submitted by NY
Interestingly, with the exception of Judge Bufford and a few other judges, there
has been less than adequate focus upon the UCC title issues. The next
round of cases may and should focus upon the title to debt instrument. The person seeking to enforce the note must show that:
(1) It is the holder of t his note original by transfer, with all necessary rounds;
(2) It had possession of the note before it was lost;
(3) If it can show that title to the note runs to it, but the original
is lost or destroyed, the holder must be prepared to post a bond;
(4) If the person seeking to enforce is an agent, it must show its
agency status and that its principal is the holder of the note (and
meets the above requirements).
Then, and only then, do the issues of evidence of debt and default and assignment of mortgage rights become relevant.
WHERE’S THE NOTE, WHO’S THE HOLDER: ENFORCEMENT OF PROMISSORY NOTE SECURED BY REAL ESTATE
HON. SAMUEL L. BUFFORD
UNITED STATES BANKRUPTCY JUDGE
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES, CALIFORNIA
(FORMERLY HON.) R. GLEN AYERS
LANGLEY & BANACK
SAN ANTONIO, TEXAS
AMERICAN BANKRUPTCY INSTUTUTE
APRIL 3, 2009
WASHINGTON, D.C.
WHERE’S THE NOTE, WHO’S THE HOLDER
INTRODUCTION
In an era where a very large portion of mortgage obligations have
been securitized, by assignment to a trust indenture trustee, with the
resulting pool of assets being then sold as mortgage backed securities,
foreclosure becomes an interesting exercise, particularly where
judicial process is involved. We are all familiar with the
securitization process. The steps, if not the process, is simple. A
borrower goes to a mortgage lender. The lender finances the purchase of
real estate. The borrower signs a note and mortgage or deed of trust.
The original lender sells the note and assigns the mortgage to an
entity that securitizes the note by combining the note with hundreds or
thousands of similar obligation to create a package of mortgage backed
securities, which are then sold to investors.
Unfortunately, unless you represent borrowers, the vast flow of
notes into the maw of the securitization industry meant that a lot of
mistakes were made. When the borrower defaults, the party seeking to
enforce the obligation and foreclose on the underlying collateral
sometimes cannot find the note. A lawyer sophisticated in this area has
speculated to one of the authors that perhaps a third of the notes
“securitized” have been lost or destroyed. The cases we are going to
look at reflect the stark fact that the unnamed source’s speculation
may be well-founded.
UCC SECTION 3-309
If the issue were as simple as a missing note, UCC §3-309 would
provide a simple solution. A person entitled to enforce an instrument
which has been lost, destroyed or stolen may enforce the instrument. If
the court is concerned that some third party may show up and attempt to
enforce the instrument against the payee, it may order adequate
protection. But, and however, a person seeking to enforce a missing
instrument must be a person entitled to enforce the instrument, and
that person must prove the instrument’s terms and that person’s right
to enforce the instrument. §3-309 (a)(1) & (b).
WHO’S THE HOLDER
Enforcement of a note always requires that the person seeking to
collect show that it is the holder. A holder is an entity that has
acquired the note either as the original payor or transfer by
endorsement of order paper or physical possession of bearer paper.
These requirements are set out in Article 3 of the Uniform Commercial
Code, which has been adopted in every state, including Louisiana, and
in the District of Columbia. Even in bankruptcy proceedings, State
substantive law controls the rights of note and lien holders, as the
Supreme Court pointed out almost forty (40) years ago in United States
v. Butner, 440 U.S. 48, 54-55 (1979).
However, as Judge Bufford has recently illustrated, in one of the
cases discussed below, in the bankruptcy and other federal courts,
procedure is governed by the Federal Rules of Bankruptcy and Civil
Procedure. And, procedure may just have an impact on the issue of
“who,” because, if the holder is unknown, pleading and standing issues
arise.
BRIEF REVIEW OF UCC PROVISIONS
Article 3 governs negotiable instruments – it defines what a
negotiable instrument is and defines how ownership of those pieces of
paper is transferred. For the precise definition, see § 3-104(a) (“an
unconditional promise or order to pay a fixed amount of money, with or
without interest . . . .”) The instrument may be either payable to
order or bearer and payable on demand or at a definite time, with or
without interest.
Ordinary negotiable instruments include notes and drafts (a check is a draft drawn on a bank). See § 3-104(e).
Negotiable paper is transferred from the original payor by
negotiation. §3-301. “Order paper” must be endorsed; bearer paper need
only be delivered. §3-305. However, in either case, for the note to be
enforced, the person who asserts the status of the holder must be in
possession of the instrument. See UCC § 1-201 (20) and comments.
