The Maryland Court of Appeals has ruled in Deutsche Bank National Trust Co., Trustee v. Brock that a servicer possessing an original promissory note endorsed in blank—the most common type of endorsement for thousands of notes owned by mortgaged-backed security trusts—can initiate foreclosure simply as the holder.
In a decision obtained by Ballard Spahr attorneys Gary C. Tepper and Robert A. Scott and issued on March 22, 2013, the court reasoned that the servicer could proceed under those circumstances, without proving how or why it held the note, so long as the note was properly endorsed up to the endorsement in blank. The decision is a significant victory for servicers and has the potential to reduce the cost of the foreclosure process.
In Brock, beneficial interest in the mortgage loan was ultimately sold, per a pooling and servicing agreement, to a trust for which Deutsche Bank National Trust Co. was the trustee. An affiliate of Bank of America, N.A., BAC Home Loans Servicing, LP (BAC), became the sub-servicer, with another entity serving as the master servicer. In the process, ownership took a circuitous route, passing through a number of financial institutions.
Plaintiff raised an issue concerning the continued viability of the trust and ownership generally. The note itself, on the other hand, was indisputably in BAC’s possession. Regardless of unnamed intermediate owners that might have existed along the way, the note had no endorsement gaps, and was ultimately endorsed in blank to the bearer. The Court of Special Appeals ruled that BAC was merely a non-holder in possession.
The Court of Appeals reversed, however, concluding that BAC was in fact the holder. The court relied on the plain language of the Maryland Uniform Commercial Code (UCC), which distinguishes between owners and holders of promissory notes, and which gives holder status to a bearer of a note properly endorsed in blank. The court further concluded that since the security accompanied the note as a matter of common law, BAC was entitled to appoint substitute trustees and initiate foreclosure, regardless of who the owner might be or whether the owner even continued to exist.
This is critical to servicers who often cannot readily attest firsthand to the twists and turns that beneficial ownership of a note takes as a prelude to securitization. The decision of the Court of Special Appeals would otherwise greatly add to the expense of foreclosure by forcing a servicer to explain many facts that are irrelevant to the process and in some instances difficult, costly, or even impossible to prove.
Ballard Spahr reminded the Court of Appeals that securitization has allowed financial institutions to tap into sources of capital previously unavailable to the mortgage market, dramatically driving down the cost of loans to consumers. While the court is silent on securitization, this contrasts with its 2011 decision in Anderson v. Burson, where the court went out of its way to assail the securitization industry. Even when relying upon dry statutory provisions, it is useful for counsel to explain the positive role of securitization.
Ballard Spahr’s Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm’s Consumer Financial Services Group, which is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.
For more information, please contact Gary C. Tepper at 202.661.2239 or email@example.com, Robert A. Scott at 410.528.5527 or firstname.lastname@example.org, or Mortgage Banking Group Practice Leaders Michael S. Waldron at 202.661.2234 or email@example.com, Richard J. Andreano, Jr., at 202.661.2271 or firstname.lastname@example.org, or John D. Socknat at 202.661.2253 or email@example.com.