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FV-I, Inc. v. Kallevig

Supreme Court of Kansas

April 21, 2017

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.

         SYLLABUS

         1. Standing is the right to make a legal claim or seek enforcement of a duty or right. The question of standing is one of law over which this court's scope of review is unlimited. Standing is a part of subject matter jurisdiction, and the issue may be raised by the parties or the court at any time.

         2. The burden to establish standing rests with the party asserting it. The nature of that burden depends on the stage of the proceedings because the elements of standing are not merely pleading requirements. Each element must be proved in the same way as any other matter and with the degree of evidence required at successive stages of the litigation.

         3. At the pleading stage, general factual allegations of injury resulting from defendant's conduct may suffice to show a plaintiff's standing, for on a motion to dismiss we presume that general allegations embrace those specific facts that are necessary to support the claim. In response to a summary judgment motion, a plaintiff can no longer rest on mere allegations and must set forth by affidavit or other evidence specific facts that for purposes of the summary judgment will be taken to be true. At the final stage of a case, such facts, if controverted, must be supported adequately by the evidence adduced at trial.

         4. In general, to have standing, a plaintiff must have a sufficient stake in the outcome of an otherwise justiciable controversy in order to obtain judicial resolution of that controversy. Under Kansas law, in order to establish standing, a plaintiff must show that (1) he or she suffered a cognizable injury and (2) there is a causal connection between the injury and the challenged conduct. A cognizable injury is established by showing a personal interest in a court's decision and that he or she personally suffers some actual or threatened injury as a result of the challenged conduct. Moreover, the injury must be particularized, i.e., it must affect the plaintiff in a personal and individual way.

         5. A holder of a promissory note has standing to enforce the terms of indebtedness, including the right to foreclose on a mortgage that secures it.

         6. Standing in a foreclosure action is predicated on the plaintiff's ability to demonstrate-either in the pleadings, upon motion for summary judgment, or at trial- that it was in possession of the promissory note with enforcement rights at the time it filed the foreclosure action. Allowing a lack of standing to be cured by a post-petition assignment granting enforcement rights in the note after the foreclosure action has been filed defeats any incentive for a note holder to ensure that it has enforcement rights prior to filing the action.

         7. In this case, application of the business records exception to the hearsay rule to exclude endorsements on a promissory note was erroneous because the signatures were not being admitted to prove the truth of the matter asserted, i.e., the authenticity of the signatures. Rather, the existence of the endorsements themselves was the element critical to the enforcement rights at issue under the Uniform Commercial Code.

         8. The UCC treats stamp signatures as equal to original signatures. K.S.A. 84-3-308 creates a presumption that stamp signatures are authentic. This presumption applies to endorsements as well. A defendant has the burden to present sufficient evidence denying an endorsement's validity before a plaintiff is required to introduce evidence to the contrary. Under the facts of this case, mere speculation based on plaintiff's inconsistent legal positions or the timing of its assertions was insufficient to meet the defendant's burden.

         9. In order for a plaintiff to prevail in its mortgage foreclosure proceeding, it must establish both that it possessed enforcement rights in the note under Article 3 of the UCC, K.S.A. 84-3-301, and that those rights existed at the time it filed the action. This can be accomplished through the pleadings, when faced with a motion for summary judgment, or at trial. Possession or assignment of the mortgage alone when the foreclosure action is filed is not sufficient to establish standing, and the lack of standing cannot be cured by a post-petition assignment of a promissory note. The proper remedy for a lack of standing is dismissal without prejudice.

         10. Regardless of whether a promissory note and mortgage have split, or whether the party capable of enforcing the note was not a party to this case, the mortgage itself still exists.

         Review of the judgment of the Court of Appeals in an unpublished opinion filed February 6, 2015.

         Appeal from Miami District Court; Steven C. Montgomery, judge.

         Judgment of the Court of Appeals affirming the district court is affirmed in part and reversed in part. Judgment of the district court is affirmed in part, reversed in part, and remanded with directions.

          Nancy Merrill Wilson, of South & Associates, P.C., of Overland Park, argued the cause, and Stephanie L. Mendenhall, of the same firm, was with her on the briefs for appellant.

          Timothy H. Girard, of Woner, Glenn, Reeder & Girard, P.A., of Topeka, argued the cause and was on the briefs for appellee.

          OPINION

          Rosen, J.

