consumer messy mortgage claim issues in consumer bankruptcy

8/4/2019 Consumer Messy Mortgage Claim Issues in Consumer Bankruptcy

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Educational

2 0 1 1

Jeffrey S. Sabin | Bingham McCutchen LLP

ConsumerMessy MortgageMuddles: RecurringMortgage Claim

Issues in ConsumerBankruptcy

Committee

Educational Session

Hon. Wendelin I. Lipp | U.S. Bankruptcy Court (D. Md.); Greenbelt

David P. Leibowitz | Lakelaw/Leibowitz Law CenterWaukegan, Ill.

Kirk B. Burkley | Bernstein Law Firm, PC; Pittsburgh


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29TH ANNUALSPRING MEETING


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American Bankruptcy Institute

Mortgage Muddle in Chapter 13 Cases

Prepared for Consumer Law Committee


Annual Spring Meeting 2011

David P. Leibowitz

Lakelaw

Chicago Skokie Waukegan Kenosha

www.lakelaw.com

2011

There were more foreclosure filings, as well as bank repossessions, in 2010 than any

other year on record, with a total of 3,825,637 filings and 2,871,891 repossessions. This means

that one foreclosure was filed every 8 seconds and one house was foreclosed every 11 seconds.

This corresponds to one bankruptcy case filed every 20 seconds during 2011.!

As a result, foreclosure is frequently a root cause of bankruptcy. And as a concomitant

result, the bankruptcy court is frequently called upon to address issues which were not resolved

in the foreclosure court prior to bankruptcy.!

Todays session is intended to introduce the participants to a range of issues with which

bankruptcy courts and attorneys on both the debtors and creditors side must struggle when

foreclosure collides with bankruptcy.!

Rooker-Feldman Doctrine Issue Preclusion!

TheRooker-Feldman doctrine, derived from two United States Supreme Court

decisions,Rooker v. Fidelity Trust Co.,263 U.S. 413 (1923) andDistrict of Columbia Court of


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Appeals v. Feldman, 460 U.S. 462 (1983), "precludes lower federal courts from exercising

appellate jurisdiction over final state-court judgments because such appellate jurisdiction rests

solely with the United States Supreme Court."Madera v. Ameriquest Mortgage Co. (In re

Madera), 586 F.3d 228, 232 (3d Cir. 2009) (remarking that the doctrine applies "equally to

federal bankruptcy courts"). !

The Supreme Court has cited multiple decisions in which theRooker-Feldman doctrine

applied to preclude subject matter jurisdiction over previously adjudicated state court actions,

including previously adjudicated foreclosure actions.Exxon Mobil Corp. v. Saudi Basic Ind.

Corp., 544 U.S. 280, 284 (2005) (holding that theRooker-Feldman doctrine applies to "cases

brought by state-court losers complaining of injuries caused by state-court judgments rendered

before the district court proceedings commenced and inviting district court review and rejection

of those judgments");Madera, 586 F.3d 228, 232 (holding that plaintiffs attempt to utilize

adversary proceeding in bankruptcy to re-adjudicate state court foreclosure proceedings stripped

the court of subject matter jurisdiction).!

InEdwards v. New Century Mortgage Corp., et al. (In re New Century TRS Holdings,

Inc.), Adv. Pro. No. 08-50000 (KJC) (February 2, 2010), plaintiff filed an adversary proceeding

against the banks, individuals, and Court he held responsible for the foreclosure on his home.

Defendants filed motions to dismiss for lack of subject matter jurisdiction, asserting that

theRooker-Feldman doctrine applied, and arguing that the complaint failed to state a claim upon

which relief may be granted. Since Edwards was a state-court loser directly attacking the state

courts judgment, the Court held that theRooker-Feldman doctrine applied and the Court lacked

subject matter jurisdiction over the matter.!


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Nevertheless, the Rooker-Feldman Doctrine does not apply if the matter arrives at the

bankruptcy court before the issue is finally adjudicated in the state court. It doesnt matter that

the plaintiff is losing in the state court. What matters is that the plaintiff has not yet become a

state court loser with his only remaining rights being the right to appeal to a higher court. !

InHodges v. CIT Group (In re Hodges) 06 A 683 (Bankr. ND IL Oct 4, 2006), CIT

moved for judgment on the pleadings in a Truth in Lending Act complaint in the bankruptcy

court on the ground that the state court had already found plaintiff to be liable on the promissory

note. However, the state court action had not ended. It was still pending. The bankruptcy case

was filed prior to the time of foreclosure sale, the time in Illinois where plaintiffs rights would

have been extinguished. See Colon v. Option One Mortgage Corp., 319 F.3d 912, 920-21 (7th

Cir.2003) (holding that once an Illinois foreclosure sale occurs, a chapter 13 debtor loses the

right under section 1322(b) of the Code to cure mortgage defaults while maintaining current

mortgage payments). !

