Since the 2007 mortgage crisis, lack of standing by a mortgage assignee bringing a foreclosure action has received much attention from courts nationwide. However, there is nothing in Rules 4:64-1 and 2, or in current practice, which require a foreclosing mortgage assignee, its attorneys, employees or agents, to set forth in any pleading, proof or certification the date on which the mortgage assignee acquired actual physical possession of the note, an operative requirement for enforceability of a negotiable note under the Uniform Commercial Code (UCC), N.J.S.A.12A:3-203(a).
This is surprising given the often cited, comprehensive Chancery Division opinion by Judge Todd in Bank of N.Y. v. Raftogianis, 418 N.J. Super. 323, 364 (2010). In dismissing the plaintiff’s complaint, Judge Todd held that any new foreclosure complaint must be accompanied by a certification from a person with personal knowledge “confirming that plaintiff is in possession of the original note as of the date any new action is filed,” and”must indicate the physical location of the note and the name of the individual or entity in possession.”
If New Jersey courts were serious about standing in foreclosure actions, this is the standard they would use.
The burden instead is placed on the mortgagor to contest a mortgage assignee’s right to foreclose for lack of standing. Barring such a contest, a foreclosing mortgage assignee is never required to affirmatively establish, prove or even allege possession of the mortgage note, proof that is ordinarily within the exclusive domain of the foreclosing mortgage assignee, and which, as discussed below, is now subject to a highly dubious standard of proof.
Where a plaintiff lacks standing to foreclose, the effectiveness of the notice of lis pendens can also be questioned, in the author’s opinion, because the notice is not filed with respect to a legitimate claim by plaintiff. B.J.I. Corp. v. Larry W. Corp., 183 N.J. Super. 310 (1982).
In Wells Fargo Bank v. Ford, 418 N.J. Super. 592, 597 (App. Div. 2011), the Appellate Division stated: “As a general proposition, a party seeking to foreclose a mortgage must own or control the underlying debt.” This, however, is only partially true. Where the debt is embodied in a negotiable mortgage note, except as to a lost, destroyed or stolen note, delivery of possession is required before there is a “transfer” under the UCC and the note is enforceable by a mortgage assignee. Ownership of the note by way of assignment, conveyance or other document of transfer is not enough, even if the assignment of mortgage is deemed to include the note.
UCC Comment No. 1 to N.J.S.A.12A:3-203(a) highlights the critical distinction between “ownership” and “possession” of the note:
X signs a document conveying all of X’s right, title, and interest in the instrument to Y. Although the document may be effective to give Y a claim to ownership … Y is not a person entitled to enforce the instrument until Y obtains possession.
The recent Appellate Division decisions in Deutsche Bank Nat’l Trust Co. v. Mitchell, 422 N.J. Super. 214 (App. Div. 2011); Deutsche Bank Trust Co. Americas v. Angeles, 428 N.J. Super. 315 (App. Div. 2012); and Deutsche Bank Nat’l Trust Co. v. Russo, 429 N.J. Super. 91 (App. Div. 2013), make it clear that lack of standing does not render a foreclosure judgment void (Russo), and that New Jersey courts will only entertain lack of standing as a defense in a mortgage foreclosure action where the defendants actively defend the foreclosure litigation from the outset and do not sit on their rights.
Where a defendant raises lack of standing for the first time after entry of judgment, the courts on that basis alone are not likely to set aside a foreclosure judgment. Of course, the mortgagor should not have to raise lack of standing. As long as the mortgage note is deemed negotiable, the foreclosing assignee should have to prove possession of the note at the time of filing the complaint and at the entry of judgment. Without such proof, judgment should not be entered.
And even where New Jersey courts will entertain lack-of-standing defenses, the standard used by New Jersey courts for this purpose is highly questionable and says more about preserving the status quo than wholeheartedly enforcing the dictates of the UCC.
In Deutsche Bank v. Mitchell, the Appellate Division, after ruling that the plaintiff “must prove it had possession of the note when it filed the complaint to obtain standing,” held: “Deutsche Bank could have established standing as an assignee, N.J.S.A. 46:9–9, if it had presented an authenticated assignment indicating that it was assigned the note before it filed the original complaint.”
