






Allison Tanner
Swanson Midgley, LLC
4600 Madison, Suite 1100
Kansas City, MO 64112
816 886-4809
atanner@swansonmidgley.com
www.swansonmidgley.com

THE MISSOURI FORECLOSURE
PROCESS – for Lenders’ and
Borrowers’ attorneys
THE FORECLOSURE PROCESS
IN MISSOURI

Section 1 – Judicial Foreclosure

Section 2 – Non-Judicial Foreclosure Procedures

Section 3 – Statutory Requirements for Foreclosure of a
Junior Deed of Trust

Section 4 – Trustee Responsibilities

Section 5 – Taxes

Section 6 – Post Foreclosure Sale Issues

Section 7 – FAQ

Section 8 – Case Law and Legislative Update
Section 1 – Judicial Foreclosure
JUDICIAL FORECLOSURE

Judicial Foreclosure is authorized pursuant
to RSMO § 443.190. This statute authorizes
any lender to commence the action by filing a
petition in the circuit court in the county in
which the real property is located. Once the
lender has obtained judgment, a writ of
execution is issued and the sheriff is
authorized to conduct a foreclosure sale
(rather than the trustee).
JUDICIAL FORECLOSURE

Any purchaser takes the real property
subject to the interests of any entities or
persons who were not parties to the case.
This type of foreclosure is almost never used
because the non-judicial process is quicker
and cheaper, but it might be useful when
there are possible defects in the deed of trust
(such as a deed of trust which failed to
include the power of sale language).
EQUITABLE JUDICIAL FORECLOSURE

Equitable judicial foreclosure is authorized pursuant
to RSMO § 443.280. This type of foreclosure is used
when a lender needs preliminary equitable relief,
such as a need to set aside a cancellation of record
of a deed of trust or where the legal description in
the deed of trust must be corrected. Then the
parties would proceed to judicial foreclosure. See,
Louis v. Andrea, 338 S. W. 2d 96 (Mo. 1960).
Section 2 – Non-Judicial Foreclosure
Procedures

Non-judicial foreclosure (foreclosure by the
trustee of a deed of trust) is by far the most
common method of foreclosure in Missouri,
authorized pursuant to Chapter 443, RSMO.
It is almost completely a statutory-driven
process.
NON-JUDICIAL FORECLOSURE
PROCEDURES


If you represent the lender, close attention
must be paid to each statutory requirement
to ensure that a foreclosure is conducted in
accordance with such statutory
requirements.
If you represent the borrower and are trying
to fight a wrongful foreclosure sale, the
trustee’s compliance with such statutory
requirements should be closely examined.
NON-JUDICIAL FORECLOSURE
PROCEDURES


Subject to any notice and cure periods
required by the loan documents, the
foreclosure process should normally take 4560 days from the lender’s authorization to the
trustee to proceed with foreclosure.
For a lender, this is good and means the
process does not take long to get the
property back.
NON-JUDICIAL FORECLOSURE
PROCEDURES

For a borrower, this is bad and means there
is not much time to fight the process.
NON-JUDICIAL FORECLOSURE
PROCEDURES

Process for a Lender’s Attorney / Trustee:

30 to 40 Days Prior to Sale Date:

Attorney should receive authorization from lender to
proceed with foreclosure. Lender should also send
copies to attorney of all loan documents and confirm
that it has the original note.
NON-JUDICIAL FORECLOSURE
PROCEDURES

Lender’s attorney or trustee should also
confirm with lender that borrower is actually
in default under the terms of the loan
documents, which should include review of
the notice(s) sent to borrower to confirm that
any applicable requirements have been
satisfied.
NON-JUDICIAL FORECLOSURE
PROCEDURES

Trustee should also confirm that lender is
real party in interest (true holder of the debt),
to ensure that the foreclosing entity has the
original note or is the true holder of the debt
and has standing to foreclose (to be
discussed in the Ibanez and MERS cases).
NON-JUDICIAL FORECLOSURE
PROCEDURES

Ammunition for a borrower’s attorney – does
foreclosing lender have the original note?
Were proper statutory and loan document
notices requirements complied with? Is
lender true holder of debt so that it has
standing to foreclose?
NON-JUDICIAL FORECLOSURE
PROCEDURES



Lender’s attorney / trustee should
immediately order foreclosure report from
title company. Search should include:
federal and state tax liens
probate records for any indication that the
borrower is deceased, incapacitated or
disabled
NON-JUDICIAL FORECLOSURE
PROCEDURES





court records regarding whether any decree
of dissolution of marriage has been entered
judgment liens
notice of bankruptcy proceedings
mechanics’ liens
status of real estate taxes.
NON-JUDICIAL FORECLOSURE
PROCEDURES

Lender’s attorney should send default and demand
letter(s), and acceleration letter(s) if necessary. See
form of default letter and form of acceleration letter
included in your materials.
–
Any party requesting notice at least 40 days prior to sale, in
compliance with RSMO § 443.325.
–
Owners of record 40 days prior to sale.
NON-JUDICIAL FORECLOSURE
PROCEDURES

