Proving standing to foreclose a Florida mortgage.

• Author: Martin, Richard H.
• Position: Real Property, Probate and Trust Law

As Florida's onslaught of mortgage foreclosures continues, one recurring obstacle lenders appear to have is proving they have standing to foreclose. To prove standing, the plaintiff must usually show, through admissible evidence, that it holds the note and mortgage or is acting as the note holder's authorized representative. (1) Several recent appellate decisions have dismissed foreclosures, reversed summary judgments, and even imposed sanctions against lenders and their counsel for failing to prove standing. (2)

Why is Proving Standing so Hard?

In a word: securitization. Between 2005 and 2008, many residential and commercial mortgages were originated by one lender, then assigned to a trust and pooled with hundreds or thousands of other mortgages. Investments in the trusts or securities were sold to investors, certificate holders, based on the income stream realized upon repayment of mortgages in the pool. The trusts, designed as real estate mortgage investment conduits (REMICs) under the Internal Revenue Code, are governed by lengthy pooling and servicing agreements. Those agreements spell out the rights of the investors and the duties of trustee and the loan servicers. Large national banks often act as trustees. The loan servicers are other banks, bank-affiliated servicing companies, or independent servicing companies who are responsible for processing payments and supervising any resulting foreclosure or workout. When a loan held by the trust defaults, the servicing agreements typically give the servicer the right to foreclose on behalf of the trust. For commercial mortgages, the pooling and servicing agreements have both a master servicer, responsible for day-to-day management of the loan, and a special servicer, a separate company in charge of working out or foreclosing defaulted loans. Many servicing agreements provide for another bank or company to act as the "custodian" for the trust, to maintain the actual paper files of original loan documents for loans held by the trust. Trustee, master servicer, special servicer, custodian, certificate holder: Got it?

Despite these complexities, the courts' expectations persist: The foreclosing plaintiff must present admissible evidence that it holds the note or has the rights of a holder under Art. 3 of the Uniform Commercial Code (UCC), F.S. Ch. 673. Simple enough? Well, how do you prove it to the trial court? In many cases cited in this article, plaintiffs have failed to do so.

First, a Word about Commercial Paper

A mortgage is an instrument that secures with land the payment of a debt, which is typically evidenced by a promissory note. To preserve a lender's ability to sell a promissory note on the secondary market, nearly every note secured by a mortgage is intended to be, and usually is, a negotiable instrument under Art. 3 of the UCC. Under Art. 3 of the UCC, a negotiable instrument may be enforced by a) the holder; b) a nonholder in possession of the instrument who has the rights of a holder; and c) a person not in possession of the instrument who is entitled to enforce it under the provisions for enforcing lost, destroyed, or stolen instruments. (3) Commercial paper and the signatures thereon are self-authenticating, and their authenticity is deemed admitted unless the authenticity of, and authority to make, the instrument is specifically denied in the pleadings. (4)

When a note is conveyed on the secondary market, it is often indorsed, usually by a stamp or by affixing a separate document called an allonge to the note, which bears the signature of the assignor and the identity of the assignee. When the assignee is specifically identified, the indorsement is called a special indorsement, and the note becomes payable to the indorsee. (5) A note may also be assigned by a separate written assignment. Notes may also be indorsed in blank, without identifying the transferee, making them payable to bearer and negotiable by transfer of possession. (6) Assignments or indorsements of the note must be effectuated before the foreclosure is filed because the plaintiff must have standing at that time: Standing cannot be acquired after suit is filed. (7)

When a note is conveyed, an assignment of mortgage is often recorded, which gives notice of the assignment and the assignee's right to foreclose. (8) In the absence of a recorded assignment of mortgage, when a note is conveyed, the mortgage follows the note into the hands of the assignee-holder who can still enforce them. (9) However, the better practice is to have an executed and recorded assignment of mortgage attached to the complaint.

* Lost Notes--Florida law requires the note holder to tender the original promissory note to the court to obtain a judgment on the note or to foreclose a mortgage given as security for the debt evidenced by the note. (10) The idea is that if the note holder obtains a foreclosure or money judgment on the note, the negotiable instrument should be removed from the stream of commerce to avoid the possibility of a borrower facing a later claim by someone else claiming they are a holder in due course. Some Florida courts have indicated that the original mortgage must also be filed, (11) citing Downing v. First Nat'l Bank of Lake City, 81 So. 2d 486, 488 (Fla. 1955). But Downing merely held that the original note be produced. The better view, supported by the evidence code, other decisions...