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Bankruptcy Panel Sends Back Yet Another Case About Ownership of the Note - Banks v. Kondauer Capital Corp.

October 13, 2011

Our Norco foreclosure defense lawyers have written here numerous times about court cases in which the borrower challenges the foreclosure on the grounds that the foreclosing entity cannot prove ownership. Since the housing crisis, it has become clear that sloppy paperwork practices within banks and at MERS have muddied the ownership trails of many mortgages. As a result, some entities attempting to foreclose literally cannot prove they have the right to do so. In some cases, they are not permitted to foreclose until they can straighten out their paperwork; a few courts have dismissed the foreclosure entirely or required lenders to make systematic improvements to avoid fraud. Similar issues arose in Banks v. Kondauer Capital Corporation, a Minnesota couple's appeal to the Eighth U.S. Circuit Court of Appeals Bankruptcy Appellate Panel, which reversed summary judgment for the mortgage holder.

Edward and Diane Banks bought a home in St. Paul in 2006 from New Century Mortgage Corporation. NCMC went bankrupt the next year, and many of its mortgages were purchased by Ellington Management Group LLC, which assigned it to Elizon LA 2007-2 LLC by mistake, and later executed a corrective assignment intending to assign the mortgage on Kondauer. A few months after the corrective assignment, the Bankses filed for Chapter 13 bankruptcy. They later sued Kondauer as part of the bankruptcy, alleging it did not own their note because of the transfer to Elizon. Kondauer moved to dismiss, supporting its motion with the original note and mortgage to NCMC and the purchase agreement by Ellington. The bankruptcy court ultimately granted summary judgment to Kondauer, over the Bankses' objection that the motion was only to dismiss. They timely appealed.

On appeal, the BAP of the Eighth Circuit found the summary judgment ruling inappropriate because there was a genuine issue of material fact as to who owned the note. The panel did not base its ruling on the "corrective assignment," although it did express concern about the legality of that assignment in one footnote. Rather, the ruling is based on the absence of any endorsement to Kondauer on the note itself. It is endorsed in blank, the panel said, which means it can only be enforced by the entity in possession of the original note. Kondauer claims to have the note, it said, but has failed to produce it even though the parties agree that this would give it the right to foreclose. Thus, the panel found that a genuine issue of material fact remains as to whether Kondauer is the appropriate person to foreclose. The BAP reversed the bankruptcy court on those grounds and remanded the case for further proceedings.

Our Dana Point foreclosure defense attorneys have heard this kind of story many times before. Though the apparent mistaken assignment in the case is unusual, it is unfortunately not at all uncommon for mortgage lenders to lose track of the note, or fail to complete the necessary paperwork to transfer documents. Part of this problem likely stems from the mortgage bubble of the late 2000s, when banks were issuing and selling mortgages very quickly. It may also stem from the use of MERS, a private company that lenders formed to keep track of loan sales so they would not have to bother with local land offices and their rules. Without someone enforcing legal requirements at each transfer point, mortgage companies may have gotten sloppy. Now that foreclosures are very high, our Torrance foreclosure defense lawyers are pleased to see that courts are holding lenders to legal standards.

If you believe you can avoid a foreclosure, but your lender or loan servicer is not interested in helping, you should call Howard Law, P.C., right away. To tell us your story and learn more about your legal options, send us a message online or call toll-free at 1-800-872-5925.

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