
California Civil Code 3439.02 states:
(a) A debtor is insolvent if, at fair valuations, the
sum of the debtor's debts is greater than all of the
debtor's assets.
(b) A debtor which is a partnership is insolvent if,
at fair valuations, the sum of the partnership's
debts is greater than the aggregate of all of the
partnership's assets and the sum of the excess of
the value of each general partner's nonpartnership
assets
over the partner's nonpartnership debts.
(c) A debtor who is generally not paying his or her
debts as they become due is presumed to be
insolvent.
(d) Assets under this section do not include
property that has been transferred, concealed, or
removed with intent to hinder, delay, or defraud
creditors or that has been transferred in a manner
making the transfer voidable under this chapter.
(e) Debts under this section do not include an
obligation to the extent it is secured by a valid lien
on property of the debtor not included as an asset.
When operating in the grey area of the zone of insolvency,
directors and officers may owe additional (fiduciary) duties to
creditors, and by analogy, others such as investors, and
employees (North American Catholic Education
Programming Foundation, Inc., v. Gheewalla, (Del 2007) 930
A2d 92 at 101). The board is often vulnerable to legal attack
for not fully acknowledging and addressing or protecting, the
interests of these other parties when operating in the zone of
insolvency. By failing to address, resolve or safeguard these
inherent conflicts of interests among these conflicting diverse
self-interests, the board may assume liability - for failure to
do so.
did the Bear Stearns merger team have a duty to invite its
major creditors, investors, counterparties or employee
representatives to the negotiation table to avoid violating
these (possibly) heightened duties? No opinion is drawn
herein. The author acknowledges that there may be a business
judgment defense argument that the Bear Stearns merger was
in part motivated by the Feds to avoid a potential broad
market meltdown that would have caused total loss to the
company (and economy).
Zone of Insolvency in the Mortgage Meltdown > Key
Questions >
Zone of Insolvency is the grey-matter of this tumultuous
issue. What exactly is the zone of insolvency, and how do
directors and officers know they are operating within it? Are
the decisions of directors and officers (Board) always
susceptible to attack when operating in economic times of
foreseeable financial stress when credit and liquidity are
uncertainty or much less available then in prior (good) times?
What about banks, lenders and investment banks (like Bears
Stearns) who have great amounts of Mortgage Backed
Securities (MBS) on their books that are subject to probable
high default rates, huge write-downs, and additional capital
(call) requirements; are they operating in the zone of
insolvency? What about their counterparties, especially when
probable Rating Agency downgrades are foreseeable? What
about holders of securitized MBS and commercial back
mortgage securities (CMBS) that are facing probable writedowns, and downgrades from rating agencies, and hold
representations and warranties from known thinly
capitalized mortgage lenders, who have either gone out of
business or are likely to do so at any time, and may (or may
not) have insurance to cover the losses? These fact patterns
and many others may support the elements of numerous
causes of action that are generally accepted and/or emerging.
Causes of Action > Personal & Entity Level Liability >
There are many potential causes of action that may ensue to
seek redress consistent with the theme conduct of
recklessness, gross negligence or intentional conduct intended
to defraud the creditors (or others) from assets sufficient to
cover the foreseeable debts owed, or to defraud the creditors
(or others) of a remedy. Causes of action that may encompass
such theme facts may also include, breach of contract, fraud,
breach of fiduciary duty, by derivative actions (North
American Catholic Education Programming Foundation, Inc.,
v. Gheewalla, (Del 2007) 930 A2d 92 at 102), and fraudulent
transfers, conspiracy to defraud creditors (others), Unfair
Business Practices (California Business & Professions Code
17200), sham sale liability, RICO, and Deepening
Insolvency ((Bankr. D. Del. 2003) Official Comm. of
Unsecured Creditors v Credit Suisse First Boston 299 B.R.
732, 750-52). Creditors may be entitled to use derivative
actions, as authorized by most courts, however, direct actions
are not generally authorized as yet.
The law is not settled in this area, and is uncertain in many

respects. But in jurisdictions imposing such duties, directors
and officers are better advised to include such diverse groups
A deepening insolvency cause of action or damages element
in the decision-making-process. Similar to the administration
occurs when the directors and officers incur additional debt
of a bankruptcy estate, creditor groups are entitled to
while operating
participate in the litigation of all such issues. For example,
24 in the zone of insolvency, in an attempt to
bridge the insolvency gap into the solvency zone. A few

courts have indicated that they would or may allow such
redress or direct claim. ((Bankr. D. Del. 2007) Miller v
McCown De Leeuw & Co., Inc. (In re The Brown Schools),
368 B.R. 394, and Jetpay Merchant Services, LLC. v. Miller,
2007 WL 2701636, 7 (N.D. Tex. Sept. 17, 2007).
Some cases arising out of the Delaware General Corporation
Law 271 should serve as a reminder that creditors (and other
like parties) who are defrauded out of repayment or assets by
which to be redressed, or legal or equitable remedies, will
have authority to pursue such claims. For example, the sale,
lease or exchange of assets without fair consideration, or
made with disparity (is) so great as to shock the conscience
of the court or warrant the conclusion that the majority was
actuated by improper motives, thereby working injury to the
minority (Massaro v Fisk Rubber Corp. 36 FSupp 382 (D
Mass 1941), California General Corporation Law at 1000,
1001, and 1100, CSC California Law Affecting Business
Entities). The provisions of this section are for the benefit of
the stockholders and creditors and they alone can object to
the transfer (Gunther v. Thompson, 211 Cal 631).
Moreover, failing to adopt a plan to pay creditors (Delaware
General Corporation Law 280, 281; California General
Corporation Law, 2004-2011, CSC California Law Affecting
Business Entities) may result in further action against the
purchaser and seller. Creditors may pursue the corporate
assets into the hands of the transferee corporation when, on
the sale of corporate assets, no provision is made for the
payment of corporate debts. (McKee v. Standard Minerals
Corp. 156 A 193 (Ch Ct 1931); Colonial Ice Cream Co. v
Southland Ice Utilities Corp., 53 F2d 932 (CD Cir 1931).
For pleading, law & motion and damages purposes, litigators
may very well seek cases limited to facts that indicate that the
directors and officers have failed to acknowledge that they
are operating in the zone of insolvency, and failed to address,
resolve or include creditors, counterparties, investors or
employees from participating in the resolution of the these
diverse interests. These cases with successful expert
testimony would tend to show that the directors and officers
acted recklessly, with gross negligence or with the intention
to defraud creditors (or others), and/or to wrongfully destroy
such remedies.
The defenses of such actions will revolve around the general
limitations of corporate duty rules holding that no duty is due
such remote parties, no direct action for a deepening
insolvency cause of action or as damages exists, invocation of
the Business Judgment Rule defense and the factual expert
defense argument that the circumstances were merely
foreseeable business risks.
However, one thing is for certain: one of the hottest areas of
litigation that will arise from the mortgage meltdown will be
over insurance coverage. Bad faith actions against carriers
should see a rise as disputes over coverage, exclusions, and
notice requirements materialize. One example of where a vast
landmine of coverage disputes reside is in the buyback or
repurchase demand and litigation area.
Related Insurance Coverage & Litigation >

Several types of insurance policies might afford coverage to
various buyers or beneficiaries of such mortgage industry
related policies, including corporate directors and officers,
investment banks, investors, pension funds, assignee trusts,
REMICS, owners of mortgage backed securities,
shareholders, employees, lenders, and in some cases,
borrowers. Coverage may be available for investigations,
litigation, defense or indemnity. Directors and Officers
(D&O), Errors & Omissions (E&O), Commercial General
Liability (CGL), Employment Practices Liability (EPL),
Credit Risk, Accounts Receivable or Private Mortgage
Insurance (MI), and Investors Residential Value (IRV)
insurance policies may be in play.
Whether or not directors and officers (Board of Directors) are
required to give notice of a potential claim to their carrier(s)
or whether certain exclusions preclude coverage, will be hotly
contested as investigations and lawsuits are filed and
coverage requests are made. There are very short claims
notice requirements (i.e. 10 days) in many of these policies,
which may act to preclude coverage (in some states). There
are many policy provisions that may preclude coverage or be
counter intuitive to good business judgment. Moreover, this
uncertainty, and/or potential or actual loss of coverage may
add to the argument that the entity operated within a zone of
insolvency, and therefore owed a higher or expanded duty
(i.e. to creditors).
The Zone of Coverage >
Special Warning: BuyBacks & Potential Waiver of
Insurance Coverage >
The unwary investment bank or investor demanding subprime
defaulted buybacks from the unwary lender or originator,
may preclude insurance coverage when adverse positions are
taken which outright deny or prove that there is no liability
(debt) under the repurchase agreement or buyback demand
because certain credit risk policies (MI) have clauses which
require the buyer to be in actual debt to gain policy coverage.
So the lender industry norm of dispute and deny when faced
with buyback demands, may very well jeopardize insurance
coverage.
Disputes might better seek further information and evidence
of such demands on a loan by loan and document by
document level, without an outright denial of such
indebtedness, but at the same time, trigger a notice of
potential claim to the carrier; but only after consultation with
an expert (bad faith and mortgage industry) insurance
litigator.
Furthermore, directors and officers must consider whether

insurance may or may not be available for such underlying
buybacks or its related litigation as a factor in determining
whether the company is operating in the zone of insolvency
with heightened duties, and how that might affect creditors,
counterparties, investors, employees and other interested
parties; including
the availability of insurance (loss) coverage
25
to each diverse related interest. Buyers of insurance must act

quickly when facing investigations, buyback demands,
disputes or litigation, to ascertain how to act within the zone
of coverage.
Directors and officers must act immediately to seek the
advice of expert insurance litigation attorneys or face the
potential of uninsured losses, personal and/or entity level
liability.
Resolution of Conflicting Priorities > New Optimal Best
Practices Safe Harbor >
For those cases where directors and officers include creditors,
counterparties, investors, or employees to participate in the
resolution of such diverse interests, such efforts of inclusion
may tend to preclude such actions altogether, limit liability
and lessen or preclude findings of intent or malice. Moreover,
such inclusive participatory resolution strategy practices are
or will become the safe harbor or optimal best practice as it
benefits all related interests.
the Mortgage Meltdown. Mr. Rydstrom created the following

solutions for the mortgage banking industry and its
consumers:
Opt In Mods
BK Mods
Opt In Settlement
Default Referral
Shared Built In Equity Mods
QBieSam
Quarantined Built In Equity Shared Appreciation Mods
Zone of Foreclosure
Zone of Insurance
Zone of Loss Mitigation
Zone of Bankruptcy
The author can be reached at rich@procouncil.com or by
telephone at 949-678-2218. Special zone sites are available
to industry members for research, debate, and membership.
An inclusive resolution strategy can be implemented by

