Reprinted in part from Volume 22, Number 4, March 2012 (Article starting on page 403 in the actual issue)

MILLER & STARR R E A L E S T A T E N E W S A L E R T Reprinted in part from Volume 22, Number 4, March 2012 (Article starting on page 403 in the actual issue) A R T I C L E SHOW ME YOUR PAPERS: SALES AND ASSIGNMENTS OF SECURED REAL ESTATE LOANS AND THE CALIFORNIA FORECLOSURE PROCESS (PART II) By: Karl E. Geier* THIS IS THE SECOND PART OF A TWO-PART ARTICLE. PART ONE APPEARED IN THE JANUARY 2012 ISSUE OF THE MILLER & STARR REAL ESTATE NEWSALERT PREFACE TO PART TWO As discussed in Part One of this article, 1 the requirements for the sale and assignment of real property secured debt under the Uniform Commercial Code and related provisions of law, seemingly observed as often in the breach as through compliance in the secondary mortgage market, usually have not resulted in successful defenses on the part of borrowers facing nonjudicial foreclosures in California. Rather, in a series of decisions devoid of sympathy for the plight of borrowers attempting to hold lenders and their agents and assignees to some minimal standards of documentation and proof of authority to foreclose, the California courts of appeal have protected the nonjudicial foreclosure and trustees sale process against pre-foreclosure intrusion by the courts. As a result, while the courts have held borrowers in foreclosure to rigorous adherence to the requirements that any modifications or * Karl E. Geier is a Shareholder of Miller Starr Regalia and the Editor-in-Chief of the treatise, Miller & Starr, California Real Estate 3d. Main Article, Volume 22, Number 4 1

Main Article u Volume 22, Number 4 MILLER & STARR REAL ESTATE NEWSALERT extensions must be in writing 2 and that performance be tendered to the lender, 3 they have permitted purported lender representatives to pursue the trustee s sale remedy without producing documents establishing ownership or authority to act. 4 This trend has continued since publication of Part One of this article. 5 In Part Two, however, the focus shifts to circumstances involving access by lenders or their agents to the judicial process, whether in state court or federal bankruptcy court, in the context of seeking affirmative relief, including judicial foreclosure, relief from the automatic stay against foreclosure resulting from federal bankruptcy filings, and the pursuit of interim remedies such as receivership. Here, courts have been more inclined to insist that the lender representatives prove their credentials and their ownership and possession of the necessary paperwork to pursue claims with competent and admissible evidence. While the decisions do not invariably require possession and production of the original note and deed of trust and a clear, documented chain of assignments with equally well documented authorizations as agents or nominees to act for the lender, they usually do. Litigants attempting to pursue lenders remedies in court can be left hanging and unable to proceed if they do not properly plead and prove the evidentiary chain of ownership and authority in filings with the court. In this context, unlike the non-judicial foreclosure context, the usual requirements of standing to pursue claims as real party in interest or in a representative capacity, as well as evidentiary standards applicable to proving an affirmative case and entitlement to relief, can be expected to prevail over the presumed policy justification allowing ease of foreclosure and speedy recovery of collateral, since by definition the lender is not pursuing a process that, by statute, restricts or precludes judicial oversight. These requirements in turn, will compel the payee or transferee of a secured obligation to produce the note and prove that it has been duly indorsed or negotiated, or otherwise transferred, so as to give the claimant the status of one entitled to enforce the obligation under familiar common law and UCC requirements. A. Collection Actions and the Right to Enforce Under California Law 1. Proving the Cause of Action Prior to the Uniform Commercial Code Since long before the adoption of the California version of the Uniform Commercial Code, the California Supreme Court has held that 2 2012 Thomson Reuters

MILLER & STARR REAL ESTATE NEWSALERT Main Article u Volume 22, Number 4 proof of a negotiable instrument by the payee was an essential element of an action to enforce the debt. 6 On this authority, parties seeking to recover on a note must allege and be prepared to prove ownership of the instrument. 7 One who claims under a lost or destroyed note necessarily must identify the payee as a condition of the right to enforce the note; and in any case the holder of the note must prove that it is the true holder with a right to collect. 8 While actual production of the debt instrument and the original chain of indorsements are not necessarily essential to pleading a cause of action for collection, 9 if the plaintiff s ownership and the right to collect is denied, the plaintiff must produce the instrument, 10 and as necessary, the due indorsement of the instrument to him or her. 11 Where a claim arises under a mere contract right, the same general principles apply. If the claim is on an agreement other than a note, the plaintiff ordinarily must allege and prove the contract under which the claim arose, and if the claimant is an assignee, the fact that the claim has been assigned to him. 12 In all such cases, the assignee has the burden to prove the assignment (and the validity thereof), 13 and the evidence introduced to show the assignment must be clear and positive to protect an obligor from any further claim by the primary obligee [assignor]. 14 In the context of a negotiable instrument, this protection is afforded by production of the note and proof of indorsement, 15 by which time-honored practice the obligor s risk of continuing liability for double payment to another purported payee is negated. 16 Unlike the cases in which borrowers unsuccessfully have asserted a lack of standing by the purported owner or assignee to foreclose nonjudicially, 17 the courts have insisted upon competent proof of assignment as a condition of exercising judicial remedies for collection or enforcement of the note. In the leading case, Cockerell v. Title Ins. & Trust Co., 18 the California Supreme Court enunciated the requirement that an assignee must prove not only the due assignment of the instrument on which he or she seeks to collect, but also, in the case of a purported assignment by the legal entity that was the original payee and beneficiary of a deed of trust, that the payee legally existed and the purported agent who executed the indorsement of the note on its behalf was in fact authorized to do so. 19 In this case, the court refused to allow the alleged holder of a third deed of trust to participate in surplus proceeds realized from a sale of the property under the senior debt, on the basis that the alleged holder of the junior note who had introduced the original 2012 Thomson Reuters 3

