It might not get the popular press that some more damning foreclosure cases have tended to draw — which ought to be instructive about the bias of much of the media — but a ruling last week out of Alabama might prove to be more instrumental than many of its more-sensationalized brethren. The case, U.S. Bank v. Congress, hails out of the Circuit Court of Jefferson County, Ala. The defendant in this case, Erica Congress, saw her home foreclosed upon in November of 2009 by U.S. Bank [stock USB][/stock]. The bank then moved the court to gain possession of the Congress’ house after foreclosure, and Congress objected saying that U.S. Bank had no right to the house since it couldn’t prove it owned the note and didn’t comply with the terms of the pooling and servicing agreement, among other claims. This is a style of argument that has gained plenty of traction in the blogosphere in certain quarters; Naked Capitalism’s pseudonymous proprietor Yves Smith is among those that have successfully worked investors into frenzy over this particular set of issues. In a Dec. 2, 2010, post, Smith summarized her view thusly:
By way of background, we’ve discussed for some time the bigger implications of problems witnessed in foreclosure battles all over the U.S. Increasingly, consumer lawyers are recognizing that they can often successfully challenge foreclosures in which the loan was securitized by examining whether the party trying to foreclose really has the standing to do so, which is legal-speak for whether they are the proper party. If the loan was securitized, it is owned by a specific trust, and the trustee for the trust should be the party taking action. The trustee needs not only produce the note, but if questioned, also to demonstrate that it is the right party to enforce the note (note this is theory; some judges are more predisposed toward banks than others).
What Smith didn’t write about at the time — although I’m very certain she was aware of — was that her view of the law was being tested in an Alabama courtroom by way of the Congress case. And in a final judgment issued on Feb. 22, Alabama Judge J. Scott Vowell threw a pretty big bucket of ice cold water on nearly the whole thing. Which I suppose makes Judge Vowell either an expert arbiter on matters of substantive law, or “predisposed to the banks.” Your choice. This isn’t New York, folks, this is Alabama Congress and her counsel, Alabama attorney Nick Wooten, contended in their defense that New York law should govern the Alabama proceedings, given the terms of the PSA which opted for a New York venue — even going so far as to introduce expert testimony from erstwhile Naked Capitalism co-contributor and New York attorney Tom Adams, and New York trust expert Ira Bloom — in an effort to assert the trustee’s alleged lack of standing to foreclose. Both Adams and Bloom variously contended in separate declarations that the PSA terms were violated, that ownership of the note was therefore clouded, and that mortgage on the Congress property may not have been owned by the trust. As it turns out, the judge did find a party to the lawsuit that lacked standing; the only problem is that it wasn’t the bank. From the ruling:
The plaintiff points out that Ms. Congress is not a party to the PSA and therefore she has no standing to invoke its provisions. The language of the choice of law provision clearly states that it addresses the "obligations, rights and remedies of the parties hereunder." Ms. Congress is not a party to the PSA. If this were a legal dispute between the parties to the PSA, then that dispute would be controlled by New York law. That is not the case before this court in this litigation. Ms. Congress did sign the mortgage which provides that it is “governed by federal law and the law of the jurisdiction where the property is located.” Since Ms. Congress is not a party to the PSA, she did not agree for this case to be tried under New York substantive law and therefore, the court will apply Alabama law in this case. [italics in original]
Here, I want to reiterate comments made in December of last year, about this very same issue in this very same case, by one of my sources — an attorney with more than 25 years of experience in representing creditor’s rights—who predicted this exact outcome:
“The core legal issues are completely missed by these [Tom Adams and Ira Blooms’] declarations. The issues are one of standing and one of N.Y. trust law. The standing issue means that the only person who can attack the issue of validity [of the PSA] is not the person who gave the note, but the beneficiary of the trust… “So, who is objecting here? The person who defaulted on the secured debt. The court should deny the defaulting party standing.”
