Nationstar Mortg., LLC v. Hinkle

321 Or.App. 300

516 P.3d 718

NATIONSTAR MORTGAGE, LLC, dba Mr. Cooper, Plaintiff-Appellant,

v. David M. HINKLE, aka David Michael Hinkle and Tracy A. Hamblet, aka Tracy Ann Hamblet, aka Tracy A. Hamlet Hinkle, Defendants-Respondents,andClackamas Federal Credit Union and occupants of the property, Defendant.

A173078

Court of Appeals of Oregon.

Argued and submitted August 24, 2021

August 10, 2022

John Thomas argued the cause and filed the briefs for appellant.

Jeffrey A. Long, Portland, argued the cause and filed the brief for respondents.

Before Powers, Presiding Judge, and Egan, Judge, and Landau, Senior Judge.

POWERS, P. J.

During the pendency of this judicial foreclosure action, plaintiff transferred the note and deed of trust to a third-party mortgage servicer. We must decide what effect, if any, that transfer has on plaintiff's ability to maintain the proceeding. After plaintiff unsuccessfully moved to substitute the new mortgage servicer as plaintiff and for leave to amend the complaint, the trial court granted summary judgment for defendants. On appeal, plaintiff assigns error to the trial court's rulings on the motions and the court's award of costs and attorney fees to defendants. For the reasons explained below, we conclude that the trial court's rulings denying leave to amend and granting summary judgment stemmed from an incorrect legal premise, and we reverse those rulings and remand, which obviates the need to address plaintiff's challenge to the award of costs and fees.

FACTS AND PROCEDURAL HISTORY

The pertinent facts are undisputed. In 1998, defendants Hinkle and Hamblet obtained a loan to finance the purchase of a home in Clackamas County, secured by a promissory note and deed of trust. The note obligated defendants to make regular payments on the loan and permitted the lender to accelerate the entire amount due under the note in the event of a default. In 2012, defendants stopped making payments on the note, and the loan entered into default. In 2017, plaintiff Nationstar Mortgage, LLC became the holder of the note, which was indorsed in blank, and the beneficiary to the trust deed. In August 2018, plaintiff initiated this judicial foreclosure action and, two months later, delivered the note and assigned the trust deed to a third-party mortgage servicer, New Penn Financial, LLC (New Penn).

In their answer to the complaint, defendants timely asserted that plaintiff is not the real party in interest because it no longer holds the note. See ORCP 21 A and G(2) (providing that the defense that the party asserting the claim is not the real party in interest must be asserted in a responsive pleading to the claim of relief, an amendment to the responsive pleading, or a motion to dismiss, or else it is waived). In response, plaintiff moved pursuant to ORCP 34 E to substitute New Penn as plaintiff and, later, moved pursuant to ORCP 23 for leave to amend the complaint to allege facts showing the transfer of the note to New Penn and to substitute New Penn as plaintiff.

Defendants opposed both motions. As to the motion to substitute, defendants argued that ORCP 34 does not authorize substitution in cases where the claim does not survive the transfer of interest. See ORCP 34 A ("No action shall abate by the death or disability of a party, or by the transfer of any interest therein, if the claim survives or continues."). Defendants argued that plaintiff's foreclosure claim did not survive its transfer of the note because, under the Uniform Commercial Code (UCC), a plaintiff that transfers a note no longer has the right to enforce the note and the right is terminated rather than passed onto the new note holder. According to defendants, a transfer of a note pendente lite —or "pending litigation"—requires the pending suit to be dismissed and the new note holder to file a new claim. That is because, defendants argued, a plaintiff must both hold the note at the time it commences the foreclosure action and maintain possession of the note through trial to judgment.

As to plaintiff's motion for leave to amend the complaint, defendants argued that an amended claim alleging facts showing plaintiff's pendente lite transfer of the note to New Penn would not have merit. That is because, defendants argued, even if ORCP 34 allowed substitution in these circumstances (which they did not concede), New Penn did not hold the note when the complaint was filed and therefore did not have standing to initiate the action.

The trial court denied the motion to substitute without explanation and denied the motion for leave to amend as "essentially a re-do" of the motion to substitute.