Main Article u Volume 22, Number 4 MILLER & STARR REAL ESTATE NEWSALERT note into evidence failed to show how the persons who delivered it to her were authorized to indorse it on behalf of a company whose legal existence and identity were not established by the evidence. 20 Even though the claimant necessarily must allege and prove the right to enforce the obligation (and if the claimant is not the original payee, must at least allege that the instrument has been assigned), the issue of proof depends on whether the defendant contests the validity of the obligation or of the assignment. If the defendant admits the claim, or fails to raise infirmities in the assignment as a defense, the plaintiff need not introduce specific evidence of validity of the assignment or that he is the holder of the indebtedness; but if validity is denied, the plaintiff must produce the note and any requisite indorsement as evidence. 21 Also, while a defense based on invalidity of the assignment may be asserted, the mere allegation that the purported assignee is not the actual payee or holder does not deprive the plaintiff of standing to assert the claim, although it does compel the plaintiff to prove his right to bring the action. 22 Once the defendant contests validity of the debt 23 or of the assignment, 24 the burden shifts to the plaintiff to introduce competent evidence of both. In the case of a debt instrument, production of the instrument and, if required by substantive law, its negotiation to the claimant, is sufficient to satisfy this burden, 25 subject to any allegations of fraud, lack of due indorsement or other defenses that may be asserted and proven by the defendant. 26 The same general principles apply to the assignment of the security instrument, subject to the supervening rule that an assignment of the debt carries with it the assignment of the security. 27 2. Proving the Cause of Action as Assignee Under the Uniform Commercial Code In 1965, California enacted Article 3 of the Uniform Commercial Code, replacing most of the statutory antecedents and case law applicable to negotiable instruments with the modern principles of the UCC, 28 which for most purposes, however, are consistent with the rules enunciated in these prior authorities. Since then, there has been very little case law development with respect to the sale and assignment of real property secured debt, but the older authorities discussed in the previous section, virtually all of which arose before adoption of Article 3 of the Uniform Commercial Code in California, continue to have persuasive if not 4 2012 Thomson Reuters

MILLER & STARR REAL ESTATE NEWSALERT Main Article u Volume 22, Number 4 dispositive authority in this area. 29 Still, the technical language of the Commercial Code must be reviewed as to any particular issue if the matter involves a negotiable instrument. 30 To summarize, under the Commercial Code, a prima facie case for collection of a note requires at least an allegation that the party seeking to collect is the true holder of the indebtedness. As discussed in this section, in order to establish a right to recover, the party seeking to collect ordinarily must produce the instrument and, if he or she is a transferee, must also produce authenticated evidence that it was transferred to him by a person authorized to act for the prior holder or payee. Before describing the statutory basis that leads to this conclusion, it should be noted that some sections of the Commercial Code might lead one to the opposite conclusion. Specifically, Commercial Code, 3305, subd. (c), states, as a general rule, that in an action to enforce a negotiable instrument, the obligor may not assert against the person entitled to enforce the instrument another person s defense or claim to an interest in the instrument or its proceeds. 31 In the words of the Code, the other person s claim to the instrument may be asserted by the obligor if the other person is joined in the action and personally asserts the claim against the person entitled to enforce the instrument. 32 Thus, in order for the defendant in a collection action on a note to raise the defense that some third party is entitled to payment, that person must actually be brought into the action and must assert the claim himself. Otherwise, by the literal language of 3305, subd. (c), there is seemingly no defense to payment if the instrument is a negotiable instrument and the person seeking to enforce it is the holder of the instrument, i.e., the person entitled to enforce it. 33 In order to meet such a defense, once it is properly raised, the plaintiff must demonstrate (a) that the instrument is negotiable, and (b) that the holder is a party to the action. 34 More to the point, however, the current provisions of the Commercial Code plainly require the production of the note by the party seeking to enforce it, whether or not the defendant contests its validity. Specifically, subdivision (a) of 3308 provides that the authenticity of the note and authority to make each signature of the instrument is admitted unless denied in the pleadings; but if validity is denied, the person claiming validity bears the burden of establishing it. Subsection (b) then goes on to provide that whether validity is admitted or proven under subdivision (a), a plaintiff who produces the instrument is 2012 Thomson Reuters 5

