Case 1:08-cv-02777-SJ-RML Document 37 Filed 07/11/13 Page 1 of 13 PageID #: 584
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
08 CV 2777 (SJ) (RML)
FAIRFIELD FINANCIAL MORTGAGE
GROUP, INC., and SHAW MORTGAGE
A P P E A R A N C E S
LAW OFFICES OF ROBERT E. BROWN
44 Wall Street, 12th Floor
New York, NY 10005
By: Robert E. Brown
Attorney for Plaintiff
TOMPKINS, MCGUIRE, WACHENFELD & BARRY LLP
FOUR GATEWAY CENTER
100 Mulberry Street
Newark, NJ 07102
By: William Graig Sandelands
Attorney for Proposed Intervenors Mortgage Electronic
Registration Systems, Inc. and Deutsche Bank Trust
Company Americas and Aurora Loan Services, LLC
JOHNSON, Senior District Judge:
On July 21, 2006, Plaintiff Yanki Tshering (“Plaintiff” or “Tshering”)
refinanced her Brooklyn, New York property through a $960,000 mortgage loan
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from Fairfield Financial Mortgage Group, Inc. (“Fairfield Financial” or
“Fairfield”). In her complaint, Plaintiff alleges that a Fairfield officer advertised
the loan at issue as being fixed-rate with an interest rate of 1%. Plaintiff also
alleges that the officer assured her that he could lower her monthly mortgage
payments by $829.00 if she refinanced both of her then-existing mortgages with
Fairfield Financial. However, Plaintiff claims that the 1% interest rate was a
“teaser,” because her monthly rate soon rose to 8%, causing her monthly loan
payment to balloon to $7,692.69, an amount in excess of her monthly income.
The terms of Plaintiff’s loan contained a note provision that allowed
Fairfield to transfer the loan’s financial interest to a third party. According to
Mortgage Electronic Registration Services (“MERS”), Deutsche Bank Trust
Company Americas (“Deutsche Bank”) and Aurora Loan Services LLC (“Aurora”)
(collectively “Proposed Intervenors” or the “Intervenors”), Plaintiff’s mortgage was
securitized and transferred pursuant to a July 1, 2006 Series Supplement, giving the
financial rights to Deutsche Bank through a pass-through mortgage-backed
security. The Proposed Intervenors also assert that in addition to Deutsche Bank
and MERS becoming successors to Fairfield’s interest as a lender, Homecomings
Financial, LLC (“Homecomings”) became Plaintiff’s loan servicer, effective
September 1, 2006. The Intervenors submit two letters addressed to Tshering
informing her of changes in her loan servicer. The first is dated September 29,
2006, and informs Tshering that her loan was transferred to Homecomings, and
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instructs her to remit payment to a new address accordingly. The second is dated
March 18, 2008, and informs Tshering of another transfer, this time to Aurora Loan
Services. Again, she was provided with a new address to which to send her
mortgage payments, which she did.
On July 11, 2008, Plaintiff filed the instant complaint (“Complaint”),
pursuant to the Truth in Lending Act, 15 U.S.C. 1601, et seq., (“TILA”) and related
state law. Plaintiff sought to have the mortgage declared void and unenforceable
based on Fairfield’s failure to make various disclosures during the closing process.
She named Fairfield and Shaw Mortgage Group, Inc. (“Shaw”), Plaintiff’s
mortgage broker, as defendants. Neither party appeared.
On May 22, 2009, Plaintiff moved for a default judgment against Fairfield
and Shaw. The motion was referred to Judge Levy for a Report and
Recommendation (“Report”). The Report issued on February 1, 2010. Fairfield
and Shaw neither appeared nor filed any documents in their defense. Judge Levy
recommended denying Tshering’s prayer for rescission, finding that TILA’s right
to rescind credit transactions does not extend to residential mortgage transactions.
However, Judge Levy determined that the Complaint stated a cause of action for
fraud under New York State Law, and accordingly declared the mortgage null and
void. (Dkt. No. 14.)
The Report was adopted by this Court on February 19, 2010. On May 17,
2010, Aurora received a letter from Plaintiff notifying Aurora that the mortgage
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was declared void. Plaintiff ceased making payments to Aurora after July 2010.
