Court Denies Alleged Mortgagee’s Right to Enforce Mortgage Note
Posted by Clayton Gillette on February 28th, 2012
There is little doubt that numerous courts are demonstrating antipathy to actions by mortgagees who attempt to foreclose on residential real estate mortgages. Much of this reluctance has been triggered by reports of “robo-signing” or other perceived procedural errors in the processing of foreclosure documents. But distrust of the foreclosure process has spilled over into other situations in which banks or other financial entities have been unable to demonstrate that they have jumped through the requisite hoops to effect a technically correct foreclosure. At the same time, the dramatic shifts that have occurred in ownership of documents as a consequence of the consolidation of financial institutions and the onslaught of securitization has made it more difficult for mortgagees to fulfill their obligations to prove a right to foreclose.
A recent case in Florida illustrates the problem that banks face when attempting foreclosure actions. In Beaumont v. Bank of New York Mellon, 2012 WL 511288 (Fla. App. 5 Dist.), Bank of New York Mellon (“BNY”) had apparently succeeded to the interest of Novastar Home Mortgage, Inc., which had been named as trustee of a securitized portfolio of mortgages known as Funding Trust 2005–3. Beaumont was one of the mortgagors whose mortgages and notes were included in the trust, and he may have fallen into arrears in his payments. BNY sought to foreclose. Apparently, however, somewhere along the line the note that evidenced Beaumont’s obligation was lost. The loss of a note is not necessarily a major obstacle to recovery by the person to whom the obligation is owed. If the note is negotiable, state law generally still permits its enforcement by a person who was entitled to enforce the instrument when the loss occurred or who acquired the note from a person who was entitled to enforce the note when the loss occurred. That suggests that BNY could have enforced the note whether it or its predecessor was responsible for the loss.
But BNY made none of the requisite showings. According to the court, the bank did not prove who lost the note or when it was lost, offered no proof of anyone’s right to enforce the note when it was lost, and did not provide evidence of the transfer to it from Novastar that presumably entitled BNY to assert Novastar’s right to enforce the lost note. In addition, state law provides some protection to those who are obligated on lost notes. The person seeking enforcement must provide “adequate protection” against loss that might occur if some third party subsequently shows up with the note and tries to enforce it against the obligor. The trial court hadn’t required BNY to comply with that obligation.
Finally, BNY contended that Beaumont could not raise the bank’s lack of “standing” to enforce the note because he had not raised the issue at an earlier point in the proceedings. But the court would have none of that. Beaumont had not previously been notified that BNY was the transferee of the note. Indeed, the court concluded, Novastar had concealed the existence of the transfer for more than three years. Ultimately, it was BNY’s obligation to demonstrate that it had the right to enforce the note as of the time judgment was entered on its behalf.
The bottom line for banks is that courts throughout the country are enforcing foreclosure requirements more strictly than they may have in the past. Suspected improprieties may be the cause of such judicial scrutiny, but its effects are likely to spill over into any deficiency in the mortgagee’s ability to demonstrate that it is entitled to foreclose at the time that the proceedings are initiated.
Clayton P. Gillette, Max E. Greenberg Professor of Contract Law, NYU School of Law