June 6, 2014

We have been dealing lately with a flood of “substitution” related claims: where the foreclosing party is suddenly requesting that another party be “substituted” as the “new” foreclosing party which new party has allegedly inherited the interest in a mortgage loan through nothing more then an unverified, undocumented assertion of the attorney for the party seeking to foreclose. Such “substitutions” beget numerous issues which affect defenses, discovery, readiness for trial, and the progress of a foreclosure. Three recent cases from three different states demonstrate the numerous problems with these claimed “substitutions.”

As those of you who follow this website are aware, Colorado foreclosures begin with a “Rule 120” proceeding where the party seeking to foreclose files a Motion for an Order Authorizing Sale (“OAS”). The standard for this probable cause proceeding is low, but there is case law from the Colorado Supreme Court which permits the assertion of “real party in interest” defenses at a 120 proceeding. The Judge presiding over the 120 proceeding must take these defenses into account if timely and properly raised.

Recently, a situation came up where in a case where the foreclosing party sought to “substitute” the 120 movant (U.S. Bank National Association as trustee for a securitized mortgage loan trust) with Citibank, N.A. based on a claimed “transfer” of the Note and Deed of Trust (DOT) to Citibank. However, no Affidavit was filed to support the claimed transfer; no documentation was filed evidencing what was transferred, when the alleged transfer occurred, or by what means it took place; and no attorney consenting to the transfer on behalf of Citibank filed any papers in the case. The homeowner, who is represented by Mr. Barnes, challenged the transfer.

Colorado case law requires that any challenged transfer be the subject of an evidentiary hearing, and that the court must make detailed findings of fact and conclusions of law as to the alleged transfer sufficient to permit review by a court of appeals. The Judge in the case granted with substitution without an evidentiary hearing despite being presented with the binding law at the hearing, and thus the matter is now on appeal.

In Florida, JPMorgan Chase has recently sought to substitute a private trust, through “MCM Capital Partners LLC, its trustee”, as the foreclosing Plaintiff in two separate cases where the homeowner is represented by Mr. Barnes. As with the Colorado case, no Affidavit was filed evidencing the alleged transfer; no documentation was filed demonstrating what was transferred, when the alleged transfer occurred, and by what means it occurred; and no evidence of any kind has been presented to prove the alleged transfer. However, the case is set for trial, which presents several problems.

First, the homeowner is now being forced to trial with a last-minute change of the party seeking foreclosure through an undocumented transfer. Due process requires that the homeowner be permitted to amend his pleadings to include defenses as to this alleged and undocumented transfer, and to conduct discovery on the alleged transfer as to what was transferred, when it allegedly occurred, how it occurred, the source of authority for the transfer, and what documents evidence the transfer. Was it a bogus MERS Assignment? Was it an impermissible transfer to a securitization trust? Was the transfer in violation of law?. The homeowner has filed a Motion to amend his defenses.

Second, the case is also no longer in a posture to be tried, as the foreclosing party is amending its pleading as to who is seeking to foreclose and by a different theory [that being now a multiple transfer of interests in the Note and Mortgage to yet another downline party]. Forcing the case to trial would result in an illegal “trial by surprise” and a denial of basic fundamental rights.

In Tennessee, a homeowner represented by Mr. Barnes and local Tennessee counsel John Higgins, Esq. filed an action for Declaratory Relief to determine the rights in a Note and DOT which was originated by one party but sought to be enforced by another. In Tennessee (as in all states), one must name, in a Declaratory Relief action, all parties who may claim an interest in the matters sought to be declared, or who may have an interest in the Declaratory Judgment being sought, or who may be affected thereby.

The originating bank filed a Motion to Dismiss claiming, again in unsworn fashion and without any documentation being filed, that it no longer had any interest in either the Note or the DOT as it had transferred same. The Tennessee Court, at a hearing today, denied the originating bank’s Motion to Dismiss because (a) the Complaint stated a cause of action for declaratory relief, and (b) there was no admissible evidence of the claimed transfer which may have otherwise entitled the originating bank to be dismissed from the action.

The bottom line of all of this is that requests to substitute the foreclosing party should never be taken lightly, and strict proof, by admissible evidence, must be demanded as to any claimed transfer. Never take as gospel or otherwise a naked assertion by a foreclosing party’s attorney that the claimed substitution is “simple”.

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Jeff Barnes, Esq.,