by Richard H. Martin
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, and Florida’s recording system, is that the original mortgage is not a negotiable instrument and may be proven through a recorded copy.12
If the original note cannot be found, standing to enforce the note can be established if the lender can prove it is entitled to enforce the note under F.S. §673.3091.13 To prevent improper or multiple attempts to enforce an instrument, §673.3091 imposes a higher evidentiary burden. The lender must show: a) It was entitled to enforce the note when loss of possession occurred (or it directly or indirectly acquired the note from someone who was);14 b) the loss of possession was not the result of transfer of possession or lawful seizure; c) it cannot reasonably obtain possession of the instrument because the original was destroyed, its whereabouts cannot be determined, or it is wrongful possession of someone else. The lender must also prove the terms of the instrument, usually through a copy, and its entitlement to enforce it.15 If these can be shown, Art. 3 requires that the holder in due course provisions apply as if the lender had produced the original. However, the court may not enter judgment unless it finds the person required to pay the instrument is adequately protected from multiple claims to enforce the instrument. The right to enforce a lost instrument may be assigned and a rightful assignee can enforce the lost note when it would prevent a defendant from receiving a windfall by escaping an unpaid obligation and preventing foreclosure.16
Specific Circumstances and How to Prove Standing
• The Plaintiff is the Originating Lender — When the plaintiff is the originating lender and the note and mortgage identify the plaintiff as payee, tendering the original note to the court or an affidavit from the plaintiff that it holds the note and mortgage is sufficient evidence to establish standing. F.S. §673.3011 provides that the note’s holder is entitled to enforce it.
• The Note is Indorsed to the Plaintiff or Indorsed in Blank — If the plaintiff is not the originating lender, as is typical, standing can be shown by tendering the original note with an indorsement to the plaintiff; tendering the original note indorsed in blank with an affidavit of the holder; or filing an affidavit or verified pleading that the plaintiff holds the note. Florida courts have held these sufficient.17 An assignee of a mortgage has statutory standing to foreclose under F.S. §701.01.
• The Originating Bank Has Changed Names or Been Acquired — If the originating bank has been acquired or changed names since the loan was originated but still holds the note, the named plaintiff should be the current entity name, perhaps identifying the originating lender with an indication that the named plaintiff is successor by merger or name change. To support this allegation, if contested, a certified copy of a certificate of corporate existence from federal or state bank regulators, bearing the agency’s seal, which are self-authenticating official records,18 can be obtained for a nominal charge from the agency.
• MERS Loans — Many residential mortgages are assigned to Mortgage Electronic Registration System, Inc. (MERS).19 These mortgages either name MERS as the mortgagee, nominee for the lender, or assignee of record by a recorded assignment. Once this is completed, the loan can be bought and sold any number of times later without recording an additional assignment. MERS does not actually possess a beneficial interest in the note. At least two districts have held that MERS has standing to bring a foreclosure action in its own name,20 and another has held that a valid assignment from MERS to another lender before suit gave that lender standing to bring the foreclosure action.21
• The Note is Held in a Securitized Mortgage Trust — Standing to foreclose a securitized mortgage can be established many ways. If the note is held by a trust, the trustee can be the named plaintiff.22 As holder, the trust and trustee clearly have standing just as any other endorsee.23
If the loan servicer prosecutes the mortgage foreclosure, as it is often authorized to do by servicing agreements, the question sometimes arises whether the servicer is duly authorized to foreclose on behalf of the trust. Though no Florida court appears to have squarely addressed the issue, it appears Florida law would permit a duly authorized servicer to bring an action in the name of the trust to foreclose a securitized mortgage. If the note is indorsed in blank, the servicer’s possession of the original note, by itself, or an affidavit of possession by the servicer, has been held sufficient.24
If the note is specially indorsed to the trust, it may be necessary to establish the servicer’s authority to act for the trust. Well before the modern rules of civil procedure, Florida courts held certain nonholders, with limited rights in a note, had standing to foreclose, such as indorsees for collection, as collection agent, or banks to which the note had been pledged as security for another obligation.25 The modern rules of civil procedure are intended to take a more liberal view of standing. Fla. R. Civ. P. 1.210(a) permits actions to be brought both by a trustee of an express trust and by someone other than, but acting for, the real party in interest. Traditional notions of agency law would appear to permit an agent to bring an action in the principal’s name.
