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Maryland Appellate Decision Makes It Easier for Creditors Holding Notes with Gaps in the Chain of Title to Foreclose

Posted: 07/03/2012
Industries: Financial Services

Summary
An appellate court in Maryland recently handed down a decision that makes it easier for a creditor holding a promissory note, secured by a deed of trust and with gaps in its chain of title, to foreclose.

Last week, the Court of Appeals of Maryland rejected a borrower in foreclosure's argument that gaps in a promissory note's chain of title amounts to fraud that infects a deed of trust. The Court's holding makes it easier for creditors who hold notes that are not completely traceable to the original lender, to foreclose.

In Thomas v. Nadel, No. 106, 2012 WL 2368881 (Md. June 25, 2012), the Thomases, a couple in foreclosure, challenged the sale of their home, in part, because there was a gap in the chain of title of the promissory note, which was secured by a deed of trust against their home. Biltmore Specialty Investments II, LLC ("Biltmore") held the promissory note and was also the winning bidder of the Thomases' home at a public foreclosure auction. Just how Biltmore came to hold the note is unclear. The borrowers' original lender indorsed the note to a mortgage corporation that subsequently went out of business. Before going out of business in 2008, the mortgage company made blank indorsements of all its notes, so they could be transferred. At some point, the mortgage company transferred the note to another company, but Biltmore did not exist until 2009, leaving a one-year period where ownership of the note was anyone's best guess.

Maryland borrowers in foreclosure have two opportunities to challenge a foreclosure sale – before the sale is conducted or within 30 days following the sale. The general rule in Maryland is that a borrower challenging a foreclosure action must assert known defenses prior to the sale. After a foreclosure sale, a borrower is limited to raising only procedural irregularities. The Court of Appeals in Bates v. Cohen, 417 Md. 309, 9 A.3d 846 (2010), left open the possibility that following a sale, a borrower could assert a mortgage or deed of trust was itself a product of fraud. Seizing on this open question, the borrowers in Thomas argued the gap in the note's chain of title amounted to fraud that tainted the deed of trust and the sale should have been set aside.

The Court was not convinced that a mere gap of ownership in a note's chain of title amounted to fraud. The Court noted that in the context of fraud relating to the execution of a document, Maryland courts recognize charges of forgery, alteration and misrepresentation. The borrowers in Thomas conceded that no forgery took place at any point during the note's assignment; they were not the victims of misrepresentation and all documents including the note and the deed of trust were genuine. The Court concluded that the couple's "general allegation" of fraud did not suffice and the question left in Bates is still an open one – whether fraud infecting the underlying mortgage or deed may be raised by a borrower following a foreclosure sale.

In rejecting the borrowers' fraud argument in Thomas, the Court has made it easier for creditors holding a promissory note, secured by a deed of trust, with gaps in its chain of title to foreclose. A note that is not completely traceable to the original lender does not, by itself, rise to the level of fraud in the underlying mortgage or deed of trust.

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