The Nevada Supreme Court cited the Restatement Third, Property (Mortgages) in its recent opinion addressing the legal ramifications on a foreclosure when the promissory note and deed of trust are not controlled by the same party at the time of foreclosure.
By way of background, the Court previously adopted the Restatement’s view that a party does not have the authority to enter into foreclosure proceedings if it does not possess both the promissory note and deed in trust. In its 2012 opinion, Edelstein v. Bank of New York Mellon, the Court also mentioned that although the splitting of these two documents prohibits one to proceed with foreclosure, it “does not render either instrument void.”
The case recently before the Court, In re Montierth, involved the reunification of a note and deed after the mortgagor filed for bankruptcy. The mortgagor claimed that the bankruptcy stay prevented reunification of the deed and the note, and, consequently, the lender could not enter into foreclosure proceedings because reunification had not been properly completed.
In its decision holding that the lender could enter into foreclosure proceedings without the reunification of the two instruments, the Court relied on an exception to the reunification requirement developed in Section 5.4, Comment e of the Restatement. This exception focuses on the relationship between the note holder and mortgage holder.
Comment e identifies an exception to the requirement that the mortgage and promissory note are controlled by one party at the time of foreclosure if a principle-agent relationship between the note holder and mortgage holder exists, allowing one to act on the other’s behalf.