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USFN 25th Anniversary

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NY: Must a Lender Have an Assignment of Mortgage Before Action?

by Bruce J. Bergman
Berkman, Henoch, Peterson & Peddy, P.C. – USFN Member (NY)

The question and answer offered by an appeals court in New York presents a vital practical and legal issue: 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. Wells Fargo Bank v. Marchione, 2009 WL 3380639 (N.Y.A.D. 2d Dept.).

A miscue in this realm 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 glacial in many counties because of overwhelming case volume, multitudinous new notice requirements, and settlement conference mandates (for residential cases). By adding to these delays relating to assignments, lenders and servicers are suffering a disservice.

Just so the dangerous fact pattern will be absolutely clear, observe the not uncommon events in the new case. A mortgage held of record by Lender A goes into default on April 1, 2007. As claimed trustee for Lender A, the trustee has its attorneys begin the foreclosure action by filing the complaint with the court on November 30, 2007. The assignment of mortgage from Lender 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 of course was 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 costs attendant to that. This is hardly the way to handle defaulted loans and certainly not what lenders and servicers need to encounter.

Some of the legal principles supporting the court’s conclusion are set forth here for convenient review:

▪     To begin a foreclosure a lender must have a legal or an 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 in Marchione), this fiction of retroactivity cannot be applied to adversely affect rights of third persons. In this scenario, the borrower.

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, one cannot sign an assignment today and declare that it was effective as of some earlier time.)

Practitioners in the mortgage industry recognize that sometimes there is a disconnect between having an assignment executed and proceeding with a foreclosure. But borrowers’ attorneys know this, too, and they 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 Marchione argued that dismissal would be a waste of judicial resources because the plaintiff would simply start a new action the moment this one might be dismissed. True enough, the court implied, but advised that it was the plaintiff that should have reached this conclusion earlier in its process when it decided to begin an action without the assignment.

© Copyright 2009 USFN. All rights reserved.
Nov./Dec. e-Update



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