The original and subsequent transferees are referred to as holders.
Holders who take with no notice of defect or default are called
“holders in due course,” and take free of many defenses. See §§
3-305(b).
The UCC says that a payment to a party “entitled to enforce the
instrument” is sufficient to extinguish the obligation of the person
obligated on the instrument. Clearly, then, only a holder – a person in
possession of a note endorsed to it or a holder of bearer paper – may
seek satisfaction or enforce rights in collateral such as real estate.
NOTE: Those of us who went through the bank and savings and loan
collapse of the 1980’s are familiar with these problems. The
FDIC/FSLIC/RTC sold millions of notes secured and unsecured, in bulk
transactions. Some notes could not be found and enforcement sometimes
became a problem. Of course, sometimes we are forced to repeat history.
For a recent FDIC case, see Liberty Savings Bank v. Redus, 2009 WL
41857 (Ohio App. 8 Dist.), January 8, 2009.
THE RULES
Judge Bufford addressed the rules issue this past year. See In re
Hwang, 396 B.R. 757 (Bankr. C. D. Cal. 2008). First, there are the
pleading problems that arise when the holder of the note is unknown.
Typically, the issue will arise in a motion for relief from stay in a
bankruptcy proceeding.
According F.R.Civ. Pro. 17, “[a]n action must be prosecuted in the name of the real party in interest.”
This rule is incorporated into the rules governing bankruptcy procedure
in several ways. As Judge Bufford has pointed out, for example, in a
motion for relief from stay, filed under F.R.Bankr.Pro. 4001 is a
contested matter, governed by F. R. Bankr. P. 9014, which makes F.R.
Bankr. Pro. 7017 applicable to such motions. F.R. Bankr. P. 7017 is, of
course, a restatement of F. R. Civ. P. 17. In re Hwang, 396 B.R. at
766. The real party in interest in a federal action to enforce a note,
whether in bankruptcy court or federal district court, is the owner of
a note. (In securitization transactions, this would be the trustee for
the “certificate holders.”) When the actual holder of the
note is unknown, it is impossible – not difficult but impossible – to
plead a cause of action in a federal court (unless the movant simply
lies about the ownership of the note). Unless the name of the actual
note holder can be stated, the very pleadings are defective.
STANDING
Often, the servicing agent for the loan will appear to enforce the
note. Assume that the servicing agent states that it is the authorized
agent of the note holder, which is “Trust Number 99.” The
servicing agent is certainly a party in interest, since a party in
interest in a bankruptcy court is a very broad term or concept. See,
e.g., Greer v. O’Dell, 305 F.3d 1297, 1302-03 (11th Cir. 2002).
However, the servicing agent may not have standing: “Federal
Courts have only the power authorized by Article III of the
Constitutions and the statutes enacted by Congress pursuant thereto. …
[A] plaintiff must have Constitutional standing in order for a federal
court to have jurisdiction.” In re Foreclosure Cases, 521 F.Supp. 3d
650, 653 (S.D. Ohio, 2007) (citations omitted).
But, the servicing agent does not have standing, for only a person
who is the holder of the note has standing to enforce the note. See,
e.g., In re Hwang, 2008 WL 4899273 at 8.
The servicing agent may have standing if acting as an agent
for the holder, assuming that the agent can both show agency status and
that the principle is the holder. See, e.g., In re Vargas, 396 B.R. 511
(Bankr. C.D. Cal. 2008) at 520.
A BRIEF ASIDE: WHO IS MERS?
For those of you who are not familiar with the entity known as MERS, a frequent participant in these foreclosure proceedings:
MERS is the “Mortgage Electronic Registration System, Inc. “MERS is
a mortgage banking ‘utility’ that registers mortgage loans in a book
entry system so that … real estate loans can be bought, sold and
securitized, just like Wall Street’s book entry utility for stocks and
bonds is the Depository Trust and Clearinghouse.” Bastian, “Foreclosure
Forms”, State. Bar of Texas 17th Annual Advanced Real Estate Drafting
Course, March 9-10, 2007, Dallas, Texas. MERS is enormous. It
originates thousands of loans daily and is the mortgagee of record for
at least 40 million mortgages and other security documents. Id.
MERS acts as agent for the owner of the note. Its authority to act should be shown by an agency agreement. Of course, if the owner is unknown, MERS cannot show that it is an authorized agent of the owner.
