Mortgages bundled into securities were a favorite trick of Wall Street at the height of the big bubble. The securities changed hands frequently, the French bought billions, and the investment banks profiting from mortgage payments were often not the same parties that made the loans. At the heart of this disconnect was the Mortgage Electronic Registration System, or MERS, a company that serves as the mortgagee of record for lenders, allowing mortgage pools to transfer without the necessity of recording. The point was investment banker fees without responsibility or accountability to the home owner!

MERS was made for the banks, but courts are now slamming down the impact of all of this financial juggling when it comes to mortgage ownership. To foreclose on real property, the plaintiff must be able to establish the chain of title entitling it to relief. As MERS has acknowledged that MERS is a “nominee”—an entity appointed by the true owner simply for the purpose of holding property in order to facilitate transactions. Recent court opinions stress that this defect is not just a procedural but is a substantive failure, one that is fatal to the plaintiff’s legal ability to foreclose.

The latest decisions came down in California on May 20, 2010, in a bankruptcy case called In re Walker, Case no. 10-21656-E–11. The court held that MERSbecause it was a mere nominee; and that as a result, plaintiff Citibank could not collect on its claim. The judge opined:

Since no evidence of MERS’ ownership of the underlying note has been offered, and
other courts have concluded that MERS does not own the underlying notes, this
court is convinced that MERS had no interest it could transfer to Citibank.
Since MERS did not own the underlying note, it could not transfer the
beneficial interest of the Deed of Trust to another. Any attempt to transfer
the beneficial interest of a trust deed without ownership of the underlying
note is void under California law.

While not binding on courts in other jurisdictions, the ruling could serve as persuasive precedent there as well, because the court cited non-bankruptcy cases related to the lack of authority of MERS, and because the opinion is consistent with prior rulings in Idaho and Nevada Bankruptcy courts on the same issue. Call Bill Miller at 480-948-3095 a long standing Arizona Trial and Real Estate Lawyer located in Scottsdale.

Arizona Trial & Business Law

William A. Miller, Esq.

William A. Miller, PLLC

8170 North 86th Place, Suite 208
Scottsdale, Arizona 85258

Following on the heels of the federal class-action lawsuit filed against two nation­al law firms and national accounting firms last week in Phoenix, Greenberg Traurig and Mayer Hoffman McCann and its affiliates find themselves on the wrong end of another inves­tor lawsuit to recover some $52.3 million that the investors claim the lawyers and audi­tors helped Mortgages Ltd (MLtd) and its wholly-owned subsidiary Mortgages Ltd. Secur­i­ties (MLS) defraud investors to the tune of $900-plus million between 2004 and 2008.

The latest lawsuit was filed on June 1st in Maricopa County Superior Court in Phoenix by Scotts­dale attorney William A. Miller on behalf of the Plaintiff, Victims Recovery, LLC (VR), a group that represents 18 high net-worth investors who, according to the complaint, as the result of the defendants’ misrepresentations, bought into Mortgages Ltd.’s promise of high-interest income and relatively quick payback of principal from its “secured” investments.

In addition to Greenberg Traurig and Mayer Hoffman, the complaint names as defendants May­er Hoffman affil­i­ates, CBIZ, Inc., and CBIZ-MHM, LLC, as well as two Greenberg attor­neys, Robert Kant and Jeffrey Verbin, two Mayer Hoff­man accountants and auditors, Charles McLane and Joel Kramer, and three former MLtd executives, former president Michael Den­ning, former CFO Chris­to­pher Olson and former vice president Jeffrey Newman, who was also the for­mer president of MLS, which was used to sell MLtd’s invest­ments to investors.

Kant, Verbin and Greenberg Traurig were MLtd’s and MLS’s attorneys from 2006, while McLane, Kramer and Mayer Hoffman reviewed and audited the company’s 2004-08 financial statements, which Olson prepared. According to the complaint, these defendants participated in or facilitated MLtd’s fraud by preparing false offering memoranda, other legal documents and indepen­dent auditors’ reports, which mis­led investors by misstating the real risks of MLtd’s loan programs, and the fact that MLS was selling securities illegally and that MLtd was actually insolvent but for creative accounting and undisclosed bor­row­ing from related and third parties.

In the complaint VR says, “the Company’s lawyers, accountants and auditors made sure that “MLtd would fall [like Humpty Dumpty], leaving investors ‘holding the bag’ of worth­less paper.” After detailing how all of that happened, VR alleges claims of fraud, negligence, aiding and abetting breaches of con­tract, bad faith and fiduciary duty, and civil conspiracy against Greenberg Traurig, Mayer Hoffman and the other defendants.

