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Newland v. Morgan Stanley Private Bank, N.A.

United States District Court, E.D. Tennessee, Knoxville

February 13, 2018



         Steve and Cathy Newland, acting pro se, have brought this action seeking to set aside the foreclosure and sale of their property, and for compensatory damages. Pending before the court are the motions to dismiss filed by Morgan Stanley Private Bank, N.A.; FV-I, Inc.; Specialized Loan Servicing, LLC; Specialized Asset Management, LLC; Morgan Stanley Mortgage Capital Holdings, LLC; and Saxon Mortgage Services, Inc.[1]

         I. Background

         The Newlands filed their original complaint on June 3, 2015, in the Circuit Court for Sevier County, Tennessee. The original complaint alleges that in March 2002, the Newlands entered into a Tennessee Open-End Deed of Trust with Morgan Stanley to secure a credit line of up to $250, 000. The terms of the credit agreement required the Newlands to pay off the balance of the credit line within ten years, or by March 20, 2012.

         In April 2012, the Newlands entered into a Home Equity Line of Credit (HELOC) Modification Agreement with Wells Fargo. The terms of the Modification Agreement required the Newlands to make monthly interest-only-payments on the unpaid principal balance of $238, 686.84 for five years starting in June 2012 and continuing through May 2017, at which time the Newlands agreed to pay the entire loan balance in full. The Newlands allege they sent the executed Modification Agreement to Morgan Stanley, but the agreement was never recorded with the Register's Office.

         The Newlands allege difficulties with the servicing of the modified HELOC and attempted to communicate with certain of the servicers and lenders involved with processing the HELOC. The Newlands further allege their attempts to pay on the HELOC Modification were rejected by PHH, the servicer at the time. The Newlands stopped making all payments under the Note, Deed of Trust, and HELOC sometime in late 2012 or early 2013. On April 26, 2013, PHH and Wells Fargo referred the Newlands account to Shapiro & Kirsch, LLP for foreclosure. The property was sold by public auction on May 15, 2015 to FV-I for a sale price of $205, 000. The Newlands received notice of the sale, but do not allege they were willing and able to bid at the sale.

         II. Standard of Review

         To survive a motion to dismiss under Rule 12(b)(6), the complaint must state a facially plausible claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). To determine whether the complaint states a facially plausible claim, the court takes a two-step approach. Id. at 679. First, it separates the complaint's factual allegations from its legal conclusions. All factual allegations, and only the factual allegations, are taken as true. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

         Second, the court asks whether these factual allegations amount to a plausible claim for relief. Id. at 555. The allegations do not need to be highly detailed, but they must do more than simply recite the elements of the offense. Id. Specifically, the complaint must plead facts permitting a reasonable inference that the defendant is liable for the alleged conduct. Id. If this is not done, the claim will be dismissed. Id. at 570.

         III. Morgan Stanley and Saxon

         The Newlands allege thirteen claims against the Morgan Stanley defendants and Saxon: (1) breach of contract; (2) failure to apply $850.00 payment; (3) failure to record HELOC; (4) false reports to credit agencies; (5) failure to provide checkbook for HELOC; (6) failure to respond to written dispute; (7) failure to provide billing statements; (8) fraud; (9) failure to notify of transfer of Deed of Trust to Wells Fargo; (10) “actions and inactions” by defendants; (11) failure to provide 14-day foreclosure notice; (12) failure to provide notice of transfer of deed of trust; and (13) use of unregistered name by Saxon.

         A. Breach of Contract

         The Newlands allege breach of contract for not notifying them that their loan was being serviced by Saxon. To establish a breach of contract claim under Tennessee law, a plaintiff must allege the existence of an enforceable contract, a breach of that contract, and damages resulting from the breach. LifeMed, Inc. v. AMC-Tennessee, Inc., 183 S.W.3d 1, 26 (Tenn.Ct.App. 2005). The Newlands do not allege any problems arose as a result of Saxon's servicing of the HELOC; nor do they allege any damages associated with Morgan Stanley's failure to provide notice that Saxon was the loan servicer.

         The Newlands do allege that a $850.00 payment remitted on May 1, 2012 was not applied to their account until June 2, 2012. However, the record shows that Saxon transferred service of the loan to PHH on June 1, 2012, and the $850.00 payment was transferred to PHH to apply. The Newlands claim for breach of contract fails because they have not shown any nonperformance amounting to a breach, nor any damages. Accordingly, this claim is dismissed.

