Opinion
No. 111,235.
2015-02-6
FV–I, INC., In Trust For Morgan Stanley Mortgage Capital Holdings, LLC, Appellant, v. Constance M. KALLEVIG, et al., Defendants, and Bank of the Prairie, Appellee.
Appeal from Miami District Court; STEVEN C. MONTGOMERY, Judge.Nancy Merrill Wilson and Stephanie L. Mendenhall, of South & Associates, P.C., of Overland Park, for appellant.Timothy H. Girard, of Woner, Glenn, Reeder & Girard, P.A., of Topeka, for appellee.
Appeal from Miami District Court; STEVEN C. MONTGOMERY, Judge.
Nancy Merrill Wilson and Stephanie L. Mendenhall, of South & Associates, P.C., of Overland Park, for appellant. Timothy H. Girard, of Woner, Glenn, Reeder & Girard, P.A., of Topeka, for appellee.
Before PIERRON, P.J., BRUNS and SCHROEDER, JJ.
MEMORANDUM OPINION
PER CURIAM.
The district court denied FV–I, Inc.'s (FV–I) petition to foreclose its mortgage because FV–I failed to establish it had possession and/or assignment of the note prior to filing the foreclosure petition. FV–I appeals. FV–I admitted during the trial it had to have possession of the note prior to filing the foreclosure petition. We find there was substantial competent evidence to support the district court's finding FV–I lacked standing to foreclose the note and mortgage. We affirm.
Facts
This is the second time this case appears before the Kansas Court of Appeals. In FV–I, Inc. v. Kallevig, No. 108,706, 2013 WL 2321198 (Kan.App.2013) (unpublished opinion), this court set out the note and mortgage history and initial priority alignment of the various notes and mortgages. We see no need to retell that part of the story as the parties are well aware of the facts. Given that understanding, the issue for the district court on remand was to determine whether FV–I had possession of the note at the time it filed the mortgage foreclosure. If so, the district court must determine if FV–I's note and mortgage maintained its priority over Bank of the Prairie's (BOP) various notes and mortgages.
The first time this case appeared in our court, the panel determined there existed a fact question about the ownership of the GMAC note and mortgage now being foreclosed by FV–I that denied BOP's motion for summary judgment. With assignment and/or possession of the GMAC note in dispute, the case was remanded and the parties presented the issue for trial to the district court.
District Court Trial
The district court issued a pretrial order on September 10, 2013. In its pretrial order, the district court narrowed the issues in the case to the following:
• Did GMAC Bank split the promissory note and mortgage that FV–I seeks to enforce, and if so, what was the effect of that split?
• Does FV–I have enforcement rights in the promissory note and mortgage that it seeks to enforce?
• Does FV–I have standing to pursue foreclosure, whether or not the promissory note and mortgage were split?
• If FV–I did not have standing to pursue foreclosure of the note and mortgage on the date the foreclosure petition was filed, can it cure its lack of standing in order to be the real party in interest?
At trial, FV–I knew the validity of its note was at issue and called Andy Chatfield, an asset manager at AMS Servicing, to establish foundation for the note. FV–I moved to have the note admitted into evidence. BOP objected to the admissibility of the note for lack of foundation, lack of authentication, and hearsay. BOP argued Chatfield had no personal knowledge about the loan documents before AMS Servicing began servicing the loan on January 12, 2012. Chatfield's limited knowledge of FV–I's file reflected he could not testify FV–I had the note assigned to it or that the note was in FV–I's possession before the foreclosure petition was filed on June 24, 2011. Chatfield's testimony was limited to past industry practice and experience on how note and mortgage documents are generally transferred between lenders.
FV–I presented no other witnesses. BOP recalled Chatfield to question him regarding FV–I's previous position that it was claiming enforcement in the September 16, 2005, note based on an allonge from Ally Bank. BOP also called Chris Donnelly, president and chief executive officer of BOP, to testify as an expert witness regarding the banking industry and his personal experience regarding the Kallevig loans. Donnelly testified he did not believe BOP's October 2002 mortgage was subordinate to the GMAC Bank mortgage because it was unclear FV–I had enforcement rights in the GMAC Bank note and mortgage.
FV–I did not introduce any evidence regarding the allonge previously referenced in the motion for summary judgment, the pretrial order, or as argued by BOP during the trial.
BOP argued FV–I lacked enforcement rights in the note. In support of this position, BOP discussed the three different positions asserted by FV–I regarding its rights of enforcement throughout the proceeding: the note copy attached to the petition, the allonge produced from Ally Bank, and the note presented at the trial with two additional endorsements that were not on the note attached to the foreclosure petition. BOP's counsel argued:
“So they come here relying on both, the allonge and the ... note. And relying on both indicates a couple of things. First of all, FV–I doesn't know how it got its claimed enforcement rights in the promissory note. It can't even get settled in on one position by which a promissory note on day-one, payable to GMACB, got to it.”
