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January, 2013 New York Foreclosure Defense Update: the "Lost Note" Affirmative Defense Remains Alive and Well in NY Foreclosure Cases

January 15, 2013
Marc A. Rapaport, Esq.

As America's mortgage foreclosure crisis enters its fourth year, New York homeowners continue to successfully answer foreclosure complaints by citing the banks' sloppy - and sometimes fraudulent - record keeping practices. New York property owners have succeed in indefinitely delaying, and sometimes defeating, foreclosure cases by arguing (as an affirmative defense) that the foreclosing plaintiffs lack standing to foreclose. The bottom line: if you are trying to retain possession of your home in the face of a foreclosure lawsuit, you need to do (at least) 2 things: (a) file an answer to the foreclosure complaint; and (b) assert "lack of standing" as an affirmative defense. If you want the details why this works, read on.

The Feeding Frenzy of Assignments Led to Today's "Show me the Note" Affirmative Defense to Foreclosure:

Many foreclosure proceedings are brought by assignees rather than the original lenders. At the height of the financial feeding frenzy that nearly brought our nation's economy to its knees, millions of mortgage notes were "flipped" with scant attention to basic recordkeeping requirements. Assignments of mortgages were happening so rapidly, and with so little attention to detail, that original paperwork was irretrievably lost. The original holders of the loans (i.e., the lenders) had little reason for concern, as they had no intention of holding the loans. They intended to transfer the loans within a matter of mere days. As the loans were repeatedly transferred, frequently in bulk, the original documents evidencing millions of individual loans went missing.

At the advent of the residential foreclosure crisis, the banks disingenuously denied that there was a problem. However, it was soon revealed that there were astonishingly serious deficiencies in how the banks had conducted business. Beginning in 2010, courts began taking the banks to task. It was revealed that banks had arranged for the "robo-signing" of loan documents. In some instances, mortgage foreclosure cases were filed by financial institutions in which no actual person had reviewed any of the underlying loan documents, or even the court papers. In several states (including in New York), the attorneys for the banks were subjected to discipline, and banks were forced to pay financial penalties.

The "Show Me the Note" Affirmative Defense is Alive and Well:

Years later, homeowners seeking to defend against foreclosure lawsuits continue to benefit from the banks' sloppiness. The inattentiveness of banks opened the door to compelling affirmative defenses for New York homeowners facing foreclosure. The "lost note" affirmative defense (sometimes referred to as "show me the note") stems from the following legal rule: a lender must be the holder or assignee of both the mortgage and the note. This rule stems from the basic legal requirement, applicable to all New York foreclosure cases, that in order to commence a foreclosure action, the foreclosing plaintiff must have a legal or equitable interest in the subject mortgage (see Wells Fargo Bank, N.A. v Marchione, 69 AD3d 204 [2009]; Katz v East-Ville Realty Co., 249 AD2d 243 [1998]; Kluge v Fugazy, 145 AD2d 537, 538 [1988]).

In New York, the "show me the note" defense remains alive and well, even if it is not always an automatic key to victory. Despite a lost mortgage note, a lender may still foreclose if it proves, by competent evidence: (a) that it owns the note; (b) the facts preventing its production of the note itself; and (c) the terms of the note.

However, the bank must prove that it owns the note in order to establish its standing to foreclose. There are two ways in New York for a lender to prove from the outset that the underlying note was properly transferred:

  1. producing a valid written assignment of the note (Deutsche Bank Nat. Trust Co. v. Pietranico, 33 Misc.3d 528, 928 N.Y.S.2d 818 [Sup.Ct. Suffolk Cty.2011]); or
  2. demonstrating that the note was physically delivered to it.

If a foreclosing plaintiff can't prove either a valid written assignment or physical delivery of the note, its action for foreclosure should be dismissed for lack of standing.

In a decision issued on June 13, 2012, New York's Second Department (which handles the largest volume of New York foreclosure cases, and encompasses Brooklyn, Queens, Staten Island, Nassau County, Westchester, and Putnam) ruled, in U.S. Bank v. Cange, 96 A.D.3d 825, that producing ".a written assignment of the underlying sufficient to transfer the obligation."

In the Cange case, the homeowner forced the bank to prove its case at an evidentiary hearing, which was held on December 14, 2011. At that hearing, a "Default Resolution Specialist employed by the plaintiff testified, inter alia, that the plaintiff came into possession of the subject original note from the original mortgagee in December 2002. The original note was produced and admitted into evidence without objection. In addition, a computer printout which indicated the loan number, the appellant's name, and the acquisition date of December 11, 2002, was admitted into evidence without objection."

The Cange case, though ultimately decided in favor of the foreclosing financial institution, actually demonstrates the effectiveness of the defendant-homeowner's litigation strategy. By asserting, as an affirmative defense, that the bank lacked standing, the homeowner succeeded in delaying the foreclosure proceeding for months, if not years. Moreover, had the bank failed to produce the note, the homeowner may have succeeded in getting the foreclosure dismissed.

Many banks are unable to establish standing to foreclose. For example, some plaintiffs try to submit retroactively-dated assignments to establish their ownership of the subject notes (in the shuffle of mass assignments, even the most basic of documents, such as written assignments, were simply "forgotten"). If the plaintiff has asserted lack of standing as an affirmative defense in their answer, the foreclosure action should be dismissed for lack of standing, as occurred in Wells Fargo v. Marchione, 69 A.D.3d 204. Further, the court in Countrywide v. Gress, 68 A.D.3d 709, ruled that an assignment executed subsequent to filing the complaint, but prior to serving the defendants, will also fail to confer standing.

The bottom line: homeowners in New York who face foreclosure are amply rewarded by answering the foreclosure complaint, and asserting lack of standing as a defense.

By: Marc A. Rapaport, founder of New York City's Rapaport Law Firm
All Rights Reserved

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