After first explaining the origin and application of theRooker-Feldman doctrine, the

bankruptcy court stated: !

Rooker-Feldman does not deprive this court of jurisdiction over Hodges adversary

proceeding because the state mortgage foreclosure action against Hodges had not ended

when he filed his adversary complaint. The state court had entered a judgment offoreclosure, true enough. But a judgment of foreclosure does not end a mortgage

foreclosure case in Illinois. Upon entry of such a judgment, the Illinois Mortgage

Foreclosure Law provides for the sale of the property once periods for reinstatement andredemption have expired. 735 ILCS 5/15-1507(a) (2004). After the sale, the person whoconducted it makes a report to the court, 735 ILCS 5/1508(a) (2004), and, upon motion,

the court holds a hearing to confirm the sale, 735 ILCS 5/1508(b) (2004). At the hearing,a defendant can contest the sales validity, though on limited grounds. Id.; see Colon,

319 F.3d at 915, 921. Only after confirmation of the sale and payment of the purchase

price can the purchaser obtain a deed. 735 ILCS 5/15-1509(a) (2004). Although the

Illinois Mortgage Foreclosure Law employs the term judgment of foreclosure, see, e.g.,735 ILCS 15/1506(a)(2) (emphasis added), a foreclosure judgment does not conclude the


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case and is not final. A judgment ordering the foreclosure of a mortgage is not final andappealable until the court enters orders approving the sale and directing the distribution.!

It is important for the practitioner to be aware of the time a judgment becomes final and

appealable. This varies from state to state. For example, in Wisconsin, the defendant still has

rights in the property cognizable in chapter 13 until the time of confirmation of sale. However,

the time when a judgment becomes final for purposes of appeal is at the time of entry of the

judgment of foreclosure, and not at the time of confirmation of sale which is deemed to be a

post-judgment act in aid of judgment.!

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!Lien Stripping

Lien stripping in chapter 13 has become a contentious issue. Real estate has declined so

markedly in value that many junior mortgages are now fully unsecured. It is well established

that a fully unsecured mortgage may be re-characterized as an unsecured claim in chapter 13 and

upon completion of the chapter 13 plan, the lien of that junior mortgage might be stripped off

and treated as a fully unsecured claim. In re Lane, (George Lane, et. al v. Western Interstate

Bancorp), 280 F.3d 663 (6th Cir. 2002). SeePond v. Farm Specialist Realty (In re Pond), 252

F.3d 122 (2nd Cir. 2001);McDonald v. Master Fin., Inc.(In re McDonald), 205 F.3d 606 (3d

Cir. 2000), cert. denied, 531 U.S. 822, 121 S.Ct. 66, 148 L.Ed.2d 31 (2000); Bartee v. Tara

Colony Homeowners Assn (In re Bartee), 212 F.3d 277 (5th Cir.2000); Zimmer v. PSB Lending

Corp. (In re Zimmer), 313 F.3d 1220, (9th Cir. 2002); Tanner v. FirstPlus Fin., Inc. (In re

Tanner), 217 F.3d 1357 (11th Cir. 2000).

Some courts hold that lien stripping is not allowed in Chapter 13. In re Loban, 426 B.R.

805 (Bankr. D.Minn. April, 2010) (since mortgage is an allowed claim secured by a lien, debtors

cannot strip off wholly unsecured, residential mortgages in chapter 13). This is a distinctively

minority position.

Section 506(a)(1) explains bifurcation (division) of an allowed claim into secured and

unsecured partsthe secured part being secured by the collaterals value, the unsecured part

being the remaining amount of the claim in excess of the collaterals value. The process of lien

stripping might be invoked in a chapter 13 case by motion or adversary proceeding, depending

on the practice in the particular area. There is no uniformity of practice. While it is theoretically

possible that the lien stripping process might be invoked simply by so providing in a plan, this is


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not best practice, particularly in light ofEspinosa. Due process suggests that the procedural

protections afforded by a contested matter motion or an adversary proceeding are necessary in

order to affect the substantive rights of a lien holder. The practitioner should be aware of the

service requirements of Rule 7004(h) when applicable.!

Practice on lien stripping raises several interesting questions. First and foremost, who is

the lienholder? Is it enough to simply serve the lienholder of record? The lienholder of record

may not be the entity to which the debtor has been making mortgage payments. The lienholder

of record might be Mortgage Electronic Registration Systems. Does one serve the MERS

registrant to be ascertained on MERS website? Does MERS website have any legal

justification for consideration compared, for example, to the official keeper of real estate

records? Does one serve the servicer to whom the debtor has been making payments? How

about the attorney who has been handling the foreclosure? How about the securitized trust or

other plaintiff who is named in the pleadings? When in doubt, it is probably best to serve

everyone. This naturally leads to the questions of standing which is addressed in the next section

of these materials. !