         This case stems from a mortgage foreclosure petition that plaintiff/appellant FV-I, Inc. filed in June 2011. The homeowner-debtors are no longer involved in this proceeding, as the parties agreed to sell the property and place the proceeds in escrow pending resolution of this case. The dispute is between FV-I and Bank of the Prairie (BOP), a bank with junior mortgages on the same property. Although summary judgment was initially granted in BOP's favor, the Court of Appeals reversed and remanded for trial to determine whether FV-I had possession of the promissory note underlying the mortgage at the time it filed the mortgage foreclosure. FV-I, Inc. v. Kallevig, No. 108, 706, 2013 WL 2321198 (Kan. App. 2013) (unpublished opinion) (Kallevig I).

         At trial, FV-I presented the original note endorsed in blank and the original mortgage with an assignment to FV-I, although it had attached a previous copy of the note without the endorsement in blank to the petition. The district court held: (1) FV-I lacked standing to file the petition because it did not have possession of the original note prior to filing its petition; (2) the note and mortgage FV-I held had split because these documents did not follow the same path to FV-I; (3) FV-I lacked enforcement rights in the note because FV-I had failed to lay the proper foundation for the endorsement in blank on the note and therefore, the court must exclude the endorsement in blank from evidence; and (4) the first three rulings meant that BOP's mortgages were therefore superior to FV-I's mortgage.

         The Court of Appeals affirmed the district court in FV-I, Inc., v. Kallevig, No. 111, 235, 2015 WL 717776 (Kan. App. 2015) (unpublished opinion) (Kallevig II) holding FV-I did not have standing to pursue its claim without establishing enforcement rights in the promissory note as of the date of the filing, FV-I's mortgage was unenforceable, and FV-I's mortgage lost its superior priority to BOP's mortgages. FV-I petitions for review, arguing standing does not have to be proved at the time of filing and that a lack of standing should not result in its mortgage losing its superior position.

         We agree with the Kallevig II panel that standing is based on the party's enforcement and possession rights at the time of filing. However, evidentiary rulings excluding endorsements on the promissory note compel us to remand for a rehearing regarding standing and the panel's priority determination. We therefore reverse contrary rulings by the district judge and the Court of Appeals, and we remand the case to the district court for further proceedings.

         Factual and Procedural Background

         On September 16, 2005, Kermit and Constance Kallevig and GMAC Bank entered into a note and mortgage concerning property in Bucyrus. On June 15, 2011, the mortgage was assigned to FV-I by Mortgage Electronic Registration Systems, Inc., (MERS) as a nominee for GMAC Bank, its successors, and assigns. On June 24, 2011, FV-I filed a petition to foreclose the mortgage. Attached to the petition was a copy of the mortgage and a note with an undated stamp endorsement from GMAC Bank to GMACB Asset Management Corp. FV-I indicated it had authority to enforce the note and mortgage under K.S.A. 60-217.

         FV-I named BOP as a party because BOP had three mortgages on the same property that FV-I claimed were either subordinated by agreement or otherwise junior: a mortgage recorded October 16, 2002, subordinated by agreement; a mortgage recorded October 19, 2006; and a mortgage recorded September 28, 2007. FV-I attached the subordination agreement to the petition.

         BOP filed an answer, a counterclaim against FV-I, and a cross-claim against the Kallevigs. BOP acknowledged that it held three mortgages on the property and that it had executed a subordination agreement. BOP argued FV-I failed to state a claim upon which relief could be granted and asked that the district court establish that its mortgages had priority.

         FV-I and BOP filed multiple motions back and forth. FV-I consistently claimed the right to enforce the note by possession and endorsement of the note. BOP challenged whether FV-I had standing, whether FV-I's mortgage and note had split, and whether FV-I had the ability to enforce the note. FV-I subsequently claimed enforcement rights through two additional means.

          The first was based on an allonge transferring the note to FV-1-originally with GMACB-from Ally Bank, as successor in interest to GMACB. FV-I indicated it did not know when the allonge had been prepared. The second was the original note, which included two additional endorsements that the note attached to FV-I's petition did not have: the first was without recourse from GMACB to Residential Funding Company, LLC (Residential); and the second was an undated endorsement in blank from Residential.

         The district court granted BOP's motion for summary judgment, holding that FV-I lacked standing because it failed to establish ownership of the note as of the date FV-I filed its petition. The district court further held that FV-I's mortgage and note had split, which rendered FV-I's mortgage unenforceable and allowed BOP's mortgages to jump ahead in priority.

