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Picatinny Federal Credit Union v. Federal National Mortgage Association

April 7, 2011

PICATINNY 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NOT FOR PUBLICATION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 a Motion for Partial Summary Judgment on Liability (Doc. No. 90) by the plaintiff Picatinny Federal Credit Union ("Picatinny"), and upon the Motion for Summary Judgment (Doc. No. 91) by the defendant Federal National Mortgage Association ("Fannie Mae"). The parties respectively oppose these motions. This Court has jurisdiction in this matter pursuant to 28 U.S.C. § 1332. The Court has reviewed the parties' submissions and has decided the motions without oral argument pursuant to Federal Rule of Civil Procedure 78. For the following reasons, the Court will deny both motions.

I. BACKGROUND

The matter presented before this Court involves mortgages and their underlying notes that were initially issued by Picatinny to its members, but were then stolen by a third party and sold to Fannie Mae. "Picatinny is a federally chartered credit union" whose "members consist of military and other personnel stationed and/or working at the Picatinny Arsenal, other residents of the Morris County area, and local businesses." (Fannie Mae's Resp. 56.1 Statement at ¶¶ 1, 2; Doc. No. 101-4.) "Picatinny is governed by a Board of Directors solely consisting of its members . . . who are volunteers" and are "elected to the Board by other members of the credit union." (Id. at ¶ 5.) "In 1995, Picatinny began making first mortgage loans to its members." (Id. at ¶ 6.) "At that time, Picatinny did not have employees with expertise in making or servicing first mortgage loans, and did not wish to incur the substantial cost of hiring employees to staff a first mortgage department and purchasing the requisite hardware and software." (Id. at ¶ 7.) "As of April 7, 1995, Picatinny retained CUMAnet to originate, process, underwrite and close first mortgage loans for Picatinny's members and service those loans for Picatinny." (Id. at ¶ 8.) In addition to maintaining Picatinny's mortgage loan files, "Picatinny also allowed CUMAnet to hold its original promissory notes." (Id. at ¶ 9.)

At some point in the late 1990's, the Chief Operating Officer ("CEO") of CUMAnet announced to Picatinny that he was forming a new company, CU National, and "[b]ecause Picatinny was satisfied with the services CUMAnet provided . . . and [because] CU National offered reduced pricing for the same services, Picatinny selected CU National as its new mortgage loan originator and servicer." (Id. at ¶¶ 13, 14.) On July 1, 1999, Picatinny and CU National entered into the Credit Union Support Services and Correspondent Lending Agreement ("the Agreement")." (Id. at ¶ 15.) Specifically, "CU National agreed to provide Picatinny with loan services that were integral to Picatinny's residential mortgage lending program, including the performance of all duties necessary or incidental to the servicing of all first mortgage loans on behalf of Picatinny" including "the collection of payments from Picatinny loan customers and the remittance of those payments to Picatinny." (Id.) It also provided that "CU National would assist Picatinny in selling its loans to the secondary market." (Picatinny's Resp. 56.1 Stmt. at ¶ 15.) Further, "[t]he Agreement provided that it was 'critical that CU National provide its services to the Credit Union members in such a manner that highlights the Credit Union's involvement and reduces CU National's involvement in the eyes of the member." (Id. at ¶ 17.)

CU National is a wholly owned subsidiary of U.S. Mortgage. (Fannie Mae's Resp. 56.1 Statement at ¶ 16.) Mark McGrath was the CEO of U.S. Mortgage, and he was also an officer of CU National. (Id.) However, "U.S. Mortgage was not a party to the . . . Agreement between CU National and Picatinny." (Id.) "Fannie Mae is a federally chartered entity that purchases mortgage loans originated by lenders in the primary mortgage market in order to provide liquidity and stability to the mortgage markets." (Picatinny's Resp. 56.1 Stmt. at ¶ 3; Doc. No. 99-3.)

U.S. Mortgage was "one of Fannie Mae's approximately 1,800 active approved Sellers/Servicers" and was approved in 1996. (Id. at ¶ 4.) "As a Seller/Servicer, U.S. Mortgage could both sell mortgage loans to Fannie Mae and continue to service those loans post-sale by collecting monthly principal and interest payments from the borrowers and remitting those payments to Fannie Mae." (Id. at ¶ 5.)

"In or around 2004, U.S. Mortgage experienced financial troubles and began making authorized sales of credit union loans to Fannie Mae but then delayed remittance of the proceeds to credit unions." (Picatinny's Resp. 56.1 Stmt. at ¶ 27.) Thereafter, from November 2007 through December 2008, U.S. Mortgage's CEO McGrath stole notes that were in the custody of CU National and which belonged to Picatinny and sold them to Fannie Mae for his own personal gain. (Id. at ¶ 30.) In order to make these sales appear legitimate to Fannie Mae, "McGrath signed an allonge to the underlying promissory note[s] and an assignment of mortgage . . . as an "AVP" (Assistant Vice President) of Picatinny." (Fannie Mae's Resp. 56.1 Statement at ¶ 33.) McGrath, however, "never was an 'AVP' or other officer of Picatinny." (Id. at ¶ 34.)

"In January 2009, Picatinny learned from sources other than CU National that CU National had sold certain Picatinny loans to Fannie Mae without Picatinny's knowledge or authorization, and did not remit the loan proceeds to Picatinny." (Id. at ¶ 23.) "In February 2009, Picatinny undertook its own investigation to determine the number of loans U.S. Mortgage had sold without Picatinny's knowledge or authorization, and discovered U.S. Mortgage may have unlawfully sold as many as 58 Picatinny mortgage loans." (Id. at ¶ 25.) However, in this action, Picatinny seeks to recover with respect to only 52*fn1 of the loans that were identified during the investigation. (Id. at ¶ 27.) McGrath, U.S. Mortgage's CEO, pled guilty on June 11, 2009, to charges of conspiracy to commit mail and wire fraud and conspiracy to commit money laundering, admitting that he stole the notes related to these mortgages from Picatinny and through U.S. Mortgage sold the notes to Fannie Mae without Picatinny's knowledge or consent and without giving Picatinny the proceeds of these sales. (Id. at ¶ 31.)

Fannie Mae admits that it is in possession of these disputed notes, but denies liability, asserting a number of affirmative defenses. It may be that it is relevant to these defenses the details of the process by which Fannie Mae's employees review the paperwork that is submitted in connection with the sale of notes to Fannie Mae. With respect to the evaluation process of these documents, "Fannie Mae required its loan sellers, including U.S. Mortgage, to deliver documents to be purchased to Fannie Mae's Document Delivery Facility" ("DDF"). (Fannie Mae's Resp. 56.1 Stmt. at ¶ 36.) "After delivery of the loan documents to the DDF, Fannie Mae would review the promissory notes, endorsements or allonges to ensure that they were in proper form, a process Fannie Mae referred to as certification." (Id. at ¶ 37.)"If DDF did not certify the loan, Fannie Mae would not purchase it." (Id.) Fannie Mae required that "the original promissory note . . . be delivered to it or its custodian in connection with a loan sale." (Picatinny's Resp. 56.1 Stmt at ¶ 35.)

Picatinny originally filed this action in the Superior Court of New Jersey, Law Division, on February 27, 2009. (Compl.; Doc. No. 1-1.) Fannie Mae filed its Notice of Removal thereafter on March 20, 2009. (Doc. No. 1.) Picatinny filed its Amended Complaint on May 26, 2009. (Doc. No. 11.)The instant cross-motions for summary judgment were filed on December 15, 2010. (Doc. Nos. 90, 91.) The parties respectively oppose these motions.

II. DISCUSSION

A. Standard of ...


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