CONSUMER RIGHTS LITIGATION CONFERENCE Authority to Foreclose: Updates and Recent Developments Elizabeth Renuart November 7, 2013 PRESENTATION OUTLINE Right to Foreclose: 50 state overview. Right to Foreclose: controversial cases. Compliance with PSAs: two recent cases. Enforcement: nonnegotiable notes. Fannie Mae Servicing Guideline Part I, Chapt. 2, 202.07: Note Holder Status for Legal Proceedings Conducted in the Servicer s Name 1
AUTHORITY TO FORECLOSE: 50 STATE ANALYSIS My findings relying on reported state appellate court decisions: The courts in 17 states explicitly join the right to foreclose on a mortgage that secures the negotiable note with the concept of a PETE and UCC 3-301. (AL, FL, IN, KS, KY, LA, MD, NV, NJ, NY, OH, OK, PA, SC, TX, VT, WS). Another 4 states lean in this direction. (AR, CO, MO, NM). AUTHORITY TO FORECLOSE: 50 STATE ANALYSIS The courts in 6 states focus on relevant words in their foreclosure statutes, such as mortgagee, beneficiary, holder, or owner and determined that these terms refer to the note holder or the one with the right to act on behalf of the note holder. These courts may or may not reference the UCC but the result generally is consistent with Articles 3 and 9 principles. (CT, ME, MA, NC, OR, WA). Another 6 states and D.C. lean in this direction. (AK, D.C., IL, MI, RI, UT, WV). 2
AUTHORITY TO FORECLOSE: 50 STATE ANALYSIS The courts in 3 states reject the relevance of the UCC in the context of the right to foreclose. (AZ, CA, GA). 2 states lean in this direction. (ID, MN). AUTHORITY TO FORECLOSE: 50 STATE ANALYSIS In 12 states, the foreclosure statutes provide little or no guidance regarding the contours of the right to foreclose and the role of the UCC. In some of these states, I could not find any relevant reported state appellate court decisions. In others, the court cases either predated the adoption of the UCC or were not on point. (DE, HI, IA, MS, MT, NE, NH, ND, SD, TN, VA, WY). 3
SOURCE Elizabeth Renuart, Uneasy Intersections: The Right to Foreclose and the UCC, forthcoming 48 Wake F. L. Rev. (2013). Current version available at the Social Science Research Network: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2316152 Final version available at SSRN in early January. CONTROVERSIAL RIGHT TO FORECLOSE DECISIONS Arizona: Hogan v. Washington Mut. Bank, 277 P.ed 781 (Ariz. 2012). California: Debrunner v. Deutsche Bank Nat l Trust Co., 138 Cal. Rptr. 3d 830 (Cal. Ct. App. 2012) (6 th Dist). Followed by The First, Second, and Fifth District Courts of Appeal in unpublished decisions with little or no independent analysis. Georgia: You v. JP Morgan Chase Bank, N.A., 743 S.E.2d 428, 433, (Ga. 2013) 4
RECENT PSA CASES: TRANSFERS POST CLOSING DATE Glaski v. Bank of America, N.A., 160 Cal. Rptr. 3d 449 (Cal. Ct. App. 2013). Dernier v. Mortgage Network, Inc., A.3d, 2013 WL 56632279 (Vt. Oct. 18, 2013). ENFORCEMENT OF PSAs AND NONNEGOTIABLE NOTES My view: In order for the buyer of nonnegotiable notes to enforce the notes, it must prove its ownership status (or that it is an agent for the owner). To do that, it must show it is a buyer from a qualified seller (i.e., the seller must have had rights in the notes being sold) and the other requirements of UCC 9-203 are met. In addition, each previous sale must meet the 9-203 requirements, otherwise a previous buyer possessed no rights to sell to the next buyer. 5
ENFORCEMENT OF PSAs My view: The burden of proof ought to be on the party claiming ownership and right to enforce the nonnegotiable note. My view: Regardless of whose burden it is, compliance with UCC 9-203 is mandatory and relevant. The question is not whether the homeowner is a third party beneficiary to the purchase and sale agreement. The issue is whether the foreclosing party owns and has the right to enforce the note. FANNIE MAE SERVICING GUIDE: Part I, Chapt. 2, 202.07 Fannie Mae claims ownership of the mortgage note whether it is in Fannie Mae s portfolio or when Fannie Mae is the trustee for an MBS trust. Response: Fannie Mae must show ownership, if that is relevant to enforcement, just like any other foreclosing party. Ownership of promissory notes is an exclusively Art. 9 matter (9-203). Ownership is relevant under some states foreclosure laws, e.g., Maine, Michigan. 6
