Anderson v. Burson (Ct. of Special Appeals)

Filed: December 22, 2010
Opinion by James P. Salmon

Held: A "person in possession" of a note has the right of a holder of the note, including the right to appoint a substitute trustee to the deed of trust securing the note and the right to proceed to foreclose under that deed of trust.

Facts: In 2006, the Andersons refinanced their home in Columbia, Maryland, borrowing $277,250.00 from Wilmington Finance, Inc. The loan was evidenced by a note and secured by a deed of trust on their home. Mortgage Electronic Registration Systems, Inc. ("MERS") was named in the deed of trust as the nominee of the lender. As explained by the Court:

In 1993, members of the real estate mortgage industry created MERS, an electronic registration system for mortgages. Its purpose is to streamline the mortgage process by eliminating the need to prepare and record paper assignments of mortgage, as had been done for hundreds of years. To accomplish this goal, MERS acts as nominee and as mortgagee, for its members’ successors and assigns, thereby remaining nominal mortgagee of record no matter how many times loan servicing, or the mortgage itself, may be transferred. MERS hopes to register every residential and commercial home loan nationwide on its electronic system.

Subsequently, MERS transferred its beneficial rights under the note and deed of trust to Morgan Stanley Capital Holdings, Inc., and its servicing rights to Saxon Mortgage Services, Inc. Thereafter, the Andersons began making their mortgage payments to Saxon.

Some time later, Morgan Stanley transferred its rights to Morgan Stanley ABS Capital I, Inc. The rights were then subsequently transferred to Deutsche Bank Trust Company Americas, as Trustee and Custodian for Morgan Stanley Home Equity Loan Trust, MSHEL 2007-2.

In 2007, the Andersons went into default on the note and deed of trust and various substitute trustees were named and foreclosure proceedings instituted. As part of the filings in the foreclosure proceedings, the substitute trustees filed a lost note affidavit claiming that the original promissory note had been lost. Subsequently, Mr. Anderson filed for bankruptcy protection.

Ultimately, the automatic bankruptcy stay was lifted and foreclosure proceedings resumed. The Andersons sought to obtain an injunction blocking the foreclosure because they alleged that the substitute trustees and Deutsche Bank had no legal standing to foreclose on the residence because they had failed to establish that Deutsche Bank was the lawful owner or holder of the note and deed of trust. They contended that in order for Deutsche Bank to have a right to name the substitute trustees it would have to demonstrate that it was a holder of the note. According to the Andersons, if DeutscheBank was not a holder then it had no right to appoint anyone to foreclose on the property. In support of this contention, they pointed out that the note was not indorsed by anyone in Deutsche Bank’s chain of title except Wilmington, but that Wilmington indorsed it after it had given up all of its right, title and interest in the note.

The substitute trustees stressed that the Andersons had never controverted the fact that the loan was in default and that they had not paid the money due under the note for a long period of time. They also pointed out that during the lengthy period the note had been in default, no one else had claimed ownership of the note. This proved, circumstantially, that it would be impossible to suppose that some third party owned the note. The substitute trustees also pointed out that, in Mr. Anderson's bankruptcy proceeding, he had listed the creditor who had a first lien on the residence as "Saxon Mortgage."

The circuit court had initially granted a temporary restraining order blocking the foreclosure, but, after an evidentiary hearing, dissolved the injunction. This appeal followed.

Analysis: The Court of Special Appeals rejected the argument of the substitute trustees that Deutsche Bank was a "holder" of the note because Maryland Comm. L. Art. § 1-201(20) defines a "holder" of a note to be one who is either in possession if (i) the note is payable to bearer or (ii) is payable to a person who is identified in the note. Deutsche Bank did not meet either qualification.

However, the Court concluded that Deutsche Bank was a "a non-holder in possession of the [note] who has the right of a holder" pursuant to Maryland Comm. L. Art. § 3-301(ii). This conclusion turned on the finding that Deutsche Bank was a successor to the holder. See Maryland Comm. L. Art. § 3-203(a).

Discussion: Because of the securitization of the residential mortgage market, it is more often than not the case that bank loans and the related promissory notes and mortgages have passed through several hands before a mortgage goes into foreclosure. Frequently, due to the large number of transfers, the paper trail evidencing each link in the ownership chain is imperfect. The question of whether parties holding these "imperfect" documents and who seek to enforce their rights by foreclosure can do so has become a matter of great contention due to the collapse of the residential housing market and the Great Recession. The Court of Special Appeals has clearly taken the position that the note and mortgage holders (or, perhaps more correctly, the note and mortgage possessors) will be allowed to assert all rights under the loans so long as they can show that they were successors to the holder or holders.

The opinion is available in PDF.