One can scarcely read a current business news article without coming across a new article on the outcome of a recently litigated foreclosure defense. The North Carolina Court of Appeals has released several opinions on the subject recently and two of them with disparate outcomes should be of particular interest to real property practitioners. In addressing the first of the two cases we will discuss, In Re Foreclosure: Gilbert, (10-361-1) we would observe that the Court of Appeals followed closely the established precedent in North Carolina and this case may be remarkable only in that it took very literal guidance from North Carolina Supreme Court opinions requiring strict proof in foreclosure proceedings.
In 2006, the respondent, Mr. Gilbert, executed a note ("the Note") in favor of First National Bank of Arizona and secured by a Deed of Trust executed by Mr. Gilbert and his wife, on real property located on Ocracoke Island, North Carolina in order to refinance the existing loan on his home. The Deed of Trust designated First National Bank of Arizona as the lender and Matthew J. Ragaller of Casey, Grimsley & Ragaller, PLLC as the trustee. The record before the Court revealed that the note had been assigned repeatedly and the Allonge entered into evidence reflected the following series of endorsements:
Pay to the order of:
First National Bank of Nevada
Without recourse by:
Amy Hawkins, Assistant Vice President
First National Bank Of Arizona
Pay to the order of:
Residential Funding Corporation
First National Bank of Nevada by: [Signature]
Deutsche Bank National Trust
Company, F/K/A Bankers Trust Company of California, N.A.
as Custodian as Attorney in Fact
[Illegible Name and Title]
Pay to the order of
Deutsche Bank Trust Company Americas as Trustee
Residential Funding Corporation by:
Judy Faber, Vice President
After default, the Trustee was substituted and the Substitution of Trustee identified Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6 ("Petitioner") as the holder of the Note and the lien created by the Deed of Trust. The ensuing foreclosure documents were consistent in identifying the holder as such. In 2009, Mr. Gilbert attempted to exercise his right to rescind the loan transaction he entered into with the original lender, First National Bank of Arizona, pursuant to the federal Truth in Lending Act, 15 U.S.C. § 1635.
The Clerk of Superior Court entered an Order permitting the Substitute Trustee to proceed with the foreclosure finding that Petitioner was the holder of the Note and Deed of Trust that it sought to foreclose and the Note evidenced a valid debt owed by Mr. Gilbert. Respondents appealed the Order to superior court. During the hearing, two affidavits attesting that Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6 was the owner and holder of the Note were admitted into evidence in the trial. Additionally, the petitioner introduced the original Note and Allonge for the trial court's inspection. The trial court concluded as a matter of law that the requirements of N.C. Gen. Stat. §45-21.16 had been satisfied and authorized the Substitute Trustee to proceed with the foreclosure.
There were two issues addressed by the Court of Appeals. First, whether the respondents' rescission argument was an equitable defense in equity that could be raised in a Chapter 45 foreclosure proceeding and second, whether the petitioner had produced sufficient evidence to establish that Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6 was the holder of the Note.
On the first issue, the Court of Appeals held that trial court properly refused to consider evidence of rescission. "Rescission under the TILA is an equitable remedy. See Am. Mortg. Network, Inc. v. Shelton, 486 F.3d 815, 819 (4th Cir. 2007) ('"[A]lthough the right to rescind [under the TILA] is [statutory], it remains an equitable doctrine subject to equitable considerations." (Quoting Brown v. Nat'l Permanent Fed. Sav. & Loan Ass'n, 683 F.2d 444, 447 (D.C. Cir. 1982))." ..."While legal defenses to a foreclosure under a power of sale are properly raised in a hearing held pursuant to section 45-21.16, equitable defenses are not. Watts, 38 N.C. App. at 94, 247 S.E.2d at 429.'" This apparently being a case of first impression in the North Carolina state appellate courts, the outcome was foreseeable to one aware of the Federal cases addressing the nature of the defense, but it is not necessarily intuitive under prior North Carolina appellate decisions
On the second issue, the Court had more to say. It emphasized
that identifying the true holder of the note in a proceeding to enforce the note
is necessary in order to protect the debtor from actions by multiple claimants
under the same note. "A 'foreclosure under a power of sale is not favored in the law and its exercise
will be watched with jealousy.' In re Foreclosure of Goforth Props.,
Inc., 334 N.C. 369, 375, 432 S.E.2d 855, 859 (1993) (citations and internal
quotation marks omitted). That the
party seeking to foreclose on a promissory note is the holder of said note is an
essential element of the action and the debtor is 'entitled to demand strict
proof of this element.'" Liles v. Myers, 38 N.C. App. 525, 528, 248 S.E.2d 385, 388 (1978)."
