Tag Archives: mortgage

Borden and Reiss on Show Me The Note!

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Brad and I were e-interviewed by the Knowledge Effect, a Thomson Reuters blog on our recent article (co-authored with KeAupuni Akina), Show Me The Note!.  The interview is below:

Westlaw Journals: Your commentary is about the success of the “show me the note” defense to stop or delay a foreclosure.  Can you explain what the “show me the note” defense means during foreclosure proceedings? 

Bradley T. Borden and David J. Reiss:“Show me the note” can mean different things in different jurisdictions.  But the bottom line is that the homeowner is typically telling the court that the foreclosure should not proceed unless and until the foreclosing party can prove that it in fact owns or holds (or is the agent of the owner or holder of) the mortgage note that is secured by the mortgage that is being foreclosed upon.

WJ: What is the difference between a mortgage and a deed of trust, and does this have any bearing on the foreclosure defense?

BTB and DJR:The two documents are very similar in many ways – they both provide a security interest in real property.  The mortgage is the simpler of the two, involving just two parties.  The two parties are the mortgagor (the borrower) and the mortgagee (the lender).  The borrower uses its interest in real property to secure a loan made to it by the lender.  If the borrower fails to repay the loan or otherwise violates the terms of the loan transaction, the mortgagee can foreclose upon the real property.  The mortgagee forecloses through a judicial proceeding.

The deed of trust adds another party to a secured loan transaction.  Here, the borrower delivers a deed of trust to a trustee which states that the borrower’s real property is held as security for the loan made by the lender to the borrower.  The trustee of a deed of trust has the very limited role of following the provisions of the deed of trust.  Most importantly, it can foreclose on the deed of trust on behalf of the beneficiary of the deed of trust, the lender, if the terms of the loan transaction have been violated.  Because of the addition of this third party, foreclosure can (but need not) take place in a non-judicial proceeding.  The thinking is that the trustee will ensure that there will be some basic procedural protections in place for the foreclosure, obviating the need for judicial oversight. The big advantage of the deed of trust is the ability to foreclose quickly and cheaply by means of a non-judicial proceeding.

WJ: How do assignments of mortgages contribute to the confusion about what entity has the right to foreclose?

BTB and DJR: Let us count the ways!  On our blog, REFinblog.com, we track the litigation that arises from the foreclosure epidemic.  The absence of all of the relevant assignments in a transaction can play out one way in a judicial foreclosure (in mortgage-only jurisdictions), another way in a non-judicial foreclosure (in jurisdictions that allow for deeds of trust) and another way in a bankruptcy proceeding.  It plays out differently in different states.  It can play out one way if the mortgagee brings the suit, in another way if the servicer brings the suit and another if MERS (the Mortgage Electronic Recording System) brings the suit.  It can play out differently if the note is negotiable or if it is non-negotiable.  So to answer your question precisely, assignments of mortgages don’t contribute to the confusion – they are the confusion!

WJ: What is the difference between a judicial and non-judicial foreclosure?  Is the “show  me the note” defense more successful in states that use a non-judicial foreclosure proceeding or judicial proceeding?  What contrasts exists between the cases highlighted in your analysis? 

BTB and DJR: Keep in mind that states typically fall into two categories:  those that only allow judicial foreclosures and those that allow either judicial or non-judicial foreclosures.  In a judicial foreclosure, foreclosure actions are brought in court.  A judicial foreclosure can be brought where the security interest is a mortgage or deed of trust.  A non-judicial foreclosure does not – shocker! — involve a court proceeding.  Instead it is conducted using the power of sale contained in the deed of trust.  With the power of sale, the mortgaged property is sold at a public auction.

If we were to generalize, the rule is that state supreme courts do not require the foreclosing party to “show the note” in a non-judicial foreclosure (with Massachusetts one exception).  In addition, the general rule in a judicial foreclosure is that the foreclosing party must “show the note,” although it need not be the actual mortgage note holder, but merely one who has been assigned an interest in the mortgage note by the mortgage note holder.

We think the most interesting contrast is between the more typical Hogan v. Washington Mutual Bank, 277 P.3d 781 (Ariz. 2012), and the more cutting edge Eaton v. Federal National Mortgage Association, 969 N.E.2d 1118 (Mass. 2012).  Hogan strictly construes the state foreclosure law, but leads to some odd results, including the possibility that a borrower can be liable in competing foreclosure proceedings arising from just one deed of trust.  Eaton pushes the language of the statute a bit, but seems to ensure that borrowers are protected from inequitable results in foreclosure proceedings.  For a more in depth analysis, we would recommend a recent law review article by Dale Whitman and Drew Milner in the most recent issue of the Arkansas Law Review, Foreclosing on Nothing: The Curious Problem of the Deed of Trust Foreclosure Without Entitlement to Enforce the Note.

WJ: How does state law influence the success of the defense?   Are there any federal laws applicable to the “show me the note” defense?

