Posted: April 3, 2014

Homeowners’ Fraud Claims Based On Lender’s Questionable Practices Dismissed

In Knox v. Countrywide Bank, 13 CV 3789 (JFB)(WDW) (E.D.N.Y. March 12, 2014), homeowners who took out first and second home mortgage loans from Countrywide sued the bank and others on two fraud theories. The first theory alleged that Countrywide had concealed that the note underlying the mortgage was invalid because the mortgage was held in the name of defendant Mortgage Electronic Registration Systems (“MERS”), an agent of the mortgagee, and was therefore “split” from the underlying note signed by defendant Countrywide. Plaintiffs’ second theory was that Countrywide caused the homeowners to inflate their income on a loan application in order to obtain the loan. Judge Joseph F. Bianco dismissed the fraud claims. With respect to the “splitting” of the mortgage from the underlying note, the Court, citing a New York Appellate Division, Second Department decision , held that plaintiffs had it backwards: the mortgage is unenforceable apart from its underlying note, but the note remains enforceable apart from its mortgage. This dashed plaintiffs’ hopes of using the controversial MERS system (of registering mortgages in the name of an agent so that they could be more easily assigned among lenders) as a basis to get out from under their debt. Since Countrywide held the underlying note, the note was enforceable and there could be no fraud claim. With respect to the inflated income on the loan application, plaintiffs claimed that even though they informed Countrywide that their income was lower than that stated on the form, Countrywide took advantage of plaintiffs’ “severe financial stress” and caused them to submit it anyway. Id. at 7. The Court rejected that theory as well, holding “Plaintiffs’ financial situation does not convert their knowing submission of false information into a cause of action for fraud against Countrywide.” Id. The second fraud theory was dismissed because plaintiffs could not have reasonably relied “on a lender’s misstatement of one’s own income, which one knows to be false.” Id. The Court went on to uphold plaintiffs’ statutory claim for quiet title under Article 15 of the New York Real Property Actions and Proceedings Law, the only claim to survive the dismissal motion.

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