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Eighth Circuit Court of Appeals Holds that Bank, as Holder of legal Title, could Commence Foreclosure-by-Advertisement

In Stein v. Chase Home Fin., LLC, 662 F.3d 976 (8th Cir. 2011), The United States Court of Appeals, Eighth Circuit, held that the holder of legal title to a mortgage did not need to possess the corresponding promissory note before instituting non-judicial foreclosure by advertisement.

In October 2006, Stein (mortgagor) refinanced his home. In exchange for a $484,000 loan, Stein signed a promissory note and granted Chase Bank a mortgage on his home to secure payment of the note. The terms of the note and mortgage made both instruments freely assignable or otherwise transferable without giving prior notice to Stein. In January 2007, Stein obtained a loan from National City Bank in the amount of $100,000, signed a promissory note, and granted National a second mortgage on his home to secure payment of the loan. Both mortgages were recorded in Hennepin County.

Stein defaulted on Chase’s mortgage by failing to make a loan payment. Chase notified him that a foreclosure proceeding would commence. On September 28, 2008, Chase Bank assigned the Mortgage to Chase Home Finance. Subsequently, Chase Home Financial commenced foreclosure and bought the property. Stein had six months to redeem the property by paying Chase the amount it paid at the sheriff’s sale plus interest. After Stein failed to exercise his right of redemption, National exercised its statutory right of redemption as a junior lienholder and purchased Stein’s home from Chase.

Stein then brought this law suit in state court challenging the validity of both the foreclosure of his home by Chase Home Financial, LLC, and the redemption of his home by a junior lienholder, National City Bank. The case was removed to District Court where Chase’s motion for summary judgment was granted. Stein appealed alleging that: Minnesota law required Chase to hold both the mortgage and the promissory note at the time of foreclosure, genuine issues of material fact remained as to whether Chase held the note, and National’s redemption was invalid because the foreclosure was invalid.

First, the court cited Jackson v. Mortgage Electronic Registration Systems, Inc., 770 N.W.2d 487 (Minn.2009) for the proposition that a party can hold legal title to the mortgage without holding an interest in the promissory note. The court stated that a mortgagee of record does not lose legal title when the mortgagee transfers interest in the promissory note. In other words, the right to enforce the mortgage through foreclosure by advertisement lies with the legal, rather than equitable, holder of the mortgage. Here, Chase Bank was the mortgagee of record and held legal title to Stein’s mortgage. Chase Bank then assigned the mortgage to Chase Home Financial. Thus, Chase Home Financial was the party entitled to commence a foreclosure by advertisement, even if the promissory note had been transferred to someone else.

Second, the court held that the District Court properly granted Chase Home Financial’s motion for summary judgment, because Stein failed to raise genuine issues of material fact showing Chase Home Financial was not the holder of the note at the time of foreclosure. The record indicated that Chase Bank transferred the mortgage and the promissory note to Chase Home Financial on September 28, 2009—before they commenced foreclosure by advertisement. Additionally, Stein did not present any evidence in District Court that contradicted the clear language of the September 2008 “Assignment of Mortgage” from Chase Bank to Chase Home Financial.

Finally the court rejected Stein’s arguments regarding the validity of National’s redemption. Because Stein’s challenge directly tied to his claim that Chase Home Financial’s foreclosure was invalid—and considering that the court concluded that the foreclosure was valid—Stein’s arguments failed.

Minnesota District Court Holds that a Mortgagee is not Required to Have an Interest in the Promissory Note in Order to Foreclose

In Butler v. Bank of Am., N.A., CIV. 11-461 DWF/TNL, 2011 WL 2728321 (D. Minn. July 13, 2011), Minnesota District Court denied the Butlers’ motion to remand and granted Bank of America, BAC Homes Loans Servicing, LP, and Peterson, Fram & Bergman, P.A. (PFB)’s motion to dismiss. The Butlers (homeowners) and “all others similarly situated” motioned to remand the case to state court while the Banks filed a motion to dismiss. In addition, PFB, who acted as foreclosure counsel for the Banks, also filed a motion to dismiss.

The Butlers are Minnesota homeowners who alleged that the Banks asserted an invalid and voidable mortgage against Butlers’ home. The Butlers alleged that 1) Defendants did not have actual physical possession of the Butlers’ original note, and 2) the Banks or their predecessors in interest securitized and sold the original note into a pooling and servicing agreement, and in the process of securitizing the note and mortgage, the Banks predecessors in interest purported to transfer legal title to the note and mortgage to a separate and distinct legal entity. Thus, the Butlers alleged that the Banks did not have valid, clear legal title to the original note and could not assert rights under the Mortgage nor remove the Butlers from their home. The Butlers also alleged that the original note was not an unconditionally enforceable negotiable instrument and therefore the banks could not assert the right to foreclose on the mortgage.

The Butlers supported their motion to remand by claiming that the federal district court did not have original jurisdiction under the Class Action Fairness Act (CAFA). The Butlers alleged that the Banks failed to offer evidence showing that the amount in controversy exceeded $5,000,000 and that the putative class contains at least 100 members. The Court noted, however, that the Banks had a litigation specialist testify that “BAC has researched its serving system and determined that there are more than 100 loans secured by property in the state of Minnesota that were acquired by Countrywide Bank, FSB, and subsequently acquired by BOA… records of these loans show that [the] remaining outstanding principle… exceeds, $25 million.” Thus, the Court concluded that the Banks offered sufficient evidence that the jurisdictional requirements were met under the definition of the putative class.

The Butlers also supported their motion to remand by alleging that the Banks offered nothing in support of their alternative claim of jurisdiction under 28 U.S.C. § 1332(a). The Banks contended that the Court had subject matter jurisdiction, via the parties’ diversity of citizenship, because the Butlers fraudulently joined PFB. The Court noted that when a Plaintiff joins a non-diverse party, Defendant may avoid remand to state court by demonstrating that the non-diverse party was fraudulently joined. Here, the Butlers fraud claim is based on the legal theory that the Banks cannot assert the right to foreclose because the Butlers’ original note was not an unconditionally enforceable negotiable instrument. The Court held that this legal theory had no basis in Minnesota law, and thus concluded that the Court had subject matter jurisdiction over the action.

Although the Butlers did not mention any wrongdoing on behalf of PFB, in response to PFB’s motion to dismiss, the Butlers claimed that they alleged fraud against all Defendants including PFB. Their claim depended upon the legal theory that only the holder of the promissory note may foreclose on a mortgage. However, the Minnesota Supreme Court in Jackson v. Mortgage Elec. Registration Sys., 770 N.W.2d 487 (2009) rejected this argument. Thus, the Court granted PFB’s motion to dismiss.

With regards to the Banks’ motion to dismiss, the Court stated that although the Butlers asserted sixteen causes of action, their sole wrongdoing alleged was that the Banks foreclosed on their property without holding the promissory note and without the legal authority to do so. However, the Court in Jackson held that a mortgagee is not required to have any interest in the promissory note in order to foreclose. Because the Butlers did not allege that the foreclosure proceeding was initiated on behalf of an entity other than the mortgagee holding legal title, and since documents submitted by the parties establish that the Mortgage was assigned to BAC; the assignment was recorded; and that the foreclosure sale was conducted in the name of BAC as record holder of legal title, the Court granted the Banks’ motion to dismiss.