Foreclosing Trust Had Enough Evidence to Show It Owned the Note, Appeals Court Rules

Federal case law summary by Attorney Richard Clem: MN mortgage foreclosure, real party in interest..

Michael H. Johnson, Jr., v. Wells Fargo Bank, N.A., as trustee for the Holders of the SASCO 2007 MLNI Trust Fund. MN mortgage foreclosure, real party in interest.

Michael H. Johnson, Jr., is a Minnesota homeowner who was trying to save his home from foreclosure. The mortgage on his house is held by a mortgage trust, and he filed suit in Minnesota state court alleging that the mortgage had never been validly assigned to the trust.

The owner of the mortgage was the e SASCO 2007 MLN1 Trust Fund, a trust set up under New York law. This trust is a Real Estate Mortgage Investment Counduit (REIMC) set up to take advantage of the provisions of 26 U.S.C. 860A. Under that federal tax statute, an REIMC is not subject to income tax at the corporate level. But for the trust to qualify for that type of tax treatment, 26 U.S.C. 860G(a)(3) requires that the mortgage must be in the possession of the trustee on the date the trust was organized. In other words, if the trust acquires mortgages after it is organized, then it loses the preferential tax treatment.

To prevent this from happening, the organizers of the trust included in the original trust agreement a provision stating that the trust was not allowed to acquire any mortgages after it was organized. Under New York law ( N.Y. Est. Powers & Trusts Law, section 7-2.4) any action taken in violation of the trust agreement is void.

Therefore, the issue in this case was whether the trust had the note for the mortgage in its possession on the date the trust was organized, March 13, 2007. If it did not have physical possession of the note on that date, then it did not have the right to foreclose the mortgage, because under the trust agreement, its purported ownership would be void, and it would have no standing to foreclose.

Mr. Johnson filed a lawsuit in Minnesota state court alleging that the trust did not have possession on that date. The defendant in the case was Wells Fargo Bank, N.A., which was serving as trustee of the New York trust. The defendant removed the case to federal court, and it was heard in the federal District Court in Minneapolis. That court granted summary judgment to the trust. The lower court held that there was insufficient evidence for a jury to conclude that the note was not in the trust's possession.

It based this ruling on a March 9, 2017, document in which the trust's custodian certified which documents were in its possession. That document stated that the custodian was missing the was missing the “SECI–Security Instrument” for Johnson's loan. The document also included the cryptic note that the "document is a true & correct copy" but that the custodian still "needed the recorded original."

The lower court interpreted this to mean that the trust did possess the note, since it was not on the list of items that were missing. Since there was no evidence to the contrary, the court held that this entitled the defendant to summary judgment.

Dissatisfied with this ruling, the plaintiff appealed to the U.S. Court of Appeals for the Eighth Circuit. The Court of Appeals interpreted the crypic document somewhat differently from the district court. But unfortunately for the plaintiff, it also reached the conclusion that the note had been received. In the absence of any other evidence to the contrary, the Court of Appeals affirmed the lower court.

No. 13-1005 (8th Cir. Feb. 25, 2014).

Please see the original opinion for the court's exact language.


Richard P. Clem is an attorney and continuing legal education (CLE) provider in Minnesota. He has been in private practice in the Twin Cities for 25 years. He has a J.D., cum laude, from Hamline University School of Law in St. Paul and a B.A. in History from the University of Minnesota. His reported cases include: Asociacion Nacional de Pescadores a Pequena Escala o Artesanales de Colombia v. Dow Quimica de Colombia, 988 F.2d 559, rehearing denied, 5 F.3d 530 (5th Cir. 1993), cert. denied, 510 U.S. 1041 (1994); LaMott v. Apple Valley Health Care Center, 465 N.W.2d 585 (Minn. Ct. App. 1991); Abo el Ela v. State, 468 N.W.2d 580 (Minn. Ct. App. 1991).

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