BOP also argued FV–I lacked standing at the time of filing the petition to foreclose because FV–I failed to produce documents demonstrating the note was in FV–I's possession or endorsed and payable to FV–I prior to filing the foreclosure petition. Finally, BOP argued that if FV–I did not have standing when it filed the petition, then FV–I cannot subsequently cure its lack of standing by obtaining possession and endorsement of the note after the suit was filed.
In response, FV–I asserted that it had valid enforcement rights in the note as a holder of the note by endorsement and possession. In response to BOP's argument that FV–I lacked standing, FV–I asserted that under Kansas pleading rules, FV–I was not required to attach the note or mortgage to its petition but, rather, FV–I simply had to be able to produce the note at trial and show it had possession at the time of filing. Furthermore, FV–I argued that should the district court determine FV–I did not have standing, the “proper course of action would not be to dismiss the case but substitute or join the real party in interest into this action.” Finally, relying on the subordination agreement signed by BOP, FV–I argued BOP's prior course of conduct stopped it from claiming priority.
At the conclusion of the trial, the district court found:
“FV–I asserted a ‘non-holder with possession and holder's rights' position when it filed the Memorandum in October 2011. However, FV–I withdrew and abandoned that position in December 2011, never reasserted the claim, and did not pursue the claim at trial, FV–I has no Promissory Note enforcement claim on any such basis.
“FV–I claimed in the Pretrial Order that it had enforcement rights in the Promissory Note as a holder of the Promissory Note, both by an allonge endorsement from Ally Bank to FV–I and by an endorsement in blank from Residential Funding Company LLC. At times, FV–I asserted both positions simultaneously even though doing so is inconsistent and contradictory. Such positions erode FV–I's credibility with the Court. Moreover, at no time has FV–I demonstrated with admissible evidence that it has enforcement rights in the Promissory Note.
“For the many reasons stated herein, FV–I has failed to sustain its burden to prove with admissible evidence that the Promissory Note has been negotiated to it, and specifically, that the Promissory Note has been endorsed to FV–I or in blank. FV–I has failed to prove it is the holder of the Promissory Note.”
The district court went on to find that FV–I had failed to sustain its burden of establishing standing to pursue the foreclosure action when it stated:
“FV–I failed to introduce any credible or reliable trial evidence proving that it had actual possession of the Promissory Note when the action was filed.... At trial, FV–I attempted to introduce alleged endorsement stamps on an alleged version of the Kallevig note, which the Court found inadmissible. Mr. Chatfield's testimony lacked clarity and certainty; FV–I lacked credibility. Neither is reliable. FV–I failed to prove that it had possession of the ... Note when it filed this case—it has only shown that it had possession of the ... Note at the time of trial.”
The district court found that FV–I's lack of standing at the time of filing could not be cured with possession of the note at the time of trial and went on to find:
“The BOP liens are superior to that claimed by FV–I. FV–I's Petition against BOP is denied and BOP is granted judgment with respect to its Counterclaim against FV–I. On October 8, 2013, default judgment was granted [to] BOP with respect to its Crossclaim in this action against individual defendants. Furthermore, the Court adopts the argument of BOP that FV–I lacks standing to file this action based upon its failure to establish title and ownership in the Note on the date this action was filed. FV–I's failure to establish enforcement rights in the Promissory Note as of the date of filing lead to the inevitable conclusion by the Court that FV–I has no standing to pursue its claim.”
On appeal, FV–I argues the district court erred in determining:
• FV–I's note and mortgage were split;
• The district court erred in concluding that FV–I lacked enforcement rights in the note;
• The district court erred in stating that a lack of standing cannot be cured;
• The district court abused its discretion in excluding evidence and failing to consider credible evidence;
• The district court erred in holding that BOP's liens are superior to FV–I's lien; and
• The district court erred in failing to consider equitable estoppel.
Analysis
While FV–I has multiple arguments on appeal, what this appeal boils down to is whether the district court erred in finding FV–I lacked standing because it failed at the trial to establish with credible and reliable evidence the note had been assigned to FV–I and/or that FV–I had possession of the note prior to filing the petition for foreclosure.
Standing
When reviewing a mixed question of fact and law, an appellate court applies a bifurcated review standard. The court's factual findings are generally reviewed under the substantial competent evidence standard. Its conclusions of law based on those facts are subject to unlimited review. See Gannon v. State, 298 Kan. 1107, 1175–76, 319 P.3d 1196 (2014). Substantial competent evidence is such legal and relevant evidence as a reasonable person might accept as being sufficient to support a conclusion. 298 Kan. at 1175, 319 P.3d 1196.
