Horvath v. Bank of N.Y.

Decision Date19 May 2011
Docket NumberNo. 10–1528.,10–1528.
Citation641 F.3d 617
PartiesJohn A. HORVATH, Plaintiff–Appellant,v.BANK OF NEW YORK, N.A.; CWALT, Incorporated, Alternative Loan Trust 2006–45TI; Countrywide Home Loans Servicing, LP; Mortgage Electronic Registration Systems, Incorporated; Equity Trustees, LLC; America's Wholesale Lender, Defendants–Appellees,andJohn Doe; Jane Doe; Jack Doe; Jill Doe; Qui Doe; Chi Doe; Samuel I. White, PC, Defendants.
CourtU.S. Court of Appeals — Fourth Circuit

OPINION TEXT STARTS HERE

ARGUED: Christopher Edwin Brown, Brown, Brown & Brown, PC, Alexandria, Virginia, for Appellant. George Peter Sibley, III, Hunton & Williams, LLP, Richmond, Virginia, for Appellees. ON BRIEF: R. Michael Smith, Brown, Brown & Brown, PC, Alexandria, Virginia, for Appellant. Mark B. Bierbower, Hunton & Williams, LLP, Washington, D.C., for Appellees Bank of New York, N.A., CWALT, Incorporated, Alternative Loan Trust 2006–45TI, Countrywide Home Loans Servicing, LP, Mortgage Electronic Registration Systems, Incorporated, and America's Wholesale Lender; Allison Melton, Bierman, Geesing, Ward & Wood, LLC, Arlington, Virginia, Robert Ryan Michael, Bierman, Geesing, Ward & Wood, LLC, Richmond, Virginia, for Appellee Equity Trustees, LLC.Before WILKINSON, KEENAN, and DIAZ, Circuit Judges.Affirmed by published opinion. Judge WILKINSON wrote the opinion, in which Judge KEENAN and Judge DIAZ joined.

OPINION

WILKINSON, Circuit Judge:

In October 2006, America's Wholesale Lender (AWL) agreed to loan John Horvath $650,000. The loan was reflected in an interest-only fixed-rate note and was secured by a deed of trust on Horvath's home. In exchange for the $650,000, Horvath agreed to repay AWL in monthly installments ranging from $3,791.67 to $5,039.44.

The note allowed AWL (and any subsequent holder) to freely transfer the note. In fact, the note provided for “anyone who takes this Note by transfer” to inherit the powers of the “Note Holder,” including the right to accelerate payment in the event Horvath defaulted. Moreover, AWL endorsed the note in blank, meaning that, under Virginia law, any party who took possession of the note would have the authority to enforce it.

In 2009, the note ended up in the hands of the Bank of New York (BNY). After Horvath failed to make payments for over half a year, BNY foreclosed on the property. In response, Horvath filed suit, alleging that BNY lacked authority to carry out that sale. On Horvath's theory, only AWL—the original lender—had authority to foreclose on the property. This theory, however, runs counter to centuries of Virginia law. We therefore affirm the district court's dismissal of Horvath's lawsuit.

I.

The facts of the case are largely undisputed; the parties primarily disagree on their meaning. On October 23, 2006, America's Wholesale Lender (AWL) and John Horvath agreed to terms on a loan secured by a deed of trust on Horvath's property at 11599 Water Oak Court in Woodbridge, VA. Under the loan, Horvath received $650,000 and agreed to pay it back in monthly installments starting on December 1, 2006. Samuel I. White agreed to serve as the trustee for the loan and Mortgage Electronic Registration Systems, Inc. (MERS) became the beneficiary.

The terms of the note and the deed of trust clarified that AWL could freely transfer the note at any time, stating, “the Lender may transfer this note.” To drive that point home, the note clarified that “The Lender or anyone who takes this Note by transfer and who is entitled to receive payments under this Note is called the ‘Note Holder.’ (emphasis added). Nor was the term “Note Holder” merely a meaningless title; whoever filled that role had the right to decide whether excess payments would be counted towards interest or principal, to receive late charges, and to accelerate the payment of the loan in the event of default.

The deed of trust contained similarly straightforward language regarding transferability. As Section 20 explained, “The Note or a partial interest in the Note (together with this Security Instrument) can be sold one or more times without prior notice to Borrower.” In the event of such a sale, the deed of trust clarified that [t]he covenants and agreements of this Security Instrument shall bind ... and benefit the successors and assigns of Lender.” Finally, the deed of trust named MERS as the beneficiary “for Lender and Lender's successors and assigns,” establishing a consistent beneficiary and thereby further enhancing the ease with which the deed of trust could be transferred.

