Defective Assignment, Failure To Produce Note Endorsement Sanctionable Under Nevada Mediation Rules; Halts F'closures; Another Lower Court Reversal

From a recent ruling by the Nevada Supreme Court:

• In this appeal, we consider issues arising out of Nevada's Foreclosure Mediation Program.
  
  First, we must determine whether a homeowner who is not the original mortgagor is a proper party to participate in the program. We conclude that the Foreclosure Mediation statute, NRS 107.086, and the Foreclosure Mediation Rules (FMRs) dictate that a homeowner, even if he or she is not the named mortgagor, is a proper party entitled to request mediation following a notice of default.
  
  Second, we must determine if a party is considered to have complied with the applicable statute and FMRs governing document production in a mediation proceeding by producing what the district court referred to as "essential documents." In this, we address whether substantial compliance satisfies the mandates of the statute and FMRs.
  
  Because we conclude that strict compliance is compelled by NRS 107.086(4) and (5), that the assignment offered was defective, and that no endorsement of the mortgage note was provided according to Article 3 of the Uniform Commercial Code, we conclude that Wells Fargo failed to produce the documents required under NRS 107.086(4).(1)
  
  Additionally, we recently concluded in Pasillas v. HSBC Bank USA, 127 Nev. ___, ___. P.3d ___ (Adv. Op. No. 39, July 7, 2011), that a party's failure to produce the enumerated documents required by NRS 107.086 and the FMRs prohibits the district court from directing the program administrator to certify the mediation so that the foreclosure process can proceed. Here, we again conclude that, due to the statute's and the FMRs' mandatory language regarding document production, a party is considered to have fully complied with the statute and rules only upon production of all documents required.
  
  Failure to do so is a sanctionable offense, and the district court is prohibited from allowing the foreclosure process to proceed.
  
  Therefore, we must reverse and remand this case to the district court for it to determine appropriate sanctions against respondents.

For the rest of the ruling, see Leyva v. National Default Servicing Corp., 127 Nev. Adv. Op. No. 40 (Nev. July 7, 2011).

For a discussion of this and a companion case issued by the Nevada Supreme Court on the same day, see Credit Slips: Nevada Supreme Court: You Gotta Prove Chain of Title.

(1) It may be that the foreclosing lender here may attempt to cure its problem by 'producing' an endorsement on a separate sheet of paper that magically appears at the 11th hour in this litigation in order to move forward and proceed to foreclosure. Such a separate sheet of paper, also known as an allonge, may be fatal to the foreclosing lender's status as a holder in due course when not attached to the actual note itself. Consequently, additional defenses to the foreclosure action may become available to the homeowner when the foreclosing lender lacks this special status.

For what may be, for some, helpful discussions on the importance of this separate sheet of paper being affixed to the note itself, see:

• Adams v. Madison Realty & Development, Inc., 853 F.2d 163 (3d Cir. 1988) (involves a purchaser of a group of promissory notes where the allonges were not appropriately attached to the instruments),
• New York Law Journal: Getting Attached: When do allonges meet the requirements of the New York UCC?
• Max Gardner: STAPLES OR GLUE? The Validity of Allonges and Its Impact on Standing to Foreclose,
• All American Finance Co. v. Pugh Shows, Inc., 30 Ohio St.3d 130, 507 N.E.2d 1134, 1136-37 n. 3 (1987) (collecting cases showing disagreement among courts on how firmly indorsements must be affixed - see footnote 3 of the ruling).