Main Article u Volume 22, Number 4 MILLER & STARR REAL ESTATE NEWSALERT entitled to payment if the plaintiff proves entitlement to enforce the instrument under Section 3301. 35 In other words, in order to make out a cause of action, the plaintiff must at least produce the instrument. 36 If the instrument is produced, the authenticity of, the authority to make, and genuineness of each signature is admitted unless specifically denied in the pleadings, 37 and the defenses of the defendant (including any claim that the plaintiff is not a holder in due course) also must be proven by the defendant. 38 As a result, introducing the original instrument is sufficient to make the claim, provided the person making the claim proves that he or she is a holder or has the rights of a holder. 39 (As discussed in Part One of this Article, being a holder usually requires, under Article 3 of the UCC, possession of the note payable to or duly indorsed to the holder, 40 or, under Article 9 of the UCC, the existence of an authenticated sales contract transferring the instrument to the holder coupled with possession of the instrument.) 41 Where the instrument is transferred by negotiation, the plaintiff must at minimum demonstrate that the instrument was indorsed by producing evidence of the indorsement, but once this is produced, the signature and its accompanying words constitute an indorsement regardless of the intent of the signer, unless the accompanying words, terms of the instrument, place of the signature or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement. 42 Once possession of the note is transferred, the person in possession also may be able to enforce the note either as a holder not in due course, even if the note has not been endorsed to him or her, 43 or by proving that it was a promissory note transferred in ordinary business by an authenticated record under Article 9. 44 In the context of an action to enforce a non-negotiable promissory note, a failure to prove that one is a holder and to produce the instrument is not necessarily fatal to the action, because the claimant can simply assert the debt as a contract claim (or a common count for money had and received), and prove existence of the debt without actually possessing the instrument. 45 If the claimant seeks to assert the right to enforce as a holder in possession of the note without an indorsement under Article 9 of the UCC, the holder would also need to produce the authenticated sales agreement by which ownership was assigned to him or her. 46 However, no specific provision in the UCC allows for enforcement of a negotiable instrument without producing the instrument unless 6 2012 Thomson Reuters

MILLER & STARR REAL ESTATE NEWSALERT Main Article u Volume 22, Number 4 provisions relative to a lost, stolen or destroyed note have been complied with. 47 By its very nature, an instrument payable to bearer, or indorsed in blank or to a particular payee, if intended to be negotiable, requires possession of the actual instrument for collection. Even if the note is payable or indorsed to a particular claimant, however, as with pre-ucc case law, the UCC requires that the person seeking to collect without producing the note must prove, among other things, that possession cannot be obtained, 48 and that he or she has the right to enforce the instrument. 49 Pursuant to Commercial Code 3309, if these are proven, then 3308 applies to the case as if the person seeking enforcement had produced the instrument, but the claimant also can be required to provide adequate protection to the defendant against claims by others under the same instrument. Otherwise, the Commercial Code provides no mechanism for a claim by a purported payee of an instrument (or a transferee of the payee) without actually producing the instrument. 50 To summarize, when the action is for collection of a negotiable instrument, the plaintiff must prove holder status or rights of a holder (i.e., produce an original instrument that was either duly indorsed to him or her under Article 3 of the UCC, or otherwise transferred to him or her under the provisions of Article 9 of the UCC dispensing with the requirement of an indorsement). 51 In either case, the minimally necessary requirement is actual possession and production of the note. A judicial foreclosure action is by definition an action for the recovery of any debt, or the enforcement of any right secured by mortgage upon real property. 52 It is therefore subject to the rules applicable to negotiable instruments. While no reported California appellate decision has directly so held since enactment of the California Uniform Commercial Code in 1965, this conclusion would follow from the pre-code case authority discussed above 53 and the fact that the current Commercial Code provisions governing negotiable instruments and the right to enforce are substantially the same as under prior law and require production of the note. If the debt is evidenced by a negotiable instrument, therefore, an action for judicial foreclosure should not be possible unless the plaintiff produces the note and either proves due indorsement of the note to him or her or indorsement in blank, or a sale without indorsement of a record transferring the note to him or her. 54 If the claim is under a non-negotiable promissory note or other agreement, however, the claimant should be able to pursue the claim 2012 Thomson Reuters 7

