Missouri Court Weighs In on ‘Show Me the Note’

17 Mar Missouri Court Weighs In on ‘Show Me the Note’

A Missouri appellate court concluded that a mortgage lender would not have standing to appear in court unless it could prove it was the true owner of the loan. Once again, old fashioned legal rules are getting in the way of convenience for the lending industry.

A mortgage typically consists of two separate documents: A Note and a Deed of Trust. The Note says how much you owe, to whom, what the payment and interest rate terms are, and what happens if you fail to pay properly. The Deed of Trust is what grants the lender a lien on the property which secures the payment of the Note — and what gives the lender the right to take the property if you don’t pay. Most states require a Deed of Trust to be publicly recorded in order to give a lender a higher lien on the property as against other lenders, if any. But the rules often do not require a Note to be recorded — or the assignments of the Notes or Deeds of Trust that happen all the time. So the public record often shows the original lender, but not any of the subsequent owners of the loan.

The Missouri Court of Appeals for the Eastern District concluded this month that a lender ought to be able to prove it is owed the money that was not paid before it can go to court to claim a right in the property. In the particular case, the court was dealing with a common mortgage practice: Assigning the Deed of Trust to MERS for safe-keeping while assigning the Note –the right to collect the money — to a securitized trust, ultimately owned by various investors. However, the “chain” of assignments of the Note typically is not so easy to follow. The original lender is usually still listed on the Note and the assignments of the Note to other banks or servicers is either not traceable — or was never technically completed because the first assignment left the the assignee/recipient blank (called an “assignment in blank”).

For those of us who have had the sad occasion to deal with multiple mortgage servicers claiming to be entitled to payment on the same loan documents — and most bankruptcy lawyers eventually have this journey through the Looking Glass experience — one can only say, “It’s about time!”

The Missouri court concluded, based on a long tradition in state law, that the Note controls everything and the holder of a bare Deed of Trust is without power to do anything against the property. And in order to appear in court based on the Note, the party must actually prove they are properly entitled to the Note through a purchase or assignment of the loan. In other words, “because I said so” is not good enough. This is in line with what has happened elsewhere nationally.

Ironically of course this case evolved not from a foreclosure — most foreclosures in Missouri are “non-judicial,” meaning they take place without the court ever being involved — but rather from a fight between an investor who bought a property at a delinquent tax sale and the mortgage lender. It is an odd twist of fate that a vulture investor would have a greater right to force a mortgage lender to prove they are entitled to pursue a home than the actual homeowner. This is a critical flaw of the entire “non-judicial” foreclosure process used in many states today.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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