Supreme Court Rejects “Show Me The Note” Defense

In this ever-changing real estate landscape, one thing hasn’t changed: there’s no such thing as a free lunch – or a free house. In keeping with that tradition, last week our Supreme Court rejected the now famous “show me the note” defense. More specifically, the Supreme Court addressed the issue of whether a lender must first prove ownership of the note before foreclosing. According to our Supreme Court, Arizona’s foreclosure statutes do not require the lender to prove its authority or “show the note” before proceeding with foreclosure. Hogan v. Washington Mutual Bank, NA, 227 Ariz. 561 (May 2012).

In Hogan, the borrower financed the purchase of two properties in Yavapai County. The loan was secured by a deed of trust in favor of Long Beach Mortgage Company. Several years after the transaction, Washington Mutual acquired Long Beach Mortgage Company. Thereafter, Washington Mutual failed and was seized by the FDIC and was subsequently sold to JP Morgan Chase. JP Morgan Chase later sold the loan to Deutsche Bank. In 2008, the borrower defaulted on the loan and Deutsche Bank initiated foreclosure proceedings.

After receiving notice of foreclosure, the borrower filed a lawsuit to enjoin the foreclosure unless Deutsche Bank could prove that they had authority to foreclose under the promissory note. The trial court dismissed the borrower’s lawsuit and request to postpone the trustee sale and held that Arizona’s foreclosure statutes do not require the lender to present the original note before commencing foreclosure proceedings. Id. Last week, the Arizona Supreme Court agreed: A.R.S. §33-809(c) “Requires only that, after recording notice of the trustee sale under Section 33-808, the trustee must send the trustor notice of the default, signed by the beneficiary or his agent, setting forth the unpaid principle balance.” The Supreme Court recognized that Arizona’s foreclosure statutes do not require presentation of the original note before commencing foreclosure proceedings. The only proof of authority the trustee sale statutes require is a statement indicating the basis for the trustee’s authority. Id. The Supreme Court recognized that Arizona’s non-judicial foreclosure sales are meant to operate quickly and efficiently, “outside of the judicial process” – requiring the beneficiary to prove ownership of a note before foreclosing might frustrate that purpose. Id.

Although rumors abound on the Internet and elsewhere of homeowners bringing claims against the banks due to “robo-signing,” missing promissory notes, and predatory lending, Arizona courts have repeatedly rejected these claims. Regardless, distressed property owners still have good options in most cases. If you or someone you know has questions regarding their distressed property or mortgage, please call our office today to schedule a consultation with Attorney Christopher J. Charles.