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Deutsche Bank National Trust Co. v. Wuensch

Supreme Court of Wisconsin

April 17, 2018

Deutsche Bank National Trust Company, Plaintiff-Respondent-Petitioner,
Thomas P. Wuensch, Defendant-Appellant, Heidi Wuensch, Appellant.

          Submitted on Briefs: oral argument: October 2, 2017

         REVIEW from a decision of the court of appeals. Reversed.

          Court Circuit County La Crosse Todd W. Bjerke, Judge (L.C. No. 2009CV752)

          For the plaintiff-respondent-petitioner, there were briefs filed by Thomas C. Dill and BP Peterman Group, Brookfield; Robert W. Brunner and Bryan Cave LLP, Chicago, Illinois; and Kenneth Lee Marshall and Bryan Cave LLP, San Francisco, California. There was an oral argument by Kenneth Lee Marshall.

          For the defendant-appellant there was a brief filed by Christa 0. Westerberg, Susan M. Crawford, Aaron G. Dumas, and Pines Bach LLP, Madison. There was an oral argument by Christa 0. Westerberg.


         ¶1 This is a review of an unpublished court of appeals summary disposition reversing the La Crosse County Circuit Court's[1] foreclosure judgment against Thomas P. Wuensch in favor of Deutsche Bank National Trust Company (Deutsche Bank).[2] The circuit court admitted the promissory note signed by Wuensch (the Note) into evidence when offered by Deutsche Bank through its attorney, and permitted the Bank to enforce the Note, ruling that the original Note, endorsed in blank, was sufficient to establish possession. We reverse the court of appeals' summary disposition[3] and affirm the circuit court's judgment of foreclosure.

         ¶2 The issue before this court is whether presentment by a party's attorney of an original, wet-ink note endorsed in blank is admissible evidence and enforceable against the borrower without further proof that the holder had possession at the time the foreclosure action was filed. To answer this question, we must determine the evidence necessary to prove that an entity seeking to enforce a note against a borrower has the right to do so. We hold that presentment to the trier of fact in a mortgage foreclosure proceeding of the original, wet-ink note endorsed in blank, establishes the holder's possession and entitles the holder to enforce the note.

         I. BACKGROUND

         ¶3 In December 2006, Wuensch signed an adjustable rate Note issued by HLB Mortgage for $301, 500. Wuensch secured the Note with a mortgage he executed in favor of the mortgagee, Mortgage Electronic Registrations Systems, Inc. as nominee for HLB Mortgage, the lender. By the time this action was filed, HLB had transferred the Note to American Home Mortgage Servicing, Inc. (AHM), [4] HLB's parent entity, and AHM had endorsed the Note in blank.

         ¶4 It is uncontested that in February 2008, Wuensch defaulted. He failed to make any payment on the Note after February 2008 and has remained in default through the pendency of this foreclosure action. The events surrounding the default underlie the circuit court's ruling that "equity dictates that Wuensch be allowed one last opportunity to cure his default, because his default on the Note may have been caused by the actions of the preceding Note holders." They also color Wuensch's arguments on the primary issue regarding whether Deutsche Bank in fact possessed the original Note.

         ¶5 Wuensch's Note required him to remain current on all property taxes by paying into an escrow account serviced by the lender, which would pay his property taxes directly from the escrow account. His promised monthly mortgage payment, due the first of each month, totaled $1, 487.68, consisting of $1, 210.98 for the Note itself, plus $276.70, which went into escrow to cover property taxes.[5] In August 2007, although Wuensch was current on his mortgage payments, he received notice from the Town of Onalaska that his property taxes had not been paid. Around this time, Wuensch learned that AHM, then in possession of his Note, had filed for bankruptcy earlier in the month.

         ¶6 In a letter dated February 23, 2008, AHM informed Wuensch it had not received his February mortgage payment. Wuensch claimed he had submitted payment via Western Union on February 15, 2008. Wuensch's attempts to resolve the February payment issue were unsuccessful. Allegedly based on the recommendation of an AHM employee, Wuensch stopped making payments on the Note altogether. As a result, AHM sent Wuensch notice of acceleration dated March 4, 2008, indicating that he was in default and owed $2, 355.89, which had become due on or after February 1, 2008. Regardless of why Wuensch stopped making payments, there is no dispute that AHM never received any mortgage payments from Wuensch after February 15, 2008.

