Courts Clarify Who Has Right to Sue in Foreclosure
Prominent foreclosure defense attorney Thomas Ice is celebrating an unlikely cause: two appellate decisions that went against homeowners and gave lenders control of the disputed properties. Both decisions center on lenders’ rights to sue after endorsing or turning over key loan documents to third-party mortgage servicers. Both found the lenders maintained constructive possession even when their agents had physical possession of the documents — an outcome many observers say bodes poorly for homeowners whose defenses hinge on claims of incomplete paperwork and missing notes to show lenders lacked standing to sue. But Ice sees other value in the decisions. “You would be able to find foreclosure defense attorneys who hate these decisions, while I applaud them,” he said. Although the homeowners lost, he said the rulings support a point he’s long argued: Servicers lack possessory rights even when they’re in physical possession of mortgage notes. He argues lenders maintain constructive possession and should be the ones bringing suit in their own names. Florida’s Uniform Commercial Code gives standing to holders or bearers of negotiable instruments, like mortgage notes, endorsed to them or in blank. But Ice, head of the foreclosure defense firm Ice Legal in Royal Palm Beach, insists the law intends a deeper ownership interest and was not created to accommodate an agency relationship. “There’s a difference between physical possession and the kind of possession you need under the UCC. I’ve been preaching this for years that servicers cannot be noteholders under the UCC because the possessory interest they have in it is not complete. They can’t cash in on it and keep the money. They can’t foreclose on it and keep the money,” he said. “These cases say the trustee is still the holder because they’re holding it through the agent. It’s a sea change in the way holdership has been applied in Florida.” ‘Additional Wrinkle’ In one case, the Second District Court of Appeal in February affirmed the trial court’s decision against Pinellas County homeowner Ngoc T. Phan but wrote to “explain the effect an agency relationship may have for proving standing in foreclosure proceedings.” Phan was sued by Deutsche Bank National Trust Co., trustee for First Franklin Mortgage Loan Trust 2006-FF11. She argued Deutsche Bank lacked standing because it was not the holder of her note when it filed the foreclosure complaint. At that time, the note was with servicer Wells Fargo Bank N.A. “Ms. Phan was correct to a point: Deutsche Bank did not have direct possession of her note at the time it filed its lawsuit. That alone, however, was not dispositive to the issue of its standing,” the appellate court ruled. “While it is true that Deutsche Bank never had direct possession of the note … it did have constructive possession of the note when its foreclosure complaint was filed by virtue of its agent Wells Fargo’s possession.” A second ruling from the Fourth DCA on Feb. 24 also turned on a pooling and servicing agreement that left the lender with ownership rights while the servicer held the note. That case involved Palm Beach Gardens homeowner Thomas Caraccia, servicer Bank of America N.A. and lender U.S. Bank N.A. as trustee for Bank of America Funding Corp. “Had U.S. Bank requested, it could have obtained physical possession of the note from its agent, Bank of America. While it might have simplified the trial court’s standing analysis for U.S. Bank to have done so in this case, we hold that such procurement of physical possession was ultimately unnecessary where U.S. Bank is able to show constructive possession of the note,” the Fourth DCA ruled. “We emphasize that we do not hold that possession is not necessary when bearer paper is at issue. Instead we hold only that when an agency relationship such as that exists here is at issue, the element of possession can be met through either actual or constructive possession.” Andrew Rafkin, a plaintiffs attorney not involved in the litigation, found the decisions to be straightforward. “This really isn’t rocket science,” Rafkin told the Daily Business Review. “All the bank had to do if it wanted to sue in its own name was call up the servicer and say, ‘Give me my note back.’ Then it could allege it was the holder and everything would be fine.” Rafkin and other attorneys on both sides of foreclosure cases say the rulings help overcome arguments against lack of standing. “What these cases do now is relieve the lenders of a certain burden of having physical possession of the note,” said Rafkin of the Law Offices of Joseph C. Kempe in Jupiter. “If they can allege and prove that their agent held the note on their behalf, they have constructive possession.” Caraccia’s attorney, John Jorgensen of Scott, Harris, Bryan, Barra & Jorgensen in Palm Beach Gardens, focused on proof of standing. “It adds an additional wrinkle to the issue of standing,” Jorgensen said. “It creates a limited exception to the requirement that the plaintiff in a foreclosure must have physical possession of the promissory note when it files a lawsuit. When the agent has possession, the principal can file the lawsuit, and that’s good enough for standing.”
