Fustolo v. Select Portfolio Servicing, Inc.

123 F.4th 528

• Court: Court of Appeals for the First Circuit
• Decided: December 12, 2024
• Docket: 24-1221
• Status: Published

Opinion

United States Court of Appeals For the First Circuit

No. 24-1221

STEVEN C. FUSTOLO,

Plaintiff, Appellant,

v.

SELECT PORTFOLIO SERVICING, INC.; FEDERAL HOME LOAN MORTGAGE CORPORATION, as Trustee of SCRT 2019-2,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Richard G. Stearns, U.S. District Judge]

Before

Rikelman, Lynch, and Kayatta, Circuit Judges.

Joe Dye Culik and Dye Culik PC on brief for appellant. Peter F. Carr, II and Eckert Seamans Cherin & Mellott, LLC on brief for appellees.

December 12, 2024 LYNCH, Circuit Judge. Steven Fustolo appeals from the

dismissal of his claims against the holder of a mortgage, Federal

Home Loan Mortgage Corp. as Trustee of SCRT 2019-2 (the "Trust"),

and his mortgage servicer, Select Portfolio Servicing, Inc.

("SPS"). In an attempt to avoid foreclosure on a rental investment

unit he owns, Fustolo's primary claim sought a declaratory judgment

that the Trust and SPS had no right to foreclose under

Massachusetts law because they do not validly hold either the

mortgage or the accompanying promissory note (the "Note"). Fustolo

also asserted pendent state law damages claims for defamation,

slander of title, unfair business practices, and violation of

Massachusetts's Debt Collection Act, all of which depended on the

validity of the primary allegations. He also claimed that SPS

violated Regulation X of the Real Estate Settlement Procedures Act

("RESPA"), 12 C.F.R. § 1024, in refusing to correct an allegedly

incorrect valuation of the property at issue.

Because Fustolo failed to state a claim, we affirm.

I.

When reviewing the allowance of a motion to dismiss,

"'we recount the underlying facts as alleged in the complaint,'

but 'disregard any conclusory allegations.'" Analog Techs., Inc.

v. Analog Devices, Inc., 105 F.4th 13, 14 (1st Cir. 2024) (citation

omitted) (first quoting Shash v. Biogen, Inc., 84 F.4th 1, 6 (1st

- 2 - Cir. 2023); then quoting Ponsa-Rabell v. Santander Sec. LLC, 35

F.4th 26, 30 n.2 (1st Cir. 2022)).

In 2009, Fustolo purchased Unit 13 at 115 Salem Street,

Boston, Massachusetts, and took out a mortgage to do so. The

mortgage was in favor of Mortgage Electronic Registration Systems,

Inc. ("MERS"), as nominee for Union Capital Mortgage Business Trust

("Union Capital") and its successors and assigns, with a loan in

the amount of $283,500. At the same time, Fustolo executed a

promissory note to Union Capital for the same amount. Union

Capital, a trust, was terminated on June 29, 2010.

In the years following Fustolo's purchase of the

property, the mortgage was reassigned six times.1 Fustolo's

Complaint alleged that the First Assignment was invalid because

"the original lender, Union Capital, had dissolved at the time the

1 The assignments proceeded as follows. 1. On December 7, 2011, an assignment was recorded from MERS to HSBC Bank USA, N.A. (the "First Assignment"). 2. On August 3, 2012, a corrective assignment was filed from MERS to HSBC Bank USA (the "Second Assignment") 3. On January 31, 2017, an assignment was recorded from HSBC Bank USA to Nationstar Mortgage LLC (the "Third Assignment"). 4. On December 3, 2018, an assignment was recorded from Nationstar to SPS (the "Fourth Assignment"). 5. On December 5, 2018, a corrective assignment was recorded from Nationstar to SPS (the "Fifth Assignment"). 6. On August 12, 2021, an assignment was recorded from SPS to the Trust (the "Sixth Assignment").

- 3 - Mortgage was assigned via the First Assignment." The Note has an

allonge payable to, and indorsed in blank by, "HSBC Mortgage

Corporation (USA)." The entity HSBC Mortgage Corporation (USA)

never received the Note in the chain of assignments; rather, the

distinct entity HSBC Bank USA did.