bringing creditor, shareholder, investor, counterparty,
employees or conflicting self interest groups into the
"decision-making-process" at the time of assessment or
acknowledgment of the zone of insolvency. This will also
serve the interests of all related parties. However,
confidentiality may be necessary when structuring an
inclusive participatory resolution strategy. Otherwise, filing
for bankruptcy protection may be the preferred step for the
prepared entity (directors and officers).
The Zone of Coverage Meets the Zone of Insolvency >
The author recommends that the industry consider immediate
steps to ascertain optimal best practices that enhance the
likelihood that related participants are operating within the
zone of coverage before fair value valuations (FASB
157, etc.) more accurately recognize loss severity due to
insecure or uncertain related insurance coverage (procedures),
that can be used to support the argument that the entity was
(knowingly) operating within the zone of insolvency; finding
extended (fiduciary) duties and uninsured liabilities owed not
only to first parties, but to third parties, such as creditors, and
others. The author will continue this debate for industry
executives on www.zoneofcoverage.com ,
www.procouncil.com and at upcoming AFN industry
conferences.
About the Author: Richard Ivar Rydstrom is a California
attorney practicing in Southern California helping banks,
lenders, and servicers help borrowers, with emphasis in
residential, commercial and consumer debt workouts, civil
litigation, and select bankruptcy related matters. He is the
Chairman of ProCouncil Advisory settlement group,
(www.procouncil.com) and the Chairman of the Coalition for
Mortgage Industry Solutions out of DC. He was published by
the 110th Congress on the State of the Economy and
Challenges Facing the Middle Class, Homeownership, and
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ISSUE
RESOLUTION
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Corner:
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Excel Innovations, Inc.

Kozeny & McCubbin, L.C.
Phelan, Hallinan & Schmieg, L.L.P.
Potestivo & Associates, P.C..
RealtyTrac
Safeguard Properties, Inc.
Trott & Trott, P.C.
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West Coast: Richard Rydstrom, Esq.

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Confidential Strategy Solutions

Opt In Settlements
ProCouncil Advisory
www.procouncil.com
Richard Rydstrom, Esq.
4695 MacArthur Ct. 11th Floor
Newport Beach Ca 92660
rich@procouncil.com
TABLE OF CONTENTS
TABLE OF CONTENTS ........................................................................................ i
TABLE OF AUTHORITIES ................................................................................ iii
QUESTIONS PRESENTED ...................................................................................1
STATEMENT OF FACTS.............................................................. ........................1
ARGUMENT ............................................................................................................3
I.
The Supreme Court Did Not Err in Dismissing the Complaint on the
Ground that HSBC Filed the Foreclosure Action Before It Obtained
an Assignment of the Mortgage. ...............................................................5
A. The Supreme Court Did Not Err in Finding that HSBC Did Not
Obtain Ownership of the Mortgage Prior to September 7, 2006. ................6
1. The Effort To Backdate the Assignment Has No Legal Effect...........7
2. No Record Evidence Shows an Assignment Effective Prior to
September 7, 2008..........................................................................................9
B. The Supreme Court Did Not Err in Allowing Mr. Dammond To
Question HSBCs Ownership of the Mortgage After His Time To Answer
Had Expired.................................................................................................... 10
C. Under New York Constitution, the Supreme Court Did Not Have
Authority To Hear HSBCs Suit................................................................... 13
II.
The Supreme Court Also Had Grounds to Dismiss the Complaint

Because HSBC Failed to Allege or Prove Ownership of the Mortgage
Debt........................................................................................................... 16
A. Ownership of the Debt Sued Upon Is an Element of a Cause of Action

To Foreclose a Mortgage Securing Payment of a Debt. ............................. 16
B. The Defense of Failure To State a Cause of Action Is Not Waivable.
19
i
III.
The Supreme Court Did Not Abuse Its Discretion In Vacating the
Judgment of Foreclosure and Sale ........................................................ 20
A. The Supreme Court Did Not Abuse Its Discretion in Vacating the
Judgment for a Sufficient Reason and in the Interests of Substantial
Justice. ........................................................................................................... 21
B. The Record Also Supports Vacatur of the Judgment for Either
Excusable Default or Material Misrepresentation under C.P.L.R.
5015(a). ............................................................................................................ 23
1. Excusable Default. ............................................................................... 23
2. Material Misrepresentation. ............................................................... 27
CONCLUSION...................................................................................................... 28
CERTIFICATE OF COMPLIANCE ................................................................. 30
ii
TABLE OF AUTHORITIES
CASES
142 Fulton LLC v. Hegarty, 41 A.D.3d 286 (1st Dept 2007) .............................. 27
5-Star Mgmt. v. Rogers, 940 F. Supp. 512 (E.D.N.Y. 1996)............................ 17, 19
ALBANK, FSB v. Dashnaw, 37 A.D.3d 932 (3d Dept 2007) ................................ 20
Alling v. Fahy, 70 N.Y. 571 (1877) ........................................................................ 21
Archer v. Archer, 171 A.D. 549 (2d Dept 1916)................................................... 21
Aurora Loan Services, LLC v. Sattar, 17 Misc.3d 1109(A) (Sup. Ct. Kings County
2007) .......................................................................................................................5
Bankers Trust Co. v. Hoovis, 263 A.D.2d 937 (3d Dept 1999) ...................... 6, 8, 9
Barranco v. Cabrini Med. Ctr., 50 A.D.3d 281 (1st Dept 2008) .......................... 13
Campaign v. Barba, 23 A.D.3d 327 (2d Dept 2005) ............................................ 16
City of N.Y. v. State of N.Y., 86 N.Y.2d 286 (1995) ............................................... 10
Countrywide Home Loans, Inc. v. Taylor, 17 Misc. 3d 595 (Sup. Ct. Suffolk
County 2007) ................................................................................................... 8, 11
Deutsche Bank Natl Trust Co. v. Miele, 20 Misc. 3d 1146(A) (Sup. Ct. Richmond
County 2008) ....................................................................................................... 25
Deutsche Bank Trust Co. Ams. v. Peabody, 20 Misc. 3d 1108(A) (Sup. Ct.
Saratoga County 2008) .................................................................................... 8, 10
First Trust Natl Assoc. v. Meisels, 234 A.D.2d 414 (2d Dept 1996)................... 18
Green Apple Mgmt. Corp. v. Aronis, __ A.D. ___, 2008 WL 4595179 (2d Dept
Oct. 14, 2008) ...................................................................................................... 24
Haber v. Nasser, 289 A.D.2d 200 (2d Dept 2001)................................................ 27
iii
Hearst Corp. v. Clyne, 50 N.Y.2d 707 (1980)........................................................ 14

Hosp. for Joint Diseases v. Dollar Rent A Car, 25 A.D.3d 534 (2d Dept 2006).. 27
I.J. Handa, P.C. v. Imperato, 159 A.D.2d 484 (2d Dept 1990) ............................ 27
In re City of Buffalo, 78 N.Y. 362 (1879)............................................................... 21
In re Foreclosure Cases, 521 F. Supp. 2d 650 (N.D. Ohio 2007).......................... 15
In re Foreclosure Cases, No. 07-cv-2282 et al., 2007 WL 3232430 (N.D. Ohio
Oct. 31, 2007) .........................................................................................................4
Kluge v. Fugazy, 145 A.D.2d 537 (2d Dept 1988).................................... 16, 17, 19
Mackay v. Treat, 213 A.D. 725 (1st Dept 1925) ......................................................7
Manne v. Carlson, 49 A.D. 276 (1st Dept 1900) .................................................. 19
Merritt v. Bartholick, 36 N.Y. 44 (1867)................................................................ 17
Montefiore Med. Ctr. v. Hartford Acc. & Indem. Co., 37 A.D.3d 673 (2d Dept
2007) .................................................................................................................... 23
Mortgage Electronic Registration Sys. v. Coakley, 41 A.D.3d 674 (2d Dept 2007)
................................................................................................................................9
N.Y. & Presbyterian Hosp. v Am. Home Assur. Co., 28 A.D.3d 442 (2d Dept
2006) .................................................................................................................... 26
N.Y. Univ. Hosp. Rusk Inst. v. Ill. Natl Ins. Co., 31 A.D.3d 511 (2d Dept 2006) 26
People ex rel. Spitzer v. Grasso, 54 A.D.3d 180 (1st Dept 2008) ........................ 15
RCR Servs. Inc. v. Herbil Holdings Co., 229 A.D.2d 379 (2d Dept 1996)..............6
Rich v. Rich, 103 Misc. 2d 723 (Sup. Ct. N.Y. County 1980)................................ 13
Savino v. ABC Corp., 44 A.D.3d 1026 (2d Dept 2007).............................. 20, 23
iv
Schmidt v. City of N.Y., 50 A.D.3d 664 (2d Dept 2008) ....................................... 12

Shepard & Morse Lumber Co. v. Franklin Trust Co., 55 A.D. 627 (3d Dept 1900)
................................................................................................................................7
Siegel v. State, 138 Misc. 474 (N.Y. Ct. Cl. 1930)................................................. 21
Simpson v. Tommy Hilfiger U.S.A., Inc., 48 A.D.3d 389 (2d Dept 2008) ............ 23
Vanderbilt v. Schreyer, 81 N.Y. 646 (1880)........................................................... 21
Wade v. Village of Whitehall, 46 A.D.3d 1302 (3d Dept 2007)............................ 21
Wells Fargo Bank Minn., N.A. v. Mastropaolo, 42 A.D.3d 239 (2d Dept 2007) . 14
Woodson v. Mendon Leasing Corp., 100 N.Y.2d 62 (2003) ...................... 20, 21, 22
STATUTES
C.P.L.R. 2004.......................................................................................................... 12
C.P.L.R. 3012(d) ..................................................................................................... 12
C.P.L.R. 3211(a)(7)........................................................................................... 16, 20
C.P.L.R. 3211(e) .................... ........................................................................... 11, 20
C.P.L.R. 5015(a) ..................................................................................................... 23
N.Y. U.C.C. 3-201(3)........................................................................................... 10
N.Y. U.C.C. 3-202(1)......................................................... .................................. 10
N.Y. U.C.C. 3-204(2)........................................................................................... 10
v
QUESTIONS PRESENTED
1. Did the Supreme Court err in dismissing the Complaint on the ground that
Plaintiff-Appellant filed the foreclosure action before it obtained assignment of
the mortgage? No.
2. Did the Supreme Court err in dismissing the Complaint on the ground that
Plaintiff-Appellant failed to state a cause of action because it did not allege or
subsequently establish ownership of the debt sued upon? No.
3. Did the Supreme Court abuse its discretion in vacating its judgment of
foreclosure and sale? No.
STATEMENT OF FACTS
Plaintiff-Appellant HSBC appeals an order of the Supreme Court,
Westchester County entered on January 11, 2008 granting Defendant-Respondent
Howard Dammonds request to dismiss the Complaint and vacate the judgment of
foreclosure and sale. The Supreme Court vacated the judgment of foreclosure and
dismissed the Complaint on the ground that HSBC did not own the subject
mortgage at the time the foreclosure action was filed. (R. 2).
HSBC filed the action on July 27, 2006 to foreclose a mortgage given by
Mr. Dammond to First Continental Mortgage and Investment Corporation. That
mortgage secured a $440,000 indebtedness pursuant to a promissory note signed
by Mr. Dammond on September 28, 2005. (R. 82). In its Complaint, HSBC
alleged that at the time the Complaint was filed, the subject mortgage had already
been assigned to HSBC by assignment to be recorded. (R. 83). However, as Mr.
1
Dammond later discovered, the purported assignment was executed on September