The motion or adversary proceeding must allege the value of the property in question, the

amount of senior liens, establish that the junior lien is fully unsecured by competent appraisal

evidence or affidavit. This might lead to a trial or contested hearing on the question of valuation.

However, in due course, the court will determine whether or not the junior lien is wholly

unsecured. The order stripping the lien will be entered but contingent at the very minimum on

the debtors having successfully completed his plan.!


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In light of amendments to the Bankruptcy Code in 2005, the question now arises whether

the debtor must also be entitled to a discharge in order to strip a wholly unsecured lien. Thats

because Section 1328(f)(1) limits a debtor to a discharge in chapter 13 for a period of 2 years

after a prior chapter 13 discharge and 4 years after a prior chapter 7 discharge. Section

1325(a)(5)(B)(i)(I)(bb) of the Bankruptcy Code requires that each allowed secured claim

provided by the plan requires that the holder of such claim retains the lien until discharge under

section 1328. Does this preclude lien stripping without discharge? The courts are split on this

point.!

One line of reasoning holds that a lien which is wholly unsecured simply cannot be an

allowed secured claim. Thats because the creditors interest in the debtors interest in the

property is zero. So therefor, discharge under Section 1328 is irrelevant to stripping that lien.

On the other hand, courts denying lien stripping without discharge conclude that Section

1325(a)(5)(B)(i)(I)(bb) must have suggested Congress intent not to allow lien stripping without

discharge.!

This has generated a split of authority among cases arising in the so-called chapter 20

context a chapter 13 case which follows a prior chapter 7 case in which the debtor has already

obtained a discharge of the underlying debts at least on an in personam basis whereas the

secured creditor has retained a lien.!

Several courts have suggested that a subsequent chapter 13 case after a chapter 7

discharge has been granted connotes bad faith. This has been rejected by many courts as well.

Cases which permit lien stripping in chapter 13 absent a discharge include:In re Tran, 431 B.R.

230 (Bankr. SD CA 2010);In re Grignon, 2010 Bankr. LEXIS 4279 (Bankr. D. Or. Dec. 7,


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2010)(overruling trustees objection and confirming chapter 13 plan stripping off wholly

unsecured junior lien in no discharge chapter 13) and In re Coryell, (Bankr. ED MI No. 09-

54760).!

Cases which deny lien stripping in chapter 13 absent a discharge include: !

In re Jarvis, 390 B.R. 600 (Bankr. C.D. Ill. 2008);In re Trujillo, 2010 WL 4669095

(Bankr. M.D. Fla. Nov. 10, 2010);In re Colbourne, 2010 WL 4485508 (Bankr. M.D. Fla. Nov.

8, 2010);In re Mendoza, 2010 WL 736834 (Bankr. D. Colo. Jan. 21, 2010); andIn re Blosser,

2009 WL 1064455 (Bankr. E.D. Wis. Apr. 15, 2010). !

TheJarvis line of cases has been cited more frequently than the Tran line of cases

however theJarvis line of cases does not address the legal theories raised in the Tran line of

cases.!

It is the authors view that the Tran line is cases is the better reasoned. The author also is

in the midst of litigating this issue in the matter ofLindskog v M & I Bank(Case No. 10-02278-

jes, Bankr. ED WI). It is expected that this matter and a companion case will be appealed both to

the District Court and the Seventh Circuit Court of Appeals!

Further reference is made to Chapter 13 Lien Stripping, Thompson, R. H. available at:

http://www.abiworld.org/committees/newsletters/consumer/vol8num2/selected.pdf and Lien

Stripping from A to Z from the 2010 Detroit Consumer Bankruptcy Conference available at:

http://www.abiworld.org/AM/Template.cfm?Section=Home&CONTENTID=62376&TEMPLA

TE=/CM/ContentDisplay.cfm

!


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Standing

The question of standing is frequently raised by debtors in the context of either a motion

for relief from automatic stay or in connection with a proof of claim in chapter 13. Put bluntly,

the debtor is not merely saying that he or she doesnt owe something on the debt. Rather, the

debtor is saying Who are you to say that I owe you, in particular, any money? And beyond

that Unless you can prove to the courts satisfaction that you have the rights you say you do,

why should the bankruptcy court grant any relief to you whatever?

Ford Elsaesser recently wrote a paper entitled Paperless Pipedream Rule 9011 and

Standing Issues in the E-Bankruptcy World available here:

http://www.abiworld.org/committees/newsletters/consumer/vol8num8/pipedream.pdf

This paper included the following in its introduction:

Standing has both constitutional and prudential (i.e. self-imposed) requirements.

