Monday, July 15, 2013

A Lender’s Duty To Produce Sufficient Documentation In Forcelosure Mediation Proceedings: Nevada Foreclosure Mediation Rules (FMR)

The Deed of Trust
A deed of trust is an instrument that "secure[s] the performance of an obligation or the payment of any debt." NRS 107.020. The Nevada Supreme Court has previously held that a deed of trust "constitutes a conveyance of land as defined by NRS 111.010."[1]  Ray v. Hawkins, 76 Nev. 164, 166, 350 P.2d 998, 999 (1960). The statute of frauds governs when a conveyance creates or assigns an interest in land: No estate or interest in lands, . . . nor any trust or power over or concerning lands, or in any manner relating thereto, shall be created, granted, assigned, surrendered or declared . . . , unless ... by deed or conveyance, in writing, subscribed by the party creating, granting, assigning, surrendering or declaring the same, or by the party's lawful agent thereunto authorized in writing. NRS 111.205(1) (emphases added). Thus, to prove that WAMU properly assigned its interest in land via the deed of trust to Wells Fargo, Wells Fargo needs to provide a duly signed writing from WAMU demonstrating that transfer of interest (and each subsequent transfer). If no such assignment(s), duly executed, is/are provided at the mediation, Wells Fargo lacks would lack standing to pursue foreclosure proceedings against ________.