The Complaint also alleged that "each of the assignments

of the Mortgage clearly states that all sums due related to it,

i.e., the amounts due pursuant to the Note[], are being

transferred," and that "[t]his means that the Mortgage assignments

and the Note transfers contradict each other." In his brief before

this court, Fustolo clarified that the First and Second Assignments

purportedly transferred both the mortgage and the Note, but that

"the remaining assignments of the Mortgage only contain language

that the Mortgage was assigned without reference to a transfer of

the rights of the debt related to the Mortgage and Note." The

parties do not dispute that the Trust is currently in possession

of the Note.

In 2013, involuntary bankruptcy proceedings were

initiated against Fustolo by a different entity not a party to

this case. An automatic stay went into effect pursuant to 11

U.S.C. § 362. After the stay went into effect, Appellees continued

to send collection notices for the mortgage debt, filed a

Servicemembers Civil Relief Act action against Fustolo in

Massachusetts Land Court, and reported the mortgage account on

- 4 - Fustolo's credit report. Fustolo defaulted, and on or about

September 17, 2019, SPS noticed a cure date.

In 2021, Fustolo submitted a request for assistance with

the defaulted mortgage loan to SPS. On April 2, 2021, SPS sent a

response which included a valuation of the property between

$500,000 and $510,000. Fustolo and his counsel sent SPS a letter

contesting that amount and a valuation concluding that the property

was worth $350,000. On June 24, 2021, SPS responded with a letter

denying additional loss mitigation and stating that "a variance in

the property value will not change the outcome of our decision;

therefore, we will not adjust the property value."

Fustolo filed this action on December 30, 2022 in

Massachusetts state court, and the Appellees removed it to federal

district court. On March 20, 2023, the district court dismissed

the action as to all counts except for Count II, a claim

challenging the adequacy of a notice letter sent to Fustolo, which

the parties later settled. The district court first determined

that Counts I, IV, V, VI, and VII, the declaratory judgment and

state law claims, "hinge on defendant improperly attempting to

foreclose without establishing the unity of the Mortgage and the

Note."2 Fustolo v. Select Portfolio Servicing, Inc., No. 1:23-cv-

2The district court found that the claims were judicially estopped, but we have no need to discuss that ruling or Fustolo's arguments on the issue.

- 5 - 10033, (D. Mass. Mar. 20, 2023), ECF No. 14. The district court

held that "[w]ith respect to the Note, [Fustolo] concedes that it

is indorsed in blank and currently in the possession of defendant

(otherwise, defendant could not have produced it for [Fustolo])."

Id. The district court then held that Massachusetts law, including

the Massachusetts Uniform Commercial Code, established that

Fustolo "thus has no basis to challenge assignment of the note."

Id. As to Count III, Fustolo's RESPA claim, the district court

held that it was insufficiently pled because Fustolo failed to

"specify . . . which provision of [RESPA] allegedly imposes a

requirement to respond to a notice of error about the valuation."

Id. Further, Fustolo "only alleges having sent one notice of

error, and defendant indisputably responded to that notice with

its rationale for declining to update the valuation." Id. The

district court noted that the Complaint alleged only that "under

RESPA, [SPS] 'was required to respond to, and correct, any notices

of error sent by Fustolo.'" Id.

On appeal, Fustolo argues that he "sufficiently pleads

contradictions between the assignments of the Note and of the

Mortgage" because the Trust does not properly hold the Note through

the chain of mortgage assignments. Fustolo also argues that the

district court erred in dismissing the RESPA claim because Fustolo

"sufficiently alleged that [SPS] committed an error covered by the

statute, that [SPS] failed to comply with its statutory obligations

- 6 - in responding to correct the error, and Fustolo suffered actual

damages."

II.

We review the district court's dismissal order de novo.

Douglas v. Hirshon, 63 F.4th 49, 54-55 (1st Cir. 2023). "We do

not credit legal labels or conclusory statements, but rather focus

on the complaint's non-conclusory, non-speculative factual

allegations and ask whether they plausibly narrate a claim for

relief." Cheng v. Neumann, 51 F.4th 438, 443 (1st Cir. 2022).

A.

We need not reach the question of whether Fustolo is

judicially estopped from challenging the Appellees' right to

foreclose because his claim to that effect fails on the merits.

