Tag Archives: note

Deane Finds Us East of Eden

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Last week, I discussed a NYLJ article about the “Show Me The Note” argument in New York. The article discussed a recent case, Bank of N.Y. Mellon v. Deane, 2013 Slip Op. 23244 (Sup. Ct. Kings Country July 11, 2013). Brad and I have earlier noted 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 . . ..”  As if to prove us wrong, Judge Battaglia has taken on the UCC in Deane even while acknowledging that “quotation of the Code, or even its citation, has virtually disappeared from the caselaw on this part of negotiable instruments law, at least where addressed in mortgage foreclosure actions.” (5) Judge Battaglia also notes how NY mortgage enforcement caselaw diverges from the contemporary UCC caselaw.

Judge Battaglia framed the issue of standing as follows:

As recently summarized by the Second Department:”In order to commence a foreclosure action, the plaintiff must have a legal or equitable interest in the subject mortgage…A plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note prior to commencement of the action with the filing of the complaint…Either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation, and the mortgage passes with the debt as an inseparable incident.” (GRP Loan, LLC v. Taylor, 95 AD3d at 1173 [internal quotation marks and citations omitted] [emphasis added].) (2)

He continued, “the cursory treatment of the standing question in the memorandum of law evidences a misunderstanding of the general law of negotiable instruments in its equation of the status as “holder” to mere possession of the instrument. The core of the law of negotiable instruments is found in Article 3 of the Uniform Commercial Code . . ..” (3) He finds that the plaintiff has not established that it is a holder or a nonholder in possession who has the rights of a holder. He states that

To allow an assignee to sue without possession of the note, therefore, would be inconsistent with Revised Article 3, and put New York out-of-step with the 49 states that have adopted the revision, including, in particular, a conception of “transfer” as “deliver[y] by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument” (see Revised UCC §3-203 [1].) That misstep, however, if such it is, has apparently already been taken. (7)

Doing its best to reconcile the the mortgage enforcement and UCC caselaw, Judge Battaglia concludes that

in the usual case, a plaintiff has “standing” to prosecute a mortgage foreclosure action where, at the time the action is commenced: (1) the plaintiff is the holder of the note (see NYUCC §1-201 [20]); or (2) the plaintiff has possession of the note by delivery (see NYUCC §1-201[14]), from a person entitled to enforce it, for the purpose of giving the plaintiff the right to enforce it; or (3) the plaintiff has been assigned the note, by a person entitled to enforce it, for the purpose of giving the plaintiff the right to collect the debt evidenced by the note, and the plaintiff tenders the note at the time of any judgment. (8)

New York’s law in this area is not satisfying and it looks to me like courts need to make a concerted effort to synthesize UCC law with foreclosure law.  Otherwise, mortgage litigants are left to wander like Cain in the land of Nod, east of Eden, not knowing what law governs their disputes.

U.S. District Court for the Eastern District of New York Rules That a Party Perfects its Security Interests in Disputed Loans by Taking Possession of the Notes as Opposed to Recording the Mortgage Assignments, Pursuant to UCC Article 9

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In Provident Bank v. Community Home Mortgage Corp., 498 F.Supp.2d 558, 558 (E.D.N.Y. 2007) the U.S. District Court for the Eastern District of New York ruled in favor of intervenor-plaintiff NetBank, granting its cross motion for summary judgment against intervenor-plaintiff, Southwest Securities Bank (herein described as Southwest) in a dispute regarding conflicting recorded mortgage assignments for nine loans. The court stated that “where parties assert competing interests in mortgage assignments,” under Article 9, “possession of the note perfects the assignee’s security interest regardless of whether any mortgage securing the note has been properly recorded.” It concluded that NetBank perfected its interest in eight of the nine disputed loans and took possession of them before Southwest, giving it a superior interest in those loans.

Confusion over who possessed the loans started when Defendant Community, a mortgage banker, entered into agreements with two banks, Southwest and RBMG (NetBank’s successor in interest), to fund a portion of its mortgage loans. Community entered Mortgage Purchase Agreements with both banks and engaged in a scheme known as “double booking,” where it “obtained duplicate funding for one loan from two different lenders and retained the entire value of the loan.” Essentially, “Community created two original notes and mortgages for each of the disputed loans.” Because of Community’s fraud “only one of the lenders would be paid in full,” and each bank claimed a priority interest in the nine loans that Community sold to it. Southwest recorded its assignments of the mortgages before RBMG for five of the loans, but RBMG received the original notes and assignments for eight of the loans before Southwest.

In determining which of the loans belonged to Southwest or NetBank and which of the mortgages were valid, the court had to decide “whether Article 9 or state real property law governs the security interests in mortgages.”  Under Article 9, a party perfects it security interest in a note by taking possession of it. Alternatively, under “race-notice statutes in state real property law,” a party perfects its security interest in a mortgage by recording the assignment. Southwest argued that the court should follow New York’s race-notice statute, whereas RBMG argued that Article 9 should govern.