At least one Florida court has allowed an agent to bring an action to collect a note and foreclose a mortgage in its representative capacity.26 In Rauch, Weaver, Millsaps, Bigelow & Co. v. Central Bank & Trust Co. of Miami, 453 So. 2d 459 (Fla. 4th DCA 1984), the beneficiaries of an estate gave Rauch title to the note and authorized Rauch to sue to enforce a note and foreclose a mortgage in its representative capacity as their agent. The Fourth District reversed the trial court’s order, which required the beneficiaries of the estate to be named as plaintiffs. Two cases involving MERS also appear to support standing by an authorized agent. In Mortgage Elec. Registration System, Inc. v. Azize, 965 So. 2d 151 (Fla. 2d DCA 2007), the Second District held MERS had standing to bring a foreclosure action even though it owned no beneficial interest in the note. In Mortgage Elec. Registration System, Inc. v. Revoredo, 955 So. 2d 33 (Fla. 3d DCA 2007), the Third District held MERS acting as “a collection and litigation agent for the current owners of notes and mortgages” had standing to foreclose.
An oft-cited case not involving a foreclosure is Kumar Corp. v. Nopal Lines, Ltd., 462 So. 2d 1178, 1184-85 (Fla. 3d DCA 1985), in which the Third District held that an agent of the real party in interest had standing to bring a cargo damage claim in its own name for the benefit of the real party in interest when the principal authorized or ratified the agent’s actions. The Kumar court stated, “[W]here a plaintiff is either the real party in interest or is maintaining the action on behalf of the real party in interest, its action cannot be terminated on the ground that it lacks standing.”27 These cases appear to indicate that a duly authorized servicer, as an agent for the trustee, could establish standing to foreclose a mortgage held by the trust.
The trust, as the note holder, is the real party in interest. The trust should be the named plaintiff and the servicer, if identified, should be identified as acting in a representative capacity for the trustee. The servicer may choose to rely upon the servicing agreement to establish its authority. Specific allegations should be included in the verified complaint establishing the existence of the servicer’s authority or specifically referencing the servicing agreement. The latter could subject the servicing agreement to production in discovery. However, most servicing agreements for REMICs were filed with the Securities and Exchange Commission in connection with the mortgage-backed securities offering. The servicer’s authority can also be established by an affidavit from the servicer, or the trustee, or by the deposition testimony of the trustee. The trustee could also deliver a limited power of attorney to the servicer, authorizing the servicer to foreclose on behalf of the trust the defaulted loans held by the trust.28
Despite the complexities of securitization wrought by the recent real estate boom and bust, Florida courts continue to require a foreclosing lender prove its standing. A surprising number of recent decisions reversed judgments when lenders have failed to do so. With securitized mortgages, careful presuit attention to, and review of, the loan documents and chain of title of the note, and, when necessary, the proper execution and/or recording of any missing assignments or indorsements, will provide lender’s counsel with sufficient supporting evidence to establish standing in a verified complaint, and thus avoid many standing defenses. After that, when standing is still contested, the above-described showings, most of which can be made through affidavit, can satisfactorily resolve most standing challenges.
1 Lizio v. McCullom, 36 So. 3d 927, 929 (Fla. 4th D.C.A. 2010).
2 State Street Bank & Trust Co. v. Lord, 851 So. 2d 790 (Fla. 4th D.C.A. 2003) (affirming grant of mortgagor’s summary judgment where plaintiff failed to prove it properly held lost note); BAC Funding Consortium Inc. ISAOA/ATIMA v. Jean-Jacques, 28 So. 3d 936 (Fla. 2d D.C.A. 2010) (reversing summary judgment where plaintiff filed no supporting affidavits and original note did not identify the plaintiff as its holder); Servedio v. U.S. Bank, N.A, 46 So. 3d 1105 (Fla. 4th D.C.A. 2010) (reversing summary judgment where lender failed to demonstrate original note was filed prior to summary judgment hearing); Country Place Community Ass’n, Inc. v. JP Morgan Mtg. Acq. Corp., 51 So. 3d 1176 (Fla. 2d D.C.A. 2010) (reversing trial court’s refusal to order sanctions against lender and its counsel who failed to demonstrate standing to foreclose when it filed the foreclosure action and finding immaterial that lender may be able to establish standing in new foreclosure); Nadel v. Flagstar Bank, FSB, 36 Fla. L. Weekly D1065a (Fla. 4th D.C.A. May 18, 2011) (awarding borrower attorneys’ fees as prevailing party in foreclosure dismissed without prejudice upon order that plaintiff failed to prove standing); Mazine v. M&I Bank, 36 Fla. L. Weekly D1579 (Fla. 1st D.C.A. July 22, 2011) (reversing judgment after trial where lender failed to prove that “M&I Bank” had standing to foreclose a mortgage given to “M&I Marshal & Ilsley Bank”).