The Mortgage Note
The proper method of transferring the right to payment under a mortgage note is governed by Article 3 of the Uniform Commercial Code—Negotiable Instruments, because a mortgage note is a negotiable instrument.[2]   Birkland v. Silver State Financial Services, Inc., No. 2:10-CV-00035 KJD-LRL, 2010 U.S. Dist. LEXIS 88471, 2010 WL 3419372, at page 4 (D. Nev. Aug. 25, 2010). The obligor on the note has the right to know the identity of the entity that is "entitled to enforce" the mortgage note under Article 3, see NRS 104.3301, "[o]therwise, the [homeowner]  may pay funds to a stranger to the case." In re Veal 450 B.R. 897, 920, 921, 2011 Bankr. LEXIS 2359, 2011 WL 2304200, at *16 (B.A.P. 9th Cir. 2011) (holding, in a bankruptcy case, that AHMSI did not prove that it was the party entitled to enforce, and receive payments from, a mortgage note because it "presented no evidence as to who possessed the original Note. It also presented no evidence showing [e]ndorsement of the note either in its favor or in favor of Wells Fargo, for whom AHMSI allegedly was servicing the [bankrupt party's] Loan."). If the homeowner pays funds to a "stranger to the case," then his or her obligation on the note would not be reduced by the payments made. See id. at 910, 2011 Bankr. LEXIS 2359, [WL] at page 7 ("if a[n obligor on a mortgage note] makes a payment to a 'person entitled to enforce,' the obligation is satisfied on a dollar for dollar basis, and the [obligor] never has to pay that amount again").
Wells Fargo may argue that, under Nevada law, possession of the original note allowed it to enforce the note. The Nevada Supreme Court would disagree.[3]  It has concluded that Article 3 clearly requires Wells Fargo to demonstrate more than mere possession of the original note to  be able to enforce a negotiable instrument under the facts of this case. This of course assumes that Wells Fargo actually possesses the original note.
Article 3 is codified in NRS 104.3101-.3605.  Pursuant to NRS 104.3102(1), Article 3 applies to negotiable instruments. Negotiable instruments are defined as an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:
(a)   Is payable to bearer or to order at the time it is issued or first comes into possession of a holder;
(b)  Is payable on demand or at a definite time; and
(c)   Does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money. NRS 104.3104(1). Thus, a mortgage note is a negotiable instrument, and any negotiation of a mortgage note must be done in accordance with Article 3
A note can be made payable to bearer or payable to order. NRS 104.3109. If the note is payable to bearer, that "indicates that the person in possession of the promise or order is entitled to payment." NRS 104.3109(1)(a). However, "[a] promise or order that is not payable to bearer is payable to order if it is payable to the order of an identified person .... A promise or order that is payable to order is payable to the identified person." NRS 104.3109(2).
For a note in order form to be enforceable by a party other than to whom the note is originally payable, the note must be either negotiated or transferred.  A "'[n]egotiation' means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder." NRS 104.3201(1). "[I]f an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its endorsement by the holder."[4] NRS 104.3201(2) (emphasis added). An "endorsement" is a signature that is "made on an instrument for the purpose of negotiating the instrument." NRS 104.3204(1). Thus, if the note is payable to the order of an identifiable party, but is then sold or otherwise assigned to a new party, it must be endorsed by the party to whom it was originally payable for the note to be considered properly negotiated to the new party. Once a proper negotiation occurs, the new party, or "note holder," with possession is entitled to enforce the note. [*1281] NRS 104.1201(2)(u)(1) ("Holder means...[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.")
If a party cannot attain "holder" status by showing a valid negotiation, the party may establish its right to enforce the note by showing that the note has been validly transferred. NRS 104.3203(2). The only distinction between a negotiation and a transfer is that, in the case of a transfer, the note need not be endorsed by the party who is relinquishing enforcement rights. Because a transferred note is not endorsed, however, the party seeking to establish its right to enforce the note "must account for possession of the unendorsed instrument by proving the transaction through which the transferee acquired it." U.C.C. §3-203 cmt. 2 (explaining the effect of §3-203(b), codified in Nevada as NRS 104.3203(2)). In other words, because the party seeking to enforce the note cannot "prove" its right to enforce through the use of a valid endorsement, the party must "prove" by some other means that it was given possession of the note for the purpose of enforcing it.[5]
In this case, the mortgage note provides: "In return for a loan that I have received, I promise to pay U.S. $_____ plus interest, to the order of Lender. Lender is _________(emphasis added). Because the mortgage note is payable to the order of a specific party, ______, to negotiate the note to a new party, in this case Wells Fargo, Wells Fargo must have possession of the note and the note must be properly endorsed by _____________. See NRS 104.3201(2). If no such endorsement is included in the documents produced at mediation, or if Wells fargo fails to produce a valid assignment as proof of the note's transfer, Wells Fargo is not entitled to enforce the note. (Mere possession does not entitle Wells Fargo to enforce the note assuming they can even produce the original note.) Therefore, because the mortgage note is payable to               , unless Wells Fargo can prove that the note was properly endorsed or validly transferred, thereby making it the party entitled to enforce the note, it has not demonstrated authority to mediate the note.
As the Nevada Supreme Court has concluded in Pasillas[6], a foreclosing party's failure to bring the required documents to the mediation is a sanctionable offense under NRS 107.086 and the FMRs.

[1] "'Conveyance' shall be construed to embrace every instrument in writing, except a last will and testament, whatever may be its form, and by whatever name it may be known in law, by which any estate or interest in lands is created, aliened, assigned or surrendered." NRS 111.010(1).
[2] Article 3 is codified in NRS 104.3101-.3605.
[3] Leyva v. Nat'l Default Servicing Corp., 255 P.3d 1275, 1279-1281 (Nev. 2011).
[4] Under NRS 104.3301(1)(a), a person entitled to enforce an instrument is "[t]he holder of the instrument."
[5] To "prove" a transaction under NRS 104.3203(2), a party must present evidence sufficient to establish that it is more likely than not that the transaction took place. NRS 104.3103(1)(i) (defining "prove"); NRS 104.1201(2)(h) (defining [**18] "burden of establishing")
[6] In Pasillas, the Nevada Supreme Court concluded that the following nonexhaustive list of factors would aid district courts in determining what sanctions are appropriate: "whether the violations were intentional, the amount of prejudice to the nonviolating party, and the violating party's willingness to mitigate any harm by continuing meaningful negotiation." Pasillas v. HSBC Bank USA, 127 Nev. ___,___, 255 P.3d 1281, 2011 Nev. LEXIS 39 (Adv. Op. No. 39, July 7, 2011)

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