Original Promissory Note May Not Be Necessary in Foreclosure

Nothing ventured, nothing gained.

With the unprecedented number of foreclosures that have been occurring over the past few years, borrowers in default on their loans have been faced with the unpleasant – and very real – prospect of losing their homes in foreclosure.

When presented with the likelihood of foreclosure, some borrowers have chosen to sell their properties through a “short sale.”  Others have chosen to simply abandon their homes and allow the foreclosure sale to occur.  Other borrowers have ended up in bankruptcy.

Some borrowers have taken a very creative approach in dealing with a potential foreclosure.  In one case, a homeowner in default chose to file a lawsuit against a lender by claiming that the lender had no right to foreclose because the lender didn’t have the original promissory note. This case was determined by a federal court, and it is identified as Sicairos v. NDEX West, LLC, 2009 WL 385855 (S.D. Cal.)   A “promissory note” is a written promise to pay money, and many loan agreements are evidenced by a promissory note.  In general, a creditor who holds a promissory note should be able to prove that such creditor actually owns the loan by producing the original promissory note.

Home loans get bought and sold by lenders every day.  Sometimes the paper trail is imperfect, and as a result the loan may be transferred to a purchasing bank, but the original promissory note may get lost in the shuffle.  The homeowner in the Sicairos case claimed that because the bank didn’t have the original promissory note, it wasn’t entitled to foreclose on the borrower’s home. But the homeowner’s attorney didn’t have any real legal authority that required the foreclosing lender to actually have the original promissory note.  In the Sicairos case, the court held that California law doesn’t require a lender to actually have physical possession of the original promissory note in order to conduct foreclosure proceedings. The Sicairos court found that California law provides a comprehensive procedures for non-judicial foreclosures, and the Sicairos court wasn’t able to identify anything in the foreclosure statutes that required the lender to actually have the original promissory note.

Some borrower may wonder whether or not they might have a good defense to foreclosure if their lender hasn’t kept a perfect paper trail.  The plaintiff in the Sicairos case certainly made a game effort to halt foreclosure based on this technicality.  But in this case, the court wasn’t impressed, and it dismissed the homeowner’s lawsuit, thereby allowing the lender to proceed with foreclosure.

The Sicairos case was decided by a federal trial court.  This decision wouldn’t be binding on California state courts, nor would it be binding on most other federal courts, including bankruptcy courts.  Sometimes technical arguments can be successful in legal matters. And a different court could potentially have reached a different result.  But in this case, this technical argument failed.

Copyright 2023 ROBERT B. JACOBS