Opinion ID: 4255191
Heading Depth: 2
Heading Rank: 1

Heading: Behrendt May Challenge The Foreclosure

Text: Behrendt contends that Wells Fargo did not meet its prima facie burden of demonstrating that it was the holder of the Note at the time its complaint was filed and did not provide any admissible evidence that it possessed the Note at the time it filed its motion for summary judgment. Behrendt argues that the Lewis Declaration did not demonstrate personal knowledge of any such facts, but that it instead offered vague, unfounded testimony that amounted to inadmissible hearsay at best. Thus, Behrendt contends that genuine issues of material fact remain in dispute with respect to Wells Fargo’s standing to sue and whether Wells Fargo was the holder of the Note secured by the Mortgage. Wells Fargo contends that because Behrendt was not a party to the Mortgage and because there is no reasonable interpretation of the Mortgage that confers contractual rights, obligations, and standing on Behrendt or upon any subsequent purchaser who does not assume the Mortgage, Behrendt could not “seek protection” under the Mortgage. In other words, Wells Fargo argues that Behrendt could not attack the foreclosure because he was a stranger to the Note and Mortgage transactions. Further, even if Behrendt did have standing to challenge the foreclosure, Wells Fargo asserts, the circuit court’s Judgment 8 FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER should still be affirmed because the Lewis Declaration authenticates4 the original Note and states that Lewis had “personal knowledge of the facts and matters stated” based on her access to and familiarity with its records and the records of Ocwen. Under our law, a foreclosing party “must demonstrate that all conditions precedent to foreclosure under the note and mortgage are satisfied and that all steps required by statute have been strictly complied with” to prove entitlement to foreclose. Bank of Am., N.A. v. Reyes-Toledo, 139 Hawaiʻi 361, 367, 390 P.3d 1248, 1254 (2017). Typically, this requires that the plaintiff “prove the existence of an agreement, the terms of the agreement, a default by the mortgagor under the terms of the agreement, and giving of the cancellation notice.” Id. A foreclosing plaintiff must also prove that the plaintiff is entitled to foreclose the note and mortgage. Id. (citing Hawaii Revised Statutes (HRS) §§ 490:3-301, 490:3-308). The “burden to prove entitlement to enforce the note overlaps with the requirements of standing in foreclosure actions.” Id. (quoting Mottl v. Miyahira, 95 Hawaiʻi 381, 388, 23 P.3d 716, 723 (2001)). Under the doctrine of standing, a 4 Wells Fargo uses the term “authenticate” to describe the act of confirming through a declaration that a document is a record of regularly conducted business activities admissible under HRE Rule 803(b)(6). 9 FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER plaintiff typically must have suffered an injury-in-fact to “justify exercise of the court’s remedial powers on his or her behalf.” Id. at 368, 390 P.3d at 1255 (citing Mottl, 95 Hawaiʻi at 389, 23 P.3d at 724). For a foreclosing plaintiff, the injury-in-fact is the mortgagor’s “failure to satisfy its obligation to pay the debt obligation to the note holder.” Id. Thus, a person seeking to judicially foreclose on a mortgage following a promissory note default must establish that it was the “person entitled to enforce the note” as defined by HRS § 490:3-301 at the time the foreclosure complaint was filed to satisfy standing and to be entitled to prevail on the merits.5 5 HRS § 490:3-301 (2008) provides as follows: “Person entitled to enforce” an instrument means (i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to section 490:3-309 or 490:3-418(d). A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument. “Holder” as it appears in the statute is a term of art, defined in HRS § 490:1-201(b) (2008) as (1) The person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession; (2) The person in possession of a negotiable tangible document of title if the goods are deliverable either to bearer or to the order of the person in possession; or (3) The person in control of a negotiable electronic document of title. (continued . . .) 10 FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER Id. at 368-69, 390 P.3d at 1255-56; see also U.S. Bank N.A. v. Mattos, 140 Hawaii 26, 33, 398 P.3d 615, 622 (2017); In re 1250 Oceanside Partners, 260 F. Supp. 3d 1300, 1312-13 (D. Haw. 2017). Wells Fargo claims that Behrendt’s defense is contractually-based and thus barred by the fact that Behrendt was a stranger to the Note and Mortgage. This court’s reasoning in Reyes-Toledo, however, was based on standing and the statutory foreclosure requirements and was not tied to the contractual relationship between the parties. See 139 Hawaii at 367–68, 390 P.3d at 1254–55 (“[A] foreclosing plaintiff does not have standing to foreclose on mortgaged property unless the plaintiff was entitled to enforce the note that has been defaulted on.” (citing Hanalei, BRC Inc. v. Porter, 7 Haw. App. 304, 310, 760 P.2d 676, 680 (1988))). Thus, principles governing standing and statutory construction--and not contracts--apply here.6 (. . . continued) As Wells Fargo claims to be entitled to enforce the Note as the holder of the Note and in turn argues that it is the holder of the Note by virtue of its possession of the endorsed-in-blank Note, Wells Fargo appears to use the terms “hold” and “possess” and their derivatives interchangeably. 