Lender’s attorney should check with local
municipality regarding registration
requirements for foreclosing properties.
(New vacant property registration
requirements have been enacted by
municipalities – to be discussed)
NON-JUDICIAL FORECLOSURE
PROCEDURES

Lender’s attorney should confirm with lender
that borrower is alive, and is not a member of
the armed forces. If borrower has died or if
there is any indication that borrower is a
member of the armed forces, the trustee
must comply with special statutory provisions
(to be discussed).
NON-JUDICIAL FORECLOSURE
PROCEDURES
–
If borrower has died, see RSMO § 443.300
(foreclosure stayed by 6 months)
–
If borrower is a member of the armed forces,
trustee must comply with the Servicemembers’
Civil Relief Act of 2003 (to be discussed). No
foreclosure against such a protected person can
be undertaken without consent of a court.
NON-JUDICIAL FORECLOSURE
PROCEDURES




Lender’s attorney should:
Have a CERCLA search performed.
Perform state and local UCC searches.
Perform federal tax lien search (do NOT
depend on the title company)
NON-JUDICIAL FORECLOSURE
PROCEDURES

Lender’s attorney should prepare
Appointment of Successor Trustee, if
necessary. Successor trustee must be a
person who lives in Missouri or is a Missouri
corporation. See Form of Appointment of
Successor Trustee included in your
materials.
–
–
Send to client for signing.
Record.
NON-JUDICIAL FORECLOSURE
PROCEDURES

Lender’s attorney should work with lender to
choose Sale Date and prepare Notice of
Trustee's Sale. See form of Notice of
Trustee’s Sale included in your materials.
Confirm with the trustee that he or she will be
available on that date prior to publication.
NON-JUDICIAL FORECLOSURE
PROCEDURES



Lender’s attorney should
Fax or mail notice of Trustee’s sale to
publisher.
Review proof of publication.


Check first publication (21 days before sale).
Update foreclosure report and confirm that
no parties have filed a “Notice of Sale”
pursuant to RSMO § 443.325.
NON-JUDICIAL FORECLOSURE
PROCEDURES


Lender’s attorney should be aware that publication
requirements vary with the location of the land to be sold.
RSMo.§ 443.320 requires notice to be inserted at least 20 times
and continued to the date of the sale in some daily newspaper
in counties having cities of 50,000 or more. In all other
counties, or in any county of the first class not having a charter
form of government, or in any county of the second class, and
containing a portion of a city with a population over 350,000
notice must be published in a weekly newspaper for 4
successive issues, with the last publication being not more than
1 week prior to the sale date.
NON-JUDICIAL FORECLOSURE
PROCEDURES

20 to 25 days prior to sale date:

Lender’s attorney should send Notice letters
or combined acceleration/notice letters
(certified mail, return receipt requested) at
least 20 days prior to sale date to (and see
form of notice letter to junior creditor or other
interested party included in your materials)
to:
NON-JUDICIAL FORECLOSURE
PROCEDURES



Grantors in deed of trust (if different from owners of
record),
Any other interested party (e.g., guarantors, subordinate
lien holders),
IRS (notice must be sent at least 25 days prior to sale
date). If an IRS lien exists and no notice is sent to the
IRS, the foreclosed property will be subject to the IRS
lien (1954 I.R.C. § 7425).
NON-JUDICIAL FORECLOSURE
PROCEDURES



Lender’s attorney should
Collect certified mail slips (white) and save to
be attached to Trustees' Deed.
Collect green receipt cards to keep in the file.
NON-JUDICIAL FORECLOSURE
PROCEDURES

5 Days Prior to Sale Date:

Lender’s attorney should prepare Trustee's
Deed(s). See Form of Trustee’s deed
included in your materials.
Prepare Foreclosure Dialogue. See Form of
Foreclosure Sale Dialogue included in your
materials.

NON-JUDICIAL FORECLOSURE
PROCEDURES






Lender’s attorney should;
Prepare any necessary corporate resolutions for
anticipated buyer.
Work with lender to determine bid amount.
Obtain signed bid instructions from lender, if it
intends to bid.
Obtain original Note and Deed of Trust (if not already
received).
Prepare closing letter to title company.
NON-JUDICIAL FORECLOSURE
PROCEDURES

Day of Sale, Lender’s attorney should:

Check bankruptcy court records on day of sale;
PACER system is at
https://pacer.psc.uscourts.gov/index.html
(registration is required)
Note that lender’s attorney should also check on
bankruptcy of any co-debtor or guarantor
Acquire Affidavit of Publication from publisher and
take original to the foreclosure sale.


