Knox v. Countrywide Bank
4 F. Supp. 3d 499
E.D.N.Y2014Background
- Plaintiffs deeded owners in Oyster Bay, NY, mortgaged to Countrywide in 2004 with initial balance $329,000.
- In 2008, plaintiffs sought a second mortgage; the 2004 and 2008 loans were consolidated into a CEMA totaling $585,000.
- Plaintiffs allege the 2008 loan documents contained false income data and were signed under pressure to close that evening.
- Countrywide allegedly knew the income data was false but required signing; Diana signed in her name while away, with Philip signing as her agent.
- MERS held the mortgage interest while Countrywide held the note; plaintiffs claim this “split” invalidates the note and mortgage.
- The court addresses standing/validity implications of mortgage-note splitting and various fraud and statutory claims, ruling on a motion to dismiss.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether mortgage-note splitting invalidates instruments. | Knox claim: note split from mortgage; invalidates both. | Split does not extinguish debt; note governs; standing issues limited to foreclosure. | Not a valid basis for fraud; note remains enforceable. |
| Whether plaintiffs stated a fraud claim based on false income data. | Countrywide misrepresented income; relied on by plaintiffs. | Plaintiffs knew data was false and still signed; no reasonable reliance. | Fraud claim dismissed; lack of reasonable reliance; in pari delicto applies. |
| Whether GBL § 349 claim is time-barred and cognizable. | Deceptive practices occurred in 2008; tolling possible. | Three-year statute; events in 2008; suit filed 2013; barred. | Time-barred; and private contract dispute not consumer-oriented. |
| Whether RPAPL Article 15 quiet-title claim survives dismissal. | Defendants claim adverse interest; statutory quiet-title supports relief. | RPAPL claim requires only assertion of interest and adverse claim. | RPAPL Article 1501 claim survives; quiet-title claim may proceed. |
| Whether leave to amend should be granted for the dismissed claims. | Amendment could cure defects. | Amendment would be futile given admissions and statutes. | Leave to amend denied; amendments would be futile. |
Key Cases Cited
- Bank of New York v. Silverberg, 86 A.D.3d 274 (2011) (standing to foreclose when note not held; mortgage passes with note)
- Merritt v. Bartholick, 36 N.Y. 44 (1867) (principal-incident rule: mortgage incident passes with principal note)
- MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90 (2006) (background on MERS and standing issues in NY)
- In re Escobar, 457 B.R. 229 (2011) (bankruptcy context on mortgage-note relationship)
- Hayrioglu v. Granite Capital Funding, LLC, 794 F.Supp.2d 405 (E.D.N.Y. 2011) ( reliance in fraud claims; consumer-oriented conduct)
- Kirschner v. KPMG LLP, 15 N.Y.3d 446 (2010) (in pari delicto; policy of deterring illegality)
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