The Delaware Supreme Court has ruled you must own note and mortgage in order to foreclose — which is what I have been saying for 12 years. A lot of good that will do the millions of people who lost their homes to parties that did not have ownership of the note and mortgage. The days of creating the illusion of standing are approaching their end- but how about the families who were illegally foreclosed by parties who had no standing to do so?
In Shrewsbury v. The Bank of New York Mellon, No. 306, 2016 (Del. Apr. 17, 2017), the Delaware Supreme Court ruled that a mortgage assignee must be entitled to enforce the underlying obligation that the mortgage secures in order to foreclose on the mortgage.
The decision enforces that the mortgage holder in a foreclosure action must also prove that it owns the underlying note. The majority opinion held that best practice for plaintiff’s counsel in a foreclosure action where a mortgage has been assigned would be to include an averment that the note, as well as the mortgage, was assigned to the plaintiff.
The Shrewsburys executed a promissory note in favor of Countrywide Home Loans and a mortgage that secured the note in favor of Mortgage Electronic Registration Systems (MERS) as nominee for the lender. MERS assigned the mortgage to The Bank of New York. The Shrewsburys “defaulted” on the note (remember there is no default if the servicer made advances), and the bank filed a mortgage complaint seeking to foreclose. The Shrewsburys responded alleging that the note had not been assigned to the bank, it did not have the right to enforce the underlying debt, and therefore the Bank of New York could not prove it had the right to foreclose.
The bank moved to dismiss on summary judgment, which was predictably granted by the Delaware Superior Court. The Superior Court held that under Delaware law, a mortgagee or the assignee of a mortgagee’s interest had standing to pursue foreclosure, citing 10 Del. C. Section 5061(a). In this case, the assignment of the mortgage was deemed valid because it conveyed all rights and interest of the assignor, was attested to by a credible witness, and was properly notarized. As a valid assignee of the mortgage, the bank was a proper party to enforce the note even though the bank did not produce the note or claim to be the holder of the note. The Shrewsburys appealed the decision to the Supreme Court.
On appeal, the bank argued that under Delaware law, a mortgagee’s right to foreclose derives from the mortgage, not the note. Ownership of the related promissory note is irrelevant to the mortgage holder’s right to foreclose on the mortgage.
In reaching its decision, the court looked to statute 10 Del. C. Section 5061 which provides that upon breach of the condition of a mortgage by nonpayment of the “mortgage money,” the mortgagee or the mortgagee’s assignee may sue out a writ of scire facias requiring the mortgagor to show cause why the mortgaged premises ought not to be seized and taken in execution for payment of the mortgage money.
The court noted that “mortgage money” refers to the note or debt that is secured by the mortgage. The only defenses available in a mortgage foreclosure action were payment of the mortgage money, satisfaction, or a plea to avoidance to avoid the mortgage based on the validity or illegality of the mortgage documents.
The court concluded that a mortgage does not create a debt or obligation, but merely secures one. An underlying debt or obligation is essential to a mortgage’s enforceability. An assignment of the note carries the mortgage with it, while an assignment of the mortgage alone is a nullity.
If the holder of the mortgage is not the one entitled to enforce the underlying debt—the “mortgage money” or note—the mortgage holder suffers no injury by the mortgagor’s nonperformance. Thus, a mortgage holder must be a party entitled to enforce the obligation that the mortgage secures in order to foreclose. Since the bank had not produced the note or claimed to be the holder of the note or entitled to enforce it, a question of fact existed that should have resulted in the denial of the bank’s motion for summary judgment. Accordingly, the decision of the Superior Court was reversed.
In this particular lawsuit, the homeowners didn’t need need to delve into issues of securitization, it was enough to challenge the assignment of the note (or lack of) and to attack the servicer’s affiant who lacks sophisticated knowledge of the business records.
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