NON-JUDICIAL FORECLOSURE
PROCEDURES


Cry foreclosure sale.
Adjourn to title company or law office to close
the foreclosure sale (complete and deliver
Trustee's Deed, deliver certified mail slips
and original Note and Deed of Trust).
Section 3 – Statutory Requirements for
Foreclosure of a Junior Deed of Trust

Pursuant to § 408.551-408.562, Certain additional
statutory requirements may apply to foreclosure of a
junior deed of trust:
–
If it is a “second mortgage loan,” defined in RSMO §408.231
as a loan secured in whole or in part by a lien or residential
real estate that is already subject to at least one prior
mortgage loan; and
–
If it is a loan on which the interest rate charged is to be
calculated at the rate allowed by RSMO § 408.232.
STATUTORY REQUIREMENTS FOR
FORECLOSURE OF JUNIOR DEED OF TRUST

If the loan qualifies as a “second mortgage
loan”, then:
–
–
The lender may not take steps to enforce its
interest until 30 days after notice of the borrower’s
right to cure.
Such notice cannot be given until after an event of
default.
STATUTORY REQUIREMENTS FOR
FORECLOSURE OF JUNIOR DEED OF TRUST
–
–
If the borrower cures the default, all borrower’s
rights are restored unless there is a third default.
After the 3rd default, the borrower has no cure
rights.
Section 4 – Trustee Responsibilities


A Trustee is considered to be in a fiduciary
relationship with both the borrower and the lender.
A Trustee cannot make any statements or
representations regarding the state of the property or
title which might have the effect of “chilling” the
bidding. Requiring bidders to prove that they are
financially capable of purchasing the property does
not “chill” the bidding.
TRUSTEE RESPONSIBILITIES

Trustee may not “self deal” or act in his or
her own best interests. It looks very
suspicious for a trustee to purchase the
property at the sale.
TRUSTEE RESPONSIBILITIES

A Trustee can accept (and announce at the
sale) a bid made in writing before the sale. A
good practice tip for Trustees to minimize
exposure is to bring another person (such as
an attorney or paralegal) to offer any bid on
behalf of the lender.
TRUSTEE RESPONSIBILITIES


Trustee must personally conduct the sale,
not someone designated by the Trustee.
The Trustee has the option to continue the
sale one time without the need to advertise
or send new notices. The new sale date
must be within 7 days of the originally set
sale date. The continuance must have been
announced at the original time, place and
date of the sale.
TRUSTEE RESPONSIBILITIES

The Trustee should offer the property both in
parcels and in bulk. This will ensure that the
Trustee has fulfilled his or her fiduciary
obligation to both borrower and lender to
obtain the best possible price for the
property.
TRUSTEE RESPONSIBILITIES

Trustees have the ability to recess the sale
for a short period of time to confirm a
purchaser’s ability to pay the purchase price
in accordance with the requirements set forth
in the notice.
TRUSTEE RESPONSIBILITIES





Ammunition for borrower’s attorneys:
Trustee did not fulfill its fiduciary duties to
Borrower
Trustee “chilled” the bidding or self-dealt
Trustee did not actually conduct the sale
Trustee conducted the sale improperly and
did not obtain the best price for the property
Section 5 – Taxes
STATE TAXES

RSMO § 144.150 allows a lender to make
written request to the Director of Revenue for
a statement of the status of sales taxes
which might be owed by the borrower. If no
response is received within 15 business
days, the parties can proceed with the sale
with the assumption that no state taxes are
due.
STATE TAXES

If state sales tax liens are filed subsequent to
the deed of trust, a foreclosure sale will wipe
them out.
REAL ESTATE TAXES


The amounts due to the government for real estate
taxes take priority over any Deed of Trust, so all
outstanding real estate taxes create a cloud on the
title to foreclosed property whether the taxes were
due prior or after the recording of the Deed of Trust.
The lender could pay the taxes and include any such
amounts as part of its debt, or it could choose not to
pay them and any third party purchaser at the sale
would become liable.
FEDERAL TAXES


IRS Redemption Rights.
If there is an IRS lien on the property, the
IRS has the right to redeem the property for a
period of 120 days from the date of the sale
by paying to the successful bidder the
purchase price plus interest from the sale
date.
Section 6 – Post Foreclosure Sale
Issues




Redemption
New Notice Requirements
Obtaining Possession following Foreclosure
Deficiency
REDEMPTION RIGHTS

Can the borrower redeem?

Equitable redemption
Statutory redemption

REDEMPTION RIGHTS
Equitable Redemption. Equitable redemption is
allowed in Missouri when the borrower seeks
relief because of fraud or other defect in the sale.
Damage to the borrower is usually proven by
evidence that the property sold for inadequate
consideration; but inadequate consideration alone
is not enough for equitable relief.
REDEMPTION RIGHTS

Statutory Redemption.

A statutory redemption right exists in Missouri
pursuant to RSMO § 443.410, but it is very
cumbersome and, as a result, infrequently used.

Right applies only if purchaser is the holder of the
debt.
Available only to original borrower, his heirs,
devisees, executors, administrators, grantees or
assigns.

