adrozny vs. Bank of New York Mellon
Zadrozny vs. Bank of New York Mellon, 2013 Westlaw – – (9th Cir. 2013): Applying Arizona law, the Ninth Circuit has held that a foreclosing creditor need not produce the original promissory note before pursuing nonjudicial foreclosure. [See immediately below].
Facts: A married couple executed a note and deed of trust in favor of a lender. The deed of trust authorized the lender to transfer the note and authorized MERS (Mortgage Electronic Registration Systems, Inc.) to act as the nominee on behalf of the lender. MERS ultimately transferred the rights to the note and trust deed to an assignee.
The assignee eventually sought nonjudicial foreclosure. The borrowers filed suit, claiming that MERS lacked authority to act on behalf of the lender and that the original promissory note had not been produced prior to foreclosure. Following removal of their case to federal court, the district court dismissed their complaint, and the Ninth Circuit affirmed.
Reasoning: On appeal, the borrowers relied upon in In re Veal, 450 B.R. 897 9th Cir. BAP 2011), for the proposition that the note and the deed of trust cannot be separated; therefore, the party seeking nonjudicial foreclosure under the deed of trust had to establish that it also had rights to the underlying note. But the Ninth Circuit distinguished Veal on the ground that it construed Illinois law, rather than Arizona law. The Arizona Supreme Court had recently held that there is no statutory requirement that a foreclosing creditor produce the original promissory note prior to foreclosure.
The Ninth Circuit also distinguished Veal on the ground that it was limited to cases involving relief from the automatic stay in bankruptcy and did not necessarily control nonjudicial foreclosure under state law.
As a fallback, the borrowers argued that following the securitization of the promissory note, the assignee lacked a valid security interest under the Uniform Commercial Code, because it did not obtain actual possession of the note. But again quoting Arizona authority, the court noted that the Arizona foreclosure statutes "do not require compliance with the UCC before a trustee commences a nonjudicial foreclosure."
Comment: Except in isolated jurisdictions and isolated procedural contexts, the "show me the note" theory is becoming more and more marginalized. In a perfect world, assignees would indeed obtain the original promissory notes prior to commencing foreclosure; but the recent trend in the case law recognizes that this is not a perfect world and that the disastrous mortgage securitization schemes hatched during the early years of this century must be unwound in a quick and orderly way, so that the banking system can recover and so that the "shadow inventory" of pending foreclosures can be cleared out of the real estate market.
The Ninth Circuit’s opinion in this case makes it clear that the holding in Veal does not supersede state law; indeed, the Veal court itself (perhaps in dicta) made a similar observation in footnote 34:
Ultimately, the minimum requirements for the initiation of foreclosures under applicable nonbankruptcy law will shape the boundaries of real party in interest status . . . with respect to relief from stay matters. As a consequence, the result in a given case may often depend upon the situs of the real property in question. [Id., 450 B.R. at 917, fn. 34.]
For a discussion of Veal, see 2011 Comm. Fin. News. 52, Purported Assignee of Mortgage Lacks Standing to Obtain Relief from Automatic Stay Because Assignment Transferred Mortgage Without Underlying Note. For discussions of decisions dealing with closely-related issues, see 2012 Comm. Fin. News. 30, Assignee Of Senior Trust Deed Seeking Nonjudicial Foreclosure Need Not Show Possession of the Underlying Promissory Note, Despite Commercial Code Provisions Governing Enforcement Of Negotiable Instruments, and 2011 Comm. Fin. News. 95, Assignee of Mortgage May Not Have Standing to Pursue Foreclosure Unless It Can Establish Assignment of Corresponding Promissory Note.
This analysis was published by the California State Bar Business Law Section’s INSOLVENCY COMMITTEE e-newsletter