7, 2006, after the foreclosure action was commenced. (R. 80).
Before the action was filed and during the pendency of the litigation, Mr.
Dammond and a foreclosure prevention counselor attempted in good faith to
resolve the matter through a loan modification agreement with the loan servicer,
Chase Home Finance. (R. 10). These negotiations resulted in Mr. Dammond
accepting a modification offer in November 2006. (R. 11). Chase later withdrew
the offer and proposed an unaffordable modification requiring payments of more
than $5,000 a month and a balloon payment of $25,744 after seven months. (R.
11). Following the breakdown of negotiations, Mr. Dammond then pursued other
avenues of relief, including consultation with a bankruptcy attorney. (R. 11). The
bankruptcy counsel did not undertake to represent Mr. Dammond in the
foreclosure action. (R. 11-12). She entered a Notice of Appearance in the case on
January 5, 2007 so as to be notified of any developments concerning the
foreclosure that would be relevant to a bankruptcy filing. (R. 11-12, 39). Mr.
Dammond also filed complaints with the New York State Banking Department and
the New York State Attorney Generals Criminal Fraud Division concerning fraud
in the origination of the loan. (R. 12).
After Mr. Dammond learned that HSBC did not own the mortgage at the
time the action was filed, he filed an order to show cause seeking vacatur of the
2
judgment of foreclosure and sale and dismissal of the Complaint on several

grounds, including that HSBC did not own the mortgage when the action was filed.
(R. 8-27). In response, HSBC argued that the assignment was legally effective as
of a stated effective date of June 16, 2006, but proffered no evidence to support
this factual assertion. (R. 92-96). The Supreme Court therefore concluded that
the [l]anguage in the assignment purporting to make it retroactive is insufficient
to establish [HSBCs] ownership interest at the time the action was commenced
and accordingly dismissed the Complaint and vacated the judgment of foreclosure
and sale. (R. 3).
ARGUMENT
The Supreme Court did not abuse its discretion in vacating the judgment of
foreclosure and dismissing the Complaint after Mr. Dammond brought to the
courts attention that HSBC did not own the mortgage loan at the time it filed the
Complaint. In response to the Order to Show Cause, HSBC failed to establish that
it had received assignment of the mortgage before it filed the foreclosure action.
Moreover, HSBC did not allege, much less prove, that it ever owned the
promissory note secured by the mortgage. These deficiencies in HSBCs
allegations and proof created a meritorious defense to foreclosure that required
dismissal of the action. Furthermore, the Supreme Court did not abuse its
discretion in vacating the judgment of foreclosure in the interests of fairness and
3
substantial justice because Mr. Dammond presented a meritorious defense to the

foreclosure action, provided a reasonable excuse for failing to raise HSBCs
ownership of the mortgage at the outset of litigation, and showed that HSBC
misrepresented in the Complaint that it received assignment of the mortgage prior
to filing the action. Accordingly, this Court should hold that the Supreme Court
was well within its discretion to vacate the foreclosure judgment and dismiss the
action.
Nevertheless, HSBC seeks this Courts blessing for its loose and fast legal
procedures. Under HSBCs breathtakingly expansive legal theories, once a
foreclosing party obtains a judgment of foreclosure, it has no obligation to respond
to evidence disputing its ownership of a mortgage loan and it can rely on
conclusory legal assertions to resolve the factual issue of when it obtained
ownership of the mortgage loan. Invoking judicial assistance, particularly
assistance to strip a family of its home, should require more. As one federal court
recently observed in rejecting a foreclosing partys similar justifications for its
sloppy practices: the jurisdictional integrity of the courts is [p]riceless and
cannot be shoved aside by the condescending mindset and quasi-monopolistic
system where financial institutions have traditionally controlled, and still control,
the foreclosure process. In re Foreclosure Cases, No. 07-cv-2282 et al., 2007
WL 3232430, at *3 n.3 (N.D. Ohio Oct. 31, 2007).
4
In particular, when a foreclosure complaint contains misrepresentations

concerning assignment of the mortgage and note or fails to allege ownership, it is
exceedingly difficult for homeowners, especially those proceeding pro se, to
discover these defects and raise them as defenses to the foreclosure. At the outset,
pro se homeowners have an inherent informational disadvantage regarding the
transfer of the complicated financial instruments on which foreclosing financial
institutions rely. When these instruments are transferred between institutions
without written, recorded assignments, it is virtually impossible for homeowners to
determine ownership at any given time. See, e.g., Aurora Loan Services, LLC v.
Sattar, 17 Misc. 3d 1109(A) (Sup. Ct. Kings County 2007). Moreover, the rise of
the secondary market and the securitization of mortgage debt have created
significant uncertainty about the ownership of mortgage loans. Foreclosing
parties, like HSBC, cannot be allowed to disguise defects in their standing to bring
an action by misrepresenting, or failing to allege, if and when they acquired
ownership of the mortgage and note, and then attempt to bar homeowners from
raising these defects once they are discovered.
I.
The Supreme Court Did Not Err in Dismissing the Complaint on the
Ground that HSBC Filed the Foreclosure Action Before It Obtained an
Assignment of the Mortgage.
The Supreme Court did not err in dismissing the Complaint on the ground
that HSBC lacked standing to proceed with the foreclosure action because it did
5
not establish ownership of the mortgage at the time the action was filed. Standing
to bring a foreclosure action requires having an ownership interest in the mortgage
and note at the time the complaint is served. See RCR Servs. Inc. v. Herbil
Holdings Co., 229 A.D.2d 379, 380-81 (2d Dept 1996) ([B]ecause the plaintiff,
at the time it served the complaint on Herbil in 1994, was the assignee of the
subject mortgage, the plaintiff had standing and was entitled to commence this
proceeding in its own name. (citations omitted)); see also Bankers Trust Co. v.
Hoovis, 263 A.D.2d 937, 938 (3d Dept 1999) (Where plaintiff is the assignee of
a mortgage at the time of service of the complaint, plaintiff has standing and is
entitled to commence a proceeding in its own name.). The Supreme Court
properly dismissed the Complaint in light of HSBCs lack of standing.
A.
The Supreme Court Did Not Err in Finding that HSBC Did Not
Obtain Ownership of the Mortgage Prior to September 7, 2006.
HSBC does not dispute that it lacked standing to proceed with this
foreclosure action if it did not own the mortgage on or before September 7, 2006.
Rather, HSBC argues that the Supreme Court erred in finding that HSBC failed to
prove that it owned the mortgage at the time the action was filed. However, the
September 7, 2006 execution date listed on a written mortgage assignment is the
only record evidence of the date when HSBC obtained a legal interest in Mr.
Dammonds mortgage. (R. 80-81). Because that date is later than July 27, 2006
when HSBC filed the Complaintthe Supreme Court correctly concluded that
6
HSBC failed to establish that it had standing to proceed with this foreclosure
action.
1. The Effort To Backdate the Assignment Has No Legal Effect.
HSBC argues that the assignment was effective prior to its execution date of
September 7, 2006 because the assignment contains a provision stating it is
effective on or before June 16, 2006. (R. 80-81). HSBC latches onto this
provision to claim it demonstrated its standing as a matter of law. HSBC Br. 14,
17.
However, the mere fact that a written assignment states that it is effective as
of a date prior to the date of execution has no legal significance. Under New York
law, a party cannot change the date of the assignment solely based on the stated,
retroactive effective date in the assignment document. See Mackay v. Treat, 213
A.D. 725, 728 (1st Dept 1925) (citing prior holding that an assignment made
after the commencement of an action did not have a retroactive effect, carrying the
right to enforce a cause of action which did not exist in favor of the assignees at the
time the suit was commenced by them); Shepard & Morse Lumber Co. v.
Franklin Trust Co., 55 A.D. 627, 628 (3d Dept 1900) (Until it established its debt
it had no standing to assert foreclosure. If, by virtue of the recent transfer to it . . .
it became vested with a better right, a cause of action it did not have before, such
right or cause of action cannot . . . be tacked on to the original, and thus by
7
transfers subsequent to the commencement of the action, the cause of action be

changed.).1
Consistent with this longstanding law, the Supreme Court of Suffolk County
recently refused to give effect to a provision in a written mortgage assignment
identical to the one in this case attempting to backdate the effective date.
Countrywide Home Loans, Inc. v. Taylor, 17 Misc. 3d 595, 597 (Sup. Ct. Suffolk
County 2007) (Such attempt to retroactivity . . . is insufficient to establish [the
mortgage assignees] ownership interest at the time the action was commenced.);
see also Deutsche Bank Trust Co. Ams. v. Peabody, 20 Misc. 3d 1108(A) (Sup. Ct.
Saratoga County 2008) (The assignments language purporting to give it
retroactive effect, absent a prior or contemporary delivery of the note and
mortgage, is insufficient to grant it standing.).
Bankers Trust Co. v. Hoovis, relied on by HSBC, HSBC Br. 18-19, is
entirely consistent with the courts refusal to give legal effect to a provision
backdating a mortgage assignment. The assignment in that case stated that it was
effective as of May 1, 1997, and the record contained no contradictory evidence.
Hoovis, 263 A.D.2d 937, 938 (3d Dept 1999). In other words, unlike in the case
at hand, Hoovis contains no suggestion that the assignments stated effective date
In contrast, HSBC cites cases that do not pertain to assignments and do not discuss, let
alone permit, the enforcement of a backdated contract through a lawsuit commenced prior to
contracts execution. HSBC Br. 17-18.
8
differed from its execution date. Based on these facts, the Hoovis court made the
entirely unremarkable holding that the assignee had standing when it commenced a
foreclosure action on June 19, 1997. Id. The record here, however, reflects that
the execution date of the written assignment was not the same as the stated
effective date. Accordingly, Hoovis provides absolutely no support for HSBCs
argument that a backdated assignment is sufficient to establish standing.
2. No Record Evidence Shows an Assignment Effective Prior to
September 7, 2008.
HSBC argues, for the first time on appeal, that it received physical
possession of Mr. Dammonds promissory note and mortgage on June 16, 2006,
and that the mortgages assignment was therefore effective on that date.2 HSBC
Br. 15-16. This allegation appears only in the appellate brief, authored by HSBCs
counsel, and is unsupported by any record evidence. The record contains
absolutely no evidence of this date of physical transfer. In fact, the record is
entirely devoid of any allegations or evidence, such as affidavits from parties with
actual knowledge, concerning the physical transfer of the note and mortgage.
HSBC does not argue, and New York law does not provide, that an assignment of the
mortgage and note can be effected through the physical transfer of the mortgage alone. Rather,
physical transfer is significant only to the extent that ownership of the note may be transferred by
a change in its physical possession. As incident to the change in the notes ownership, the new
note owner also becomes the mortgage owner. See Mortgage Electronic Registration Sys. v.
Coakley, 41 A.D.3d 674, 674 (2d Dept 2007) (holding that physical transfer of a note
transferred ownership of the note and mortgage, which passed as an incident to the promissory
note).
9
Instead, the records only reference to June 16, 2006 is the conclusory
sentence in the written mortgage assignment attempting to backdate the effective
date. (R. 80). But neither the written mortgage assignment nor anything else in
the record indicates what allegedly occurred on that date. There is no suggestion
that the date is related to the physical transfer of the note and mortgage to HSBC.
In sum, the assignments language purporting to give it retroactive effect, absent
any evidence of a prior or contemporary delivery of the note and mortgage as of
the effective date, is insufficient to establish that the assignment of the mortgage
occurred prior to the date of execution. See Peabody, 20 Misc. 3d at 1108(A).3
B.
The Supreme Court Did Not Err in Allowing Mr. Dammond To