REDEMPTION RIGHTS

Statutory procedure must be followed:
–
–
–
Borrower must give written notice to trustee within
10 days prior to the sale or at the sale that
borrower intends to redeem the property.
Borrower must file a bond and a motion for its
approval within 20 days after the sale, in the
circuit clerk’s office.
Borrower must also give notice to the purchaser
at the sale.
REDEMPTION RIGHTS
–
–

Bond must be approved by the court within 20
days after the date of the sale.
Bond must be executed by the borrower and at
least one good surety.
Amount of the bond must be sufficient to
cover:
–
–
Interest on the debt for 1 year following the date
of the sale;
Legal charges and costs of the sale;
REDEMPTION RIGHTS
–
–
–
–
Interest accrued before the sale date on any prior
encumbrance that is past due and that was paid by the
purchaser plus interest on such prior encumbrance that will
accrue for 1 year following the sale date;
taxes and assessments accrued or accruing during the
period of 1 year from the sale;
interest at the rate of 6% on all sums paid by the purchaser
at the sale;
damages for all waste committed or suffered by the
borrower during the period of 1 year from the sale date.
REDEMPTION RIGHTS

Within 1 year from the date of the sale, the
borrower must pay the following in order to
complete the redemption:
–
–
Full amount of the debt secured by the deed of
trust and interest to the date of payment;
Full amount paid by the purchaser for interest and
principal on any prior encumbrance on the
property;
REDEMPTION RIGHTS
–
–
Taxes and assessments paid by the purchaser;
Legal charges and costs of foreclosure sale.
Possession After Foreclosure
Unlawful Detainer



The only issue is the right to possession.
Owner is entitled to file suit by filing a petition,
verified by affidavit, in the court where the property is
located.
Petition should state: (1) the defendant has held
over after he no longer has the right to possess the
property, (2) plaintiff’s entitlement to possession and
the date of such entitlement (usually the date of the
Trustee’s Deed),
Unlawful Detainer


(3) written demand was made and (4) the
reasonable rental value of the property.
Demand for possession is made by (a)
delivering written demand to the occupant,
(b) leaving a copy with someone over the
age of 15 who resides or is present at the
property, or (c) posting a copy of the demand
on the property.
Unlawful Detainer


Summonses are served the same as in other
civil actions
No counterclaims are allowed in Unlawful
Detainer actions as the only issue is the right
to possession.
New Post Sale Notice Requirements

The federal “Protecting Tenants at
Foreclosure Act of 2009” requires that
owners must give 90 days notice to vacate or
quit to residential tenants, unless the tenant
has a “bona fide” lease in which case the
lease must be honored (to be discussed in
more depth).
New Post Sale Notice Requirements

RSMO § 534.030 (amended effective
8/28/09) requires 10 business days notice to
a residential tenant before a new owner can
commence an action for unlawful detainer.
The exact language that must be included in
the notice is included in the statute. A copy is
included in your materials.
Deficiency



If the lender is unable to recover all of its
losses at the foreclosure sale, it is entitled to
a deficiency judgment.
As a practical matter, unless the lender
knows that the borrower has other
substantial assets, it will probably not pursue
a deficiency judgment.
If lender thinks borrower has assets, it may
be a different story.
Deficiency





If a lender sues for a deficiency, the likely responses
will be:
Chapter 7 bankruptcy by borrower
Offer to settle for little or nothing
Default judgment, but no ability to collect
OR the borrower will hire an attorney to mount a
vigorous defense and the foreclosure sale will be
scrutinized to see if there were any technical
problems that could vacate the sale.
Section 7 – Frequently Asked
Questions
FAQ ABOUT EFFECT OF
FORECLOSURE


What does a foreclosure wipe out?
A trustee’s sale of a senior deed of trust
wipes out junior encumbrances, including
junior deeds of trust.
FAQ ABOUT EFFECT OF
FORECLOSURE


How are the funds obtained from a
foreclosure sale to be applied?
Pursuant to Missouri case law, (In re
Lacy, 112 S.W.2d 594 (Mo .App. E.D. 1937)
and Farris v. Hendrichs, 413 S.W.2d 185
(Mo. 1967)), the funds must be applied as
follows:
FAQ ABOUT EFFECT OF
FORECLOSURE



A. to pay expenses of the sale
B. then to pay the balance due on the debt
secured by the deed of trust being foreclosed
(assuming the lender was not the high
bidder)
C. then to pay the balance to the borrower or
the borrower’s successors in interest.
FAQ ABOUT EFFECT OF
FORECLOSURE

If there is any question about how the funds
should be applied, an interpleader action in
state court should be considered. See Lick
Creek Sewer Systems, Inc. v. Bank of
Bourbon, 747 S.W. 2d 317 ( Mo. App. S. D.
1988) for questions about foreclosure of
second deed of trust and payment of surplus.
Section 8 -- Case Law and Legislative
Update



Federal Laws that affect foreclosure
State and Local Laws that affect foreclosure
Recent Case Law that affects foreclosure
Federal Laws





Bankruptcy (Title 11, USC)
Service Members Civil Relief Act of 2003
(updated 1940 Soldiers and Sailors Relief
Act) (50 USC §§ 501-596)
Fair Debt Collection Practices Act (15 USC §
1601, et seq.)
Hope for Homeowners program
Protecting Tenants at Foreclosure Act
Bankruptcy




