Horvath v. Bank of New York, N.A.

Summarized by Jon Powers , White and Williams LLP
14 years 9 months ago

Citation:

___ F.3d ___ (4th Cir. May 19, 2011) (Case No. 10-1528)

Tag(s):

4th Circuit

Ruling:

The Fourth Circuit Court of Appeals upheld over a century of well established Virginia law. Primarily, the Fourth Circuit maintained Virginia's long history of ensuring that negotiable instruments remain freely transferable, specifically in instances where such instruments are endorsed in blank. The court further recognized that Virginia's codification of the provisions of the Uniform Commercial Code governing negotiable instruments was an affirmative act by the legislature to ensure the free transferability of negotiable instruments. When such instruments, such as a mortgage note as in the current case, are endorsed in blank, their free transferability is well established, and although parties are free to contract around these basic provisions, when they do not this principle stands. The Fourth Circuit additionally upheld the well settled principle that interests in deeds of trust accompany the promissory notes that they secure. Although separate and distinct documents, notes and written agreements executed as part of the same contemporaneous transaction will be construed as forming one contract and, thus, the transfer of the note necessarily involves the transfer of the underlying security. Finally, the Fourth Circuit notes that Virginia law allows parties to freely transfer securities, such as a deed of trust. However, recording such transfers in the land records relating to the property at issue is merely voluntary, and failure to do so does not result in a break in the chain of title.

Procedural context:

Appeal from final judgment granting motions to dismiss in quiet title action.

Facts:

On October 23, 2006, the Appellant entered into an agreement with America's Wholesale Lender ("AWL"), whereby AWL loaned the Appellant $650,000 and obtained a Deed of Trust on Appellants Virginia property. The Appellant agreed to satisfy the loan in monthly installments beginning on December 1, 2006. In conjunction with the Agreement, Samuel I. White ("White") served as Trustee and Mortgage Electronic Registration Systems, Inc. ("MERS") became beneficiary. The terms of both the Note evidencing the loan and the Deed of Trust explicitly stated that the Note was freely transferable at any time and without notice to the Appellant, and that any subsequent transferee would be bound by the covenants and agreements of the Deed of Trust. After making the loan, AWL securitized the loan in a mortgage investment conduit whereby the Appellant's loan was pooled with others, and shares of the pool were sold to investors. As a result of the securitization process, the Appellant's Note changed hands, and came to rest in possession of the Bank of New York, N.A. ("BNY"). By this time, the Appellant had failed to make the required payments for several months. Equity Trustees was appointed as substitute Trustee in place of White at BNY's request, and a foreclosure sale was conducted on the property on August 14, 2009 due to non-payment by the Appellant. In response, the Appelant filed a complaint in Virginia state court alleging violations of the Fair Debt Collection Practices Act, the Due Process Clause and various Virginia state laws, naming as defendants BNY, Countrywide (servicer of the Appellant's loan), MERS, AWL, Equity Trustees, White, and the trust itself. After the case was removed to federal court, Equity Trustees moved to dismiss the complaint and the federal District Court granted the motion on November 13, 2009. the Appellant subsequently amended his complaint alleging several claims, including quiet title under Virginia Law. All of the defendants except White moved to dismiss the amended complaint and the motions were granted on January 29, 2010. The District Court reasoned that the transfers of the Note were proper under the plain language of the Note and the Deed of trust as well as well established Virginia law, and that the Appellant's payment obligations did not change during the transfer process. the parties subsequently agreed to voluntarily dismiss the final claims against White, and appeal to the Fourth Circuit followed.

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