After making the loan, AWL included it in a real estate mortgage investment conduit known as the CWALT Trust. In other words, AWL pooled Horvath's loan with others and then sold shares in the pool to investors. Countrywide Servicing subsequently agreed to service Horvath's loan. Insofar as Countrywide agreed to accept all of Horvath's payments, send him any notices, and answer all of his questions about the loan, it became Horvath's single point of contact.

As a natural consequence of the securitization process, Horvath's note changed hands. As of 2009, the Bank of New York (BNY) possessed Horvath's loan note. The deed of trust, however, remained unchanged in Virginia's real estate records. By that point, Horvath had failed to make payments on the loan for several months. The changing ownership of the note provided him no excuse: despite the transfers, Countrywide had remained as the servicer and Horvath had dealt exclusively with that company. Accordingly, a lawyer at the law firm of Bierman Geesing & Ward (acting on BNY's behalf) appointed Equity Trustees as a substitute trustee for Samuel I. White. Equity Trustees then conducted a foreclosure sale on the property on August 14, 2009.

That same month, Horvath filed his complaint in Virginia state court. The complaint alleged violations of the federal Fair Debt Collection Practices Act (“FDCPA”), the Due Process Clause, and various Virginia laws, and it named as defendants BNY, Countrywide, MERS, AWL, Equity Trustees, Samuel I. White, the CWALT Trust, and all holders of certificates in that trust. The defendants removed the case to federal court based on the FDCPA and constitutional claims, and Equity Trustees moved to dismiss the complaint in October 2009.

That motion was granted in part and denied in part on November 13, 2009, which led Horvath to file an amended complaint later that month. That complaint alleged several claims, the most salient of which was Horvath's claim to quiet title under Virginia law on the theory that the “splitting, selling, trading, and insuring of the pieces of” his mortgage had caused “the Deeds of Trust [to] split from the Notes and [become] unenforceable.” On Horvath's view, the securitization of his mortgage note had voided anyone else's claim to title over the property, meaning that he now owned the property free and clear despite having defaulted on the loan.

All of the defendants except Samuel I. White moved to dismiss that complaint, and their motion was granted on January 29, 2010. The court concluded that Horvath's quiet title claim must fail because AWL's decision to transfer Horvath's note to the CWALT Trust and ultimately to BNY was proper under both the note and Virginia law. The district court further reasoned that these transfers had not changed Horvath's repayment obligations in any way. After Horvath filed several unsuccessful motions to reconsider, the parties agreed to voluntarily dismiss the remaining claims against Samuel I. White in an order the court labeled “final.” 1 This appeal followed.

II.

For several centuries, Virginia has attempted to enhance commerce within the state by ensuring that negotiable instruments—broadly defined under Virginia law as “unconditional promise[s] or order[s] to pay a fixed amount of money,” see Va.Code Ann. § 8.3A–104(a)—are freely transferable. Indeed, the state's policy dating back to at least 1827 has been to allow the bearer of a negotiable instrument (that is, the person to whom funds are owed) to endorse the instrument “in blank.” Whitworth v. Adams, 26 Va. (5 Rand.) 333, 1827 WL 1200, at *45 (1827) (Cabell, J.). Such an endorsement allows the bearer to transfer the instrument freely, insofar as it makes possession the sole precondition to enforcement of the instrument. Id. ([H]aving been endorsed in blank, every bearer or holder, be he agent, trustee, finder or thief, has a right to sell [the instrument], and to transfer it, by delivery.”). This approach allows the parties to avoid thorny disputes about who has to pay whom, and when, in favor of a simple rule: possession permits enforcement. After all, as the Whitworth court observed, [t]o compel the purchaser to go into enquiries as to the consideration, or to permit the parties to the bill to object to its payment, on any of the grounds stated, would greatly impair the negotiability of bills and notes; their most distinguishing, most useful, and most valued feature.” Id.

Since then, Virginia law has hewed to this basic approach in a variety of ways. Principally, the state has ensured that notes remain easy to transfer by adopting the provisions of the Uniform Commercial Code governing negotiable instruments. Those provisions set forth a relatively simple set of rules. Instruments may still be endorsed in blank, see Va.Code Ann. § 8.3A–201(b), and once they are so endorsed, they may be negotiated (that is, transferred) “by transfer of possession alone,” see id.; see also id. § 8.3A–205(b) ( “If an [e]ndorsement is made by the holder of an instrument and it is not a special [e]ndorsement, it is a ‘blank [e]ndorsement.’ When [e]ndorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially [e]ndorsed.”). After a transfer, the recipient of an instrument obtains whatever rights the transferor had, which in the case of an instrument endorsed in blank amounts to plenary...

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