Alert July 09, 2013

Fifth Circuit Rejects Show-Me-The-Note and Split-the-Note Challenges to Foreclosure

Addressing the question of an oft-used tactic by borrowers seeking to challenge a foreclosure, the United States Court of Appeals for the Fifth Circuit held that neither the "show-me-the-note" nor the "split-the-note" theories apply under Texas law. In the underlying case, the lender executed a security instrument naming MERS as the beneficiary and nominee of the lender and its assigns. After the borrower defaulted, MERS assigned the mortgage to defendant, a bank, that subsequently filed a foreclosure action against the borrower. The borrower contested the foreclosing arguing that defendant was not the holder of the note, did not own the mortgage and therefore could not foreclose. The borrower also alleged that defendant could not foreclose because MERS only assigned the mortgage and not the note. The lower court granted defendant’s motion to dismiss.

In affirming the lower court’s dismissal of the borrower’s action, the Fifth Circuit held that Texas law did not require production of the original note. In particular the Court held that "the original, signed note need not be produced in order to foreclose," thus rejecting the borrower’s show-me-the-note theory. The Fifth Circuit rejected the borrower’s "split-the-note" theory, holding that the "split-the-note" theory is inapplicable under Texas law where the foreclosing party is a mortgage servicer and the mortgage has been properly assigned. Under the "split-the-note" theory, borrowers argue that assignment of the deed of trust by MERS splits the note from the actual deed of trust, making it unlawful for the lender to which the deed of trust was last assigned to initiate foreclosure proceedings. The Fifth Circuit concluded that the foreclosing party need not possess the note itself (i.e., MERS and its assignee did not need to possess the note to foreclose). "Split-the-note" theories are commonly advanced by defaulted borrower plaintiffs in an effort to challenge foreclosures and invalidate the enforceability of their loan obligations. Numerous state and federal courts around the country have rejected such claims on a host of grounds (see e.g., October 16, 2012 Alert) and this case presents yet another example that contributes to the weight of authority.