New York Supreme Court Holds that Judgment of Foreclosure and Sale May be Vacated Where Bank did not Own the Mortgage Note and Mortgage on the Date it Commenced the Foreclosure Suit

In Wells Fargo v. Sposato, 2013 N.Y. Misc. LEXIS 75, 2013 NY Slip Op 30034(U) (N.Y. Sup. Ct. Jan. 7, 2013), the Supreme Court of New York, Richmond County held that a judgment of foreclosure and sale be vacated where the assignment was executed after the suit to foreclose was commenced.

On April 8, 2008, Wells Fargo filed an action to foreclose on a mortgage originated by Option One Mortgage Corporation in 2006. However, the assignment of the mortgage and note from Option One to Wells Fargo was not executed until the next day, and was not filed with the Richmond County Clerk until April 18, 2008.

A default judgment of foreclosure and sale was granted on October 14, 2008, when the mortgagee, Sposato, did not appear in court. When Sposato filed her first Order to Show Cause on December 1, 2008, the sale planned for December 4, 2008 was cancelled. The foreclosure and sale to Wells Fargo eventually took place on November 28, 2011 for $443,634.00.

Sposato sought to vacate the October 4, 2008 judgment of foreclosure and sale, claiming that Wells Fargo lacked standing to file the original action to foreclose because: (1) the assignment was executed after commencement of the action; (2) the assignment is invalid because it was executed by a “robo-signer”; and (3)  because Wells Fargo has not demonstrated that it acquired the note in accordance with the requirements of the terms for “Pooling and Servicing” the mortgage (mainly that any transfer to a Trust must be made by a depositor, not an originator).

In opposition, Wells Fargo argued that it did have standing to bring the action as “beneficial owner and holder of the note and mortgage” at the time of commencement, and that the mortgage was properly pooled and transferred by the SEC. Wells Fargo failed to address the issue of the robo-signer, and to provide details as to when and how it attained “beneficial ownership” of the mortgage and the note.

The court found that Sposato’s challenge to the judgment of foreclosure and sale did have merit, citing the possibility of fraud and/or misrepresentation concerning the assignment. Additionally, the court ruled that the failure of the bank to show that the validity of the signature on the assignment gave Sposato grounds to seek vacatur of the judgment.

New York Appellate Court Holds that Bank Lacks Standing to Bring Foreclosure Action if it did not Own the Mortgage Note and Mortgage on the Date it Commenced the Foreclosure Suit

In Wells Fargo Bank, N.A. v. Marchione69 A.D.3d 204 (N.Y. App. Div. 2d Dep’t 2009), the New York Supreme Court, Appellate Division, Second Department held that an assignee of a note and a mortgage does not have standing to commence a foreclosure action prior to the date of execution of the assignment.

Defendants Vincent and Debbie Marchione executed a mortgage with Option One Mortgage Corporation on September 2, 2005 for real property in Mamaroneck, New York. Vincent Marchione also signed an adjustable rate note on the same day.

On November 30, 2007, plaintiff Wells Fargo (acting as trustee for Option One Mortgage Corporation) commenced a foreclosure action against Defendants, alleging that they had not made payments beginning April 1, 2007. The assignment to Wells Fargo from Option One occurred on December 4, 2007—5 days after Wells Fargo commenced the action. Although a provision in the assignment said it became effective on October 28, 2007, it was not attached to the November 30th complaint.

The defendants were served on December 7, 2007, and the assignment was not submitted to the court until January 18, 2008, following a pre-answer motion to dismiss made by the defendants, who did not yet know of the contents of the assignment. The defendants then filed a reply, properly challenging the standing of Wells Fargo. The Supreme Court found that because Wells Fargo was not yet the assignee of the mortgage on the day the action was commenced the bank lacked standing to file the action.

Wells Fargo argued that it did have standing because the assignment was executed before the defendants were served. This argument failed because in New York an action is commenced when the summons and complaint (or summons with notice) is filed with the County Clerk, not when service is made upon the defendant. Here, the summons and complaint were filed a week before the defendants were served, and the assignment was executed during that week – after the summons was filed but before service upon the defendant was made.

Wells Fargo argued further that the assignment became valid on October 28, 2007, before the commencement of the action. Citing LaSalle Bank Natl. Assn v. Ahearn,.59 A.D.3d 911, 912 (N.Y. App. Div. 3d Dep’t 2009), the court held that with no proof that the mortgage and note were actually delivered on a retroactive date, the execution date of a written assignment is controlling.

Court in Suffolk County New York Holds that Bank that Held Note and Mortgage by Way of Assignment from the Original Lender and MERS had Standing in Foreclosure Action

In US Bank N.A. v. Flynn, 27 Misc.3d 802 (N.Y. Sup. Ct. 2010), the Supreme Court of New York, Suffolk County, granted a motion by plaintiff US Bank for partial summary judgment and for dismissal of defendant’s affirmative defenses and counterclaims.

In February, 2007, defendant Flynn took out a mortgage for $2,000,000 on his residential real property in Southampton, New York. On November 21, 2008, US Bank commenced a hybrid foreclosure suit against Flynn in connection with this mortgage.

US Bank’s first cause of action was to foreclose on the mortgage given by Flynn to secure a note for $2,000,000 for his purchase of residential real property in Southampton. US Bank’s second cause of action was for declaratory relief to extinguish liens owned by the other defendants.

US Bank’s motion for partial summary judgment of first cause of action was granted because US Bank established a prima facie case for summary judgment, and Flynn failed to rebut that prima facie case. US Bank properly presented copies of the mortgage, the unpaid note, and due proof of a default in payment in their moving papers, as required to establish a prima facie case for summary judgment. Flynn failed to rebut the US Bank’s prima facie case for summary judgment because he did not submit sufficient factual proof or demonstrate an affirmative defense.

Flynn’s argument that US Bank lacked standing to sue because it did not own the note and mortgage failed because US Bank does in fact hold ownership of the note and mortgage by way of a written assignment from the original lender to US Bank.

Flynn’s second argument, that the assignment from MERS to US Bank was an invalid transfer because MERS never owned the note or the mortgage, also failed because the language of the mortgage document itself names MERS as the mortgagee of record and nominee of the lender, and grants MERS the rights associated therewith, including the right to release or discharge the mortgage.

The court held that where an entity (such as MERS) is identified as nominee of the lender and mortgagee of record in the mortgage indenture, that entity has all of the powers of the lender. A written assignment of that mortgage is a valid transfer of good title. US Bank established that a valid transfer had taken place before the litigation, and US Bank thereby had standing to sue defendant Flynn.

Flynn’s affirmative defenses were dismissed as unmeritorious because US Bank’s assignment was effective, so it had standing to sue; and Flynn failed to assert his other affirmative defenses in opposition to US Bank’s motion. Flynn’s counterclaim is also unmeritorious because he asserts relies on a duty of the plaintiff—to notify the mortgagor of the assignment—which did not exist.

Note: The United States Bankruptcy Court for the Eastern District of New York declined to follow US Bank v. Flynn in  In re Agard, 444 BR 231, 235 (Bankr. E.D.N.Y. 2011) because the plaintiff failed to show that it held ownership of the mortgage and the note, thereby negating plaintiff’s standing to bring suit.