Question HSBCs Ownership of the Mortgage After His Time To
Answer Had Expired.
HSBC argues that the Supreme Court erred in allowing Mr. Dammond to
raise the defense, after his time to answer had expired, that HSBC did not own the
mortgage at the time the Complaint was filed. HSBC argues that Mr. Dammond
waived this defense under C.P.L.R. 3211(e) because Mr. Dammond did not raise
the defense in his Notice of Appearance. HSBC Br. 10-14. However, HSBC cites
Furthermore, even if the note and mortgage were physically delivered to HSBC on June
16, 2008, physical delivery alone is not enough to transfer ownership of the note and
accompanying mortgage to the recipient. The note must also be properly endorsed for the
assignment to be effective. See N.Y. U.C.C. 3-202(1) (requiring delivery with any necessary
indorsement to effectively negotiate an instrument payable to a definite entity, such as the
originating lender of a home loan); id. 3-201(3) (Negotiation takes effect only when the
indorsement is made and until that time there is no presumption that the transferee is the
owner.); id. 3-204(2) (providing that physical delivery can effectively negotiate a note that is
indorsed in blank).
3
10
no authority for the proposition that a defense is waived if not asserted in a Notice
of Appearance.
Under C.P.L.R. 3211(e), [w]hen a defendant answers a complaint and fails
to assert lack of standing as a defense, such defense is waived. However, here,
no such answer or waiver exists. Countrywide Home Loans, Inc. v. Taylor, 17
Misc. 3d 595, 597 (Sup. Ct. Suffolk County 2007) (finding no waiver of standing
defense where defendant had not yet filed an answer). Mr. Dammond did not
waive the defense under the terms of C.P.L.R. 3211(e), because he raised the
defense in his first, pre-answer motion to dismiss the Complaint. See C.P.L.R.
3211(e) (providing that [a]t any time before service of the responsive pleading is
required, a party may move to dismiss the complaint for lack of capacity to sue
and that any objection or defense based lack of capacity is waived unless raised
either by such motion or in the responsive pleading).
Although Mr. Dammonds time to answer the Complaint had expired at the
time that he raised the issue of HSBCs ownership of the mortgage, he nonetheless
still had the ability to file an answer at that time with leave of the court. The
Supreme Court has the inherent power to extend a partys time to respond under
C.P.L.R. 2004. See C.P.L.R. 2004 (Except where otherwise expressly prescribed
by law, the court may extend the time fixed by any statute, rule or order for doing
any act, upon such terms as may be just and upon good cause shown, whether the
11
application for extension is made before or after the expiration of the time fixed.).
C.P.L.R. 3012(d) explicitly provides that, [u]pon the application of a party, the
court may extend the time to appear or plead, or compel the acceptance of a
pleading untimely served, upon such terms as may be just and upon a showing of
reasonable excuse for delay or default. Here, the Supreme Court had the
discretion to extend Mr. Dammonds time to respond to the Complaint at the time
he raised the issue of HSBCs standing.
A court must consider several factors in determining whether to extend a
partys time to respond to a complaint including: the existence of a potentially
meritorious defense to the action, the prejudice to plaintiff, and the public policy
favoring the resolution of cases on the merits. Schmidt v. City of N.Y., 50 A.D.3d
664, 664 (2d Dept 2008). Although HSBC had already obtained a judgment at the
time he made the request, Mr. Dammond presented a meritorious defense to the
foreclosure action based upon which the court ultimately dismissed the Complaint.
Furthermore, Mr. Dammonds delay in discovering and raising the defense
that HSBC did not own the mortgage at the time the action was filed was due in
part to HSBCs misrepresentations in the Verified Complaint that it had obtained a
written assignment of the mortgage prior to the commencement of the foreclosure
action. The Verified Complaint alleges that, at the time the Complaint was filed,
the subject mortgage had already been assigned to HSBC by assignment to be
12
recorded. (R. 83). However, as Mr. Dammond later discovered, the assignment
was executed after the date that the foreclosure action was commenced. Such a
misrepresentation is a proper ground for allowing a late answer. See Barranco v.
Cabrini Med. Ctr., 50 A.D.3d 281, 281-82 (1st Dept 2008) (affirming order of
trial court allowing defendant to amend its answer to assert lack of standing where
factual basis for defensethat plaintiffs claim had been discharged in prior
bankruptcy filinghad not been previously disclosed to defendant); cf. Rich v.
Rich, 103 Misc. 2d 723, 726-27 (Sup. Ct. N.Y. County 1980) (finding that failure
to include a defense in answer, where facts upon which defense was based did not
arise until after service of answer, did not constitute waiver of defense and
allowing amendment of answer to assert defense).
Accordingly, because Mr. Dammond had not yet filed an answer at the time
that he raised the defense of HSBCs ownership of the mortgage loan, and the
Supreme Court had discretion to permit Mr. Dammonds filing of a late answer at
that time, C.P.L.R. 3211(e) does not deem him to have waived the standing
defense.
C.
Under New York Constitution, the Supreme Court Did Not Have
Authority To Hear HSBCs Suit.
Even if the Notice of Appearance operated pursuant to C.P.L.R. 3211(e) to

waive certain defenses, it could not waive an objection that the Supreme Court
lacked constitutional power to hear HSBCs suit. See Wells Fargo Bank Minn.,
13
N.A. v. Mastropaolo, 42 A.D.3d 239, 243-44 (2d Dept 2007).4 Such power was
lacking to hear this lawsuit because of HSBCs lack of standing when it filed the
Complaint.
The Court of Appeals has held the separation-of-powers doctrine present in
the New York Constitution requires that the power of a court to declare the law . .
. is limited to[] determining the rights of persons which are actually controverted in
a particular case pending before the tribunal. Hearst Corp. v. Clyne, 50 N.Y.2d
707, 713 (1980). But the rights of HSBC were not actually controverted in the
suit it filed suit on July 27, 2006. Instead, according to the record evidence, the
mortgage was still owned by Mortgage Electronic Registration Systems, Inc. as
nominee for First Continental Mortgage and Investment Corporation on July 27,
2006. Accordingly, it was First Continentals rights that were actually
controverted in the suit, and the Supreme Court had no constitutional power over
HSBCs lawsuit.
The constitutional limitations on a New York court hearing a suit prosecuted
by a party without standing were recently highlighted by the First Department.
Mastropaolo did not consider whether New York courts lack constitutional power to
hear a case brought by a mortgage assignee without standing. Moreover, Mastropaolos holding
that standing should be considered the same as capacity for purposes of C.P.L.R. 3211(e) entirely
overlooks, and is completely inconsistent with, the statement of the Court of Appeals in City of
New York v. State of New York that [t]he issue of lack of capacity to sue does not go to the
jurisdiction of the court, as is the case when the plaintiffs lack standing. Rather, lack of capacity
to sue is a ground for dismissal which must be raised by motion and is otherwise waived. 86
N.Y.2d 286, 292 (1995) (emphasis added).
14
People ex rel. Spitzer v. Grasso, 54 A.D.3d 180, 197, 206 (1st Dept 2008). That
court specifically noted that justiciability requirements, such as a partys standing,
are unquestionably of constitutional dimension . . . in New Yorks constitution.
Id. at 206 n.19. And Grasso looked to cases addressing standing under the United
States Constitution to guide its understanding of the limits of the New York
constitution.5 Id. at 641-42, 648.
Such logic applies equally to this case. Federal courts have held they lack
power under the United States Constitution to hear mortgage foreclosure actions
brought by parties who had not received mortgage assignments until after filing
suit. See, e.g., In re Foreclosure Cases, 521 F. Supp. 2d 650, 653-54 (N.D. Ohio
2007) (holding the court lacked constitutional power to hear twenty-six foreclosure
suits brought by parties that submitted evidence that indicates that they may not
have had standing at the time the foreclosure complaint was filed). Accordingly,
the New York courts lack power to hear foreclosure cases brought by such parties
Of course, there are textual differences between the power the United States
Constitution grants to the federal judiciary and the power the New York Constitution grants to its
courts. These differences, however, do not diminish that separation-of-powers principles in both
constitutions deny the power of courts to entertain suits brought by parties without standing. See
Grasso, 54 A.D.3d at 206.
15
under the New York Constitution. The Supreme Courts dismissal of HSBCs
lawsuit therefore should be affirmed.6
II.
The Supreme Court Also Had Grounds to Dismiss the Complaint

Because HSBC Failed to Allege or Prove Ownership of the Mortgage
Debt.
In addition to HSBCs failure to establish standing at the time it brought the
action, the Supreme Court also properly dismissed the Complaint because HSBC
failed to state a cause of action. HSBC neither alleged nor provided any evidence
of its ownership of the promissory note signed by Mr. Dammond. This omission
resulted in HSBC failing to state a cause of action to foreclose the subject
mortgage. Under C.P.L.R. 3211(a)(7), Defendant had the right to raise this
meritorious defense even after his time to answer had expired.
A.
Ownership of the Debt Sued Upon Is an Element of a Cause of