In Massachusetts, a party may foreclose when they hold both the

mortgage and the mortgage note. Eaton v. Fed. Nat'l Mortg. Ass'n,

969 N.E.2d 1118, 1129 (Mass. 2012). Fustolo argues that the Trust

does not hold the Note because of various alleged discrepancies in

the chain of assignments. However, under Massachusetts law,

"[t]here is no case holding that a foreclosing party must

demonstrate an unbroken chain of assignments of the mortgage

note."3 LaRace v. Wells Fargo Bank, N.A., 166 N.E.3d 1025, 1037

3 To the extent that Fustolo argues that the Trust cannot foreclose because the mortgage assignments sometimes did not transfer the Note as well, that argument lacks merit. "[N]othing in Massachusetts law requires a foreclosing mortgagee to

- 7 - (Mass. App. Ct. 2021). The Supreme Judicial Court has further

made clear that mortgage notes can be "transferred by indorsement

and delivery between the parties." Eaton, 969 N.E.2d at 1121 n.5;

see also Sullivan, 7 N.E.3d at 1119 n.16 (holding that party was

noteholder where it "[wa]s in possession of the original note,

endorsed in blank by WMC"); Galvin v. U.S. Bank, N.A., 852 F.3d

146, 156 (1st Cir. 2017) (noting that in Massachusetts, mortgage

notes "may be transferred by indorsement and delivery"). Mass.

Gen. Laws ch. 106, § 3-205(b) likewise establishes that "[w]hen

indorsed in blank, an instrument becomes payable to bearer and may

be negotiated by transfer of possession alone until specially

indorsed." The parties agree that the Trust possesses the Note

and that the Note was indorsed in blank, so Fustolo's allegations

that the Trust does not hold the Note fail.4

demonstrate that prior holders of the record legal interest in the mortgage also held the note at the time each assigned its interest in the mortgage to the next holder in the chain." Sullivan v. Kondaur Cap. Corp., 7 N.E.3d 1113, 1119 (Mass. App. Ct. 2014). 4 On appeal, Fustolo argues that Mass. Gen. Laws ch. 106, § 3-205(b) does not apply to the Note as a negotiable instrument because language in Paragraph 10 of the Note establishes "express condition[s] to payment" and that "rights or obligations with respect to the promise or order are stated in another writing." See Mass. Gen. Laws ch. 106, § 3-106(a), § 3-104(a). Fustolo did not plead this theory in the Complaint or otherwise present it to the district court, and he has waived it. As we have held, "[i]f any principle is settled in this circuit, it is that, absent the most extraordinary circumstances, legal theories not raised squarely in the lower court cannot be broached for the first time on appeal." Teamsters, Chauffeurs, Warehousemen & Helpers Union, Local No. 59 v. Superline Transp. Co., 953 F.2d 17, 21 (1st Cir.

- 8 - Fustolo's allegation that the Appellees do not hold the

mortgage because "the original lender, Union Capital, had

dissolved at the time [of the First Assignment]" likewise fails to

state a claim. It is beyond dispute that MERS may hold and assign

a legal interest in a mortgage. See, e.g., Serra v. Quantum

Servicing, Corp., 747 F.3d 37, 40 (1st Cir. 2014) ("MERS may

validly possess and assign a legal interest in a mortgage."); see

also Haskins v. Deutsche Bank Nat'l Tr. Co., 19 N.E.3d 455, 463

(Mass. App. Ct. 2014) ("There is likewise no merit to the

plaintiff's claim that MERS is without capacity to execute a valid

assignment of the mortgage . . . ."). That remains true when MERS

is a nominee of an original lender that has since dissolved as

well as that lender's successors and assigns. See Giannasca v.

Deutsche Bank Nat'l Tr. Co., 130 N.E.3d 1256, 1259 (Mass. App. Ct.

2019). Fustolo's mortgage establishes MERS as "a nominee for

[Union Capital] and [Union Capital's] successors and assigns," so

MERS validly assigned the mortgage despite Union Capital's

dissolution. Fustolo's allegations make clear that after that

First Assignment, the chain of assignments is unbroken such that

the Trust holds the mortgage. See U.S. Bank Nat'l Ass'n v. Ibanez,

941 N.E.2d 40, 53 (Mass. 2011) (holding that a party has the right

to foreclose when there exists "a complete chain of assignments

1992).

- 9 - linking it to the record holder of the mortgage, or a single

assignment from the record holder of the mortgage").