The Proposed Intervenors retained counsel and moved to intervene as a matter of
right, pursuant to Federal Rule of Civil Procedure (“Rule”) 24(a); and for relief
from a final judgment pursuant to Rule 60(b).
Intervention is a procedural device which facilitates courts’ desire to resolve
related issues in a single case, while simultaneously functioning as a gatekeeper
protecting against overly complex and burdensome litigation. See United States v.
Pitney Bowes, Inc., 25 F.3d 66, 69 (2d Cir. 1994). To intervene as a matter of
right, a party must: (1) file a timely motion; (2) assert an interest relating to the
property or transaction that is the subject of the action; (3) be “so situated that
disposing of the action may as a practical matter impair or impede the movant’s
ability to protect its interest;” and (4) have those interests insufficiently accounted
for in the action. Fed. R. Civ. P. 24(a). Courts are not to assess the adequacy of the
individual criteria in isolation, but together. See United States v. Hooker Chemicals
& Plastics Corp., 749 F.2d 968, 983 (2d Cir. 1984) (“Rule 24(a)(2) is a
nontechnical directive to courts that provides the flexibility necessary ‘to cover the
multitude of possible intervention situations.’”) (citing Restor-A-Dent Dental
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Labs., Inc.v. Certified Alloy Prods., Inc., 725 F.2d 871, 875 (2d Cir. 1984)).
Moreover, it is “‘an obvious and important truth’ that in applying Rule 24(a)(2)
courts should ‘not make a fortress of the dictionary’ but rather should ‘apply the
rule with thoughtful consideration of the objectives it is intended to serve.’”
Hooker Chemicals, 749 F.2d at 983 (citing 7A Charles Alan Wright & Arthur R.
Miller, FEDERAL PRACTICE AND PROCEDURE § 1904 at 474 (3d ed.) (1972)). It is
through this lens that the motion will be analyzed.
“Among the factors to be taken into account to determine whether a motion
to intervene is timely are: (a) the length of time the applicant knew or should have
known of his interest before making the motion; (b) prejudice to existing parties
resulting from the applicant's delay; (c) prejudice to applicant if the motion is
denied; and (d) presence of unusual circumstances militating for or against a
finding of timeliness.” United States v. New York, 820 F.2d 554, 557 (2d Cir.
1987) (collecting cases).
The Intervenors motion was filed three months after Plaintiff informed
Aurora that the mortgage was invalidated. This Court does not find that this delay
causes the motion to be untimely. See id. (“It is incorrect to adopt a per se rule
focused solely” on lapse of time). Prejudice to the Intervenors is obvious – the case
involves a $960,000 mortgage. Plaintiff has failed to allege any prejudice
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bestowed upon her. On the contrary, she has been freed from what was once an
obligation to pay a substantial amount to Aurora. Finally, the Court finds no
unusual circumstances on the issue of timeliness. This factor has been met.
B. Remaining Rule 24(a) Factors
As discussed above, the Intervenors also have the burden of demonstrating
an interest in the underlying action, not otherwise protected, that will be impaired
from an unfavorable disposition. See Mortg. Lenders Network, Inc. v. Rosenblum,
218 F.R.D. 381, 384 (E.D.N.Y. 2003). This interest must be “direct, substantial,
and legally protectable.” Wash. Elec. Corp., v. Massachusetts Mun. Wholesale
Elec. Co., 922 F.2d 92, 97 (2d Cir. 1990) (holding that a would-be intervenor’s
purported interest was based upon a double contingency, and thus could not be
described as direct or substantial.); see also Brennan v. New York City Bd. of
Educ., 260 F.3d 123, 129 (2d Cir. 2001). Conversely, “an interest that is remote
from the subject matter of the proceeding, or that is contingent upon the occurrence
of a sequence of events before it becomes colorable, will not satisfy the rule.”