Main Article u Volume 22, Number 4 MILLER & STARR REAL ESTATE NEWSALERT by proving a contract right to recover, unless the standard of proof and the potential defenses create other obstacles to the enforcement of the claim. 55 Where the instrument is not negotiable, a transferee of the debt is a mere transferee and is subject to the same defenses as the assignor. 56 In such cases, the transferee seeking to collect on an assigned contract claim must allege and prove the assignment 57 and the authority of the person making the assignment, in addition to a right of payment. 58 3. Proving Signatures and Authority to Transfer Under the UCC The Uniform Commercial Code provides alternative means of authenticating a transfer of a negotiable instrument, either by indorsement or by an assignment of a note by sale without indorsement. An indorsement requires a signature made for purposes of indorsement, 59 and an indorser is a person who makes an indorsement. 60 If the instrument is payable to a holder under a name that is not the holder s name (such as a misspelling or other change in name), the indorsement may be made either under the name to which it is payable, or in the correct name, or both, and the person to whom the instrument is indorsed can require that it be in both names. 61 In each case, however, unless the instrument is payable to bearer, the negotiation requires an indorsement, and the party actually indorsing the instrument must be the holder. 62 The Code also includes a set of rules for determining when a person s signature on an instrument is valid and effective to impose liability. 63 If the signature is by a representative of the person on whose behalf the instrument is signed, then the authority of the person signing is governed by the usual non-ucc agency and contract rules discussed above. In the specific words of the Code, [i]f a person acting, or purporting to act, as a representative signs an instrument by signing either the name of the represented person or the name of the signer, the represented person is bound to the same extent the represented person would be bound if the signature were on a simple contract. 64 A signature made without actual, implied, or apparent authority is an unauthorized signature, 65 and is generally ineffective except as the signature of the unauthorized signer in favor of a person who in good faith pays the instrument or takes it for value. 66 Even in that instance, however, the unauthorized signature is only effective to impose liability on the signing party, not the person on whose behalf the signer 8 2012 Thomson Reuters

MILLER & STARR REAL ESTATE NEWSALERT Main Article u Volume 22, Number 4 purports to sign in a representative capacity, 67 unless the signature is later ratified by that person. 68 To summarize, in the context of an ordinary indorsement of a negotiable instrument, as well as a non-negotiable promissory note, the principles of the Code generally leave intact the requirements of pre-code contract law, discussed in the preceding section of this article, and do not create a new set of principles that override the common law. The Code does provide a safe harbor for the person who is seeking to enforce the instrument to rely upon the signature on the instrument (which may be on the actual instrument or a separate paper affixed to the instrument in case of an indorsement) in the absence of evidence to the contrary. 69 The authenticity of, and authority to make the signature on a negotiable instrument is admitted unless denied in the pleadings; once validity is denied, however, the burden is on the person claiming validity of the signature to prove that it was authorized. 70 As reflected in the official Uniform Commercial Code commentary, the denial of authority or authenticity may be on information and belief, and while a person claiming a forgery or other lack of authenticity must introduce some evidence to overcome the presumption of validity, once authenticity is denied, only the authenticity of a signature, and not its authorization, are presumed, and the plaintiff must prove due authorization. 71 All of these principles, considered by the courts to be irrelevant and inapplicable in the context of non-judicial foreclosure under the case law discussed in Part One of this Article, 72 would be applicable in an action with respect to an instrument 73 which would appear to include an action for judicial foreclosure under Code Civ. Proc., 726. 74 There are two common circumstances in which the burden of the person seeking to enforce a promissory note that was not initially payable to bearer (and therefore did not require indorsement) 75 may not extend to each step in a chain of assignments or transfers of the debt instrument or rights to enforce. The first is where a negotiable instrument has been indorsed in blank. In that instance, the person in possession of the instrument is the holder without further indorsement, so only the signature and authority of the person purporting to indorse will be subject to the requirement of provable authority. 76 The second is where the note (whether negotiable or not) has been sold in accordance with Article 9 of the UCC. In the latter instance, the requirement is that there be a transfer of possession of the note coupled with an authenticated sales contract by which the instrument was transferred 2012 Thomson Reuters 9

Main Article u Volume 22, Number 4 MILLER & STARR REAL ESTATE NEWSALERT (without indorsement) to the person entitled to enforce it. 77 Here, the Article 9 definition of authenticate comes into play. Under Article 9, authenticate means either to sign or to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept a record. 78 The term record means information that is inscribed in a tangible medium or which is stored on an electronic or other medium and retrievable in perceivable form. 79 Since an agreement for sale of a promissory note, characterized as a security interest, 80 requires a sales agreement that meets the definition of an agreement, 81 which in turn must be the bargain of the parties, 82 the net effect of all of this is that some form of record of the parties agreement of transfer must be authenticated, which may be accomplished by an actual signature of a paper instrument or by a variety of electronic forms of authentication of non-paper documents. In the case of an Article 9 transfer by sale of one or more promissory notes, the transferee seeking to claim the right to enforce the note must establish that he or she is a holder in possession of the note 83 and in order to do so must establish the existence of an authenticated agreement transferring the note to him or her. 84 Ultimately, this requires proving a signature or its electronic or digital equivalent, but Article 9 leaves unstated whether it must be authorized. The effectiveness of a security agreement under Article 9 (which includes an agreement for sale of a negotiable or nonnegotiable note, as previously discussed), requires that the assigning person, in the context of a promissory note, have title to the note, i.e., must be its owner, 85 but in other respects is effective according to its terms between the parties under Section 9201. 86 In order to become enforceable, ordinarily value must be given, the transferor must have rights in the asset, and the agreement transferring it must be authenticated by the transferor, 87 but whether it is binding on the transferor when executed by another person is determined by laws other than the UCC. 88 At some point, the obligations and rights under Article 9 of the transferee of a promissory note, like any contract right, thus return to roost on the general principles of agency and contract law. While the Code is less explicit on the burden of proof in the context of an Article 9 sale than it is under Article 3, the party claiming rights to enforcement in either case necessarily must be able to show that the transfer to him occurred by some agreement authorized by a person who could bind 10 2012 Thomson Reuters

