Vermont Supreme Court Boots Foreclosure Action Marked By Potentially Dubious Filings; Score Victory For Homeowner, Non-Profit Law Firm (& Trial Court)

The Vermont Supreme Court recently weighed in with a ruling in a foreclosure action, affirming a trial court ruling that gave a foreclosing lender the boot, with prejudice, in a foreclosure action because of a lack of standing to bring the lawsuit.

The court's ruling contains an analysis of the applicable provisions of the Uniform Commercial Code, as well as Vermont's version thereof.

The following point, which merits highlighting, reflects the filing of potentially dubious documents by the foreclosing lender that homeowner characterized as inconsistent and "likely fraudulent filings" (among the documents filed in the foreclosure action was a copy of an instrument entitled "Assignment of Mortgage," signed by the notorious, nationally-recognized robo-signer Jeffrey Stephan) (Note: the following 'bulleted' text has been slightly adapted from the text of the court's ruling):

• Initially, the foreclosure was based solely on an assignment of the mortgage by MERS. The complaint did not allege that the foreclosing lender held the original note. It simply attached a copy of the note with an allonge endorsement in blank. Homeowner successfuly challenged this evidence as insufficient to show that the lender held an interest in her note.



• At that point, US Bank abandoned its claim of assignment of the mortgage and instead asserted that it held the original note, and submitted the note with an allonge containing two undated specific endorsements, one to the lender. The supporting affidavit claimed that the note had been endorsed to US Bank, but provided no information about when and failed to explain why a note with a blank endorsement was the basis for the complaint.

In ruling in favor of the homeowner, the Vermont high court stated (from the original text, bold text is my emphasis):

• Based on this contradictory and uncertain documentation, the trial court did not err in concluding that there was no evidence to show that US Bank was a holder of the note at the time it filed the complaint. US Bank failed to allege or demonstrate that it held the original note endorsed in blank when it commenced the foreclosure action.
  
  In fact, US Bank asserted that the note with the blank endorsement was an earlier copy that was mistakenly attached to the complaint. It also alleged that the blank endorsement was stamped with RFC's name in 2005. Therefore, it could not possibly have held the original note with a blank endorsement when the complaint was filed. Further, there is no evidence to show that US Bank held the original note endorsed to its name before the complaint was filed.
  
  While US Bank eventually produced the original note with an endorsement to it, none of the evidence submitted at summary judgment by US Bank established the timing of the endorsement. Given US Bank's failure to show it had standing, the foreclosure complaint was properly dismissed.

After the foreclosing lender made what the court implicitly indicated was a decent argument in favor of overlooking the initial defects because it now produced the original note with a chain of endorsements ending in U.S. Bank, the court excoriated the foreclosing lender with the following comments:

• US Bank argues that for reasons of policy it should be permitted to proceed because it would be wasteful to prevent it from being able to "cure" its standing problem. While we are sympathetic to the desire to avoid wasteful and duplicative litigation, the source of the unnecessary proceedings in this case was not an overly wooden application of the rules, but US Bank's failure to abide by them.
  
  It is neither irrational nor wasteful to expect a foreclosing party to actually be in possession of its claimed interest in the note, and have the proper supporting documentation in hand when filing suit.
  
  Nor is it irrationally demanding to expect the foreclosing party to provide adequate, satisfying proof in response to a motion for summary judgment challenging standing to bring suit.
  
  What should have here been a fairly straightforward, if not a summary, proceeding under the rules, was rendered inefficient by US Bank's failure to marshal its case before compelling homeowner and the court to waste time and resources, twice, by responding to what could not be proven. There was nothing inequitable in dismissing this matter.(1)

Another point worthy of note is that the Vermont high court remanded the case back to the lower court to consider the homeowner's attorney's fees request.

The homeowner filed a motion for attorney's fees asserting that US Bank had filed affidavits in bad faith. The Vermont Supreme Court agreed that the request for attorney's fees under Rule 56(g) was timely and properly raised in the trial court, and that the court erred in failing to consider the motion. It therefore kicked the case back to the trial court for consideration of homeowner's request.

For the ruling, see U.S. Bank v. Kimball, 2011 VT 81 (Vt. July 22, 2011).

See VT Sup CT: Yes US Bank, You Have to Prove Standing for commentary on this case.

Representing the homeowner in this case was Grace B. Pazdan of Vermont Legal Aid, Inc., a non-profit law firm that, according to their website, provides free civil legal services to people throughout Vermont who are poor, elderly, or have disabilities, and has six offices througout the state.

(1) Although this foreclosure action was dismissed by the trial court with prejudice, the Vermont Supreme Court cautioned the homeowner against getting too excited about winning a 'free' house in the following excerpt:

• Thus, this may be but an ephemeral victory for homeowner. Absent adjudication on the underlying indebtedness, the dismissal cannot cancel her obligation arising from an authenticated note, or insulate her from foreclosure proceedings based on proven delinquency. Cf. Indymac Bank, F.S.B. v. Yano-Horoski, 912 N.Y.S.2d 239, 240 (App. Div. 2010) (reversing trial court's order canceling mortgage and debt).
  
  Homeowner's arguments supporting a dismissal with prejudice are not convincing. Homeowner relies on Nolen v. State, but that unpublished three-justice decision simply affirmed the trial court's decision to dismiss with prejudice plaintiff's constitutional claim for lack of standing without a challenge to or any analysis of the "with prejudice" designation. No. 08-131, 2009 WL 2411832, at *2 (Vt. May 29, 2009) (unpub. mem.), available at http://www.vermontjudiciary.org/d-upeo/upeo.aspx.
  
  Further, the court's order does not support plaintiff's assertion that the court was warranted in dismissing with prejudice on equitable grounds given what homeowner characterizes as inconsistent and "likely fraudulent filings" submitted by US Bank. See New Eng. Educ. Training Serv., Inc. v. Silver St. P'ship, 156 Vt. 604, 613, 595 A.2d 1341, 1345-46 (1991) (affirming dismissal of foreclosure action where recovery on the underlying note would be unconscionable).
  
  While the trial court may have had discretion to exert its equitable powers in this manner, no findings were made to support such a conclusion, and we will not speculate on a matter of such importance.