BTB and DJR: While “show me the note” does come up in federal cases, federal courts defer to the applicable state law in reaching their results.  As our article demonstrates, the courts’ holdings tend to flow from a careful reading of the relevant state foreclosure statute, so a particular state’s law can have a big effect on the outcome.  We would note that many scholars and leaders of the bar are befuddled by courts’ failure to do a comprehensive analysis under the UCC as part of their reasoning in mortgage enforcement cases, but judges make the law, not scholars and members of the bar.  See Report of The Permanent Editorial Board for The Uniform Commercial Code Application of The Uniform Commercial Code to Selected Issues Relating to Mortgage Notes at 1 (Nov. 14, 2011).

WJ: What are the main points you want to emphasize for homeowners and their attorneys challenging a foreclosure action?

BTB and DJR: The main point is – the law matters and the jurisdiction matters.  Whether you are a homeowner trying to stave off foreclosure or a real estate finance lawyer structuring a securitization, you should expect that courts will enforce statutes as they are written in an adversarial proceeding.  What works in one jurisdiction may not work in another because the laws of the jurisdictions may vary.  Plan accordingly.

 

Court Holds That MERS Assignment, in Isolation, Could Not Prove Ownership

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The court deciding In Re Wilhelm (Case No. 06-51747) was faced with the issue of when actual notes prove that the note’s chain of ownership is unclear. In reaching their decision the court found that in such a situation, the MERS assignment could not, on its own, prove ownership of the note.

The court in this case stated that the MERS assignment was legitimate when taken as a whole, along with proper transfer of the note. The court further went on to note “in hundreds of stay relief motions, including many post-Sheridan, creditors are providing adequate documentation and explanation to meet the requisite standing requirements.”

MERS Has Standing to Bring Foreclosure Action as Court Ruled There Was No Question That the Defendant-Homeowner Was the Correctly Named Party

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In the case of Mortgage Elec. Registration Sys., Inc. v. Ventura, No. CV 054003168S, 2006 WL 1230265 (Conn. Super. Ct. April 20, 2006) the plaintiff-lender moved for summary judgment against defendants, a husband and wife, as to liability only. After review of the lender’s complaint and allegation that the husband was indebted to the lender, the court found that because the husband and quit claimed his interest in the property to the wife, she was the owner of the equity of redemption. Consequently, the wife was properly named as a party to the litigation as a defendant.

Moreover, there was no question that the named lender was the correct party to bring the action. Consequently, the lender was entitled to summary judgment as to the husband’s and the wife’s liability only.

The defendants first claimed there was a question of fact as to whether the defendant Tina Galka-Ventura was liable to MERS. However, the court determined this was not a question of fact as the plaintiff properly alleged that the defendant Joseph Ventura quitclaimed his interest to Gina. Thus, the court determined she was the owner of the equity of redemption.

Second, the defendants claimed that there was a genuine issue of material fact as whether a debt was owed to the plaintiff. The court determined that this was not a material fact. Thirdly, the defendants claimed there was material fact as to what entity is the holder of the note securing the property. The court also determined that this was not a material question.

U.S. District Court for Hawaii Rules in Favor of MERS in Non-Judicial Foreclosure Proceeding, Validating its Right to Transfer, Foreclose, and Sell Property as the Lender’s Nominee

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In Pascual v. Aurora Loan Services, No. 10–00759 JMS–KSC, 2012 WL 2355531, at 1-18 (D. Haw. June 18, 2012), the court explained the role of MERS in mortgage transfers and granted Defendant Aurora Loan Services’s motion to dismiss the Plaintiff Pascual’s claim that the non-judicial foreclosure executed by Defendant was void as a result of MERS’s invalid assignment of the mortgage.

Under the language of the mortgage, MERS held the power of sale of the subject property and “the right to foreclose and sell the property and to take action required of the Lender.” The mortgage also notified the Plaintiffs that the “Note [could] be sold without prior notice.” MERS, acting as a nominee for the lender, Lehman Brothers, assigned the mortgage to the Defendant after Lehman Brothers filed for voluntary Chapter 11 bankruptcy. Shortly after the assignment, the Plaintiffs defaulted on their loan. Defendants subsequently filed a Notice of Mortgagee’s Intention to Foreclosure Under Power of Sale. It held a public auction, and as the highest bidder, recorded a Mortgagee’s Affidavit of Foreclosure Sale under Power of Sale.