ROLES OF FANNIE MAE, DOCUMENT CUSTODIAN, AND SERVICER Fannie Mae: claims to have possession of and is the holder (UCC Art. 3 term of art) of the note at all times. Form of possession: direct or through a third party custodian (constructive possession). Response: If the note is negotiable, Art. 3 requires possession of the note to enforce it unless the note is lost, stolen, or destroyed. Art. 3 appears to permit possession by a third party on behalf of the holder to constitute possession by the holder. 3-420 Cmt. 1, last para. ( Delivery to an agent is delivery to the payee. ). ROLES OF FANNIE MAE, DOCUMENT CUSTODIAN, AND SERVICER More Response: If a third party possesses the note on behalf of the holder, the holder can enforce it but not necessarily the agent (unless it is bearer paper or was transferred to the agent for purposes of giving the agent the right to enforce). 3-201; 3-203. [Note: under 3-203, an instrument is transferred when it is delivered. Delivery is defined in 1-201(b)(15) with respect to instruments (promissory notes are instruments) as the voluntary transfer of possession. ]. 7
TRANSFER OF NOTE TO SERVICER: TWO SCENARIOS Fannie Mae Fannie Mae s Document Facility: direct possession Third party Document Custodian: Fannie Mae--possession through agent Servicer NEGOTIABLE NOTES The following scenarios assume the note is negotiable. 8
SCENARIO 1: DIRECT TRANSFER FROM FANNIE MAE TO SERVICER Result under Art. 3 if a negotiation or 3-203 transfer occurred and servicer obtains possession: servicer has the right to enforce the note in its name. Arguably, Fannie Mae has no right to enforce unless and until servicer negotiates or transfers note back to Fannie Mae because Art. 3 does not confer PETE status on more than one party at a time. SCENARIO 2: TRANSFER FROM 3 RD PARTY CUSTODIAN TO SERVICER Result under Art. 3 if a negotiation or 3-203 transfer occurred and servicer obtains possession: servicer has the right to enforce the note in its name. Arguably, Fannie Mae has no right to enforce unless and until servicer negotiates or transfers note back to Fannie Mae because Art. 3 does not confer PETE status on more than one party at a time. 9
NO ACTUAL TRANSFER OF NOTE TO SERVICER: TWO SCENARIOS Fannie Mae Fannie Mae s Document Facility: direct possession of notes and mortgages Third party Document Custodian: Fannie Mae--possession of notes and mortgages through an agent Servicer SCENARIO 3: NO TRANSFER FROM FANNIE MAE TO SERVICER Fannie Mae says: servicer becomes holder of the note even if the note is never transferred or negotiated to the servicer where the note is held at Fannie Mae s document delivery facility (direct possession). Fannie Mae calls this temporary possession. Result under Art. 3 (my view): Servicer possibly may act on behalf of Fannie Mae as its agent but should not be able to foreclose in its own name as a holder because no Article 3 negotiation or transfer occurred. Fannie Mae can enforce in its own name, of course. 10
SCENARIO 4: NO TRANSFER FROM 3 rd PARTY CUSTODIAN TO SERVICER Fannie Mae says: servicer becomes holder of the note (via temporary possession ) even if the note is never transferred or negotiated to the servicer by the third party custodian. Result under Art. 3 (my view): Servicer possibly may act on behalf of Fannie Mae as its agent but should not be able to foreclose in its own name as a holder because no Article 3 negotiation or transfer occurred. Third party custodian was not an Art. 3 holder or transferee and, ordinarily, only possessed the note in a limited capacity on behalf of Fannie Mae. NONNEGOTIABLE NOTES So long as Fannie Mae is the Art. 9 owner of the note, it likely can contract to give enforcement rights to an agent without the necessity of transferring possession to the agent. Unless agency or real party in interest law states otherwise, the agent could enforce the note in its own name. 11
FANNIE MAE CUSTODIAL AGREEMENT https://www.fanniemae.com/singlefamily/sellingservicing-guide-forms Scroll down to Form 2010 RELEVANT SECTIONS OF FANNIE MAE CUSTODIAN AGREEMENT Whereas clauses: Custodian will maintain custody of the Documents on behalf of, and as custodial agent for, Fannie Mae [T]he parties hereto intend that Custodian s custody of the Documents shall provide Fannie Mae with legal possession thereof, as the term possession is used in the [UCC], at all times, except insofar as Fannie Mae may provide. 12
RELEVANT SECTIONS OF FANNIE MAE CUSTODIAN AGREEMENT Sec. 3(a): Custodian may not transfer, pledge any Mortgage Loan or any Document. Sec. 6(a): All Documents are held solely and exclusively for Fannie Mae Custodian shall make disposition of Documents solely in accordance with instructions furnished by Fannie Mae Sec. 6(b): Custodian shall: [1] maintain continuous custody of all Documents 13