Defendants then moved for summary judgment. Based on the court's earlier rulings on the motions and the record before it, the trial court concluded that defendants were entitled to judgment as a matter of law.¹ The court explained, "[I]f you don't possess the note, you're not entitled to enforce the note. As an instrument, you weren't allowed to substitute in the—I don't even know what to call the new holder. So, the record as it stands right now, before me, I have to grant the motion." The trial court entered a limited judgment of dismissal based on its ruling and later issued a supplemental judgment awarding attorney fees and costs to defendants.²

On appeal, the parties do not dispute that plaintiff held the note and had the right to enforce it when it commenced this foreclosure action. Their disagreement—and the trial court's rulings on both the motion for leave to amend and the motion for summary judgment—turn on the legal ramifications of plaintiff's transfer of the note while this action was pending.³ Defendants argue, as they did below, that a plaintiff's pendente lite transfer of the note it is seeking to enforce in foreclosure requires dismissal because the transfer: (1) divests the plaintiff of its status as the real party in interest, (2) abates the foreclosure action, and (3) precludes substitution of the new note holder for lack of standing. The problem with defendants’ argument, however, is that the legal premises are incorrect.

As explained below, we conclude that plaintiff's transfer of the note pendente lite has no bearing on plaintiff's status as the real party in interest in this case, because the relevant time a plaintiff must establish that it is entitled to enforce the note is at the commencement of the foreclosure action. It is undisputed that plaintiff held the note, indorsed in blank, at the time it filed the complaint and, therefore, is the real party in interest entitled to enforce the note in foreclosure. Accordingly, the trial court erred in granting summary judgment for defendants on that basis.

Moreover, a pendente lite transfer of interest does not abate a foreclosure action because the transfer of the note vests the right to enforce it in the transferee. And ORCP 34 E authorizes the action to be continued in the name of the original party and gives a trial court discretion to substitute the party to whom the interest is transferred. Therefore, we also conclude that the trial court erred when it denied the motion to amend because its ruling flowed from the incorrect legal premise that New Penn could not be substituted as plaintiff as a matter of law.

DISCUSSION

We begin with a brief overview of the substantive law of judicial foreclosure actions before turning to the applicable principles governing the parties’ dispute. A judicial foreclosure action seeks to recover debt secured by real property. A typical home loan consists of two distinct but related legal documents: a promissory note in which the borrower promises to repay the lender on a specified schedule, and a security agreement—either a mortgage or trust deed—in which the borrower conveys to the lender a lien on the purchased property to secure the loan memorialized in the promissory note. Brandrup v. ReconTrust Co. , 353 Or. 668, 675-76, 303 P.3d 301 (2013). Oregon subscribes to the "lien theory" of mortgages in which the borrower "merely conveys a ‘right, upon condition broken, to have the mortgage foreclosed and the mortgaged property sold to satisfy [the underlying debt].’ " Id. at 676, 303 P.3d 301 (quoting Schleef v. Purdy , 107 Or. 71, 78, 214 P. 137 (1923) (bracketed text in Brandrup )). In the event that the borrower defaults on the note, the lender or the lender's successor in interest may exercise its right to sell the secured property to satisfy the obligation by bringing a judicial foreclosure action against the borrower. Brandrup , 353 Or. at 676, 303 P.3d 301.

A promissory note secured by a trust deed or mortgage is a negotiable instrument governed by the UCC. See ORS 73.0104(1) (defining "negotiable instrument"). ORS 73.0301 establishes who is entitled to bring a judicial foreclosure action to enforce a note. Bank of New York Mellon v. Brantingham , 303 Or.App. 649, 655, 464 P.3d 1143, rev. den. , 367 Or. 217, 474 P.3d 907 (2020) (citing Deutsche Bank Trust Co. Americas v. Walmsley , 277 Or.App. 690, 695-96, 374 P.3d 937 (2016) ). That statute provides:

" ‘Person entitled to enforce’ an instrument means the holder of the instrument, a nonholder in possession of the instrument who has the rights of a holder, or a person not in possession of the instrument who is entitled to enforce the instrument pursuant to ORS 73.0309 or 73.0418(4). A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument."

ORS 73.0301. A "holder" includes "[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession." ORS 71.2010(2)(u)(A). And "[w]hen indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed." ORS 73.0205(2). Thus, "to be entitled to enforce a negotiable instrument as a holder, a party must simply...