If a borrower files for bankruptcy it stops the
foreclosure process.
If you represent the lender, check the bankruptcy
records prior to crying the sale to ensure that no
bankruptcy has been filed:
PACER system is at
https://pacer.psc.uscourts.gov/index.html
(registration is required)
If you represent the borrower – discuss the pros and
cons of bankruptcy to stop the foreclosure process.
Bankruptcy


Co-debtor stay – in a bankruptcy, a creditor
may NOT pursue against a co-debtor or
guarantor who has not filed for bankruptcy if
the debt is a “consumer debt”.
“Consumer debt” means a debt incurred by
an individual primarily for personal, family or
household purposes.
Service Members Civil Relief Act of
2003
If borrower is a member of the armed forces, foreclosing
trustee must comply with the Service Members Civil Relief
Act of 2003.
A sale, foreclosure or seizure of property shall not be valid if
made during or within 90 days after the period of the
servicemember’s military service, except upon court order.
Check military service status at:
https://www.dmdc.osd.mil/appj/scra/scraHome.do
FDCPA


Fair Debt Collection Practices Act is often
raised as a defense.
Courts have generally held that an attorney
or lender foreclosing on a mortgage is NOT
debt collection activity for purposes of
FDCPA.
FDCPA




But, see, McDaniel v. South & Associates, P.C., 325 F. Supp.
1210 (D. Kan. 2004) holding:
The filing of a foreclosure petition which also seeks a personal
judgment is a debt collection activity under the FDCPA;
If borrower request verification under the FDCPA, the
foreclosure action must be stayed until the verification is sent;
Attorney can file a lawsuit within the 30 day verification period
without violating the FDCPA as long as the attorney
immediately stays the foreclosure action while the verification
process is ongoing.
Hope for Homeowners Act



New program for borrowers at risk of default.
See materials for some basic facts about the
Hope for Homeowners program and the
Housing and Economic Recovery Act of 2009
Voluntary program for lenders with no
requirement of principal reduction, so it has
helped a fraction of the homeowners
anticipated.
Protecting Tenants at Foreclosure Act



All tenants must receive a 90 day notice before being evicted
as the result of a residential foreclosure.
With some exceptions, existing leases for renters must be
honored to the end of the term of their leases.
The stated exceptions are for tenants without a lease, tenants
with a lease terminable at will under state law, or where the
owner acquiring the property will occupy it as a primary
residence. In these cases, the tenants must have 90 days to
vacate the property.
Protecting Tenants at Foreclosure Act


This changes the nature of evictions on
foreclosed properties and preempts state
law, unless state law gives longer notice
requirements.
Text is included in your materials.
State law update


Chapter 443 generally governs foreclosures of deeds of trust in
Missouri.
Only current statutory change which effects foreclosure is
RSMO § 534.030 (amended effective 8/28/09) which requires
10 business days notice to a residential tenant before a new
owner can commence an action for unlawful detainer. The
exact language that must be included in the notice is included
in the statute. A copy is included in your materials. This is likely
preempted by the 90 day notice required by the Protecting
Tenants at Foreclosure Act, but we recommend giving both
notices.
Local Laws

Check with local municipality regarding registration
requirements for foreclosing properties. As of May
1, 2009, KCMO requires that all “owners” register
vacant and/or properties in the process of being
foreclosed within 14 days of initiation of the
foreclosure process. Numerous municipalities in the
Kansas City Metropolitan area and across the state
of Missouri have adopted or are adopting variations
on these types of requirements. Foreclosing lenders
will need to check with each municipality regarding
registration requirements.
Local Laws

See copy of ordinances that have been
passed in Kansas City, Missouri, Lee’s
Summit, Gladstone, Belton, Raymore and
St. Louis (as of March 12)
Case Law Update

Foreclosure actions are being thrown out of
court, particularly in the bankruptcy context,
because the courts are finding that the
servicers who are bringing the foreclosure
actions are not real parties in interest and do
not have proper standing to foreclose.
Holder


To enforce, the entity must be in possession
of the instrument. The original holder and
subsequent transferees are “holders” and if a
transferee takes with no notice of default, he
is a “holder in due course.”
Payment to a party entitled to enforce is
sufficient to extinguish the obligation.
Therefore only a holder of a note endorsed to
it or holder of bearer paper may enforce it.
Holder



Article 3 of the UCC governs negotiable instruments
(notes and drafts).
Defines a negotiable instrument as “an unconditional
promise or order to pay a fixed amount of money,
with or without interest . . .”
Negotiable instruments are transferred from the
original payor by negotiation. Order paper must be
endorsed (such as a check drawn on a bank).
Bearer paper must be delivered.
Real Party in Interest (F.R. Civ. Pro 17)


Pursuant to Federal Rule of Civil Procedure
17, an action must be prosecuted in the
name of the real party in interest.
Typical problems arise in a motion for relief
from stay in a bankruptcy proceeding.
Real Party in Interest (F.R. Civ. Pro 17)


The real party in interest in a federal action to
enforce a note is the holder of the note. In a
securitization it would be the trustee for the
certificate holders.
Unless the name of the actual note holder is
stated, the pleadings are defective.
Standing