The real party in interest question is the prudential component of the overall standing

analysis, while injury-in-fact is a constitutional requirement, and the moving party must

meet both requirements before a court can grant relief from the automatic stay. Inaddition, a party also has standing to seek relief if it has the authority to act on behalf of

an entity that has standing. Therefore, a nominee or agent will have to prove both (1) it isan agent with the authority to act on behalf of the principal, and (2) the principal has both

constitutional standing and prudential standing. However, even if a party has standing in

its own right, the agent or nominee must prosecute the action in the name of the real partyin interest and not in its own name.

The standing requirement is an essential and unchanging part of the case-or-

controversy requirement of Article III. This constitutional doctrine requires that a

claimant must present an actual or imminent injury that is fairly traceable to thedefendants conduct and redressable by a favorable ruling. The standing question is a

threshold issue, required before a court may entertain a suit. Thus, if a litigant cannot

prove standing, the court has no authority to hear the case and it must dismiss the action.


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Rule 17 of the Federal Rules of Civil Procedure (FRCP) requires [a]n action

must be prosecuted in the name of the real party in interest. The purpose is to ensure theparty bringing forth the action is the party who possesses the substantive right being

asserted under the applicable law. The real party in interest . . . is whoever is entitled to

enforce the obligation sought to be enforced. This reflects the fact that the federaljudiciary also adheres to certain prudential principles concerning standing. The real party

in interest inquiry is one of the prudential considerations the judiciary self-imposes to

limit the role of courts in democratic society. Because FRCP 17 applies to contestedmatters, parties must adhere to FRCP 17 in order to seek relief from automatic stay.

(footnotes and citations omitted).

Any analysis of standing of mortgage related plaintiffs must begin with Judge Boykos

decision in the Northern District of Ohio inIn re Foreclosure Cases.1In these cases, the

plaintiffs asserted rights in the name of various securitized trusts. However, in each case, the

notes and mortgages attached to the complaint were in the name of the original lenders. The

district court dismissed each case without prejudice, holding:

Further, the plaintiff bears the burden of demonstrating standing

and must plead its components with specificity. Coyne, 183 F. 3d

at 494; Valley Forge Christian College v. Americans United forSeparation of Church & State, Inc., 454 U.S. 464 (1982).The

minimum constitutional requirements for standing are: proof of

injury in fact, causation,and redressability. Valley Forge, 454 U.S.at 472. In addition, the plaintiff must be a properproponent, and

the action a proper vehicle, to vindicate the rights asserted.Coyne, 183 F. 3dat 494 (quotingPestrak v. Ohio Elections

Commn, 926 F. 2d 573, 576 (6th Cir. 1991)). Tosatisfy the

requirements of Article III of the United States Constitution, the

plaintiff mustshow he haspersonally suffered some actual injuryas a result of the illegal conduct of the defendant. (Emphasis

added). Coyne, 183 F. 3d at 494; Valley Forge, 454 U.S. at 472.

What was worse, from the courts standpoint, was that the purported assignments from

the Originators to the Trusts were dated after the commencement of the complaint and executed

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!U!No. 1:07-cv-02282 (N.D.Ohio Oct. 31, 2007)!


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by the attorney for the plaintiff and thereby belie Plaintiffs assertion they own the Note and

Mortgage by means of a purchase which pre-dated the Complaint by days, months or years.

Subsequently, Judge Boykos opinion was cited and followed by the Southern District of Ohio2

which held that the plaintiff had the burden of pleading that it was the holder of the note and

mortgage at the time the mortgage foreclosure case is commenced.

Standing in the Bankruptcy Courts

Any discussion of standing of mortgage related parties in the bankruptcy court must

begin with Judge Buffords decision in In re Hwang.3

There, IndyMac Federal Bank sought

relief from the automatic stay in a chapter 7 case to enforce a note and mortgage which it had

sold to Federal Home Loan Mortgage Corporation (Freddie Mac) and which Freddie Mac,

almost certainly, sold to someone else pursuant to a securitized trust. Even after trial and

extensive briefing, nobody before the court could answer to the courts satisfaction the question

who owns the note?

The bankruptcy court held that even though IndyMac was the holder of the Note and

entitled to enforce the note in accordance with its terms, it nevertheless was not the real party in

interest within the meaning of Rule 17 of the Federal Rules of Civil Procedure. Moreover,

joinder of the real party in interest was required by rule 19 of the Federal Rules of Civil

Procedure. Both Rules 17 and 19 are incorporated within the Federal Rules of Bankruptcy

Procedure.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!?!In re Foreclosure Cases, 521 F. Supp. 2d 650 (S.D. Ohio 2007) (J. Rose) (lack of

standing/proof of ownership of mortgage)!X!396 BR. 757 (Bankr. CD CA 2008).!


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Although IndyMac remained the holder of the note and mortgage, it contended that it

held the note as servicer for a securitized trust, the identity of which it could not ascertain.

Neither could it present to the Court any agreement pursuant to which it purported to be the

servicer of the note or mortgage or for whom it purported to be servicing.

