FV-I, Inc. v. Kallevig ( 2017 )

IN THE SUPREME COURT OF THE STATE OF KANSAS
No. 111,235
FV-I, INC.,
In Trust for MORGAN STANLEY MORTGAGE CAPITAL HOLDINGS, LLC,
Appellant,
v.
CONSTANCE M. KALLEVIG, et al.,
Defendants,
and
BANK OF THE PRAIRIE,
Appellee.
SYLLABUS BY THE COURT
1.
Standing is the right to make a legal claim or seek enforcement of a duty or right.
The question of standing is one of law over which this court's scope of review is
unlimited. Standing is a part of subject matter jurisdiction, and the issue may be raised by
the parties or the court at any time.
2.
The burden to establish standing rests with the party asserting it. The nature of that
burden depends on the stage of the proceedings because the elements of standing are not
merely pleading requirements. Each element must be proved in the same way as any
other matter and with the degree of evidence required at successive stages of the
litigation.
1
3.
At the pleading stage, general factual allegations of injury resulting from
defendant's conduct may suffice to show a plaintiff's standing, for on a motion to dismiss
we presume that general allegations embrace those specific facts that are necessary to
support the claim. In response to a summary judgment motion, a plaintiff can no longer
rest on mere allegations and must set forth by affidavit or other evidence specific facts
that for purposes of the summary judgment will be taken to be true. At the final stage of a
case, such facts, if controverted, must be supported adequately by the evidence adduced
at trial.
4.
In general, to have standing, a plaintiff must have a sufficient stake in the outcome
of an otherwise justiciable controversy in order to obtain judicial resolution of that
controversy. Under Kansas law, in order to establish standing, a plaintiff must show that
(1) he or she suffered a cognizable injury and (2) there is a causal connection between the
injury and the challenged conduct. A cognizable injury is established by showing a
personal interest in a court's decision and that he or she personally suffers some actual or
threatened injury as a result of the challenged conduct. Moreover, the injury must be
particularized, i.e., it must affect the plaintiff in a personal and individual way.
5.
A holder of a promissory note has standing to enforce the terms of indebtedness,
including the right to foreclose on a mortgage that secures it.
6.
Standing in a foreclosure action is predicated on the plaintiff's ability to
demonstrate—either in the pleadings, upon motion for summary judgment, or at trial—
that it was in possession of the promissory note with enforcement rights at the time it
filed the foreclosure action. Allowing a lack of standing to be cured by a post-petition
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assignment granting enforcement rights in the note after the foreclosure action has been
filed defeats any incentive for a note holder to ensure that it has enforcement rights prior
to filing the action.
7.
In this case, application of the business records exception to the hearsay rule to
exclude endorsements on a promissory note was erroneous because the signatures were
not being admitted to prove the truth of the matter asserted, i.e., the authenticity of the
signatures. Rather, the existence of the endorsements themselves was the element critical
to the enforcement rights at issue under the Uniform Commercial Code.
8.
The UCC treats stamp signatures as equal to original signatures. K.S.A. 84-3-308
creates a presumption that stamp signatures are authentic. This presumption applies to
endorsements as well. A defendant has the burden to present sufficient evidence denying
an endorsement's validity before a plaintiff is required to introduce evidence to the
contrary. Under the facts of this case, mere speculation based on plaintiff's inconsistent
legal positions or the timing of its assertions was insufficient to meet the defendant's
burden.
9.
In order for a plaintiff to prevail in its mortgage foreclosure proceeding, it must
establish both that it possessed enforcement rights in the note under Article 3 of the UCC,
K.S.A. 84-3-301, and that those rights existed at the time it filed the action. This can be
accomplished through the pleadings, when faced with a motion for summary judgment,
or at trial. Possession or assignment of the mortgage alone when the foreclosure action is
filed is not sufficient to establish standing, and the lack of standing cannot be cured by a
post-petition assignment of a promissory note. The proper remedy for a lack of standing
is dismissal without prejudice.
3
10.
Regardless of whether a promissory note and mortgage have split, or whether the
party capable of enforcing the note was not a party to this case, the mortgage itself still
exists.
Review of the judgment of the Court of Appeals in an unpublished opinion filed February 6,
2015. Appeal from Miami District Court; STEVEN C. MONTGOMERY, judge. Opinion filed April 21, 2017.
Judgment of the Court of Appeals affirming the district court is affirmed in part and reversed in part.
Judgment of the district court is affirmed in part, reversed in part, and remanded with directions.
Nancy Merrill Wilson, of South & Associates, P.C., of Overland Park, argued the cause, and
Stephanie L. Mendenhall, of the same firm, was with her on the briefs for appellant.
Timothy H. Girard, of Woner, Glenn, Reeder & Girard, P.A., of Topeka, argued the cause and
was on the briefs for appellee.
The opinion of the court was delivered by
ROSEN, J.: This case stems from a mortgage foreclosure petition that
plaintiff/appellant FV-I, Inc. filed in June 2011. The homeowner-debtors are no longer
involved in this proceeding, as the parties agreed to sell the property and place the
proceeds in escrow pending resolution of this case. The dispute is between FV-I and
Bank of the Prairie (BOP), a bank with junior mortgages on the same property. Although
summary judgment was initially granted in BOP's favor, the Court of Appeals reversed
and remanded for trial to determine whether FV-I had possession of the promissory note
underlying the mortgage at the time it filed the mortgage foreclosure. FV-I, Inc. v.
Kallevig, No. 108,706, 2013 WL 2321198 (Kan. App. 2013) (unpublished opinion)
(Kallevig I).
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At trial, FV-I presented the original note endorsed in blank and the original
mortgage with an assignment to FV-I, although it had attached a previous copy of the
note without the endorsement in blank to the petition. The district court held: (1) FV-I
lacked standing to file the petition because it did not have possession of the original note
prior to filing its petition; (2) the note and mortgage FV-I held had split because these
documents did not follow the same path to FV-I; (3) FV-I lacked enforcement rights in
the note because FV-I had failed to lay the proper foundation for the endorsement in
blank on the note and therefore, the court must exclude the endorsement in blank from
evidence; and (4) the first three rulings meant that BOP's mortgages were therefore
superior to FV-I's mortgage.
The Court of Appeals affirmed the district court in FV-I, Inc., v. Kallevig, No.
111,235, 2015 WL 717776 (Kan. App. 2015) (unpublished opinion) (Kallevig II) holding
FV-I did not have standing to pursue its claim without establishing enforcement rights in
the promissory note as of the date of the filing, FV-I's mortgage was unenforceable, and
FV-I's mortgage lost its superior priority to BOP's mortgages. FV-I petitions for review,
arguing standing does not have to be proved at the time of filing and that a lack of
standing should not result in its mortgage losing its superior position.
We agree with the Kallevig II panel that standing is based on the party's
enforcement and possession rights at the time of filing. However, evidentiary rulings
excluding endorsements on the promissory note compel us to remand for a rehearing
regarding standing and the panel's priority determination. We therefore reverse contrary
rulings by the district judge and the Court of Appeals, and we remand the case to the
district court for further proceedings.