MILLER & STARR REAL ESTATE NEWSALERT Main Article u Volume 22, Number 4 the prior holder, and that the transferee seeking to enforce the note has possession of the note. Thus, the principles of authority, agency and capacity to transfer, as enunciated by the Supreme Court in Cockerell v. Title Ins. & Trust Co. will continue to be critical to the person attempting to enforce the note. 89 B. Assignee and Non-Holder Standing to Pursue Judicial Foreclosure Despite the requirement for production of the debt instrument, an incomplete chain of assignments or factual issues concerning ownership of the debt and security, where ownership has been divided, fractionalized or securitized, will not necessarily prevent the claimant from pursuing foreclosure. As discussed in this section, so long as the plaintiff includes all persons with a putative interest in the note as parties (whether as plaintiffs or defendants), and the right of these parties to enforce the note is proven, and the instrument (if negotiable) is produced (or inability to produce it as a lost, destroyed or stolen instrument is proven), the plaintiff eventually should be able to recover. In such cases, the debtor ultimately must be able to show some defense to the obligation, such as payment, that is good against the holder, 90 or tender performance, 91 in order to defend the foreclosure action. Courts in some other states have held, for example, that the holder of a note secured by a MERS mortgage lacks standing to commence a judicial foreclosure because ownership of the mortgage had been severed from ownership of the note and the mortgage thereby became essentially a nullity and could not be enforced by the noteholder. 92 Similar issues of proof or status may arise when the noteholders are not identified, or when some or all of the assignees or transferees of the debt instrument or the mortgage do not appear and join the action as plaintiffs. In all of these situations, the question would arise, first, whether the alleged noteholder or assignee can establish standing to assert a claim and second, whether the plaintiff can prove its case without producing a physical note and a complete authenticated chain of assignments or indorsements of the debt instrument and the deed of trust. In California, these issues are not fully resolved, but the following discussion suggests that in the context of judicial foreclosure the answer may lie more in the language of the Code of Civil Procedure and decisional law concerning indispensible parties and real parties in interest than in the intricacies of Article 3 of the UCC and the law 2012 Thomson Reuters 11

Main Article u Volume 22, Number 4 MILLER & STARR REAL ESTATE NEWSALERT of negotiable instruments. To summarize, California courts traditionally have not been willing to deny claims by an assignee or co-obligee based on assertions by the debtor that other necessary parties with an interest in the debt were not joined as plaintiffs in the action. Nonetheless, the plaintiff ultimately must produce the instrument, together with evidence of the chain of assignments of the debt and the security, and if equity requires, join all parties who might assert a claim against the debtor or the collateral under the debt sued upon, in order to state and pursue to judgment a cause of action to collect or foreclose. 1. Payee or Holder as Real Party in Interest Code of Civil Procedure 726 provides that there can be but one form of action for recovery of a debt or enforcement of any right secured by a mortgage on real property, which is a judicial foreclosure action followed by an application for a deficiency judgment under the provisions of that statute. 93 This section, which applies to deeds of trust as well as mortgages, 94 does not expressly require the plaintiff to be the holder of the indebtedness. As noted in Part One of this article, the California courts have readily allowed a party who is not a noteholder and not the trustee to foreclose nonjudicially, or to assign the debt if a statute or contractual writing purports to give that power. 95 There is no reason to think that 726 would be read to permit judicial foreclosure without regard to the laws of negotiable instruments, however. To the contrary, the courts generally have assumed that these principles apply in an action to foreclose as in any other collection action. 96 In 1901, in the case of Martin v. Weber, the Supreme Court concluded that the note and mortgage are inseparable by reason of 726, and one cannot be foreclosed or collected without the other. 97 (The court also held that the very fact the note was secured by the mortgage rendered the note non-negotiable as a matter of law and subject to whatever defenses the debtor could assert, whether in the hands of the original payee or an assignee, 98 a conclusion that would not follow under the current Commercial Code.) 99 From this, it can be assumed that the party foreclosing a mortgage or deed of trust must possess and have the right to enforce the debt instrument under the UCC, or be an agent or nominee duly authorized by the holder to do so. Code Civ. Proc., 367, a statute that does not come into play in nonjudicial foreclosure but is applicable to any civil lawsuit, requires that every action must be presented by the real party in interest, unless otherwise expressly provided by some other statute. 100 The real party 12 2012 Thomson Reuters

