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Suffolk Federal Credit Union v. Federal National Mortgage Association

March 7, 2011

SUFFOLK FEDERAL CREDIT UNION, PLAINTIFF,
v.
FEDERAL NATIONAL MORTGAGE ASSOCIATION, DEFENDANT.



The opinion of the court was delivered by: Brown, Chief Judge

NOT FOR PUBLICATION

MEMORANDUM OPINION

This matter comes before the Court upon the Motion to Dismiss in part (Doc. No. 15) filed by the defendant Federal National Mortgage Association. ("Fannie Mae"). The plaintiff Suffolk Federal Credit Union ("Suffolk") opposes the motion. This Court has jurisdiction pursuant to 28 U.S.C. § 1332. The Court has considered the parties' submissions and decided the matter without oral argument pursuant to Federal Rule of Civil Procedure 78. For the reasons that follow, the Court will deny Defendant's motion.

I. BACKGROUND

The matter presented before this Court involves mortgages and their underlying negotiable notes that were initially issued by Suffolk to its members, but were then stolen by a third party and sold to Fannie Mae.*fn1 Fannie Mae asserts in its defense that it is a bona fide purchaser of these mortgage interests and therefore should not be held liable. Fannie Mae brings the instant Motion to Dismiss in part as it relates to the cause of action for negligence that Suffolk has stated in its Complaint.

Suffolk is "a cooperative, not-for profit credit union that . . . provides residential mortgage loans to its members." (Compl. ¶ 1; Doc. No. 1.) It depends on third party companies or mortgage servicers "to handle the origination and servicing of the loans it provides" and "from time to time . . . balance[s] its portfolio by selling a portion of the residential mortgage loans it originates in the secondary mortgage market." (Id. at ¶ 3.) Fannie Mae, a "government created, private-shareholder owned corporation" "has set and controlled that [secondary] market by . . . only purchasing mortgage loans through companies it picks and certifies as Fannie Mae 'authorized' sellers." (Id. at ¶ 2, 3.) U.S. Mortgage Corporation ("U.S. Mortgage") is one of these authorized sellers, and CU National Mortgage, LLC ("CU National") is a division of U.S. Mortgage that acts as a mortgage servicer. (Id. at ¶ 3.) Beginning in 2003, CU National "assisted Suffolk in originating new mortgage loans and servicing Suffolk's loan portfolio" by "facilitat[ing] the sales of selected mortgage loans to Fannie Mae" and "arrang[ing] for Suffolk to make the sales through U.S. Mortgage." (Id. at ¶ 4.) A Servicing Agreement was in place between Suffolk and CU National. (Id. at ¶¶ 33-37.)

An individual named Mark McGrath was the Chief Executive Officer ("CEO") of U.S. Mortgage and a major shareholder of Fannie Mae. (Id. at ¶ 5.) He also sat on Fannie Mae's Customer Advisory Board ("CAB"). "The CAB is a group of mortgage sellers that Fannie Mae uses to gain information on the needs of its consumers," with each seller having been appointed by Fannie Mae because the person is considered one of the "best sellers in the region or up-and-coming stars in mortgage loan sales." (Id. at ¶ 24.) "As part of CAB, McGrath traveled to Phoenix and Philadelphia to participate in conferences with Fannie Mae executives and members of Fannie Mae's purchasing teams." (Id. at ¶ 25.) "Fannie Mae's business interests were served by keeping McGrath and U.S. Mortgage happy and in place as its authorized seller so it could continue to purchase large volumes of mortgages from credit unions like Suffolk." (Id. at ¶ 22.)

In 2009, "Suffolk learned that U.S. Mortgage ha[d] stolen 189 of the mortgage loans it was servicing (the "Stolen Mortgages"), worth more than $42 million*fn2 and sold them to Fannie Mae." (Id. at ¶ 7.) Suffolk states in its Complaint that "McGrath and another U.S. Mortgage employee, Ron Carti, had prepared and signed loan transfer documents that falsely identified themselves as executives of Suffolk" and that "Fannie Mae accepted the documents and paid U.S. Mortgage millions of dollars without ever checking into McGrath's or Carti's authority to execute loan transfer documents on behalf of Suffolk." (Id. at ¶ 7.) The theft of the Stolen Mortgages occurred throughout years 2004, 2005, 2006, 2007, 2008, and 2009, during which time "U.S. Mortgage officers and employees . . . selected loans that Suffolk had instructed CU National to retain in Suffolk's portfolio and . . . sold those loans to Fannie Mae without Suffolk's knowledge or authorization." (Id. at ¶ 39.) "U.S. Mortgage sold the Stolen Mortgages to Fannie Mae by having McGrath and Carti execute the documentation themselves" despite the fact that only authorized Suffolk employees had authority to sign these documents. (Id. at ¶ 41.) Neither McGrath nor Carti had the authority to execute these documents. (Id. at ¶¶ 71-77.) In addition, U.S. Mortgage "concealed its actions from Suffolk . . . for years by continuing to make monthly payments on the stolen mortgages as if they remained in [Suffolk's] portfolio[]." (Id. at ¶ 9.) "McGrath has already pleaded guilty to crimes in connection with his unauthorized sales of the Stolen Mortgages and, in doing so, had admitted that he and Carti executed loan transfer documents purportedly on Suffolk's behalf without Suffolk's authorization." (Id. at ¶ 48.) McGrath also admitted that "he did not always deliver an authentic original note to Fannie Mae in his unauthorized sales" and that in some cases "he forged the name of the borrower on a newly created note" and in others "he had color copies of notes made and delivered a copy of the note to Fannie Mae." (Id. at 51.)

