Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca1-24-01221/USCOURTS-ca1-24-01221-0/pdf.json

Parties Involved:
Federal Home Loan Mortgage Corporation
Appellee
Steven C. Fustolo
Appellant
Select Portfolio Servicing, Inc.
Appellee

Document Text:

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

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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 

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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").

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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 

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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-cv2 The 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. 

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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 

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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 

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(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. 

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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).

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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. 

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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 

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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.

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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.

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