Thursday, June 23, 2011

Bankruptcy Decision has GREAT Implications for Home Owners in Foreclosure

A federal bankruptcy judge has ruled that a lender must prove that it has the original note in order to receive relief from the automatic stay in bankruptcy and proceed against the real estate. This has potentially HUGE repercussions in all foreclosures and certainly all foreclosures in bankruptcy.

The "produce the note" affirmative defense in one in which a home owner in foreclosure alleges as a defense to the foreclosure lawsuit that the lender does not have the legal right to sue ("standing") because they cannot prove that they have the original note. Many courts (in my experience it is about 50/50) will dismiss a foreclosure lawsuit when a bank cannot produce the original note. There was a lot of publicity last year about banks alleging that they had the original note when in fact they did not. In legal parlance that is referred to as a misrepresentation. In my world it is called a lie!! LOL

In bankruptcy, the second a petition is filed, all assets are under the exclusive jurisdiction of the bankruptcy court (judge and/or trustee). Lenders routinely seek relief from the automatic stay in order for them to proceed against the actual real estate under the collateral (mortgage or deed of trust). Courts routinely grant relief from the stay because as a matter of law, the lender is entitled to pursue relief against the asset. However, this decision now requires that a lender prove that they have standing - prove that they do have the original note. This will be a problem in a significant number of cases and it will certainly slow the process down.

The ruling will have an impact on all foreclosures as attorneys will cite the bankruptcy case in furtherance of the affirmative defense of "produce the note". Trust me, this decision has far broader implications than many believe
I will relate a bizarre outcome that I had in the OTHER Orange County..Orange County, Florida. I had an investor client that owned two condominium units in the same complex. Same price, same lender, purchased at the same time. Both went into foreclosure at the same time. Naturally, two separate actions had to be filed and two different judges were assigned. In both cases, the lender (Wells Fargo) could not find the original notes and we pleaded the affirmative defense that the bank did not have standing to sue because they could not prove that they held the note.

I filed Motions to Dismiss once Wells Fargo admitted that they could not produce the original notes. Same brief filed, identical facts. You can guess what happened. Judge A granted the Motion to Dismiss and threw out the foreclosure suit and Judge B denied the Motion to Dismiss. This is how it is folks....both decisions are legally supportable.

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