Foreclosure reversed because servicer can’t produce note

A party seeking to foreclose on a note and deed of trust in North Carolina doesn’t have to show much.

But at the very least, it must show it is the holder of the note evidencing the debt secured by the property upon which it is seeking to foreclose.

On May 3, the North Carolina Court of Appeals ruled that a trustee for a securitized trust failed to do even that in In re Foreclosure of Gilbert (Lawyers Weekly No. 11-07-0456, 24 pp.). The trustee is Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6.

As a result, the court reversed a Hyde County Superior Court judge’s order authorizing foreclosure of an Ocracoke property owned by Rex and Daniela Gilbert.

It appears to be the first state appellate court opinion in North Carolina dealing with the well-publicized “robo-signing” issues plaguing the foreclosure practices of some lenders and servicers.

Katherine S. Parker-Lowe of Ocracoke, who represented the Gilberts, said it was a great day for consumers in North Carolina.

“I think this decision will help other homeowners in their struggle to hold on to their homes in the face of the mortgage meltdown mess.”

Parker-Lowe said that far too often the foreclosure process is designed to hurry people out of their homes, and lenders over the past several years have shown “how low they are willing go to push the process along.”

Parker-Lowe said lenders created problems on the front-end of loans by inflating appraisals to justify lending money and offering so-called no-documentation loans.

“Now we are seeing problems on the back end,” Parker-Lowe said.

She said Jeffrey Stephan, identified in the Gilbert opinion as a “limited signing officer for GMAC Mortgage” – the sub-servicer of the Gilberts’ loan – admitted to signing from 8,000 to 10,000 affidavits per month.

In a deposition Stephan gave as part of a federal case involving the Gilberts, he said he checked affidavits for
borrower names and certain numbers, but he did not check other details.

In the affidavit in Gilbert, Stephan alleged that he was “familiar with the books and records of [GMAC Mortgage], specifically payments made pursuant to the Note and Deed of Trust.”

Writing for the Court of Appeals, Judge Robert N. Hunter Jr. said he was troubled by Stephan’s averments. He wrote that GMAC Mortgage had “recently [been] found to have submitted a false affidavit by [Stephan] in a motion for summary judgment” in a federal case in Maine. In that case, Hunter wrote, Judge John H. Rich III “concluded that GMAC Mortgage submitted Stephan’s false affidavit in bad faith and levied sanctions against GMAC Mortgage.”

In the Gilbert case, Hunter wrote, Stephan’s affidavit referenced “a Pooling and Servicing Agreement that allegedly governed the securitization of the Note to Deutsche Bank Trust Company Americas as Trustee.”

But the agreement was not included in the record, Hunter wrote.

Hunter added that Stephan alleged no facts as to who possessed note, “other than his averment that the Note was ‘delivered’ to the original lender, First National Bank of Arizona.”

Stephan also referenced a statement by counsel for GMAC that “the original Note would be brought to the foreclosure hearing,” but, Hunter wrote, “He did not provide any facts from which the trial court could determine who had possession of the Note.”

But Stephan still made, based on those averments, what Hunter called “the conclusory statement” that “Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6 is the current owner and holder of the Note and Deed of Trust described herein.”

The court also referenced an affidavit by a “litigation analyst” named Scott Zeitz that contained at least one factually questionable statement, in Hunter’s opinion.

Zeitz alleged that the purported holder of the note “has possession of the Note,” but Hunter wrote that “[Zeitz’s] affidavit provides no basis upon which we can conclude he had personal knowledge of this alleged fact.”

But in an email to Lawyers weekly, John T. Benjamin Jr., the attorney who represented Deutsche, said the original promissory note was offered to the court and inspected by Superior Court Judge Marvin K. Blount III at the foreclosure trial. Judge Blount reviewed the note and gave Parker-Lowe the opportunity to review the document, but she declined, Benjamin said in the email.

Calls to Benjamin for a follow-up interview were not returned. Parker-Lowe could not be reached for her version of the incident.

Nevertheless, the Court of Appeals concluded that neither affidavit provided “competent evidence to support the trial court’s finding that Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6 is the owner and holder of [the] note.”

The Court of Appeals therefore reversed the trial court’s order allowing the foreclosure to proceed. The ruling said the record was “lacking of competent evidence sufficient to support that Deutsche was the owner and holder of the note and deed of trust.”

GMAC Mortgage did not respond to Lawyers Weekly’s request for comment by press time.

Not the end

Parker-Lowe said the defendants in Gilbert “violated almost every consumer protection law available under state and federal law and advanced what several different courts have determined to be fraudulent affidavits by GMAC.”

A separate action the Gilberts brought to rescind their mortgage transaction based on the federal Truth-in-Lending Act was dismissed by the trial court.

Hunter wrote that the rescission action constituted an equitable defense to foreclosure, not a legal defense under Chapter 45 of the General Statutes, which governs foreclosures.

“While legal defenses to a foreclosure under a power of sale are properly raised in a hearing held pursuant to section 45-21.16,” Hunter wrote, “equitable defenses are not.”

The Court of Appeals therefore upheld the trial court’s dismissal of the rescission action.

Parker-Lowe said she wished the court had given the equitable argument more consideration.

“It’s not like [the lender] missed two dollars in interest,” she said. The Gilberts’ truth-in-lending statement contained some $100,000 in hidden interest and fees, Parker-Lowe alleged.

“Truth-in-lending was intended to make lenders tell the truth about fees and interest,” Parker-Lowe said. “That didn’t happen here.”

But the federal court to which Deutsche removed the Gilberts’ Truth-in-Lending action disagreed and dismissed the claim. The Gilberts appealed the dismissal to the 4^th Circuit Court of Appeals, where the appeal is pending.

Parker-Lowe said the Gilberts also have a Rule 60(b) motion pending in U.S. District Court for the Eastern District of North Carolina to set aside the dismissal because, she alleged, the affidavits brought forward in the Gilberts’ foreclosure action constituted a fraud upon the court.

Writing on behalf of Deutsche in a memorandum in opposition to the Gilberts’ motion, Charlotte attorney Nicholas J. Voelker wrote that “There is no evidence that the Plaintiffs have discovered new evidence, any fraud, or another reason that extraordinary relief” provided under Rule 60(b) should be accorded to the Gilberts.

He called the Gilberts’ motion “a further futile attempt to raise issues related to the validity of the foreclosure.”

Parker-Lowe said the Gilberts still live in the house on the property at issue and are making payments into the lawyer’s trust account that will, presumably, be paid to their lender if and when the legal controversies are resolved.

“They want to be able to hold onto the most important thing people ever buy,” Parker-Lowe said: “Their home.”

And despite Voelker’s assertion of the futility of that effort, for the moment, the Gilberts are vindicated.

Opinion Brief

Case name: In re Foreclosure of Gilbert

Court: North Carolina Court of Appeals

Judges: Judge Robert N. Hunter Jr.; Judges Linda McGee and Cheri Beasley, concurring

Date: May 3, 2011

Plaintiffs’ attorneys: Katherine S. Parker-Lowe (Ocracoke)

Defendants’ attorneys: John T. Benjamin Jr. (Raleigh)

Issues: Did the party seeking to foreclose on the borrowers’ property establish that it was the holder of the promissory note and deed of trust, one of four requirements that must be established in order to allow foreclosure to proceed?

Holding: Affidavits from the purported holder of a promissory note did not establish that the purported holder was in fact the holder of the note, nor did an allonge to the note indicate a transfer to the purported holder. The trial court’s order authorizing the substitute trustee to proceed with foreclosure under a power of sale is reversed.