In order to support an order of sale, the Clerk of Superior Court or the trial court hearing the matter de novo
on appeal must find sufficient evidence that a petitioner is the holder of a
valid debt in accordance with section 45-21.16(d). "If such proof were not
required, the plaintiff could negotiate the instrument to a third party who
would become a holder in due course, bring a suit upon the note in her own name
and obtain a judgment in her favor.
. . .Requiring proof that the plaintiff is the holder of the note at the time of her suit reduces the possibility of such an inequitable occurrence." (The Court citing) Liles v. Meyers, 38 N.C. App. at 527, 248 S.E.2d at 387.
The Court notes that the definition of "holder" as it is used in N.C.G.S. Section 45-21.16 for foreclosure actions under a power of sale is as set out under the Uniform Commercial Code ("UCC"), as adopted by North Carolina, extensively citing Connolly v. Potts, 63 N.C. App. at 550, 306 S.E.2d at 125 and In Re Adams, __ N.C. App. at __, 693 S.E.2d at 709. As defined in the UCC a "holder" of an instrument is the party "in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession." N.C. Gen. Stat. § 25-1-201(b)(21) (2009).
After finding sufficient evidence of a valid debt before the trial court, the remaining test addressed by the Court of Appeals was whether there was competent evidence that that the petitioner in this matter was the "holder" of the Note that evidenced that debt. The Court of Appeals declared that production of original Note with the Allonge did not plainly evidence the transfer of the Note to the petitioner. Mere possession of a note is not sufficient to prove the right of the party in possession to enforce the instrument. The court states: "Under the UCC, as adopted by North Carolina, '[a]n instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.' N.C. Gen. Stat. § 25-3-203(a) (2009). Production of an original note at trial does not, in itself, establish that the note was transferred to the party presenting the note with the purpose of giving that party the right to enforce the instrument, as demonstrated in Connolly, 63 N.C. App. at 551, 306 S.E.2d at 125, and Smathers v. Smathers, 34 N.C. App. 724, 726, 239 S.E.2d 637, 638 (1977) (holding that despite evidence of voluntary transfer of promissory notes and the plaintiff's possession thereof, the plaintiff was not the holder of the note under the UCC as the notes were not drawn, issued, or indorsed to her, to bearer, or in blank. '[T]he plaintiff testified to some of the circumstances under which she obtained possession of the notes, but the trial court made no findings of fact with respect thereto.')
The Court proceeds through a thorough and orderly analysis of Connolly, Adams and the UCC to reach its conclusion. N.C.G.S. Section 25-3-110 states: For the purpose of determining the holder of an instrument, the following rules apply. . . "(2) If an instrument is payable to (i) a trust, an estate, or a person described as trustee or representative of a trust or estate, the instrument is payable to the trustee, the representative, or a successor of either, whether or not the beneficiary or estate is also named . . .", the Official Comment 3 to this section of the UCC states, in part, "This provision merely determines who can deal with an instrument as a holder. It does not determine ownership of the instrument or its proceeds" and N.C.G.S. Section 25-1-201(b)(21) defines "holder" as "[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession"). These provisions as applied in the cited prior cases leads the Court of Appeals to conclude that the petitioner did not offer sufficient evidence that Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6 was the holder of the Note and entitled to proceed with the foreclosure action because the final assignment on the Allonge was made to "Deutsche Bank Trust Company Americas as Trustee," which is not, in the court's view, the same party as "Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6."