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FACTUAL AND PROCEDURAL BACKGROUND
On September 16, 2005, Kermit and Constance Kallevig and GMAC Bank entered
into a note and mortgage concerning property in Bucyrus. On June 15, 2011, the
mortgage was assigned to FV-I by Mortgage Electronic Registration Systems, Inc.,
(MERS) as a nominee for GMAC Bank, its successors, and assigns. On June 24, 2011,
FV-I filed a petition to foreclose the mortgage. Attached to the petition was a copy of the
mortgage and a note with an undated stamp endorsement from GMAC Bank to GMACB
Asset Management Corp. FV-I indicated it had authority to enforce the note and
mortgage under K.S.A. 60-217.
FV-I named BOP as a party because BOP had three mortgages on the same
property that FV-I claimed were either subordinated by agreement or otherwise junior: a
mortgage recorded October 16, 2002, subordinated by agreement; a mortgage recorded
October 19, 2006; and a mortgage recorded September 28, 2007. FV-I attached the
subordination agreement to the petition.
BOP filed an answer, a counterclaim against FV-I, and a cross-claim against the
Kallevigs. BOP acknowledged that it held three mortgages on the property and that it had
executed a subordination agreement. BOP argued FV-I failed to state a claim upon which
relief could be granted and asked that the district court establish that its mortgages had
priority.
FV-I and BOP filed multiple motions back and forth. FV-I consistently claimed
the right to enforce the note by possession and endorsement of the note. BOP challenged
whether FV-I had standing, whether FV-I's mortgage and note had split, and whether
FV-I had the ability to enforce the note. FV-I subsequently claimed enforcement rights
through two additional means.
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The first was based on an allonge transferring the note to FV-1—originally with
GMACB—from Ally Bank, as successor in interest to GMACB. FV-I indicated it did not
know when the allonge had been prepared. The second was the original note, which
included two additional endorsements that the note attached to FV-I's petition did not
have: the first was without recourse from GMACB to Residential Funding Company,
LLC (Residential); and the second was an undated endorsement in blank from
Residential.
The district court granted BOP's motion for summary judgment, holding that FV-I
lacked standing because it failed to establish ownership of the note as of the date FV-I
filed its petition. The district court further held that FV-I's mortgage and note had split,
which rendered FV-I's mortgage unenforceable and allowed BOP's mortgages to jump
ahead in priority.
On appeal, a panel of the Court of Appeals reversed the order in Kallevig I. The
panel held that FV-I must establish it was in possession of the note prior to filing its
petition, in order to establish holder status and a right to enforce the note. Kallevig I,
2013 WL 2321198, at *4. The panel also observed that there was no evidence the note
and mortgage had been split. 2013 WL 2321198, at *4. The panel concluded that neither
party was entitled to judgment as a matter of law and reversed and remanded the case to
determine when FV-I took possession of the note. 2013 WL 2321198, at *5. Neither
party filed a petition for review of the Kallevig I decision.
On remand, the parties agreed to the sale of the subject real estate, and the sale
proceeds were paid into escrow until a priority determination could be made. At the
October 8, 2013, bench trial, the parties stipulated to the Kallevigs' default on the note.
FV-I claimed enforcement rights through its status as holder of the original note and
argued that the interests had not been split and that its mortgage had priority. BOP argued
that there had been an "implied or inferred" split of the mortgage and note, that FV-I's
7
inability to explain how it had acquired the note was suspicious, and that the mortgage
FV-I held was "ineffectual and unenforceable" because FV-I could not establish its
enforcement rights. Regarding the two additional endorsements on the original note, BOP
argued that, "if there was ever a presumption in their favor, it seems to me they've got a
lot of work to do with regard to prov[ing] issues on authenticity or validity of those
signatures."
At trial, Andy Chatfield testified for FV-I. He worked as an asset manager for
AMS Servicing, LLC, a servicing agent that handled defaulted loans. AMS serviced the
loans for FV-I and acquired the servicing of the Kallevig loan in January 2012—6
months after the petition in this case was filed. Chatfield was familiar with AMS'
practices and procedures and was authorized to testify on behalf of FV-I. FV-I's counsel
relied on Chatfield to lay the foundation for the original note that was endorsed in blank.
Chatfield testified that it was the original note from the Kallevig's file, that to his
knowledge FV-I had acquired the loan in 2010, but that he did not have any personal
knowledge regarding the transfer of the note to FV-I prior to January 2012 by GMAC
Bank and GMACB.
BOP challenged the two additional endorsements on the note. FV-I argued that
signatures were presumed valid and that a challenge to the signature was an affirmative
defense, which meant that BOP had the burden to prove the signatures were not
authentic. The district court sustained BOP's objections to the foundation and hearsay of
the two additional endorsements, reasoning that FV-I needed to lay a proper business
record foundation for the endorsements in order for them to be admitted. The district
court admitted the original note at trial without the last two endorsements, which included
the endorsement in blank.
In the journal entry of judgment, the district court relied on its decision to exclude
the two additional endorsements in holding that FV-I failed to establish it had
8
enforcement rights in the note. Relying on Mortgage Electronic Registration Systems v.
Graham, 44 Kan. App. 2d 547, Syl. ¶ 1, 247 P.3d 223 (2010), the district court also held
that FV-I failed to show it had standing to bring the suit because it had not established
holder status as of the day it filed its petition. Relying on Ohio and Maine caselaw, the
district court held that the lack of standing could not be cured by a post-filing assignment
of the note to FV-I.
The district court held that the note and mortgage had split, that FV-I's mortgage
was unenforceable, and that BOP's mortgages were therefore superior. It denied FV-I's
petition, granted BOP judgment on its counterclaim against FV-I, and granted BOP
default judgment on its cross-claim against the other defendants.
A panel of the Court of Appeals affirmed the district court in Kallevig II. The
panel treated the primary issue as whether the district judge erred in holding that FV-I
lacked standing. Kallevig II, 2015 WL 717776, at *4. The panel cited MetLife Home
Loans v. Hansen, 48 Kan. App. 2d 213, 225, 286 P.3d 1150 (2012), for the proposition
that a "holder of a promissory note has standing to enforce the terms of indebtedness,
including the right to foreclose on a mortgage that secures it." 2015 WL 717776, at *4.
The panel noted that a "mortgage is unenforceable when it is not held by the same entity
that holds the promissory note," relying on our decision in Landmark Nat'l Bank v.
Kesler, 289 Kan. 528, 540-41, 216 P.3d 158 (2009) (recognizing the possibility of a
mortgage and note split). 2015 WL 717776, at *4.
The panel held that FV-I had to establish enforcement rights in the note as of the
filing of the petition in order to have standing to bring its mortgage foreclosure suit.
Kallevig II, 2015 WL 717776, at *4. The panel held that FV-I lacked standing because it
"produced no evidence that the district court as the factfinder found credible and reliable
to show FV-I had possession or assignment of the note when the foreclosure petition was
filed." 2015 WL 717776, at *5. The panel therefore held that the district court properly
9
determined FV-I's mortgage had lost its priority over BOP's mortgages. The panel held
that BOP's mortgages were superior because FV-I's failure to establish enforcement rights
in the note made the mortgage unenforceable, and the unenforceability of the mortgage
meant there was no longer a mortgage for BOP's mortgages to be subordinate to. 2015
WL 717776, at *6.
The panel declined to address FV-I's challenges to the district court's ruling
excluding the two additional endorsements and held that the district court's "ultimate
decision did not include FV-I's and BOP's arguments over the note and mortgage split,
[so] we see no need to address the arguments on appeal." 2015 WL 717776, at *6.
