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From Banking and Finance Law Daily, June 22, 2015

Loan servicer’s standing to foreclose hinges on evidence of possessing note

By Thomas G. Wolfe, J.D.

Despite a mortgage borrower’s contention that a loan servicer did not have standing to bring a mortgage foreclosure action against her because the servicer did not possess a valid and enforceable mortgage, New York’s highest court—the New York Court of Appeals—ruled that the loan servicer established standing because it adequately presented evidence showing that it possessed the original promissory note prior to commencement of its foreclosure action. As enunciated by the court, “the note, and not the mortgage, is the dispositive instrument that conveys standing to foreclose under New York law” (Aurora Loan Services, LLC v. Taylor, June 11, 2015, Lippman, J.).

Background. In July 2006, as part of a mortgage loan transaction with a bank, Monique Taylor executed a mortgage and an adjustable rate note indicating that she would repay the bank $600,000, with interest. In keeping with a “pooling and servicing agreement,” the loan “was made part of a residential mortgage-backed securitization trust.” According to the trust, Deutsche Bank Trust Company Americas—the trustee—became the owner of the note through an allonge indorsing the note to Deutsche, as required under the pooling and servicing agreement. The allonge also showed the “chain of ownership” of several financial institutions before Deutsche Bank.

In keeping with the pooling and servicing agreement as well as a master servicing and assumption agreement (MSAAA), in April 2008, Aurora Loan Services, LLC “assumed servicer obligations” concerning Taylor’s mortgage loan. In January 2010, Taylor and her co-borrower defaulted on the mortgage loan after failing to make required mortgage payments.

According to the court’s opinion, under a “limited power of attorney” granted by Deutsche Bank to Aurora Loan Services, the loan servicer asserted that it “took physical custody of the original note on May 20, 2010.” Just a few days later, Aurora initiated a mortgage foreclosure action against Taylor in New York state court.

Motions for summary judgment. In response to the loan servicer’s foreclosure action, Taylor requested that the court grant summary judgment in her favor, arguing that Aurora did not have standing to bring the foreclosure action. Aurora then requested summary judgment in its favor as well, submitting an affidavit of its “legal liaison,” Sara Holland.

Among other things, Holland’s affidavit stated that she had reviewed the “note, mortgage and other loan documents and related business records,” and that the “original Note has been in the custody of Plaintiff Aurora Loan Services, LLC and in its present condition since May 20, 2010.” Further, a copy of the note and the allonge were attached to Holland’s affidavit.

After the state trial court ruled in the loan servicer’s favor, Taylor appealed the matter to New York’s Appellate Division. The appellate court concluded that the loan servicer had “proven its standing as a matter of law.” While the appellate court ruled in favor of Taylor on a separate issue concerning a referee’s report, Taylor appealed the decision on the standing issue to the New York Court of Appeals.

Court’s decision. In framing the issue on appeal, New York’s high court communicated, “The critical issue we must resolve is whether the record demonstrates a basis for finding that Aurora had standing to commence this mortgage foreclosure action. The physical delivery of the note to the plaintiff from its owner prior to commencement of a foreclosure action may, in certain circumstances, be sufficient to transfer the mortgage obligation and create standing to foreclose.”

In applying principles of New York law, the court ultimately determined that “Aurora was vested with standing to foreclose.” The court rejected Taylor’s argument that the loan servicer lacked standing because it did not possess a valid and enforceable mortgage at the time the mortgage foreclosure proceeding was initiated. Possession of the note, not the mortgage, was the key, the court stressed. While Taylor also argued that Aurora had not presented sufficient evidence to establish that it held possession of the original note, the court again disagreed.

In reaching its decision, the court determined that: (1) Deutsche Bank became the lawful owner of the note under the pooling and servicing agreement; (2) the Holland affidavit established that the loan servicer “came into possession of the note on May 20, 2010, prior to the May 24, 2010 commencement of the foreclosure action”; and (3) the Holland affidavit, along with the loan servicer’s authority under the MSAAA and the limited power of attorney from Deutsche Bank set forth a reasonable inference that physical delivery of the note was made to Aurora prior to the foreclosure action.

The case is No. 83 (2015 NY Slip Opinion 04872).

Attorneys: Jeffrey Herzberg (Zinker & Herzberg LLP) for Monique Taylor. Martin C. Bryce, Jr. (Ballard Spahr, LLP) for Aurora Loan Services, LLC.

Companies: Aurora Loan Services, LLC; Deutsche Bank Trust Company Americas

MainStory: TopStory Loans Mortgages StateBankingLaws NewYorkNews

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