Promissory Note Defense: Foreclosure Dismissed

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[Exerpt Of Case – Standing Issue]








No. C-08-4357 EMC



(Docket No. 7)

Plaintiffs Saxon Mortgage Services, Inc. and Consumer Solutions REO, LLC have filed suit against Defendants Ruthie B. Hillery and the Spielbauer Law Firm, asserting claims for, inter alia, declaratory relief pursuant to the Truth in Lending Act (“TILA”).

Currently pending before the Court is Defendants’ motion to dismiss. Having considered the parties’ briefs and accompanying submissions, as well as the oral argument of counsel, the Court hereby GRANTS the motion to dismiss.

The dismissal shall be without prejudice, and Consumer shall have leave to amend.

C. Standing

Defendants contend that, even if there is subject matter jurisdiction, both Consumer and Saxon lack standing to pursue this litigation. It is well established that a plaintiff must prove standing by showing: (1) injury in fact; (2) a causal connection between the injury and the defendant’s conduct; and (3) a likelihood that a favorable outcome will redress the injury. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992).

1. Consumer

Consumer seeks, in essence, to “enforce the [Promissory] Note and Deed of Trust if [Ms.] Hillery does not pay the Rescission Balance by a date set by this Court.” Compl. ¶ 27. Thus, as Consumer itself acknowledges, to proceed with this action, it must demonstrate that it is the holder of not only the deed of trust but also the promissory note. If not, it has no injury in fact. See In re Foreclosure Cases, 521 F. Supp. 2d 650, 653 (S.D. Oh. 2007) (stating that, “[t]o show standing in a foreclosure action, . . . the plaintiff must show that it is the holder of the note and the mortgage at the time the complaint was filed [and] . . . that the holder of the note and mortgage is harmed, usually by not having received payments on the note”).

There is evidence that the deed of trust was transferred to Consumer. As noted above, New Century designated MERS the beneficiary of the deed and gave MERS broad authority to act with respect to the property. See Compl., Ex. A (Deed at 3) (stating that MERS “has the right to exercise any or all of those interests [granted by Ms. Hillery] in this Security Instrument”).

The Court thus assumes MERS had the power to assign the deed to Consumer, which it apparently did on or about June 20, 2008. See Compl., Ex. D (assignment, recorded on 7/21/08). However, for there to be a valid assignment, there must be more than just assignment of the deed alone; the note must also be assigned. See Carpenter v. Longan, 83 U.S. 271, 274 (1872) (stating that “[t]he note and mortgage are inseparable; the former as essential, the latter as an incident”; adding that “[a]n assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity”); In re Leisure Time Sports, Inc. 194 B.R. 859, 861 (9th Cir. 1996)

 Case3:08-cv-04357-EMC Document19 Filed12/09/08 Page7 of 10

United States District Court

For the Northern District of California

[In their motion to dismiss, Defendants further argue for dismissal based on failure to join an indispensable party. At this juncture, the Court cannot make any determination about joinder because it is not clear who currently owns the promissory note at issue. The bottom line is that if, as Consumer claimed at the hearing on the motion to dismiss, it currently owns the promissory note, then there will likely be no joinder problem. (stating that “[a] security interest cannot exist, much less be transferred, independent from the obligation which it secures” and that, “[i]f the debt is not transferred, neither is the security interest”); Kelley v. Upshaw, 39 Cal. 2d 179, 192 (1952) (stating that assigning only the deed

without a transfer of the promissory note is completely ineffective); see also Restatement (3d) of Property (Mortgages) § 5.4 (stating that “[a] mortgage may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation that the mortgage secures”) (emphasis added). As Kelley establishes, this is true under California law which presumably applies here.

As noted above, MERS purportedly assigned both the deed of trust and the promissory note to Consumer. See Compl., Ex. D (assignment, recorded on 7/21/08). However, there is no evidence of record that establishes that MERS either held the promissory note or was given the authority by New Century to assign the note. Indeed, Consumer’s own complaint contains only an allegation

about assignment of the deed of trust — and not the note. See Compl. ¶ 17 (alleging that “New Century assigned its beneficial interest of the Deed of Trust to Plaintiff Consumer Solutions”).

 Accordingly, the Court concludes that there is insufficient evidence that Consumer has standing to proceed with this litigation. Dismissal is therefore warranted. The dismissal, however, shall be without prejudice, and Consumer shall be given leave to file an amended complaint. Such a complaint must include not only allegations that Consumer is the current holder of both the deed of trust and promissory note but also evidence supporting such.

The amended complaint must be filed no later than December 19, 2008. Defendants shall then have until January 30, 2009, to file a response. A case management conference shall thereafter be held on February 4, 2009, at 1:30 p.m.

2. Saxon

Whether or not Saxon, the servicer of the loan, has standing in the instant case rises and falls with whether or not Consumer has standing. See In re Kang Jin Hwang, 393 B.R. 701, 712 (C.D. Cal. 2008) (indicating that a loan servicer cannot bring an action without the holder of the promissory note).

[Case3:08-cv-04357-EMC Document19 Filed12/09/08 Page8 of 10]

United States District Court

For the Northern District of California

That is, if Consumer can demonstrate that it is the owner of both the deed of trust and the promissory note, then it was proper for Saxon to have been named a plaintiff at the outset of the litigation along with Consumer.

Defendants contend that Saxon cannot have standing because it was no longer the servicer of the loan at the time the original complaint was filed on September 17, 2008. The Court does not agree. The evidence of record indicates that Saxon did transfer loan servicing to another entity, EverHome Mortgage Company (“EverHome”), but the transfer was effective after the date of the filing of the complaint, i.e., on October 1, 2008. See Mot., Ex. 7 (letter, dated 9/16/08, notifying Ms. Hillery that, effective 10/1/08, EverHome Mortgage Company would be the loan servicer).

Of course, it does appear that, currently, Saxon is no longer the loan servicer. Because the Court is requiring that an amended complaint be filed, Plaintiff may want to substitute Saxon out of the complaint. See Fed. R. Civ. P. 25(c) (providing that, “[i]f an interest is transferred, the action may be continued by or against the original party unless the court, on motion, orders the transferee to be substituted in the action or joined with the original party”); see also Hilbrands v. Far East Trading Co., 509 F.2d 1321, 1323 (9th Cir. 1975) (noting that defendant “never made a motion for substitution, only the motion for summary judgment against [plaintiff]” and therefore she should “have been permitted to continue the action”).

This order disposes of Docket No. 57.


Dated: December 9, 2008



United States Magistrate Judge

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