Recent Developments in Hawai'i Foreclosure Law

• Publication year: 2018
• Citation: Vol. 22 No. 05

Recent Developments in Hawai'i Foreclosure Law

By J. Blaine Rogers and Janna Ahu

INTRODUCTION

Two 2017 opinions by the Hawai'i Supreme Court altered the landscape of judicial foreclosure law in Hawai'i. In Bank of America, N.A. v. Reyes-Toledo, 139 Hawai'i 361, 390 P.3d 1248 (2017), the court held that a foreclosing mortgagee must establish that it had standing to foreclose at the time the action was commenced. While Reyes-Toledo did not expressly discuss the case, it rejected by implication the decision of the Intermediate Court of Appeals ("ICA") in Indy-Mac Bank v. Miguel, 117 Hawai'i 506, 184 P.3d 821 (App. 2008), which held that a post-complaint, prejudgment perfection of an interest is effective to cure an unnoticed defect in standing existing at the initiation of the foreclosure. After Reyes-Toledo, the four longstanding Hawai'i foreclosure requisites—(1) existence of the agreement, (2) terms of the agreement, (3) default by the mortgagor, and (4) proper notice¹—are now five.

A few months later, in U.S. Bank N.A. v. Mattos, 140 Hawai'i 26, 398 P.3d 615 (2017), the court clarified the standard by which a representative of a loan servicer acting on behalf of a foreclosing mortgagee may be considered a "qualified witness" under Rule 803(b)(6) of the Hawai'i Rules of Evidence ("HRE") for the purpose of authenticating documents supporting the foreclosure. While the declaration supporting the motion for summary judgment established the declarant as a "qualified witness" on behalf of the loan servicer, it did not do so with respect to the foreclosing mortgagee.

Together, Reyes-Toledo and Mattos provide needed clarity and guidance to trial courts and foreclosure practitioners, particularly with respect to the inextricable relationship between foreclosure and the Uniform Commercial Code ("UCC"). In other respects, however, the cases may open the door for confusion and delay in what most mortgagees already consider to be a decidedly pro-mortgagor environment.

THE CASES

Reyes-Toledo

The Reyes-Toledo foreclosure was prosecuted by Bank of America following the homeowner/mortgagor Grisel Reyes-Toledo's default on her mortgage loan. Reyes-Toledo, 139 Hawai'i at 364, 390 P.3d at 1251. In 2007, Ms. Reyes-Toledo had executed a promissory note in favor of Countrywide Bank, FSB ("Countrywide") that was secured by a mortgage encumbering mortgagor's real property. Id. The mortgage identified Mortgage Electronic Systems, Inc. ("MERS") as mortgagee and nominee for Countrywide. Id. A subsequent assignment gave notice of the assignment of the mortgage from MERS to Bank of America, as successor by merger to BAC Home Loans Servicing, LP ("BAC Servicing"). Id.

In early 2011, Ms. Reyes-Toledo received a notice of intent to accelerate the loan from BAC Servicing, a Bank of America company. Id. The notice stated that BAC Servicing serviced the loan on behalf of the holder of the promissory note and that the loan was in serious default because required payments had not been made. Id.

In March 2012, Bank of America filed a complaint in the First Circuit Court seeking to foreclose the mortgage. Id. The complaint alleged that Bank of America was in possession of the mortgage and promissory note and was entitled to foreclose the mortgage. Id.

In September 2012, Ms. Reyes-Toledo filed an answer and counterclaim, asserting numerous defenses to the foreclosure including that Bank of America was not the holder of the promissory note and mortgage and therefore not entitled to foreclose. Id. Ms. Reyes-Toledo also attacked the validity of the assignment, the negotiation of the promissory note, and the securitization of the loan. Id. She asserted counterclaims for wrongful foreclosure, declaratory relief, quiet title, and unfair and deceptive trade practices.² Id., at 365, 390 P.3d at 1252. Bank of America's motion to dismiss the counterclaims was granted and Ms. Reyes-Toledo's motion for reconsideration denied. Id.

Bank of America moved for summary judgment and an interlocutory decree of foreclosure, arguing that it was entitled to judgment as a matter of law because there was no genuine issue of material fact as to (1) the existence of the note and mortgage, (2) the terms of the note and mortgage, (3) Ms. Reyes-Toledo's default, and (4) proper notice. Id. Attached to the motion was a declaration by a Bank of America officer stating, among other things, that Bank of America "has possession" of the original, indorsed promissory note. Id. A copy of the note was also attached to the motion. It contained two indorsements - one from the originating lender to Countrywide Home Loans, Inc., and another from that entity that was in blank and without recourse. Id. The motion also attached copies of the mortgage, the assignment, the foreclosure notice, and payment records for Ms. Reyes-Toledo's account. Id.