Servicing agent may be a party in interest, but may
not have standing.
Federal Courts have power authorized by Article III
of the Constitution and statutes enacted by
Congress. A plaintiff must have constitutional
standing for a federal court to have jurisdiction.
Servicing agent would only have standing if it can
show that it has agency status and that its principal
is the holder of the note.
Standing

Also see Deutsche Bank National Trust Co. v.
McRae, 2010 Westlaw 309105 (N. J. Supp. 1/25/10).
In this case, the foreclosure defendant did not
appear and did not file any response but the court
raised the standing issue itself independently and
dismissed after it determined that the filings did not
support the verified complaint stating that the plaintiff
was the owner of the note and mortgage.
To Enforce Note




It is the holder of the note by transfer with all
necessary transfer documentation
It had possession of the note before it was
lost
If lost, must be prepared to post a bond
If person seeking to enforce is an agent, it
must show its agency status and prove that
its principal is the holder of the note.
Case Law Update

See In re Hwang, 396 B. R. 757 (C. D. Ca., 2008) in which
court held, among other things, that the motion for relief from
stay to enforce mortgage note could not be pursued by bank
that had previously assigned its rights under note to another
entity, and that at most retained only loan servicing rights,
without joinder of party that owned the note following the
assignment. Court also noted that bank to which mortgage
note was payable and which was in physical possession of the
note qualified as the “holder” of the note, even though it had
assigned its rights under the note to another entity, which had
further sold the note as part of a securitization transaction.
Case Law Update

See, also, In re Vargas, 396 B. R. 511 (C. D. Ca.,
2008); In re Hayes, 393 B. R. 259 (D. Mass. 2008);
Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL
111227 (S. D. Ohio 2008); In Re Foreclosure Cases,
2007 WL 3232430 (N. D. Ohio 2007); In Re
Foreclosure Cases, 521 F. Supp. 2d 650 (S. D. Ohio
2007) and In re Jones (2008 WL 4539486 (Bkrtcy. D.
Mass) (which is also a great example of how
complicated the assignment and servicing issues
can be to sort out).
Case Law Update

Further, see, Nosek v. Ameriquest Mortgage
Company, 386 B. R. 374 (Bankr D. Mass.
2008), in which court noted that during the
five years during which the Chapter 13
proceeding was pending, Ameriquest had
represented itself to be the holder of the note
and mortgage, and only later did Ameriquest
notify the court that it was merely the
servicer.
Case Law Update


During part of the pendency of the Chapter
13 proceeding, Ameriquest had not even
been assigned servicing rights.
The court imposed fairly dramatic sanctions,
some of which have been affirmed on appeal
and some of which were vacated. See 406
B.R. 434 (D. Mass. 2009).
Case Law Update

See In re Jacobson, 2009 WL 567188 (Bkrtcy. W.D. Wash.), in
which court held that the entity that claimed to be only a
servicer for deed of trust note, and that it neither asserted any
beneficial interest in note nor claimed it could enforce note in its
own right, was not a real party in interest in whose name motion
for relief from stay to foreclose on property which secured note
could be prosecuted; and alleged servicing agent failed to
establish that it had standing to pursue motion for relief from
stay in order to enforce deed of trust.
Case Law Update

U.S. Bank National Association v. Ibanez, Misc 384283 and
386755 (Trial Court, Land Court Department of Commonwealth
of Massachusetts 2009). Mortgage foreclosure sales (there
were several) were noticed up and conducted by an entity
without any recorded interest in the mortgage at the time of the
notice and sale. Because foreclosing entity (the plaintiff) was
unable to get title insurance, it brought the actions to obtain
judgment on two issues: (1) whether the notices were valid,
having been published in the Boston Globe, and (2) whether
the plaintiff had the right to foreclose the mortgage since the
assignment was not executed or recorded until after the
exercise of the power of sale.
Ibanez


The court held that the publication in the Boston
Globe was valid.
The “present holder of the mortgage” issue was
decided against the plaintiffs. Plaintiffs appealed,
arguing that (i) the “present holder of the mortgage”
issue came as a surprise to them and shouldn’t have
been decided, (ii) had plaintiffs known that issue was
going to be addressed they would have pled the
case differently, (iii) since the defendant
homeowners had defaulted, it was inappropriate for
judgment to be entered against the plaintiffs,
Ibanez

(iv) based on new evidence, plaintiffs were the
“present holder of the mortgage” because they had
the note (endorsed in blank) and assignment in
blank without an identified assignee, and a
contractual right to obtain the mortgage at those
times and (v) if the note and mortgage endorsed in
blank weren’t enough, the foreclosure sale was valid
anyway because the plaintiffs were authorized by the
last record holder of the mortgage and the plaintiffs
were acting as its agent.
Ibanez


The Land Court held that the foreclosing agent did
not have the right to foreclose on the property since
the assignment of the mortgage did not occur (either
executed or recorded) until well after the foreclosure
sale. The court stated as follows:
“The plaintiffs cannot credibly claim surprise at the
judgment that was entered and, having asked for
(and received) a declaration on issues they chose
and on the facts exactly as they pled them, they
have no right to a “do-over” because the declaration
was not entirely as they wished.”
Ibanez