MILLER & STARR REAL ESTATE NEWSALERT Main Article u Volume 22, Number 4 in interest is ordinarily the person who, under the substantive law, possesses the right sued upon. 101 The reason for this is to avoid a multiplicity of suits and avoid subjecting the defendant to inconsistent or unresolved claims by others on the same demand. 102 This rationale is consistent with the UCC requirement that the person entitled to enforce an instrument be a holder of the instrument or one with rights of a holder. 103 The holder of a negotiable instrument ordinarily is the real party in interest in an action to collect the note, 104 and the beneficiary of a deed of trust is ordinarily a real party in interest and an indispensible party to an action to foreclose. 105 In the context of foreclosure by an action on a debt, this requires that the plaintiff creditor must at least show a real and provable interest in the debt instrument with status as a party with rights to enforce it; but ordinarily, an assignee s status is sufficient for this purpose. 106 Code Civ. Proc., 725a allows either the beneficiary or the trustee of a deed of trust, or the mortgagee of a mortgage, or their successors, to file an action for judicial foreclosure, and, like 726, says nothing about the holder of the debt instrument. 107 The issue of whether 725a is a statute that, within the meaning of 367, otherwise expressly provides that the real party in interest (i.e., the noteholder or the person entitled to enforce the note) need not be a party to the action, apparently has not been litigated in a reported California appellate decision, but the Law Revision Commission also did not identify 725a as being one of the statutes that otherwise expressly provides in their commentary on the 1992 amendments to 367. 108 To repeat, Section 725a, again, permits a trustee or beneficiary named in the deed of trust or mortgage, or their successors in interest to bring suit to foreclose, a mortgage or deed of trust that secures a debt or obligation. 109 It does not expressly address whether the provisions of the Commercial Code requiring the holder to produce the note in order to enforce it are also overridden by 725a. Recent case law in other jurisdictions concludes, under the Uniform Commercial Code, that a transferee who can produce the note and an indorsement, whether in blank or directly to him or her, has standing as a real party in interest to foreclose judicially, irrespective of whether the mortgage was properly assigned. 110 In these cases, the critical factor is the production of the note and proving that one is the holder with rights to enforce it, in keeping with the requirements of the UCC discussed in the preceding section of this article. Similar results can be expected in 2012 Thomson Reuters 13

Main Article u Volume 22, Number 4 MILLER & STARR REAL ESTATE NEWSALERT California, based on venerable pre-ucc precedent as well as the current provisions of the Commercial Code. 111 2. Compulsory Joinder of Interested Parties. In any civil litigation, the rules for joinder of parties generally will require any person who has an interest in the subject matter of the litigation be joined in the action if that party s inclusion is necessary to provide full and complete relief, and to avoid a multiplicity of lawsuits at least where a failure to join the party would result in substantial prejudice to the person who is omitted from the action or to other parties to the suit. 112 Because the judicial foreclosure process is just another form of litigation, the substantive law governing the assignment of mortgages and deeds of trust and the negotiation of instruments is only the beginning of an analysis of whether the foreclosing plaintiff has standing as a real party in interest and whether the debtor can force joinder of other persons who may have had or may currently have an interest in the note or mortgage at the time of the action. In the context of full or partial assignments, or of multiple noteholders or fractional beneficial interests, as well as broken chain assignments, the rules for compulsory joinder may give the debtor or a creditor party the ability to compel inclusion of other parties in the action but will not necessarily provide a defense if joinder is impractical. One provision of statutory law that has yet to be clarified in this context is the effect of an amendment to the real party in interest statute enacted in 1988. Prior to that time, Code Civ. Proc., 369 provided that certain persons could sue without joining as parties the persons for whose benefit an action is prosecuted; one of these was a person with whom, or in whose name, a contract is made for the benefit of another. 113 Thus, the statute formerly may have allowed a beneficiary s nominee, such as MERS, to sue on behalf of multiple noteholders. In 1988, the statute was amended, however, to except from this clause the trustee under a deed of trust or mortgage holding a power of sale. As now worded, the section therefore would seem to require the trustee to join the beneficiary in the action. 114 The second part of the 1988 amendment provides, however, that the trustee may sue to exercise the trustee s powers and duties pursuant to certain provisions of the Civil Code. 115 These are the provisions dealing with mortgages, deeds of trust, and the non-judicial exercise and enforcement of powers of sale generally. 116 They do not, as such, relate to judicial foreclosure under 725a and 726. The effect of this provision of 369 therefore is perhaps unresolved by case law but it appears irrelevant in the context of judicial foreclosure. 14 2012 Thomson Reuters