         On appeal, a panel of the Court of Appeals reversed the order in Kallevig I. The panel held that FV-I must establish it was in possession of the note prior to filing its petition, in order to establish holder status and a right to enforce the note. Kallevig I, 2013 WL 2321198, at *4. The panel also observed that there was no evidence the note and mortgage had been split. 2013 WL 2321198, at *4. The panel concluded that neither party was entitled to judgment as a matter of law and reversed and remanded the case to determine when FV-I took possession of the note. 2013 WL 2321198, at *5. Neither party filed a petition for review of the Kallevig I decision.

         On remand, the parties agreed to the sale of the subject real estate, and the sale proceeds were paid into escrow until a priority determination could be made. At the October 8, 2013, bench trial, the parties stipulated to the Kallevigs' default on the note. FV-I claimed enforcement rights through its status as holder of the original note and argued that the interests had not been split and that its mortgage had priority. BOP argued that there had been an "implied or inferred" split of the mortgage and note, that FV-I's inability to explain how it had acquired the note was suspicious, and that the mortgage FV-I held was "ineffectual and unenforceable" because FV-I could not establish its enforcement rights. Regarding the two additional endorsements on the original note, BOP argued that, "if there was ever a presumption in their favor, it seems to me they've got a lot of work to do with regard to prov[ing] issues on authenticity or validity of those signatures."

         At trial, Andy Chatfield testified for FV-I. He worked as an asset manager for AMS Servicing, LLC, a servicing agent that handled defaulted loans. AMS serviced the loans for FV-I and acquired the servicing of the Kallevig loan in January 2012-6 months after the petition in this case was filed. Chatfield was familiar with AMS' practices and procedures and was authorized to testify on behalf of FV-I. FV-I's counsel relied on Chatfield to lay the foundation for the original note that was endorsed in blank. Chatfield testified that it was the original note from the Kallevig's file, that to his knowledge FV-I had acquired the loan in 2010, but that he did not have any personal knowledge regarding the transfer of the note to FV-I prior to January 2012 by GMAC Bank and GMACB.

         BOP challenged the two additional endorsements on the note. FV-I argued that signatures were presumed valid and that a challenge to the signature was an affirmative defense, which meant that BOP had the burden to prove the signatures were not authentic. The district court sustained BOP's objections to the foundation and hearsay of the two additional endorsements, reasoning that FV-I needed to lay a proper business record foundation for the endorsements in order for them to be admitted. The district court admitted the original note at trial without the last two endorsements, which included the endorsement in blank.

         In the journal entry of judgment, the district court relied on its decision to exclude the two additional endorsements in holding that FV-I failed to establish it had enforcement rights in the note. Relying on Mortgage Electronic Registration Systems v. Graham, 44 Kan.App.2d 547, Syl. ¶ 1, 247 P.3d 223 (2010), the district court also held that FV-I failed to show it had standing to bring the suit because it had not established holder status as of the day it filed its petition. Relying on Ohio and Maine caselaw, the district court held that the lack of standing could not be cured by a post-filing assignment of the note to FV-I.

         The district court held that the note and mortgage had split, that FV-I's mortgage was unenforceable, and that BOP's mortgages were therefore superior. It denied FV-I's petition, granted BOP judgment on its counterclaim against FV-I, and granted BOP default judgment on its cross-claim against the other defendants.

         A panel of the Court of Appeals affirmed the district court in Kallevig II. The panel treated the primary issue as whether the district judge erred in holding that FV-I lacked standing. Kallevig II, 2015 WL 717776, at *4. The panel cited MetLife Home Loans v. Hansen, 48 Kan.App.2d 213, 225, 286 P.3d 1150 (2012), for the proposition that a "holder of a promissory note has standing to enforce the terms of indebtedness, including the right to foreclose on a mortgage that secures it." 2015 WL 717776, at *4. The panel noted that a "mortgage is unenforceable when it is not held by the same entity that holds the promissory note, " relying on our decision in Landmark Nat'l Bank v. Kesler, 289 Kan. 528, 540-41, 216 P.3d 158 (2009) (recognizing the possibility of a mortgage and note split). 2015 WL 717776, at *4.