Even though IndyMac could enforce the note in accordance with its terms under state law

as the holder, within the meaning of federal law, it was not the real party in interest whose

joinder as a necessary party was held to be mandatory.

Critically, the court held that after a mortgage and note is securitized, the real party

interest is the securitized trust.4

The court went on to state:

The right to enforce a note on behalf of a noteholder does not

convert the noteholder's agent into a real party in interest. "As a

general rule, a person who is an attorney-in-fact or an agent solelyfor the purpose of bringing suit is viewed as a nominal rather than

a real party in interest and will be required to litigate in the nameof his principal rather than in his own name." 6A WRIGHT

1553. Consequently, even if the court had found that a properagency relationship exists between the holder of the note and the

party seeking to enforce its security, this does not excuse the agentfrom the requirement that an action be prosecuted in the name of

the noteholder, who is the real party in interest

The court was also careful to distinguish between the concept of party in interest which

is incorporated by Bankruptcy Code section 362, 11 USC 362, and the prudential concept of

real party in interest. Just because a person has suffered economic consequences by an act or

omission does not make it the real party in interest for purposes of Article III standing. The court

concluded that even though IndyMac had the legal right to enforce the note it held, it was

nevertheless not the real party in interest and failed to join the real party in interest. Failure to

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!V!See LaSalle Bank N.A. v. Nomura Asset Capital Corp., 180 F.Supp.2d 465, 469-71

(S.D.N.Y.2001) ("LaSalle-Nomura"); accord, LaSalle Bank N.A. v. Lehman Bros. Holdings,

Inc., 237 F.Supp.2d 618, 631-34 (D.Md.2002)("LaSalle-Lehman").!


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join the real party in interest was held to be fatal to its motion for relief from stay a defect

which the court was not only free to raisesua sponte, but which the court had the obligation to

raisesua sponte.Judge Bufford also decidedIn re Vargas

5wherein he rather forcefully illustrated the

infirmities with the types of affidavits customarily employed by mortgage lenders and their

servicers. He pointed out the standards required for authentication of records, business record

exception to hearsay and proper foundation for computer related evidence. Following these

standards, he denied the relief sought by the lender in Vargas.

Hwangwas immediately cited with approval by the bankruptcy court inIn re Jacobson.6

There, the court denied relief from the automatic stay over the objection of the pro se debtor

where the servicer, UBS AG, failed to introduce any evidence as to its authority to act as servicer

for the true owner of the note and mortgage. Absent authority to act for whoever actually holds

the note, UBS AG had no constitutional standing to pursue relief from the automatic stay. A

necessary party, namely the owner of the note and mortgage, was a real party in interest and was

missing from the proceedings. UBS AG tried to salvage its motion with an affidavit by someone

supposedly in charge of the records. However, the court found the affidavit to be legally

insufficient, stating,even if all of the deficiencies were overlooked or resolved in Movant's

favor, one emerges from the syntactical fog into an impassable swamp. The affidavit of a

California Bankruptcy Specialist for UBS AG purported to state that it was the servicing agent

for ACT Properties LLC and/or its successors or assigns This was far too indefinite for the

court.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!5

396 BR 511 (Bankr. C.D. CA 2009)6

402 BR 359 (Bankr. WD WA 2009)


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Later in 2009, the Bankruptcy Court for the District of Idaho considered the question of

standing again in the context of a chapter 7 trustees motion for relief from the automatic stay in

In re Wilhelm7and companion cases. In the lead case, the chapter 7 trustee opposed the relief

requested. In another case, the chapter 7 trustee stipulated to relief. In a third, the chapter 7

trustee remained silent. And in the fourth, the chapter 7 trustee filed a statement of non-

opposition.

Yet the bankruptcy court denied relief from the stay in each of these cases because each

movant had failed to establish standing to seek relief from the automatic stay. As a prefatory

comment, Judge Myers tries to put his reasoning in context of prior decisions rendered by his

court and others on the question of standing as follows:

Before delving into the specifics of these cases, it is worthreiterating that changes in mortgage practices during the past

several years including, most prominently, the serial assignmentof mortgage obligations have complicated the factual situations

to which the standing analysis applicable to stay relief motionsmust be applied. SeeIn re Sheridan, 09.,1 I.B.C.R. 24, 2009 WL

631355, at *1 (Bankr.D. Idaho 2009). Several bankruptcy courts

including this Court, in In re Sheridan have been required to

issue decisions explaining who does (and who does not) havestanding to seek stay relief. See, e.g.,In re Jacobson, 40,2 B.R.

359 (Bankr.W.D.Wash.2009);In re Vargas, 39,6 B.R. 511 (Bankr.

