SC Year In Review: Loan Servicer Has Standing To Foreclose
On July 16, 2013, the Connecticut Supreme Court addressed an issue of first impression in J.E. Robert Co. v. Signature Properties LLC, 309 Conn. 307 (2013). Specifically, the Court held that a loan servicer for the owner and holder of a note and mortgage has standing in its own right to bring a foreclosure action against the mortgagor. As the Court acknowledged, this is a significant decision because it is consistent with the practice of pooling of mortgages, which is an important financial device for lenders, and, thus, should encourage lenders to continue underwriting loans to borrowers in Connecticut.
The original plaintiff in this case was J.E. Robert, a loan servicer who commenced a foreclosure action against Signature Properties LLC, the borrower on a promissory note in the amount of $8.8 million. The note was payable to JP Morgan Chase Bank N.A., which was the original lender. The note was secured by a mortgage on commercial property owned by Signature Properties. Several months after the loan was made, Chase Bank assigned the note and mortgage to another lender, LaSalle Bank National Association, and the note and mortgage were bundled with numerous other loans into a mortgage-backed security, which was governed by a separate pooling and servicing agreement. Under that agreement, Chase Bank was the depositor, LaSalle Bank was the trustee and paying agent, and J.E. Robert was the special servicer. When Signature Properties stopped making payments and defaulted on its loan, J.E. Robert brought the foreclosure action in its own name against Signature Properties. LaSalle Bank subsequently assigned the note and mortgage at issue to another party, Shaw's New London LLC, who substituted in as the plaintiff in the foreclosure action and amended the complaint to also name as defendants various individuals who guaranteed the loan.
The defendants moved to dismiss the foreclosure action for lack of standing. In particular, the defendants argued that J.E. Robert lacked standing to bring the action because it was the mere servicer of the loan. The defendants claimed that only LaSalle Bank had standing to sue because it was the owner and holder of the note and mortgage at the time the action was commenced. In response, Shaw's argued that J.E. Robert had standing to sue in its own name by virtue of the rights granted under the pooling and servicing agreement and under the Uniform Commercial Code (UCC). The trial court agreed with Shaw's and denied the defendants' motions to dismiss. The trial court then rendered a judgment of strict foreclosure, and the defendants appealed. The Appellate Court, on its own motion, transferred the appeal to the Connecticut Supreme Court.
'Rights Of A Holder'
The Supreme Court began its analysis by reiterating certain fundamental principles. First is that a claim of lack of standing raises a question of subject matter jurisdiction, and without subject matter jurisdiction the courts have no ability to hear the matter. Second is the rule, codified at Connecticut General Statutes § 49-17, that a mortgage follows the debt. Thus, the Court noted that the focus of its inquiry was on J.E. Robert's rights with respect to the note executed by Signature Properties.
The Court then considered the relevant UCC provisions. Specifically, the Court noted that, under C.G.S. § 42a-3-301, a "person entitled to enforce an instrument" includes "the holder of the instrument" or "a nonholder in possession of the instrument who has the rights of a holder." A holder is the person in possession of the instrument if the instrument is payable to the bearer. A nonholder in possession of an instrument includes a person who acquired the rights of a holder. Under C.G.S. § 42a-3-203, a person may acquire the rights of a holder, including the right to enforce an instrument, by transfer of that instrument. A transfer occurs when the instrument is delivered by a person, other than the issuer, for the purpose of giving the person receiving delivery the right to enforce the instrument. Thus, as a practical matter, to transfer an instrument and convey the rights of a holder, the transferor must: (1) intend to vest in the transferee the right to enforce the instrument; and (2) deliver the instrument to the transferee such that he has actual or constructive possession of the instrument.
In light of this statutory framework, the Court stated that the salient question is whether a loan servicer qualifies as a nonholder transferee entitled to enforce the note that it services. Based on the facts of this case, the Court concluded that J.E. Robert was so qualified. In particular, the Court relied on the fact that, prior to commencement of the foreclosure action, the note and mortgage were transferred to J.E. Robert for servicing pursuant to the pooling and servicing agreement, and that the agreement provided J.E. Robert with the right to enforce the note, including by way of foreclosure and with the ability to seek a deficiency judgment. The Court also relied on the corresponding limited power of attorney executed by LaSalle Bank in favor of J.E. Robert as proof of LaSalle Bank's intention to deliver the note to J.E. Robert for the purpose of giving the special servicer the right to enforce the note.
In reaching the conclusion that the special servicer had standing to bring the foreclosure action in its own name even as a nonholder of the note, the Court stressed that, under C.G.S. § 42a-3-301, a person may be a person entitled to enforce an instrument "even though the person in not the owner of the instrument." In this regard, the Court stated that the defendants' reliance on its prior decision in RMS Residential Properties LLC v. Miller, 303 Conn. 224 (2011), for the proposition that "only the rightful owner of the note has the right to enforce the mortgage," was misplaced. The Court explained that this principle applies where different parties own the note and mortgage at the time the foreclosure action is commenced, which was not the case in J.E. Robert. Accordingly, the Court rejected the defendants' argument that a loan servicer must be either the owner or holder of a note and mortgage in order to have standing to bring a foreclosure action.
The Court's decision to uphold a loan servicer's right to bring a foreclosure action in its own name where the loan servicer demonstrates that it has been granted the right to enforce the note is consistent with decisions in other jurisdictions throughout the country. This decision is important for lenders who do business in Connecticut. The securitization of mortgage loans remains popular among lenders, many of whom originate these loans fully intending to package the loans and sell them to investors. Appointing a loan servicer who can effectively manage a large pool of loans is often a critical component of the overall transaction. As a result, the ability of a loan servicer to enforce each individual note and its corresponding mortgage is likewise critical to the lender's ability to package and sell the loans. The decision in J.E. Robert affirms that a loan servicer has standing to foreclose on a mortgage upon default of a loan in the pool where the servicer can show — including through the terms of the pooling and servicing agreement and the corresponding power of attorney — that the owner of the note has granted the servicer the right to enforce the note. As the Supreme Court has recognized, a decision to the contrary would inhibit the commercial pooling of mortgages and would discourage lenders from underwriting loans in Connecticut. •