The following is an update analyzing a recent case of interest:
In Deutsche Bank National Trust Company, Trustee v. Pototschnig, 200 Conn. App. 554, 2020 WL 5884059 (2020), the Appellate Court of Connecticut ruled that possession of an original mortgage note, endorsed in blank, creates a rebuttable presumption that the lender has standing to file a foreclosure action. The Court stated that the borrower’s burden to overcome that presumption is not met simply by pointing to defects in a chain of assignment documentation. Instead, the borrower must “prove that another party is the owner of the note and debt.” A copy of the opinion may be found here.
The defendant Hubert Pototschnig appealed from a judgment of foreclosure in favor of plaintiff Deutsche Bank National Trust Company, as Trustee for HSI Asset Securitization Corporation (etc.). (“HSI”). Pototschnig was the borrower under a $750,000 loan originally made by New Century Mortgage Corporation in June, 2005. No payment had been made on the loan since January, 2012. The issue was whether HSI had standing to bring the foreclosure action, which was commenced in 2012.
New Century Mortgage filed a chapter 11 bankruptcy petition in 2007. By order of the Bankruptcy Court, its assets were transferred to a liquidating trust in 2008. The opinion is silent as to when and how HSI acquired the note from the liquidating trust. The original note in the possession of HSI was endorsed in blank by the use of a stamp bearing the name of a former New Century employee.
The central fact issue resolved by the trial court had to do with when the stamped endorsement was applied to the note. Magda Villanueva, the former employee whose name appeared on the stamp, testified that her employment with New Century terminated in 2005, at which time she destroyed all of the stamps bearing her name. Inconsistent with this, Albert Smith, a “home lending research officer” employed by loan servicer JP Morgan Chase, testified in a deposition that the endorsement was applied on June 6, 2012. However, at the hearing Smith corrected his earlier testimony and explained that he had misinterpreted a computer generated document, which actually showed only that “Chase had, as part of an internal document review process, confirmed on June 6, 2012 that the note in its possession had been properly endorsed.” Mr. Smith went on to testify at the hearing that Chase computer records contained an image of the endorsed note which was produced in discovery on June 24, 2009 “in connection with a prior action, which had been commenced to foreclose the mortgage which the note secures.”
Mr. Pototschnig also raised the argument that HSI was bound by a previous ruling in a different case brought against him by Deutsche Bank, in its capacity as trustee of the New Century Home Equity Loan Trust 2005-3 (a different trust) to foreclose a mortgage securing a different note. In that prior case, the court ruled that Deutsche Bank lacked standing to foreclose.
The trial court rejected Mr. Pototschnig’s contentions and issued a judgment for foreclosure. The Appellate Court affirmed.
The Court did not make any specific finding as to when exactly the note was endorsed or assigned. It ruled that HSI was “not required to prove the factual details of the delivery of the note, such as the precise date and manner in which it acquired the note. ‘Generally, in order to have standing to bring a foreclosure action the plaintiff must, at the time the action is commenced, be entitled to enforce the promissory note that is secured by the property.’ [italics in original] (quoting Deutsche Bank National Trust Co. v. Bliss, 159 Conn. App. at 488, 124 A.3d 890).
The court ruled that “[b]y producing the note endorsed in blank, [HSI] established the presumption that it is the rightful owner of the debt.” Mr. Pototschnig was entitled to rebut that presumption. However, he could not carry that burden “‘by merely identifying some documentary lacuna in the chain of title that might give rise to the possibility that a party other than the foreclosing party owns the debt…. To rebut the presumption that the holder of a note endorsed specifically or to bearer is the rightful owner of the debt, the defending party must prove that another party is the owner of the note and debt. … Without such proof, the foreclosing party may rest its standing to foreclose the mortgage on its status as the holder of the note,’” quoting JPMorgan Chase Bank National Assn. v. Simoulidis, 161 Conn. App. 133, 144, 126 A.3d 1098 (2015), cert. denied, 320 Conn. 913, 130 A.3d 266 (2016). Court found that Mr. Pototschnig did not produce evidence proving that any party other than HSI owned the debt.
The Court also overruled the argument that HSI was bound by collateral estoppel by the ruling that Deutsche Bank lacked standing in another case. First, because the trust entities represented by Deutsche Bank were different entities, there was no privity between the parties to the two cases. Next, the facts of the cases were different, as they involved different loans. Finally, the issue of standing was different in the two cases. Deutsche Bank was found to lack standing in the prior case because it had purported to acquire the note directly from New Century, which was powerless to make the assignment after it had filed its chapter 11 petition.
Unlike many of the cases in which a borrower challenges the right of a mortgage assignee to foreclose, this opinion does not analyze or cite the applicable version of the Uniform Commercial Code. Article 3 of the UCC contains detailed, if characteristically abstruse, provisions which govern who is entitled to enforce a promissory note. The opinion in Pototschnig uses, but does not define or explain, terms like the “holder” of a note “endorsed in blank.”
Under UCC section 3-205(b), an endorsement which does not specify a payee is a “blank endorsement.” UCC section 3-109(c) provides that an instrument may become payable to bearer if it is endorsed in blank pursuant to Section 3-205(b).”UCC section 1-201(5) defines “bearer” to mean “a person in possession of a negotiable instrument . . . that is payable to bearer or endorsed in blank.” UCC section 1-201(21) includes in its definition of “holder” “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person . . . .” UCC section 3-301 provides only three ways in which a person may be entitled to enforce a note. The first and simplest is that the “holder” of a note is entitled to enforce it.
Because of its finding that the note was endorsed in blank before being transferred to HSI, the Court was not required to address the question of whether a necessary endorsement can be added later by the original payee after the note is transferred. Nor did the Court need to consider whether the trustee of the bankruptcy liquidating trust would have stepped into the shoes of New Century Mortgage and could have provided an endorsement when the note was sold by the liquidating trust.
There have been many cases in which a borrower has challenged the right of an assignee to enforce a mortgage. But it is a rare case indeed in which alleged defects in assignment of a note are raised by a borrower who was mistakenly making current payments to the wrong lender, or who was depositing current payments in court. Instead Mr. Pototschnig’s legal battle was one to avoid the consequences of making no payments on a mortgage debt for years. While the opinion fails to specify the actual legal nuts and bolts underlying its ruling, it is hard to quarrel with the result.
The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association’s (CLA) Business Law Section. These materials were written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., located in San Diego, California. Mr. Kirby is a member of the ad hoc group and a member of the Commercial Transactions Committee of the Business Law Section. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. The opinions expressed herein are solely those of the author. The opinions expressed herein are solely those of the author. The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee of Business Law Section of the California Lawyers Association to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.
This ebulletin was prepared by Walter K. Oetzell, Walter K. Oetzell, APC, firstname.lastname@example.org.