C.D.Cal.2008);In re Hwang, 39,6 B.R. 757

(Bankr.C.D.Cal.2008); In re Mitchell, 200,9 WL 1044368, at *2-6(Bankr.D.Nev. Mar.31, 2009).

InIn re Sheridan, for example, this Court explained that a stayrelief motion "must be brought by one who has a pecuniary interest

in the case and, in connection with secured debts, by the entity that

is entitled to payment from the debtor and to enforce security for

such payment." 09.1 I.B.C.R. at 25, 2009 WL 631355, at *4. Inhundreds of stay relief motions, including many post-Sheridan,

creditors are providing adequate documentation and explanation to

meet the requisite standing requirements. These Movants, all of!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!7

407 BR 392 (Bankr. ID 2009)


17/26773


whom are represented by attorney Matthew Cleverly ("Counsel"),

are an exception.

Common features in each case considered in Wilhelm were:

None of the notes named a Movant as the payee. None of the notes were indorsed, either in blank or to a particular payee None of the declarations in support of the motions show that any of the movants

actually held the notes they sought to enforce

Each mortgage was in favor of MERS rather than any entity that might actually havean economic interest in the transaction.

The court in Wilhelm made reference to its prior decision inIn re Sheridan8

which

followed the logic and reasoning of the bankruptcy court inHwang. The court next addressed

the lenders position that it was up to the respondent to the motion to lift stay to rebut the

allegations in its motion, including the allegations in the motion regarding standing. The court

rejected this notion holding that standing was essential to the right to seek relief. It held that a

relaxed standard might be possible in the pleading stage. However, in the event the respondent

objected, then the movant has the burden going forward with evidence to establish its standing.

Addressing Idaho law under the Uniform Commercial Code, the court held that to

establish standing for relief from the automatic stay, the movant had to establish that it was the

holder or otherwise had the rights of a holder by being in possession of the notes. And even had

they established that they were in possession, they also had to establish a transaction by which

means they acquired possession. Of particular note was that the notes purported to have been

assigned to the movants by reason of an assignment from MERS. This was problematic since

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!8

09.,1 I.B.C.R. at 25, 2009 WL 631355,


18/26774


MERS never had any interest in any of the notes. In fact, at most, MERS was the nominee for

the Originator. Accordingly, MERS had no authority to assign the notes, even assuming that the

MERS assignment was otherwise valid.9

InIn re Relka10

the bankruptcy court followed the principles of standing set forth above

but found that the movant had established standing since it was supported by a declaration on

behalf of the movant that the movant had retrieved the note from a vault in Nebraska and

obtained possession of it endorsed in blank. Even though it was possible that the movant was

wrongfully in possession of the note, the UCC allows one wrongfully in possession of a note

endorsed in blank to enforce it. The court did not seem troubled that there were four different

versions of the signature page of the note. MERS had assigned the mortgage directly to the

current holder of the note the Trustee of the Securitized Trust. One might refer to this as an A

to D assignment, or an assignment from the Original Mortgagee to the Trust. There was nothing

of record regarding any deposit from the Original Mortgagee to the Sponsor, from the Sponsor to

the Depositor or from the Depositor to the Trust. Similarly, there was no evidence that the Note

was ever transferred from the Originator to the Sponsor, from the Sponsor to the Depositor or

from the Depositor to the Trust. It is possible that these questions simply dont arise on the

occasion of a motion for relief from automatic stay, which is intended to be a summary

proceeding but might be more properly raised in connection with objections to claim.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!AAt least two other courts construing similar MERS assignments are in accord. See Saxon

Mortgage Servs. v. Hillery, 2008 WL 5170180, at *5 (N.D.Cal. Dec.9, 2008);Bellistri v. Ocwen

Loan Servicing, LLC, 284 S.W.3d 619, 623-24, 2009 WL 531057, at *3 (Mo.Ct.App.2009). Cf.alsoIn re Vargas, 39, 6 B.R. at 517 ("MERS presents no evidence as to who owns the note, or of

any authorization to act on behalf of the present owner.")!U@09 -20806 (Bankr. D. WY Dec. 18, 2009)!


19/26775


In re Mitchell11

also addressed standing in the context of motions for relief from the

automatic stay.Mitchellis noteworthy because it rather closely analyzes the nature of MERS and

the legal effect of the manner in which it operates in context of mortgage issues in bankruptcy.

MERS contended that in a non-judicial foreclosure state where no deficiency was being sought,

it didnt matter whether MERS had any interest in the note. The court rejected this contention as

being made out of whole cloth. The court reviewed the manner in which MERS officers are

appointed and also considered the evidentiary problems with the several affidavits in support of

motions for relief from stay and found them wholly inadequate to establish standing to seek

relief from the automatic stay. Mitchellshould be read by anyone involved in a motion for relief

from automatic stay which relies on a MERS or MERS related affidavit.

