Law Reflects Advances in Technology

Shortly after the financial crisis in 2008, many homeowners were faced with foreclosure. Around the same time, and perhaps as a result of the unprecedented amount of foreclosure actions that were commenced, it was discovered that many of the foreclosing entities could not prove themselves to be the owner of the mortgage to be foreclosed. Many of the loans that were in foreclosure had been bundled as securities to be sold to investors; investigations showed that, in selling off these bundles, many of the assignments of the individual mortgages had been “robo signed”, i.e., they were not signed by an officer of the assigning lender and the note (if it could be found) had not been endorsed and delivered to the assignee. The situation was further exacerbated when lenders commenced foreclosure actions, alleging themselves to be the owner of the note and mortgage, when in fact the loan had not been assigned to the foreclosing lender until after the action had begun.

In response to all of this, legislation was passed, court rules were promulgated and lack of standing became the standard defense for borrowers finding themselves in the unfortunate situation of foreclosure. The law became clear that a lender seeking to foreclose would establish its standing by proving that it was in physical possession of the endorsed note prior to commencement of the foreclosure action even in the absence of an assignment of the mortgage.

Recently, in the case of New York Community Bank v. McClendon, the defendant’s motion to dismiss the complaint for lack of standing was granted by the Supreme Court but reversed on appeal. The note (eNote) secured by the mortgage was signed by the defendant electronically. AmTrust, the original mortgagee, was closed and the FDIC, as receiver for AmTrust, sold the mortgage to the plaintiff. In opposition to the defendant’s motion to dismiss, the plaintiff submitted a copy of the eNote, the eNote Transfer History and an affidavit of its assistant vice president.

In reversing the lower court, the appellate court looked to various sections of 15 USC 7021 and the Uniform Commercial Code Section 1-201 regarding transferable records. The court determined that the eNote is a transferable record. The eNote transfer history established that the plaintiff acquired the note prior to the foreclosure action. The eNote and the transfer history were sufficient to review the terms of the transferable record in order to identify the entity having control of it and thus establish plaintiff’s standing. Unlike the rules for paper documents, delivery, possession and endorsement of the eNote were not required.

While the advent of electronic signatures does not abrogate the need for a plaintiff to prove its standing, it does change the type of proof that is presented to establish a plaintiff’s standing.

Underwriting Tip: Standing is an affirmative defense which, if not raised, is waived. However, if you are insuring out of foreclosure and the defendant defaulted, plaintiff’s lack of standing should be raised as an exception to coverage, particularly if the property is occupied and/or the defendant was not personally served.

To comment or ask a question please contact Judith Lanahan at Judith.lanahan@fnf.com.

Foreclosure Notices

Be careful when reviewing foreclosure actions since defaulting borrowers may still be entitled to notice of the default motion.

See Deutsche Bank Natl. Trust Co. v Gavrielova (2015 NY Slip Op 05907).

In a mortgage foreclosure action, defendant, Talib Bey, sought to vacate an order of the Supreme Court which denied his motion to vacate an order granting plaintiff Deutsche Bank’s motion for a default judgment and an order of reference appointing a referee to compute. Bey appeared in the action and filed a motion to dismiss which was denied without prejudice. Bey’s motion to renew his motion to dismiss was marked off the court’s calendar and he never answered the complaint. The court granted the plaintiff’s motion for default and an order of reference. Bey subsequently moved to vacate the order arguing that he was entitled to notice of the motion. The Supreme Court denied Bey’s motion and the Appellate Division reversed.

The appellate court reasoned that Bey’s motion to dismiss constituted an appearance and he was therefore entitled to at least five days’ notice of the motion for default even though he defaulted subsequent to the appearance. The court stated that the failure of the plaintiff to provide the proper notice to Bey was a jurisdictional defect which deprived the Supreme Court of the jurisdiction to entertain the motion and held that the motion for the default judgment and the order of reference should have been vacated.

See also Citimortgage Inc. v LaFortune in which the plaintiff moved for a default judgment. The court, in denying the motion, reiterated that failure to provide the appropriate notice deprived the court of jurisdiction to hear the motion and that any resulting order would be a nullity. The court articulated the further rule that, pursuant to CPLR §3215, if one year has elapsed since the default, any defendant who has not appeared is also entitled to the same 5 day notice unless the court orders otherwise.

Underwriting tip:

A large amount of the claims submitted involve claims in which the borrower seeks to set aside the judgment of foreclosure and/or the sale. Many foreclosure actions involve default judgments. When reviewing a foreclosure action be sure to review the notices provided to any defendant who has appeared. CPLR §320 provides that, “The defendant appears by serving an answer or notice of appearance, or by making a motion which has the effect of extending the time to answer.” If the defendant has answered, filed a notice of appearance or filed a motion, that defendant must have received notice of the default motion or an exception must be raised. If the motion for default is filed more than one year after the default, then all defendants must receive notice unless the court ordered otherwise or an exception should be raised.

 

To comment or ask a question please contact Judith Lanahan at 516-296-4650 or send an email to Judith.lanahan@fnf.com