3 Fla. Stat. §673.3081 (2009).
4 Fla. Stat. §90.902(8) (2009); Fla. Stat. §673.3081(1) (2009); see Riggs v. Aurora Loan Servs., LLC, 36 So. 3d 932 (Fla. 4th D.C.A. 2010).
5 Fla. Stat. §§673.2041 and 673.2051 (2009).
6 Fla. Stat. §673.2051(2) (2009).
7 Progressive Express Ins. Co. v. McGrath Comm. Chiropractic, 913 So. 2d 1281 (Fla. 2d D.C.A. 2005); Jeff-Ray Corp. v. Jacboson, 566 So. 2d 885 (Fla. 4th D.C.A. 1990).
8 Fla. Stat. §§701.01 and 701.02 (2009).
9 See, e.g., JP Morgan Chase v. New Millenial, LC, 6 So. 3d 681 (Fla. 2d D.C.A. 2009) (reversing summary judgment in favor of mortgagor); Margiewicz v. Terco Properties of Miami Beach, Inc., 441 So. 2d 1124, 1125 (Fla. 3d D.C.A. 1995); WM Specialty Mtg., LLC v. Salomon, 874 So. 2d 680, 682 (Fla. 4th D.C.A. 2004); Chem. Res. Mtg. v. Rector, 742 So. 2d 300 (Fla. 1st D.C.A. 1998) (no requirement that written and recorded assignment be attached to complaint); Mfrs’ Trust Co. v. People’s Holding Co., 110 Fla. 451, 149 So. 5 (1933); Restatement (Third) Property: Mortgages §5.4(a).
10 Fla. Stat. §90.953 (2009) (requiring originals of negotiable instruments be received in evidence); Lenfest v. Coe, 16 So. 277 (Fla. 1894) (failure of indorsee to produce original note as proof of indorsement required reversal); Perry v. Fairbanks Cap. Corp., 888 So. 2d 725 (Fla. 5th D.C.A. 2004); Figueredo v. Bank Espirto Santo, 537 So. 2d 1113 (Fla. 3d D.C.A. 1989) (reversing summary judgment and remanding to permit lender to file original note).
11 Fair v. Kaufman, 647 So. 2d 167 (Fla. 2d D.C.A. 1994) (failure to introduce note and mortgage at trial mandated reversal); Pastore-Borroto Dev., Inc. v. Marevista Apts., M.B., Inc., 596 So. 2d 576 (Fla. 3d D.C.A. 1992) (vacating and remanding foreclosure judgment to permit lender to present original note and mortgage or reestablish them); cf. Nat. Loan Investors, LP v. Joymar Assoc., 767 So. 2d 549, 551 (Fla. 3d D.C.A. 2000) (only stating that original note need be filed); Int’l Ctr. of the Americas, Inc. v. Chem. Bank, 384 So. 2d 725 (Fla. 3d D.C.A. 1980) (same).
12 See Perry, 888 So. 2d at 726-27; Fla. Stat. §90.953; Harvey v. Deutsche Bank Nat’l Trust Co., 36 Fla. L. Weekly D1402a (Fla. 4th D.C.A. June 29, 2011) (standing proven through production of original note indorsed in blank, regardless of status of recorded assignments of mortgage).
13 Fla. Stat. §673.3011(3); Connolly v. Matthews, 899 So. 2d 1141 (Fla. 4th D.C.A. 2005) (reversing denial of judgment on promissory notes where elements of §673.3091 were proven).
14 The parenthetical provision, which appears in §673.3091(1)(a), was added in 2004 to conform to changes made to UCC §3-309 in 2002. See Ch. 2004-1, §1, Laws of Fla. The senate staff analysis indicates the 2004 amendment was intended to modify the prior requirement that the lender have been in possession of the note when it was lost and apparently to address, but not necessarily supersede, the decision of the Fourth District in State Street Bank & Trust Co. v. Lord, 851 So. 2d 790 (Fla. 4th D.C.A. 2003), where the court affirmed a summary judgment in favor of a mortgagor where neither the plaintiff, nor the party from whom it had been assigned the note, ever had possession of the original note and the original note was lost before the assignment to the plaintiff was made. See Staff Analysis and Economic Impact Statement, Senate Bill 282 (Dec. 31, 2003), available at http://www.flsenate.gov/data/session/2004/Senate/bills/analysis/pdf/2004s0282.cm.pdf.