6 Additionally, Behrendt’s argument--that Wells Fargo did not hold the Note and was thus itself a stranger to the transaction--does not rely on Behrendt’s contractual rights. Although it is true that Behrendt cannot assert an affirmative defense based on rights derived from a contract that he is not a party to, no privity of contract is required for Behrendt to argue (continued . . .) 11 FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER As we observed in Reyes-Toledo, requiring “that a foreclosing plaintiff prove its entitlement to enforce the note at the commencement of the proceedings ‘provides strong and necessary incentives to help ensure that a note holder will not proceed with a foreclosure action before confirming that it has a right to do so.’” Reyes-Toledo, 139 Hawaiʻi at 369, 390 P.3d at 1256 (quoting Deutsche Bank Nat’l Trust Co. v. Johnston, 369 P.3d 1046, 1052 (N.M. 2016)). This procedural safeguard is vital because the securitization of mortgages has given rise to a pervasive failure among mortgage holders to comply with the technical requirements underlying the transfer of promissory notes and, more generally the recording of interests in property. Indeed, scholars have commented on the widespread documentation problems that are associated with modern mortgage securitization practices. It appears that under these circumstances, not even the plaintiffs may be sure if they actually own the notes they seek to enforce. Id. (brackets, quotations marks, footnotes, and citations omitted). Thus, requiring a foreclosing plaintiff to prove an entitlement to foreclose serves “essential purpose[s],” such as “protect[ing] the maker of an instrument from multiple enforcements of the same instrument.” Id. (citing Porter, 7 (. . . continued) that Wells Fargo has not met the burden of proving its right to foreclose on the Property. Indeed, under Wells Fargo’s argued rule, a property owner could not defend against an ejectment or replevin action by a plaintiff falsely claiming to have purchased the property from a prior owner because the current property owner would not have been a party to the fabricated transaction. This approach is plainly flawed. 12 FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER Haw. App. at 308, 760 P.2d at 679). The requirement also serves to ensure that a foreclosing party in an action brought against a homeowner is actually entitled to bring the action, thus protecting the homeowner from an improper foreclosure. Id. This prerequisite serves no less an essential purpose when the homeowner is a subsequent purchaser of the property as Behrendt is here. The ICA has concluded that a party who obtains an interest in property subsequent to a foreclosing party can challenge the foreclosure. In Bank of New York Mellon v. Lemay, a defendant obtained its interest in the subject property at a foreclosure sale, and a party with a senior secured interest later brought a foreclosure action. 137 Hawaiʻi 30, 34, 364 P.3d 928, 932 (App. 2015). The defendant sought discovery regarding an employee of the purported loan servicer who submitted a declaration in support of the plaintiff’s summary judgment motion. See id. at 34-35, 364 P.3d at 932-33. At a motion to compel hearing, the defendant argued that the requested information was relevant to determine if the foreclosing party had standing and was entitled to foreclose. Id. at 33, 364 P.3d at 931. The trial court indicated that it was not inclined to grant the motion as the defendant was not a party to the note and mortgage. Id. at 34, 364 P.3d at 932. The trial court later granted summary judgment in favor of the plaintiff, which 13 FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER the ICA concluded was effectively a denial of the motion to compel. Id. On review, the ICA reasoned that the defendant was “permitted to seek discovery of information relevant to defending its interest in the property.” Id. (citing Hawaiʻi Rules of Civil Procedure Rule 26(b)(1)(A)). The ICA concluded that the trial court’s “hesitation” to grant the motion to compel because the defendant was not a party to the note or mortgage was “unwarranted” and that denying the motion was error. Id. at 34–35, 364 P.3d at 932–33. The ICA accordingly vacated the order granting summary judgment, ruling that the effective denial of the defendant’s motion to compel constituted an abuse of discretion that substantially prejudiced the defendant. Id. at 35, 364 P.3d at 933. Although the defendant was not a party to the note or mortgage in Lemay, the ICA recognized that information rebutting the plaintiff’s claim that it was entitled to enforce the note was relevant to the defense of the junior interest in the property. Id. at 34–35, 364 P.3d at 932–33. Thus, the Lemay decision allowed a subsequent purchaser to challenge whether the lender was entitled to foreclose on the mortgage securing the note. Under facts similar to this case, a court of appeals in Florida also concluded that a subsequent purchaser has 14 FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER standing to challenge the plaintiff’s authority to bring the foreclosure proceeding. 3709 N. Flagler Drive Prodigy Land Trust v. Bank of Am., N.A., 226 So. 3d 1040, 1042-43 (Fla. Dist.