Why the “Lost Note Defense” Doesn’t Work That Well in Maryland

09 Mar Why the “Lost Note Defense” Doesn’t Work That Well in Maryland

A number of clients facing foreclosure have asked me whether I could use the “lost note defense” to help them save their homes. They’d read about how successful it had been in states like Ohio and Florida, and wondered about whether it could help them here in Maryland. Sadly, the answer is that normally it can’t. Why not? The answer lies in Maryland’s somewhat unusual method of conducting foreclosures, and the explanation is a bit technical.

Unlike Ohio and Florida, Maryland is a “non-judicial foreclosure” state. In “judicial foreclosure” states, a foreclosure is conducted like a typical lawsuit: the lender sues you in state court, serves the suit papers, and must prove to the Court its entitlement to foreclose on the property. In Maryland, however, foreclosures are started by “docketing” a foreclosure action in Court. It does not have to be served on you (although certain notices must be provided), and no hearing, trial or Court approval is required before the foreclosure occurs (although you can request mediation). It also means that the lender does not have to prove to you or to the Court that it is the owner of the note before the foreclosure. If you want to stop the foreclosure, the only way (other than a bankruptcy filing) is for you to file a separate declaratory judgment or injunction action in state court and get the court to rule in your favor.

Maryland is also a “Deed of Trust” state, rather than a “mortgage” state. For both a Deed of Trust and a mortgage, you sign a note agreeing to repay the money loaned. But the way the lien is placed on the house differs. A mortgage involves two parties, the borrower (you) and the lender (the bank). A Deed of Trust requires three parties: the borrower, the lender, and a trustee. The trustee, usually a lawyer at the title company or a law firm, actually holds legal title to the property for the benefit of the lender. Until the loan is paid, the title is not released to you.

What does this mean in terms of the foreclosure? The Trustee is the party bringing the foreclosure action, not the lender. The Trustee can even appoint a “Successor Trustee,” who will conduct the sale. The presence or absence of the Note is irrelevant in these situations, since the lender isn’t directly involved and the Trustee’s authority to conduct the foreclosure is in the Deed of Trust itself.

So I usually tell my clients that the Lost Note Defense doesn’t work as well in Maryland because of the way our state handles foreclosures.

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Brett Weiss, a senior partner at Chung & Press, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11 and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his law partner, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute, the Bankruptcy Bar Association of Maryland, and the Civil Justice Network. He has been recognized as a “Super Lawyer” every year since 2007 for Maryland and the District of Columbia, and in 2011 received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, The United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.

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