PA: Two Recent Judicial Decisions on Assignments & Standing
by Michael McKeever and Thomas I. Puleo
In the past few years, an increasing number of mortgagors have raised as a defense to mortgage foreclosure actions that the plaintiff or the holder of the mortgage lacked standing or was prevented from commencing an action in mortgage foreclosure because of the lack of an assignment of mortgage to the lender or assignee of the mortgage.
Basically, the mortgagors have attacked the right to bring suit on two grounds. First, that without an executed and recorded assignment of mortgage in its name, the plaintiff or current holder of the mortgage was not the owner of the mortgage and therefore had no standing to bring the action in mortgage foreclosure. Second, that without an executed and recorded assignment of mortgage, the plaintiff also failed to comply with the rules of civil procedure requiring that the complaint recite both the date of execution and the recording information for the assignment of mortgage.
This issue has nagged lenders’ attorneys for the past several years and has become a fairly prevalent and routine attack on the mortgage foreclosure process. The situation has resulted in various, and even inconsistent or conflicting, decisions by the trial courts, which sometimes decided the question of standing or ownership of the mortgage, while other times the matter turned on procedural grounds (that is, the necessity to reference the date and recording of the assignment in the complaint in mortgage foreclosure).
Trial courts have also sought to distinguish these cases depending on the dates of execution or recording; and, in some cases, the court has required that the assignment need only be executed prior to filing the complaint. Other courts have wanted the assignment to be both executed and recorded prior to filing the complaint, while yet further courts have held that the execution and/or recording of the assignment of mortgage may be done even after the complaint is filed, so long as it is before the entry of judgment.
In Mallory, the lender US Bank filed a complaint in mortgage foreclosure on November 14, 2007, and proceeded to enter a default judgment on January 3, 2008. The mortgagor filed a petition to strike the judgment on the basis that there appeared a fatal defect of record at the time the mortgage foreclosure action was commenced because the assignment of mortgage was not executed until December 28, 2007, after the complaint had already been filed, and then not recorded until January 15, 2008, after judgment had been entered. This lack of a recorded assignment, argued the mortgagor, indicates that the lender was not the legal owner of the mortgage or the real party in interest and, therefore, had no standing to bring the action. This argument was rejected by the superior court, which held that the recording of an assignment of mortgage was not a prerequisite to a lender having standing to seek enforcement of the mortgage via a mortgage foreclosure action.
Moreover, the superior court in Mallory indicated that a statement in the complaint that the “[p]laintiff is now the legal owner of the mortgage and is in the process of formalizing an assignment of the same” was sufficient to support the record that the lender was the real party in interest, even though no copy of the assignment had been attached to the complaint. As a result, the superior court found that there was no “fatal defect” apparent on the face of the record requiring the default judgment be stricken. The court also found that the complaint’s language that the plaintiff was in the process of formalizing the assignment of mortgage was a sufficient explanation as to why a copy was not attached, and the complaint adequately met the procedural mandates of the Pennsylvania Rules of Civil Procedure (Pa. R.C.P.), which require the plaintiff set forth in its complaint the date and recording information for the assignment, or alternatively attach a copy to the complaint, (Pa.R.C.P. 1147(a)(1)), or an explanation of why a copy of the written assignment was not attached to the complaint. (Pa.R.C.P. 1019).
This Pennsylvania Superior Court decision is consistent with the judicial rulings in at least two other jurisdictions, which have held that a post-complaint assignment cures any defects in the foreclosure process. See IndyMac Bank v. Miguel, 117 Hawaii 506, 184 P.3d 821 (2008) (post-complaint, prejudgment assignment of mortgage effective to cure defect in standing at the initiation of suit); Bank of New York v. Stuart, 2007 WL 936706 (Ohio App. 9th Dist. 2007) (bank that had filed a foreclosure action could cure the real party in interest issue by subsequently obtaining the mortgage).
It is important to note that since in Mallory the actual assignment of mortgage was executed before the entry of judgment, and recorded subsequently, whether the superior court would extend its holding to a case where there is no assignment executed prior to the entry of judgment. The court also alluded to the fact that this case was decided on the mortgagor’s petition to strike the judgment, which restricts the court’s review to matters appearing of record, such as the pleadings filed in the case, and that the mortgagor had not sought to challenge the truth of the factual averments in plaintiff’s complaint and go beyond the face of the record by seeking to open the judgment on the basis that the plaintiff was not the owner of the mortgage at the time the complaint was filed. In this case, although the mortgagors also unsuccessfully sought to open the judgment, it was not based upon the lack of assignment, but rather on other grounds, and was also denied.
The superior court acknowledged that although the mortgage instrument provided that MERS held legal title to the interests granted by the borrower in the security instrument, MERS, as nominee, had the right to exercise any or all of those interests, including the right to foreclose and sell the property. Thus, the superior court held that the mortgage instrument vested MERS with the requisite authority, as nominee, to enforce the mortgage.
The court cited the terms of the mortgage with approval as follows:
“Paragraph 23 of the Mortgage provides that MERS is the mortgagee and is acting ‘as a nominee for Lender and Lender’s successors and assigns.’ Mortgage at 1 (emphasis added). Paragraph 24 of the Mortgage also provides: Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument. Id. at 3, 652 A.2d 327 (emphasis added).”
The court went on to say, in language that would be applicable in any jurisdiction, that since the borrowers had agreed in the mortgage to the role that MERS would play in the transaction, the borrowers’ attempted defense to the action is barred by their consent to MERS’s role: “As the trial court correctly found, the Mortgage vests MERS with the authority, as nominee, to enforce the loan. The trial court noted, ‘[the Ralichs’] insistence that the sheriff’s sale and deed must be set aside for want of authority is directly at odds with the explicit acknowledgement by [the Ralichs] at the time of refinancing that MERS would have precisely the authority [the Ralichs] now contest.’ Opinion at 6. Therefore, the Ralichs’ argument that MERS lacked the authority to complete the sheriff’s sale is without merit.”
Pointers re Assignments of Mortgage
Due to the posture of the case, the Mallory opinion leaves several questions. In the case, the defendant was trying to set aside a judgment that had already been entered. The superior court made clear that it is appropriate for a lender to file suit without a recorded assignment; however, the defendant would have the right to answer the complaint and demand proof of ownership of the mortgage and note before proceeding to judgment.
This author’s firm continues to recommend that, until the appeals process plays out, lenders provide either a recorded assignment or an assignment to be recorded before filing the complaint. We do not want to invite a defendant to file an answer and delay the foreclosure on this basis, leading to additional contested cases, as well as increased fees and costs.
Further, the failure to record assignments by the time judgment in mortgage foreclosure is entered will trigger the imposition of realty transfer of up to four percent of the value of the property on the sheriff’s deed transfer.
If the assignment is executed but not yet recorded, this author’s firm will continue to attach a copy of the unrecorded assignment to the complaint. Since instituting this policy last year, this has substantially reduced the number of contested matters on the issue.
Pointer re MERS
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