Lender Must Have Assignment Of Mortgage Before Action – Case Dismissed!

This vital concept was the subject of our alert of June 1, 2009 and readers who may have saved that might want to peruse it again for a nuanced analysis. The point made there in what was then a new case has been reasserted even more strongly in a new holding (October 20, 2009):  Wells Fargo Bank v. Marchione, 2009 WL 3380639 (N.Y.A,D. 2d Dept.).

The issue as presented by the appeals court was whether an assignee of a mortgage has standing to commence a foreclosure before the date the assignment is executed.  “No” ruled the Appellate Division – even if the assignment purports to be retroactive to an earlier date before the action was begun. 

This may sound to some like an obscure legal nicety.  It is not – it has genuine practical effect and a miscue is proving to be expensive and time consuming for lenders, and a fertile arena for defaulting borrowers to further delay the foreclosure process.  In this regard, lenders and servicers should be aware that the progress of mortgage foreclosures in New York has become absolutely glacial in many counties because of overwhelming case volume, multitudinous new notice requirements, settlement conference mandates (for residential cases) and elevated court perception that borrowers are somehow being victimized.  By adding to these delays through inexactitude relating to assignments, lenders and servicers are shooting themselves in the foot.

Just so the dangerous fact pattern will be absolutely clear, we look here at the events in the new case (which by the way are hardly uncommon).  A mortgage held of record by lender A goes into default on April 1, 2007.  As claimed trustee for lender A, B has its attorneys begin the foreclosure action by filing the complaint with the court on November 30, 2007.  The assignment of mortgage from A to trustee (plaintiff in the foreclosure action) is dated December 4, 2007 – after the action had been commenced (which as noted was accomplished by filing the pleadings on November 30).  The assignment dutifully noted that it was effective on October 28, 2007 which was of course before the foreclosure action was begun.

On these facts, the borrowers moved to dismiss the complaint – and won.  This consumed many months and forced the trustee-plaintiff to begin the action anew, with all the time and cost attendant to that – hardly the way to handle defaulted loans and hardly what lenders and servicers need to encounter.

To quickly cite some of the legal principles which support the court’s conclusion, concepts lenders and servicers need to know:

• To begin a foreclosure a lender must have a legal or equitable interest in the mortgage.
• An assignee of a note and mortgage does have the necessary standing to bring the foreclosure action.
• But there is no standing if the plaintiff was not the assignee on the day the action was commenced.
• Because an action is commenced by the filing of the pleadings (summons and complaint) with the court, that there was a later assignment but before process was served does not rescue the plaintiff.
• While sometimes parties to an agreement may bind themselves retroactively (as lender A and the trustee attempted to do here) this fiction of retroactivity cannot be applied to adversely affect rights of third persons – here the borrower.

So, here is the compelling rule presented in this case:

• A retroactive assignment cannot be employed to grant standing upon an assignee in a foreclosure begun prior to the signing of that assignment. (In the vernacular, you cannot sign an assignment today and declare that it was effective as of some earlier time.)

Practitioners in the mortgage industry recognize that sometimes (too often it seems) there is a disconnect between having an assignment executed and proceeding with a foreclosure.  But borrowers’ attorney know this too and they will not hesitate to assault the assignee’s standing to prosecute the foreclosure where the assignment comes after the action is started.  Faced with possible dismissal of its foreclosure (which did then happen) counsel for the plaintiff in the subject case argued that dismissal would be a waste of judicial resources because the plaintiff would just start a new action the moment this one might be dismissed.  True enough, the court implied, but advised that it was the plaintiff which should have reached this conclusion earlier in its process when it decided to begin an action without the assignment.

That, lenders, servicers and other readers, is the scathing lesson of this case.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.