Which is, of course, precisely what the court found in this case. Naked Capitalism’s Smith was more than content to mock both my and my source’s legal acumen ahead of the court’s ruling — it isn’t the first time she’s been flat-out wrong on issues involving foreclosure, nor will it be the last, as we’ll soon see. The real issue? It’s in the burden of proof Litigators that I speak with have repeatedly told me that winning a case at trial is ultimately and most often a function of which party must bear the greater burden of proof. The greater burden one side can shift toward their opposition, the tougher (and more expensive) it becomes for the comparatively more burdened side to gain a ruling in their favor. In the Congress case, Judge Vowell picked up on this critical issue — even addressing burden of proof as the very first item in the final judgment, although it wasn’t a specific claim brought before the court. It’s the first time, to my knowledge at least, that a trial court judge has seen fit to address this issue within the context of a foreclosure defense. From the ruling (case citations omitted for readability):
Alabama law is clear that a party asserting an affirmative defense has the burden of proving the elements of that defense in order to prevail. This court has defined an affirmative defense as a defense that raises a new matter and that would be a defense even if the relevant allegations in the plaintiff’s complaint were true. The defenses asserted by Ms. Congress are affirmative defenses and therefore she has the burden of proof in showing that the foreclosure was wrongful. Ms. Congress says that without proof that U.S. Bank was owner of the Note, it has no standing and that the trial court has no subject matter jurisdiction over the case… The Court disagrees that this is an issue of “standing” … the questions raised by Ms. Congress are affirmative defenses upon which she has the burden of proof; they are not questions of standing.
Okay, so the burden of proof is now squarely on Congress and her counsel to prove their allegations. Let’s look at some of the allegations, starting with a claim that U.S. Bank did not own the note at the time of foreclosure, and see what the judge said in the ruling about this (again, omitting citations for readability):
It is undisputed that the Note is a negotiable instrument under the Alabama version of the U.C.C. It is an unconditional promise to pay a fixed amount, $104,400 to Mortgage Lenders Network USA Inc., d/b/a Lenders Network or the subsequent holder of the note. “Holder” is defined … as, “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.” … Therefore it is clear that the party entitled to enforce the note does not have to be the owner of that note. U.S. Bank was the “holder” of the Congress note and therefore it had the legal right to foreclose on the Congress property.
In plain English, the judge is saying that U.S. Bank didn’t need to actually own the note in order to enforce it, so any claims here by Congress as to ownership are effectively rendered moot; U.S. Bank merely needed to be a “holder,” as codified under Alabama law. Beyond ownership of the note, Congress also alleged forgery of an allonge attached to the note, and an associated fraud upon the court in so doing. The issue of allonges — which are a separate sheet of paper attached to a note, to allow for additional endorsements — has become a hot-button discussion of sorts as of late. To get a feel for why this is, I’ll again cite Naked Capitalism’s Smith, who late last year asserted the following:
An allonge is NOT to be used unless all the space on the original note, including the margins and the back side of pages, has been used up. This is never the case. Second, an allonge has to be so firmly attached to the original document as to be inseparable. Thus an allonge suddenly being discovered is an impossibility (well impossible if it were legit), yet it seems to happen all the time. [bold is mine]
It’s a claim repeated on the Naked Capitalism site numerous times, and with authority. You’d think it was the universal law of the land, reading that text — except for the wee fact that it isn't the universal law of the land. According to Judge Vowell:
Ms. Congress says that the signatures on the allonge should not be considered because the separate paper was not properly attached to the note. The Alabama law does not require such an attachment and the rubber band which held it to the note is sufficient.
Oops. Like I said earlier, this isn’t the first time Smith has been wrong about foreclosure-related issues — nor, I’m fairly certain, will it be the last. The bottom line There are other, more technical discussions in the Congress ruling, such as a discussion of the use of digital signatures in endorsing the note (which is — surprise! — permitted under Alabama law). I’ll spare readers the technicalities here, and instead highlight the simple assessment that wraps up the ruling:
Laying sympathy aside, the truth of the case is that Ms. Congress borrowed $104,400 and put up her residence as a security for the repayment of the loan. She failed to make the required payments. Plaintiff is entitled to possession of the security in lieu of repayment of the debt. The plaintiff, U.S. Bank, has carried its burden of proof. The defendant has failed to carry her burden of proof as to her affirmative defenses.
It doesn’t get any clearer than that. The upshot of this ruling is very clear, too, at least in Alabama and perhaps in other jurisdictions where similar cases are being tried: alleged problems involving the PSA, securitization, whether the note is owned by the trust—while these issues generate plenty of heat and light amongst bloggers and columnists, none of these issues are ultimately a concern for the borrower who has defaulted on their payments, and who by definition is not a party to the PSA. I also should be very clear that this ruling doesn’t address the underlying debate among at least some in the securities markets surrounding whether notes and/or mortgages were properly conveyed into trust. As Judge Vowell noted, such litigation would be limited to the parties to the PSA itself, should those parties find themselves in dispute on the matter. To date, and to my knowledge, none have. Paul Jackson is the founder of HousingWire. The views expressed here are entirely his own, and do not reflect the views of HousingWire or its media affiliates. Follow him on Twitter: @pjackson