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Kansas: Court of Appeals Reaffirms Need to Prove Standing at “First Legal Filing”

Posted By USFN, Tuesday, February 13, 2018
Updated: Monday, February 12, 2018

February 13, 2018

by Blair Gisi
SouthLaw, P.C – USFN Member (Iowa, Kansas, Missouri)

Kallevig Decision (April 2017)
In April 2017 the Kansas Supreme Court made a significant and dramatic ruling that the plaintiff in a foreclosure action must prove its standing at the filing of any petition to foreclose mortgage (also referred to as a “first legal filing”). See FV-I, Inc. v. Kallevig, 306 Kan. 204 (2017).

In summation, Kallevig found: (1) under the Uniform Commercial Code, as “the holder of the instrument,” a plaintiff 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; and (2) “either in the pleadings, upon motion for summary judgment, or at trial [the plaintiff must demonstrate] that it was in possession of the 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.

Dixon Decision (September 2017)
More recently, in Deutsche Bank National Trust Co. (as Indenture Trustee) v. Dixon, 2017 Kan. App. Unpub. LEXIS 834 (Kan. Ct. App. 2017), the Kansas Court of Appeals bolstered the notion that it is in a foreclosing plaintiff’s best interest to prove standing prior to the initiation of a foreclosure action via a properly endorsed note.

Dixon involved an assertion from the borrower that the plaintiff lacked standing to bring a 2012 foreclosure action. The borrower’s argument was “that the allonge to the note was not attached to the note when the endorsement was executed, rendering the endorsement ineffective in creating a bearer instrument in the hands of [Deutsche Bank National Trust Company].”

The complex procedural background involves a first foreclosure action that was filed in 2007 by a predecessor in interest to the plaintiff in the second foreclosure action. (Standing in this subsequent foreclosure action is at the center of the 2017 Dixon decision discussed in this article.) After a transfer of the loan, and issues regarding inconsistencies as to the actual owner of the note, the first foreclosure action was ultimately dismissed by the district court. In any event, when the second foreclosure action was filed in 2012, the petition to foreclose attached a copy of the promissory note with an allonge endorsed in blank.

In this second foreclosure action, the borrower relied on several cases in support of his argument that there was no evidence that the allonge was actually affixed to the note, specifically:

In re Shapoval, 441 B.R. 392 (Bankr. D. Mass. 2010), involving a Massachusetts bankruptcy court requiring additional evidence as to the bank’s standing to file a claim in the debtor’s bankruptcy case where the bank submitted a copy of the note without any endorsement and, later, an unattached allonge that contained an endorsement in blank.

Guzman v. Deutsche Bank National Trust Co., 179 So. 3d 543 (Fla. Dist. App. 2015), in which the Florida District Court of Appeals held that the bank lacked standing because it did not provide any evidence that the endorsements predated the filing of the initial petition, and standing could not be established by presenting an undated allonge after the proceeding commenced.

U.S. Bank Natl. v. George, 50 N.E.3d 1049 (Ohio App. 2015), where the copy of the note attached to an affidavit (intended to cure a break in the chain of endorsements giving U.S. Bank standing) did not actually contain any endorsement to U.S. Bank. Thus, because there was no unbroken chain of endorsements from the original lender to U.S. Bank, U.S. Bank was not entitled to a summary judgment of foreclosure.

In Dixon, the appellate court distinguished the matter before it from these three cases due to the fact that the plaintiff attached a copy of the note with an attached allonge, endorsed in blank, at the time it filed the subject foreclosure action, as well as with its summary judgment motion. In further support of its decision, the court went on to explain that the rationale for requiring an endorsement or allonge attached to the note is to avoid fraud and to promote the general “policy of providing a traceable chain of title, thereby promoting the free and unimpeded negotiability of instruments.”

Assertions that the plaintiff in Dixon had “unclean hands” and that dismissal of a number of the borrower’s counterclaims was improper were also rejected by the appellate court, but are outside the scope of this article. The district court’s decision granting summary judgment in favor of the plaintiff-bank was affirmed.

The takeaway from the Dixon decision is that, in Kansas, the best practice for establishing standing to bring a foreclosure action is to be able to demonstrate that the plaintiff was in possession of the properly endorsed note (whether special or in blank) and that the plaintiff is the of-record assignee of the mortgage — as of the date of filing the foreclosure petition.

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