The panel also declined to consider whether, assuming FV-I could not enforce the
note, another party would have been able to enforce the note because FV-I had not sought
to join a necessary party to the action. 2015 WL 717776, at *6. The panel affirmed the
district court's determination that FV-I lacked standing to initiate this foreclosure action.
2015 WL 717776, at *7.
ANALYSIS
Standing
Both the district court and the Court of Appeals in Kallevig I and Kallevig II
treated this case as one that turns on whether FV-I had standing to initiate the foreclosure
proceedings. On petition for review, FV-I first argues that the district court and Court of
Appeals erred in requiring it to prove possession of the note and the existence of
enforcement rights in it at the time it filed its petition in order to establish standing to
pursue mortgage foreclosure. FV-I alternatively argues that standing could be established
by its undisputed possession of the mortgage prior to filing, even without possession of
the note.
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Standard of Review
Standing is the "right to make a legal claim or seek enforcement of a duty or
right." Gannon v. State, 298 Kan. 1107, 1122, 319 P.3d 1196 (2014). "The question of
standing is one of law over which this court's scope of review is unlimited." 298 Kan. at
1122. Standing is a part of subject matter jurisdiction, and the issue may be raised by the
parties or the court at any time. Vorhees v. Baltazar, 283 Kan. 389, 397, 153 P.3d 1227(2007).
The burden to establish standing rests with the party asserting it. Gannon, 298
Kan. at 1123. "[T]he nature of that burden depends on the stage of the proceedings[,]
because the elements of standing are not merely pleading requirements. Each element
must be proved in the same way as any other matter and with the degree of evidence
required at . . . successive stages of the litigation." 298 Kan. at 1123 (citing Lujan v.
Defenders of Wildlife, 504 U.S. 555, 561, 112 S. Ct. 2130, 119 L. Ed. 2d 351 [1992]).
"At the pleading stage, general factual allegations of injury resulting from the
defendant's conduct may suffice, for on a motion to dismiss we 'presum[e] that general
allegations embrace those specific facts that are necessary to support the claim.' [Citation
omitted.]" Lujan, 504 U.S. at 561. "In response to a summary judgment motion . . . the
plaintiff can no longer rest on such 'mere allegations,' but must 'set forth' by affidavit or
other evidence 'specific facts,' . . . which for purposes of the summary judgment will be
taken to be true." 504 U.S. at 561. "[A]t the final stage, those facts (if controverted) must
be 'supported adequately by the evidence adduced at trial.'" 504 U.S. at 561.
In general, to have standing, a plaintiff must have a "'sufficient stake in the
outcome of an otherwise justiciable controversy in order to obtain judicial resolution of
11
that controversy.'" Gannon, 298 Kan. at 1122 (quoting Moorehouse v. City of Wichita,
259 Kan. 570, 574, 913 P.2d 172 [1996]).
"Under Kansas law, in order to establish standing, a plaintiff must show that (1) he
or she suffered a cognizable injury and (2) there is a causal connection between the injury
and the challenged conduct." Solomon v. State, 303 Kan. 512, 521, 364 P.3d 536 (2015).
A cognizable injury is established by showing a "'personal interest in a court's decision
and that he or she personally suffers some actual or threatened injury as a result of the
challenged conduct.'" 303 Kan. at 521 (quoting Sierra Club v. Moser, 298 Kan. 22, 33,
310 P.3d 360 [2013]). Moreover, "[t]he injury must be particularized, i.e., it must affect
the plaintiff in a '"'personal and individual way.'"'" 298 Kan. at 1123.
Standing to Foreclose Mortgage
A mortgage is a conveyance or retention of an interest in real property as security
for performance of an obligation. Restatement (Third) of Property (Mortgages) §1.1
(1997). "Promissory notes and mortgages are contracts to which the rules of contract
construction apply." Hansen, 48 Kan. App. 2d 213, Syl. ¶ 4.
A mortgage permits foreclosure on the property once the debt becomes due.
"When an obligation secured by a mortgage becomes due, the mortgagee may
either:
(a) obtain a judgment against any person who is personally liable on the
obligation and, to the extent that the judgment is not satisfied, foreclose the mortgage on
the real estate for the balance; or
(b) foreclose the mortgage and, to the extent that the proceeds of the foreclosure
sale do not satisfy the obligation, obtain a judgment for the deficiency against any person
12
who is personally liable on the obligation in accordance with § 8.4." Restatement (Third)
of Property (Mortgages) §8.2 (1997).
Payment is due at the time stated in the mortgage/note or upon acceleration.
"An acceleration provision is a term in a mortgage, or in the obligation it secures,
that empowers the mortgagee upon default by the mortgagor to declare the full mortgage
obligation immediately due and payable. An acceleration becomes effective on the date
specified in a written notice by the mortgagee to the mortgagor delivered after default."
Restatement (Third) of Property (Mortgages) §8.1 (a).
Thus, in order to establish standing a foreclosing plaintiff must show a sufficient
stake in the outcome to warrant invocation of the court's jurisdiction and a cognizable
injury. Solomon, 303 Kan. at 521; Gannon, 298 Kan. at 1122. While an interest in the
mortgage generally establishes a "sufficient stake" in the outcome, the mortgage itself
may or may not establish a "cognizable injury."
In order to establish an injury in a mortgage foreclosing proceeding, the party must
show that the debt is now due. In most mortgage foreclosure cases, this will likely be
because the debt has been accelerated and become immediately due. The due date is
accelerated when the debtor defaults; however, what constitutes a default is based on the
terms of the contract—i.e., the note, in most cases.
In these cases, the note therefore is necessary to establish an injury. However, the
foreclosing plaintiff must show that it has been injured by establishing that it is entitled to
enforce the note. See also Restatement (Third) of Property (Mortgages) §5.4(c) (1997)
("A mortgage may be enforced only by, or in behalf of, a person who is entitled to
enforce the obligation the mortgage secures.").
13
Thus, a "holder of a promissory note has standing to enforce the terms of
indebtedness, including the right to foreclose on a mortgage that secures it." 2015 WL
717776, at *4. In this case, the Kallevig II panel identified the promissory note as "the
key to showing FV-I had standing." 2015 WL 717776, at *5.
Enforcement Rights under the UCC
A note is a negotiable instrument, which is governed in Kansas by Article 3 of the
Uniform Commercial Code (UCC), K.S.A. 84-1-101 et seq. K.S.A. 2016 Supp. 84-3-104;
Bank of America v. Inda, 48 Kan. App. 2d 658, 665, 303 P.3d 696 (2013). The UCC
explains who is entitled to enforce a note. Under K.S.A. 84-3-301, the "[p]erson entitled
to enforce" a note is:
"(a) the holder of the instrument, (b) a nonholder in possession of the instrument who has
the rights of a holder, or (c) a person not in possession of the instrument who is entitled to
enforce the instrument pursuant to K.S.A. 84-3-309 or 84-3-418(d). A person may be a
person entitled to enforce the instrument even though the person is not the owner of the
instrument or is in wrongful possession of the instrument."
The "[h]older" includes "(A) The person in possession of a negotiable instrument
that is payable either to bearer or to an identified person that is the person in possession."
