March 22, 2017
by Lloyd Workman
Aldridge Pite, LLP – USFN Member (California, Georgia)
A recent Hawaii Supreme Court decision significantly impacts judicial foreclosure actions in the state. More specifically, the Supreme Court held that in order for summary judgment to be granted in favor of a foreclosing mortgagee in a Hawaii judicial foreclosure action, the foreclosing mortgagee must prove that the plaintiff who initiated the action (which might be different than the current foreclosing mortgagee) had standing to foreclose at the time the foreclosure complaint was filed. [Bank of America, N.A. v. Reyes-Toledo (Haw. Feb. 28, 2017)]. The Supreme Court found that the plaintiff was not entitled to summary judgment because it failed to establish that it was the note holder pursuant to Hawaii Revised Statutes § 490:3-308 (UCC Art. 3-308) at the time the foreclosure complaint was filed.
This author’s firm analyzed the pleadings filed in the foreclosure action upon which the Reyes-Toledo decision was based. The foreclosure complaint was not verified and no exhibits were attached thereto. As a result, there was no documentary evidence on the record evidencing that the plaintiff was the note holder when the foreclosure complaint was filed. Additionally, the declaration of indebtedness filed in support of the plaintiff’s motion for summary judgment (MSJ) did not explain when the plaintiff became the note holder and did not specify when the note indorsements were executed. However, prior to the Supreme Court’s decision, there was no requirement to establish standing at the time a foreclosure complaint was filed and defects in standing could be cured at the MSJ stage. [See IndyMac Bank v. Miguel, 117 Haw. 506, 184 P.3d 821 (Haw. Ct. App. 2008), as corrected (July 17, 2008); see also Rule 17(a) of the Hawaii Rules of Civil Procedure.] As explained more fully below, foreclosing mortgagees have several options to prove note holder status at the time that the foreclosure complaint was filed.
Foreclosure Complaint Already Filed
If the foreclosure complaint has already been filed, it is recommended that the current foreclosing mortgagee execute and file a declaration in support of the MSJ, whereby the declarant attests that the foreclosing mortgagee was the original plaintiff and was in possession of the note at the time the foreclosure complaint was filed. If this is not possible [e.g., because the loan has been transferred between one or more investors/servicers and the current plaintiff (real party in interest) is unable to attest to note holder status at the time of the filing of the foreclosure complaint] then a declaration may need to be sought from the original plaintiff. If this is not possible, it might be advisable to voluntarily dismiss and re-file the foreclosure action anew depending upon the circumstances of the case. It may also be possible for the current foreclosing mortgagee to file an amended complaint, which may cure this issue. Still, this strategy bears some risk given that the Reyes-Toledo decision does not address whether it is possible to cure a defect in standing.
It is conceivable that the trial court might not raise this new requirement as an issue. If so, then the foreclosure action may proceed so long as the MSJ is granted. On the other hand, the trial court judges handling foreclosure cases are becoming aware of the Supreme Court’s decision and can, sua sponte, require a foreclosing mortgagee moving for summary judgment to provide evidence that the plaintiff held the note when the case was filed. While a trial judge could also raise this standing issue later in the case (i.e., at confirmation) there is prior Supreme Court precedent that a foreclosure judgment is final and must be timely appealed. Thus, if this standing issue has not been raised at summary judgment, prior precedent dictates that it has been waived. See MERS v. Wise, 130 Haw. 11, 17, 304 P.3d 1192, 1198 (Haw. 2013). Irrespective of Wise, some title insurers could refuse to provide title insurance, citing a failure to comply with the Reyes-Toledo decision as a basis for a title defect after the foreclosure sale is completed. Also, the foreclosing mortgagee runs the risk that the foreclosure judgment may be vacated because standing is an issue that may be raised at any time during the foreclosure action. Further, it is anticipated that various borrowers’ counsel will be citing Reyes-Toledo to oppose foreclosure actions through the sale confirmation stage.
For cases in the First Circuit (Oahu – approximately 60 percent of all Hawaii judicial foreclosure actions) the presiding foreclosure judge (Hon. Castagnetti) continued all MSJs filed on the Island of Oahu until moved upon and is requiring that foreclosing creditors file further briefing and an additional declaration, if necessary, to ensure that the new requirement set forth in the Supreme Court’s decision is met before granting a foreclosing mortgagee’s MSJ. The best course of action on these MSJs will depend upon the circumstances in each case. If a verified complaint was filed, the creditor can reference the filed verification to prove that it was the holder of the note when the complaint was filed. If a verified complaint was not filed and there is no evidence on the record to establish that the creditor was the note holder at the time of the filing of the complaint, then execution of a declaration attesting to possession of the note at the time the foreclosure complaint was filed will likely be necessary to obtain a judgment. Regardless of how a foreclosing mortgagee elects to proceed, substantial delay in the prosecution of all First Circuit cases at MSJ stage should be expected.
It is worth noting that in the event a loan has been transferred since a complaint was filed, the original servicer can help the current servicer by executing a declaration (on behalf of the original plaintiff) attesting to note possession at the time the foreclosure complaint was filed. If a prior loan servicer finds itself in this situation, then — to the extent possible — it is recommended that the prior servicer work with the current servicer to execute the appropriate declaration, as this is an issue that affects all loan servicers currently conducting business in the state of Hawaii. The cooperation of prior and current loan servicers will help the current note holders satisfy this heightened evidentiary necessity established by Reyes-Toledo.
Foreclosure Complaint Has Not Been Filed
For cases where the foreclosure complaint has not yet been filed, filing a verified complaint wherein the verification includes an attestation as to note possession (as of the filing of the complaint) is recommended. Alternatively, a separate declaration attesting to possession of the original note at the time the complaint is filed should be executed and filed contemporaneously with the filing of the complaint, or as soon thereafter as possible.
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