February 5, 2014
by Nikolaus S. Schuttauf
Brennan, Recupero, Cascione, Scungio & McAllister, LLP – USFN Member (Rhode Island)
Late last year, the Rhode Island Supreme Court held that “homeowners in Rhode Island have standing to challenge the assignment of mortgages on their homes as being void to the extent necessary to contest the foreclosing entity’s authority to foreclose.” Mruk v. Mortgage Electronic Registration Systems, Inc., 2013 R.I. LEXIS 163, 20 (R.I. Dec. 19, 2013). By giving homeowners standing, the Supreme Court carved out an exception to the general law in Rhode Island that “strangers to a contract lack standing to either assert rights under that contract or to challenge its validity.” Prior to the Supreme Court’s decision, the Rhode Island Superior Court had uniformly applied the general law in Rhode Island, finding that homeowners do not have standing to contest the assignment of a mortgage on their home.
The Supreme Court based its decision on the following grounds:
“a homeowner whose home is foreclosed has suffered a concrete and particularized injury that gives the homeowner a personal stake in the outcome of litigation challenging the foreclosure”;
- “there is a causal connection between the injury (the foreclosure) and the challenged action” because “the assignment of the mortgage is the basis of the right to foreclose being asserted by the foreclosing entity”; and
- “the injury would be redressed by a decision in the plaintiff’s favor; if we hold that the assignment of a mortgage was, in fact, invalid, then a foreclosure sale conducted pursuant to the invalid assignment would be unlawful and therefore void.”
The Supreme Court noted the exception to the general rule is narrow, however. The exception is “confined to the circumstances of a mortgagor challenging an ‘invalid, ineffective, or void’ assignment of the mortgage. … We further reiterate that this exception is confined to private residential mortgagors challenging the foreclosure of their homes.” Mruk, p. 19.
Although Rhode Island homeowners now have the right to challenge the assignment of the mortgage on their homes, the Supreme Court made it clear that homeowners must have some concrete grounds for seeking to invalidate the assignment of their mortgage. In fact, the Supreme Court rejected every argument the homeowner made as to why the assignment of the mortgage on his home was invalid:
The Supreme Court reaffirmed its decision in Bucci that MERS may act as the nominee for the owner of the note, be named as the mortgagee in the mortgage, and exercise the statutory power of sale.
- The Supreme Court also reaffirmed its holding that the note and the mortgage did not need to be held by one entity.
- The Supreme Court rejected the homeowner’s arguments challenging the validity of:
the endorsement of the note in blank, which is a valid signature for negotiating a note under Article 3 of the Rhode Island Uniform Commercial Code,
- the signature on the mortgage assignment, noting the homeowner’s conclusionary allegations were devoid of fact and insufficient to raise a triable issue, and
- the affidavit of an IndyMac employee regarding the records and documents at issue in the case, as the homeowner failed to submit any evidence that the employee did not have personal knowledge of the business records in question.
For banks, mortgage companies, and mortgage servicers (MERS Members), there are important lessons to take from the Mruk decision.
First and foremost, MERS Members will no longer be able to use the third-party standing defense to compensate for any errors in negotiations of the note or assignments of the mortgage.
- Mruk underscores the critical importance of properly executing assignments of mortgages and negotiations of notes. Homeowners, armed with standing, may now use any error in the execution of an assignment or a note as a ground for invalidating a foreclosure.
- MERS Members must provide court-sufficient documentation regarding the authority of the individuals signing assignments and notes. The “robo-signing” argument, which questions the signing authority of the individual who executed an assignment, has been a favorite of homeowners to assert against defendant MERS Members. MERS Members should be prepared for homeowners, armed with standing, to press the “robo-signing” assertion with new vigor.
In the big picture, Mruk is neither a magic elixir to make a default disappear nor an escape hatch to dodge an otherwise valid foreclosure. As with the defendants in Mruk, MERS Members can win on the merits so long as each foreclosure is handled with attention to detail and proper documentation. There is no denying that Mruk turns up the heat on MERS Members, however, as homeowners now can, and will, use their standing rights to scrutinize every aspect of the assignments of mortgage and the negotiation of notes.
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