K.S.A. 2016 Supp. 84-1-201(21). Under K.S.A. 84-3-205(b), a note can be endorsed "in
blank," which means that the "instrument becomes payable to [the] bearer and may be
negotiated by transfer of possession alone until specially endorsed." "It is a well-
established general rule that the possession of negotiable paper proves prima facie the
ownership of the holder. [Citations omitted.]" King v. Bellamy, 82 Kan. 301, 302, 108 P.
117 (1910).
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"No distinction is drawn by the [UCC] in terms of whether the 'holder' is the holder for
his or her own use and benefit or whether the holder holds as a fiduciary for another.
Thus, the fact that a holder is not the owner who is entitled to keep the proceeds for his
or her own personal use does not affect the holder's right as holder to sue on the
instrument. A holder may sue in his or her own name alone although holding the paper as
a fiduciary for another, and there is no obligation to join such other party as a co-plaintiff.
This is true even though the holder does not have any express authorization from the
beneficial owner of the paper to bring suit." (Emphasis added.) 5A Anderson, Uniform
Commercial Code § 3-301:7, pp. 569-70 (3d ed. 1994).
Based on these provisions of the UCC, FV-I was entitled to enforce the note upon
a showing (1) that the note was made payable to FV-I or was endorsed in blank and (2)
FV-I was in possession of the note. However, a preliminary standing issue arises as to
when FV-I must establish these requirements.
Timing of Standing
In this case, the district court held that FV-I failed to establish enforcement rights
in the note attached to the petition, the allonge, or the original note, and that it failed to
show that it had those rights on the day the petition was filed. On appeal, the Kallevig II
panel held that FV-I had to establish enforcement rights in the note as of the filing of the
petition in order to have standing to bring its mortgage foreclosure suit, and that it had
failed to do so at trial. 2015 WL 717776, at *4. On petition for review, FV-I focuses on
whether standing must be proved at the time of filing and argues the panel cited no
Kansas authority for this proposition.
The panel relied on McLean v. JP Morgan Chase Bank Nat. Ass'n, 79 So. 3d 170,
173-74 (Fla. Dist. App. 2012), where Chase, the plaintiff in a mortgage foreclosure
proceeding, submitted the original note, with a special endorsement in its favor, to the
15
district court 3 days after filing the complaint. The Florida court acknowledged that the
note established "standing to foreclose, at least at some point," however,
"the record evidence is insufficient to demonstrate that Chase had standing to foreclose at
the time the lawsuit was filed. The mortgage was assigned to Chase three days after
Chase filed the instant foreclosure complaint. While the original note contained an
undated special endorsement in Chase's favor, the affidavit filed in support of summary
judgment did not state when the endorsement was made to Chase. Furthermore, the
affidavit, which was dated after the lawsuit was filed, did not specifically state when
Chase became the owner of the note, nor did the affidavit indicate that Chase was the
owner of the note before suit was filed. Therefore, Chase failed to submit any record
evidence proving that it had the right to enforce the note on the date the complaint was
filed. See U.S. Bank Nat'l Ass'n v. Kimball, 27 A.3d 1087 (Vt.2011) (bank that filed a
foreclosure complaint against a homeowner did not show that, at the time it filed the
complaint, the bank possessed the original promissory note either made payable to bearer
with a blank endorsement or made payable to order with an endorsement specifically to
the bank; although the bank ultimately submitted the promissory note with an undated
specific endorsement to the bank, the bank provided no information as to when such
endorsement was made).
"We therefore reverse the summary judgment and corresponding final judgment
of foreclosure. On remand, in order for Chase to be entitled to summary judgment, it
must show, without genuine issue of material fact, that it was the holder of the note on
the date the complaint was filed (i.e., that the note was endorsed to Chase on or before the
date the lawsuit was filed). By contrast, if the evidence shows that the note was endorsed
to Chase after the lawsuit was filed, then Chase had no standing at the time the complaint
was filed, in which case the trial court should dismiss the instant lawsuit and Chase must
file a new complaint." 79 So. 3d at 174-75.
In seeking to distinguish this case from McLean, FV-I relies primarily on U.S.
Bank NA v. McConnell, 48 Kan. App. 2d 892, 906-07, 305 P.3d 1 (2013), which discussed
McLean but concluded that a bank that held a promissory note at the time a foreclosure
16
suit was filed had standing, despite the formal assignment of the related mortgage being
filed after the date of suit:
"[E]ven if the interests of the note holder become separated from the interests of
the mortgage holder, we see no impediment to a foreclosure action if those interests are
subsequently reunited before judgment. The approaches used by the courts in Ohio and
Florida in CitiMortgage and JP Morgan Chase discussed earlier are logical, practical,
and consistent with our law. Under Kansas law the mortgage follows the note. But any
arguable severance of the note holder's interest from the mortgage holder's interest
should be able to be cured with the transfer of the mortgage to the Bank, even if that
occurs after suit was filed[,] so long as the transfer occurs before the Bank moves for
summary judgment." (Emphasis added.) 48 Kan. App. 2d at 907.
FV-I argues this language demonstrates it had to prove that it had standing only by
the time of trial in this case. BOP persuasively responds that FV-I misreads McConnell,
where the panel also held that "there is no genuine fact issue about the Bank being the
holder of the note at the time suit was filed . . . the fact that the Bank held the promissory
note was sufficient to give it standing to pursue this action." 48 Kan. App. 2d at 901.
Additionally, BOP correctly distinguishes this case from McConnell because the Bank
held the note with enforcement rights when the action was filed and was assigned the
mortgage after suit was filed, the reverse factual situation of this case.
Apart from McClean and McConnell, several other jurisdictions agree with the
panel in this case. "[T]here is broad agreement among courts that some sort of standing or
similar status is necessary for both judicial and nonjudicial foreclosure . . . . There is also
broad agreement that the party bringing the foreclosure action or sale must have standing
at the time the litigation . . . is commenced." (Emphasis added). Levitin, The Paper
Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title, 63 Duke L.J.
637, 642-44 (2013).
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The New Mexico Supreme Court has recognized this fact in Deutsche Bank Nat.
Trust Co. v. Johnston, 2016-NMSC-013, 369 P.3d 1046 (N.M. 2016), a case that is
helpful to our analysis of when a party must have standing. Deutsche Bank filed a
foreclosure action with an unendorsed note and a mortgage that had been assigned to it
prior to the filing of the complaint, but it possessed a version of the note endorsed in
blank at trial. The court held this was insufficient to establish that standing existed at the
time of filing. It explained the reasoning for requiring strict compliance with the
traditional procedural requirement that standing be established at the time of filing in
mortgage foreclosure actions:
"This procedural safeguard is vital because the securitization of mortgages has given rise
to a pervasive failure among mortgage holders to comply with the technical requirements
underlying the transfer of promissory notes, and more generally the recording of interests
in property. See Renuart, Uneasy Intersections: The Right to Foreclose and the U.C.C.,
48 Wake Forest L. Rev. 1205, 1209-10 (2013) ('[T]he failure to deliver the original notes
with proper indorsements [to assignees], the routine creation of unnecessary lost note
affidavits, the destruction of the original notes, and the falsification of necessary
indorsements . . . is widespread.'). Under these circumstances, not even the plaintiffs may
be sure if they actually own the notes they seek to enforce. . . . These formalities are
strengthened by strict standing requirements. Otherwise, institutions could potentially
cloud title by foreclosing on a property upon which they do not possess the right to
foreclose.
