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First Circuit Confirms Loan Modification Rendered Borrower’s ‘Standing’ Challenge Moot

firstcircuitThe U.S. Court of Appeals for the First Circuit recently dismissed a borrower’s appeal as moot because the borrower and loan servicer entered into a loan modification agreement while the appeal was pending, meaning the borrower was no longer subject to any actual or threatened foreclosure proceedings.

A copy of the opinion is available at:  Link to Opinion

In 2005, the borrower obtained a $200,000 loan secured by a mortgage on her home. The mortgage was assigned twice, the last one to a bank as trustee. The first assignee, to whom the note was transferred along with the mortgage, endorsed the note in blank as payable to the bearer and eventually sold into the trust in late 2005.

The trustee sued in state court to foreclose the mortgage and the borrower responded by filing suit in federal district court, challenging the assignments for several reasons, including that the assignment to the trust violated the trust’s Pooling Service Agreement. The district court granted summary judgment in favor of the plaintiff trustee and the borrower appealed.

On appeal, the First Circuit learned for the first time at oral argument that the parties had entered into an agreement that brought the loan current. The Court asked the parties to submit a stipulation explaining the agreement and whether the case was rendered moot as a result of the agreement. The parties could not agree and filed separate statements explaining their position.

Despite the modification agreement, the borrower continued to argue that the plaintiff trustee lacked standing to sue due to the allegedly invalid assignments.

The First Circuit directed the district court to hold an evidentiary hearing to determine and clarify whether loan modification agreement was valid and binding and whether the borrower still faced any actual or threatened foreclosure. After a hearing, the district court found that the modification agreement was valid and the borrower was no longer was subject to any actual or threatened foreclosure action, which the borrower did not dispute.

The First Circuit limited its focus to the borrower’s argument that the plaintiff trustee lacked standing to foreclose, first pointing out that mootness is jurisdictional and can be raised by the court sua sponte because an actual controversy must exist at all stages of a case, both at trial and appellate levels, in order to comply with the “case or controversy” requirement of Article III of the U.S. Constitution. As the Court noted, when there remain no “live” issues or the parties lack a legally cognizable interest in the outcome, a case becomes moot and must be dismissed.

The First Circuit then found that there no longer existed a live controversy because the borrower’s case hinged on whether the plaintiff trustee had standing to foreclose, but foreclosure was no longer being sought due to the parties’ execution of the modification agreement.

Noting that federal courts do not issue declaratory rulings as to past actions that have no continuing effect and there remained no substantial controversy, the First Circuit concluded it lacked jurisdiction to issue an advisory opinion and dismissed the case as moot, taxing costs against the borrower.

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Ralph Wutscher's practice focuses primarily on representing consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. He represents the lending and financial services industry as a litigator, and as regulatory compliance counsel. For more information, see