The Court also took issue with the petitioner's attempt to 'connect the dots' through an Affidavit of Indebtedness by Jeffrey Stephan ("Stephan"). In a footnote to the opinion the court states: "This Court finds troubling that GMAC Mortgage, LLC was recently found to have submitted a false affidavit by Signing Officer Jeffrey Stephan in a motion for summary judgment against a mortgagor in the United States District Court of Maine. Judge John H. Rich, III concluded that GMAC Mortgage submitted Stephan's false affidavit in bad faith and levied sanctions against GMAC Mortgage, stating: '[T]he attestation to the Stephan affidavit was not, in fact, true; that is, Stephan did not know personally that all of the facts stated in the affidavit were true. . . GMAC [Mortgage] was on notice that the conduct at issue here was unacceptable to the courts, which rely on sworn affidavits as admissible evidence in connection with motions for summary judgment. In 2006, an identical jurat signed under identical circumstances resulted in the imposition of sanctions against GMAC [Mortgage] in Florida."
Taking its cue from the lead of the footnoted decisions, the Court, in this unanimous opinion, did indeed subject the supporting affidavits to "strict scrutiny" and found them insufficient. This opinion makes it clear that inferences will not be permitted to be drawn from affidavits that might have been deemed to have been 'close enough' in other, less troubled, times.
In the second opinion selected for discussion, Dobson v. Substitute Trustee Serv's, Inc., (10-632-1), the Court was split in its decision and the majority was less stringent in its requirements than the panel that decided Gilbert. Judge Hunter, dissented, and if the extensive citation of Connolly and Adams in the dissenting opinion seems hauntingly familiar, it should come as no surprise since he also penned the opinion in Gilbert.
In 1996, the plaintiff borrowed, $50,400.00 from Equivantage, Inc. ("Equivantage") secured by a Deed of Trust on land owned by Dobson and her husband. The note and deed of trust were assigned to "Norwest Bank Minnesota, National Association, as trustee of Equivantage Home Equity Loan Trust 1996-4 under the pooling and servicing agreement dated as of November 1, 1996." According to affidavits, Norwest Bank Minnesota is "now known as Wells Fargo." The plaintiff defaulted in 2001. To cure the delinquency, the parties agreed to modify the note resulting in an agreed unpaid principal balance in the sum of $53,276.26; and a new maturity date of November 1, 2026 among other terms. Plaintiff again defaulted after November 2003, and in March 2004, Wells Fargo filed a foreclosure action which was stayed by the plaintiff's filing of a bankruptcy petition. In July 2007, the bankruptcy court dismissed the plaintiff's case for failure to comply with the provisions of the bankruptcy plan. In September 2007, Defendant Substitute Trustee Services, Inc. ("STS"), as substitute trustee for Wells Fargo, filed a foreclosure action and finding that;
(1) Wells Fargo is the holder of the note;
(2) "[t]he total due under the note and [d]eed of [t]rust was undetermined;"
(3) "[t]here was insufficient evidence that [Dobson] was in default ... of the [d]eed of [t]rust."
The Clerk of Superior Court then ordered that "the foreclosure of the deed of trust . . . is dismissed with prejudice." Subsequently, Wells Fargo appealed the dismissal to the Superior Court. And then the plaintiff filed a complaint "against Wells Fargo, STS, Equivantage, and Defendant America's Servicing Company ("ASC") (collectively, "Defendants") seeking (1) both a preliminary and permanent injunction against the foreclosure proceedings; (2) an equitable accounting and appointment of a referee; and (3) appointment of a mediator." The trial court granted Dobson's request for a preliminary injunction. Ultimately after pleadings, discovery, motions and hearings, the trial court "partially granted Dobson's motion for summary judgment by 'permanently enjoin[ing] [Defendants] from foreclosing upon, or taking any steps of any nature to cause the foreclosure of the [d]eed of [t]rust . . . until such a time as Defendants can establish that they are the owner and holder of the [n]ote and the amount owed by [Dobson].'"
On appeal, the defendants successfully argued that the trial court's grant of partial summary judgment was error because Dobson was not entitled to judgment as a matter of law based upon the evidence before the court. The trial court concluded that the defendants should be enjoined from
Foreclosing on the Deed of Trust because, the defendants' evidence was insufficient "to prove the existence of the facts necessary to allow a foreclosure." The trial judge concluded that the defendants did not establish that Wells Fargo was the holder of the note or the amount owed by Dobson on the note. The Court of Appeals majority disagreed on both counts.