         ¶7 Deutsche Bank filed this foreclosure action against Wuensch in August 2009, attaching a copy of the Note to the complaint. It elected to proceed to foreclosure under Wis.Stat. § 846.101 (2013-14), waiving any deficiency judgment against Wuensch, and consenting to Wuensch's continued occupancy of the property until the circuit court entered confirmation of a sale.[6]

         ¶8 Deutsche Bank claimed to be the "lawful holder of said note and mortgage." During the life of the loan, Wuensch's Note and mortgage were transferred multiple times, ultimately landing with Deutsche Bank on August 4, 2009. Because of the nature of a note endorsed in blank, precisely how Deutsche Bank came into physical possession of the Note is not relevant. For purposes of enforcing the Note, it is enough that Deutsche Bank was in possession of the original Note at trial, a copy of which was attached to the complaint.

         ¶9 In his answer, Wuensch denied that Deutsche Bank was a holder entitled to enforce the Note and denied that any payments were past due. Wuensch also asserted the following affirmative defenses: material misrepresentation, laches, estoppel, lack of standing, improper joinder of parties, and lack of note. In an amended answer, Wuensch also alleged fraud and unclean hands by Deutsche Bank and again asserted that the Bank lacked the ability to foreclose.

         ¶10 Pretrial proceedings continued for five years before the case finally came before the circuit court for a bench trial. In May 2014, Deutsche Bank's attorney presented the original, wet-ink Note to the circuit court to inspect and asked the circuit court to admit into evidence a copy of the Note as a self-authenticating, "non-hearsay instrument . . . offered for its legal significance, not to prove the truth of the matter asserted."[7] Wuensch's counsel objected on the bases of hearsay and lack of personal knowledge on the part of Deutsch Bank's counsel, while also asserting that Deutsche Bank's counsel was impermissibly acting as a witness. The circuit court overruled these objections and after inspecting the Note, observed:

THE COURT: When I looked at the document purporting to be an original, looks like original ink on signatures and appears to be the same as what has now been marked as a copy Exhibit 1 . . . .
It will be admitted.

         The circuit court then concluded that "plaintiff is, in my mind, the holder in due course of a note endorsed in blank and they can proceed on it." Wuensch's counsel objected to the admission of the Note and questioned the validity of the signatures on and the assignment of the instrument, arguing that there were "no indentations on the initials" and "the assignments of the mortgage are relevant because of the false nature of them." The circuit court responded, "the law is pretty clear that somebody that is holding a note endorsed in blank has the right to seek foreclosure of such a document" and that it did not think "the assignments were relevant when there's a note endorsed in blank."

         ¶11 Deutsche Bank called one witness at trial, Rasheed Blanchard, a loan analyst from Ocwen Financial Corporation, the entity that serviced the loan. He testified as to Wuensch's payment history and the processes by which Ocwen serviced the loan.

         ¶12 Wuensch testified regarding the difficulty he had contacting AHM to resolve the 2007 property tax issue, the payment history leading up to his default, and the events that followed his default. He also claimed that the Note presented by Deutsche Bank did not contain his original, wet-ink signature.

         ¶13 In December 2014, the circuit court issued findings of fact and conclusions of law in its judgment and order. It determined that Deutsche Bank "is entitled to a judgment of foreclosure of the Defendant's mortgage." It found Deutsche Bank:

is the holder of the original Note, endorsed in blank. The Court is satisfied that the Plaintiff has in its possession the original ink Note. The Plaintiff produced the original Note at trial and the Court examined it. The Court is satisfied that it is the original Note executed by Wuensch on December 18, 2006. Exhibit 1 is a true and accurate copy of the original ink Note.