         The panel held that FV-I had to establish enforcement rights in the note as of the filing of the petition in order to have standing to bring its mortgage foreclosure suit. Kallevig II, 2015 WL 717776, at *4. The panel held that FV-I lacked standing because it "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." 2015 WL 717776, at *5. The panel therefore held that the district court properly determined FV-I's mortgage had lost its priority over BOP's mortgages. The panel held that BOP's mortgages were superior because FV-I's failure to establish enforcement rights in the note made the mortgage unenforceable, and the unenforceability of the mortgage meant there was no longer a mortgage for BOP's mortgages to be subordinate to. 2015 WL 717776, at *6.

         The panel declined to address FV-I's challenges to the district court's ruling excluding the two additional endorsements and held that the district court's "ultimate decision did not include FV-I's and BOP's arguments over the note and mortgage split, [so] we see no need to address the arguments on appeal." 2015 WL 717776, at *6.

         The panel also declined to consider whether, assuming FV-I could not enforce the note, another party would have been able to enforce the note because FV-I had not sought to join a necessary party to the action. 2015 WL 717776, at *6. The panel affirmed the district court's determination that FV-I lacked standing to initiate this foreclosure action. 2015 WL 717776, at *7.

         Analysis

         Standing

         Both the district court and the Court of Appeals in Kallevig I and Kallevig II treated this case as one that turns on whether FV-I had standing to initiate the foreclosure proceedings. On petition for review, FV-I first argues that the district court and Court of Appeals erred in requiring it to prove possession of the note and the existence of enforcement rights in it at the time it filed its petition in order to establish standing to pursue mortgage foreclosure. FV-I alternatively argues that standing could be established by its undisputed possession of the mortgage prior to filing, even without possession of the note.

         Standard of Review

         Standing is the "right to make a legal claim or seek enforcement of a duty or right." Gannon v. State, 298 Kan. 1107, 1122, 319 P.3d 1196 (2014). "The question of standing is one of law over which this court's scope of review is unlimited." 298 Kan. at 1122. Standing is a part of subject matter jurisdiction, and the issue may be raised by the parties or the court at any time. Vorhees v. Baltazar, 283 Kan. 389, 397, 153 P.3d 1227 (2007).

         The burden to establish standing rests with the party asserting it. Gannon, 298 Kan. at 1123. "[T]he nature of that burden depends on the stage of the proceedings[, ] because the elements of standing are not merely pleading requirements. Each element must be proved in the same way as any other matter and with the degree of evidence required at . . . successive stages of the litigation." 298 Kan. at 1123 (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 561, 112 S.Ct. 2130, 119 L.Ed.2d 351 [1992]).

         "At the pleading stage, general factual allegations of injury resulting from the defendant's conduct may suffice, for on a motion to dismiss we 'presum[e] that general allegations embrace those specific facts that are necessary to support the claim.' [Citation omitted.]" Lujan, 504 U.S. at 561. "In response to a summary judgment motion . . . the plaintiff can no longer rest on such 'mere allegations, ' but must 'set forth' by affidavit or other evidence 'specific facts, ' . . . which for purposes of the summary judgment will be taken to be true." 504 U.S. at 561. "[A]t the final stage, those facts (if controverted) must be 'supported adequately by the evidence adduced at trial.'" 504 U.S. at 561.

         In general, to have standing, a plaintiff must have a "'sufficient stake in the outcome of an otherwise justiciable controversy in order to obtain judicial resolution of that controversy.'" Gannon, 298 Kan. at 1122 (quoting Moorehouse v. City of Wichita, 259 Kan. 570, 574, 913 P.2d 172');">913 P.2d 172 [1996]).

         "Under Kansas law, in order to establish standing, a plaintiff must show that (1) he or she suffered a cognizable injury and (2) there is a causal connection between the injury and the challenged conduct." Solomon v. State, 303 Kan. 512, 521, 364 P.3d 536 (2015). A cognizable injury is established by showing a "'personal interest in a court's decision and that he or she personally suffers some actual or threatened injury as a result of the challenged conduct.'" 303 Kan. at 521 (quoting Sierra Club v. Moser, 298 Kan. 22, 33, 310 P.3d 360');">310 P.3d 360 [2013]). Moreover, "[t]he injury must be particularized, i.e., it must affect the plaintiff in a '"'personal and individual way.'"'" 298 Kan. at 1123.

         Standing to Foreclose Mortgage

         A mortgage is a conveyance or retention of an interest in real property as security for performance of an obligation. Restatement (Third) of Property (Mortgages) §1.1 (1997). "Promissory notes and mortgages are contracts to which the rules of ...


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