MILLER & STARR REAL ESTATE NEWSALERT Main Article u Volume 22, Number 4 The real party in interest in a foreclosure action is the beneficiary, not the trustee of a deed of trust or mortgage. 117 Ordinarily, both the holder of the obligation and the true beneficiary are indispensible parties to the action to foreclose, under 369, subd. (b)(3), and the foregoing exception for actions by the trustee to enforce the trustee s powers would not, as such, justify omitting a beneficiary from an action to foreclose. 118 If there are multiple beneficiaries, however, an action can be brought by any one of them to foreclose on behalf of the others, and the debtor has no basis for objecting to such a procedure in the absence of a showing that it is actually injured by allowing such a suit without joining all the other beneficiaries as defendants. 119 This is consistent with the current Commercial Code, which provides that any negotiable instrument payable to two or more persons may be enforced by any one of them. 120 Likewise, an assignee of a debt or contract is an appropriate party to bring suit on the obligations, irrespective of whether he or she is a holder in due course and, whether or not the instrument is negotiable. 121 Unless the other creditor parties also object that joinder is required, the debtor who is not able to show prejudice from the failure to join all the beneficiaries has no grounds for complaint. 122 In this respect, the rules governing joinder of parties as plaintiff or defendant are not unlike those affecting parties defendant; under 726, ordinarily all parties with an interest in the property security must be joined as defendants in the judicial foreclosure action, 123 but the effect of omitting them is not to preclude judicial foreclosure as to the debtors and other parties named in the action, but rather to leave the interest of the unnamed parties unaffected by the sale. 124 Where the instrument is payable or indorsed to multiple payees, or there are multiple notes secured by the same mortgage, the case law suggests that the fractional assignees of such instruments, who cannot be holders of the instrument, 125 still may establish standing to foreclose judicially. As the following discussion suggests, the Commercial Code rules for establishing that one has rights to enforce a negotiable instrument including possession of the note, indorsement and other attributes of a holder to whom the note has been negotiated, will have no direct application to the issue of standing and joinder of essential parties in the judicial foreclosure context unless the mortgagee or trustor can assert some actual prejudice resulting from the circumstances, and then it would seem the issue will be resolved if the other parties to the transfers of the obligation and the security are joined in the action, if they can be located. 2012 Thomson Reuters 15

Main Article u Volume 22, Number 4 MILLER & STARR REAL ESTATE NEWSALERT A number of California decisions confirm the right of one of several potential payees to procure a foreclosure remedy even where the other payees are not plaintiffs in the action. Some of the decisions consider the right of a bondholder to foreclose on a mortgage held by a trustee (as beneficiary) under an indenture for itself and numerous other bondholders. 126 For example, in Citizens Bank v. Los Angeles Iron & Steel Company, 127 a single bondholder sued for foreclosure under such a deed of trust, and the borrower/trustor demurred on the grounds that the plaintiff bondholder had not adequately pleaded ownership of bonds at the time of its alleged demand on the trustee to foreclose. The trustee was also sued in the case, and defended on the grounds that an insufficient number of bondholders had demanded foreclosure to require the trustee to act under the terms of the bond offering. Even though, at the pleading stage, the plaintiff had been unable to allege who owned the other bonds, he brought the action on behalf of all other bondholders and at trial the identities of these bondholders were proven and they surrendered their bonds and coupons. Therefore, everyone that could actually be affected by the foreclosure was in the action, either as plaintiff or as defendant. The court held that under the circumstances, the borrower s attempted defense that the initial plaintiff should not have been permitted to maintain the suit was misplaced, stating as follows: As to alleging demand upon the [debtor] for payment, demand was alleged and that [sic] such demand was made more than six months prior to commencing the action. But no demand on the steel company was necessary, the suit being all the demand required. (Citations omitted.) Furthermore, as demand was in fact alleged, a failure to state of whom made, or that the demand was made improperly or of the wrong person, would be matter of defense. 128 Citizens Bank is an example of a real party in interest permitted to initiate and pursue foreclosure on behalf of itself and other real parties in interest despite the existence of other beneficial interest holders who did not directly join the action but whose interests were identical. In another decision, even the omission and failure to concur by one of the bondholders did not preclude an action by the other bondholders, when the contract specifically authorized the holders of less than all of the bonds to institute foreclosure. 129 However, it is significant that 16 2012 Thomson Reuters

MILLER & STARR REAL ESTATE NEWSALERT Main Article u Volume 22, Number 4 in Citizens Bank the other non-foreclosing creditors actually appeared in the action and proved their right to payment. What if they had not been able to prove actual rights to enforce or collect the indebtedness? A case more clearly involving a gap in the assignment documentation is Cortelyou v. Jones, 130 where the foreclosing plaintiff, an assignee for collection, had received an assignment of the mortgages and credits due from the mortgagee in trust but sued in its own name. The mortgagee on appeal claimed that as an assignee, the trustee should only have been permitted to sue in a representative capacity. As a matter of law, the court held that the capacity in which the assignee sued was immaterial because legal title to the mortgage had passed to him by assignment, and upheld the adjudication of foreclosure. 131 Again, the exact nature of the assignment does not appear to have been the direct subject of the litigation nor is it clear whether the trustee produced the actual note, but the court clearly allowed an assignee for collection who produced the assignment to foreclose judicially without determining its status as a holder of a negotiable instrument or any other question of negotiability. 132 In another case, Patten v. Pepper Hotel Co., 133 the debtor directly asserted that defects in the chain of assignments or pledges of a note and mortgage precluded judicial foreclosure by the alleged pledgor. The debtor demurred to a complaint for judicial foreclosure on the basis that the plaintiff was not the holder of the note because it had been pledged to a bank which held possession of the note and evidently held an assignment of the mortgage, but it was not joined as a party to the action. 134 The court held, however, that since the pledgee also was alleged to have demanded payment on the note (required to accelerate the indebtedness) the pledgor could pursue the claim. Again, as in Citizens Bank, all of the parties that had an interest in the note and mortgage, including the pledgee, had been named as parties in the action. In these circumstances, the defendant debtor had no standing to raise an objection as to whether all the necessary parties had been sued. As stated by the court: It will be observed that the bank as first assignee of the note and mortgage and the mortgagee Abbie E. Barr were both made parties to the action as defendants. All those, therefore, who were interested in enforcing the lien of the mortgage were before the court either as parties plaintiff or defendant. This was all that 2012 Thomson Reuters 17

