Why Show Me The Note Matters

Why Show Me The Note Matters —- kudos to the Bankruptcy Law Network

More bankruptcy courts are demanding mortgage servicers prove they are entitled to collect on a mortgage loan note before foreclosing.  The fight over standing to appear in court runs deeper than technicalities and tactics to stall a lender.  It is a matter of fundamental rights.

A Missouri state appellate court recently joined the chorus of tribunals demanding that mortgage lenders show me the Note in order to appear in court to pursue a home.  Although the particular case may have limited impact in Missouri courts since most foreclosures are completed outside court and therefore without the lender ever having to prove to a third-party that they are legally entitled to take someones home.  That alone should give anyone pause.

But in bankruptcy court where a lender must have standing to seek relief from the automatic stay in order to start a foreclosure it matters even more.

Why should courts get caught up in the minutiae of assignments of Notes and Deeds of Trust?  After all, the debtor owes a mortgage to somebody its usually admitted right there on the debtors sworn schedules.  If the same company (or someone claiming rights from them) shows up in court complaining it hasnt been paid, shouldn’t the judge just cut to the chase instead of getting in the way?  Not if the bankruptcy court wants to fulfill its real purpose, it shouldnt.

Initially, these decisions require the lending industry to disclose what it has been doing with loans.  Its a small thing but important.  Homeowners rarely understand how their loan ended up where it is.  Sometimes they have conflicting information about who is entitled to payments.  Servicers dont always talk to each other coherently when they pass paper between them, how can consumers trained in fixing disc brakes be expected to comprehend it?

Just as important, consumers may discover (inconveniently for the lender) they have rights and claims which should be vindicated.  Consumers dont know when their rights are violated.  In fact, they often are outraged by things which are lawful while only confounded by the unlawful.

In the case of mortgage lending, they may have been scammed by a mortgage broker (e.g. promised one loan and sold another).  Unless those flaws are obvious on the loan documents, a future holder of the loan is not liable for that claim unless the assignment was completed only after a default occurred.  If proper assignments were not actually completed until just in time for court, the consumer may have plenty of rights to offset the claims made by the servicer.  But the consumer wont know the option is there if the lender can hide the chain of assignments behind smoke and mirrors.

And then there is the pesky Constitution.  A bankruptcy court is a federal court.  Federal courts are constitutionally limited to addressing only a case or controversy between parties who have a true stake something to win or lose in the outcome.  And someone claiming such a stake ought to be able to prove it.

Even if outside court everyone seems to know who is owed the money on a loan, the court must be satisfied that the actual parties before it have this standing.  As Idahos bankruptcy court recently pointed out, in most cases this will mean proving that the party appearing in court has an actual pecuniary interest in the case.  See, In re Sheridan, #08-20381 (Bankr.D.Idaho 3/12/09).   When a lender has not received a complete assignment or cannot prove they have based on the documents filed with the court the court lacks the power under the Constitution to act.

This is a critical but easily-ignored point.  American federal courts are limited creatures because Americans rightly fear uncontained power and federal district judges with lifetime terms have the potential for tyranny.  The constitutional limits on the reach of federal courts was meant to contain this great power.

Neither the parties nor the court can simply wish away the requirements as inconvenient.  Democracy is not meant to be efficient because in the tangle of inefficient rules lies the safety and security of popular rights.  The judge is not there to clear the sand from the gears of the machine -the judge is the sand.

Finally theres the broader role of the law in a democracy.   In the 1930s, when homes across the country were being foreclosed, it was typically being done by the the bankers in town, or at least in your state.  It was not a faceless corporate name which shielded another faceless trust which in turn shielded large institutional or foreign investors that wanted to take your home.  It was “Bob the Banker” who lived a few blocks away.

Why would that matter?  A local banker has to think hard about whether foreclosing on a property and reselling it is a good investment decision for the bank.  And he has to decide how that will affect the community the bank makes loans in as well dragging down the local economy is not usually good for the local bank in the long run.  A faceless, unknown amalgam of investors shielded by layer upon layer of middlemen, agents and lawyers doesnt care about the community any more than a fox cares about the health of the chickens.

