Why “Produce the Note” Doesn’t Work All That Well in Minnesota

Last month the Massachusetts Supreme Court rendered a very significant decision in a case entitled U.S. Bank National Association vs. Ibanez .  This case is being closely watched around the country, particularly by advocates of a theory of foreclosure defense called “produce the note”.

What does “produce the note” refer to?  Recall that in the heyday of the housing boom, many residential mortgages were “securitized”; that is,  the mortgage loans (mortgage notes) were purchased from banks and other lenders and assigned to a trust, the loans were assembled into collections, or “pools”, and the trusts securitize the pool and issue mortgage-backed securities, with documentation that identifies the underlying loans. 

With many of the mortgages held within these trusts going into default, the trustees of these trusts found themselves in a position which they had not expected to be in; namely, foreclosing the mortgages which comprised the pools in an effort to mitigate the losses of those investors who purchased the mortgage-backed securities. 

Somewhere along the way, some enterprising individual had a revelation:  in order to foreclose a mortgage, there needs to be a debt, and what is the evidence for the debt?  The promissory note.  So, goes the line of thinking which has become known as “produce the note”, if these trusts go to foreclose the mortgages, why not ask them to produce the evidence of the debt owed to them, and if they cannot produce it, then they should not be allowed to foreclose. 

The Ibanez decision is quite simple and straightforward:  you need to own the mortgage which you intend to foreclose upon.  Now, given that this is a state court decision, the scope of the Ibanez ruling remains to be seen, but this case is certainly a huge arrow in the quiver of foreclosure prevention strategists.

I personally first heard of the “produce the note” theory just over two years ago when a client of mine came to me with information on the strategy.  After reviewing the concept, I came to the conclusion that, for the most part, “produce the note” would not work in the State of Minnesota.  Why did I conclude that?  Because Minnesota’s system of non-judicial foreclosure, also known as “foreclosure by advertisement”, created a number of procedural hurdles for a property owner seeking to require their lender to produce the promissory note which evidences the debt alleged to be secured by the mortgage. 

Where the produce the note request typically arises is during the discovery phase of the foreclosure action.  The borrower makes a request of the lender to turn over the note and, when the lender is unable to do so, the borrower brings a motion to dismiss the foreclosure on the grounds that the lender cannot show that it owns the mortgage being foreclosed.

In Minnesota, with a foreclosure by advertisement, there is no court lawsuit; the sheriff’s sale is scheduled, notices are given, the sale is held and, once the owner’s and junior creditors’ redemption periods expire, the high bidder at the sale (which is typically the lender) is the owner of the property.  For a property owner to launch a produce the note offensive, the owner must first commence its own lawsuit against the lender for wrongful foreclosure and make the discovery request within that suit for the note.  There is, however, more to the story.  Because the foreclosure by advertisement proceeds so quickly, and litigation proceeds very slowly and in accordance with an agreed upon scheduling order, the borrower must seek some sort of emergency relief in order to stop the pending foreclosure sale.  This emergency relief would be a motion for a temporary restraining order to stop the sale, and any such motion, to be successful, must include sufficient proof that the borrower is likely to prevail upon the merits of its claims in the lawsuit.  This is a high bar to meet.

The Minnesota Supreme Court addressed a similar issue in 2009 in the case of Jackson, et al. v. Mortgage Electronic Registration Systems (MERS) .  In that case, the homeowners challenged the ability of mortgagees to foreclose mortgages which were held in the name of MERS rather than the actual mortgagee.  The Supreme Court found in favor of MERS and held that it was not necessary for legal title to the mortgage to be transferred along with every transfer of the promissory note in order for the mortgage to be foreclosed validly by advertisement.  The Jackson case would seem to indicate that the Minnesota Supreme Court would not be inclined to adopt the Ibanez ruling.

Essentially, the procedural hurdles created under Minnesota law for a borrower to use a “produce the note” strategy to stop a fast-moving non-judicial foreclosure require a well-funded plaintiff as the costs of preparing, filing and serving the complaint, not to mention the preparation of motion papers for the TRO and the required appearance at the hearing, will quickly lead to a steep tab from the attorney (and you have to use an attorney in order to successfully navigate the maze of rules necessary to ultimately get in front of a judge for a TRO motion).  There could certainly be a handful of borrowers in such a position, but the odds are that if the person could not pay their mortgage payments, it is doubtful that they could afford an attorney to fight the foreclosure.