"{ 22} Indeed, standing in foreclosure actions 'is not a mere procedural detail'; it protects
homeowners against double liability such as 'when the wrong party sells the home and
the note holder later appears seeking full payment on the note,' or when a homeowner
faces multiple lawsuits in different jurisdictions. Renuart, supra, at 1212. . . . In other
words, requiring that standing be established as of the time of filing provides strong and
necessary incentives to help ensure that a note holder will not proceed with a foreclosure
action before confirming that it has a right to do so." Johnston, 369 P.3d at 1053-54.
18
The Johnston court cited several cases from other jurisdictions, including
McConnell, which require a foreclosure plaintiff to prove that it was entitled to enforce
the note when it filed suit. 369 P.3d at 1054. See, e.g., Fed. Home Loan Mortgage Corp.
v. Schwartzwald, 2012–Ohio–5017, ¶ 26, 134 Ohio St. 3d 13, 979 N.E.2d 1214 (2012)
(post-filing events that supply standing that did not exist on filing may be disregarded . . .
despite a showing of sufficient present injury caused by the challenged acts and capable
of judicial redress); Deutsche Bank Nat'l Tr. v. Brumbaugh, 2012 OK 3, ¶ 11, 270 P.3d
151 (2012) (plaintiff's initial lack of standing could not be cured, even if entitled to
enforce the note after the case was filed, and proper remedy was to dismiss the case
without prejudice); McLean, 79 So.3d at 173 (party's standing is determined at the time
the lawsuit was filed and lack of standing cannot be cured); Deutsche Bank Nat'l Tr. Co.
v. Mitchell, 422 N.J. Super. 214, 221-25, 27 A.3d 1229, (2011) (plaintiff must have
standing at the time the foreclosure complaint is filed, and a lack of standing cannot be
cured by showing that a plaintiff acquired standing after the complaint was filed); Wells
Fargo Bank, N.A. v. Marchione, 69 A.D.3d 204, 205-07, 887 N.Y.S.2d 615 (2009)
(noting that a plaintiff-assignee lacked standing where the note and mortgage were
assigned to the plaintiff after commencement of the foreclosure action); U.S. Bank Nat'l
Ass'n v. Kimball, 2011 VT 81, ¶¶ 12-20, 190 Vt. 210, 27 A.3d 1087 (it did not contravene
the interest of judicial efficiency to dismiss the complaint of a foreclosure plaintiff who
acquired standing after the complaint had been filed).
With these considerations and relevant caselaw in mind, the Johnston court
continued in relevant part:
"As a result, we conclude that it is not presumptuous to require, as do a substantial
number of other states, that a company claiming to be a mortgage holder must produce
proof that it was entitled to enforce the underlying promissory note prior to the
commencement of the foreclosure action by, for example, attaching a note containing an
undated indorsement to the initial complaint or producing a note dated before the filing of
the complaint at some appropriate time in the litigation. We agree with the Vermont
19
Supreme Court, which opined that '[i]t is neither irrational nor wasteful to expect a
foreclosing party to actually be in possession of its claimed interest in the note, and have
the proper supporting documentation in hand when filing suit.' Kimball, 2011 VT 81, ¶
20.
....
". . . [T]his is an issue of proof rather than pleading standards. The elements of standing
'are not mere pleading requirements but rather an indispensable part of
the plaintiff's case, [and therefore] each element must be supported in the
same way as any other matter on which the plaintiff bears the burden of
proof, i.e., with the manner and degree of evidence required at the
successive stages of the litigation.'
Lujan, 504 U.S. at 561. For example, a foreclosure plaintiff may satisfy pleading
requirements by simply alleging that it is the holder of the note without attaching any
additional documentary evidence, but when a defendant subsequently raises the defense
that the plaintiff lacks standing to foreclose, the plaintiff must then prove that it held the
note at the time of filing. Attaching the note to the complaint is not the only means of
proving that the plaintiff held the note at the time of filing because standing can also be
proven through a dated indorsement establishing when the note was indorsed to the
plaintiff. Therefore, neither Bank of New York nor the Court of Appeals' opinion in this
case establish an additional pleading requirement, as Deutsche Bank argues, but rather set
forth requirements that must be met to prove standing, should that issue be raised by the
defendant or sua sponte by the Court." Deutsche Bank, 369 P.3d at 1054-56.
We agree with the sound reasoning of the Deutsche Bank court and hold that
standing in a foreclosure action is predicated on the plaintiff's ability to demonstrate—
either in the pleadings, upon motion for summary judgment, or at trial—that it was in
possession of the note with enforcement rights at the time it filed the foreclosure action.
Allowing a lack of standing to be cured by a post-petition assignment granting
enforcement rights in the note after the foreclosure action has been filed would defeat any
incentive for a note holder to ensure that it has enforcement rights prior to filing the action.
20
FV-I's reliance on McConnell for this premise is misplaced because, unlike this case, the
plaintiff unequivocally had enforcement rights in the note prior to filing the petition. 48
Kan. App. 2d at 901.
Exclusion of Endorsements on Note
Before addressing whether FV-I in fact established standing as of the time of
filing, we pause to address a district court evidentiary ruling related to our analysis. The
district court admitted the original note at trial but excluded the two additional
endorsements that were stamp signatures. The district court applied the business records
exception to the hearsay rule and excluded the endorsements based on FV-I's alleged
failure to lay a proper foundation. K.S.A. 2016 Supp. 60-460(m) provides:
"Writings offered as memoranda or records of acts, conditions or events to prove
the facts stated therein, if the judge finds that (1) They were made in the regular course of
a business at or about the time of the act, condition or event recorded and (2) the sources
of information from which made and the method and circumstances of their preparation
were such as to indicate their trustworthiness."
This ruling was erroneous because the signatures were not being admitted to prove
the truth of the matter asserted, i.e. the authenticity of the signatures. See In re Phillips,
491 B.R. 255, 271-72 (Bankr. D. Nev. 2013) ("the significance of an endorsement is that
it was made, not that the words used are themselves true"). Rather, the existence of the
endorsements themselves was the element critical to the enforcement rights at issue under
the UCC.
Under the UCC, a "holder" includes "[t]he person in possession of a negotiable
instrument that is payable either to bearer or to an identified person that is the person in
possession." K.S.A. 2016 Supp. 84-1-201(a)(21)(A). And K.S.A. 84-3-205(a) and (b)
21
recognize two types of endorsements: (1) a special endorsement, which is an
endorsement made to an "identified person" or "payable to bearer" and is payable to the
identified person; and (2) a blank endorsement, which is not a special endorsement and is
payable to bearer.
The UCC treats stamp signatures as equal to original signatures. See K.S.A.
84-3-401(b) ("A signature may be made (1) manually or by means of a devise or
machine.") K.S.A. 84-3-308 creates a presumption that signatures are authentic:
"[T]he authenticity of, and authority to make, each signature on the instrument is
admitted unless specifically denied in the pleadings. If the validity of a signature is
denied in the pleadings, the burden of establishing validity is on the person claiming
validity, but the signature is presumed to be authentic and authorized unless the action is
to enforce the liability of the purported signer and the signer is dead or incompetent at the
time of trial of the issue of validity of the signature."