Before reaching its decision, the court examined the New York Real Property Law Section 291, which states that a “bona fide purchaser for value, without notice of a junior mortgage, who records his assignment is entitled to priority over a prior unrecorded mortgage of which his assignor has full knowledge.” It explained that previous decisions applying the statute did not address instances where the “first party to record a mortgage assignment [had] a prior interest over another party who first takes possession of the note securing the mortgage.”  The court stated that in this case, the question depended on the “supremacy of perfecting the security interest in the note [as opposed to previous cases which regarded] perfecting the security interest in the mortgage.”

According to the statute’s language and precedent decisions regarding the same issue, Southwest would have a priority interest in five of the loans that it recorded before RMGA. Instead, the court applied Article 3 and Article 9 of the UCC in reaching its conclusions. It stated that “NetBank perfected its security interest in the loans and Southwest,” did not. The court agreed with previous cases in the Circuit which held that, “perfection of a security interest in the note (by taking possession under Article 9) should carry over to the mortgage incidental to it.” It explained that in New York, assignment of a note creates a security interest in the note, but a party perfects its security interest in the note by possessing it. From this reasoning, the court determined Southwest was not the first party to perfect its security interest in the loans, as it merely recorded its mortgage assignments but never possessed them. Therefore, the court denied Southwest’s motion for summary judgment requesting possession over the disputed loans.

Instead, the court granted NetBank’s motion for summary judgment, pursuant to Article 9, as it possessed eight of the disputed loans before Southwest. It also held that under UCC Article 3, NetBank qualified as a holder in due course (defined as a holder of a negotiable instrument who takes it for value, in good faith, and without notice that it is overdue or has been dishonored) in regards to seven of the loans, entitling it to those loans independent of its possession under Article 9.

U.S. District Court for the Eastern District of Texas Rules in Favor of MERS in Foreclosure Proceeding, Upholding its Power of Sale Over the Plaintiff’s Property

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In Richardson v. Citimortgage, No. 6:10cv119, 2010 WL 4818556, at 1-6 (E.D. Tex. November 22, 2010) the U.S. District Court for the Eastern District of Texas, Tyler Division, granted the Defendants’, Citimortgage and MERS, motion for summary judgment against the Plaintiff, Richardson, in a foreclosure proceeding. The Court reiterated MERS’s power of sale and its role as an “electronic registration system and clearinghouse that tracks beneficial ownerships in mortgage loans.”

Plaintiff purchased his home from Southside Bank with a Note. As the Lender, Southside Bank could transfer the Note and it, or any transferee, could collect payments as the Note Holder. In the agreement, Plaintiff acknowledged that Citimortgage, the loan servicer, could also receive payments. A Deed of Trust secured the Note by a lien payable to the Lender.

Under a provision in the deed, Southside Bank secured repayment of the Loan and Plaintiff irrevocably granted and conveyed the power of sale over the property. The Deed of Trust also explained MERS’s role as its beneficiary, acting as nominee for the Lender and Lender’s and MERS’s successors and assigns. MERS “[held] only legal title to the interests granted by the Borrower but, if necessary to comply with law or custom, [had] the right to exercise any and all of the interests [of the Lender and its successors and assigns], including the right to foreclose and sell the property.”

Plaintiff signed the Deed of Trust but eventually stopped making mortgage payments to CitiMortgage and filed for bankruptcy protection. As a result, “MERS assigned the beneficial interest in the Deed of Trust to Citimortgage.” Citimortgage posted the property for foreclosure after receiving authorization from the United States Bankruptcy Court. Plaintiff brought suit, seeking declaratory and injunctive relief and challenging Citimortgage’s authority to foreclose on the property.

In granting Citimortgage and MERS’s motion for summary judgment, the court explained that Citimortgage could enforce the loan agreements, including the power of foreclosure, after it received the Note from Southside Bank. Furthermore, under the doctrine of judicial estoppel, Plaintiff could not challenge Citimortgage’s right to enforce the Note after he “represented that it was [his] intention to surrender [the] property to Citimortgage,” in bankruptcy court. Citimortgage subsequently acquired a “valid, undisputed lien on the property for the remaining balance of the Note.”

Plaintiff also challenged MERS’s role with “respect to the enforcement of the Note and Deed of Trust.” In response, the court explained that “[u]nder Texas law, where a deed of trust expressly provides for MERS to have the power of sale, as here, MERS has the power of sale,” and that the Plaintiff’s argument lacked merit.

The court described MERS as a “[book entry system] designed to track transfers and avoid recording and other transfer fees that are otherwise associated with,” property sales. It concluded that MERS’s role in the instant foreclosure “was consistent with the Note and the Deed of Trust,” and that Citimortgage had the right to sell the Plaintiff’s property and schedule another foreclosure.