By forcing servicers to prove who owns the loan, courts are opening the door just a little bit so the homeowners and, ultimately, the American public can see who is taking their homes, and who is potentially helping to lay waste to their community.  And, in a democracy, knowledge is power.

Edit:  For those keeping score, the Western District of Washington has weighed in last week on this issue as well.  See Jacobson.  (Hat tip to Ford Elsaesser, for highlighting this case.)

7 Responses

  1. hi, I’m looking for an attorney that specializes in show me the note, litigation. I’m in California

  2. Since the “foreclosure process is commenced by the recording of a notice of default and election to sell by the trustee,” the key is to allege that the party that did the recording is not in fact the “trustee” — because the so-called beneficiary, not having the Note, is not truly the “beneficiary.”

    Therefore, the Sicairos case is not applicable to your case, because the alleged facts are not the same.

    The Civil Code is silent on the definitions of “trustee” and “beneficiary.” Where the Civil Code has gaps, other law must fill in.

  3. (My apologies if this post repeats. For some reason, my comments are not being posted.)

    I ran across a couple of recent CA federal cases (Central & Eastern District) that are pointing toward a very disturbing trend in the Golden State. Although neither case sets precedent, (slip opinions only), defendant lenders are citing the language in these opinions to support the argument that they do not need to show the original promissory note to utilize nonjudicial foreclosure.

    It should be noted that in both cases, the judges faulted the homeowner complaints for being wholly conclusory and lacking specific facts to state a claim. In addition, one court took judicial notice of the fact that 38 similar lawsuits had been filed in the SD by the same attorney in a six-month period, and commented: “The Court is also aware that Plaintiff’s counsel has come under substantial criticism for filing thousands of these “Produce the Note” suits – suits one judge found to be frivolous and generic-and subsequently failing to litigate them.”

    Both cases were dismissed without prejudice, allowing the plaintiffs to amend, but expressing the view that the cases were brought merely to stall pending foreclosure. However, although dismissing for failure to state sufficient facts to establish any cause of action, the opinions went further and included definitive statements that the original promissory note is not needed to bring a nonjudicial foreclosure under CA codes.

    Here’s my briefs of the cases:

    1. Sicairos v. NDex West & America’s Servicing Company, 2009 WL 385855 (S.D.Cal.), February 13, 2009.
    Background Facts (Court’s version): Loan was originated by Axiom Financial Services in Nov. 2006, with MERS the nominee on the deed of trust. In Oct 2007, MERS assigned DOT to HSBC. In March 2008, NDex as substituted trustee issued a notice of default. Homeowner filed suit in state court, alleging several causes of action including predatory lending, unfair debt collection, RICO, and violations of TILA and RESPA. The court described the “crux of his argument” as the foreclosure trustee not having the proper paperwork. Defendants removed case to federal court.

    Quoting court’s response to the homeowner’s request for the lender to produce the original promissory note:
    (quote)
    Plaintiff’s Flawed Legal Premise:
    The legal premise of Plaintiff’s lawsuit is that a foreclosing party has to have the original promissory note before it can proceed. “Enforcement of a note which is a negotiable instrument, by foreclosure or otherwise, requires that the party seeking payment may be in possession of the original note.” (Letter, 2.) Plaintiff cites, chiefly, to Article 3 of the Uniform Commercial Code. (Comp.P 17.) Wrong law. In fact, the California Court of Appeal has held that “[California] Civil Code sections 2924 through 2924k provide a comprehensive framework for the regulation of a nonjudicial foreclosure sale pursuant to a power of sale contained in a deed of trust.” Moeller v. Lien, 25 Cal.App.4th 822, 830, 30 Cal.Rptr.2d 777 (1994). The Court of Appeal continued: The comprehensive statutory framework established to govern nonjudicial foreclosure sales is intended to be exhaustive. It includes a myriad of rules relating to notice and right to cure. It would be inconsistent with the comprehensive and exhaustive statutory scheme regulating nonjudicial foreclosures to incorporate another unrelated cure provision into statutory nonjudicial foreclosure proceedings. Id. at 834, 30 Cal.Rptr.2d 777 (citation omitted). Under Civil Code section 2924, no party needs to physically possess the promissory note. See Cal. Civ.Codes 2924(a)(1). Rather, “[t]he foreclosure process is commenced by the recording of a notice of default and election to sell by the trustee.” Moeller, 25 Cal.App.4th at 830, 30 Cal.Rptr.2d 777.
    (unquote)

