The Third DCA recently reversed a final judgment entered in favor of two borrowers (Joseph and Margaret Buset, hereinafter “the Borrowers” or “the Busets”) in a foreclosure action concluding securitization of their loan did not affect the negotiable nature of the note or the Bank’s holder status.[i]  In Buset, the Borrowers executed a note and mortgage in 2005 in favor of Fremont Investment & Loan. Shortly thereafter, Fremont “packaged the note with others for purposes of securitization and sale to investors.” In September 2010, the Borrowers defaulted on their loan and in October 2012, the Bank initiated foreclosure proceedings. Prior to initiating the foreclosure, Fremont endorsed the note in blank and MERS, the mortgagee identified in the mortgage, assigned the mortgage to the Bank. The Bank attached a copy of the endorsed note, the mortgage and the assignment of mortgage to its complaint.

The matter proceeded to trial and the lower Court heard testimony from two witnesses: (i) The Bank proffered “a loan analyst” employed by its servicer, and (ii) the Borrowers proffered an expert, Kathleen Cully, a New York barred attorney, who “specialized in securitization” of mortgages. Based in great part on Ms. Cully’s expert testimony regarding securitization and her opinion “that the note…was not negotiable…”, the trial Court concluded the Bank lacked standing to foreclose despite being the “holder” of the note both at the time it filed the complaint and at the time of trial. The lower Court further found the Bank lacked standing based on alleged violations of the Pooling and Servicing Agreement (“PSA”) and alleged deficiencies in the Bank’s assignment of mortgage. Lastly, the lower Court excluded a portion of the Bank’s evidence based on hearsay grounds. [ii]

The Third DCA found each of the lower Court’s legal conclusions in the final judgment to be erroneous and reversed the lower Court’s final judgment explaining it improperly shifted the focus of the case “from foreclosure to securitization.”[iii] The Court first addressed the testimony offered by the Borrowers’ expert witness, agreeing with the Bank that:

the trial court committed reversible error by permitting Ms. Cully…to testify to legal issues,” noting that determination of questions of law “is exclusively within the province of the court.”

The Court also surmised that the lower Court’s reliance on Ms. Cully’s testimony rather than century old precedent from the Florida Supreme Court that a mortgage note is a negotiable instrument was error and demonstrated the Court’s misapprehension of “the nature of negotiable instruments.”

The Court also rejected Ms. Cully’s opinion that “the note’s negotiability was destroyed because it referred to the mortgage which purportedly contained provisions limiting transferability.”

The Appellate Court explained it could not “find any intent in [the note provisions] to limit the transferability of the note in a manner that indicates an intent by the parties to destroy its negotiability.

Further, the Court distinguished between a note which “merely references the mortgage,” like the Busets’ note, and one which “expressly incorporates the terms of the mortgage,” finding the former had no effect on the negotiability of the note.

The Court rejected Ms. Cully’s testimony pertaining to alleged deficiencies in the “chain of endorsements on the face of the note” and the assignment of mortgage. The Court pointed out the note contained a blank endorsement in exactly the same form as that required by the PSA and that the Bank, as the note holder, “was fully entitled to fill in the blank and name a specific payee, as happened here.” The Court noted “the question of who is the ultimate beneficial owner of the proceeds of the foreclosure” is not an “issue normally or necessarily part of a foreclosure case.” The Court elaborated that proof of ownership “may be relevant to a dispute where a person claims his or her ownership interest trumps the interest of the holder, but the borrower cannot make this argument on its own…” The Court concluded, if the Bank is “a person entitled to enforce [the note]” as a holder, the issue of ownership was “irrelevant” and the assignment of mortgage was “superfluous.”

Lastly, the Court rejected the Borrowers’ argument that the Bank’s purported violations of the  PSA destroyed the Bank’s standing. The Court explained the Borrowers’ were not parties to or beneficiaries of the PSA and noted that their interests were actually adverse to those of the parties to the PSA. The Court concluded, based on the Borrowers’ lack of standing, they could not rely on the purported violations of the PSA “to defend against foreclosure.”[iv]

The Third DCA’s opinion in Buset provides significant guidance on several key issues which are frequently dispositive in a foreclosure case. Regarding standing, the Court established clear limitations on the bank’s evidentiary requirements and the arguments available to a borrower challenging foreclosure. Assuming the Buset opinion withstands a motion for rehearing, it will be of great precedential value to banks in the future as all Florida trial courts will be required to follow its holding.[v]

[i] HSBC Bank USA, N.A. v. Buset, 2018 Fla. App. LEXIS 1660 (Fla. 3d Feb. 7, 2018). The Borrowers recently moved for an extension of time to file a motion for rehearing so the Third DCA’s opinion remains a non-final order pending resolution of any timely filed rehearing motion.

[ii] The Court disagreed with the trial court’s conclusion that the Bank failed to lay an adequate foundation for admission of its business records, integrated from a prior servicer, finding the Bank’s witness “provided substantial testimony regarding the records,” her training, and how the “records were created and stored.” Additionally, the Court pointed out the Borrowers failed to “present any evidence challenging the accuracy of the records.” Buset, 2018 Fla. App. LEXIS 1660 *15-16.

[iii] Buset, 2018 Fla. App. LEXIS 1660 *2, 4.

[iv] Buset, 2018 Fla. App. LEXIS 1660 *14.

[v] The Court cited Pardo v. State, noting “in the absence of interdistrict conflict, district court decisions bind all Florida trial courts.” Buset, 2018 Fla. App. LEXIS 1660 *7 (quoting Pardo v. State, 596 So. 2d 665, 666 (Fla. 1992)).