Comment 1 to K.S.A. 84-3-308 elaborates on the presumption afforded to signatures:
"'Presumed' is defined in Section 1-201 and means that until some evidence is introduced
which would support a finding that the signature is forged or unauthorized, the plaintiff
is not required to prove that it is valid. The presumption rests upon the fact that in
ordinary experience forged or unauthorized signatures are very uncommon, and normally
any evidence is within the control of, or more accessible to, the defendant. The defendant
is therefore required to make some sufficient showing of the grounds for the denial before
the plaintiff is required to introduce evidence. The defendant's evidence need not be
sufficient to require a directed verdict, but it must be enough to support the denial by
permitting a finding in the defendant's favor. Until introduction of such evidence the
presumption requires a finding for the plaintiff." (Emphasis added).
This presumption applies to endorsements as well. See 6B Anderson on the UCC
§3-308:5R (3d ed. 2016) ("The requirement of specifically denying the genuineness of a
22
signature applies not only to the signature of the obligor sought to be held liable but also
to the signatures of any indorsers in the chain of title.").
Therefore, a defendant has the burden to present sufficient evidence denying an
endorsement's validity before a plaintiff is required to introduce evidence to the contrary.
See K.S.A. 84-3-308; King v. Bellamy, 82 Kan. 301, 303, 108 P. 117 (1910) (everything
is presumed to be done rightly until the contrary be proved); see also 6B Anderson on the
UCC § 3-308:8R (3d ed. 2016) ("The presumption requires a finding that the signature is
genuine or authorized unless and until the obligor has introduced sufficient evidence to
support a finding to the contrary.").
In this case, the endorsements on the original note should have been presumed
valid unless BOP proved otherwise. BOP's "evidence" against the endorsement was: (1)
the original note was not attached to the original petition; (2) 4 months into the case FV-I
was still relying on the older version of the note; (3) FV-I could not explain how or when
the allonge came to be; and (4) FV-I had argued inconsistent legal positions regarding its
ability to enforce the note. But, none of these assertions amounts to actual evidence that
the signatures were forged or unauthorized.
Mere speculation based on FV-I's inconsistent legal positions or the timing of its
assertions was insufficient to meet BOP's burden. The district court erred as a matter of
law by failing to apply the presumption of validity to the endorsements under K.S.A.
84-3-308 and by applying K.S.A. 60-460(m) separately to the note and then again to the
endorsements.
Under K.S.A. 84-3-308(b), once the validity of the signature is admitted, a
plaintiff producing a promissory note is entitled to payment so long as plaintiff is the
holder of the note and unless the defendant provides a defense. On default of a validly
executed mortgage given to secure a loan on real estate, the payee is entitled to judgment
23
for the amount due on its note and for foreclosure of its mortgage on the real estate
securing the note. See Daniels v. Army National Bank, 249 Kan. 654, 660-61, 822 P.2d
39 (1991).
Despite our holding, no evidence was presented that FV-I actually possessed the
note with the endorsement in blank at the time the petition was filed in this case.
However, review of the record suggests that the exclusion of the note with its
endorsements may have hindered FV-I from establishing this at trial.
Effect of Erroneous Exclusion of Endorsements
Chatfield testified that in January 2012, he became an asset manager for AMS,
which services the loans for FV-I, the trustee of Morgan Stanley Mortgage Capital
Holdings, the investor that purchased the Kallevig loans. Chatfield explained that Saxon
Mortgage serviced the loan on June 24, 2011, when this case was filed, and AMS had
access to its records. Chatfield apparently was not 100 percent sure how FV-I acquired
the Kallevig loan. When asked when FV-I purchased the loan, Chatfield stated, "I believe
it was 2010." When asked if FV-I had access to the original documents, Chatfield
responded, "I believe they do."
Chatfield testified that FV-I possessed the original note through its custodian,
Wells Fargo:
"Q. Okay. And I've previously represented to you that FV-I filed this foreclosure
case on June 24, 2011. Do you know if FV-I possessed that original note on or before that
date?
"A. Yes, they would have had it with the custodian (Wells Fargo)."
24
The district court clarified that the document they were referring to was the
original note that had been admitted into evidence but that the last two
endorsements had been excluded.
On cross-examination, Chatfield reiterated that he knew FV-I took over the
loan in 2010 through the comment history in the file he received from Saxon, but
he did not have written documentation of that fact at trial. The following relevant
exchange occurred:
"Q. But my question was, you don't have any knowledge of any agreements being made
between GMACB and GMAC Bank about transfers of the Kallevig note and mortgage
that preceded January of 2012?
"A. Other than the endorsements on the note, no.
"Q. Endorsements on what note?
"A. The original note.
"Q. The original note that shows an endorsement to GMACB?
"A. And it shows two other endorsements on the bottom, correct.
"Q. Those endorsements aren't part of the record. You understand. You've been here.
"A. Okay.
"Q. If GMAC Bank and GMACB made agreements prior to January of 2012 about
transfers of the note and mortgage, you wouldn't have been involved in that.
"A. That is correct.
25
Subsequently, the following exchange also occurred between BOP's
counsel and Chatfield:
"Q. (By Mr. Girard) We looked at a note that had some stamped endorsements [but] those
aren't part of the record anymore. . . . [A]m I right so far?
"A. That's correct.
"Q. GMAC Bank didn't endorse the promissory note to FV-I, right?
"A. Correct.
"Q. Do you have any other theories by which FV-I might claim it got enforcement rights
in the promissory note?
"A. They bought the loan in 2010.
"Q. Buying the loan is enough?
"A. It should have been endorsed to FV-I, or it should have been endorsed to the entity
buying the loan.
"Q. Do you have any knowledge of any of those types of endorsements you just
described?
"A. I don't have a copy of those, no."
Review of the record demonstrates that FV-I's witness was unable to fully answer
questions surrounding the timing of FV-I's acquisition of the promissory note because he
was unable to discuss the improperly excluded endorsements. As we cannot definitively
ascertain whether Chatfield would have testified that FV-I possessed the original note
26
with the excluded endorsement in blank when the petition was filed, we are compelled to
remand for a hearing on this matter, as discussed more below.
Mortgage Alone to Establish Standing
FV-1 alternatively argues that it had standing to foreclose because it possessed the
mortgage when it filed the petition. See Bank of New York Mellon v. Grund, 2015-Ohio-
466, 27 N.E.3d 555, 559 (Ohio App. 2015) (mortgage lender must establish an interest in
the promissory note or the mortgage in order to have standing to invoke the jurisdiction;
U.S. Bank, N.A. v. Tomlinson, No. 111,081, 2014 WL 4627608, at *4 (Kan. App. 2014)
(unpublished opinion) ("[E]ven if we are incorrect about the note itself establishing U.S.
Bank as the valid holder of the note, the fact U.S. Bank is the valid mortgage holder also
makes it the holder of the debt."), rev. denied 302 Kan. 1022 (2015); U.S. Bank v.
Massey, No. 109,902, 2014 WL 4080115, at *4 (Kan. App. 2014) (unpublished
opinion)("U.S. Bank produced an assignment of the mortgage that, both by the terms of
the assignment and by statute [58-2323], carried the note with it.").
This argument hinges in part on the interplay between the common law idea that
the mortgage follows the note and statutory language suggesting the debt follows the
mortgage. In 1870, this court recognized that "the mortgage is but appurtenant to the
debt—a mere security; and, under ordinary circumstances, whoever owns the debt owns
the mortgage. . . . An assignment of the debt ordinarily carries the mortgage with it."