Action To Foreclose a Mortgage Securing Payment of a Debt.
It is axiomatic that foreclosure of a mortgage may not be brought by one

who has no title to it. Kluge v. Fugazy, 145 A.D.2d 537, 538 (2d Dept 1988); see
also Campaign v. Barba, 23 A.D.3d 327, 327 (2d Dept 2005) (To establish a
prima facie case in an action to foreclose a mortgage, the plaintiff must establish
6
Mastropaolo did not consider whether New York courts lack constitutional power to
hear a case brought by a mortgage assignee without standing. Moreover, Mastropaolos holding
that standing should be considered the same as capacity for purposes of CPLR 3211(e) entirely
overlooks, and is completely inconsistent with, the statement of the Court of Appeals in City of
New York v. State of New York that [t]he issue of lack of capacity to sue does not go to the
jurisdiction of the court, as is the case when the plaintiffs lack standing. Rather, lack of capacity
to sue is a ground for dismissal which must be raised by motion and is otherwise waived. 86
N.Y.2d 286, 292 (1995) (emphasis added).
16
the existence of the mortgage and the mortgage note, ownership of the mortgage,
and the defendant's default in payment.). The owner of the mortgage could be the
original mortgagee named on the mortgage itself or a party to whom the mortgage
has been subsequently and properly assigned.
In order for a party to obtain ownership of a mortgage through assignment,
the debt secured by the mortgage also must be transferred to the assignee. A party
cannot acquire a mortgage if it does not also acquire ownership of the underlying
debt. In other words, absent transfer of the debt, the assignment of the mortgage
is a nullity. Kluge, 145 A.D.2d at 538; see also Merritt v. Bartholick, 36 N.Y. 44,
45 (1867) ([A] transfer of the mortgage without the debt is a nullity, and no
interest is acquired by it.); 5-Star Mgmt. v. Rogers, 940 F. Supp. 512, 521
(E.D.N.Y. 1996) (New York law [is] consistent with the majority default rule that
an assignment of a mortgage unaccompanied by the note that it secures is a nullity,
absent a contrary intent of the original contracting parties). This rule exists to
prevent the mortgagor from facing double liability. 5-Star Mgmt., 940 F. Supp. at
520. Accordingly, in cases without the transfer of the debt, the assignee of the
mortgage has no right to foreclose. See Kluge, 145 A.D.2d at 538 (holding a
foreclosure cause of action fails when the mortgage assignee was not transferred
the debt); 5-Star Mgmt., 940 F. Supp. at 522 (dismissing a plaintiffs foreclosure
complaint when the complaint did not allege transfer of the debt to the assignee of
17
the mortgage); see also First Trust Natl Assoc. v. Meisels, 234 A.D.2d 414, 414
(2d Dept 1996) (holding a plaintiff could maintain a foreclosure action when the
record demonstrated it was both the assignee of the mortgage and, by
indorsement, the holder of the underlying note at the time the foreclosure action
was commenced (emphases added)).
Here, HSBC commenced an action to foreclose a mortgage given by Mr.
Dammond to First Continental Mortgage and Investment Corporation to secure his
$440,000 indebtedness pursuant to a promissory note dated September 28, 2005.
However, HSBC failed to state a claim to foreclose the subject mortgage because it
did not allege in the Complaint, much less prove, that it owns the subject debt. Mr.
Dammond moved to dismiss on the ground that HSBC lacked an ownership
interest in his mortgage loan, attaching supporting documents to his affidavit. (R.
17-18, 80-81). HSBC, in response, presented no evidence that it owned the debt at
the time the action was commenced, or thereafter. (R. 92-96).
The Complaint alleges, in paragraphs 8 and 9, that the mortgage given by
Mr. Dammond to the First Continental Mortgage and Investment Corporation as
security for repayment of the debt was assigned to HSBC and that the assignment
18
was later delivered for recording.7 (R. 83). The Complaint does not, however,
allege that the note was ever transferred to Plaintiff.
Accordingly, the Supreme Court had grounds to dismiss the Complaint for
failure to state a cause of action to foreclose the subject mortgage, since Plaintiff
did not allege that it owned the underlying debt at the time that action was
commenced. See Kluge, 145 A.D.2d at 538 (reversing the denial of a motion to
dismiss when the mortgage assignee seeking foreclosure had not established
ownership of the underlying debt); Manne v. Carlson, 49 A.D. 276, 278 (1st Dept
1900) (reversing denial of a demurrer upon the grounds that the complaint failed to
state a cause of action when the foreclosure complaint lacked an allegation that the
underlying debt had been transferred to the mortgage assignee); 5-Star Mgmt., 940
F. Supp. at 522 (dismissing a foreclosure complaint as failing to state a cause of
action when the complaint by a mortgage assignee did not allege transfer of the
underlying debt).
B.
The Defense of Failure To State a Cause of Action Is Not

Waivable.
The defense that HSBC did not own the debt sued upon at the time the
Complaint was filed was not waived by Mr. Dammonds failure to assert the
defense before his time to answer had expired. The defense that a pleading fails
The Complaint goes on to allege, in paragraph 10, that Plaintiff is still the holder of the
aforementioned instrument(s). (R. 83).
19
to state a cause of action, under C.P.L.R. 3211(a)(7), is not waivable. See

C.P.L.R. 3211(e) (providing that, unlike many of the grounds for dismissal listed in
C.P.L.R. 3211(a), the defense that a complaint fails to state a cause of action is not
waived if not asserted in the defendants answer or pre-answer motion to dismiss).
The Supreme Court therefore had sufficient grounds to dismiss the Complaint,
even after Mr. Dammonds time to answer had expired, based on HSBCs failure
to allege or provide any evidence of its ownership interest in the subject debt.
III.
The Supreme Court Did Not Abuse Its Discretion In Vacating the
Judgment of Foreclosure and Sale
In light of Mr. Dammonds meritorious defenses to the foreclosure
Complaint, the decision whether to grant the motion to vacate was left to the
sound discretion of the Supreme Court. Savino v. ABC Corp., 44 A.D.3d 1026,
1026 (2d Dept 2007). HSBC must demonstrate that the Supreme Court abused its
discretion in order to prevail on appeal. See Woodson v. Mendon Leasing Corp.,
100 N.Y.2d 62, 68 (2003) ([A] courts decision to vacate a default judgment will
be reviewed on appeal for an abuse of discretion.); see also ALBANK, FSB v.
Dashnaw, 37 A.D.3d 932, 934 (3d Dept 2007) (requiring a clear abuse of that
discretion to disturb the Supreme Courts decision on whether to vacate a
foreclosure judgment (emphasis added)).
20
A. The Supreme Court Did Not Abuse Its Discretion in Vacating the
Judgment for a Sufficient Reason and in the Interests of Substantial
Justice.
A court may vacate its own judgment for a sufficient reason and in the
interests of substantial justice. Woodson, 100 N.Y.2d at 68. As the Court of
Appeals has observed, the power of the Supreme Court to vacate its judgments in
furtherance of the ends of justice is unquestionable. Vanderbilt v. Schreyer, 81
N.Y. 646, 648 (1880); see also Wade v. Village of Whitehall, 46 A.D.3d 1302,
1303 (3d Dept 2007) (observing the Supreme Courts inherent power to vacate an
order in the interest of justice recognizes our strong preference for deciding cases
on their merits). Furthermore, [w]hether the power shall be exercised in any
case rests in [the Supreme Courts] discretion, with the exercise of which [the
appellate courts] will not ordinarily interfere. Vanderbilt, 81 N.Y. at 648.
Historically, New York courts have vacated judgments of foreclosure where,
as in the case here, there was a misapprehension of the true facts of the claim.
Archer v. Archer, 171 A.D. 549, 550-51 (2d Dept 1916); Siegel v. State, 138 Misc.
474, 482-83 (N.Y. Ct. Cl. 1930); see also In re City of Buffalo, 78 N.Y. 362,
370 (1879); Alling v. Fahy, 70 N.Y. 571, 572 (1877).
The Supreme Court did not abuse its discretion in vacating the judgment of
foreclosure against Mr. Dammond because its decision is supported by the interests
of fairness and substantial justice. Here, Mr. Dammond presented evidence that
21
HSBC did not own the mortgage at the time the Complaint was filed and argued
that HSBC accordingly had no right to a judgment of foreclosure and sale. (R. 2425, 80-81). In response to this meritorious defense, HSBC presented no evidence
to establish that it owned the mortgage at the time that it filed the Complaint. (R.
92-96).
In addition, granting pro se litigants additional leeway in defending
foreclosure actions is consistent with notions of fairness and substantial justice.
Foreclosure defendants have an inherent informational disadvantage regarding the
complicated financial instruments foreclosing financial institutions rely on for their
cause of action. The rise of the secondary market and the securitization of
mortgage debt have created significant uncertainty about the validity of ownership,
even among the nations largest financial institutions. Accordingly, the Supreme
Court properly exercise[d] [its] inherent discretionary power in [a] situation[] that
warranted vacatur but which the drafters [of C.P.L.R. 5015] could not easily
foresee. Woodson, 100 N.Y.2d at 68.
While the legitimate motives of foreclosing financial institutions should be
respected, the repercussions of judgments of foreclosure for homeowners (and their
families) can be as harsh as homelessness. Balancing the harm from the eviction
of a foreclosed upon homeowner with meritorious defenses to foreclosure, against
22
the prejudice of putting foreclosing plaintiffs to their proofs, tips the scales of
substantial justice towards the homeowner.8
B. The Record Also Supports Vacatur of the Judgment for Either
Excusable Default or Material Misrepresentation under
C.P.L.R. 5015(a).
Although the Supreme Court need not have based its vacatur of the
judgment of foreclosure and sale on any of the five grounds specifically
enumerated in C.P.L.R. 5015, the Court could have vacated the judgment based on
either excusable default or material misrepresentation, pursuant to C.P.L.R.
5015(a).
1.
Excusable Default.
The Supreme Court has discretion to vacate a judgment for excusable