         It further found Wuensch was in default on the Note in the principal amount of $315, 233.64.[8]

         ¶14 The circuit court concluded that Wuensch's arguments regarding allegedly fraudulent practices associated with mortgage-backed securities comprised of pooled mortgages such as his own were "beyond the scope of this case." Relying on Dow Family, LLC v. PHH Mortgage Corp., 2014 WI 56, ¶21, 354 Wis.2d 796, 848 N.W.2d 728, the circuit court ruled that "[u]nder the doctrine of equitable assignment, a mortgage automatically follows the assignment of the note." The circuit court applied the Dow Family holding that "security for a note is equitably assigned upon transfer of the note, without need for a written assignment." Pivotally, the circuit court held that "[t]he holder of an original note endorsed in blank has the right to enforce the note"; therefore, Deutsche Bank had standing to bring the foreclosure action against Wuensch.

         ¶15 The circuit court, however, exercised its equitable authority to delay entry of the foreclosure judgment and permit Wuensch the opportunity to return to the position he occupied prior to the default event of February 2008. It explained:

Even if the Plaintiff is without blame for the problems with Wuensch's mortgage, the same cannot be said about the preceding holders of his Note. Although the question of whether Wuensch's Note was fraudulently passed between creditors before it came into the Plaintiff's possession is beyond the scope of this case, the Court is convinced that the seemingly unregulated transferring of mortgages during the housing bubble and crash contributed to Wuensch finding himself in this position.

         Accordingly, the circuit court stayed entry of the judgment until January 24, 2015, to allow Wuensch to cure the default by paying Deutsche Bank $347, 826.03-the sum of the unpaid principal, plus expenses paid by Deutsche Bank for property taxes, hazard insurance, and other costs and fees. If Wuensch did not pay that amount by January 24th, the circuit court would enter judgment of foreclosure in favor of Deutsche Bank for the entire amount sought-totaling $455, 641.85.

         ¶16 Wuensch appealed in September 2015 and the court of appeals summarily reversed the judgment of foreclosure. Deutsche Bank Nat'1 Trust Co. v. Wuensch, No. 2 015AP175, unpublished order (Wis. Ct. App. Aug. 23, 2016). Wuensch argued the circuit court lacked a factual basis to enter judgment of foreclosure against him because Deutsche Bank did not prove it was the holder of the original Note entitled to enforce it. Id. at 4. He contended that Deutsche Bank was required to present evidence not only that the purported original Note was in fact the original Note, but also that Deutsche Bank's counsel had obtained the Note from the Bank. Id. Wuensch insisted that possession alone of the purported original Note endorsed in blank was not enough to prove possession. Id.

         ¶17 The court of appeals agreed. It held that Wuensch's pleadings and his objections as to authenticity and possession at trial placed "possession of the original note in dispute, and there is no dispute that this was an issue that the plaintiff had to prove at trial." Id. Citing Wis.Stat. §§ 906.02 ("A witness may not testify to a matter unless evidence is introduced sufficient to support a finding that the witness has personal knowledge of the matter."), 906.03(1) ("which provides that a witness must take an oath before testifying"), and 901.04(2) ("a judge is to make preliminary determinations on the qualifications of a person to be a witness"), the court of appeals held as "axiomatic" the rule "that 'unsworn statements' have 'no proper place' as substitutes for evidence in a trial." Id. at 5 (citations omitted). The court of appeals recognized the "difficulties" the Bank's counsel would have encountered had he attempted to testify as to his personal knowledge surrounding the Note and its possession. Id. at 5. Nevertheless, the court of appeals held that the Bank was required to present testimony from a witness with personal knowledge who could verify possession of the Note by the Bank up to the moment Deutsche Bank's attorney presented the Note to the circuit court. Id. at 6-7.

         ¶18 Acknowledging that the "mandate reversing the judgment of foreclosure in this action may appear at first blush to elevate form over substance and to produce a highly inefficient result, " the court of appeals nonetheless persisted in holding that possession by the Bank's counsel would not suffice to prove possession by the Bank itself or the concomitant right to enforce the Note endorsed in blank. Id. at 8. Deutsche Bank filed a petition for review, which this court granted.


