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“Failure to Add Indispensible” Parties: Why Not Raising This Defense in Your Client’s Mortgage Foreclosure Case May be a Ticket to a Legal Malpractice Claim

July 22, 2008

This article is intended for attorneys who choose to defend a mortgage foreclosure action. As has been repeatedly published in this blog, in the great majority of instances we have seen, the Plaintiff in the foreclosure action is something along the lines of “ABC Bank as Indenture Trustee for the Registered Holders of XYZ Asset-Backed Bonds Series 2005-V”, or something of that ilk. Per a previous article published on this blog by this author, when the name of the Plaintiff is something akin to this example, you need to dig, as that type of moniker tells you, right up front, that there were several assignments of the note and mortgage to various entities before these instruments wound up in some tranche in some special investment vehicle which may be in the Cayman Islands or with a batch of thousands of other notes and mortgages in some vault in Rekjavik, Iceland.

In other instances and in addition to the “red flag” name of the Plaintiff, we have seen  other cases where the Plaintiff admits that they do not own or hold the note or mortgage, do not know where they are, and in one case the Plaintiff actually put a settlement offer into the allegations of the Count for “Enforcement of Lost Documents” that the Plaintiff would “agree to a Final Judgment of Foreclosure which would require the Plaintiff to indemnify and hold [the named borrower Defendant] harmless” from someone who may come along later and claim ownership of the original note and mortgage. Talk about chutzpah!

Which begats the defense of failure to add indispensable parties. As soon as you see a case where the Plaintiff is some trustee or some assignee of some group of unnamed investors or holders of some series of mortgage-backed securities or bonds, etc., the Motion to Dismiss for Failure to Add Indispensible Parties should be filed forthwith. The allegation is that the Plaintiff knows or should know, by its very title, that the mortgage and note were assigned or sold or transferred at least one or more times between the time of loan origination and the time of the filing of the action, and that there are thus real parties in interest who may claim an interest in the note or mortgage who have not been named. Remember, the classic definition of an indispensable party is “one without whose joinder the complete rights and obligations of the parties cannot be determined”. The case cited above where the Plaintiff admitted that there may be some other party or parties out there who may, at some point, claim an interest in the note or mortgage is proof positive of the Plaintiff’s actual knowledge of this material issue.

Not filing this Motion can be a ticket to a claim for legal malpractice. Even if you prevail in defending the foreclosure on one or more of the substantive defenses, if you do not ascertain all other potentially interested parties in your intensive discovery, there is the distinct possibility that someone is going to come out of the woodwork down the road with the original note and mortgage and go “AHA, this property belongs to me!”, whereupon you, as the underlying foreclosure defense attorney, then get the letter from your client (or his malpractice attorney) requesting copies of your E&O or professional liability policy, dec sheet, etc.

Bottom line: file the Motion, do the discovery, and find out who all of the players were who may have an interest, and force the Plaintiff to add them as Defendants. In any settlement, make it an absolute “deal breaker” that the settling party sign an iron-clad  indemnification and hold harmless agreement, even if it means putting up a bond if the settling party’s future existence is dubious (a la Bear Stearns) or may be teetering on the verge of bankruptcy or closing its doors.

Stay tuned to this blog for examples of the type of discovery you will need to advance this most important issue in your client’s defense.

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