Standing is a jurisdictional issue which may be raised at any time. Stechschulte v. Jennings, 297 Kan. 2, 29, 298 P.3d 1083 (2013). Whether a court has jurisdiction is a question of law over which this court exercises unlimited review. Northern Natural Gas Co. v. ONEOK Field Services Co., 296 Kan. 906, 916, 296 P.3d 1106, cert. denied ––– U.S. ––––, 134 S.Ct. 162, 187 L.Ed.2d 40 (2013). “Standing is a question of whether the plaintiff has alleged such a personal stake in the outcome of a controversy as to warrant the invocation of jurisdiction and justify exercise of the court's remedial powers on his or her behalf.” Varney Business Services, Inc. v. Pottroff, 275 Kan. 20, 30, 59 P.3d 1003 (2002). A note holder of a promissory note has standing to enforce the terms of indebtedness, including the right to foreclose on a mortgage that secures it. See Metlife Home Loans v. Hansen, 48 Kan.App.2d 213, 225, 286 P.3d 1150 (2012). Conversely, a mortgage is unenforceable when it is not held by the same entity holding the promissory note. See Landmark Nat'l Bank v. Kesler, 289 Kan. 528, 540–41, 216 P.3d 158 (2009).
To have standing to enforce its petition to foreclose, FV–1 must be entitled to enforce the promissory note as a negotiable instrument under K.S.A. 84–3–301. Under this statute, FV–1 can be a holder of the note; a nonholder in possession of the note who has the rights of a holder; or a person not in possession of the note who can enforce because the note was lost, stolen, destroyed, or paid and revoked or recovered. See K.S.A. 84–3–301; K.S.A.2014 Supp. 84–3–309; K.S.A. 84–3–418(d). The facts do not support the third alternative; therefore, to enforce the note, FV–I must show any one of the following three conditions happened before the foreclosure petition was filed:
• The note was assigned directly to FV–I;
• The note was endorsed in blank and FV–I had possession; or
• FV–I had physical possession of the note.
At trial, the district court found FV–I failed to show assignment or possession of the note before filing the foreclosure petition. This failure by FV–I to present evidence showing possession or assignment of the note prior to the foreclosure action being filed resulted in a negative factual finding by the district court. “[I]n reviewing a negative factual finding, an appellate court considers whether the district court arbitrarily disregarded undisputed evidence or relied on some extrinsic consideration such as bias, passion, or prejudice to reach its determination. [Citation omitted.]” Hamel v. Hamel, 296 Kan. 1060, 1078, 299 P.3d 278 (2013).
FV–I presents this appeal claiming the district court erred in not admitting the note with the last two endorsements affixed it offered at trial. That is not the basis of the district court's ruling. The district court found that “FV–I failed to introduce any credible or reliable evidence proving that [FV–I] had actual possession of the promissory note when the foreclosure action was filed.” The district court went on to say the testimony presented by Chatfield “lacked clarity and certainty, that FV–I lacked credibility; neither is reliable.” Additionally, the district court found FV–I had asserted inconsistent positions about how it obtained the note. Originally, the note attached to FV–I's foreclosure petition had only two endorsements, and neither of those endorsements was in favor of FV–I. FV–I argued at summary judgment it received the note through an allonge from Ally Bank, but it did not pursue that theory at trial. Then at trial, FV–I argued it was the owner of the note by a blank assignment with possession from Residential Funding Company, LLC. FV–I's position in respect to how and when it received the note is inconsistent and still fails to reflect FV–I had an assignment and/or possession of the note at the time of filing the foreclosure petition.
We acknowledge what the court in O'Keeffe v. National Bank, 49 Kan. 347, 349–50, 30 P. 473 (1892), said: “The note and mortgage were in the possession of the bank, and were produced by it at the trial. A negotiable note may be transferred without written indorsement, and by mere delivery. The possession of the note, and its production at the trial, furnished prima facia evidence of ownership.”
Clearly, the key factor here is when the note was assigned to FV–I or when FV–I obtained possession of the note. FV–I produced no evidence that the district court as the factfinder found credible and reliable to show FV–I had possession or assignment of the note when the foreclosure petition was filed. FV–I offered nothing to show possession at the time it filed the petition and basically stood on the fact it had possession at the trial to mean it had possession when the petition was filed. BOP's evidence regarding the allonge and the note attached to the petition clearly placed in controversy whether FV–I had possession of the note prior to filing the foreclosure petition. Without being able to show possession or assignment at the time of filing the petition, FV–I lacked standing to bring the foreclosure action. The note was the key to showing FV–I had standing. The district court's decision was not arbitrary, fanciful, or unreasonable, based on an error of law, or based on an error of fact and thus the district court did not err in finding FV–I had no standing to bring the foreclosure action. See Northern Natural Gas Co., 296 Kan. at 935, 296 P.3d 1106.
