July 25, 2010

As those of you who follow this website are aware, the “nonjudicial” foreclosure states require the borrower to institute litigation in court to challenge a Trustee’s (foreclosure) sale and request both a temporary restraining order cancelling a pending sale, and for a preliminary injunction prohibiting any further attempts at foreclosure pending the duration of the borrower’s litigation challenging the foreclosure attempt. One of the elements which must be proven in order to obtain a preliminary injunction is something called “likelihood of success on the merits”. This element has consistently been mischaracterized by attorneys representing the “lenders”, servicers, and trustees of securitized mortgage loan trusts as the likelihood of success on the merits of the entire case.

Not so under Arizona law, which has explained the distinction in print. Arizona case law provides that a showing of irreparable harm if an injunction is not granted satisfies the “likelihood of success on the merits” prong of the claim for injunctive relief. As such, if a borrower can show that absent a court order to preclude the sale of the unique real property during the pendency of the borrower’s litigation that the unique property will be lost, the borrower has satisfied the “likelihood of success on the merits” prong of the claim for injunctive relief. The case stems from an insurance dispute where the particular type of insurance was unique and absent an injunction, the protections of the insurance would be lost.

What we consistently run into in the non-judicial states is this argument from counsel for the “lenders”, servicers, and trustee banks of securitized mortgage loan trusts that “the plaintiff (borrower) cannot satisfy the likelihood of success on the merits of their case because the plaintiff is in default and they are living in the house for free”. This argument is not only incorrect, but is a deliberate misrepresentation of the state of the law, at least in Arizona, as the “likelihood of success on the merits” claim relates SOLELY to the claim for injunctive relief, not the whole case, and has nothing to do with the claimed default.

Of course, the counter-argument takes its first steps at the legal right to declare a default (standing, chain of title, etc.), and follows, in securitization cases, that what the “lender”, servicer, or securitized trustee is really doing is trying to get paid twice, three times, four times, or more with the foreclosure. In fact, when the Arizona state court Judge in the case recently argued by Mr. Barnes was presented with the question of why a Wall Street securitized trustee Bank would buy a loan which is already in default (a/k/a a “toxic” loan) for purposes of placing it into a securitized mortgage loan trust, the Judge stated “because they knew they were going to get paid by insurance”. This is the question which was implicitly posed by Judge Schack in the Deutsche Bank v. Rolando Campbell case in New York back in 2008, which the Arizona Judge answered on the record last week.

BINGO!!! SHAZAM!!! This is what the Goldman Sachs litigation was all about, and why they settled so quickly with the SEC. As those of you who read the lawsuit know, Goldman pooled a series of loans which they knew would fail and took out multiple insurances on the risk of failure, and cashed in when the loans did fail. We call this “rigged gambling contracts”. For a paltry $0.55 billion, Goldman walked away with what must have been many times that. The settlement was nothing more than a “cost of doing business”.

It is up to us who defend foreclosure cases to keep bringing this to the attention of the judiciary. We are more than happy that at least one jurist has finally stated on the record what we have been arguing all along.

Jeff Barnes, Esq.,