Kurtz v. Sponable, 6 Kan. 395, 397 (1870). However, in 1899, the legislature passed the
predecessor of K.S.A. 58-2323, which provides conversely: "The assignment of any
mortgage as herein provided shall carry with it the debt thereby secured." L. 1899,
ch. 168, sec. 5.
In U.S. Bank NA v. McConnell, 48 Kan. App. 2d 892, 305 P.3d 1 (2013), the Court
of Appeals addressed whether a post-petition assignment of the mortgage was sufficient
27
to give the note holder standing to foreclose. The panel acknowledged K.S.A. 58-2323
and reviewed caselaw concerning whether the mortgage followed the note so that a
holder of the note without the mortgage could have standing to foreclose:
"Kansas has long held that the holder of the note is also the holder of the
mortgage securing it. In Anthony v. Brennan, 74 Kan. 707, 87 P. 1136 (1906), the
plaintiff obtained an assignment of the mortgage from one, but not all, of the mortgagees
before filing a foreclosure action. The mortgagor claimed the plaintiff lacked standing,
and the plaintiff's later efforts to obtain assignments from the remaining mortgagees did
not cure the standing defect that existed at the time suit was filed. In rejecting the
mortgagor's argument, the court cited O'Keeffe v. National Bank, 49 Kan. 347, 30 P. 473(1892), in which the court held that 'the title to a note and the mortgage securing its
payment passed by delivery, and that the possession of the instruments and their
production at the trial by the plaintiff furnished prima facie evidence of his ownership.'
Anthony, 74 Kan. at 708-09.
"In Middlekauff v. Bell, 111 Kan. 206, 207, 207 P. 184 (1922), our Supreme
Court held: " 'An assignment of a mortgage is merely a formal transfer of title to the
instrument, and the assignment from the bank to the plaintiff was admittedly good for
that purpose. The plaintiff, however, did not need the assignment in order to invest her
with ownership of the mortgage. She acquired full title by purchase of the note which it
secured, and the assignment may be excluded from consideration without prejudice to her
lien.'
"The court reasoned:
'"The mortgage is a mere security, creating a lien upon the property, but
vesting no title. The debt secured by the mortgage is the principal thing,
and the mortgage the mere incident following the debt wherever it goes,
and deriving its character from the instrument which evidences the
debt."' 111 Kan. at 208.
28
Further, the Middlekauff court quoted Insurance Co. v. Huntington, 57 Kan. 744, Syl. ¶ 1,
48 P. 19 (1897): '"The assignment and delivery of a negotiable promissory note before
maturity operates as an assignment of a mortgage given as security for the payment of the
note."' 111 Kan. at 209.
"In a case with disparate facts, Army Nat'l Bank v. Equity Developers, Inc., 245
Kan. 3, 17, 774 P.2d 919 (1989), the court reaffirmed this notion by stating: 'Our view is
that the mortgage follows the note. A perfected claim to the note is equally perfected as
to the mortgage.'
"Likewise, in MetLife Home Loans v. Hansen, 48 Kan. App. 2d 213, Syl. ¶ 5, 286
P.3d 1150 (2012), a panel of our court held that the mortgage follows the note when it
stated: 'The transfer of an obligation or debt secured by a mortgage also transfers the
mortgage unless the parties to the transfer agree otherwise.' Further: 'Kansas law favors
keeping the mortgage and the right of the enforcement of the obligation it secures in the
hands of the same person or entity.' 48 Kan. App. 2d 213, Syl. ¶ 6.
"Finally, Restatement (Third) of Property (Mortgages) § 5.4(a) (1996) provides:
'A transfer of an obligation secured by a mortgage also transfers the mortgage unless the
parties to the transfer agree otherwise.'
"This approach is consistent with the reality of modern residential lending
practices, in which the lender or a later holder of the note ordinarily does not look to the
borrower's financial ability to satisfy a money judgment in the event of default on the
note, but rather to the value of the home which stands as collateral for the debt. That was
the case here, where the Bank did not seek a personal judgment against Steven but only
sought to foreclose on the residence which stood as collateral for the loan.
"Because the mortgage followed the note and there is no genuine fact issue about
the Bank being the holder of the note at the time suit was filed, we conclude that the
Bank had standing to pursue this foreclosure action." 48 Kan. App. 2d at 900-01.
A closer review of Restatement (Third) of Property (Mortgages) § 5.4 and its
comments provide further guidance. Restatement (Third) of Property (Mortgages) §
29
5.4(a) provides: "A transfer of an obligation secured by a mortgage also transfers the
mortgage unless the parties to the transfer agree otherwise." Comment a provides:
"The essential premise of this section is that it is nearly always sensible to keep
the mortgage and the right of enforcement of the obligation it secures in the hands of the
same person. This is so because separating the obligation from the mortgage results in a
practical loss of efficacy of the mortgage . . . . When the right of enforcement of the note
and the mortgage are split, the note becomes, as a practical matter, unsecured."
(Emphasis added.) Restatement § 5.4, comment a.
Restatement (Third) of Property (Mortgages) § 5.4(b) provides: "Except as
otherwise required by the Uniform Commercial Code, a transfer of a mortgage also
transfers the obligation the mortgage secures unless the parties to the transfer agree
otherwise." Comment b provides:
"A transfer in full of the obligation automatically transfers the mortgage as well
unless the parties agree that the transferor is to retain the mortgage. The objective of this
rule, as noted above, is to keep the obligation and the mortgage in the same hands unless
the parties wish to separate them. This result is sometimes justified on the ground that
"'[a]ll the authorities agree that the debt is the principal thing and the mortgage an
accessory.'" Restatement (Third) of Property (Mortgages) § 5.4 comment b (quoting
Carpenter v. Longan, 83 U.S. (16 Wall.) 271, 21 L. Ed. 313 [1872]).
Restatement (Third) of Property (Mortgages) § 5.4(c) states: "A mortgage may be
enforced only by, or on behalf of, a person who is entitled to enforce the obligation the
mortgage secures." Comment c provides:
"It is possible for a mortgagee to assign the mortgage while retaining full
ownership of the obligation, but only if the parties so agree. . . . The practical effect of
such a transaction is to make it impossible to foreclose the mortgage, unless the
30
transferee is also made an agent or trustee of the transferor or otherwise has authority to
foreclose in the transferor's behalf." (Emphasis added) Restatement § 5.4 comment c.
Comment e notes that courts should be "vigorous" in seeking to find the sort of
relationship outlined in comment c that would allow a split mortgage/note to be
foreclosed.
In Landmark Nat. Bank v. Kesler, 289 Kan. 528, 539-40, 216 P.3d 158 (2009), we
recognized the possibility that a mortgage and note could split and the subsequent effect
on the mortgage:
"The relationship that MERS has to Sovereign is more akin to that of a straw man
than to a party possessing all the rights given a buyer. A mortgagee and a lender have
intertwined rights that defy a clear separation of interests, especially when such a
purported separation relies on ambiguous contractual language. The law generally
understands that a mortgagee is not distinct from a lender: a mortgagee is '[o]ne to whom
property is mortgaged: the mortgage creditor, or lender.' Black's Law Dictionary 1034
(8th ed. 2004). By statute, assignment of the mortgage carries with it the assignment of
the debt. K.S.A. 58-2323. Although MERS asserts that, under some situations, the
mortgage document purports to give it the same rights as the lender, the document
consistently refers only to rights of the lender, including rights to receive notice of
litigation, to collect payments, and to enforce the debt obligation. The document
consistently limits MERS to acting 'solely' as the nominee of the lender.
