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Possession of The Original Note is Not Necessary to Conduct a Valid Foreclosure Sale

Ron Stormoen

It has been a popular tactic across the country, with all the foreclosures of trust deeds, which have been assigned multiple times, for borrowers and/or junior lien holders to try and thwart a non-judicial foreclosure sale by claiming that “no foreclosure of a deed of trust is valid unless the beneficiary is in possession of the original underlying promissory note.” Any assignees of the original note and deed of trust do not possess the original note. Without such possession, some argue, the deed of trust is allegedly “severed” from the promissory note and consequently is of no effect. Some have also tried to rely on the Commercial Code claiming that because a promissory note is a negotiable instrument, it can only be assigned with a valid endorsement and physical delivery to the assignee; again, the foreclosing party allegedly needs the original note.

California State Court cases and Federal Courts in California continue to overwhelmingly reject those positions. A recent California case affirmed:

“Procedures to be followed in a non-judicial foreclosure are governed by sections 2924 through 2924k, which do not require that the note be in the possession of the party initiating the foreclosure.”

(See Debrunner v. Deutsche Bank Nat. Trust Co. L 883128, 4 -6 (Cal.App. 6 Dist. 2012).)

In Debrunner, the assignment of the deed of trust from one lender to the next stated (what most assignments state) that it was an assignment of “all beneficial interest” under the deed of trust, “TOGETHER with the note or notes therein described and secured thereby, the money due and to become due thereon, with interest, and all rights accrued or to accrue under said Deed of Trust....” The question in Debrunner was whether the assignee of the note and deed (without possession of the original note) court foreclose.

The court stated that the language in this deed of trust, governed California non-judicial foreclosure statutory procedures, does not require physical possession of the underlying promissory note in order for a foreclosure to be valid.

The Debrunner, court stated: The California state courts and Federal courts in California have “noted that the procedures to be followed in a non-judicial foreclosure are governed by sections 2924 through 2924k, which do not require that the note be in the possession of the party initiating the foreclosure. (See, e.g., Geren v. Deutsche Bank National (E.D.Cal.2011) 2011 WL 3568913; Kolbe v. JP Morgan Chase Bank, N.A. (N.D.Cal.2011) 2011 WL 4965065; Hague v. Wells Fargo Bank, N.A. (N.D.Cal.2011) 2011 WL 3360026, 3; Impink v. Bank of America (S.D.Cal.2011) 2011 WL 3903197.) We likewise see nothing in the applicable statutes that precludes foreclosure when the foreclosing party does not possess the original promissory note. They set forth “a comprehensive framework for the regulation of a non-judicial foreclosure sale pursuant to a power of sale contained in a deed of trust. The purposes of this comprehensive scheme are threefold: (1) to provide the creditor/beneficiary with a quick, inexpensive and efficient remedy against a defaulting debtor/trustor; (2) to protect the debtor/trustor from wrongful loss of the property; and (3) to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.” (Moeller v. Lien (1994) 25 Cal.App.4th 822, 830, 30 Cal.Rptr.2d 777.) Notably, section 2924, subdivision (a)(1), permits a notice of default to be filed by the “trustee, mortgagee, or beneficiary, or any of their authorized agents.” The provision does not mandate physical possession of the underlying promissory note in order for this initiation of foreclosure to be valid.”

The Appellant in Debrunner also attempted to use the Commercial Code provisions pertaining to negotiable instruments, arguing that the negotiable instrument (that is the note) needed to be endorsed and physically delivered to be valid. Debrunner rejected that contention:
“The comprehensive statutory framework established [in sections 2924 to 2924k] to govern nonjudicial foreclosure sales is intended to be exhaustive.” (Moeller v. Lien, supra, 25 Cal.App.4th at p. 834, 30 Cal.Rptr.2d 777; see also I.E. Associates v. Safeco Title Ins. Co. (1985) 39 Cal.3d 281, 285, 216 Cal.Rptr. 438, 702 P.2d 596 [“These provisions cover every aspect of exercise of the power of sale contained in a deed of trust”].) “Because of the exhaustive nature of this scheme, California appellate courts have refused to read any additional requirements into the non-judicial foreclosure statute.” (Lane v. Vitek Real Estate Indus. Group (E.D.Cal.2010) 713 F.Supp.2d 1092, 1098; accord, Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 1154–1157, 121 Cal.Rptr.3d 819 [no statutory right to sue to determine authority of a lender's nominee to initiate foreclosure; and in any event, plaintiff agreed in deed of trust that nominee had such authority].) “There is no stated requirement in California's non-judicial foreclosure scheme that requires a beneficial interest in the Note to foreclose. Rather, the statute broadly allows a trustee, mortgagee, beneficiary, or any of their agents to initiate non-judicial foreclosure. Accordingly, the statute does not require a beneficial interest in both the Note and the Deed of Trust to commence a non-judicial foreclosure sale.” (Lane v. Vitek Real Estate Indus. Group, supra, 713 F.Supp.2d at p. 1099.) (Debrunner v. Deutsche Bank Nat. Trust Co. L 883128, 4 -6 (Cal.App. 6 Dist., 2012)

Practice Point: The holder of a deed of trust may be authorized to foreclose, even if it did not possess the underlying promissory note.

DISCLAIMER: This entry does not give specific legal advice about your specific legal problem. No text or graphic contained in this entry is to be or should be used or relied upon as legal advice. This entry does not create an attorney-client relationship. If you want specific legal advice about your particular legal issues, or if you want to create an attorney-client relationship, you need to retain the Law Offices of Ron A. Stormoen by a signed written retainer agreement.