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.

Washington Court Holds That the Language of the Security Instrument Gave MERS Both the Authority to Foreclose and Assign the Deed of Trust

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The court Salmon v. Bank of America, MERS et al., No. 10-446 (D. Wash. May 25, 2011) dismissed claims against Bank of America and MERS. The plaintiffs argued that MERS was a “ghost-beneficiary” and as such could not be the beneficiary of a deed of trust under Washington law, as it did not have an interest in the note. The court rejected this argument, and noted that the beneficiary of a deed of trust is not required to be the note holder

The court, in their holding, noted that MERS had both the authority to foreclose and the authority to assign the deed of trust, based on the language of the security instrument.

Massachusetts Trial Court Limits Ibanez Holding by Rejecting Plaintiff’s Proposition That Foreclosing Party Needs to Hold The Mortgage in Order to Bring a Service Member’s Action

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This action commenced in this court on August 12, 2009. The plaintiff in Randle v. GMAC, No. 09 MISC 408202 GHP, Allison Randle, sought to prevent a foreclosure sale by defendant GMAC Mortgage, LLC [GMAC], and asked the court for judgment declaring that GMAC did not hold any claim secured by a certain mortgage recorded with the county registry of deeds. Therefore GMAC lacked standing to bring such an action against plaintiff Randle pursuant to the Servicemembers Civil Relief Act, and under legislation enacted in Massachusetts under and pursuant to that federal law.

Partially relying on the holding from U.S. Bank Nat’l Assoc. v. Ibanez, 17 LCR 202 (2009), the plaintiff claimed that she had a right to challenge the standing of GMAC to have filed the Servicemembers Case as a vehicle to vindicating this right, she had filed the Miscellaneous Case.

In relying on Ibanez the court found that the plaintiff confused or conflated the issue in Ibanez with the issues in her case. In Ibanez two foreclosures were determined to be invalid because the foreclosing parties failed to comply with the provisions of G.L. c. 244, § 14. These provisions required that requisite notice be given which “identifies the holder of the mortgage.” See Ibanez, 17 LCR at 204 [failure to identify holder of mortgage renders sale void as matter of law]; Ibanez, 17 LCR at 206-07 [foreclosure invalid where foreclosing party named in notice had not been assigned mortgage either on or off record].

In reaching this decision in Ibanez, the Land Court determined that a bank did not “hold” a mortgage, within the meaning of G.L. c. 244, §14, before a valid assignment had been executed and delivered. However, it was also noted that nothing from the Ibanez decision stood for the proposition that a foreclosing party needs to “hold” the mortgage to file a complaint under the Servicemembers Civil Relief Act for a determination that the mortgagor or owner is not entitled to the benefits of the federal Act, and the plaintiff’s complaint pointed to neither an authority in support of such a contention nor precedent in support of her contention.

Accordingly, the court in the current case decided there was no need to consider the question of whether GMAC Mortgage had standing to commence the Servicemembers Case, deciding that the answer to such a question could not and did not affect the outcome in such a case.

Massachusetts District Court Interprets Ibanez Narrowly in Deciding That Plaintiff-Homeowner Lacked Standing to Challenge Bank’s Standing to Foreclose

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This action arose out of an attempted foreclosure by defendant Aurora Loan Services on plaintiff David Kiah’s property. Based on the recent holding from U.S. Bank National Ass’n v. Ibanez, 458 Mass. 637, 941 N.E.2d 40 (2011), Kiah sought a declaratory judgment to make the “mortgage on record legally null and void.” The Massachusetts District Court in deciding Kiah v. Aurora Loan Services, LLC, No. 10-40161-FDA, 2011 WL 841282 (D.Mass. Mar.4, 2011) considered the Massachusetts Supreme Court’s holding from Ibanez, along with the plaintiff-homeowners’ arguments, and concluded that granting the defendant’s dismissal was proper.

The court found that the plaintiff’s claims were merit-less, as he challenged neither the note nor the note’s assignment to Aurora. As expressed in Ibanez “By law, the transfer of the note automatically transfers an equitable interest in the underlying mortgage, even without a formal assignment.” An equitable right to the mortgage was thus transferred to Aurora along with the note.

The court noted that the Ibanez holding did not require a reconsideration of the lower court’s judgment. In Ibanez the Massachusetts Supreme Court held that a foreclosure sale made by a party who holds the note but not the mortgage is void as a matter of law. In that case, the note holder provided no evidence of assignment prior to foreclosure. However here, there was a facially valid assignment of the mortgage from MERS to Aurora prior to the foreclosure sale. To the extent the assignment was defective, the court interpreted Ibanez required, at most, that a confirmatory assignment be executed and recorded.