In McLean v. JP Morgan Chase Bank Nat. Ass'n, 79 So.3d 170, 173 (Fla.Dist.App.2012), the court addressed a similar fact situation to ours and held that standing to foreclose could not be cured by assignment of the note after filing the foreclosure petition. The McLean court said standing to file the lawsuit had to be established at the time of filing. 79 So.3d at 173. Here, FV–I failed to make that showing with the evidence it offered.
With our holding that FV–I lacked standing to file the foreclosure action, we deem it unnecessary to address whether the district court erred in not admitting the note for lack of foundation or that the last two note endorsements were hearsay. Even if the note showing the last two endorsements was admitted by the district court, it would not have cured FV–I's lack of standing. Here, FV–I failed to establish with credible evidence that either the note had been assigned to FV–I or that it had possession of the note prior to filing the foreclosure petition. Additionally, because the district court's ultimate decision did not include FV–I's and BOP's arguments over the note and mortgage split, we see no need to address the arguments on appeal.
Are BOP's Mortgages Superior to FV–I's Mortgage?
FV–I argues on appeal even if it cannot enforce the note, the note “remains enforceable by some other entity because it is a valid instrument, secured by a valid mortgage. In that case, the district court would have to dismiss the foreclosure action and allow it to be refiled by the entity with the right of enforcement, or join the party with the right of enforcement.” FV–I went on to argue the only way the district court could find BOP's liens were superior to FV–I's was if FV–I's note became unsecured. FV–I argues on appeal that “[b]ecause FV–I's note and mortgage are not split, the mortgage remains a valid and enforceable senior lien on the subject matter property.” We find no motion in the record reflecting that FV–I asked to join a necessary party to the action. It appears FV–I mentioned the possibility, but took no steps to formally ask the court to join a party or to dismiss the case prior to trial.
Issues not raised before the trial court cannot be raised on appeal. See Wolfe Electric, Inc. v. Duckworth, 293 Kan. 375, 403, 266 P.3d 516 (2011). “An issue or claim for relief that is not contained in the pretrial order should not be entertained by the trial court. [Citation omitted.]” McCain Foods USA, Inc. v. Central Processors, Inc., 275 Kan. 1, 19, 61 P.3d 68 (2002).
Generally, a mortgage is unenforceable when it is not held by the same entity holding the promissory note. U.S. Bank v. Howie, 47 Kan.App.2d 690, 695, 280 P.3d 225 (2012). The record reflects the mortgage was assigned by MERS to FV–I, and FV–I failed to show the note was in its possession or was timely assigned to FV–I to initiate the foreclosure. FV–I's failure to establish enforcement rights in the note makes the mortgage unenforceable. With FV–I's mortgage unenforceable, there is no longer a mortgage for BOP's mortgages to be subordinate to. Thus, the district court did not err in finding FV–I's mortgage lost its superior priority to BOP's mortgages.
Did the District Court Err in Failing to Consider Equitable Estoppel?
FV–I argues on appeal that the district court failed to consider the effect of the subordination agreement. FV–I claims that “[BOP] voluntarily surrendered its right to challenge lien priority when it executed the Subordination Agreement and, as such, is estopped from challenging priority now.” However, FV–I failed to assert the defense of promissory estoppel in the pretrial order. FV–I did file a motion to amend the pretrial order to add the affirmative defense of promissory estoppel; however, FV–I withdrew its motion prior to trial.
Issues not raised before the trial court cannot be raised on appeal. See Wolfe, 293 Kan. at 403, 266 P.3d 516. “An issue or claim for relief that is not contained in the pretrial order should not be entertained by the trial court.” McCain, 275 Kan. at 19, 61 P.3d 68.
Since FV–I failed to include the affirmative defense of promissory estoppel in its pretrial order or present it to the district court, we will not consider it on appeal.
Conclusion
The district court found FV–I failed to establish with credible evidence its possession of the note prior to filing the foreclosure petition, and we cannot say the district court abused its discretion. At the pretrial and trial of this matter, FV–I knew the status of the note was at issue and failed to present sufficient evidence to show it had an assignment and/or possession of the note prior to filing the foreclosure petition. There is substantial competent evidence to support the district court's decision FV–I lacked standing to initiate the foreclosure action. We affirm the district court.
Affirmed.