Editor: David Reiss
Brooklyn Law School

January 17, 2013

New Jersey Superior Court Dismisses Foreclosure Suit, Requiring Physical Possession of Note & Mortgage at Time of Filing

By Joseph Kelly

In Bank of New York v. Raftogianis, 418 N.J. Super. 323, 13 A.3d 435 (Ch. Div. 2010) the Superior Court of New Jersey, Chancery Division, Atlantic County, found that although the lender had not separated the note and mortgage through the securitization process, there was insufficient evidence that the trustee had physical possession of the original note as of the date the foreclosure was filed.

Defendant, Michael Raftogianis, executed a note in the amount $1,380,000 to American Home Mortgage Acceptance, Inc. (“AHA”) and corresponding mortgage in September 2004. The mortgage described MERS as the mortgagee, as nominee for the Lender. In December 2004, defendant’s mortgage was securitized along with a group of other mortgages held by AHA to American Home Mortgage Securities, LLC. Afterwards, defendant’s mortgage was resold to plaintiff’s trust. Defendant defaulted in October 2008. Bank of New York was prosecuting this foreclosure case as indentured trustee for the trust.

After a lengthy discussion of the UCC, MERS recording system, and securitization in general, the court concluded “[w]hile it was clear the note had been indorsed prior to the time it was presented to the court, presumably as a part of the securitization process, it was not clear just when that occurred, or when the note had been physically transferred from American Home Acceptance to some other individual or entity.”

In turn, the court addressed the three central issues necessary to resolution.

First, the court rejected defendant’s “separation theory.” Splitting the note and the mortgage, in the sense the note was payable to the lender, and the mortgage was directed to MERS as nominee for the lender does not restrict the ability to foreclose. Interestingly, the court seemed to focus in part on the lender’s intent, stating “[i]t is clear, however, that there was no real intent to separate ownership of the note and mortgage at the time those documents were created.”

Second, the court rejected plaintiff’s argument that it did not have to establish it had possession of the note at the time of filing as it was a “real party in interest” under New Jersey Rule 4:26-1. The court focused on the permissive nature of this statute and the uncertainty that the trust had possession of the note (which would be required under the UCC) to reject this position.

Third, the court addressed plaintiff’s claim that possession of the note after the complaint was filed was sufficient to overcome any initial deficiencies. Citing to the Southern District of Ohio, the court stated to satisfy Article III’s standing requirements, “the plaintiff in a foreclosure action must establish that it was the holder of the note and the mortgage at the time the complaint was filed.”

Here, the bank’s witness was unable to offer any direct proof as to the physical transfer of the note at issue. Accordingly, the court found “[p]laintiff failed, even by the preponderance of the evidence standard, [to establish] that it did have possession of the note as of the date the complaint was filed” and dismissed without prejudice.

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