"Indeed, in the event that a mortgage loan somehow separates interests of the
note and the deed of trust, with the deed of trust lying with some independent entity, the
mortgage may become unenforceable.
"'The practical effect of splitting the deed of trust from the promissory
note is to make it impossible for the holder of the note to foreclose,
unless the holder of the deed of trust is the agent of the holder of the
note. [Citation omitted.] Without the agency relationship, the person
31
holding only the note lacks the power to foreclose in the event of default.
The person holding only the deed of trust will never experience default
because only the holder of the note is entitled to payment of the
underlying obligation. [Citation omitted.] The mortgage loan becomes
ineffectual when the note holder [does] not also hold the deed of trust.'
Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App.
2009)." (Emphasis added.)
K.S.A. 58-2323, Kansas caselaw, and the Restatement thus work to keep the note
and mortgage together based on the intent of the transferring parties. See MetLife Home
Loans v. Hansen, 48 Kan. App. 2d 213, 224, 286 P.3d 1150 (2012) (Kansas law favors
keeping the mortgage and the right of the enforcement of the obligation it secures in the
hands of the same person or entity.). While this may be important in a case where there is
a dispute between the transferor/transferee, or where there is a cloud over who possesses
the mortgage, it is immaterial in this case where enforcement rights in the note are
necessary to demonstrate a default that gives rise to the power to foreclose on the
mortgage.
In this case, BOP stipulated at oral argument that FV-I possessed the original note
and mortgage at trial. While we acknowledged the possibility that a mortgage and note
could split in Landmark, the emphasized language above suggests that while a split is a
possibility, it would be rare or an exception. The Kallevig II panel seemed to accept the
premise that the note and the mortgage had split in this case in ruling on BOP's
counterclaim. Regardless of whether the note and mortgage had split in this case, a
person or entity possessing only the mortgage would never experience the cognizable
injury, i.e., the default necessary to foreclose the mortgage. Thus, despite K.S.A. 58-
2323, FV-I's possession of the mortgage alone without demonstrating enforcement rights
in the note is insufficient to establish standing in a mortgage foreclosure proceeding.
32
Standing Application to this Case
In summary, in order for a plaintiff to prevail in its mortgage foreclosure
proceeding, it must establish both that it possessed enforcement rights in the note under
Article 3 of the UCC, K.S.A. 84-3-301, and that those rights existed at the time it filed
the action. This can be accomplished either through the pleadings, when faced with a
motion for summary judgment, or at trial. Possession or assignment of the mortgage
alone when the foreclosure action is filed is not sufficient to establish standing, and the
lack of standing cannot be cured by a post-petition assignment of a promissory note. The
proper remedy for a lack of standing is dismissal without prejudice.
In this case, the district court and the Kallevig I and II panels correctly recognized
that enforcement rights must be possessed by the plaintiff when the foreclosure action is
filed. However, the district court erroneously excluded the last two endorsements on the
original note that FV-I attempted to present at trial. At this point FV-I had possession of
the original promissory note endorsed in blank and the mortgage; however, it had not
established that it had possession of the original promissory note when it filed the
foreclosure petition.
The Court of Appeals held that even if the note showing the last two endorsements
was admitted by the district court, "it would not have cured FV-I's lack of standing."
2015 WL 717776, at *6. We disagree that this is certain from the current state of the
record. Chatfield's inability to rely upon the endorsements when discussing how FV-I
obtained enforcement rights in the note leaves open the possibility that he could have
established when FV-I acquired possession of the note to demonstrate standing to
foreclose. Accordingly, we remand for a new hearing on whether FV-I possessed the
original note with the improperly excluded endorsements when the petition to foreclose
was filed.
33
In so holding, we necessarily vacate the district court's ruling that BOP should be
given lien priority, subject to the district court's evaluation of the standing issue on
remand. In the event the district court again holds FV-I did not have standing when it
filed its foreclosure petition, we offer some additional guidance concerning BOP's
remaining counterclaim to establish priority.
Priority Determination
In granting the original summary judgment motion, the district court ruled that the
note and the mortgage had split, that the parties had agreed to the split, and that BOP's
mortgages were thus superior to the mortgage held by FV-I. On appeal, the Kallevig I
panel held there was no evidence the parties intended to split the mortgage and note:
"FV-I was not the original holder of the note; it was a subsequent assignee of the original
lender, GMAC Bank. Likewise, MERS assigned the mortgage to FV-I 'as the nominee of
GMAC Bank.' Because MERS is simply a 'straw man' and the mortgage and the note in
this case reference one another, it is clear the parties intended for the instruments to
remain together. There is no evidence in the record of an expressed agreement to split the
note and the mortgage." 2013 WL 2321198, at *4.
BOP did not petition for review from this decision; however, BOP continued to
argue on remand that there was a split, despite not offering any additional evidence of it.
On remand, the district court nevertheless addressed the issue and again held that GMAC
Bank split the note and mortgage. Specifically, it held GMAC assigned the note to
GMACB on November 15, 2008, without simultaneously assigning the mortgage to
GMACB, and GMAC then later assigned the mortgage to FV-I. The district court held
this was evidence that GMAC did not intend to assign the mortgage to GMACB.
34
In the second appeal, the Kallevig II panel held that it was not addressing the
district court's holding that the note and the mortgage split although its reasoning
regarding the mortgage being unenforceable suggests otherwise:
"the record reflects the mortgage was assigned by MERS to FV-I, and FV-I failed to
show the note was in its possession or was timely assigned to FV-I to initiate the
foreclosure. FV-I's failure to establish enforcement rights in the note makes the mortgage
unenforceable. With FV-I's mortgage unenforceable, there is no longer a mortgage for
BOP's mortgages to be subordinate to. Thus, the district court did not err in finding FV-I's
mortgage lost its superior priority to BOP's mortgages." 2015 WL 717776, at *6.
The Kallevig II panel's holding that the mortgage was unenforceable appears to be
based on our Landmark decision. 289 Kan. at 540 ("in the event that a mortgage loan
somehow separates interests of the note and the deed of trust . . . the mortgage may
become unenforceable"). However, the panel overreads our Landmark decision, where
we were addressing whether MERS was a necessary party to the action. We did not
address the effect of a split on the priority of the mortgages or whether a separated note
and mortgage could later be reunited. In short, our Landmark decision never held that a
mortgage not currently capable of being enforced by the assignee no longer exists.
Regardless of whether a split occurred or the party capable of enforcing the note was not
a party to this case, the mortgage itself still exists.
This case presents a unique procedural posture as the property sought to be
foreclosed upon has already been sold and the proceeds placed into escrow pending a
priority determination. On remand, after making its ruling on standing, the district court
should make a priority determination using Kansas' existing law on the subject. See
K.S.A. 58-2221; K.S.A. 58-2222; K.S.A. 58-2223; see also Bank Western v. Henderson,
255 Kan. 343, 348, 874 P.2d 632 (1994) (general rule is that first to record a mortgage
has priority; priority continues as long as mortgage is not released).
35
Affirmed in part, reversed in part, and remanded to the district court for a new
hearing consistent with this opinion.
36