Daily Development for Tuesday, January 23, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
MORTGAGES; CONSTITUTIONAL LAW; SECURITIZED LENDING: Trustee in securitized lending arrangement is not by that function subject to process in North Carolina in class action involving alleged usurious character of the underlying loan.
Skinner v. Preferred Credit, 638 S.E. 2d 203 (N.Car. 2006)
The case was decided December 20 of last year. The North Carolina Attorney General is aghast at this 4-3 decision and is seeking rehearing. The AG’s office views the outcome as contrary to the public policy of North Carolina and has distributed a memo asking that all similar thinking North Carolina attorneys join in the rehearing effort.
The case involves a pretty stinky subprime loan that got sold into a securitized trust. The loan, made in 1997, was for $45,000, and carried over $5000 in up front fees and an interest rate of 14.75% and a term of 180 months. It apparently is the centerpiece of a class action alleging breaches of the North Carolina Deceptive Trade Practices Act and the North Carolina Usury Laws.
The defendant is a Trustee in a securitized loan arrangement. The court noted that less than 3% of the mortgage loans held by the trust originated in North Carolina, and the loan passed into the trust, of course, after it was originated by third parties. A separate loan servicer, Chase Bank, serves as servicer of the loans, and has, the court notes, complete discretion as to how to manage the loan account, including when to foreclose. The servicer pays loan proceeds to the trustee, which distributes the proceeds in accordance with the securitization arrangement to investors in the capital market.
North Carolina loans use the deed of trust device, and the Trustee is acknowledged to be the beneficiary (by assignment) of the Deed of Trust.
In a relatively brief opinion, relying on a prior North Carolina case involving an individual purchase money loan held by an out of state beneficiary and other lower court cases involving securitized lending arrangements in Tennessee, the court ruled not only that the Trust did not fall under any of the three bases for jurisdiction under North Carolina statutes, but that, if the statutes did apply, this outcome would violate the Due Process Clause of the United States Constitution because there were insufficient “minimum contacts” on which to predicate a claim of jurisdiction.
The court ruled that the Trust had undertaken no “substantial activity” in North Carolina, as all the acts by which it became owners of the 114 North Carolina loans that it held (less than 3% of its portfolio) occurred outside of the state and after the loans were originated. The Trust had no other activities in North Carolina.
The court then ruled that the case did not involve “goods, documents of title, or other things of value shipped from [North Carolina] by the plaintiff to the defendant at his direction.” The payments under the loan were sent to the servicer which, as noted, had complete discretion in managing the account. The fact that the servicer shipped them on to the Trust did not make the Trust the direct recipient of the payments.
Perhaps most significantly, the court ruled that the Trust’s status as the beneficiary of the deed of trust securing the loan did not render it the holder of “local property” sufficient to make it subject to North Carolina jurisdiction. The court here relied almost exclusively on precedent in North Carolina and elsewhere, and did not separately analyze the policy ramifications of this decision.
In its discussion of the question of whether Due Process would permit the State to exercise jurisdiction over the Trustee, the court also referred to authority from other jurisdictions, including Kansas, Michigan and Rhode Island, involving similar arrangements. But it distinguished a 9th Circuit decision that did impose jurisdiction in a similar case involving a Washington loan alleged to be usurious. The distinction is important because it tends to narrow the Due Process decision made here. In the Ninth Circuit case, the court noted, the claim was that the trustee benefitted by the receipt of usurious interest payments. Here, the court stated, the claim was that the original fees charged at inception of the loan rendered the loan usurious. Of course, those fees were paid prior to the transfer of the loan to the Trust.
Comment: This strikes the editor as an important decision, albeit 4-3, and is not surprised to see the North Carolina Attorney General so exercised about it. Note that the interpretation of the application of the North Carolina statute tends to immunize the Due Process discussion from further appeal. Further, note that the distinguishing of the 9th Circuit decision occurs only in connection with the Due Process analysis. The editor has not studied the 9th Circuit case to determine whether the Washington statute had a broader basis for jurisdiction than the North Carolina case, but the fact that the North Carolina court did not discuss the 9th Circuit case in deciding on its own statute certainly suggests that the court viewed the statutes as different.
Comment 2: The memo from the North Carolina Attorney General notes that the loans in the Trustee’s portfolio amount to $4 million in 114 loans emanating from North Carolina, and that the sheer size of the investment renders the case distinguishable from the prior North Carolina case involving a single beneficiary, even though in the other case there was no separation of trustee from servicer. It is interesting that the court in the case chose to note at several points that the total North Carolina investment was less than 3% of the trust portfolio, suggesting, indeed, that size matters. So there is a line somewhere, but the court didn’t feel that it was crossed here.
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