The court continued: “Moreover, their newly
presented facts do not lead to a different result.
Instead they show that the plaintiffs themselves
recognized that they needed mortgage assignments
in recordable form explicitly to them (not in blank)
prior to their initiation of the foreclosure process. . .
They also show that the problem the plaintiffs face
(the present title defect) is entirely of their own
making as a result of their failure to comply with the
statute and the directives in their own securitization
documents.”
Ibanez

In the conclusions, the Ibanez court stated: “The
issues in this case are not merely problems with
paperwork or a matter of dotting i’s and crossing t’s.
Instead they lie at the heart of the protections given
to homeowners and borrowers by the Massachusetts
legislature. To accept the plaintiff’s argument is to
allow them to take someone’s home without any
demonstrable right to do so, based upon the
assumption that they ultimately will be able to show
that they have that right and the further assumption
Ibanez
that the potential bidders will be undeterred by the
lack of a demonstrable legal foundation for the sale
and will nonetheless bid full value in the expectation
that that foundation will ultimately be produced, even
if it takes a year or more. The law recognizes the
troubling nature of these assumptions, the harm
caused if those assumptions prove erroneous, and
commands otherwise.”
Ibanez

Although just a trial court level case, there
has been some discussion in the legal
community that the Land Court is a
specialized court designed to hear cases
involving real property and so other courts
will likely defer to its expertise, so it will likely
become established case law. A copy of the
Memorandum and Order are included in your
materials.
Case Law Update / MERS

Mortgage Electronic Registration Systems, Inc.
(“MERS”) is a national electronic registration and
tracking system that was designed to simplify
tracking of mortgage loan ownership and servicing
rights. Once MERS becomes the beneficiary of
record of a lender, it remains the beneficiary when
the ownership or servicing rights are transferred.
MERS

MERS was designed to eliminate the need to prepare and record
assignments when trading mortgage loans for ease in securitizing
such loans.

However, MERS does not have legal title to the mortgages registered
on its database and the underlying notes have never been transferred
to it.

Now the situation is arising where MERS is attempting to foreclose on
property.

Cases are coming out which are deciding whether MERS has standing
and is the real party in interest entitled to foreclose on real property.
MERS

In these cases, courts have found that MERS does
not have standing and is not the real party in interest
to be entitled to foreclose on real property. See In Re
Hawkins, 2009 WL 901766 (Bkrtcy. D. Nev.); In Re
Sheridan, 2009 WL 631355 (Bkrtcy. D. Idaho);
Novastar Mortgage, Inc. v. Snyder, 2008 WL
4560794 (N. D. Ohio); MERS v. Lisa Marie Chong,
Lenard E. Schwartzer, Bankruptcy Trustee, et al.,
Dist. Ct. Case No. 2:09-CV-00661-KJD-LRL.
MERS

Landmark National Bank v. Kesler, 192 P. 3d 177 (Kan. App.
2008), affirmed by 216 P. 3d 158 (Kan. 2009) is a Kansas case
in which Landmark National Bank brought a suit to foreclose its
mortgage against the borrower and joined Millenia Mortgage
Corp as a defendant because it had a second mortgage against
the property. Neither Borrower nor Millenia responded, so the
court entered a default judgment for Landmark. Millenia had
sold the mortgage to Sovereign Bank. Sovereign and MERS
filed a motion to set aside the judgment, as MERS asserted that
it now held legal title to the mortgage on behalf of Sovereign as
successor to Millenia.
MERS

Sovereign and MERS claimed that MERS
was a necessary party and the judgment
should be set aside because MERS wasn’t
included in the lawsuit. The court refused to
set aside the judgment and found that MERS
was not a contingently necessary party in
Landmark’s foreclosure action.
MERS

There has been some discussion in the legal
community that this is not a good decision,
and any reasonable attorney should not
foreclose a mortgage senior to MERS without
naming MERS as a necessary party.
MERS

The Minnesota Supreme Court just decided
Jackson, et al v. MERS as of 8/13/09.
Several Minnesota homeowners filed suit
against MERS alleging that MERS violated
Minnesota state law by foreclosing without
following two requirements: (i) to identify all
assignees of the mortgage in the county land
records, and (ii) to list those assignees in the
published foreclosure notice.
MERS

MERS argued that it should be able to
foreclose in its own name without identifying
the successive owners of the loan which are
tracked on its private system. The court
ruled 6-1 that MERS did not violate
Minnesota law by failing to disclose which
lenders actually owned a homeowner’s
mortgage. A copy of the decision is included
in the materials.
MERS

In Bellistri v. Ocwen Loan Servicing, LLC, 2009 WL
531057 (Mo. App. E.D.), Bellistri purchased property
at a tax foreclosure sale and then brought a quiet
title action. The original borrower had executed a
promissory note to BNC Mortgage Inc., but the
beneficiary under the Deed of Trust was MERS. The
Missouri Court of Appeals held that MERS never
held the promissory note and thus its assignment of
the Deed of Trust to Ocwen had no force. Therefore
Ocwen does not have an interest in the property and
lacks standing to seek relief.
MERS

