Breach of Contract/Covenant 16 and Footnote on 3 yr-old TILA RESPA Claims

In a previous article titled, “Default: Who’s In First Place?” I touched on the issue of breach of contract. The purpose of this article is to delve further into the scope of this issue.

First thing, define key terms:

Blacks Law Dictionary 2nd Pocket Edition (2001) Id. 77 generally defines “breach of contract” as a “Violation of a contractual obligation, either by failing to perform one’s own promise or by interfering with another party’s performance”.

Subsequent to the general definition of breach of contract, “material breach” is further defined as, “A substantial breach of contract, usu. excusing the aggrieved party from further performance and affording it the right to sue for damages”.

As where “breach of covenant” is defined separately as, “The violation of an express or implied promise, usu. in a contract, either to do or not to do an act”.

Depending on how your specific Mortgage/Deed of Trust security instrument is structured, you will generally find covenant 14, 15, or in most cases covenant 16 to be titled, “Governing Law; Severability”. In other security instruments you might find this in covenant elsewhere in the instrument. It has been my experience that this covenant is universal to all instruments securing real property. In general, this covenant is in two parts; Part 1: Governing Law; and Part 2: Severability, and usually provides as follows,

“This Security Instrument shall be governed by Federal law and the law of the jurisdiction in which the Property is located. In the event that any provision or clause of this Security Instrument or the Note conflicts with applicable law, such conflict shall not affect other provisions of this Security Instrument or the Note which can be given effect without the conflicting provision. To this end the provisions of this Security Instrument and the Note are declared to be severable.”

In the first part of this covenant under governing law, all parties agreed NOT to break the law. To perform as required by law and to refrain from actions prohibited by law, be it federal, state or local law: i.e. USC (Federal): TILA; RESPA; HOEPA; UCC… State: Occupations Code; Business Organizations Code; Property Code; Government Code; Rules of Procedure; Rules of Evidence; Rules of Professional Conduct… Any and every violation of Federal law, of State law, or of local law equates a breach of the Governing Law covenant and every different Statute/Rule, section, or subsection is a separate count of the violation e.g. 6 TILA + 2 RESPA + 6 UCC + 3 assignments not filed + 1 filing fraudulent assignment + 2 forged signatures + 1 failure to serve timely notice = 21 counts of breach of covenant 16 of the Mortgage/Deed of Trust. If a running tally is kept of every violation, without regard to severity (felonies/misdemeanors/civil torts), it is not uncommon to see counts for breach of covenant 16 to range in the hundreds.

The second part under severability is not so cut and dried as it seems to have some conditions that affect the severability of any clause or element from the contract. Any provision or clause in the note or deed of trust that conflicts with applicable law is severable from the contract and will not affect the rest of the contract if the contract (note/deed) can survive without the conflicting element.

The severability clause seems somewhat moot or irrelevant regarding the governing law clause as this clause does not conflict with any written law, but rather it specifically identifies the law shall govern the contract and is therefore essential to the contract and inseparable from it lest the contract be deemed unconscionable in the absence of any defined governing law.

Since the Governing law covenant touches the whole of the contract, and given the multiple violations of this covenant (illustrated above with extreme brevity), the banks, servicers, trustees, investors, attorneys, and/or any other party whose claim is adverse to the borrower/homeowner has evidenced a blatant disregard to Federal law, State law, and Local Law and also given the fact that some of the violations are criminal in nature it can be asserted that the whole of the contract is unconscionable therefore the whole of the contract has been breached, particularly if any of the violations give rise to a suit against the offending party for damages.

Let’s keep in mind that in the mass majority of mortgage closings the borrower does not draft or present any of the instruments for creation or execution. Licensed banking and real estate professionals gathered, drafted, and presented to the intended borrower every page of every document so that by the application of a signature on the documents the borrower would execute or create these instruments.

Footnote: RESPA, TILA claims 3 years post origination.

Real Estate Settlement Procedures Act (RESPA) Title 12 US Code of Federal Regulations (CFR) Chapter 10, Part 1024 (Regulation X) or 12 USC § 2601 et seq. for example, for actions brought for lack of notice of transfer of servicing rights have a statute of limitation of three years from the date of occurrence, and actions brought for unjust enrichment via erroneous fees for real estate settlement services, and others are limited to one year from the date of occurrence. 12 USC § 2614

Truth In Lending Act (TILA) 12 CFR Part 226 also sometimes referred to as “Regulation Z”, but more specifically under, 15 USC § 1635(f) provides the remedy to a claim under TILA is rescission, and the time to make such a claim “shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first”.

Notice the remedy under TILA is in strict regard to “rescission” and not the possible fraud that would have given right to this specific remedy, and notice that this specific remedy is limited to 3 years after closing. After 3 years I would have to agree, it’s too late to rescind, but what of the initial fraud. Though the right to rescission is gone a fraudulent act remains. The only statute of limitations I have ever seen in regard to fraud claims is that a claimant must bring his claim before a court of competent jurisdiction no later than  2 years to after its actual discovery. The nature of fraud is to deceive.

Legal Maxim – Once a fraud, always a fraud. 13 Viner’s Abridgment 539

If all of the essential elements of fraud can be satisfied it would be good to remember that “There is no question of the general doctrine that fraud vitiates the most solemn contracts, documents, and even judgments.” United States v. Throckmorton, 98 U.S. 61, 25 L. Ed. 93, 25 L. Ed. 2d 93 (1878) Id. 65.

Steve Skidmore

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