Fustolo's state law claims for defamation, slander of

title, unfair business practices, and violation of Massachusetts's

Debt Collection Act (Counts IV, V, VI, and VII) all fail because

the Trust validly holds both the mortgage and the Note. These

claims all feature as a key allegation that the Appellees lack the

right to foreclose, and Fustolo concedes that the Appellees' right

to foreclose is a "threshold issue that was determinative of the

legality of Appellees' actions in furtherance of collection, i.e.

Fustolo's claims for . . . defamation, slander of title, unfair

business practices, and illegal debt collection."5 Having

correctly determined that the Appellees had the right to foreclose,

the district court did not err in dismissing Fustolo's associated

state law claims.

B.

The district court did not err in dismissing Fustolo's

claim that SPS violated RESPA. We need not address the potential

pleading defects that the district court identified because the

claim fails on the merits. RESPA requires servicers to respond to

a borrower's notice of error related to the servicing of a mortgage

5 Fustolo did not present any argument on appeal contesting the dismissal of his remaining state law claims should we affirm the district court's holding that Appellees had the right to foreclose and has waived any such challenge.

- 10 - loan. See 12 U.S.C. § 2605(e)(1). Only certain errors, which are

enumerated in RESPA's corresponding implementing regulations, are

"covered" by the statute. 12 C.F.R. § 1024.35. Fustolo argues

that the alleged error here falls within the catchall term: "Any

other error relating to the servicing of a borrower's mortgage

loan." 12 C.F.R. § 1024.35(b)(11). The argument fails. The

statute defines "servicing" as meaning "receiving any scheduled

periodic payments from a borrower pursuant to the terms of any

loan . . . and making the payments of principal and interest

and such other payments with respect to the amounts received from

the borrower as may be required pursuant to the terms of the loan."

12 U.S.C. § 2605(i)(3).

Challenges to the merits of a servicer's evaluation of

a loss mitigation application do not relate to the "servicing" of

the loan and so are not covered errors under RESPA. See Naimoli

v. Ocwen Loan Servicing, LLC, 22 F.4th 376, 384 (2d Cir. 2022)

(determining that the catchall provision unambiguously "excludes

challenges to the merits of a servicer's loss mitigation

determination"); see also Morgan v. Caliber Home Loans, Inc., 26

F.4th 643, 651 (4th Cir. 2022) (holding that "correspondence

limited to the dispute of contractual issues that do not relate to

the servicing of the loan, such as loan modification applications,"

are not covered under RESPA); Medrano v. Flagstar Bank, FSB, 704

F.3d 661, 667 (9th Cir. 2012) (holding that RESPA "distinguishes

- 11 - between letters that relate to borrowers' disputes regarding

servicing, on the one hand, and those regarding the borrower's

contractual relationship with the lender, on the other" and that

"challenges to the terms of the loan and mortgage documents are

not disputes regarding" servicing under RESPA); MacKenzie v.

Flagstar Bank, FSB, 738 F.3d 486, 491 (1st Cir. 2013) ("[A]bsent

an explicit provision in the mortgage contract, there is no duty

to negotiate for loan modification once a mortgagor defaults."

(citing Peterson v. GMAC Mortg., LLC, No. 11-11115, 2011 WL

5075613, at *6 (D. Mass. Oct. 25, 2011)). A request for mortgage

assistance is a type of loss mitigation application. See Lage v.

Ocwen Loan Servicing LLC, 839 F.3d 1003, 1006 (11th Cir. 2016) ("A

loss mitigation application is simply a request by a borrower for

any of a number of alternatives to foreclosure, known as loss

mitigation options, including, among others, modification of the

mortgage."); see also 12 C.F.R. § 1024.31 (defining "loss

mitigation option" to mean "an alternative to foreclosure offered

by the owner or assignee of a mortgage loan that is made available

through the servicer to the borrower").6

6 Fustolo argues that Naimoli, an out-of-circuit case, nevertheless saves his claims. Not so. In Naimoli, a loan servicer denied a request for a loan modification after the servicer lost certain loan documents. 22 F.4th at 379. The Second Circuit determined that the mismanagement of documents was an error falling under RESPA's catchall and that the "loss of the loan documents . . . jeopardized [the servicer's] ability to make payments to the loan's owners in the event of a foreclosure." Id.

- 12 - We affirm the district court's dismissal of Counts I,

III, IV, V, VI, and VII.

at 384. No similar error is alleged here, and indeed, the Naimoli court agreed that "a loan servicer's failure to properly evaluate a borrower for a loss mitigation option is not a covered error under [RESPA]." Id.

- 13 -