In re Almeida12

illustrates the quantum of evidence which was held sufficient in face of

objection on a motion for relief from automatic stay to confer standing upon the movant on the

occasion of a motion for relief from automatic stay. There, the movant established to the courts

satisfaction that assignments had been made from the Originator to the Sponsor, from the

Sponsor to the Depositor and from the Depositor to the Trust. The chain of these assignments is

somewhat interesting and questionable as they appear to have been made and executed well after

the fact. The securitization in question was to have occurred in 2005 yet the assignments were

dated in 2008. However, there was no evidence proffered to refute the averments in the movants

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UU!Case No. BK-S-07-16226-LBR. (Bankr., D. Nevada. March 31, 2009)

U?!417 B.R. 140 (Bankr. D. MA 2009)

!


20/26776


affidavits that the note had been in possession of the movant since as early as 2006. However,

the bankruptcy court quoted with approval the following passage fromIn re Samuels13

A failure to follow this protocol such as by direct assignment ofthe mortgage from the loan originator to the pool trustee,

bypassing the depositor would, the Debtor contends, constitute

a breach of the PSA, a breach of fiduciary obligations under the

PSA to investors, a breach of federal regulations, and an act givingrise to unfavorable tax consequences for the investors. The Debtor

argues that because the Confirmatory Assignment is a direct

assignment from Argent to Deutsche Bank that bypasses the

depositor, it must be invalid. This argument falls far short of itsgoal. Even if this direct assignment were somehow violative of the

PSA, giving rise to unfavorable tax, regulatory, contractual, andtort consequences, neither the PSA nor those consequences would

render the assignment itself invalid. In fact, under the Debtor's ownargument, the unfavorable consequences could and would arise

only if, and precisely because, the assignment were valid andeffective.

So at least in the context of a motion for relief from stay, it did the borrower no good to

argue that the assignments were not effectuated in the manner contemplated by the parties to the

securitized trust.

Objections to Claims

In re Wells14

illustrates the analysis in which a bankruptcy court must engage when

considering the standing of a mortgage creditor to assert a proof of claim. There, debtors

objected to a secured mortgage related claim in their chapter 13 case. In particular, debtors posed

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UXIn re Samuels, 415 B.R. 8 (Bankr. D.Mass.2009)!UV!407 BR 873 (Bankr. ND OH 2009)!


21/26777


the question of what entity was entitled to receive payment on account of pre-petition arrearages.

The bankruptcy court found:

The trustee of the Securitized Trust did not provide documents to establish that it was asecured creditor of the debtors

The Servicer who filed the proof of claim did so using an undisclosed limited power ofattorney which did not give it the right to file a proof of claim on behalf of the trustee of

the Securitized Trust

The trustee of the Securitized Trust did not come forward with evidence to cure thedeficiencies of its claim at the evidentiary hearing.

The proof of claim was executed by an individual purportedly acting as Quality Control,

Bankruptcy Department without identifying her employer. She purportedly was acting on

behalf of the trustee of the Securitized Trust. Contrary to the requirements of the official proof

of claim form, the signatory did not attach any power of attorney. The claim had the following

information and exhibits appended to it:

Itemization of Claim (no backup) Payoff Information breaking down principal, interests and fees (no backup) Prepetition Fee breakdown (no backup) Mortgage signed by Debtors and naming MERS as the mortgagee as nominee for the

Originating Lender, bearing a contemporaneous recording stamp and no assignment toanyone else

An Adjustable Rate Note signed by one debtor naming the Originating Lender as thepayee.

Debtor objected to the claim whereupon secured creditor supplemented it with the following

documents:

Assignment of mortgage from MERS to the trustee for the Securitized Trust datedand recorded about a year prior in 2007


22/26778


An assignment of mortgage dated at about the time of the hearing from the trustee forthe Securitized Trust seemingly from the Bank as trustee for the registered holders of

the Securitized Trust Pass Through Certificates to the same bank as Trustee for thesame registered holders of Securitized Pass Through Certificates.

A limited power of attorney purportedly given by the Trustee Bank to Ocwen LoanServicing LLC recorded in Broward County, Florida (note that the land in this case is

located in Ohio)

An Escrow Advance Breakdown, Prior Servicer Fee Breakdown and a Late ChargesBreakdown

Creditors attorney stated that it was in the process of obtaining an allonge(presumably for a note) and once received, will provide same.

First, the court analyzed the Note. Since it is a negotiable instrument, it might be

enforced by a holder who has physical possession of the note, provided that the note is endorsed

to that person or endorsed in blank.15

In Ohio, a note can be endorsed by an allonge, a piece of

paper which becomes affixed to the instrument. Transfer of physical possession is necessary to

complete the negotiation of a note.16

There was no evidence before the bankruptcy court that the

Note had been negotiated from the original lender to the Securitized Trust Trustee Bank which

made the proof of claim.