United States v. Peoples Benefit Life Ins. Co., 271 F.3d 411, 415 (2d Cir. 2001)
Here, Intervenors’ interest in Plaintiff’s case is both direct and legally
protectable. Intervenors purport to hold various stakes in plaintiff’s loan from the
securitization and sale of the underlying asset-backed security. Specifically,
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Deutsche Bank claims to be the successor to Fairfield Financial’s interest as the
property’s Note holder through a July 1, 2006 sale-and-transfer. Aurora is the
current servicing institution for plaintiff’s loan, and thus in possession of an interest
in both monitoring plaintiff’s loan and collecting periodic payments. Finally,
MERS facilitated the collection and distribution of income from securitized assets,
such as Plaintiff’s loan.
All three of these interests are directly affected by this suit. If the default
judgment stands, Intervenors stand to lose their legal interests in Plaintiff’s
mortgage along with incidental cash-flows. Further, Intervenors’ interests cannot
be protected by the current defendants to the suit because there is no one
representing either named defendant.
In sum, the court concludes that Intervenors have a direct interest in
plaintiff’s suit that should not be thwarted by the complexities of the securitization
process. Peoples Benefit Life Ins. Co., 271 F.3d at 417. For these reasons,
Intervenors’ Rule 24(a)(2) motion is granted.
Intervenors’ Rule 60(b) Motion for Relief from a Judgment or Order
Pursuant to Rule 60(b), a federal court may relieve a party from a final
judgment under a limited set of circumstances, including (a) a mistake,
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inadvertence, surprise, or excusable neglect; (b) newly discovered evidence; (c)
fraud; (d) a void judgment; (e) a judgment that has been satisfied; or (f) any other
reason that the court, in its discretion, concludes is justified. The movant’s motion
must be made within a “reasonable time-frame,” and for claims under (a),(b), and
(c), no more than a year after the entry of judgment.
A district court’s determination on a Rule 60(b) motion must be guided by three
principle factors: (a) whether the movant’s default was willful; (b) whether the
movant possesses a meritorious defense; and (c) whether, and to what extent,
vacating the default judgment will cause the non-defaulting party prejudice. See,
e.g., New York v. Green, 420 F.3d 99, 108 (2d Cir. 2005); Am Alliance Ins. Co.,
Ltd. v. Eagle Ins. Co., 92 F.3d 57, 59 (2d Cir. 1996); Davis v. Musler, 713 F.2d
907, 915 (2d Cir. 1983). The Second Circuit has emphasized its preference that
litigation disputes be resolved on the merits. See Hawthorne v. Citicorp Data
Systems, Inc., 219 F.R.D. 47, 49 (E.D.N.Y. 2003) (quoting Cody v. Mello, 59 F.3d
13, 15 (2d Cir. 1995)). Accordingly, any doubts the court may have must be
resolved in favor of the moving party. Hawthorne, 219 F.R.D. at 49.
Tshering opposes the instant motion, but does not claim that vacating the
judgment will cause prejudice. Therefore, the analysis below addresses whether
the Intervenors acted willfully and have meritorious defenses. For the reasons
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discussed below, the Intervenors are entitled to defend their respective interests in
the instant suit.
A Rule 60(b) motion cannot stand if the default judgment was due to a strategic
decision on the movant’s part. See Am. Alliance, 92 F.3d at 60. Willfulness
encompasses conduct that is deliberate, or egregious, or is carried out in bad faith.
See Hernandez v. La Cazuela De Mari Rest., Inc., 538 F. Supp. 2d 528, 532
(E.D.N.Y. 2007). Mere negligence is insufficient for a determination of
willfulness; “although the degree of negligence in precipitating a default is a
relevant factor to be considered.” Green, 420 F.3d at 108 (citations omitted).
Here, the evidence does not support the conclusion that Intervenors willfully
defaulted. Intervenors lacked notice of the July 11, 2008 complaint because
Tshering neither included the Intervenors in her complaint, nor stopped making
timely periodic payments on her underlying mortgage. Intervenors’ interest in the
present suit rests in part on the periodic cash-flows from her securitized mortgage.