Fannie Mae accepted these documents and "failed to employ any fraud detection procedures when it received fraudulent loan transfer documentation U.S. Mortgage was passing to it" and "failed to notice that McGrath and Carti had identified themselves on the documentation as being the officers of 28 separate companies, located in multiple states, or that the mortgage assignments purportedly from these companies were all notarized in one state, New Jersey." (Id. at ¶ 8.) While "Fannie Mae's general practices and procedures required that it verify that the final endorsement on a mortgage loan was made, in blank, by a Fannie Mae authorized seller, and that the paperwork provided evidenced no break in the chain of endorsements from the initial lender to the authorized seller," these "practices and procedures did not include the review of intervening endorsements for indicia of fraud" and they did not "include any inspection of the borrower's signatures on the notes Fannie Mae was purchasing to determine whether there were indicia of forgery." (Id. at ¶¶ 57, 58.) Not only was there no general practice or procedure to make these types of examination, Fannie Mae did not make these type of examinations in this case. (Id. at ¶¶ 59, 60.) Moreover, "[o]n or about December 22, 2008, Fannie Mae was specifically informed by the U.S. Attorney's Office that the government was investigating CU National and U.S. Mortgage for the unauthorized sale of credit union loans to Fannie Mae. After this notification, Fannie Mae purchased Stolen Mortgages valued in excess of $6.6 million from U.S. Mortgage." (Id. at ¶ 70.)

While Fannie Mae claims that "U.S. Mortgage, McGrath, and Carti had 'apparent authority' to sell the Stolen Mortgages, Suffolk states that "Fannie Mae did not form any 'reasonable belief' about McGrath's or Carti's authority, nor did Fannie Mae observe any custom or practice on authorized sales" and to this end, "Fannie Mae's loan documentation review procedures did not allow for any such beliefs to be formed nor observations to be made." (Id. at ¶¶ 78-81.) Fannie Mae's employees also did not individually reasonably believe that U.S. Mortgage, McGrath, or Carti had such apparent authority. (Id. at ¶¶ 81-83.) Prior to its purchase of the Stolen Mortgages, Fannie Mae never reviewed the Servicing Agreement between Suffolk and CU National. (Id. at ¶¶ 85, 86.) Moreover, "Fannie Mae paid little attention to what U.S. Mortgage filed with Fannie Mae," "did not follow its own regulations" "for monitoring and approving its authorized sellers," and "ignored U.S. Mortgage's growing financial troubles and trading losses, [which were] red flags of the fraud it was perpetrating." (Id. at ¶¶ 96-128.)

The thefts were eventually discovered, and "by letter dated May 5, 2009, Suffolk . . . demanded that Fannie Mae return its Stolen Mortgages. Fannie Mae refused" and "asserts that it was unaware of the fraud and purchased the notes in 'good faith,' entitling Fannie Mae to keep them as a 'holder in due course.'" (Id. at ¶ 10.)

Suffolk filed the instant Complaint on May 28, 2010, listing three causes of action, respectively based upon the theories of conversion ("Count One") and negligence ("Count Two") and in addition seeking declaratory relief pursuant to 28 U.S.C. § 2201. (Doc. No. 1.) Fannie Mae filed its Motion to Dismiss on July 30, 2010. (Doc. No. 15.) Suffolk filed its opposition on August 23, 2010, (Doc. No. 22) and Fannie Mae filed a reply brief on August 30, 2010. (Doc. No. 23.) Fannie Mae also filed an Amended Answer to the Complaint and its affirmative defenses on September 28, 2010. In addition, this matter was consolidated on September 9, 2010, with three other matters, Civil Action Nos. 09-1295, 09-4782, and 10-473, for pretrial purposes only. (Doc. No. 25.) The Court's consideration of Fannie Mae's Motion to Dismiss in Part follows.

II. DISCUSSION

A. Standard of ...


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