         ¶19 "Our review requires us to construe a statute and apply it to the facts of the case." Warehouse II, LLC v. DOT, 2006 WI 62, ¶4, 291 Wis.2d 80, 715 N.W.2d 213. Ordinarily, a circuit court's "[f]indings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the [circuit] court to judge the credibility of the witnesses." Wis.Stat. § 805.17(2). Furthermore, "the decision whether to admit evidence is within the circuit court's discretion." State v. Zamzow, 2017 WI 29, ¶10, 374 Wis.2d 220, 892 N.W.2d 637 (citing State v. Griep, 2015 WI 40, ¶17, 361 Wis.2d 657, 863 N.W.2d 567), cert, denied, 138 S.Ct. 501 (2017). However, the application of a statute to the facts of a case is a question of law this court reviews de novo, although the court benefits from the analyses of the circuit court and court of appeals. Warehouse II, 291 Wis.2d 80, ¶4 (first citing State v. Reed, 2005 WI 53, ¶13, 280 Wis.2d 68, 695 N.W.2d 315; and then citing State v. Cole, 2003 WI 59, ¶12, 262 Wis.2d 167, 663 N.W.2d 700).

          III. DISCUSION

         ¶20 In mortgage foreclosure actions, the plaintiff has the burden of proving the terms of indebtedness secured by a mortgage. Mitchell Bank v. Schanke, 2004 WI 13, ¶32, 268 Wis.2d 571, 676 N.W.2d 849 (citing Doyon & Rayne Lumber Co. v. Nichols, 196 Wis. 387, 390, 220 N.W. 181 (1928)) (noting the "requirement that the mortgagee prove the existence of debt in order to foreclose on the mortgage, as a mortgage cannot exist without a debt"); see PNC Bank, N.A. v. Bierbrauer, 2013 WI.App. 11, ¶10, 346 Wis.2d 1, 827 N.W.2d 124. This includes verifying that foreclosure proceedings are maintained by the party with the right to enforce the note, a requirement that is not a mere formality. See Bierbrauer, 346 Wis.2d 1, ¶10. It is in fact a foundational precondition for any foreclosure action, protecting borrowers from wrongful loss of their homes, affording lenders a procedure for enforcing notes, and providing certainty surrounding property rights in mortgages. See, e.g., David A. Dana, Why Mortgage "Formalities" Matter, 24 Loy. Consumer L. Rev. 505, 507-08 (2012); Elizabeth Renuart, Uneasy Intersections: The Right to Foreclose and the U.C.C., 48 Wake Forest L. Rev. 1205, 1212 (2013); Adam J. Levitin, The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title, 63 Duke L.J. 637, 648 (2013) .

         ¶21 In ascertaining who has the right to enforce a note, we begin with the language of the relevant statutes, a step the court of appeals mostly relegated to footnotes. State ex rel. Kalal v. Cir. Ct. for Dane Cty., 2004 WI 58, ¶45, 271 Wis.2d 633, 663, 681 N.W.2d 110. Article 3 of the Uniform Commercial Code (U.C.C.), codified in Wisconsin at ch. 403 in 1995, provides that where a note is negotiable, [9] it may be enforced by a "holder." Wis.Stat. § 403.301. A "holder, " as relevant here, includes "the person in possession of a negotiable instrument that is payable ... to bearer." Wis.Stat. § 401.201(2)(km)l. A "bearer" includes a person in possession of an instrument endorsed in blank. Wis.Stat. § 401.201(2) (cm) . "If endorsed in blank, an instrument becomes payable to bearer, " and can be "negotiated by transfer of possession alone."[10] Wis.Stat. § 403.205(2); Bierbrauer, 346 Wis.2d 1, ¶12.

         ¶22 Wuensch makes a variety of arguments undercut by a plain reading of the statutes and application of relevant case law. First, Wuensch argues that Deutsche Bank is not a "holder." He asserts that self-authentication is not equivalent to showing physical possession. He also insists that physical possession of the original Note by Deutsche Bank's trial counsel does not make the Bank a "bearer" and that ...

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