By way of background, MLtd was founded in 1963 and licensed as an Arizona mortgage bank­er. It opera­ted as a private real estate mort­gage len­der in Arizona until 2008 when Scott Coles took over the compa­ny as CEO from his father who founded the company. Coles moved the compa­ny’s business from making traditional residential mortgage loans to making short-term multi-million dollar bridge loans to commercial real estate developers and buil­ders for pro­jects in Arizo­na such as mul­ti­family residential complex­es, office buildings and unde­vel­op­ed mixed-use prop­erties.

MLtd packa­ged these loans into “pro­grams” and sold invest­ments in the pro­grams as unreg­i­s­tered securities through its MLS subsi­di­ary to investors, such as those represented by VR, to raise the money it used to make the loans. Accor­ding to VR’s complaint, MLtd made its money by col­lec­ting “a virtual airline-like laundry list” of fees from both its borrowers and its inves­tors in addition to receiving the “interest spread,” the dif­fer­ence between the interest received from bor­rowers and the inter­est it paid to inves­tors, on the loans.

One of MLtd’s loan investment programs, its “Revolving Opportunity” (RevOp) program, was differ­ent from its other programs in that it was geared towards high net-worth investors, like the VR investors, and required higher minimum investment amounts (initially $500,000.00 and later increased to $1 million). According to VR’s complaint, RevOp, the program that the VR investors lost their money in, was touted as offering investors preferred posi­tions, higher rates of return, better security, and more liquidity than the company’s other loan programs.

VR’s complaint goes on to say that MLtd increasingly originated significantly larger but few­er loans, many of which had delayed-funding terms that obligated the company to fund sub­stan­tial portions of the loans in stages rather than the entire amounts upfront. This magnified the adverse effects of the deteriorating real estate market conditions in Arizona in late 2006 and through­out 2007, all of which began to severely impact MLtd’s cash flow.

For example, as VR’s complaint states, in late 2006 through late 2007, MLtd made com­mit­ments to developers to loan them more than $670 million for a multitude of projects with­out the resources to fund those loans. Moreover, many of MLtd’s borrowers began defaul­ting on their large multi-million dollar loans and by January 2008, developers had defaulted on more than $100 million in loans.

According to the complaint, that coupled with the impact of having to meet delayed-funding obligations resulted in the company’s not having the money or ability to raise more money to pay the VR Investors their monthly interest or to honor their investment-redemption requests as required under RevOp. The complaint continues that with the assistance of the defendants, “[a]s a result of being so grossly overextended, MLtd and MLS pursued vari­ous Ponzi schemes of sell­ing even more loan programs to existing and new investors, including the VR Investors, to raise the money … needed to pay the interest due investors on earlier investments and to keep the com­pany afloat.”

As a result, the complaint alleges, “MLtd’s house of cards came crashing down” when Coles, who also ran MLS, committed suicide on June 2, 2008, and just three weeks later, MLtd was forced into bankruptcy by its creditors. Short­ly after that the SEC and the Arizona Depart­ment of Financial Institutions (ADFI) began investi­ga­ting the com­pa­ny’s business, and the SEC shut MLS down for violating federal securities laws and the ADFI yanked MLtd’s license based on its improper finan­cial practices and accounting, which violated Arizona law.

The complaint explains that the VR RevOp investors first became aware of the fact that Greenberg Traurig and Mayer Hoffman may have been involved in MLtd’s fraud during MLtd’s bankruptcy proceedings. That then led these 18 investors to join together to set up VR to investigate the situation and that resulted in the lawsuit that VR filed on June 1st. A copy of VR’s complaint is available under the “Mortgages Ltd. Case” tab at the top of this website.

William A. Miller, PLLC, is an Arizona law firm dedicated to this simple philosophy: In every case we handle, we strive to be the best! To demand of ourselves the highest standard of diligence and follow through. To turn over every stone. To return client calls immediately and not hide behind “lawyer speak” when confronted with tough issues. Our mandate is to treat our clients with the highest level of respect, integrity and empathy – to “do unto others as you would have them do unto you.”

It’s not the traditional law professor career path, but disgraced securities plaintiffs attorney and all around scum bag Bill Lerach might make the transition from prison cell to ivory tower, according to ALM. The University of California, Irvine School of Law is considering having Lerach teach an upper-level course in 2011, Assistant Dean for Communications…

I just got back from my beach house in San Diego with a sad story regarding the direction of our Country. OK, it was very late, I had my old golden retriever Rose, a backpack beach chair, a nasty beard, a surf t-shirt, G-Star jeans from France (looked gnarly by design) and a rusty beach…

“Tarantulas” was the term philosopher Friedrich Nietzsche used for those who are consumed by resentment. Unable themselves to be great at anything, they burn with a feverish fervor, expressed as righteous anger, to tear down the reputations of those who are great. Nietzsche regarded it as one of our deepest, darkest motivations. I think of…