Antitrust Law Daily Wrap Up, RICO—MDLa: Louisiana Clerks of Court Cannot Bring RICO Claim Based on Alleged Violations of the Trust Indenture Act Against Mortgage Banks, (Jan 17, 2013)

By Tobias J. Gillett, J.D., LLM.

The clerks of court of forty-seven Louisiana parishes could not bring a Racketeer Influenced and Corrupt Organizations Act (RICO) claim against fourteen financial institutions based on an alleged conspiracy to violate the federal Trust Indenture Act of 1939 (TIA) because permitting such a claim would not be consistent with legislative intent as evidenced by the TIA’s lack of a private right of action for the clerks and its administrative enforcement scheme, the federal district court in Baton Rouge has ruled (Welborn v. The Bank of New York Mellon, January 14, 2013, Brady, J.).

According to the clerks, the financial institutions are all shareholders of Mortgage Electronic Registration Systems, Inc. and MERSCORP, Inc. (collectively, MERS). MERS records mortgages in its name when its members originate a mortgage. When a member transfers a mortgage to another member, MERS represents that it is the new beneficial owner, and thus that the assignment of the mortgage does not have to be recorded in the public land records in order to protect the priority of the mortgage lien. Through this process, MERS members avoid paying recording fees to the clerks.

The clerks alleged that the federal TIA required the financial institutions to perfect and maintain the priority of the mortgages securing their mortgage-backed securities, and that this requirement included the duty to properly record each mortgage and its subsequent conveyances in order to maintain priority of the lien under the Louisiana Public Records Doctrine.

The clerks filed suit under Section 1964(c) of the RICO Act, seeking a permanent injunction requiring the financial institutions to properly record their mortgages, and recovery of damages resulting from their previous failure to do so. The financial institutions filed a motion to dismiss.

The financial institutions first argued that the clerks did not have a private right of action under the Louisiana land recording statutes, and thus could not bring a RICO claim to enforce the statutes. The court disagreed, finding that the clerks had asserted that the duty to record they alleged had been violated arose under the federal TIA, not state law, and hence the court did not have to decide whether the clerks could have a private right of action under those laws.

However, the financial institutions contended that the TIA also did not grant the clerks a private right of action, and that the RICO Act could not be used to circumvent Congress’s decision not to provide one. The clerks responded by claiming that they were “not suing to enforce…the TIA, or securities filings,” and thus that they only needed a private right of action under the RICO Act, not the TIA as well.

The court disagreed, finding that the clerks’ complaint clearly stated that they sought to enforce the TIA, and noting that the TIA was the only law that the clerks cited as establishing the financial institutions’ duty to perfect and maintain the priority of their mortgages. Moreover, the court found that the clerks did not have a private right of action under the TIA, and therefore the clerks could only maintain their action if they could use RICO to enforce the TIA.

The court concluded that they could not, observing that the TIA was intended to safeguard the interests of security holders, with the Security and Exchange Commission granted the authority to enforce the TIA. The court cited a series of federal court decisions that had addressed RICO claims based on alleged violations of federal statutes with administrative remedies and no explicit private right of action that had found that the administrative enforcement schemes did not leave room for a private cause of action to enforce the statutes.

Although the court acknowledged that “[t]he instant case differs slightly since the administrative remedies in the TIA are not exclusive,” the court found that “Congress would not have intended the [clerks] to enforce the TIA through RICO using the present allegations, when they were not granted a private right of action through the statute, and when the SEC was expressly granted the right of enforcement.”

The court determined that a decision regarding whether the financial institutions had committed wire or mail fraud in violation of the RICO Act would necessarily involve the court deciding whether the financial institutions had violated the TIA, which would intrude on the SEC’s authority to enforce the TIA. Therefore, the court concluded that “it is inconsistent with legislative intent to allow the [clerks] to bring a RICO claim which seeks to enforce the TIA,” and dismissed their claim.

The case is No. 12-220-JJB.

Attorneys: Richard David Faulkner (Blume, Faulkner, Skeen & Northam, PLLC) for Doug Welborn. Anthony Joseph Rollo, Jr. (McGlinchey Stafford) for The Bank of New York Mellon Corp.

Companies: The Bank of New York Mellon Corp.

Cases: RICO LouisianaNews