FV-I, Inc. v. Kallevig

392 P.3d 1248

FV–I, INC., in Trust FOR MORGAN STANLEY MORTGAGE CAPITAL HOLDINGS, LLC, Appellant,

v. Constance M. KALLEVIG, et al., Defendants,andBank of the Prairie, Appellee.

No. 111,235

Supreme Court of Kansas.

Opinion filed April 21, 2017

Nancy Merrill Wilson, of South & Associates, P.C., of Overland Park, argued the cause, and Stephanie L. Mendenhall, of the same firm, was with her on the briefs for appellant.

Timothy H. Girard, of Woner, Glenn, Reeder & Girard, P.A., of Topeka, argued the cause and was on the briefs for appellee.

The opinion of the court was delivered by Rosen, J.:

This case stems from a mortgage foreclosure petition that plaintiff/appellant FV–I, Inc. filed in June 2011. The homeowner-debtors are no longer involved in this proceeding, as the parties agreed to sell the property and place the proceeds in escrow pending resolution of this case. The dispute is between FV–I and Bank of the Prairie (BOP), a bank with junior mortgages on the same property. Although summary judgment was initially granted in BOP's favor, the Court of Appeals reversed and remanded for trial to determine whether FV–I had possession of the promissory note underlying the mortgage at the time it filed the mortgage foreclosure. FV–I, Inc. v. Kallevig , No. 108706, 2013 WL 2321198 (Kan. App. 2013) (unpublished opinion) (Kallevig I ).

At trial, FV–I presented the original note endorsed in blank and the original mortgage with an assignment to FV–I, although it had attached a previous copy of the note without the endorsement in blank to the petition. The district court held: (1) FV–I lacked standing to file the petition because it did not have possession of the original note prior to filing its petition; (2) the note and mortgage FV–I held had split because these documents did not follow the same path to FV–I; (3) FV–I lacked enforcement rights in the note because FV–I had failed to lay the proper foundation for the endorsement in blank on the note and therefore, the court must exclude the endorsement in blank from evidence; and (4) the first three rulings meant that BOP's mortgages were therefore superior to FV–I's mortgage.

The Court of Appeals affirmed the district court in FV–I, Inc., v. Kallevig , No. 111235, ?2015 WL 717776 (Kan. App. 2015) (unpublished opinion) (Kallevig II ) holding FV–I did not have standing to pursue its claim without establishing enforcement rights in the promissory note as of the date of the filing, FV–I's mortgage was unenforceable, and FV–I's mortgage lost its superior priority to BOP's mortgages. FV–I petitions for review, arguing standing does not have to be proved at the time of filing and that a lack of standing should not result in its mortgage losing its superior position.

We agree with the Kallevig II panel that standing is based on the party's enforcement and possession rights at the time of filing. However, evidentiary rulings excluding endorsements on the promissory note compel us to remand for a rehearing regarding standing and the panel's priority determination.

We therefore reverse contrary rulings by the district judge and the Court of Appeals, and we remand the case to the district court for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

On September 16, 2005, Kermit and Constance Kallevig and GMAC Bank entered into a note and mortgage concerning property in Bucyrus. On June 15, 2011, the mortgage was assigned to FV–I by Mortgage Electronic Registration Systems, Inc., (MERS) as a nominee for GMAC Bank, its successors, and assigns. On June 24, 2011, FV–I filed a petition to foreclose the mortgage. Attached to the petition was a copy of the mortgage and a note with an undated stamp endorsement from GMAC Bank to GMACB Asset Management Corp. FV–I indicated it had authority to enforce the note and mortgage under K.S.A. 60–217.

FV–I named BOP as a party because BOP had three mortgages on the same property that FV–I claimed were either subordinated by agreement or otherwise junior: a mortgage recorded October 16, 2002, subordinated by agreement; a mortgage recorded October 19, 2006; and a mortgage recorded September 28, 2007. FV–I attached the subordination agreement to the petition.

BOP filed an answer, a counterclaim against FV–I, and a cross-claim against the Kallevigs. BOP acknowledged that it held three mortgages on the property and that it had executed a subordination agreement. BOP argued FV–I failed to state a claim upon which relief could be granted and asked that the district court establish that its mortgages had priority.

