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Bank of New York v. Raftogianis

F-7356-09 (N.J. Super. Ch. Div. 2010) (Unpublished)

MORTGAGES; FORECLOSURE — Because a complaint for foreclosure should be filed by the party with the authority to enforce the underlying debt, the foreclosing party must establish that it had possession of the note on the date the foreclosure complaint was filed.

A trustee for a home mortgage investment trust filed a foreclosure action against a defaulting home loan borrower. The borrower defended by questioning whether the trustee could establish that it had, in fact, acquired the right to enforce the note and mortgage under law. The original lender had used the Mortgage Electronic Registration System (MERS) in recording the mortgage by designating its nominee, MERS, as the mortgagee. The note and mortgage were subsequently sold to an investment trust without notice to the borrower, who remained obligated on the original debt. The trust agreement granted the trustee all its right, title, and interest in the mortgage loans comprising the trust. Mortgage notes in the trust were either endorsed in favor of the trustee or in blank, and were held by a custodian acting for the trustee.

The original complaint filed by the trustee merely said it had become the owner of the note and mortgage in question before the complaint had been drafted. The trustee later filed an amended complaint that specifically recited the execution and recording of an assignment from MERS. The assignment was executed and recorded a short time after the complaint was filed. The assignment intended to prove that the debt in question had been transferred to the trustee. Even though the trustee was able to produce the original note, indorsed in blank, pursuant to a motion for summary judgment, the lower court found no evidence as to when the note was indorsed or when the note was physically transferred to the trustee, and denied the motion.

The matter went to trial. The borrower specifically challenged the trustee’s reliance on the assignment from MERS, arguing that MERS did not have the authority to assign the note, given a prior “separation” – as the note was held by the lender, but the mortgage was held by MERS as nominee for the lender. The lower court dismissed this argument as there was no real intent by the lender to “separate” the note and mortgage. The designation of MERS as nominee on the mortgage was simply intended to permit the recording of the mortgage in a way that would facilitate subsequent transfers through MERS without the recording of additional documents and incurring multiple filing fees. MERS had no real interest in either the note or mortgage; it acted simply as an agent for the lender.

The lower court was troubled by the trustee’s argument that it could proceed with the action despite not establishing that it had possession of the original note at the time the complaint was filed. The court held that any complaint for foreclosure should be filed by an individual or entity with the authority to enforce the underlying debt, and in actions involving a negotiable note, that party should generally be in a position to establish that it did have possession of the note as of the date the complaint was filed. The court said where that cannot be established, the complaint may be subject to dismissal, without prejudice to the filing of a new action.

In this matter, the trustee was unable to offer any direct proof as to a physical transfer of the specific note at issue to the custodian of the trust. No competent proofs were offered as to when the note was indorsed, when the note was delivered to the custodian, and whether it had been endorsed prior to that time. Proofs established the borrower’s loan was among the loans that were part of the trust, but the trustee failed to prove that it possessed the note as of the date the complaint was filed. The court dismissed the complaint without prejudice, permitting the trustee to file a new complaint and submit an appropriate certification when it was in possession of the note.

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