U.S. banks have become victims of the foreclosure crisis. Given today’s political environment, it is hard to think of banks as victims of anything. However, during this foreclosure crisis, overly-creative attorneys, misguided consumer advocates, and desperate homeowners filed numerous lawsuits against banks on the false legal theory commonly called “Show Me the Note.” In Hogan v. Washington Mutual Bank, decided July 11, 2012, the Arizona Supreme Court debunked the Show Me the Note theory and concluded that banks must simply follow the current foreclosure laws as written.
Under the Show Me the Note theory, the homeowner admits he/she is in default but still files a lawsuit claiming that the bank cannot foreclose unless it “shows possession of, or otherwise documents its right to enforce, the underlying note.” As the theory goes, the promissory note and the deed of trust “go together” and “must be construed together;” therefore, proving mutual possession of the original promissory note and the deed of trust is mandatory before foreclosure begins. Frequently, the homeowner will allege that the bank must produce the “wet ink” signature on the promissory note and not simply a photocopy. At the end, the homeowner seeks to own the home free of the bank without paying off the promissory note.
This theory is baseless and was advanced by attorneys who did not understand the foreclosure laws or were abusing the system. However, the cases were so pervasive that the Arizona Supreme Court took up the issue. The Arizona Supreme Court explains as follows:
. . . the note and the deed of trust are . . . distinct instruments that serve different purposes. The note is a contract that evidences the loan and the obligor’s duty to repay. See A.R.S. § 33-801(4). The trust deed transfers an interest in real property, securing the repayment of the money owed under the note. See A.R.S. §§ 33-801(4), -801(8), -801(9), -805, -807(A). The dispositive question here is whether the trustee, acting pursuant to its own power of sale or on behalf of the beneficiary, had the statutory right to foreclose on the deeds of trust. See Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1043-44 (9th Cir. 2011)
In other words, the Court is saying “you don’t get it.” The underlying message is that when the homeowner fails to pay on the promissory note, the deed of trust may be foreclosed, regardless of who “owns” deed of trust and regardless of whether the deed of trust and promissory note are owned by the same person. The deed of trust and promissory note are not dependent upon each other. Homeowners facing foreclosure can recover and find solutions; however, filing a Show Me the Note lawsuit will not help.