The terminology used by the court in Mitchell is curious. N.J.S.A. 46:9–9 refers only to an assignment of the “mortgage,” not the note, and is not applicable to a mortgage securing a negotiable note. Carnegie Bank v. Shalleck, 256 N.J. Super. 23, 46 (App. Div. 1992). While a mortgage is transferred by “assignment,” a negotiable note is not. To be enforceable, as noted, delivery of possession is required.
In the next reported case, Deutsche Bank v. Angeles, the Appellate Division flatly stated: “In Mitchell, we held that either possession of the note or an assignment of the mortgage that predated the original complaint conferred standing.” (Emphasis added.)
And in Deutsche Bank v. Russo, the Appellate Division held: “Based on our reading of Guillaume and Deutsche Bank, we conclude that, even if plaintiff did not have the note or a valid assignmentwhen it filed the complaint, but obtained either or bothbefore entry of judgment, dismissal of the complaint would not have been an appropriate remedy.”
So, in light of Russo, New Jersey courts are now saying to mortgage assignees challenged for standing after judgment: “OK, you lacked standing when you filed the foreclosure complaint. Just show me an assignment of mortgage dated prior to judgment and you’re home free.”
Under this ruling, then, actual possession of the note is not required.
The appellate panel in Russo went on to say: “There is no dispute that plaintiff obtained a valid assignment of the mortgage, albeit some months after the complaint was filed. Hence…it had a legal right to enforce the note, pursuant to…N.J.S.A. 12A:3–301.”
That, however, is not what the UCC says.
By virtue of the decisions, then, in Mitchell, Angeles and Russo, New Jersey courts are now employing an “either-or” approach to standing, which makes actual possession of the note irrelevant at the time of filing the complaint and thereafter, thus confusing ownership of the mortgage note with possession.
N.J.S.A. 46:9-9, which sets forth the legal requirements for an assignment of mortgage, is not applicable to a negotiable note. This was decided in the landmark case of Carnegie Bank v. Shalleck, which held “that N.J.S.A. 46:9–9 applies only to mortgages given to secure a debt embodied in a non-negotiable instrument such as a bond.” Why, then, would the Appellate Division in Mitchell even refer to this statute when establishing an enforceability standard for a negotiable mortgage note if the statute has no applicability?
If a mortgage assignee cannot file an amended complaint to cure standing after obtaining an assignment (Mitchell), then, a fortiori, the assignee should not be able to enter judgment after obtaining an assignment (Russo), an assignment which, in the first instance, could not validate an amended pleading. Yet somehow the assignee without standing, rather than filing a new action, can simply continue to prosecute the existing one, although ostensibly having no authority to file papers in that action; and, barring any contest by the mortgagor, can enter judgment after obtaining an assignment of mortgage, the judgment being deemed valid and effectual, after-the-fact, by New Jersey courts.
Quite apart from the issue of standing, however, without proof of possession of the note, there is no certainty that the foreclosing mortgage assignee had the right to enforce the note and associated mortgage at the time of judgment. And without that right, the foreclosure judgment wouldn’t just be voidable, in the author’s view, it would be void.
Many cases on standing now take a hybrid approach: They start out by saying that a “foreclosing plaintiff must have physical possession of the note,” but wind up sanctioning a valid assignment of the mortgage prior to judgment as conferring standing and giving plaintiff “the legal right to enforce the note at the time judgment was entered.” See, e.g., Deutsche Bank Nat’l Trust Co. v. Hochmeyer, 2013 WL 2435371, at *4 & n.3 (App. Div. 2013).
Challenging standing, then, has become an increasingly hard row for a mortgagor to hoe, since actual possession of the note by the mortgage assignee has somehow fallen by the wayside.
The decisions above may simply signal a practical approach by New Jersey courts—that they are unwilling to unravel the glut of mortgage foreclosure actions prosecuted by New Jersey lenders during the last several years. Where the foreclosed property, however, is still in the hands of the mortgage assignee, it is hard to understand why New Jersey courts seem so reluctant to do so.
Where a mortgage foreclosure judgment is vacated on residential property, the homeowner, under the Fair Foreclosure Act and also under the FannieMae/FreddieMac Uniform Mortgage instrument, would ordinarily have the right to cure and reinstate the loan by paying arrearages and other lawful charges.
Professor Smith’s oft quoted analogy is relevant here: “The note is the cow and the mortgage the tail. The cow can survive without a tail, but the tail cannot survive without the cow.”
The approach to standing, however, increasingly taken by New Jersey courts appears to be a clear-cut example of the tail not only surviving without the cow but wagging it as well.¢