    Section 2924 is silent on the issue of possession of the note, so the court relied on the absence of an express requirement to conclude that the promissory note does not matter. According to this reasoning, the CA nonjudicial code preempts the fundamental principle of contract law that one has to own the note in order to enforce it?

    The court used the same reasoning to wipe out the homeowners other claims, stating that “the Court already determined that the alleged underlying offense -foreclosing without the original promissory note – is no offense at all.”

    2. Candelo v. NDex West, et al., 2008 WL 5382259 (E.D.Cal.), December 23, 2008.
    Background facts: Chase Manhattan Mort. Co. (subsequently merged with Chase) originated loan in November 2004. A notice of default was issued in August 2008. NDex substituted in as trustee in Sept 2008. In Nov 2008, NDex recorded a notice of trustee sale. Homeowner filed suit, seeking to enjoin the foreclosure and demanding that Defendants prove ownership of the note to establish power of sale.

    The court’s response:
    (quote)
    Under California Civil Code section 2924(a)(1), a “trustee, mortgagee or beneficiary or any of their authorized agents” may conduct the foreclosure process. Under California Civil Code section 2924b(4), a “person authorized to record the notice of default or the notice of sale” includes “an agent for the mortgagee or beneficiary, an agent of the named trustee, any person designated in an executed substitution of trustee, or an agent of that substituted trustee. “”Upon default by the trustor, the beneficiary may declare a default and proceed with a nonjudicial foreclosure sale.” Moeller, 25 Cal.App.4th at 830, 30Cal.Rptr.2d 777.

    As such, NDex, as trustee under the first DOT, was authorized to initiate foreclosure given the June 7, 2008 default notice indicating plaintiffs’ arrears on the first loan and the first DOT’s power of sale provision. No requirement exists under the statutory framework to produce the original note to initiate non-judicial foreclosure.
    (unquote)

    The court then summarily wipes out the remaining RESPA, unfair debt collections and predatory lending claims:

    “Moreover, the record reveals that the first DOT’s power of sale clause was properly invoked to vitiate a predatory lending practices claim.”

    I have not conducted comprehensive research, but there are almost certainly similar opinions in other district courts. I have already seen CA state judges taking the same posture, with the attitude that “the homeowner owes a mortgage to someone, it might as well be these defendants.”

    Are the courts paving the way to allow the pretender lenders to steal the Golden State?

  4. Hello,

    I sure am learning a lot here on this website, thanks for having it available to the Homeowners.

    Foreclosure papers were filed on us Jan 26,2009..on these papers, it says:

    COUNT II REESTABLISHMENT OF LOST NOTE AND MORTGAGE

    ELEMENTS OF FACT:
    The above-mentioned Note and Mortgage have been lost and are not in the custody or control of the Plaintiff. The time and manner of the loss is that the subject Note and Mortgage were lost or diappeared under unknown circumstances after Plaintiff became the holder therof. The loss of possession was not the result of a transfer or a lawful seizure. The Mortgage attached as Exibit “A” is a true copy of the lost or destroyed document. The persons named in the Complaint are the only persons known to Plaintiff who are interested for or against such reestablishment.

    I hired an Attorney 1/31/09; he filed an Answer, request for more time, while he obtains a Mortgage Audit to know what other defenses we can use; one being the Broker set up the Appraisal, and two, the “lost note”; however, MERS is listed as a defendent on our papers. MERS assigned a Mortgage to the “bank listed as the Plaintiff” of course, I never heard of this bank until I received these papers.