default when a party asserts a reasonable excuse for its prior failure to assert a
meritorious defense.9 Savino, 44 A.D.3d at 1026. The determination as to what
constitutes a reasonable excuse lies within the sound discretion of the trial court,
and will not be disturbed if the record supports such determination. Green Apple
Here, Mr. Dammond moved to vacate before execution of the foreclosure sale. The
balancing of the harms may differ where a foreclosure sale has already occurred.
9
The rule for excusable default vacatur applies to instances, like in this case, when a
party appears in the action but defaults in opposing the motion for judgment against it. See
Simpson v. Tommy Hilfiger U.S.A., Inc., 48 A.D.3d 389, 392 (2d Dept 2008) ([T]he Supreme
Court should have granted the plaintiff's motion to vacate . . . [the judgment granting] the
defendant's unopposed motion for summary judgment . . . .); Montefiore Med. Ctr. v. Hartford
Acc. & Indem. Co., 37 A.D.3d 673, 673 (2d Dept 2007) (Pursuant to CPLR 5015(a)(1), a court
may vacate a default in opposing a motion . . . .).
23
Mgmt. Corp. v. Aronis, __ A.D. ___, 2008 WL 4595179, at *1 (2d Dept Oct. 14,
2008).
The record contains ample support for a finding that Mr. Dammond had a
reasonable excuse for his default in opposing the motion for judgment of
foreclosure. Mr. Dammond filed an affidavit explaining that, although a
bankruptcy attorney had appeared in the action on his behalf, the appearance was
entered solely for the purpose of receiving court documents that would be relevant
to a bankruptcy filing. (R. 11-12). Mr. Dammond in fact remained unrepresented
throughout the course of the litigation and proceeded pro se. Mr. Dammond also
explained that he did not become aware that HSBC did not own the mortgage at
the time the action was commencedcontrary to the allegations in the Verified
Complaintuntil he examined the purported assignment, which was not filed with
the Complaint, with greater scrutiny.
HSBC asserts that Mr. Dammond did not have a reasonable excuse
because he did not act to save his house until the eve of foreclosure sale. HSBC
Br. 7-10. Mr. Dammond, however, explained in his affidavit that he had been
trying to resolve the matter ex-judicially. He averredand HSBC did not
disputethat he and a foreclosure prevention counselor had been attempting in
good faith to resolve the matter through a loan modification agreement with the
loan servicer, Chase Home Finance, beginning a month before the Complaint was
24
filed and during the pendency of the action. (R. 10). These negotiations resulted
in Mr. Dammond accepting a modification offer in November 2006. Chase later
withdrew the offer and proposed an unaffordable modification requiring payments
of more than $5,000 a month and a balloon payment of $25,744 after seven
months. (R. 11). Not only do these negotiation efforts refute HSBCs claim that
Mr. Dammond was not diligent in trying to save his house, but they also provide
further record evidence of Mr. Dammonds reasonable excuse for his delay in
raising a defense. See Deutsche Bank Natl Trust Co. v. Miele, 20 Misc. 3d
1146(A) (Sup. Ct. Richmond County 2008) (relying on the belief of the Appellate
Division, Second Department that controversies are best decided on their merits,
rather than by procedural technicalities to hold a defendants reliance on
negotiations was a reasonable excuse).
Following the breakdown of negotiations, HSBCs misleading Verified
Complaint caused Mr. Dammond to believe he had no recourse except bankruptcy.
(But for the material misrepresentations in the Verified Complaint, Mr. Dammond
would have more expeditiously investigated, identified, and asserted his
meritorious legal defense that HSBC did not own the mortgage when it filed the
action.) Consequently, Mr. Dammonds attention was diverted away from
answering or dismissing the Verified Complaint, and directed towards the
discharge potentially available to him in bankruptcy.
25
Furthermore, Mr. Dammond also filed complaints with the New York State
Banking Department (NYSBD) and the New York State Attorney Generals
Criminal Fraud Division (CFD). (R. 12). (Indeed, the initial sale date for the
property was pushed back from August to December after Mr. Dammond began
the formal complaint process with the NYSBD and the CFD in July 2007. (R. 9).)
In light of the change of sale date, Mr. Dammond pressed forward with the
administrative complaint process in hopes of resolving the matter outside of court.
However, when it became clear these extra-judicial processes would not conclude
until after the rescheduled foreclosure sale date of December 20, 2007, Mr.
Dammond proceeded pro se to vacate the judgment of foreclosure and sale. (R.
12-13).
Under these circumstances and in view of the strong public policy that
actions be resolved on their merits, vacatur was well within the Supreme Courts
discretion when Mr. Dammond was not willful in his default, did not unduly delay,
and there is little prejudice to the adverse party. N.Y. Univ. Hosp. Rusk Inst. v. Ill.
Natl Ins. Co., 31 A.D.3d 511, 512 (2d Dept 2006); see also N.Y. & Presbyterian
Hosp. v Am. Home Assur. Co., 28 A.D.3d 442, 442 (2d Dept 2006) (highlighting
public policy favoring resolution of cases on their merits, limited delay, lack of
willfulness, and absence of prejudice in affirming vacatur); Hosp. for Joint
Diseases v. Dollar Rent A Car, 25 A.D.3d 534, 534 (2d Dept 2006) (highlighting
26
absence of willfulness and lack of prejudice in affirming vacatur); I.J. Handa, P.C.
v. Imperato, 159 A.D.2d 484, 485 (2d Dept 1990) (In exercising such discretion
[under C.P.L.R. 5015(a)(1)] courts should undertake a balanced consideration of
all relevant factors . . . .).
2.
Material Misrepresentation.
Under C.P.L.R. 5015(a)(3), a court may also vacate a judgment on account

of fraud, misrepresentation, or other misconduct of an adverse party. Material
misrepresentations in court filings made as part of the process of obtaining the
judgment is an appropriate ground for vacating the judgment. See 142 Fulton LLC
v. Hegarty, 41 A.D.3d 286, 287 (1st Dept 2007) (concluding that the parties
procured the judgment by means of a misrepresentation to the court of a material
fact by stating a unit was not covered by rent stabilization laws); Haber v. Nasser,
289 A.D.2d 200, 200 (2d Dept 2001) (noting misrepresentations in the means by
which the prior order was procured are grounds for vacatur under C.P.L.R.
5015(a)(3)).
The record amply supports a finding that the judgment was procured through
material misrepresentation so as to support vacatur of the judgment under
C.P.L.R. 5015(a)(3). Here, HSBC obtained the judgment of foreclosure and sale
by means of a misrepresentation in its Verified Complaint that it had obtained a
written assignment of the mortgage prior to the commencement of the foreclosure
27
action. See Section I.B, supra (highlighting this misrepresentation in explaining

why the Supreme Court correctly allowed Mr. Dammond to file a late answer).
As has been thoroughly addressed above, this misrepresentation is material
because a party cannot bring an action to foreclose a mortgage that it does not own.
Accordingly, C.P.L.R 5015(a)(3) supports the Supreme Courts decision to vacate
the judgment.
CONCLUSION
For the foregoing reasons, Defendant-Respondent Howard Dammond
respectfully requests that this Court affirm the judgment of the Supreme Court in
all respects.
Dated:
October 31, 2008

Brooklyn, NY
Respectfully Submitted,
___________________________
Anne Fleming, Esq.
Cyrus Dugger, Esq.
Meghan Faux, Esq.
SOUTH BROOKLYN LEGAL SERVICES
Foreclosure Prevention Project
105 Court Street, 3rd Floor
Brooklyn, NY 11201
(718) 237-5500
28
Robert Young, Esq.

Lewis Creekmore, Esq.
LEGAL SERVICES OF THE HUDSON VALLEY
29 North Hamilton Street
Poughkeepsie, NY 12601
(845) 471-0058 ext. 122
Daniel Mosteller, Esq.*
CENTER FOR RESPONSIBLE LENDING
910 17th Street NW, Suite 500
Washington, DC 20006
(202) 349-1863
Attorneys for Defendant-Respondent Howard Dammond
* Pro Hac Vice
29
CERTIFICATE OF COMPLIANCE
I hereby certify that the above brief was prepared on a computer using
Microsoft Word, and using Point 14 Times New Roman typeface, in double space.
The total word count, exclusive of the cover, table of contents, table of citations,
proof of service, and certificate of compliance, is 7,874.
30
IN THE CIRCUIT COURT OF THE SIXTEENTH JUDICIAL CIRCUIT

IN AND FOR MONROE COUNTY
LASALLE BANK NATIONALE ASSOCIATION
AS TRUSTEES FOR CERTIFICATE HOLDERS
OF BEAR STEARNS ASSET BACKED
SECURITIES I, LLC, ASSET BACKED
CERTIFICATES, SERIES 2005-HE10
Plaintiffs,
vs.
CASE NO. 2007-CA-1311-K

JUDGE: HON. MARK JONES
RESHMA GIDWANI, ET AL.

Defendants.
___________________________/
DEFENDANT, RESHMA GIDWANIS

MOTION FOR FINAL SUMMARY JUDGMENT
Defendant, Reshma Gidwani (DEFENDANT) through undersigned counsel and
pursuant to Florida Rule of Civil Procedure 1.510(c), hereby moves for Final Summary
Judgment against Plaintiff, LaSalle Bank National Association as trustee for certificate holders
of Bear Stearns Asset Backed Securities I, LLC, Asset Backed Certificates, Series 2005-HE10
(PLAINTIFF) regarding Count I and II of the Complaint because the pleadings, depositions,
answers to interrogatories, and admissions on file together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that DEFENDANTS are entitled to a
judgment as a matter of law. As grounds, DEFENDANTS state as follows:
I. MOTION FOR SUMMARY JUDGMENT REGARDING COUNT I OF COMPLAINT

FOR LACK OF STANDING
1.
In its Complaint, PLAINTIFF has alleged two counts against DEFENDANTS.
2.
Count I is a demand for foreclosure based on PLAINTIFFS possession of

