Standing today is a leading issue in contested mortgage foreclosures, and New Jersey courts are using the ‘Mitchell’ standard to limit mortgagors’ standing defenses. The crux of the problem is that ‘Mitchell’ is based on a mistake.
New Jersey courts are now using the dictum espoused in Deutsche Bank Nat. Trust Co. v. Mitchell, 422 N.J. Super. 214, 225 (App. Div. 2011)—that “Deutsche Bank could have established standing as an assignee, N.J.S.A. 46:9-9, if it had presented an authenticated assignment indicating that it was assigned the note before it filed the original complaint”—to evaluate standing in mortgage foreclosure actions. In Deutsche Bank Nat. Trust Co v. Angeles, 428 N.J. Super. 315, 318 (App. Div. 2012), the Appellate Division stated: “In Mitchell, we held that either possession of the note or an assignment of the mortgage that predated the original complaint conferred standing.” And in Deutsche Bank Nat. Trust Co. v. Russo, 429 N.J. Super. 91, 101 (App. Div. 2012), the standard mutated (in the post-judgment context) into the mortgage assignee obtaining either the note or a valid assignment or both before entry of judgment.
It is this article’s thesis that, as to mortgages securing negotiable notes, Mitchell’s “either/or standard,” insofar as it permits a mortgage assignee (or its servicer) to establish standing without possession of the secured note, violates the law of negotiable instruments and mortgages.
Virtually all mortgages foreclosed today secure negotiable notes and are held by assignees or their servicers.
Standing today is a leading issue in contested mortgage foreclosures, and New Jersey courts are using the Mitchell standard to limit mortgagors’ standing defenses.
The crux of the problem is that Mitchell is based on a mistake. Mitchell mistakenly relied on N.J.S.A. 46:9-9 as authority for establishing an alternate ground for standing based solely on the mortgage assignment. However, N.J.S.A. 46:9-9 has been held inapplicable to negotiable notes in a leading case, Carnegie Bank v. Shalleck, 256 N.J. Super. 23, 46 (App. Div. 1992). This should have ended the Mitchell standard before it began. And even without Carnegie Bank, Mitchell would be wrong because of the principles and precedents referred to below.
Black letter law dictates that where the mortgage debt is embodied in a negotiable note, Section 3 of the Uniform Commercial Code (Code), specifically N.J.S.A. 12A:3-301, controls enforcement of both the note and mortgage securing it in New Jersey. This black letter law is based on the view that the note (or debt) is the principal thing and the mortgage (or security) a mere incident or accessory, and when the mortgage debt is embodied in a negotiable instrument the quality of negotiability is imparted to the accompanying mortgage, with the result that the Code controls its enforceability. (29 Weinstein, Law of Mortgages Sec. 11.5 at nn. 42-3.) Hence Professor Smith’s oft quoted maxim: “The note is the cow and the mortgage the tail. The cow can survive without a tail, but the tail cannot survive without the cow.” (Restatement (Third) of Prop.: Mortgages Sec. 5.4, Reporters’ Notes).
In order for a mortgage assignee to be entitled to enforce a mortgage securing a negotiable note, the assignee must comply with N.J.S.A.12A:3-301 and must either be (1) a “holder” (a holder in due course) where the negotiable note has been negotiated by transfer of possession and indorsement by the holder, or if payable to bearer, negotiated by transfer of possession alone, or (2) a “non-holder in possession with rights of a holder,” or (3) a person not in possession who is entitled to enforce the note pursuant to N.J.S.A. 12A:3-309 (lost, destroyed, or stolen notes) or 12A:3-418d (payment or acceptance by mistake).
Thus, except for the rare exceptions noted above, possession of the secured negotiable note by a mortgage assignee is an absolute enforcement requirement under the Code.
A mortgage assignee, then, may have an assignment of mortgage and note in hand—and may be the legal owner of the note—but still not be in “possession” of the note and have the right to enforce the note and associated mortgage. There is a critical distinction under the Code between “enforcement” and “ownership.” See N.J.S.A. 12A:3-203(a), (b), comment 1, para. 2, In re Kemp, 440 B.R. 624, 633 (Bkrtcy. D.N.J. 2010). It is possession, not ownership, of the secured negotiable note that establishes the minimum enforcement requirement under the Code.
While New Jersey courts typically pay homage to N.J.S.A.12A:3-301 (above) in their written opinions—which requires possession of the note by a foreclosing assignee—they then skip to Angeles and Mitchell reciting the “either/or” standard making possession an option. This makes no sense.
Under Mitchell, an assignee can avoid the possession requirement simply by presenting its assignment of mortgage, the assignment rendering possession of the note redundant under the “either/or” formula. Since a foreclosing assignee must produce its assignment (or certified copy) and other documents to be entitled to judgment pursuant to R. 4:64-2(a), standing under Mitchell becomes a given in every case.
