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Whittington v. Bank of New York Mellon

United States District Court, D. Hawaii

June 2, 2016



          Leslie E. Kobayashi United States District Judge

         On March 28, 2016, Defendants The Bank of New York Mellon, formerly known as Bank of New York, as trustee for the Certificate Holders of CWMBS, Inc., CHL Mortgage Pass-Through Certificates, Series 2005-24 ("BONY"); New Penn Financial LLC, doing business as Shellpoint Mortgage Servicing ("Shellpoint"); and Mortgage Electronic Registration Systems, Inc. ("MERS, " all collectively "Defendants") filed their Motion to Dismiss Complaint Filed January 13, 2016 ("Motion"). [Dkt. no. 7.] Pro se Plaintiff Daryl Jean Katsuko Whittington ("Plaintiff") filed her memorandum in opposition on May 4, 2016, and Defendants filed their reply on May 13, 2016.[1] [Dkt. nos. 20, 22.] The Court has found the Motion suitable for disposition without a hearing pursuant to Rule LR7.2(d) of the Local Rules of Practice of the United States District Court for the District of Hawai`i ("Local Rules"). [EO: Court Order Vacating Hearing on Defs.’ Motion to Dismiss Complaint Filed January 13, 2016, filed 5/4/16 (dkt. no. 19); 5/5/16 EO at 2.] After careful consideration of the Motion, supporting and opposing memoranda, and the relevant legal authority, Defendants’ Motion is HEREBY GRANTED IN PART AND DENIED IN PART. The Motion is GRANTED insofar as all of Plaintiff’s claims are HEREBY DISMISSED. The dismissal is WITH PREJUDICE, except as to the two portions of Plaintiff’s claims that are specifically identified in this Order.


         Plaintiff filed this action in this district court based on diversity jurisdiction. [Complaint for 1) Breach of Contract 2) Declaratory Relief ("Complaint"), filed 1/13/16 (dkt. no. 1), at ¶ 13.] According to the Complaint, Plaintiff is the owner of a parcel of real property on Makaaoa Place in Honolulu, Hawai`i ("the Property"). [Id. at ¶ 1.] On August 11, 2005, Plaintiff and her husband, Jeffrey Alan Whittington, executed a $650, 000 promissory note ("Note"), secured by a mortgage on the Property ("Mortgage"). [Id. at ¶ 19.] The original lender was First Magnus Financial Corporation, an Arizona Corporation ("First Magnus"), but the loan was later sold to a securitized trust.[2] [Id. at ¶¶ 21-22.]

         Plaintiff’s first claim alleges breach of contract. She alleges that BONY breached the Note "by failing to abide by the Pooling and Servicing agreement [("PSA")] governing the securitization procedure." [Id. at ¶ 23.] Plaintiff also alleges that Shellpoint, the loan servicer, [id. at ¶ 55, ] breached the Note "by failing to timely notify Plaintiff of a change in the Loan characteristics" [id. at ¶ 24]. Further, Plaintiff alleges that MERS is the original Nominee under the Mortgage, and it "participa[ted] in the imperfect securitization of the Note and the Mortgage" and failed to record, except on its own website, the transfer of interest in her loan. [Id. at ¶¶ 12, 25.]

         The primary theories supporting Plaintiff’s breach of contract claim are: 1) her Note and Mortgage are unenforceable because the documents were separated at origination; 2) various transfers of her loan are void because the transferring documents were not recorded in the State of Hawai`i Bureau of Conveyances ("BOC"); 3) Defendants violated certain requirements of the PSA which governs the BONY securitized trust ("Trust") that her loan was purportedly sold to; and 4) Defendants failed to provide her with certain notices that were required under the Note and/or the Mortgage. The alleged violations of the PSA include the failure to execute required assignments prior to the closing date of the Trust and the failure to verify the Chain of Endorsements and the Chain of Title. She also argues that the securitization process and MERS’s role in that process have clouded the issue of what entity actually owns her loan. Plaintiff therefore asserts that Defendants do not actually own her loan, and none of them is the beneficiary or the trustee under the Mortgage. In other words, there is no perfected chain of title between the loan originator - First Magnus - and BONY - which claims to be the holder and owner of Plaintiff’s Note and the beneficiary of her Mortgage. She contends that the lack of a proper transfer of her loan to BONY renders her Mortgage null and void, and therefore BONY does not have any beneficial interest in the Property.

         Plaintiff also attempts to allege violations of specific provisions in the Note and Mortgage. She points out that paragraph 20 of the Mortgage allows the Note and Mortgage to be sold, but she argues that paragraph 20 requires that they be transferred together. Thus, she alleges that the purported sale of the loan without a recorded assignment of Mortgage was a breach of the Mortgage. Plaintiff points out that paragraph 16 of the Mortgage states that the Mortgage is governed by Hawai`i law, which she argues requires that changes in the beneficial ownership of a property be recorded, with the current addresses of the mortgagees. According to Plaintiff, the breaches of paragraphs 16 and 20 render the Note and Mortgage void.

         Plaintiff states that, in spite of Defendants’ breaches of the loan agreement, she has performed all of her obligations. Plaintiff argues that Defendants’ breaches were material and were detrimental to her interest in the Property. For all of these reasons, Plaintiff alleges that Defendants do not have standing either to enforce the Mortgage or to prosecute any action regarding the Property. She claims that, because of the various breaches of the loan agreement by BONY and Shellpoint, "the entire sum of $650, 000.00 is now due" and she demands that BONY and Shellpoint repay that amount.

