Insights

A recent case out of New York, decided on June 7, 2011, demonstrated the importance of having the properly assigned notes when initiating a foreclosure proceeding. Bank of New York v. Silverberg involved a case where evidentiary defects apparently prevented a properly endorsed note from being produced in a foreclosure action.

Mortgage Electronic Registration Systems, Inc. (MERS) was listed in the underlying mortgages as a nominee and mortgagee for the purpose of recording, but was never the actual holder or assignee of the underlying note. MERS assigned the mortgages to Bank of New York for purposes of the foreclosure action, but MERS was never the actual holder or assignee of the underlying note and it appears that Bank of New York was unable to produce a properly assigned note. The issue in the case was whether the Bank of New York had standing to commence a foreclosure action.

According to the reported facts, in October 2006, Stephen and Frederica Silverberg borrowed $450,000 from Countrywide Home Loans, Inc. (Countrywide), to purchase residential real property. The loan was secured by a mortgage on the property that referred to MERS as the mortgagee for the purpose of recording, and provided that the underlying promissory note was in favor of Countrywide. On April 23, 2007, the Silverbergs executed a second mortgage on the property also in favor of MERS, as named mortgagee and nominee of Countrywide. The defendants simultaneously executed a note in favor of Countrywide, secured by the second mortgage.

Also, in April 2007, the Silverbergs executed a consolidation agreement in connection with the property in the sum of $479,000 in favor of MERS, as mortgagee and nominee of Countrywide. The consolidation agreement apparently named Countrywide as the lender and note holder, but Countrywide was not a party to the consolidation agreement. The Court does not discuss the reason for this.

In December 2007, the Silverbergs defaulted on the consolidation agreement and, on April 30, 2008, MERS assigned the consolidation agreement and mortgages to the Bank of New York, as trustee for a securitization pool. Subsequently, on May 6, 2008, the bank commenced a mortgage foreclosure action against the Silverbergs.

While the decision is not entirely clear, it appears that there were evidentiary defects that prevented a properly endorsed note from being produced in the proceedings. The Silverbergs contended that Countrywide never transferred or endorsed the notes described in the consolidation agreement to the Bank of New York. The Bank, therefore, was left to argue that assignment of the consolidation agreement and mortgages to Bank of New York was sufficient given Bank of New York’s standing to bring the foreclosure action.

The New York Supreme Court (the state’s trial court) ruled that the Bank had standing to pursue the foreclosure action, concluding that, prior to the commencement of the action, MERS, as Countrywide’s nominee, and on Countrywide’s behalf, assigned the mortgages described in the consolidation agreement. The Supreme Court then determined that, because Bank of New York was the owner of the consolidated note and mortgages, it was the proper party to commence the action.

On appeal, the Supreme Court of the State of New York Appellate Division, Second Judicial Department reversed the decision. As an initial matter, the appellate court noted that once a promissory note is tendered to and accepted by an assignee, the mortgage passes as an incident to the note. By contrast, the court stated that a transfer of a mortgage without the debt is a nullity, and that no interest is acquired by it. This is because a mortgage is merely security for a debt or other obligation and cannot exist independently of the debt or obligation. Consequently, the court determined that the foreclosure of a mortgage cannot be pursued by one who has not demonstrated a right to the debt.

Turning to the facts of the case, the Court initially noted that its decision did not call into question a prior decision by the Court, in which it concluded that MERS had standing to bring a foreclosure action. In that case, in Bank of New York v. Silverberg, the consolidation agreement did not give MERS title to the note, nor did the record show that the note was physically delivered to MERS. The court, therefore, concluded that MERS’ authority was limited to only those powers which were specifically conferred to it and authorized by Countrywide. While the consolidation agreement gave MERS the right to assign the mortgages, it did not specifically give MERS the right to assign the underlying notes, and the assignment of the notes was thus beyond MERS’ authority as nominee or agent of the lender. The Bank of New York, which merely stepped into the shoes of MERS, its assignor, gained only that to which MERS was entitled and did not acquire the power to foreclose by way of the corrected assignment.

In sum, because MERS was never the lawful holder or assignee of the notes described and identified in the consolidation agreement, MERS was without authority to assign the power to foreclose to the plaintiff. Consequently, the plaintiff failed to show that it had standing to foreclose.

The Court concluded by noting that it was mindful of the impact that the decision may have on the mortgage industry in New York, and perhaps the nation. Nonetheless, “the law must not yield to expediency and the convenience of lending institutions.” Further, “[p]roper procedures must be followed to ensure the reliability of the chain of ownership, to secure the dependable transfer of property, and to assure the enforcement of the rules that govern real property.”

David S. Darland is a partner in the Washington, D.C., office of Hudson Cook, LLP. David can be reached at 202-327-9707 or by email at ddarland@hudco.com.