         B. Failure to Apply $850.00 Payment

         The Newlands allege in ¶ 28 of their complaint that the failure to apply the $850.00 payment is a violation of the Truth In Lending Act (TILA), 15 U.S.C. § 1666a, a violation of 12 C.F.R. § 1026.36(c)(1)(i), and conversion. However, neither Morgan Stanley nor Saxon were responsible for applying the $850.00 payment because PHH was the servicer as of the due date of that payment. The Newlands second Amended Complaint acknowledges that PHH, not Morgan Stanley or Saxon, was responsible for allocation of the $850.00 payment for June.

         The Newlands also allege a claim for conversion of the $850.00 payment. However, this claim is barred by the three-year statute of limitations under Tenn. Code Ann. § 28-3-105. Transfer of the funds and the responsibility to allocate payment was made to PHH on June 1, 2012. Any claim against Morgan Stanley or Saxon had to be brought before June 1, 2015. The Newlands did not file suit until June 3, 2015. Accordingly, the Newlands have failed to state a claim against Morgan Stanley or Saxon pertaining to the $850.00 payment.

         C. Failure to Record HELOC

         The Newlands allege that Morgan Stanley and/or Saxon failed to “complete and record” the HELOC Modification Agreement, and this failure was a breach of trust, an unfair or deceitful practice under the Tennessee Consumer Protection Act, gross negligence, or conversion.

         “Registration is not essential to the validity of an instrument; it is fully effective between the parties without this step.” Toxey Sewell, The Tennessee Recording System, 50 Tenn. L. Rev. 1, 15 (1982). Instead, the purpose for recording a Modification Agreement is to protect the secured creditor, not to protect the debtor; i.e., to put the debtors' purchasers and judgment creditors on notice to the extent there is an increase in the secured indebtedness. The Modification Agreement is valid for all other purposes. Id. Thus, any failure to record the Modification Agreement is irrelevant to the claims against these defendants and does not support a claim against them.

         D. False Reports to Credit Agencies

         The Newlands allege that Morgan Stanley falsely reported them as delinquent to credit reporting agencies on June 5, 2012, in violation of the Fair Debt Collection Practices Act (FDCPA). This claim fails as a matter of law.

         First, Morgan Stanley is a creditor and not a debt collector under the FDCPA. Because Morgan Stanley was the originator of the original loan, Morgan Stanley is a creditor. The FDCPA applies to “debt collectors, ” but not to “creditors.” 15 U.S.C. § 1692(e); see also Lewis v. ACB Bus. Servs. Inc., 135 F.3d 389, 411 (6th Cir. 1998) (holding that a company whose principal purpose is to extend credit rather than collect debts is not a debt collector under the Act). Accordingly, the court finds that the Newlands have failed to state a claim for violation of the FDCPA by Morgan Stanley.

         E. Failure to Provide Checkbook

         The Newlands next allege that Morgan Stanley and Saxon breached the Note/ HELOC Modification Agreement by failing to provide them a checkbook. Defendants respond that it was the Newlands' obligation to seek additional checks. The court agrees.

         Although ¶ 2 of the Note states that the borrower will be issued an initial supply of checks, this paragraph was not referenced in the HELOC Modification, and in any event, Morgan Stanley's obligation arose and was presumptively satisfied under the Note in 2002, when the Note was originally entered. Paragraph 2 goes on to state that “subsequent checks will be sent at your request . . . .” The Newlands do not allege that they requested additional checks.

         The Newlands also assert that the failure to provide a checkbook violates the provisions of Tenn. Code Ann. § 47-30-111. The statute states that a lender's failure to make loan advances to the borrower under a reverse mortgage loan contract shall be deemed the lender's default of the contract. Id. The court does not find the statute to apply to a lender's failure to provide a checkbook where such checkbook has not been requested, and the Newlands have not provided any citation to authority interpreting the statute in this manner. Accordingly, the Newlands cannot state a claim for breach of the Note/HELOC Modification Agreement or for violation of Tenn. Code Ann. § 47-30-111.

         F. Failure to Respond to Written Dispute

         The Newlands allege that Morgan Stanley and Saxon “never acknowledged or responded to their written disputes regarding the June 6 statement from PHH, violating the TILA. This claim is barred by the one-year statute of limitations for TILA violations. See 15 U.S.C. § 1640(e); Jones v. TransOhio Sav. Ass'n, 747 F.2d 1037, 1039 (6th Cir. 1984) (failure to make ...

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