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The Bank and the “Lost Promissory Note”: Can a Lender Foreclose on a Mortgage Without Presenting the Promissory Note?

In the last several years foreclosure litigation has boomed. An object of focus for many such property owners who find themselves in such a lawsuit has been to shift the burden to the Bank to “produce the note!”
What happens if a Bank wants to foreclose on a mortgage and cannot find the underlying note that evidences the debt? Is the debt extinguished and the mortgage discharged?
As the Michigan Court of Appeals in Sallie v Fifth Third just held on June 19th, merely failing to produce the promissory note is not fatal to a Bank’s foreclose on its mortgage.
In Sallie v Fifth Third Bank, Docket  No. 302554 (Mich Ct App June 19, 2012) the court upheld a bank’s entitlement to foreclose on its mortgage. The facts are as follows: in August 2000, plaintiff and his now-deceased wife borrowed $63,665.32 from Old Kent Bank (“Bank”) and granted the bank a mortgage on their home as security for the loan. Id.  “In 2003, plaintiff’s wife died. Plaintiff defaulted on the loan in September 2009, and the Bank, pursuant to the power of sale contained in the mortgage, sought to foreclose on plaintiff’s property by advertisement.”  Although plaintiff and wife had signed a promissory note as part of the mortgage loan transaction, the Bank could not locate the note at the time it began foreclosure proceedings. Id.
Plaintiff challenged the foreclosure, arguing that the Bank was not entitled to foreclose on the mortgage without showing that it was in possession and entitled to enforce the underlying note at the time that the note was lost.
The Sallie Court held that “A mortgagee may foreclose on a mortgage without producing the note secured by the mortgage.” Citing Snyder v. Hemmingway, 47 Mich. 549, 553; 11 NW 381 (1882). The Court further held” “In order to do so, however, the mortgagee must produce a valid mortgage and power of sale. Id. “[I]t is only under the power of sale that any steps can be taken.” Id. The mortgagee must also give “clear proof” of the debtor’s default and continuing debt obligation to the mortgagee.” (Emphasis added.) Citing Hungerford v. Smith, 34 Mich. 300, 301 (1876).
The Sallie Court further expounded how deeply engrained this rule is in Michigan jurisprudence “This century-old case law is consistent with our current statutory law, which provides that “[e]very mortgage of real estate, which contains a power of sale, upon default being made in any condition of such mortgage, may be foreclosed by advertisement, in the cases and in the manner specified in this chapter.” MCL 600.3201.
What about the issue of the underlying debt?  Under Michigan law, a mortgage that has no underlying debt is void.  In this case the Sallie Court was satisfied that the Bank produced enough evidence to demonstrate there existed a debt that Plaintiff owed to the Bank. “Defendant produced documentary evidence and presented testimony establishing plaintiff’s payment history, his default, and the amount outstanding on the debt. In fact, plaintiff admitted that he stopped making payments on the debt.” (Emphasis added.) Id.
The Bank also established that it owned plaintiff’s debt. The Bank provided unrefuted testimony that the lost note was never transferred, assigned, or sold. “By establishing its continuing ownership of plaintiff’s debt, defendant eliminated the risk that plaintiff would face multiple collections on the same debt.” Id.
Application: Merely because a Bank cannot locate a “lost note” will not nullify its right to foreclose on a mortgage that is otherwise valid, so long as the Bank has clear evidence that a debt exists, and the Defendant owes the debt.
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