In opposition to the motion, Ms. Reyes-Toledo asserted, among other things, that there were genuine issues of fact as to the validity of the assignment and whether Bank of America was the lawful "holder" of the promissory note. Id. Ms. Reyes-Toledo further argued that Bank of America's evidence in support of its motion was insufficient because there was no evidence of the date of the transfer of the promissory note. Id.

The First Circuit Court granted the motion in December 2014, finding that Bank of America was the "current holder" of the promissory note and mortgage and concluding that it was entitled to foreclosure of the mortgage and a sale of Ms. Reyes-Toledo's property. Id.

Ms. Reyes-Toledo timely appealed and the ICA affirmed by summary disposition order. Id., at 366, 390 P.3d at 1253. The Supreme Court accepted Ms. Reyes-Toledo's certiorari application. Id.

After identifying the four above-referenced foreclosure requisites from the Bank of Honolulu case, the court found that a foreclosing mortgagee must also establish its entitlement to enforce the promissory note pursuant to provisions of the UCC. Id., at 367, 390 P.3d at 1254 (citing HRS § 490:3-301; 308). The court stated that a foreclosing plaintiff's burden to prove entitlement to enforce the note "overlaps with the requirements of standing in foreclosure actions as standing is concerned with whether the parties have the right to bring suit." Id. (quotations and citation omitted). Standing requires, among other things, an injury in fact, and a foreclosing plaintiff's injury in fact "is the [mortgagor's] failure to satisfy [her] obligation to pay the debt obligation to the note holder." Id., at 368, 390 P.3d at 1255 (citing Mottl v. Miyahira, 95 Hawaii 381, 388, 23 P.3d 716, 723 (2001)). To establish standing, the Reyes-Toledo Court found, the foreclosing plaintiff "must necessarily prove its entitlement to enforce the note as it is the default on the note that gives rise to the action. Id. (citing HRS § 490:9-601).

The crucial inquiry with regard to standing, per the court, is whether the plaintiff has alleged a sufficient personal stake in the outcome of the controversy as to warrant invocation of the court's jurisdiction and to justify exercise of the court's remedial powers. Id. "As standing relates to the invocation of the court's jurisdiction, it is not surprising that standing must be present at the commencement of the case." Id. (citing Sierra Club v. Haw. Tourism Auth., 100 Hawaii 242, 257, 59 P.3d 877, 892 (2002)). Thus, Reyes-Toledo held, a foreclosing plaintiff "does not have standing to foreclose on mortgaged property unless the plaintiff was entitled to enforce the note that has been defaulted on." Id. The court supported this conclusion with other cases reaching the same conclusion. Id., at 368-69, 390 P.3d at 125556 (discussing cases from Connecticut, Florida, New Mexico, New York, Ohio, Oklahoma, and Vermont). Requiring that entitlement to enforce the note exists at the time the action is commenced "provides strong and necessary incentives to help ensure that a note holder will not proceed with a foreclosure action before confirming it has a right to do so." Id., at 369, 390 P.3d at 1256. (quotations and citation omitted). The court went on to discuss issues identified by scholars related to securitization of mortgage loans and recorded interests in property, concluding that "[b]asic requirements of [the UCC] and our law on standing should not be modified, especially in light of the widespread problems created by the securitization of mortgages, because a requirement that seems to be merely technical in nature may serve an essential pur-pose[,]" such as protection of mortgagors from multiple enforcements of the same instrument. Id. The UCC determines who is a person entitled to enforce ("PETE") and a PETE can be (1) the "holder" of the instrument; (2) a nonholder in possession of the instrument who has the rights of a holder, or (3) a person not in possession of the instrument who is entitled to enforce the instrument. Id. Finally, the court noted that a person may be a PETE even though the person is not the owner of the instrument or is in wrongful possession of the instrument. Id.

The court then turned to the evidence proffered by Bank of America in support of its foreclosure, finding that, "because the Note was last negotiated by a blank indorsement, it may be negotiated by transfer of possession." Id., at 370, 390 P.3d at 1257. Applying its newly-elucidated "standing...