DEFENDANTS promissory note and a mortgage note on DEFENDANTS property. See
Complaint, Paragraph 5.
3.
Under Florida Rule of Civil Procedure 1.210(a) only the real party in interest has
standing to bring suit. See Progressive Express Ins. Co. v. McGrath Community
Chiropractic, 913 So.2d 1281 (Fla. 2nd DCA 2005) (the general rule in actions at law is
that the right of a plaintiff to recover must be measured by the facts as they exist when
the suit was instituted).
4.
With regard to foreclosure actions, case law has defined Florida Rule of Civil Procedure
1.210(a) to mean that the owner of the beneficial interest in the promissory note and
mortgage can bring a foreclosure action as well as an agent of the beneficial interest
owner. See Mortgage Electronic Registration Systems v. Azize, 965 So. 2d 151 (Fla 2d
DCA 2007); Mortgage Electronic Registration Systems v. Revoredo, 955 So. 2d 33 (Fla.
3d DCA 2007).
5.
Although Plaintiff describe what kind of business entity it is or where it has achieved its
jurisdiction as a business entity, Plaintiff claims a direct beneficial interest in the
promissory note and mortgage owned by DEFENDANT.
6.
To demonstrate standing, the Plaintiff must show that a case or controversy exists
between plaintiff and defendant and that such a case or controversy continues from the
commencement through the existence of the litigation. Ferreiro v. Philadelphia Indem.
Ins. Co., 928 So. 2d 374, (Fla. 3d DCA 2006). See also Wexler v. Lepore, 878 So. 2d
1276, (Fla. 4th DCA 2004) (whether a party has standing is a question of law to be
decided by the Court de novo).
2
7.
Moreover, standing is not a defect that can be cured after the inception of a law suit and
the filing of the complaint because in actions at law the right of the plaintiff to recover
must be measured by facts as they exist when the suit was instituted. Progressive Express
Ins. Co. v. McGrath Community Chiropractice, 913 So. 2d 1281, 1285 (Fla. 2d DCA
2005) (lack of standing is not a defect that may be cured by the acquisition of standing
after the case is filed). Progressive Express Insurance held that the failure of a plaintiff to
secure an assignment of insurance benefits until after the Complaint was filed was fatal
to the cause of action, would not be saved by relation back principles, and that the only
way to proceed was to dismiss and bring a new law-suit. This was because, until the
assignment took place, the real party in interest was an entirely different entity. Thus, on
the date the Complaint was filed, plaintiff was not the party in interest and lacked
standing to bring suit. Id. at 1285-1286.
8.
However, in the instant case, the Plaintiff, fails to include with the Complaint the
critical documents supporting its beneficial interest in the promissory note and
mortgage.
9.
The PLAINTIFF in this case is LaSalle Bank National Association as trustee for
certificate holders of Bear Stearns Asset Backed Securities I, LLC, Asset Backed
Certificates, Series 2005-HE10 See Complaint, Paras. 4, 5.
10.
PLAINTIFF claims in Count I of the Complaint that Plaintiff owns and holds the note
and mortgage. See Complaint, Para. 5.
11.
The promissory note was not attached to the Complaint as mandated by Florida
Rule of Civil Procedure 1.130. This failure to attach document is fatal under Rule
1.130. See Jeff-Ray Corp., v. Jacobsen, 566 So. 2d 885 (Fla. 4th DCA 1990) (Mortgage
3
assignment not attached to the Complaint was fatal defect and required dismissal
pursuant to Florida Rule of Civil Procedure 1.130); Winn-Dixie Stores, Inc. v. Sams, 281
So.2d 47 (Fla. 3d DCA 1973) (It is responsibility of plaintiff to provide to court any
documents on which alleged cause of action is based under this rule relating to attaching
documents to pleading); Samuels v. King Motor Co. of Fort Lauderdale, 782 So.2d 489
(Fla. 4th DCA 2001) (When a party brings an action based upon a contract and fails to
attach a necessary exhibit the opposing party may attack the failure to attach a necessary
exhibit through a motion to dismiss).
12.
Additionally, attached to Complaint as Exhibit A was a copy of the mortgage.

Exhibit A of the pleadings makes clear that a loan was made between DEFENDANT
and an entity other than Plaintiff called Columbia Home Loans, LLC. The attached
mortgage clearly lists Columbia Home Loans, LLC., as the lender. See Exhibit A of
the Complaint.
13.
Columbia Home Loans, LLC., is not the Plaintiff in this instant case.
14.
Thus, the one document attached to the Complaint suggests that another party has
standing to bring suit.
15.
Moreover, Exhibit A of the Complaint is clearly a copy, not of the original mortgage,
but a copy of a copy of a mortgage recorded in Monroe County records. Indeed, the
mortgage has the book and page number of the County Clerk on every page. See
Exhibit A of the Complaint.
16.
Thus, the mortgage document attached to the Complaint also fails the test set out in
Florida Rule of Civil Procedure 1.130 which requires copies of the original documents
upon which action may be brought to be attached to the Complaint. Because Plaintiff
4
cannot bring an action on a document which evidences an entirely different party in

interest, the attached copy of the mortgage also does not meet the requisite standard
set out in Rule 1.130. See Jeff-Ray Corp., v. Jacobsen, 566 So. 2d 885 (Fla. 4th DCA
1990); Winn-Dixie Stores, Inc. v. Sams, 281 So.2d 47 (Fla. 3d DCA 1973); Samuels v.
King Motor Co. of Fort Lauderdale, 782 So.2d 489 (Fla. 4th DCA 2001).
17.
The Complaint alleges that this prior mortgage was subsequently assigned to Plaintiff
by virtue of an assignment to be recorded. See Complaint, Count 4.
18.
However, the assignment document showing how Plaintiff became the party in
interest with standing to bring suit was also not attached to the Complaint as
mandated by Rule of Civil Procedure 1.130. See Jeff-Ray Corp., v. Jacobsen, 566 So. 2d
885 (Fla. 4th DCA 1990); Winn-Dixie Stores, Inc. v. Sams, 281 So.2d 47 (Fla. 3d DCA
1973); Samuels v. King Motor Co. of Fort Lauderdale, 782 So.2d 489 (Fla. 4th DCA
2001).
19.
Owning and holding the mortgage and the promissory note evidencing that, at some point
prior to the filing of the cause of action, Plaintiff was the real party in interest are
essential elements of a foreclosure action. See State Street Bank & Trust Co., v. Lord,
851 So. 2d (Fla. 4th DCA 2003).
20.
Moreover, because PLAINTIFF appears to be a trustee of a Security known as Bear

Stearns Asset Backed Securities I, LLC, Asset Backed Certificates, Series 2005-HE10
the mortgage appears to be securitized.
21.
If the mortgage and the promissory note at issue in the instant case have become part of a
securitized trust they are also governed by the terms of the Trusts Pooling and Servicing
Agreement.
5
22.
A Pooling and Servicing Agreement requires a mortgage shows an unbroken chain of

assignments evidencing transfer of title from the originator of the loan to the trust. See
e.g., Talcott Franklin & Thomas Nealon III, Mortgage and Asset Backed Securities
Litigation Handbook, 5:105 5:118.
23.
In this case, the Pooling and Servicing Agreement for this security requires that the
Trustee or Custodian ensure that:
the Depositor has delivered to, and deposited with, the Trustee or the
Custodian, as its agent, the following documents or instruments with
respect to each Mortgage Loan so assigned:
(i)
the original Mortgage Note, including any riders thereto,
endorsed without recourse (A) to the order of LaSalle Bank
National Association, as Trustee for Certificateholders of Bear
Stearns Asset Backed Securities I LLC, Asset-Backed
Certificates, Series 2005-HE10, or (B) in the case of a loan
registered on the MERS system, in blank, and in each case
showing an unbroken chain of endorsements from the original
payee thereof to the Person endorsing it to the Trustee,
(ii)
the original Mortgage and, if the related Mortgage Loan is a MOM
Loan, noting the presence of the MIN and language indicating that
such Mortgage Loan is a MOM Loan, which shall have been
recorded (or if the original is not available, a copy), with evidence
of such recording indicated thereon (or if clause (x) in the proviso
below applies, shall be in recordable form),
(iii) unless the Mortgage Loan is a MOM Loan, the assignment
(either an original or a copy, which may be in the form of a
blanket assignment if permitted in the jurisdiction in which the
Mortgaged Property is located) to the Trustee of the Mortgage
with respect to each Mortgage Loan in the name of LaSalle
Bank National Association, as Trustee for Certificateholders of
Bear Stearns Asset Backed Securities I LLC, Asset BackedCertificates, Series 2005-HE10, which shall have been recorded
(or if clause (x) in the proviso below applies, shall be in recordable
form),
(iv)
an original or a copy of all intervening assignments of the
Mortgage, if any, with evidence of recording thereon,
(v)
the original policy of title insurance or mortgagees certificate of
title insurance or commitment or binder for title insurance, if
available, or a copy thereof, or, in the event that such original title
insurance policy is unavailable, a photocopy thereof, or in lieu
thereof, a current lien search on the related Mortgaged Property.
6
Bear Stearns Asset Backed Securities I, LLC, Pooling and Servicing Agreement, Article
II, Section 2.01. Download from Securities and Exchange Commission Web-Site, File
Number 333-125422, page numbered and filed with the Court by Defendant, page 56-57
(My emphasis). Attachment 1.
24.
In addition, the Pooling and Servicing Agreement for this security makes clear that the
Trustee or Custodian shall transmit to the Trustee or the Custodian on behalf of the
Trustee as required by this Agreement all documents and instruments in respect a
mortgage loan that the Trust retain a Mortgage File maintained by the Trusts Record
Custodian which contains the following:
With respect to each Subsequent Mortgage Loan, the Mortgage File shall include
each of the following items, which shall be available for inspection by the
Purchaser or its designee, and which shall be delivered to the Purchaser or its
designee pursuant to the terms of this Agreement.
(i)
The original Mortgage Note, including any riders thereto, endorsed
without recourse to the order of LaSalle Bank National Association, as Trustee
for certificate holders of Bear Stearns Asset Backed Securities I LLC, AssetBacked Certificates, Series 2005-HE10, and showing to the extent available to
the related Mortgage Loan Seller an unbroken chain of endorsements from
the original payee thereof to the Person endorsing it to the Trustee;
(ii)
the original Mortgage and, if the related Subsequent Mortgage Loan is a
MOM Loan, noting the presence of the MIN and language indicating that such
Mortgage Loan is a MOM Loan, which shall have been recorded (or if the
original is not available, a copy), with evidence of such recording indicated
thereon (or if clause (x) in the proviso below applies, shall be in recordable form);
(iii)
unless the Subsequent Mortgage Loan is registered on the MERS
System, the assignment (either an original or a copy, which may be in the
form of a blanket assignment if permitted in the jurisdiction in which the
Mortgaged Property is located) to the Trustee of the Mortgage with respect
to each Subsequent Mortgage Loan in the name of LaSalle Bank National
Association, as Trustee for certificate holders of Bear Stearns Asset Backed
Securities I LLC, Asset-Backed Certificates, Series 2005-HE10, which shall
have been recorded (or if clause (x) in the proviso below applies, shall be in
recordable form);
(iv)
an original or a copy of all intervening assignments of the Mortgage,
if any, to the extent available to the related Mortgage Loan Seller, with
evidence of recording thereon;
7
Bear Stearns Asset Backed Securities I, LLC, Pooling and Servicing Agreement, Exhibit
L, Form of Mortgage Loan Purchase Agreement,Exhibit 1, Contents of Mortgage File
download from Securities and Exchange Commission Web-Site, File Number 333125422, page numbered and filed with the Court by Defendant, page 208 (My emphasis).
Attachment 2.
25.
None of the documents attached to the Complaint show an unbroken chain of

