• Georgia District Court Holds Foreclosure May Be Wrongful Where Security Deed and Note Are "Split"
  • September 5, 2011 | Authors: David N. Anthony; Teah N. Glenn; A. William "Bill" Loeffler; John C. Lynch; Alexandria J. Reyes
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Atlanta Office ; Troutman Sanders LLP - Washington Office ; Troutman Sanders LLP - Atlanta Office
  • On July 7, 2011, the U.S. District Court for the Northern District of Georgia held that a non-judicial foreclosure may be wrongful where the foreclosing party does not hold both the security deed and the note at the time of the foreclosure.

    In the case, the plaintiff had signed a promissory note and security deed to obtain a real estate secured loan. The note was later assigned to another entity. The security deed named Mortgage Electronic Registration Systems, Inc. (MERS) as grantee and nominee for the lender and its successors and assigns. MERS later assigned the security deed to Ocwen, the defendant loan servicing company.

    When the plaintiff defaulted on the loan, the loan servicing company invoked the deed’s power of sale provision and conducted a non-judicial foreclosure. The plaintiff filed suit against the loan servicing company alleging that because the security deed and note were "split," i.e., each was held by a different entity, the security deed was void and the foreclosure was wrongful.

    The loan servicing company filed a motion to dismiss, which the court granted in part and denied in part. “The question presented by this case is,” the court wrote, “whether an assignment of a security deed from MERS to Ocwen empowers Ocwen to foreclose when Ocwen does not hold the note.” 

    While the court held that the separation of the note and security deed did not render either instrument void, the fact that the servicer held only the security deed and not the note left a "substantial question" as to which entity had the right to foreclose.

    In Georgia, the right to foreclose lies with the party that holds the indebtedness. The court discounted Georgia statutes and case law which established that the transfer of a security deed also transfers the accompanying indebtedness by noting that the statutes and case law were authored at a time when the promissory note and security deed were not commonly separated.

    The court did not reach “the question of whether an agent for the holder of the debt can carry out a power of sale foreclosure under Georgia law, as Ocwen did not advertise the foreclosure as agent for any disclosed principal.” The court also did not reach the question of whether MERS has authority to foreclose under Georgia law; therefore, the ample case law holding that MERS does have such authority appears to remain undisturbed.