Show Me the Note: Borrower Loses Note Possession Foreclosure Challenge

By Robyn Hagan Cain on December 02, 2011 | Last updated on March 21, 2019

Possession may be nine-tenths of the law, but it's unnecessary for a bank in Minnesota to possess a promissory note when it commences foreclosure.

Kenath Stein challenged the validity of both the foreclosure of his home by Chase Home Finance (Chase), and the redemption of his home by National City Bank (National), a junior lienholder. The Eighth Circuit Court of Appeals sided with the banks this week.

Stein refinanced his home with Chase Bank in 2006, and took out a second mortgage on the home with National in 2007. Both mortgages were properly recorded. The terms of the Chase Bank note and mortgage stated that Stein was obligated to make monthly payments until the note was paid in full. Failure to make a payment would result in a default, in which case Chase Bank could accelerate the debt and foreclose the mortgage.

Stein defaulted on Chase Bank's mortgage by failing to make a loan payment due on March 1, 2008. He subsequently made payments, but he did not cure the default entirely. In September 2008, Chase Bank notified Stein by letter his loan was in default and foreclosure proceedings would be commenced.

Chase Bank executed an "Assignment of Mortgage" in favor of Chase, which was properly recorded. After receiving the assignment, Chase commenced a foreclosure by advertisement under law, and subsequently purchased the home at a sheriff's sale. Following the sale, Chase obtained a sheriff's certificate of sale, which under Minnesota law serves as prima facie evidence of the validity of the foreclosure.

Stein had six months to redeem the property by paying Chase the amount it paid at the sheriff's sale plus interest; he did not exercise his statutory right of redemption. After the redemption period lapsed, National exercised its statutory right of redemption as a junior lienholder, and purchased Stein's home.

Stein filed a "show-me-the-note" lawsuit against Chase and National, contesting the validity of the foreclosure.

Chase and National prevailed on summary judgment, and Stein appealed to the Eighth Circuit Court of Appeals, arguing that Minnesota law requires the holder of legal title to a mortgage to possess the corresponding promissory note before it can institute non-judicial foreclosure by advertisement.

The Eighth Circuit held that the right to enforce a mortgage through foreclosure by advertisement lies with the legal, rather than equitable, holder of the mortgage. Here, Chase was entitled to commence a foreclosure by advertisement, even if the promissory note (and the corresponding equitable interest in the mortgage) had been transferred to someone else, because Chase Bank properly assigned the mortgage to Chase.

Some borrowers have successfully defended against foreclosure with production claims, but homeowners should not rely on "show me the note" lawsuits; borrowers who run into mortgage payment problems should immediately contact their servicers to arrange workout plans.

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