endorsements from the original payee thereof to the Person endorsing it to the
Trustee. Indeed, the promissory note was not attached to the Complaint. The Mortgage
document attached to the Complaint does not show all intervening assignments of the
mortgage. Indeed, the mortgage attached to the Complaint shows an entirely different
party in interest.
26.
Because not promissory Note has been produced by PLAINTIFF, because a copy of the
Mortgage instrument showing Plaintiffs beneficial interest in DEFENDANTS property
was not attached to the Complaint and because no Assignment documents was attached
to the Complaint, DEFENDANT sought copies of these original documents in discovery.
27.
On June 13, 2008, DEFENDANT made its First Request for Production of Documents
and requested the following:
a. The assignment document attesting to the subsequent assignment to
PLAINTIFFS of the Mortgage and the Promissory Note described in Paragraph 3
and 4 of the Complaint.
b. A copy of the original Promissory Note and Mortgage at issue in this action that
PLAINTIFFS assert that they presently own and hold in paragraph 5 of the
Complaint.
Defendants First Request for Production, paras. 1,3
28.
In response to DEFENDANTS request for discovery, PLAINTIFF did not produce any
of these requested documents, nor denied they had such documents, nor sought more time
to produce those documents, nor sought any kind of protection order.
8
29.
Because of a failure to produce the requested discovery, DEFENDANT sought an Order

compelling production which was issued by this Court on September 29, 2008. This
Order Granting Motion to Compel production of Documents gave PLAINTIFFS until
October 24, 2008, to produce the documents.
30.
Once again, PLAINTIFF failed to respond by that date.
31.
It has now been nearly 5 months since DEFENDANTS requested the documents and
those documents have still not been produced by PLAINTIFF.
32.
Those requested documents are essential to the establishment of standing in Count I of

this case.
33.
Those requested documents are also critical to determining whether DEFENDANTS can
bring counter-claims in this action.
34.
DEFENDANTS now seeks summary judgment on Count I because despite PLAINTIFFs

allegation of possession, and despite repeated requests and Orders from this Court,
PLAINTIFF has failed to produce the essential documents establishing standing in this
case and this lack of evidence is in clear contradiction to the claim by PLAINTIFF that
Plaintiff owns and holds the Note and Mortgage. See Complaint, Para. 5.
35.
Possession of the Note and Mortgage are essential elements of a claim for foreclosure in
order to establish PLAINTIFFs beneficial interest in the property to be foreclosed and
over the DEFENDANT being foreclosed upon. With possession of these crucial
documents PLAINTIFF does not have standing to bring the claim. See State Street Bank
& Trust Co., v. Lord, 851 So. 2d (Fla. 4th DCA 2003). If a party is not in possession of
the original note, and cannot reestablish it, the party simply may not prevail in an action
9
on the note. See Dasma investments, LLC. V. Realty Associates Fund III, L.P., 459 F.
Supp 2d 725 (S.D. Fla. 2006).
36.
DEFENDANT also seeks attorneys fees under the compelled mutuality provisions of
Florida Statute 57.105(7) because PLAINTIFF has requested attorneys fees on the basis
of the Mortgage. See Complaint, Para. 14, flush language.
WHEREFORE, DEFENDANTS respectfully requests that this Court enter an Order

Granting Final Summary Judgment in favor of DEFENDANTS on Count I of PLAINTIFFS
COMPLAINT and awarding costs and attorneys fees along with any other remedy this Court
deems just and appropriate.
II.
MOTION FOR SUMMARY JUDGMENT REGARDING COUNT II OF COMPLAINT

FOR LACK OF STANDING
37.
Count II of PLAINTIFFS Complaint is an action to foreclose a lost, destroyed or stolen

promissory note and mortgage pursuant to Florida Statute Section 673.3091. At crux, in
Count II, PLAINTIFF alleges it once possessed DEFENDANTS promissory note and
mortgage on DEFENDANTS property, but later lost those crucial documents. As
PLAINTIFF explains in paragraph 18 of the Complaint:
The Plaintiff is not presently in possession of the original Note and Mortgage.
However:
a.
The Plaintiff was in possession of the Note and Mortgage and was
entitled to enforce them when the loss of possession occurred.
b.
The loss of possession was not the result of a transfer by Plaintiff or lawful
seizure; and
c.
The plaintiff cannot reasonably obtain possession of the Note and
mortgage because their whereabouts cannot be determined.
Complaint, para. 18.
10
38.
Under Count II PLAINTIFF claims that it should be entitled to foreclosure in the absence
of documents pursuant to Florida Statute Section 673.3091 and asks the Court to
reestablish those documents.
39.
Critical to a Section 673.3091 claim is that the PLAINTIFF possessed the documents at
one time and subsequently lost the documents.
40.
On June 13, 2008, DEFENDANT made its First Request for Production of Documents
and requested the following:
a. The assignment document attesting to the subsequent assignment to
PLAINTIFFS of the Mortgage and the Promissory Note described in Paragraph 3
and 4 of the Complaint.
b. Any document establishing or attesting to PLAINTIFFS possession of the Note
and the Mortgage at any time prior to the filing of the Complaint.
Defendants First Request for Production, paras. 1, 4.
41.
In response to DEFENDANTS request for discovery, PLAINTIFF did not produce any
of these requested documents, nor did PLAINTIFF deny they had such documents, nor
did PLAINTIFF seek more time to produce those documents, nor did PLAINTIFF seek
any kind of protection order.
42.
Because of a failure to produce the requested discovery, DEFENDANT sought an Order

compelling production which was issued by this Court on September 29, 2008. This
Order Granting Motion to Compel production of Documents gave PLAINTIFF until
October 24, 2008, to produce the documents.
43.
Once again, PLAINTIFF failed to respond.
44.
It has now been nearly 5 months since DEFENDANT requested the documents and those
documents have still not been produced.
11
45.
Those requested documents are essential to the re-establishment of the lost Note and
Mortgage and Count II of the Complaint pursuant to Florida Statute Section 673.3091.
46.
In addition, and as set out in the previous section of the Motion for Summary Judgment,
PLAINTIFF has failed to establish assignment of the promissory note and mortgage
from the originator of the loan to the PLAINTIFF. It follows, that PLAINTIFF
cannot establish that it had the note and the mortgage at any time. Because Section
673.3091 requires that PLAINTIFF had possession at one time, if PLAINTIFF cannot
establish assignment at any time it cannot, logically, have had possession at some time
prior to losing the crucial documents.
47.
In this case, PLAINTIFF has failed even to attach the assignment documents with the
Complaint, thus violating the mandate of Florida Rule of Civil Procedure 1.130. See
Winn-Dixie Stores, Inc. v. Sams, 281 So.2d 47 (Fla. 3d DCA 1973); Samuels v. King
Motor Co. of Fort Lauderdale, 782 So.2d 489 (Fla. 4th DCA 2001).
48.
Additionally, PLAINTIFFS have failed to remedy this assumed oversight by

responding to requests for discovery and by responding to this Courts Orders compelling
PLAINTIFF to produce the assignment documents.
49.
Thus, DEFENDANTS now seeks summary judgment on Count II because despite

PLAINTIFFs allegation of possession of the Note and Mortgage at some time prior to
their loss, PLAINTIFF does not even possess the critical document which would
establish assignment to PLAINTIFF of the critical Note and Mortgage. Thus, if
PLAINTIFF never possessed the Note and Mortgage, then the documents may not be
restablished by this Court pursuant to Section 673.3091. See State Street Bank & Trust
12
Co., v. Lord, 851 So. 2d (Fla. 4th DCA 2003) (a note lost prior to possession by Plaintiff
means that the note cannot be reestablished pursuant to Florida Statute 673.3091).
50.
Finally, in response to DEFENDANTs First Request to Produce, PLAINTIFF has failed

to provide any other documents whatsoever that would attest to PLAINTIFFS
possession of the Note and the Mortgage at some point time prior to its loss
51.
Moreover, this failure to reestablish is damning because as made clear by State Street
Bank and Trust the lack of Note and Mortgage and its failure to reestablish the Note and
Mortgage means that the Plaintiff simply may not prevail on any action on that Note and
Mortgage. See e.g. Dasma investments, LLC. V. Realty Associates Fund III, L.P., 459 F.
Supp 2d 725 (S.D. Fla. 2006) (a party is not in possession of the original note, who
cannot reestablish it pursuant to Florida Statute 673.3091 simply may not prevail in an
action on the Note); Mason v. Rubin, 727 So. 2d 283 (Fla. 4th DCA 1999).
52.
For the foregoing reasons, DEFENDANT seeks summary judgment on Count II of the
Complaint because the pleadings, depositions, answers to interrogatories, and admissions
on file together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that DEFENDANTS are entitled to a judgment as a matter of law.
53.
DEFENDANT also seeks attorneys fees under the compelled mutuality provisions of
Florida Statute 57.105(7) because PLAINTIFF has requested attorneys fees on the basis
of the Mortgage. See Complaint, Para. 16 flush language.
WHEREFORE, DEFENDANTS respectfully requests that this Court enter an Order

Granting Final Summary Judgment in favor of DEFENDANTS on Count II of PLAINTIFFS
Complaint and award costs and attorneys fees to DEFENDANTS along with any other remedy
this Court deems just and appropriate.
13
Respectfully submitted By Counsel for DEFENDANT
_____________________________
Kevin M. Hoyes, Esq
Florida Bar No. 0882631
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that a true and correct copy of the foregoing furnished by U.S. Mail to the
following:
Marc E. Brown, Esq.
Law Offices of David J. Stern, P.A.
900 S. Pine Island Road, Suite 400
Plantation, Florida 33324
Email: MBrown@dstern.com
Phone: 954-233-8000
Fax: 954-233-8708
on this 13th day of November, 2008, by the undersigned counsel for DEFENDANT.
_________________________________
KEVIN M. HOYES
Kevin Hoyes, Attorney, PA
1026 Thomas Street
Key West, Florida 33040
(305) 731-3349 (office/cell)
(305) 295-0123 (Fax)
Fla. Bar No. 0882631
14

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Defending Foreclosure

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Defending

IN THE CIRCUIT COURT, FOURTH

WELLS FARGO BANK, N.A., Plaintiff,

Mortgage Foreclosure Complaint.

The Plaintiff also attached to this complaint a purported assignment executed on

On or about March 27th, 2009 the Plaintiff filed an Amended Mortgage

Also attached to Plaintiffs Amended Complaint is what is titled an Allonge to

Note, hereinafter referred to as Allonge.

This Allonge is purporting to be an attachment to the Note that is the subject of

The second stamped endorsement is pay to the order of WELLS FARGO

The third endorsement is pay to the order of __________________, without

So now the Plaintiff has submitted an Amended Complaint for Foreclosure

Florida Statute 117.107(9) states:

It is only necessary that the person whose execution is

acknowledged be known by the notary to be the person described in and

execution of the instrument. Walker v. City of Jacksonville, 360 So. 2d

The Allonge is dated one month prior to the date of execution of

It is appropriate for the trial court to dismiss an action based on

fraud, provided that there is a blatant showing of Afraud, pretense,

Misrepresentations in the Plaintiffs complaint and its attachments

are willful fraud, interfering with the Court=s Aability to impartially

WHEREFORE, Defendant, William H. Corning, respectfully request this Court

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