New Pleading Requirement in Mortgage Foreclosures?

May 1, 2017

Publication| Real Estate Services

The Delaware Supreme Court recently issued an opinion that could significantly change the pleading requirements for a scire facias mortgage proceeding in the Superior Court. In Shrewsbury v. The Bank of New York Mellon, 2017 WL 1374746 (April 17, 2017), the issue before the Court was whether the Superior Court was correct in holding that the debtor in a scire facias mortgage foreclosure action had raised a permitted defense in that proceeding. The defense asserted by the debtor was that the plaintiff in the foreclosure did not have the right to enforce the note secured by the mortgage being foreclosed and therefore had no right to foreclose the mortgage. The Supreme Court, with Chief Justice Strine dissenting, reversed the judgment of the Superior Court and remanded the matter for further proceedings.

Delaware law has long upheld a narrow scope of defenses to a foreclosure at law, as distinguished from an equitable foreclosure proceeding in the Court of Chancery. In general, the allowable defenses are payment, satisfaction, or a plea in avoidance of the mortgage. In this case, the latter defense was analyzed by the Court. Although the foreclosing plaintiff had argued that a plea in avoidance relates only to the validity or legality of the mortgage—a limitation that seemed to be well established in Delaware case law—the Court determined that the standing of the plaintiff to foreclose the mortgage could, under these facts, be treated as plea in avoidance, and the defense was therefore permissible.

In coming to this conclusion, the Court articulated what could be interpreted as a new principle under Delaware law: that a foreclosing plaintiff must show not only that it is the mortgagee, or an assignee, of the mortgage being foreclosed, but also that it is the holder of the obligation secured by that mortgage or is otherwise entitled to enforce that obligation. Although the Court explained that it was not adding a requirement to the proper pleading in a foreclosure action, it is possible that this will be the effect of the decision.

In his dissent, Chief Justice Strine noted the Delaware precedent that merely holding the mortgage is sufficient to establish standing, and he expressed concern that the statutory standing requirements should not be added to by judicial act. Chief Justice Strine further observed that the majority holding may unnecessarily complicate the pleading requirements for a mortgage foreclosure under a scire facias proceeding. It will be interesting to see how the Superior Court addresses this on remand.

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