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Counsel’s Corner: The Consumer’s Use of Standing as a Defense in Foreclosure Cases

Linda Finley

Linda Finley

Linda S. Finley is a shareholder in the Atlanta office of Baker Donelson. She is a member of the firm's board of directors and Chair of the Residential Mortgage Litigation Group, Ms. Finley has tried more than 300 jury trials to verdict and concentrates her practice in business litigation involving the mortgage lending and servicing industries and litigation regarding real estate issues. She handles cases in 17 states, primarily in the Southeast, with about 45 percent of those cases in Florida. Linda recently spoke with DS News about the issue of consumers attacking the standing of mortgage note holders.

What's happening in the default servicing space in the Southeast?

Despite foreclosure numbers being down, litigation remains hot and heavy in the Southeast. Hot topics continue to be standing, defense of municipal code violations regarding property conditions, foreclosure by homeowners and condominium association and statutes of limitation in foreclosure cases. Standing has been and continues to be a hot defense for the consumer bar. Likely, if I pulled 100 files today, 75 of them would be attacking the standing of the party holding the note or bringing the foreclosure. Easily 75 percent of the cases I handle involve standing as one of the allegations.

Do any of the allegations involving standing ever have any merit?

Of course. Standing (the right of a party to bring an action) is basic to every lawsuit. The burden is on the party bringing suit. For example, the lender in a judicial foreclosure has to prove that it has the right to bring that suit. However, standing has become a “boilerplate” defense or allegation by the consumer bar, whether or not the position is legitimate or not. In most cases, a charge of lack of standing is defeated by the recorded instruments themselves. However, it remains critical that the instruments which transfer the note and the note itself be handled with care as those document likely will be needed at some time during a court case. Some Courts are also looking back to MERS issues which were cleared up in judicial opinions in many jurisdictions. A developing issue concerns the length of time it takes to foreclosure after default. I first saw cases in the northeast where the court dismissed foreclosure actions because the foreclosure had not concluded in what the court concluded was a reasonable time. Now the theory has moved to the southeast and midwest. The concern seems a bit circular. At the height of the economic downturn we (trial attorneys) were faced with the court asking, "Why is your client foreclosing on all of these homeowners?" Lenders and servicers alike heard the comments and emphasis was then placed on modifications and loan workouts to keep families in their homes where possible. Now, a few courts are saying, "Why didn't you foreclose sooner?"

Why do you think they reversed their stance?

I really don’t know the reason. The cases taking this position that I have reviewed rely upon review discuss equitable theories about prejudice to the homeowner when a foreclosure does not quickly progress. The position perplexes me because foreclosure by its very nature proceeds on contractual and statutory bases, not in equity.

Why do you think the note holder prevails in most cases that involve standing?

Note holders prevail in most cases because lack of standing is not a legitimate theory in a particular case. In most cases the current record note holder has physical possession of the note and transferring instruments are previously recorded in the deed records or can be recorded easily and therefore standing can be proven. Not in every case of course; human error does occur and documents are misplaced or inadvertently destroyed (even by the court itself!). There are very learned opponents and judicial scholars who understand the evidentiary burden of proving each element of a case and they have taught all of us on the financial industry side of things a thing or two. We've had to keep on our toes, and we have become better, stronger advocates because of it.

If standing is not a legitimate theory, why do people keep bringing it up?

Don’t misunderstand, standing IS a legitimate defense. The issue is, why is it used when such a defense is not legitimate in a particular case? That question could apply to our whole judicial system – why do advocates keep bringing up defenses that hold no water whatsoever? In our judicial system, it has become "throw it out there and see what sticks." When I started practicing law, if you made a defense that had no legal grounds or a claim that had no legal grounds, one, it was considered unethical, and two, you probably would have been called for contempt.

In a year or two from now, do you see more or fewer cases brought about based on standing?

I've been in this kind of practice for more than 25 years and I've seen legal theories come and legal theories go. It is a basic tenet of law that a party bringing a suit must prove standing. So, a foreclosing party will always be required to prove it has the right to foreclose. The consumer bar certainly has the right to demand that the foreclosing party show that it can exercise the power of sale provisions in the security instrument. As servicers tighten protocols to assure that statute and the provisions of the security instrument are followed, there will be fewer technical defenses available. Certainly, the CFPB and other regulations will result in new theories and defenses in lawsuits. There will be lawsuits as long as violations are discovered and allegations of violations are made. It's going to be interesting to see how it comes about. I do believe that the industry, with all the education I have seen over the last several years on the new regulations, will be prepared to c0mply with the new regulations and that any errors we see will be human errors or just something that somebody doesn't think of today.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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