15 Fla. Stat. §673.3091(2).
16 Deakter v. Menendez, 830 So. 2d 124, 129 (Fla. 3d D.C.A. 2002); Slizyk v. Smilack, 825 So. 2d 428 (Fla. 4th D.C.A. 2002) (affirming judgment in favor of person to whom note had been assigned though lost by assignee); Nat. Loan Investors, LP v. Joymar Assoc.,767 So. 2d 549, 551 (Fla. 3d D.C.A. 2000).
17 Riggs v. Aurora Loan Servs., LLC, 36 So. 3d 932 (Fla. 4th D.C.A. 2010); Stanley v. Wells Fargo Bank, N.A., 937 So. 2d 708 (Fla. 5th D.C.A. 2006); Philogene v. ABN Amro Mortgage Group, Inc., 948 So. 2d 45, 46 (Fla. 4th D.C.A. 2006) (“[W]e conclude that ABN had standing to bring and maintain a mortgage foreclosure action since it demonstrated that it held the note and mortgage in question.”); Isaac v. Deutsche Bank Nat’l Trust Co., 369 Fla. L. Weekly D727 (Fla. 4th D.C.A. Apr. 6, 2011); Harvey v. Deutsche Bank Nat’l Trust Co., 36 Fla. L. Weekly D1402a (Fla. 4th D.C.A. June 29, 2011).
18 Fla. Stat. §§90.902(1)(a) and 90.803(8) (2009).
19 See Phyllis K. Slesinger & Daniel McLaughlin, Mortgage Electronic Registration System, 31 Idaho L. Rev. 805 (1995).
20 Mortgage Elec. Registration System, Inc. v. Azize, 965 So. 2d 151 (Fla. 2d D.C.A. 2007); Mortgage Elec. Registration System, Inc. v. Revoredo, 955 So. 2d 33 (Fla. 3d D.C.A. 2007).
21 Taylor v. Deutsche Bank Nat’l Trust Co., 46 So. 3d 618 (Fla. 5th D.C.A. 2010).
22 See, e.g., Fla. Stat. §736.0816(23) (trustee can prosecute lawsuits); Fla. Stat. §689.071(3) (Florida Land Trust Act providing any recorded mortgage vesting interest in a mortgage in a bank “as trustee” vests the bank with full equitable and legal title).
23 Fla. Stat. §673.3011 (2009) and UCC §3-301, cmt. See also Wiers v. White, 196 So. 206 (Fla. 1940) (trust company and individual, as trustee, became holders of note by assignment); Isaac, 36 Fla. L. Weekly D727a (trust, through trustee, proved standing by holding note indorsed in blank). Although some cases refer to a requirement that the plaintiff “own and hold” the note, the more recent cases, including the MERS cases cited above, indicate that the courts will apply §673.3011, which does not necessarily require ownership of a beneficial interest in the note to enforce it.
24 Riggs, 36 So. 3d 932.
25 McCallum v. Driggs, 17 So. 407 (Fla. 1895) (Driggs, to whom note had been indorsed for collection, as collection agent, had standing to foreclose); Brown v. First Nat’l Bank of Panama City, 97 So. 351 (Fla. 1923) (bank to whom note had been pledged by its holder to secure another obligation had standing, as pledgee, to sue to enforce the note).
26 Rauch, Weaver, Millsaps, Bigelow & Co. v. Central Bank & Trust Co. of Miami, 453 So. 2d 459 (Fla. 4th D.C.A. 1984).
27 Kumar, 462 So. 2d at 1183. See also Juega v. Davidson, 8 So. 3d 488 (Fla. 3d D.C.A. 2009) (holding that an authorized representative may bring suit in its name for the benefit of the real party in interest).
28 See Keefe v. City of Hollywood, 487 So. 2d 311, 311 (Fla. 4th D.C.A. 1986) (principal may give agent power of attorney to bring replevin action).
Richard H. Martin is a shareholder at Akerman Senterfitt in Tampa. His practice focuses on intellectual property litigation and related business disputes. He has represented clients in patent, trademark, copyright and trade secret cases before state and federal courts, and in intellectual property licensing disputes.
The author thanks Ed Foster, Irene Bassel, and Jacqueline Simms-Petredis for their review and comment in the drafting of this article.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, George Joseph Meyer, chair, and William P. Sklar and Kristen Lynch, editors.