Exercising remedies on a mortgage loan requires swift access to the courts, which, in the first instance, will be contingent upon the lender establishing its standing to foreclose. Any delay to the lender in advancing its action against the borrower can be damaging to the lender's position and/or result in economic injury to the lender. We have previously discussed in this publication the state of the law in New York with respect to a lender's standing in a foreclosure action. Most recently, we discussed the New York Court of Appeals decision in Aurora Loan Services v. Taylor (25 NY3d at 358, 2015), which refined the requirements for a lender to assert standing to foreclose. In this article, we will review a recent case, Green Tree Servicing, LLC v. Molini (98 N.Y.S.3d 136, 2nd Dept., 2019), and how the opinions by the majority and the dissent indicate a certain hesitance in embracing the full import of the Aurora decision.

'Aurora'

In Aurora, the defendant executed a note to First National Bank of Arizona on July 25, 2006. The note was secured by a mortgage executed in favor of Mortgage Electronic Recording Systems (MERS), as nominee for First National Bank of Arizona, which mortgage encumbered the defendant's home. In March 2006, the loan was securitized together with other residential mortgage loans pursuant to a pooling and servicing agreement (the PSA). The note was assigned by allonge to Deutsche Bank Trust Company Americas (Deutsche), as trustee. The allonge also showed that the note had been previously transferred and endorsed, through mesne assignments, to two other entities prior to being assigned to Deutsche. Aurora Loan Servicing, (Aurora) became the master servicer on April 1, 2008 pursuant to a master servicing assignment and assumption agreement (MSAAA). The mortgage, although never assigned to Deutsche, was assigned by MERS to Aurora in August 2009. Aurora averred that it took custody of the note on May 20, 2010. The note was not otherwise assigned to Aurora.

By a limited power of attorney, Deutsche granted Aurora the right to, among other things, perform foreclosures under the trustee's name. On May 24, 2010, Aurora commenced a foreclosure against the defendant for failure to make payments under the note.  The defendant asserted that Aurora did not have standing to commence the foreclosure action and moved for summary judgment.

In affirming the Appellate Court's decision that Aurora had standing, the Court of Appeals, explicitly held that "it is not necessary to have possession of the mortgage at the time the action is commenced." The foregoing statement reaffirms the concept that once the note is transferred, the mortgage is automatically transferred as incident to the note. Taylor argued that the assignment of the mortgage was invalid. The court responded, quite emphatically, that the validity of the mortgage assignment is "irrelevant to Aurora's standing."

In evaluating Aurora's standing, the Court of Appeals acknowledged that physical delivery of the note to the plaintiff may "in certain circumstances" confer standing on the plaintiff. Based on the affidavit executed by Aurora's representative submitted to the court, it was "reasonably inferred" by the court that the note was delivered to Aurora. The affiant stated that she reviewed the note and that the original note had been in Aurora's custody since May 20, 2010, four days prior to the commencement of the action. The court did, however, state that it would have been better practice for the affidavit to explain how Aurora came into possession of the note, but, "under the circumstances," including the authority granted to Aurora under the MSAAA and the limited power of attorney, it concluded that Aurora did in fact have standing.

'Green Tree'

In Green Tree, the defendant executed a $416,000 note in favor of Countrywide Home Loans, Inc., which note was secured by a mortgage on residential property located in Staten Island. Plaintiff Green Tree Servicing, LLC commenced a foreclosure action against defendant and the defendant moved for summary judgment claiming that plaintiff lacked standing arguing, inter alia, that plaintiff failed to show it possessed the note as a holder in due course and did not show that it had obtained the note by assignment. The trial court denied the defendant's motion and the Appellate Division, Second Department, affirmed. The Green Tree court reiterated the rule stated by in Aurora that a plaintiff can establish standing in a foreclosure action by being either the "holder or assignee of the underlying note," that is, either "a written assignment of the underlying note or the physical delivery of the note prior the commencement of the foreclosure is sufficient [emphasis added]" to establish standing.

One judge dissented based on an analysis of the Uniform Commercial Code (UCC) provisions relating to a holders of negotiated instruments. The dissent argued that, under the UCC, a holder must have possession of the note "that is payable either to bearer or to an identified person that is the person in possession." The dissent further states that "mere physical possession of a note at the commencement of a foreclosure action is insufficient to confer standing." Accordingly, the dissent appears to be unwilling to follow the decision of the higher court in Aurora which held that physical possession of the note "in certain circumstances" can confer standing to the plaintiff. While other courts have based their decisions on the UCC when determining standing in a foreclosure action, the Aurora court did not discuss the application of the UCC to the question of standing.

The majority in Green Tree, nevertheless, did not rely solely on the assertion that the plaintiff obtained possession of the note prior to the commencement of the foreclosure action. The majority also stated that the note was endorsed to the plaintiff in blank. The dissent, however, asserted, inter alia, that the endorsement did not meet UCC requirements for an allonge because the plaintiff did not provide proof that the endorsement "was so firmly affixed to the note so as to become a part thereof as required under UCC 3-202 (2)." The majority, though, stated that the issue relating to affixation was not raised by the defendant and therefore was not before the court for consideration.

Conclusion

Although the Court of Appeals expressly accepted the concept that physical delivery of the note alone (qualified, vaguely, by the phrase "in certain circumstances") is a sufficient basis to find standing in a foreclosure action, there are judges in the lower courts who appear hesitant to fully embrace this view (though it should be noted that the Green Tree case involves a residential mortgage, which may partially account for the judges' hesitancy). Therefore, the better practice would be to obtain a clear chain of assignments of the note to the plaintiff. Allonges should always be employed to assign notes, however, they are not always provided by the assigning lender. In such circumstances where an allonge to a note is not received, the instrument assigning the related mortgage must state that the notes and bonds secured by such mortgage are also being assigned, which language is included in most forms typically used.

In the not uncommon event that a note in the chain is missing, a lost note affidavit, in which the lender attests, among other things, that it has not transferred the note to another person, is typically issued by the lender. By establishing a clear chain of assignments of the note, and by accepting delivery of the original note, a lender should have little difficulty in demonstrating standing in any foreclosure action.

Jeffrey B. Steiner and Scott A. Weinberg are partners at McDermott Will & Emery. John Bauco, an associate at the firm, assisted in the preparation of this article.

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