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Borrower’s Standing to Challenge an Assignment of Mortgage: A Look at the Eighth Circuit & Minnesota

Posted By USFN, Tuesday, June 14, 2016
Updated: Friday, June 10, 2016

June 14, 2016

by Kevin Dobie and Paul Weingarden
Usset, Weingarden & Liebo PLLP – USFN Member (Minnesota)

Ever since the decision in Jackson v. MERS, 770 N.W.2d 487 (Minn. 2009), which reintroduced the notion of strict compliance in Minnesota’s nonjudicial mortgage foreclosure proceedings, borrowers have used this heightened standard to attack foreclosures for any perceived waver from the statute, including the section requiring that all assignments be recorded prior to commencing the foreclosure. Where the mortgagee defends against these strict compliance claims by asserting that the borrower lacks standing to challenge the foreclosure, mortgagees have obtained somewhat differing results. On occasion, the difference has turned on whether the case is before a state versus a federal court.

In Brown v. Green Tree Servicing, LLC, __ F.3d __ (8th Cir. Apr. 20, 2016), the Eighth Circuit recently ruled that plaintiff-homeowners did not have Article III standing to challenge an allegedly invalid mortgage assignment between creditors as they were not injured by the assignment, and any harm to them was not fairly traceable to the allegedly invalid assignment. (Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota comprise the Eighth Circuit.)

Confirming in Brown that the borrowers must have standing to challenge the assignment before they can contest a foreclosure for a defective assignment, the Eighth Circuit held:

“We first address whether the Browns have Article III standing to challenge an allegedly invalid mortgage assignment between creditors. See U.S. Const. art. III, § 2, cl. 1; Brown v. Medtronic, Inc., 628 F.3d 451, 455 (8th Cir. 2010). To establish standing to raise their assignment claim, the Browns must show they have “suffered a concrete and particularized injury that is fairly traceable to the challenged conduct, and is likely to be redressed by a favorable judicial decision.” Hollingsworth v. Perry, 570 U.S. __, __, 133 S. Ct. 2652, 2661 (2013). The Browns have not done that.

The Brownsʼ invalid assignment claim is nearly identical to the claim two homeowners asserted against a foreclosing lender in Quale v. Aurora Loan Services, LLC, 561 F. App’x 582, 582-83 (8th Cir. 2014) (unpublished per curiam). In Quale, we determined the homeowners did not have standing to raise such a claim because they “were not injured by the assignment” and any harm to the homeowners was not fairly traceable to the allegedly invalid assignment. Id. at 583 (noting the assignor, not the homeowner, is ‘[t]he party injured by an improper or fraudulent assignment’). We reach the same conclusion here.” [See also Novak v. JPMorgan Chase Bank, N.A., No. 12-00589, 2012 U.S. Dist. LEXIS 119382 (D. Minn. 2012), and Gerlich v. Countrywide Home Loans, Inc., No. 10-4520, 2011 U.S. Dist. LEXIS 100844 (D. Minn. 2011)].

How would state courts hold on this issue? There is no clear answer, but a few cases are instructive. In Oppong-Agyei v. Chase Home Finance, A12-2325, 2013 Minn. App. Unpub. LEXIS (unpublished), the Minnesota Court of Appeals said that assignments in blank and stray assignments were ineffective and of no concern to the validity of the foreclosure. In Wollmering v. JPMorgan Chase Bank, A12-1926, 2013 Minn. App. Unpub. LEXIS (unpublished), the Minnesota Court of Appeals rejected the allegation of an unrecorded mortgage interest — holding that any dispute between the mortgagee and an assignee of the mortgage interest or promissory note would not affect appellants’ status in foreclosure-by-advertisement proceedings. Id. at *18 (citing Jackson, 770 N.W.2d at 501). (“In essence, any disputes that arise between the mortgagee holding legal title and the assignee of the promissory note holding equitable title do not affect the status of the mortgagor for purposes of foreclosure by advertisement.”)

Creditors are hopeful that such language would apply to an attack on the validity of assignments in state courts, but until that precise factual question is considered and a precedential decision is published, each state court’s determination is unknown.

Challenge the Borrower’s Standing
Thus, it is extremely important that practitioners assert standing as a defense in cases where borrowers claim that a mortgagee wavered from strict compliance with the foreclosure statutes, and the failure to assert such a lack of standing may lose the case. For example, in Badrawi v.Wells Fargo Home Mortgage, 718 F.3d 756 (8th Cir. 2013), the Eighth Circuit said that the mortgagor could not challenge the recording of a notice of pendency prior to the first date of publication as required by Minn. Stat. section 580.032. The court cited a 19th Century Minnesota Supreme Court case where a lessee tried to challenge the foreclosure based on the mortgagee’s failure to serve the lessee, but the court said that the service on the mortgagor was sufficient and the lessee was not part of the protected class; i.e., did not have standing.

The mortgagee in Badrawi contended, and the court agreed, that Minn. Stat. § 580.032 protects only those with “a redeemable interest in real property” who “request notice of a mortgage foreclosure by advertisement,” Minn. Stat. § 580.032, subd. 1, and that Badrawi had not requested such notice because “as the mortgagor and occupant of the relevant property” she had received direct notice. Since Minn. Stat. § 580.032, subd. 3 could not have been “prescribed for [Badrawi’s] benefit,” her claim to relief under that statute failed and strict compliance was ignored. Badrawi, 718 F.3d at 758 (citing Holmes v. Crummett, 13 N.W. 924 (Minn. 1882)).

The Eighth Circuit also recognized that its conclusion conflicted with Ruiz v. 1st Fidelity Loan Servicing, LLC, A11-1081, 2012 Minn. App. Unpub. LEXIS 203, (unpublished) affirmed on other grounds 829 N.W.2d 53 (Minn. 2013), in which a panel of the Minnesota Court of Appeals granted a homeowner relief on a similar claim based on the same statute. Badrawi, 718 F.3d at 760. The Eighth Circuit stated that the appellate decision in Ruiz was unpublished and was neither controlling nor persuasive. Furthermore, the Eighth Circuit explained that the mortgagee did not present the protected class-standing defense in Ruiz and, in a split panel, it elected to not follow the Ruiz reasoning.

Accordingly, it seems that challenges to a foreclosure in Minnesota can turn on whether the case is heard in federal or state court and whether the mortgagee raises the standing defense. Practitioners should be wary of these distinctions.

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