Main Article u Volume 22, Number 4 MILLER & STARR REAL ESTATE NEWSALERT the appellant, as successor in interest to the [original] mortgagor, could insist on. [W]hile in such actions the pledgee is a necessary party, still as far as the mortgagor, or other parties in interest are concerned, it is immaterial whether he be made a party plaintiff or defendant; that so long as the assignee was a party and did not object to his position under the pleadings, the mortgagor could not raise the question. 135 (emphasis added) Patten is consistent with other decisions holding that where a partial interest holder or transferee sues to collect on a note, the claim may be enforced by the plaintiff as an equitable assignee of the debt (not as a holder), so long as the other partial interest owners are joined as defendants, 136 but it is not dispositive of issues that can arise when the identity of the holder of the note and chain of conveyance or transfers of the mortgage are themselves at issue for example, if the mortgagor or trustor should allege and be prepared to prove, that the true holder of the indebtedness has been paid, but is not in the action. Nevertheless, Patten is consistent with the general principle that the debtor cannot defend against a foreclosure because of irregularities in the transfer of the debt and security which do not in fact cause injury to the debtor. Another decision in the same vein is Exchange Bank v. Scholz, 137 where a mortgagee who had pledged the note to its own creditors made a similar argument, contending that a pledgee and holder of the note who had received the transfer in trust for other creditors of the mortgagee lacked authority to prosecute an action to foreclose on the assigned mortgage because the transferee creditors had not consented to the trustee s action. The court found that there had been a negotiation and delivery of the note to the trustee, and that as holder of the indebtedness the trustee was entitled to foreclose without the pledgor s consent, but even if it had been a mere pledge to secure obligations of the mortgagee to its creditors, the assignee could bring the foreclosure action as a mere pledgee. 138 In the course of so holding, the court also rejected the debtor s claim that the foreclosing assignee and indorsee of the note was not a holder in due course, finding as a matter of evidence both that there had been a transfer for value and an indorsement and negotiation by delivery of the note to the transferee, and that in any case the mortgagor had received credit for all payments made by the mortgagor of which the transferee had knowledge. 139 To summarize, a debtor who asserts the party foreclosing judicially lacks standing to do so (i.e., is not a real party in interest within the 18 2012 Thomson Reuters

MILLER & STARR REAL ESTATE NEWSALERT Main Article u Volume 22, Number 4 meaning of Code Civ. Proc., 367), 140 cannot simply rely on allegations of infirmities in the assignment of the debt instrument or the mortgage. It is sufficient that the plaintiff asserts legal title to the debt being claimed. 141 Inasmuch as an assignment of a promissory note (negotiable or not) and the related deed of trust or mortgage can occur by delivery of possession without compliance with the other requirements for negotiation of an instrument, 142 the claimant assignee in such a case presumably would have standing to bring the action as a real party in interest, even if others also may have a claim to or interest in the mortgage debt. A borrower who seeks dismissal of the action based on a claim that other alleged assignees are indispensable parties will find only marginal support in cases which hold that if there is another interested person (as in a case where the possibility of an ineffective or forged indorsement has occurred), the other potential claimant may have to be joined in the action as defendant. If the debtor claims both that the negotiation was faulty and that credit was not received for payments tendered to the holder of the indebtedness, the debtor may have a valid defense to the foreclosure, 143 but the defense would not be based solely on non-joinder of parties. If there are multiple noteholders, any one of the noteholders as well as any assignor or the assignees may have standing to bring the action, and non-participating noteholders, assignors or assignees can be joined as defendants if they decline to participate as plaintiffs. 144 If the debtor cannot demonstrate that indispensible parties have not been joined in the action resulting in a risk of inconsistent obligations or double liability, a gap or nondisclosure of a party in a chain of transfers of the debt instrument or the security instrument would not necessarily be fatal to the plaintiff s action to foreclose. 145 3. When Co-Payees or Noteholders May be Indispensible Parties. In most cases, the argument that other persons besides the foreclosing beneficiary are indispensible parties, when raised by a debtor, stands little chance of success. For example, in Glendale Fed. Bank v. Hadden, 146 a leasehold lender who lacked a nondisturbance and attornment agreement or other contractual rights to cure defaults under the lease was held not to be an indispensable party to an unlawful detainer action which terminated the lessee s right to possession, forfeited the lease, and essentially extinguished its collateral. 147 While a lender/beneficiary and the trustee who conducted a trustee s sale are indispensible parties in an action by the debtor to set aside a sale that 2012 Thomson Reuters 19