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Kansas Supreme Court Clarifies Standing Issues

Posted By USFN, Tuesday, May 23, 2017
Updated: Thursday, May 18, 2017

May 23, 2017

by David L. Boman
SouthLaw, P.C. – USFN Member (Iowa, Kansas, Missouri)

The Kansas Supreme Court recently clarified a number of issues concerning judicial foreclosure actions [FV-I, Inc. v. Kallevig, 2017 Kan. LEXIS 135 (Kan. Apr. 21, 2017) (motion for modification or rehearing pending)].

The history of Kallevig is beyond the scope of this article. A thorough understanding requires a review of both FV-I, Inc. v. Kallevig, 2013 Kan. App. Unpub. LEXIS 426, 301 P.3d 789 (Kan. Ct. App. May 17, 2013) and FV-I, Inc. v. Kallevig, 2015 Kan. App. Unpub. LEXIS 86, 342 P.3d 970 (Kan. Ct. App. Feb. 6, 2015).

The principal issues addressed in Kallevig are:

1. Under the Uniform Commercial Code (UCC), what must a plaintiff plead and prove to establish standing to enforce a note?
2. Whether a plaintiff must prove standing at the time of filing?
3. Whether a plaintiff can cure an initial lack of standing?
4. Whether the business records exception to the hearsay rule applies to endorsements on a note?
5. Whether possession of the mortgage alone is sufficient to establish standing?

Standing
Speaking to the first issue, the Court concluded that a plaintiff claiming enforcement rights under the UCC “as the holder of the instrument” must show that the note was made payable to the plaintiff or was endorsed in blank and that the plaintiff was in possession of the note. 2017 Kan. LEXIS 135, *16-20.

The Court next considered whether standing must be proved at the time of filing the foreclosure petition. 2017 Kan. LEXIS 135, *21. In the context of addressing when a plaintiff must prove standing, the Court also addressed whether a plaintiff can cure a lack of standing post-petition. Reviewing case law from a number of jurisdictions, the Court concluded that “— either in the pleadings, upon motion for summary judgment, or at trial — [the plaintiff must demonstrate] that it was in possession of the promissory note with enforcement rights at the time it filed the foreclosure action” and that a lack of standing cannot be cured by a post-petition assignment granting enforcement rights in the note. 2017 Kan. LEXIS 135, *29-30.

Endorsements
During trial following the first remand, the trial court excluded two endorsements on the original note because the appellant [FV-I, Inc., In Trust for Morgan Stanley Mortgage Capital Holdings, LLC] didn’t lay the foundation under K.S.A. § 60-460(m) (business records exception to the hearsay rule). 2017 Kan. LEXIS 135, *30. In Kallevig, the Court concluded that this evidentiary ruling was erroneous because “the signatures were not being admitted to prove the truth of the matter asserted, i.e., the authenticity of the signatures.” 2017 Kan. LEXIS 135, *31.

The Court went on to rule that, under the UCC, endorsements on a note are presumed authentic and this presumption extends to stamp signatures. To overcome this presumption: “A defendant has the burden to present sufficient evidence denying an endorsement’s validity before a plaintiff is required to introduce evidence to the contrary.” In order to shift the burden, a defendant’s evidence must go beyond “[m]ere speculation.” 2017 Kan. LEXIS 135, *30-34. Because the trial court improperly excluded the endorsements, the Court remanded the case to allow the appellant the opportunity to demonstrate that “FV-I possessed the original note with the improperly excluded endorsements when the petition to foreclose was filed.” 2017 Kan. LEXIS 135, *48.

Enforcement Rights in the Note must be Established
Relying in part on K.S.A. § 58-2323, the appellant maintained that it had standing to foreclose because it possessed the mortgage when it filed the petition. 2017 Kan. LEXIS 135, *37. Following an analysis of the “interplay between the common law idea that the mortgage follows the note and statutory language suggesting the debt follows the mortgage”, the Court concluded that “possession of the mortgage alone without demonstrating enforcement rights in the note is insufficient to establish standing in a mortgage foreclosure proceeding.” 2017 Kan. LEXIS 135, *37-47.

Editor’s Note: The author’s firm represented the appellant in the case summarized in this article.

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