Opinion
NO. 2016-CA-000509-MR
09-29-2017
BETHELLENA STOKES, ESTATE OF WILLIAM B. STOKES, AND WILLIAM STOKES APPELLANTS v. HSBC MORTGAGE SERVICES, INC. AND U.S. BANK TRUST, N.A., AS TRUSTEE FOR LSF8 MASTER PARTICIPATION TRUST APPELLEES
BRIEF FOR APPELLANTS: Robert Frederick Smith Louisville, Kentucky BRIEF FOR APPELLEES: Peter M. Cummins Chongyang Ge Louisville, Kentucky Travis W. Thompson Lexington, Kentucky
NOT TO BE PUBLISHED APPEAL FROM CHRISTIAN CIRCUIT COURT
HONORABLE JOHN L. ATKINS, JUDGE
ACTION NO. 13-CI-01055 OPINION
AFFIRMING
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BEFORE: COMBS, JOHNSON, AND D. LAMBERT, JUDGES. COMBS, JUDGE: This appeal arises from a mortgage foreclosure action. U.S. Bank Trust, N.A., as Trustee for LSF8 Master Participation Trust (a pool of distressed mortgages owned by a private equity group), was awarded an in rem judgment enforcing the terms of a note executed by William Stokes and of a mortgage executed by William and his wife, Bethellena Stokes. The circuit court concluded that U.S. Bank was entitled to judicial foreclosure because it had established the terms of the parties' loan agreement; the fact of subsequent default; that it was the holder of a security interest in the collateral; and that it was the holder of the note secured by the collateral. After our review of the record and the applicable law, we affirm.
In November 2004, in order to refinance an existing mortgage, William Stokes executed a promissory note in favor of Oak Street Mortgage LLC in the amount of $79,000.00. The note was secured, in part, by a mortgage on the Stokeses' home in Hopkinsville. After William Stokes died in August 2010, the note fell into default. By that time, the mortgage had been assigned to Mortgage Electronic Registration Systems, Inc., (MERS) and then to HSBC Mortgage Services, Inc. (HSBC). HSBC accelerated the indebtedness and initiated foreclosure proceedings in September 2013. In October 2014, HSBC filed a motion for summary judgment.
Thereafter, the note and mortgage were assigned to U.S. Bank, the real party in interest. Provisions contained in an allonge made the note payable to U.S. Bank. The assignment was recorded by the Christian County Clerk on June 27, 2015; U.S. Bank was made a party plaintiff by order of the circuit court entered July 15, 2015. The circuit court granted summary judgment in favor of U.S. Bank in March 2016. This appeal followed.
A slip of paper sometimes attached to a negotiable instrument for the purpose of receiving further indorsements when the original paper is filled with indorsements. BLACK'S LAW DICTIONARY (7th ed. 1999).
Our standard of review on appeal of a summary judgment is "whether the trial court correctly found that there were no genuine issues as to any material fact and that the moving party was entitled to judgment as a matter of law." Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky.App. 1996). Summary judgment shall be granted "if the pleadings, depositions, answers to interrogatories, stipulations, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." CR 56.03. The trial court must view the record "in a light most favorable to the party opposing the motion for summary judgment and all doubts are to be resolved in his favor." Steelvest v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 480 (Ky. 1991). Summary judgment is proper only "where the movant shows that the adverse party could not prevail under any circumstances." Id.
Kentucky Rules of Civil Procedure.
On appeal, Stokes contends that the trial court erred by granting summary judgment since the Estate of William Stokes, a necessary party, was not served with process and was never properly before the court. Service of process or waiver of service is indeed necessary to satisfy the due process requirements of the United States Constitution. However, the record reveals that there was no error on this issue.
Upon agreement of the parties in this case and by order of the court entered on October 7, 2015, the Estate of William Stokes was made a party defendant to the litigation. The estate agreed to be made a party, waived service of process, and submitted to the jurisdiction of the court. Consequently, the estate was properly before the court.
Next, Stokes contends that the circuit court erred by granting summary judgment because HSBC failed to demonstrate that it had standing to initiate and to maintain the litigation. She argues that HSBC was required to produce the original note in order to prove that it was the holder and owner of the note and the real party in interest at the commencement of the litigation -- but that it failed to do so.
In foreclosure cases, the real party in interest is generally the holder of the note and/or mortgage. Acuff v. Wells Fargo Bank, N.A., 460 S.W.3d 335 (Ky.App. 2014). KRS 355.1-201(2)(u)(1) defines a "holder" as "[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession[.]"