         Plaintiff’s second claim seeks a declaratory judgment regarding the same issues she raised in her breach of contract claim. She seeks, inter alia, a declaratory judgment that: 1) the Mortgage is void because of the separation of the Note and Mortgage and because of the failure to record the assignments; 2) BONY, its successors in interest, and/or its agents do not have standing to enforce the Mortgage; and 3) Defendants do not have standing to foreclose on the Property. She states that Defendants have already initiated a foreclosure action. She also seeks a declaratory judgment regarding the parties’ obligations and interests in the Property.

         In the instant Motion, Defendants ask this Court to dismiss Plaintiff’s Complaint pursuant to Fed.R.Civ.P. 12(b)(6).[3] They argue that Plaintiff does not state any claims upon which relief can be granted because the securitization of her Note does not give rise to any viable cause of action. Defendants assert that the dismissal should be with prejudice because it is not possible for Plaintiff to amend any of her claims to state a viable cause of action.


         I. Splitting the Note

         The Court first turns to Plaintiff’s argument regarding the separation of the original Note from the Mortgage. Based on the factual allegations of the Complaint, [4] First Magnus was the original lender, but the Note was eventually sold to BONY, which asserts that it is the beneficiary of the Mortgage. However, since the time of the loan origination, MERS has held the Mortgage as the Mortgagee and the lender’s Nominee. [Complaint at ¶¶ 21, 27, 40, 56-57.] Plaintiff argues that separating the Note and the Mortgage was a breach of the loan contract, and she seeks a declaratory judgment that the separation rendered the Note and Mortgage void. Plaintiff’s claims fail to the extent that they are based on this "splitting-the-note" theory.

         The United States Bankruptcy Court for the District of Hawai`i has stated: "Under Hawaii law, the security automatically follows the obligation. The party entitled to enforce a promissory note secured by a mortgage may enforce the mortgage regardless of whether the mortgage was separately assigned to that party." In re Tyrell, 528 B.R. 790, 794-95 & n.13 (Bankr. D. Hawai`i 2015) (citing In re The Mortgage Store, 509 B.R. 292, 296 (Bankr. D. Haw. 2014)). In Mortgage Store, the bankruptcy court stated: "the collateral follows the obligation. A transfer of a promissory note automatically transfers any security for that note." 509 B.R. at 296 & nn.10-11 (citing S.N. Castle Estate v. Haneberg, 20 Haw. 123, 130 (Haw. 1910) ("The assignment of the notes, however, of itself operated as a matter of law as an assignment of the mortgage and of the mortgagee’s powers under it.")). Thus, the fact that Plaintiff’s Mortgage was not assigned to BONY simultaneously with the Note is irrelevant because the transfer of the Note automatically transferred the security for the Note.

         Similarly, the Ninth Circuit has stated that splitting a promissory note from the document securing it - e.g. a mortgage or a deed of trust - "only renders the mortgage unenforceable if MERS or the trustee, as nominal holders of the [security instrument], are not agents of the lenders." Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1044 (9th Cir. 2011). If the holder of the security instrument is not the lender’s agent, the promissory note and the security instrument are "irreparably split." Id. However, that is not the case here. Plaintiff’s Mortgage provides that MERS "is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument." [Motion, Decl. of Andrew J. Lautenbach, Exh. A (Mortgage) at 2, ¶ C.[5] Thus, even though the Note was eventually sold to BONY, MERS continues to have authority to act as the mortgagee because it is the nominee for the successors and assigns of the original Lender - First Magnus - and BONY is a successor and/or assign of First Magnus. This Court therefore FINDS that Plaintiff’s Note and Mortgage are not irreparably split.

         This Court CONCLUDES that, to the extent that Plaintiff’s breach of contract claim is based on a "splitting the note" theory, her claim fails to state a plausible claim for relief. See Iqbal, 556 U.S. at 678 ("To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’" (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955)). This Court therefore GRANTS the Motion and DISMISSES those portions of Plaintiff’s claims. The dismissal is WITH PREJUDICE because this Court CONCLUDES that it is absolutely clear that no amendment can cure the defects in those portions of Plaintiff’s claims. See Lucas v. Dep’t of Corr., 66 F.3d 245, 248 (9th Cir. 1995) ("Unless it is absolutely clear that no amendment can cure the defect, . . . a pro se litigant is entitled to notice of the complaint’s deficiencies and an opportunity to amend prior to dismissal of the action."). In other words, Plaintiff does not have the Court’s permission to amend the portions of her claims based on the "splitting the note" theory.

         II. Alleged Violations of the PSA and Challenges to the Assignment of the Note

         Both of Plaintiff’s claims also rely on her positions that the Note and Mortgage are void because of violations of the PSA and because of allegedly invalid assignments of the Note and/or Mortgage. Plaintiff, however, does not have standing either to raise alleged violations of the PSA or to challenge the validity of the assignments. See Amina v. Bank of New York Mellon, Civil No. 11-00714 JMS/BMK, 2015 WL 84760, at *8-9 (D. Hawai`i Jan. 7, 2015) ("[I]t is well-established that a borrower, who is a third party to the PSA and assignment, lacks standing to challenge their validity.").

         Thus, this Court CONCLUDES that the portions of Plaintiff’s claims based on alleged violations of the PSA fail to state a plausible claim for relief. Further, this Court CONCLUDES that it is absolutely clear that no amendment can cure the defects in these portions of Plaintiff’s claims. This Court GRANTS Defendants’ Motion insofar as ...

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