FV–I and BOP filed multiple motions back and forth. FV–I consistently claimed the right to enforce the note by possession and endorsement of the note. BOP challenged whether FV–I had standing, whether FV–I's mortgage and note had split, and whether FV–I had the ability to enforce the note. FV–I subsequently claimed enforcement rights through two additional means.

The first was based on an allonge transferring the note to FV–I—originally with GMACB—from Ally Bank, as successor in interest to GMACB. FV–I indicated it did not know when the allonge had been prepared. The second was the original note, which included two additional endorsements that the note attached to FV–I's petition did not have: the first was without recourse from GMACB to Residential Funding Company, LLC (Residential); and the second was an undated endorsement in blank from Residential.

The district court granted BOP's motion for summary judgment, holding that FV–I lacked standing because it failed to establish ownership of the note as of the date FV–I filed its petition. The district court further held that FV–I's mortgage and note had split, which rendered FV–I's mortgage unenforceable and allowed BOP's mortgages to jump ahead in priority.

On appeal, a panel of the Court of Appeals reversed the order in Kallevig I . The panel held that FV–I must establish it was in possession of the note prior to filing its petition, in order to establish holder status and a right to enforce the note. Kallevig I , 2013 WL 2321198, at *4. The panel also observed that there was no evidence the note and mortgage had been split. 2013 WL 2321198, at *4. The panel concluded that neither party was entitled to judgment as a matter of law and reversed and remanded the case to determine when FV–I took possession of the note. 2013 WL 2321198, at *5. Neither party filed a petition for review of the Kallevig I decision.

On remand, the parties agreed to the sale of the subject real estate, and the sale proceeds were paid into escrow until a priority determination could be made. At the October 8, 2013, bench trial, the parties stipulated to the Kallevigs' default on the note. FV–I claimed enforcement rights through its status as holder of the original note and argued that the interests had not been split and that its mortgage had priority. BOP argued that there had been an "implied or inferred" split of the mortgage and note, that FV–I's inability to explain how it had acquired the note was suspicious, and that the mortgage FV–I held was "ineffectual and unenforceable" because FV–I could not establish its enforcement rights. Regarding the two additional endorsements on the original note, BOP argued that, "if there was ever a presumption in their favor, it seems to me they've got a lot of work to do with regard to prov [ing] issues on authenticity or validity of those signatures."

At trial, Andy Chatfield testified for FV–I. He worked as an asset manager for AMS Servicing, LLC, a servicing agent that handled defaulted loans. AMS serviced the loans for FV–I and acquired the servicing of the Kallevig loan in January 2012—6 months after the petition in this case was filed. Chatfield was familiar with AMS' practices and procedures and was authorized to testify on behalf of FV–I. FV–I's counsel relied on Chatfield to lay the foundation for the original note that was endorsed in blank. Chatfield testified that it was the original note from the Kallevig's file, that to his knowledge FV–I had acquired the loan in 2010, but that he did not have any personal knowledge regarding the transfer of the note to FV–I prior to January 2012 by GMAC Bank and GMACB.

BOP challenged the two additional endorsements on the note. FV–I argued that signatures were presumed valid and that a challenge to the signature was an affirmative defense, which meant that BOP had the burden to prove the signatures were not authentic. The district court sustained BOP's objections to the foundation and hearsay of the two additional endorsements, reasoning that FV–I needed to lay a proper business record foundation for the endorsements in order for them to be admitted. The district court admitted the original note at trial without the last two endorsements, which included the endorsement in blank.

In the journal entry of judgment, the district court relied on its decision to exclude the two additional endorsements in holding that FV–I failed to establish it had enforcement rights in the note. Relying on Mortgage Electronic Registration Systems v. Graham , 44 Kan.App.2d 547, Syl. ¶ 1, 247 P.3d 223 (2010), the district court also held that FV–I failed to show it had standing to bring the suit because it had not established holder status as of the day it filed its petition. Relying on Ohio and Maine caselaw, the district court held that the lack of standing could not be cured by a post-filing assignment of the note to FV–I.

The district court held that the note and mortgage had split, that FV–I's mortgage was unenforceable, and that BOP's mortgages were therefore superior. It denied FV–I's petition, granted BOP judgment on its counterclaim against FV–I, and granted BOP default judgment on its cross-claim against the other defendants.

A panel of the Court of Appeals affirmed the district court in Kallevig II . The panel treated the primary issue as whether the district judge erred in holding that FV–I lacked standing. Kallevig II , 2015 WL 717776, at *4. The panel cited ...