Federal Court of Appeals Rejects ‘Show-Me-the-Note’ Defense to Foreclosure under Michigan Law

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A federal appellate court recently confirmed that, in Michigan, a foreclosing party does not need to hold the mortgage note to have "standing" to foreclose.

In the recent case, an individual borrower faced with foreclosure filed suit against the foreclosing party. Among other relief, the borrower sought a declaratory judgment that the foreclosing party lacked standing to foreclose because it did not own the mortgage note. The district court dismissed the borrower's complaint, and the borrower appealed.

On appeal, the borrower first argued that the foreclosing party did not comply with Article 3 of the Uniform Commercial Code (UCC). Specifically, the borrower argued, Article 3 requires a person who makes a "presentment" of an instrument to exhibit the instrument and give reasonable identification upon demand. The appellate court rejected the borrower's argument, noting that several federal district courts have held that the UCC does not apply to mortgage foreclosures. More importantly, the court observed, an intermediate Michigan appellate court has held that a mortgage does not constitute a negotiable instrument—and is therefore not subject to the UCC—because it does not contain an unconditional promise or order to pay a sum certain. Instead, a mortgage merely secures payment of a negotiable instrument.

The borrower next argued that, independent of the UCC's requirements, Michigan law still requires a party to hold the mortgage note before it may foreclose. The appellate court rejected this argument as well. The court explained that Michigan's foreclosure-by-advertisement statute does not require that the underlying note be endorsed to the party instituting the foreclosure, or that the party be a holder or a holder-in-due-course of the note. Rather, the court reasoned, the statute only requires that the foreclosing party have "an interest in the indebtedness" secured by the mortgage. The Michigan Supreme Court, the court observed, has specifically held that mortgagees of record have "an interest in the indebtedness," thus entitling them to foreclose under state law.

This recent decision adds to the trend in non-judicial foreclosure jurisdictions, such as Michigan, that an entity need only hold the mortgage, and not necessarily the note, before it may properly foreclose.

 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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