Basic Pleading Defects Reveal Fatal Flaws in Foreclosures

by Neil Garfield

I have frequently made the point that if you want to protect your case on appeal, you must have a coherent and accurate record established in the court file or you will be shunted away on a technicality of some sort. The strategy I endorse, and the only one I use is aggressive litigation from the start. This alone will help remove your case from the pile of deadbeat borrowers who are just trying to string out the inevitable. In order to do that, you must reject the paradigm that the debt, loan, note, mortgage, default and notice of default are valid and that the sale was valid. In order to do that you need to do your research. It is my opinion that there is going to be a wave of malpractice suits against lawyers who told their clients "there is nothing you can do."

In most cases, this is not true. There are plenty of defenses, chief among them PAYMENT and denial that the contract was ever formed --- because neither the forecloser nor any of its predecessors loaned any money to the homeowner.

The flip side of the coin is also true. If the other side pleads improperly and fails to prove their case, they have a poor record for appeal and usually won't. Applying basic rules of law and pleading, it is apparent that most foreclosures are based on pleadings that don't have two essential ingredients. They don't allege that the borrower received money from the forecloser or its predecessor and they don't allege financial injury. The first defect leads to the conclusion that there can be no injury if the loan was not made by the forecloser or its predecessors. The second defect fails to invoke the court's jurisdiction.

It is well-settled in the law that in order to invoke the court's jurisdiction the Pleader must allege an injury that is recognizable by law. This allegation is required in every type of lawsuit. It is equally well-settled that the Pleader must allege a short plain statement of ultimate facts upon which relief could be granted. Further, it is well settled that the facts alleged cannot be formulaic conclusions. ---- a point that is always hammered by the Banks when confronted with a claim or counterclaim from homeowners. They are right. But what is good for the goose is good for the gander.

In the days before the dust cloud of sham securitizations a Bank had to allege it made a loan to the homeowner or that it had purchased a loan, or acquired it through merger from an entity that made the loan. Why then are Banks skipping this essential allegation? And why are the Banks avoiding any allegation that they suffered financial injury?

In the old days if a lawyer went to court on an uncontested Motion for Summary Judgment, if his pleading and affidavit did not allege and prove the existence of the loan he was sent packing until he could come back with his papers in order. In other words, in uncontested hearings where the homeowner did not even show up, the Judge denied or continued the Motion for Summary Judgment where the Bank failed to allege the loan and failed to allege financial injury.

Fast forward to 2013. Foreclosers routinely omit any allegation that the borrower received a loan from the entity foreclosing on the house. They routinely omit any allegation of financial injury. Instead, they merely assert they are the holder of the note and mortgage. This is important because allowing the Banks to avoid alleging the existence of the loan shifts the burden of pleading and proof onto the Homeowner, thus leaving the hapless homeowner with the burden of chasing a ghost instead of simply defending their property.

If the Banks were required to plead that a loan was given to the borrower and the lender in that transaction was the Foreclosers or that it had purchased the loan, the Bank has the burden of proving the existence of the loan. So why did Banks stop pleading the loan? And why did they stop pleading financial injury?

The answer is simple. They didn't make the loan and they don't own the loan. Wall Street Banks created a cloud in which they controlled all the appearances and illusions starting with conflicting paperwork given to the lenders (investors) and borrowers (homeowners). If lawyers fail to deny or at least state they are without knowledge as to the essential allegations of the complaint they are making a mistake --- one that will move the case inexorably toward foreclosure. If lawyers fail to seek dismissal of the case or vacation of the notice of sale (non-judicial states) on the basis that that the forecloser does not claim to be the lender or even represent the lender and that the lender does not allege financial injury they are making a mistake that will cost them in the trial court and on appeal.

Most lawyers are timid about taking this position despite the glaring absence of the allegations from the banks. They feel they will make fools of themselves by denying the existence of the debt, note, mortgage, and default when they know their client received a loan. Money was on the table. How can you deny that?

The answer is that if the money didn't come from the payee on the note, the mortgagee on the mortgage, the beneficiary under the deed of trust, then they cannot have any injury. And if they are not the actual owner of an unpaid account receivable, then they cannot submit a credit bid at eh auction. The banks know this. That is why they do a substitution of trustee in 100% of the cases brought to foreclosure in non-judicial states. Because if the original trustee was left there, the trustee might actually do his job --- and inquire where this new beneficiary came from and how they stand to lose any money through non payment by the homeowner.

And there is another reason why the banks avoid such issues like the plague. If they open up the issue of payments and money, then the inquiry in discovery will be about money, where it came from, where it went, who was paid, and when they were paid. If that cloud created by the illusion of securitization contains evidence of a principal agent relationship between the lenders (investors in mortgage bonds) and the third party intermediaries (investment banks and affiliates) then the money received for insurance, CDS, guarantees, and proceeds of sale to the Federal Reserve will reduce the accounts receivable and require a reduction in the accounts payable from the homeowners. And if that happens, the insurers and everyone else are going to be making claims based upon multiple payments on the same claim for a loss that the bank never incurred because it was always playing with investor money.