Nevada Supreme Court Hands Down Two Opinions Against Loan Servicers–July 7 2011

Chain of title is crucial in these foreclosure cases, and it is insanity for courts to hold otherwise.  The Nevada Supreme Court agrees, in construing Nevada’s mandatory foreclosure mediation statutes.

Pasillas v HSBC Nev. SC July 7 2011

In Pasillas (above), the Supreme Court found that the district court should have sanctioned the loan servicer under the Nevada mediation statutes for non-judicial foreclosure.  The servicer brought uncertified, incomplete chain of title documents to the mediation.  In addition, the “investor” HSBC as trustee for a securitization trust–the decisionmaker—was not there (surprise, surprise).  Thus, although the law firm of Pite Duncan had previously stated that they represented “all defendants” including the servicer and HSBC, at the mediation, the lawyers said they only represented the servicer and did not have decision making auhtority on modification.  Not good enough said the Nevada Supreme Court, citing approval for the Mass. SC case of Ibanez in a long footnote, and also citing our BAP 9th Circuit Veal decision.

Bottom line:  failure to follow statutory guidelines is a sanctionable offense, and the servicer should have been sanctioned.  The district court abused its discretion in ordering the program administrator to okay the foreclosure with a certified letter, and by not awarding sanctions.

Levya v National Default Servicing

Mortgage note

The proper method of transferring the right to payment under a mortgage note is governed by Article 3 of the Uniform Commercial Code―Negotiable Instruments, because a mortgage note is a negotiable instrument.[6]  Birkland v. Silver State Financial Services, Inc., No. 2:10-CV-00035-KJD-LRL, 2010 WL 3419372, at *4 (D. Nev. Aug. 25, 2010).  The obligor on the note has the right to know the identity of the entity that is “entitled to enforce” the mortgage note under Article 3, see NRS 104.3301, “[o]therwise, the [homeowner] may pay funds to a stranger in the case.”  In re Veal, No. 09-14808, 2011 WL 2304200, at *16 (B.A.P. 9th Cir. June 10, 2011) (holding, in a bankruptcy case, that AHMSI did not prove that it was the party entitled to enforce, and receive payments from, a mortgage note because it “presented no evidence as to who possessed the original Note.  It also presented no evidence showing [e]ndorsement of the note either in its favor or in favor of Wells Fargo, for whom AHMSI allegedly was servicing the [bankrupt party’s] Loan.”).  If the homeowner pays funds to a “stranger in the case,” then his or her obligation on the note would not be reduced by the payments made. See id. at *7 (“if a[n obligor on a mortgage note] makes a payment to a ‘person entitled to enforce,’ the obligation is satisfied on a dollar for dollar basis, and the [obligor] never has to pay that amount again”).

Wells Fargo argues that, under Nevada law, possession of the original note allowed it to enforce the note.  We disagree and take this opportunity to clarify the applicability of Article 3 to mortgage notes, as we anticipate increasing participation in the Foreclosure Mediation Program, as well as a corresponding increase in the number of foreclosure appeals in this state.  As discussed below, we conclude that Article 3 clearly requires Wells Fargo to demonstrate more than mere possession of the original note to be able to enforce a negotiable instrument under the facts of this case.

Wells could not just show up with an unendorsed note in its possession (claimed bearer paper) without some other proof of the transfer.    ” In other words, because the party seeking to enforce the note cannot “prove” its right to enforce through the use of a valid endorsement, the party must “prove” by some other means that it was given possession of the note for the purpose of enforcing it.[9]”

In this case, the adjustable rate mortgage note provides:  “In return for a loan that I have received, I promise to pay U.S. $192,000.00 . . . plus interest, to the order of Lender.  Lender is [MortgageIT, Inc.]” (emphasis added).  Because the mortgage note is payable to the order of a specific party, MortgageIT, to negotiate the note to a new party, in this case Wells Fargo, Wells Fargo must have possession of the note and the note must be properly endorsed by MortgageIT.  See NRS 104.3201(2).  No such endorsement was included in the documents produced at mediation or in the documents filed with the district court, nor was a valid assignment produced as proof of the note’s transfer, and mere possession does not entitle Wells Fargo to enforce the note.  Therefore, because the mortgage note is payable to MortgageIT, unless Wells Fargo can prove that the note was properly endorsed or validly transferred, thereby making it the party entitled to enforce the note, it has not demonstrated authority to mediate the note.

As we concluded in Pasillas, a foreclosing party’s failure to bring the required documents to the mediation is a sanctionable offense under NRS 107.086 and the FMRs.  Therefore, we conclude that the district court abused its discretion when it denied Leyva’s petition for judicial review.  Accordingly, we reverse the district court’s order and remand this matter to the district court with instructions to determine the appropriate sanctions for Wells Fargo’s violation of the statutory and rule-based requirement.  In doing so, the district court should consider the factors discussed in Pasillas.[10]

Here’s Professor Adam Levitin’s take on these two decisions on Credit Slips.

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