    My lender was First Franklin, part of Merrill Lynch…I was trying to work a modification out and had just received papers from the servicer stating “Congratualations, we are in receipt of your paperwork and we are reviewing for the modification, we will assign a negociator in 45 days to review your file”…10 days later, they served us with Foreclosure papers.

    This week, I chose to just look on the clerk of courts website; I find that there was a Default entered on 3/13. My Attorney answered 2/19, within the 20 days (we are in Florida). I called my Attorney, he checked with the clerk and found they stated this was a “Clerical error”, very matter of fact. Do these people not realize this is someone’s home?????

    I have since read on this website that MERS now show as a defendent; and does not respond, therefore causing a Default and the Plaintiff is able to get a Sale Date.

    It has been 2 months since the “Audit” was started, and I still have no “Answers”.

    We would like to stay in our home, we had a financial hardship start May 2008; We are now back on track, but after draining all our resources to stay afloat until October, I could not make the 8.9% 1st mortgage and the 13.55 mortgage any longer, without going without other necessities, such as Food, water, electric….so we ( my husband and I) did what our Servicer told us; “We will not even talk with you about help until you are in DEFAULT”.

    They set this whole thing up.

    If anyone has some encouraging words at this point I would be eager to read them.

    I felt like we have a strong defense, but, I then start to feel as if the lenders have more money and more attorneys, and we will loose in the end.

    Does anyone think there is something else I could do to fight back? I told my attorney, regardless…I hope the Audit give us reasons to sue the lender.

  5. I ran across a couple of recent CA federal cases (Southern & Eastern District) that demonstrate a very disturbing trend in the Golden State. Although neither case sets precedent, (slip opinions only), defendant lenders are citing the language in these opinions to support the argument that they do not need to show the original promissory note to utilize nonjudicial foreclosure.

    It should be noted that in both cases, the judges faulted the homeowner complaints for being wholly conclusory and lacking specific facts to state a claim. In addition, one court took judicial notice of the fact that 38 similar lawsuits had been filed in the SD by the same attorney in a six-month period, and stated: “The Court is also aware that Plaintiff’s counsel has come under substantial criticism for filing thousands of these “Produce the Note” suits – suits one judge found to be frivolous and generic-and subsequently failing to litigate them.”

    Both cases were dismissed without prejudice, allowing the plaintiffs to amend, but expressing the view that the cases were brought merely to stall pending foreclosure. And although dismissing for failure to state sufficient facts to establish any cause of action, the courts’ went further to definitively state that the original promissory note is not needed to bring a nonjudicial foreclosure under CA codes.

    Here’s my briefs of the cases:

    1. Sicairos v. NDex West & America’s Servicing Company, 2009 WL 385855 (S.D.Cal.), February 13, 2009.
    Background Facts (Court’s version): Loan was originated by Axiom Financial Services in Nov. 2006, with MERS being the nominee on the deed of trust. In Oct 2007, MERS assigned DOT to HSBC. In March 2008, NDex as substituted trustee issueds a notice of default. Homeowner filed suit in state court, alleging several causes of action including predatory lending, unfair debt collection, RICO, and violations of TILA and RESPA. The court describes the “crux of his argument” as the foreclosure trustee not having the proper paperwork. Defendants removed case to federal court.

    Quoting court’s response to the homeowner’s request for the lender to produce the original promissory note:

    (Quote)
    Plaintiff’s Flawed Legal Premise:
    The legal premise of Plaintiff’s lawsuit is that a foreclosing party has to have the original promissory note before it can proceed. “Enforcement of a note which is a negotiable instrument, by foreclosure or otherwise, requires that the party seeking payment may be in possession of the original note.” (Letter, 2.) Plaintiff cites, chiefly, to Article 3 of the Uniform Commercial Code. (Comp.P 17.) Wrong law. In fact, the California Court of Appeal has held that “[California] Civil Code sections 2924 through 2924k provide a comprehensive framework for the regulation of a nonjudicial foreclosure sale pursuant to a power of sale contained in a deed of trust.” Moeller v. Lien, 25 Cal.App.4th 822, 830, 30 Cal.Rptr.2d 777 (1994). The Court of Appeal continued: The comprehensive statutory framework established to govern nonjudicial foreclosure sales is intended to be exhaustive. It includes a myriad of rules relating to notice and right to cure. It would be inconsistent with the comprehensive and exhaustive statutory scheme regulating nonjudicial foreclosures to incorporate another unrelated cure provision into statutory nonjudicial foreclosure proceedings. Id. at 834, 30 Cal.Rptr.2d 777 (citation omitted). Under Civil Code section 2924, no party needs to physically possess the promissory note. See Cal. Civ.Codes 2924(a)(1). Rather, “[t]he foreclosure process is commenced by the recording of a notice of default and election to sell by the trustee.” Moeller, 25 Cal.App.4th at 830, 30 Cal.Rptr.2d 777.
    (end quote)

    Section 2924 is silent on the issue of possession of the note, so the court relies on the absence of an express requirement to conclude that the promissory note does not matter. According to this reasoning, the CA nonjudicial code preempts the fundamental principle of contract law that one has to own the note in order to enforce it.

    The court used the same reasoning to wipe out the homeowners other claims, stating that “the Court already determined that the alleged underlying offense -foreclosing without the original promissory note – is no offense at all.”

    2. Candelo v. NDex West, et al., 2008 WL 5382259 (E.D.Cal.), December 23, 2008.
    Background facts: Chase Manhattan Mort. Co. (subsequently merged with Chase) originated the loan in November 2004. A notice of default was issued in August 2008. NDex substituted in as trustee in Sept 2008. In Nov 2008, NDex recorded a notice of trustee sale. Homeowner filed suit, seeking to enjoin the foreclosure and demanding that Defendants prove ownership of the note to establish power of sale.

    The court’s response:
    (start quote)
    Under California Civil Code section 2924(a)(1), a “trustee, mortgagee or beneficiary or any of their authorized agents” may conduct the foreclosure process. Under California Civil Code section 2924b(4), a “person authorized to record the notice of default or the notice of sale” includes “an agent for the mortgagee or beneficiary, an agent of the named trustee, any person designated in an executed substitution of trustee, or an agent of that substituted trustee. “”Upon default by the trustor, the beneficiary may declare a default and proceed with a nonjudicial foreclosure sale.” Moeller, 25 Cal.App.4th at 830, 30Cal.Rptr.2d 777.

    As such, NDex, as trustee under the first DOT, was authorized to initiate foreclosure given the June 7, 2008 default notice indicating plaintiffs’ arrears on the first loan and the first DOT’s power of sale provision. No requirement exists under the statutory framework to produce the original note to initiate non-judicial foreclosure.
    (end quote)

    The court then summarily wipes out the remaining RESPA, unfair debt collections and predatory lending claims:

    “Moreover, the record reveals that the first DOT’s power of sale clause was properly invoked to vitiate a predatory lending practices claim.”

    I have not conducted comprehensive research, but there are almost certainly similar opinions in other district courts. I have already seen CA state judges taking the same posture, with the attitude that “the homeowner owes a mortgage to someone, it might as well be these defendants.”

    Are the courts paving the way to allow the pretender lenders to steal the Golden State?

  6. Have any helpful thoughts? I placed my 1st mortgage as an unsecured debt in my B.K 13. The attorneys for the mortgage company submitted a certified copy of the deed of trust and a proof of claim filled out. Now I have to decide to make a motion through the bankruptcy court, or file a lawsuit for the original bearing my signature. Can anyone give me any info? Please!!!

  7. To add to “Where is the Note”, is it possible the money in Foreign offshore tax haven Banks and we know about the US Governments outrage over lost taxes but the heart of the matter is these havens; example. secret Switzerland Number accounts. I think some of this money in the various tranches of these mortgaged backed securities sold by Wall Street were purchased by terrorists and drug cartels. This was a very safe way to get a return on ill gotten gains with their laundered money. How can Fedreral Judge not want to see who really may own the notes.

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