As to the amount of the debt, the opinion notes that Dobson's 2002 modification, records of her payments, modifications of her payment schedule from the bankruptcy proceeding, and computer printouts of her payments and charges from January 2000 to February 2009 were sufficient to establish the amount owed by Dobson under the note. The court chastised the apparent unwillingness of the trial court to run through the calculations necessary to be able to determine the exact sum. "Although arriving at that determination may take some time and effort, and perhaps a calculator, the evidence contained in the record in this case is not insufficient, as a matter of law, to allow the trial court to make that determination."
On the issue of Wells Fargo's status as holder of the note, the Majority apparently simply accepted the conclusory affidavits of the defendants as sufficient to 'connect the dots' and focused on a single argument concerning whether producing photocopies of the documents was sufficient for evidentiary purposes. Citing Adams opinion holding that photo copies were admissible where there was not dispute as to the correctness of the copies. The court states that "although Dobson does not admit that the photocopy of the note is a correct copy, Dobson has presented no evidence to dispute the fact that Wells Fargo is the holder of the note." ... "However, Dobson's only "dispute" of the authenticity of the note comes from her 7 December 2009 affidavit, in which she states that "I cannot confirm the authenticity of the copy of the [n]ote produced by the Defendants." This bare statement by Dobson is insufficient to cast doubt on Defendants' evidence that Wells Fargo is the holder of the note and does not serve as evidence that the copies are not exact reproductions."
In his dissenting opinion, Judge Robert N. Hunter Jr., takes the majority to task by connecting the apparent lack of strict proof of the defendant's ownership of the note to the question of production of the original documents by stating: "I would like to conclude the majority does not intend this statement to stand for the proposition that a party may establish it is the holder of a promissory note merely "by presenting photocopies of the note." Because the record before this Court lacks any competent evidence that Wells Fargo is in possession of the Note, however, that is precisely what the majority permits." Judge Hunter took issue with the majority's conclusion that there was no real dispute as to the correctness of the proffered copies. It would seem fair to say that the dissenting opinion placed a greater weight on the lack of an admission than did the majority, but it can be argued that such is more in line with an advocate's position rather than a jurist's and that Dobson had the greater burden that is was contested rather than merely not admitted.
The more significant issue raised in the dissenting opinion was Judge Hunter's conclusion that the defendants "failed to produce competent evidence sufficient to establish that Wells Fargo is in possession of Dobson's promissory note. Without such evidence, Wells Fargo cannot establish it is the holder of the Note." Judge Hunter restated his analysis of the requirements of strict proof of possession and status as a holder upon which he expounded in Gilbert. Suffice it to say for conciseness that the defendants had not 'connected the dots' with sufficient care to satisfy the dissent. While we did not include this analysis it should stand as required reading for those preparing for contested foreclosure proceedings.
Much is already being made in the press and blogs concerning the significance of these cases, but a careful reading suggests that such concern may be, in the words of the Bard; "much ado about nothing". It seems that these decisions impart no new standards to the examination of proof by those adjudicating foreclosure actions. Rather, it seems these opinions clearly articulate the standards that have long existed, but which may not have been strictly applied in the absence of vigorous advocacy. Likely the greatest concern would be interpretations of the Dobson majority opinion that would suggest the court set a lower standard than in the Gilbert opinion. Careful reading might suggest that the focus on the issues was not the same in both cases. We may lean more if Dobson goes to the North Carolina Supreme Court and that Court clarifies the standard.
Advocates in foreclosure proceeds would profit by adhering to Judge Hunter's admonition to proffer evidence that is sufficient to permit the court to 'connect the dots' of ownership of the note and Deed of Trust. Where there is adequate service and the matter is uncontested, it become res judicata as to the parties and a purchaser for value without notice of a defect will take good title. Title examiners should, however, pay heed to the proffer of evidence in uncontested foreclosure proceeding where there is no actual service on the respondents. Service by publication and posting where there has been insufficient due diligence to ascertain the whereabouts of the respondents may be set aside for lack of jurisdiction and where there is insufficient evidence of a right to foreclose, the risk is greater of such a contest and a greater likelihood of the judgment being set aside.