Wednesday, January 4, 2012

FYI: 8th Cir Rules in Favor of Lender in "Show Me the Note" Case

The U.S. Court of Appeals for the Eighth Circuit recently upheld the validity of a foreclosure by advertisement under Minnesota law, rejecting the borrower's "show me the note" and other challenges.  A copy of the opinion is attached.
The borrower sued his foreclosing mortgagee and a junior lienholder in state court, challenging the validity of the foreclosure.  The case was removed to federal district court, where it was referred to a federal magistrate judge for recommendations on the defendants' motions for summary judgment. 
The claim against the assignee was a "show me the note" challenge.  The Eighth Circuit explained that such claims challenge foreclosures based on the theory that the original paperwork evidencing a note and mortgage has been lost due to the practice of reselling and bundling mortgages.  The "show me the note" plaintiff usually alleges that a foreclosure is invalid, unless the original note is produced. 
In this case, the assignee produced the original promissory note and the borrower examined it.  Accordingly, the magistrate judge recommended granting the assignee's motion for summary judgment. 
Likewise, the federal magistrate judge recommended granting the junior lienholder's motion for summary judgment.  The borrower alleged that the junior lienholder violated the Minnesota Uniform Commercial Code, when it "foreclosed" on the borrower's mortgage.  The magistrate judge rejected that claim, because the junior lienholder did not participate in the foreclosure, but rather redeemed its interest in the property after the borrower failed to exercise his right to redemption.
The district court adopted both recommendations, granted the motions for summary judgment, and dismissed the borrower's claims with prejudice.  The borrower appealed.
On appeal, the borrower raised two arguments.  First, he contended that Minnesota law requires a mortgagee to possess both the note and the mortgage in order to foreclose by advertisement.  Second, he contended that there was a material issue of fact as to whether the assignee in this case actually possessed the note at the time it began foreclosure proceedings.
With respect to the borrower's first argument, held that under Minnesota law the right to enforce a mortgage through foreclosure by advertisement is that of the legal, rather than the equitable, holder of the mortgage.  The assignment of the promissory note merely operates as an equitable assignment of the underlying mortgage.  Any dispute that arises between the holder of the legal title and the holder of equitable interest in the title does not affect the status of the mortgagor for purposes of foreclosure by advertisement. 
The Eighth Circuit held that, because the assignee held legal title to the borrower's mortgage through a recorded assignment, the assignee was entitled to foreclose by advertisement under Minnesota law, even if the promissory note (and the associated equitable interest in the mortgage) had been transferred to another entity.
With respect to the borrower's argument regarding the timing of the assignee's possession of the note, the Court of Appeals held that, even if Minnesota law required the assignee to possess the note, summary judgment in favor of the assignee was proper, because there was no genuine issue of material fact that the assignee was not the holder of the note at the time of the foreclosure.  The record clearly showed that both the mortgage and the note were assigned to the assignee prior to the commencement of foreclosure by advertisement.  Moreover, the borrower presented no evidence to overcome the presumption of the validity of the foreclosure arising under Minnesota law based on the sheriff's certificate of sale.
The Court also held that the borrower's challenge to the junior lienholder's redemption of the property, for the most part, was directly tied to his claim that the assignee's foreclosure was invalid.  Because the Court found the foreclosure to be valid, the borrower's challenge failed.
The Court noted that the borrower put forth "one untethered argument," which focused on the junior lienholder's merger with another bank, after the redemption of the home.  The borrower argued that, even though the merger was not complete until after the redemption of the home, the assets of the junior lienholder (including the second mortgage and note on the home) had been transferred to the other bank before the redemption, and thus the junior lienholder did not own the second mortgage or note at the time of redemption. 
The Court, however, declined to address this argument, because the borrower first raised the issue on appeal and did not develop a factual record on the issue in the district court.  Consequently, the record on appeal did not contain the necessary findings to evaluate the validity of the borrower's arguments.
Accordingly, the Court of Appeals affirmed the judgment of the district court, granting summary judgment in favor of the defendants.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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Chicago, Illinois 60602
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