Kentucky Revised Statutes. --------
HSBC attached to its complaint a copy of the note and mortgage. It also attached a copy of the note and mortgage assignment from Oak Street Mortgage to MERS that had been executed on November 29, 2004, and filed of record with the Christian County Clerk on May 16, 2005. It also attached a copy of the note and mortgage assignment from MERS to HSBC that had been executed on May 22, 2012, and filed of record with the Christian County Clerk on May 24, 2012. During the pending litigation, the note and mortgage were assigned to U.S. Bank as Trustee for LSF8 Master Participation Trust, which remains the real party in interest.
U.S. Bank represents in its brief that the original note -- endorsed in blank and payable to its bearer -- was produced by HSBC in discovery and remains available for inspection in counsel's office. The assignment of the mortgage and note to U.S. Bank -- along with its allonge making the note payable to U.S. Bank -- was also filed in the record. By producing the original note, HSBC showed that it was the owner and holder of both the note and the mortgage at the time that it filed its complaint and the motion for summary judgment. U.S. Bank, the current holder and owner of both the note and the mortgage, indicates that those original documents remain available for inspection. We are not persuaded that more is required.
Stokes also suggests that U.S. Bank had an additional burden to show that it had obtained the note and mortgage in a lawful manner. However, there is absolutely no indication that U.S. Bank (or any previous holder) came into possession of the note and the mortgage in any manner prohibited by law. Under the circumstances, we refrain from additional discussion on this issue. The circuit court did not err on this basis.
Stokes next contends that the circuit court erred by failing to conclude that she lacked the legal capacity to mortgage the property. She notes that her daughter's affidavit indicates that she was diagnosed with moderate dementia in February 2003; that she had limited reading comprehension; and that she suffered with diminished eye sight. Stokes also refers to a letter provided by her treating physician, Dr. Paresh V. Sheth, indicating that Stokes had difficulty thinking properly during the period between January 2003 and July 2004; during November 2007; and during July 2010.
In order to create a valid mortgage, the parties must have capacity to contract. See Bogie v. Nelson, 151 Ky. 443, 152 S.W. 250 (1913). One has the mental capacity to enter into a contract only where he/she is capable of understanding the consequences of the transaction. Conners v. Eble, 269 S.W.2d 716 (Ky. 1954). Mental capacity before and after execution of the contract may be material to a determination of whether a party had the requisite capacity at the time the agreement was executed. Jefferson Standard Life Ins. Co. v. Cheek's Adm'r., 258 Ky. 621, 80 S.W.2d 518 (1935). It is presumed that the parties to a contract have the mental capacity necessary to execute it.
The trial court did not err by concluding that there was no genuine issue of fact concerning Stokes's capacity to execute the mortgage in favor of Oak Street Mortgage in November 2004. In her deposition taken in March 2014, Stokes was able to explain the nature and purpose of a mortgage and the consequence of default on the underlying note. She was also able to explain and to appreciate the nature and extent of her property holdings. Stokes confirmed that she had executed the mortgage on her home in November 2004 and that she had initialed each page of the document. While she remembered that she was not happy about executing the mortgage, Stokes did not contend that she lacked the capacity to do so. Instead, she explained that she was reluctant to go further into debt by refinancing the house but was persuaded to do so by her husband. Stokes remembered the circumstances surrounding the execution of the loan documents, and she recalled specifically that her daughter, Rosilind Galbreath, had expressed a strongly negative opinion about the transaction.
In her deposition, Galbreath stated that she had been given her mother's power of attorney in March 2004. She said that "up until 2008 she [Stokes] was okay, she was still - and then she started deteriorating." Galbreath reported that her mother continued to write checks and to pay some household bills until she (Galbreath) was appointed guardian for each of her parents in 2008. Galbreath confirmed that she had been present when Stokes executed the mortgage in November 2004. She also explained that over the next three days (the period during which her parents had a statutory right to rescind the agreements), she tried to persuade her parents to void the contracts - but to no avail. Galbreath did not testify that Stokes was unable to conduct business or to appreciate the nature and purpose of the mortgage transaction in 2004. Dr. Paresh V. Sheth made no comment relevant to Stokes's capacity to enter into a contract in November 2004. Given this evidence, the trial court did not err by granting the bank's motion for summary judgment.
Finally, Stokes contends that the circuit court erred by failing to conduct a hearing on the summary judgment motion. She argues that the court's failure to permit oral argument deprived her of due process. We disagree.
The bank's demand for judgment was submitted to the court in a properly noticed motion. Through extensive briefing and the submission of affidavits, Stokes was permitted to respond. She was afforded a meaningful opportunity to be heard on the issue before the court rendered its judgment. Consequently, her right to procedural due process was not violated.
We affirm the order of the Christian Circuit Court.
ALL CONCUR. BRIEF FOR APPELLANTS: Robert Frederick Smith
Louisville, Kentucky BRIEF FOR APPELLEES: Peter M. Cummins
Chongyang Ge
Louisville, Kentucky Travis W. Thompson
Lexington, Kentucky