The holding in Bellistri was affirmed in
Bellistri v. Ocwen Loan Servicing, LLC, 284
S.W. 3rd 619 (Mo. App. E.D. 2009). The
court noted that if the note and the deed of
trust are split, the note becomes unsecured
which makes it impossible for the holder of
the note to foreclose unless the holder of the
deed of trust is the agent of the note holder.
MERS

As MERS never held the note, its assignment
of the deed of trust, separate from the note,
to Ocwen had no force. Thus Ocwen lacks a
cognizable interest in the case and lacks
standing to seek relief.
MERS



Questions:
Since MERS claims no interest in the note and is
merely the servicer/tracker of the mortgage
assignment, how does MERS claim standing as “real
party in interest” to foreclose?
How can a servicer defend a lawsuit and have legal
standing to oppose contractual issues of the loan it is
servicing if it does not name and defend the suit in
the name of its principal?
Case Law Update


See also the following articles (included in your
materials):
“Where’s the Note, Who’s the Holder: Enforcement
of Promissory Note Secured by Real Estate” by Hon.
Samuel L. Bufford, United States Bankruptcy Judge,
Central District of California, Los Angeles, CA and
(Formerly Hon.) R. Glen Ayers, Langley & Banack,
San Antonio, TX, presented at the American
Bankruptcy Institute, April 3, 2009, Washington, D.C.
Case Law Update



The Concept of Securitization, by Kenneth S.
Jannette, Esq.
“Show Me the Original Note and I Will Show You the
Money” by O. Max Gardner III
Foreclosure, Subprime Mortgage Lending, and the
Mortgage Electronic Registration System, by
Christopher L. Peterson (which is somewhat
inflammatory and apparently still in draft form – see
http://ssrn.com/abstract=1469749).
Case Law Update


Amicus Brief filed in Nevada District Court Case,
MERS v. Chong, Case No. 2:09-CV-00661-KJD-LRL
Arizona Legal Studies Discussion Paper No. 09-35
“Underwater and Not Walking Away: Shame, Fear
and the Social Management of the Housing Crisis”
by Brent T. White, James E. Rogers College of Law
at the University of Arizona.
Short Sales

A short sale means a lender will accept a
payoff of less than the balance due on the
loan.
Short Sale Issues




The IRS may consider debt forgiveness
income.
Lender may not release its right to pursue
the borrower for the difference between what
is owed and what it received in the short
sale.
Difficult to discuss or negotiate with a lender.
Negative effect on borrower’s credit rating.
Short Sales Issues


Length of time to complete the process
Borrower must prove hardship beyond that it
is underwater.
Loan Modifications


A loan modification is just a change in the
terms of a loan.
With some loans, lender may want to have a
“pre-negotiation agreement” with borrower
stating conditions under which modification
will be considered, deadlines and
confidentiality requirements.
Loan Modification Issues


Any material modification of a loan that would
adversely affect the holder of a subordinate lien or
encumbrance can lose priority if entered into without
the consent of the junior lienholder. (Either complete
loss of priority or loss to the extent prejudiced).
A “material modification” can include an increase in
the interest rate or increase in principal.
Loan Modification Issues

If a lender requires additional security without
advancing additional funds, and the borrower
files bankruptcy within 90 days thereafter, the
receipt of such additional security may be
considered a preferential transfer which
could be set aside by the bankruptcy trustee.
Loan Modification Issues

Because of the possibility of prejudicing
junior lienholders, lenders should get new
title work to make sure they work out
agreements with all junior lienholders so they
do not lose priority.
Loan Modification Issues

If all borrowers, guarantors or other sureties
are not required to either execute the loan
modification agreement or re-affirm the
modification agreement, they might be
released from personal liability.
Loan Modification Issues


Principal forgiveness may be considered a
taxable event by the IRS.
Because of the prevalence of loan
securitizations, make sure that borrower is
negotiating with the correct entity (request
documentation trail).
Loan Modification Issues


Lender will need to get a loan title policy
modification endorsement because a
modification of the loan is a “post-policy
event” that would be excluded from
coverage.
Some lenders require a “waiver of automatic
stay” provision in the modification
agreement. May or may not be enforceable.
Tips for Negotiations




Maintain thorough records system in a
professional business-like file
Make reasonable deadlines and stick to them
Use objectivity when evaluating legal and
business risks
Maintain professional relationships and act
reasonably and consistently
Tips for Negotiations


Communication and responsiveness are key
Establish a preferred method of
communication and stick with it. Email is not
a secure method of communication, but it is a
really good way of communicating status or
questions to a lot of people simultaneously.







Allison Tanner
Swanson Midgley, LLC
4600 Madison, Suite 1100
Kansas City, MO 64112
816 886-4809
atanner@swansonmidgley.com
www.swansonmidgley.com