Much has been written about the allonge and it is beyond the scope of this article.

However, it should be noted that an allonge must be so far affixed to the note as to be

permanently part of the instrument. A separate sheet of paper will not do. Moreover, there are

many cases in many jurisdictions which hold that an allonge is not appropriate where there is

sufficient space on the Note itself whereupon an endorsement might be made.17

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!U\!B::!`XRX@U!

UF!B::!`XR?@V4!`XR?@U!

17See generally, Adams v. Madison Realty & Development, Inc., 853 F. 2d 163, 167 (3d Cir. 1988).

Courts have held that "stapling is the modem equivalent of gluing or pasting."Lamson v.

Commercial Credit Corp., 187 Colo. 382 (Colo. 1975). See also Southwestern Resolution Corp. V.


23/26779


Next, the court analyzed the Mortgage and the Assignments of Mortgage, both of which

purported to assign both the Note and Mortgage. First, the Court found that the Assignments

were not legally sufficient under any circumstance to transfer ownership or any interest in the

Note. Second, it was obvious that the 2007 assignment was back-dated given that it was

notarized in 2009 and recorded in 2009, during the pendency of the proof of claim litigation.

The court also analyzed the Limited Power of Attorney and found that by its express

terms, it did not authorize Ocwen to act for the particular securitized trust in question. The

power of attorney was strictly construed against the entity or person who granted it.

Since the Proof of Claim did not comply with Bankruptcy Rule 3001, it did not have

prima facie validity. And since there was a legitimate objection to its validity pursuant to

Bankruptcy Code section 502, it was the responsibility of the creditor to come forward with

evidence in support of its claim.

The bankruptcy court not only held that the Bank as Trustee failed to establish its

standing to assert the claim, but that it also failed to establish that it was entitled to enforce the

note and mortgage. Accordingly, the claim asserted was denied.18

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Watson, 964 S.W. 2d 262 (Texas 1997) (holding that an allonge stapled to the back of a promissory

note is valid so long as there is no room on the note for endorsement, but affixed does not include

paperclips.). Numerous cases have rejected endorsements made on separate sheets of paper loosely

inserted in a folder with the instrument and not physically attached in any way. See Town of Freeport

v. Ring, 1999 Me. 48 (Maine 1999);Adams V. Madison Realty & Development, Inc., 853 F. 2d163 (3d Cir. 1988);Big Builders, Inc. V. Israel, 709 A. 2d 74 (D.C. 1988).

18To similar effect and on similar reasoning is In re Jones, 07-15662-JNF (Bankr. D. Mass

October 3, 2008).


24/26780


On the other hand, a carefully prepared claim with well-documented evidence can be

sustained in bankruptcy. Such a case isIn re Samuels19

Although the documents presented with

the proof of claim did not entitle the claim to prima facie validity, the creditor presented

documents which, in the courts opinion, were satisfactory to sustain its burden of proof. Even

though the creditor failed to show the entire chain of transfers from the Originator to the

Sponsor, from the Sponsor to the Depositor and from the Depositor to the Trust, the court held

that this was unnecessary from the debtors standpoint.

It remains to be seen whether the Samuels courts willingness to overlook the fact that the

assignment which was actually granted was beyond the authority of the assignor to give.

Perhaps that argument will be made successfully in other courts.

It is not necessary for the purpose of this article to discuss in detail the specific findings

of the court. However, any prudent lender would be wise to observe the detail to which the

creditor went in order to sustain its burden of proof in Samuels.

While beyond the scope of this paper, it is highly instructive to review the decision of the

Massachusetts Supreme Judicial Court in US Bank NA, Trustee (for the Structured Asset

Securiti9es Corporation Mortgage Pass-Through Certificates, Series 2006-Z) v. Ibanez(SJC

10694 Decided January 7, 2011) available at

http://weblinks.westlaw.com/result/default.aspx?action=Search&cnt=DOC&db=MA-ORCS-

WEB&eq=search&fmqv=c&fn=_top&method=TNC&n=1&origin=Search&query=CO(SJCF+S

JCRES+SJCOPJ+APPF+APPRES)+%26+TI(IBANEZ)&rlt=CLID_QRYRLT1.

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!19

415 BR 8 (Bankr. D. Mass 2009).!


25/26781


There, the Supreme Judicial Court of Massachusetts explains the securitization process in

detail and held that failure of the lenders to establish strict compliance with the securitization

process was fatal to their ability to foreclose upon mortgages. Such logic would also compel, at

least a Massachusetts bankruptcy court, to deny secured status to a mortgage claim in similar

circumstances. The appellate courts of the various states are still grappling with the impact of

securitization of mortgages on the ability of those concerned to foreclose. It will be the burden

of bankruptcy judges to address these complex issues in the context of chapter 13 cases as

debtors attorneys become more sophisticated and aware of these issues.

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