In Capital One, N.A. v. Peck, 455 N.J. Super. 254 (App. Div. 2018), the Appellate Division affirmed a foreclosure judgment by Capital One, N.A. (CONA), an assignee and servicer of Federal Home Loan Mortgage Corporation (Freddie Mac), although Freddie Mac had possession the note, deeming CONA’s lack of possession an irregularity and stating that the note should have been in CONA’s possession at the time it filed the foreclosure complaint. The appellate panel also stated that “a plaintiff need not actually possess the original note at the time of filing in order to have standing to file a foreclosure complaint,” citing Mitchell supra. But found that “both Mitchell and Angeles dealt with the usual foreclosure situation where one entity owns both the note and the mortgage.” (Emphasis supplied.) And “to preclude the possibility of one entity foreclosing on the home while the other enforces the note,” held that “when the note is separated from the mortgage, the plaintiff in a foreclosure action must demonstrate both possession of the note and a valid mortgage assignment prior to filing the complaint.”
It is submitted that Capital One confuses the standing issue.
First, ownership of the note and mortgage by one entity (the usual situation) does not eliminate the problem addressed in Capital One, i.e., foreclosure by one entity and enforcement of the note by another; for, as noted, an assignee may have ownership of the note and mortgage but not possess the note and the right to enforce it under the Code. The only way to preclude this is to require a foreclosing assignee to have possession of the note.
Capital One blurs the critical Code distinction between ownership and enforceability of the note (the latter requiring possession) and refers instead to ownership of the note and mortgage by one entity as the usual situation, giving the assignee authority to establish standing in accordance with Mitchell without possession of the note, a fact which is not likely to encourage mortgage assignees to adopt procedures to insure that they have possession of secured notes.
Second, Capital One specifies that in the usual foreclosure situation a mortgage assignee “need not actually possess the original note at the time of filing.” Only in the unusual situation—where the note is separated from the mortgage—need the assignee have possession. But this begs the question because in order to determine whether the note is separated from the mortgage, an assignee must establish whether it has possession of the note; otherwise, the note can be enforced by another person with possession.
Third, the unusual situation is ordinarily a non-starter since an attempted assignment of a mortgage apart from the secured obligation is a nullity. (29 Weinstein, Law of Mortgages Sec. 11.2 at n. 24). Moreover, separation of the note and mortgage is not always fatal: if the assignee has possession of the note but not the mortgage, equity can compel an assignment of the mortgage to the assignee (an equitable assignment) giving the assignee standing to foreclose.
Fourth, Capital One misconstrues Mitchell and Angeles by stating that they dealt with the usual foreclosure where the assignee owns both the note and mortgage. In the usual foreclosure, however, the assignee has both ownership and possession of the note. Moreover, Mitchell and Angeles establish an either/or criteria for standing: either possession of the note or an assignment of mortgage establish standing. To use the second alternative, an assignee need not comply with the first.
In light of Mitchell and its progeny, standing today has become an almost foregone conclusion. Since under the new foreclosure statute, N.J.S.A. 46: 18-13(b)(1), an assignee cannot, without a court order, institute foreclosure unless it is the record mortgage holder as established by the latest record of assignment, and since a document that includes a notarization of the signatory making it recordable (i.e., an acknowledgment) sufficiently proves its authenticity (the Mitchell requirement), every plaintiff foreclosing an assigned mortgage automatically has standing. See Wells Fargo Bank v. Perseo, 2014 WL 7883576, at*4 (A.D. 2015), citing Citicorp Mortg. v. Pessin, 238 N.J. Super. 606, 608 n. 2 (A.D.1990).
Now, the new foreclosure statute, N.J.S.A. 46:18-13 (above), does not, nor was intended to, change the Code’s enforcement requirements. This is made clear by The New Jersey Law Revision Commission’s “Final Report Relating to Mortgage Recording,” Sept. 19, 2013, Comment to Part 1, for L. 2015, c. 225, upon which the new statute was based, which specifically refers to “an assignment [of mortgage] to the true entity that has the authority to enforce the note may be recorded.” (Emphasis supplied.)
Contesting standing, then, appears to be a futile process, since the mortgagor will be met at the gate by the mortgage assignee holding its recorded assignment which prima facie establishes standing to foreclose under Mitchell, case closed.
All this is exacerbated because a foreclosing assignee is not required by law or court rule to allege, aver, certify, establish or even state that it has “possession” of the original mortgage note. Historically, the original note, mortgage and assignments were required and were marked as exhibits at time of entry of judgment. The author remembers this when he headed the Office of Foreclosure. This acted as an important control on standing that does not exist today because certified copies are permitted.
A foreclosing mortgage assignee in all cases should be required to establish that it has possession of the secured negotiable note. Today, by virtue of Mitchell, Angeles and Russo the assignee does not. This issue, in the author’s opinion, calls out for Supreme Court action.