Under HRS §677-5, the “mortgagee, mortgagee’s successor in interest, or any person authorized by the power to act,” can foreclose under power of sale upon breach of a condition in the mortgage. Plaintiffs argued that because MERS did not match the description of one these parties, it did not have authority to assign the mortgage to the Defendant, thereby making the transfer invalid. In response, the Court denied the Plaintiff’s assertions and explained the role of MERS, citing Cervantes v. Countrywide Home Loans, 656 F. 3d 1034 (9th Cir. 2011). It described MERS as a “private electronic database that tracks the transfer of the beneficial interest in home loans as well as any changes in loan servicers.” It further stated that “at the origination of the loan, MERS is designated in the deed of trust as a nominee for the lender and the lender’s ‘successor’s and assigns,’ and as the deed’s ‘beneficiary’ which holds legal title to the security interest conveyed.” The court elaborated that under Cervantes, “claims attacking the MERS recording system as fraud fail, given that mortgages generally disclose MERS’[s] role as acting ‘solely as nominee for Lender and Lender’s successors and assigns,’” and that “MERS has the right to foreclose and sell the property.”

Applying the holding to the present case, the court concluded that the mortgage expressly notified the Plaintiffs of MERS’s role as the “nominee for the ‘Lender and Lender’s successors and assigns,’” which had the power of sale of the subject property without giving notice to the Borrower. For these reasons, the court concluded that the transfer from MERS to the Defendant was valid. As a result, it dismissed the Plaintiff’s claim for a violation of HRS § 667-5.

The Court also dismissed Plaintiff’s motion to amend their claim. Contrary to Plaintiff’s assertions, it concluded that there was not a statutory requirement for the Defendants to provide affirmative evidence that its assignment of the subject property was valid. It also denied Plaintiff’s claim that Lehman Brothers’ entrance into Chapter 11 bankruptcy proceedings precluded it from validly transferring the mortgage to the Defendant.

Oregon Court Rules That MERS’ Role as Beneficiary is Not Inconsistent With the Purpose of Oregon’s Non-Judicial Foreclosure Statute

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The Oregon court in Nigro v. Northwest Trustee Services and Wells Fargo Bank, No. 11 CV 0135 (May 15, 2011) denied the plaintiff’s motion for a preliminary injunction to stop a non-judicial foreclosure sale.

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The court in reaching their holding found that the plaintiff failed to establish the necessary elements to sustain a request for a preliminary injunction. Most notably, the plaintiff failed to demonstrate the likelihood of success based on the merits.

The plaintiff alleged that the defendants violated the Oregon Deed of Trust Act by failing to record all transfers of the assignment as well as the note. The court, in their ruling, cited Bertrand v. SunTrust Mortgage, Inc., which held that MERS was specifically designated by all parties as the beneficiary and had the authority to assign the deed of trust. Although MERS was not a party to this case, the court in Nigro ruled that MERS’ role as beneficiary is not inconsistent with the purpose of Oregon’s non-judicial foreclosure statute, and that the Act did not require the recording of note transfers.

Oregon Court Rejects Plaintiff’s Argument That the Trust Deed Can Only be Foreclosed if a Single Entity Holds Both the Note and Deed

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After receiving a Notice of Default and Election to Sell, the plaintiff in Spencer v. Guaranty Bank et al., No. 10CV0515ST, Deschutes Co. Circuit (May 5, 2011) sought an injunction barring MERS, as well as the other defendants, from bringing a foreclosure action. The court granted the defendants’ Motion to Dismiss with prejudice.

In addition to the court granting the motion to dismiss, the court also noted that the plaintiff “made no claim that she was not in default nor that any requirement of ORS 86.735 were not satisfied,” the court held that MERS satisfied the statutory definition of “beneficiary” under ORS 86.705. Specifically, the court identified that it was “not persuaded that Mortgage Electronic Registration Systems couldn’t act in that capacity, even if it is not the holder of the note.”

Moreover, the court also rejected the plaintiff’s argument that the trust deed can only be foreclosed if a single person or entity holds both the note and deed, noting that ORS 86.770(2) protects the plaintiff from a lawsuit seeking enforcement of the note after the non-judicial sale. “The bottom line is that plaintiff sought to retain ownership, apparently forever, of a property for which she has not paid nor even alleges that she intends to pay for. She has not stated a claim.”

Minnesota Court Holds MERS Foreclosure Valid, Although Signatories on the Assignment Were Officers of More Than One Entity

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The court in deciding Ostigaard v. Deutsche Bank National Trust Company et al., No. 0:10cv1557, (May 2, 2011) granted MERS as well as its codefendants’ motion to dismiss the complaint with prejudice. The court heavily relied on the holding from an earlier case [Jackson v. MERS].

The plaintiff made the allegation that the foreclosure was invalid, claiming that the signatories on the assignment were officers of more than one entity. The court, in rejecting the plaintiff’s notion, found that “In [Jackson v. MERS], the Minnesota Supreme Court reviewed the operation of MERS and noted ‘legislative approval of MERS practices’ by the Minnesota Legislature. The Jackson court also recognized that MERS shares officers with some of the lenders with which it works. Consequently, the plaintiff’s argument failed.” Likewise, the court also rejected the plaintiff’s contention that his inability to contact the MERS signing officer who executed the assignment was a denial of due process.