Because she continued to make payments, keeping the cash-flow unaffected, the
Intervenors were not clued in to the fact that the validity of the mortgage was in
jeopardy. In particular, it is telling that Plaintiff kept the existence of the suit from
Aurora until the judgment had been declared void, whereupon she saw fit to notify
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Aurora of same. It takes no sophistication in the intricacies of securitization to
know that the recipient of one’s payments would be interested in a suit threatening
to discontinue those payments. For these reasons, Intervenors’ default was not the
product of a strategic plan to circumvent or delay the proceedings; rather, it was the
product of surprise and mistake, consistent with Rule 60(b)(1).
B. Meritorious Defense
The second element of a Rule 60(b) claim requires the court to analyze whether
the Intervenors have provided a sufficiently meritorious defense upon intervention.
In advancing their claim, the Rule 60(b) Intervenors need not establish their
defense conclusively; however they must “present evidence of facts, that if proven
at trial, would constitute a complete defense.” Green, 420 F.3d at 109 (citation and
internal quotation marks omitted). Here, the Intervenors claim, among other things,
the defense of holder in due course, and equitable subrogation. For the reasons
below, the court concludes that the Intervenors have proffered a meritorious
Intervenors’ claim concerning holder in due course is predicated on the
assertion that Deutsche Bank, as a holder in due course, is not is not liable for
Plaintiff’s allegations of misrepresentation during the closing of her loan.
Intervenors contend that claims against a holder in due course are limited to those
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that flow from the note itself, and not the underlying mortgage. Under New York
law, a purchaser of a negotiable instrument becomes a holder in due course if he
“takes the instrument (a) for value; and (b) in good faith; and (c) without notice that
it is overdue or has been dishonored or of any defense against or claim to it on the
part of any person.” A.I. Trade Fin., Inc. v. Laminaciones De Lesaca, S.A., 41 F.3d
830, 835 (2d Cir. 1994) (citing N.Y.U.C.C. § 3-302(1)). Further, Section 3-305, in
relevant part, provides that a holder in due course “takes the instrument free from
all claims to it on the part of any person; and all defenses of any party to the
instrument with whom the holder has not dealt.” Id. (citing N.Y.U.C.C. §§ 3-
305(1) and (2)).
Intervenors have provided a sufficient evidentiary basis to establish that
Deutsche Bank is a holder in due course under N.Y.U.C.C. § 3-302(1). Intervenors
contend that the Note underlying Tshering’s mortgage was transferred from
Fairfield Financial to Deutsche Bank, with consideration, as of July 1, 2006. As
such, Intervenors have sufficiently articulated the argument that Tshering’s
allegations of fraud, misrepresentation, among other claims, occurred before the
Note transfer, and thus do not attach onto a holder in due course.
Intervenors also claim that the doctrine of equitable subrogation should be
invoked to prevent unjust enrichment on the part of Plaintiff. Under equitable
subrogation, a party is entitled to be subrogated to the position of the obligee (or
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lien-holder), when the property of one party is used to discharge a lien owed by
another, under such circumstances that cause unjust enrichment. See RESTATEMENT
(FIRST) OF RESTITUTION § 162 (2012). The doctrine of equitable subrogation in the
context of mortgage liens is well-supported under New York law. See Wagner v.
Maenza, 223 A.D.2d 640, 641 (N.Y. App. Div. 1996); Ziedel v. Dunne, 215
A.D.2d 472, 473 (N.Y. App. Div. 1995) (holding that equitable subrogation was
appropriate due to documentary evidence that defendant bank had caused all prior
mortgages of which it had notice to be satisfied).
Here, Intervenors have presented evidence that a substantial portion of the
refinanced mortgage loan at issue went to pay off prior mortgage liens on
Plaintiff’s property. As such, Intervenors have a potentially meritorious claim that
they possess liens on Plaintiffs property, and that a default judgment would cause
an inequitable windfall in favor of Plaintiff.
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For the reasons discussed above, the court grants Intervenors’ Rule 24(a)
motion to intervene, and Intervenors’ Rule 60(b) motion for relief from a judgment.
The parties shall contact Judge Levy’s chambers in furtherance of consummating
Dated: July 11, 2013
Brooklyn, New York
Sterling Johnson, Jr., U.S.D.J.