Lance R. Pomerantz
Attorney at Law

Land     Title     Law

“Constructive Notice”  The  Newsletter

Excerpted from the April 25, 2014 mailing of "Constructive Notice":

Consumer Protection Statute Voids Mortgage

Even though the borrower might not have been able to challenge the mortgage in its own action, it can challenge it in a bankruptcy defense. Moran v. U.S. Bank (In re Moran), No.13-90073 (Bankr., D. Hawai`i, January 27, 2014) [motion to dismiss].

Moran entered into a mortgage transaction with an unlicensed mortgage broker in 1995. In 2010, Moran filed for Chapter 11 protection. “After a long and tortuous process, the … note and mortgage ended up in the hands of … U.S. Bank, as custodian for a securitization trust.” U.S. Bank then filed a proof of claim on the mortgage loan.

Moran defended on the ground that a Hawai`i statute in effect in 1995 rendered a mortgage entered into with an unlicensed broker “void and unenforceable.” The bank countered that the defense was unavailable due to the statute of limitations. The Court found the bank was not compelled to file the proof, but that doing so “is comparable to filing an action on the claim.” Hence, the bank was the “aggressor that is attempting to change the relations of the parties.” As a result, even if the “Moran’s contentions would be time-barred if asserted in an independent action for declaratory relief, [they] may assert them as a shield against U.S. Bank's proof of claim.”


If the word “laches” has crossed your mind, the Court had something to say about that as well. While not deciding the matter, the Court observed that the delay in filing the proof of claim (and triggering the defense) resulted from the "shockingly long time [it took] for U.S. Bank and its predecessors to figure out which of them actually held the … note.’” Equitable remedies were likewise unavailable to the bank due to the bona fide purchaser status conferred on a debtor-in-possession by the Bankruptcy Code.