This piece originally appeared in the February 2023 edition of DS News magazine, online now [1].
Servicers and their counsel have a definitive ruling from the Connecticut Supreme Court that the mere possession of an original note, which is not endorsed to the foreclosing plaintiff, does not automatically confer standing in a mortgage foreclosure (Bank of NY Mellon v. Tope, 2022 Conn. Lexis 329 [2]).
In this case, the note was endorsed to JP Morgan Chase Bank, as Trustee. The suit was filed in the name of Bank of NY Mellon as Trustee in 2014. The trial court had entered a Judgment of Foreclosure by Sale, and the date was extended multiple times, in part due to equity in the property.
The last sale date set by the trial court was October 21, 2017. The borrower had previously filed a series of Motions to Dismiss, claiming a lack of standing, that were denied by the trial court. Undeterred, the borrower then filed a Motion to Open the Judgment shortly before the sale date, again claiming a lack of standing based on the status of the note. The trial court denied the Motion to Open, without conducting an evidentiary hearing. The borrower then filed an appeal of the denial of the Motion to Open.
The Connecticut Appellate Court affirmed the trial court, holding that the borrower’s standing challenge was an impermissible collateral attack on the Judgment of Foreclosure by Sale [3] [Bank of New York Mellon v. Tope, 202 Conn. App. 540 (2021)]. The borrower then filed a Petition for Certification to the Connecticut Supreme Court, which was granted. [Bank of NY Mellon v. Tope, 2021 Conn. Lexis 287 (2021)]. The two issues preserved for review were (1) whether the borrower’s standing challenge was a collateral attack on the trial court’s judgment and (2) if the answer to the first certified question is no, did the trial court properly deny the Motion to Open?
In the Supreme Court, the lender’s counsel essentially claimed that the trial court lacked jurisdiction to open the Judgment of Foreclosure by Sale, when more than four months had passed since the date of the judgment (CGS 52-212a).
The Connecticut Supreme Court rejected this argument, noting that a court retains jurisdiction to modify a judgment until the foreclosure sale has been approved [4]. No such approval had occurred in this case.
The lender’s counsel then argued that the trial court judgment could be affirmed, because the plaintiff had proven standing to foreclose.
The Connecticut Supreme Court reversed and remanded to the trial court for the lender to prove it had the right to enforce the note at an evidentiary hearing. The lender’s counsel argued that the affidavit of debt filed in the trial court established that the plaintiff was the holder of the note, based on possession. The court distinguished that argument by noting that a “holder” under the UCC is a party in possession of a bearer paper note.
Alternatively, a party that is the entity to whom a note is specifically endorsed—and that has physical possession of the note—is also a holder under the UCC [CGS 42a-1-201 (b)(21)]. The plaintiff in Tope did not meet either definition. The Supreme Court reversed the trial court, which had denied the borrower’s Motion to Open the Judgment, and ordered that an evidentiary hearing be scheduled to address the plaintiff’s right to enforce the note.
A lender faced with this challenge has the additional burden of the consumer fee shifting statute in Connecticut, CGS 42-150bb. That statute allows a consumer to recover legal fees when the consumer has successfully defended an action based on a contract, which allows for the recovery of legal fees. Certainly, a lender may seek to withdraw its suit to avoid the burden and expense of a contested evidentiary hearing but would likely face a claim for legal fees by the borrower under CGS 42-150bb.
In Connecticut, it is good practice to have an original note endorsed either as “bearer paper” or to the specific party enforcing the note. As set forth in Tope, it can avoid substantial litigation over a period of years.