RULES OF EVIDENCE – A PRACTICAL PROBLEM
This structure also possesses practical evidentiary problems where
the party asserting a right to foreclose must be able to show a
default. Once again, Judge Bufford has addressed this issue. At In re
Vargas, 396 B.R. at 517-19. Judge Bufford made a finding that the
witness called to testify as to debt and default was incompetent. All
the witness could testify was that he had looked at the MERS
computerized records. The witness was unable to satisfy the
requirements of the Federal Rules of Evidence, particularly Rule 803,
as applied to computerized records in the Ninth Circuit. See id. at
517-20. The low level employee could really only testify that
the MERS screen shot he reviewed reflected a default. That really is
not much in the way of evidence, and not nearly enough to get around
the hearsay rule.
FORECLOSURE OR RELIEF FROM STAY
In a foreclosure proceeding in a judicial foreclosure state, or a
request for injunctive relief in a non-judicial foreclosure state, or
in a motion for relief proceeding in a bankruptcy court, the courts are
dealing with and writing about the problems very frequently.
In many if not almost all cases, the party seeking to
exercise the rights of the creditor will be a servicing company.
Servicing companies will be asserting the rights of their alleged
principal, the note holder, which is, again, often going to be a
trustee for a securitization package. The mortgage holder or
beneficiary under the deed of trust will, again, very often be MERS.
Even before reaching the practical problem of debt and
default, mentioned above, the moving party must show that it holds the
note or (1) that it is an agent of the holder and that (2) the holder
remains the holder. In addition, the owner of the note, if different
from the holder, must join in the motion.
Some states, like Texas, have passed statutes that allow
servicing companies to act in foreclosure proceedings as a statutorily
recognized agent of the noteholder. See, e.g., Tex. Prop. Code
§51.0001. However, that statute refers to the servicer as the last
entity to whom the debtor has been instructed to make payments. This
status is certainly open to challenge. The statute certainly provides
nothing more than prima facie evidence of the ability of the servicer
to act. If challenged, the servicing agent must show that the last
entity to communicate instructions to the debtor is still the holder of
the note. See, e.g., HSBC Bank, N.A. v. Valentin, 2l N.Y.
Misc. 3d 1123(A), 2008 WL 4764816 (Table) (N.Y. Sup.), Nov. 3, 2008. In
addition, such a statute does not control in federal court where Fed.
R. Civ. P. 17 and 19 (and Fed. R. Bankr. P. 7017 and 7019) apply.
SOME RECENT CASE LAW
These cases are arranged by state, for no particular reason.
Massachusetts
In re Schwartz, 366 B.R.265 (Bankr. D. Mass. 2007)
Schwartz concerns a Motion for Relief to pursue an eviction. Movant
asserted that the property had been foreclosed upon prior to the date
of the bankruptcy petition. The pro se debtor asserted that the Movant
was required to show that it had authority to conduct the sale. Movant,
and “the party which appears to be the current mortgagee…” provided
documents for the court to review, but did not ask for an evidentiary
hearing. Judge Rosenthal sifted through the documents and found that
the Movant and the current mortgagee had failed to prove that the foreclosure was properly conducted.
Specifically, Judge Rosenthal found that there was no
evidence of a proper assignment of the mortgage prior to foreclosure.
However, at footnote 5, Id. at 268, the Court also finds that there is
no evidence that the note itself was assigned and no evidence as to who
the current holder might be.
Nosek v. Ameriquest Mortgage Company (In re Nosek), 286 Br. 374 (Bankr D Mass. 2008).
Almost a year to the day after Schwartz was signed, Judge Rosenthal
issued a second opinion. This is an opinion on an order to show cause.
Judge Rosenthal specifically found that, although the note and mortgage
involved in the case had been transferred from the originator to
another party within five days of closing, during the five years in
which the chapter 13 proceeding was pending, the note and mortgage and
associated claims had been prosecuted by Ameriquest which has
represented itself to be the holder of the note and the mortgage. Not
until September of 2007 did Ameriquest notify the Court that it was
merely the servicer. In fact, only after the chapter 13 bankruptcy had
been pending for about three years was there even an assignment of the
servicing rights. Id. at 378.
Because these misrepresentations were not simple mistakes:
as the Court has noted on more than one occasion, those parties who do
not hold the note of mortgage do not service the mortgage do not have
standing to pursue motions for leave or other actions arising form the
mortgage obligation. Id at 380.
As a result, the Court sanctioned the local law firm that
had been prosecuting the claim $25,000. It sanctioned a partner at that
firm an additional $25,000. Then the Court sanctioned the national law
firm involved $100,000 and ultimately sanctioned Wells Fargo $250,000. Id. at 382-386.
In re Hayes, 393 B.R. 259 (Bankr. D. Mass. 2008).
Like Judge Rosenthal, Judge Feeney has attacked the problem of
standing and authority head on. She has also held that standing must be
established before either a claim can be allowed or a motion for relief
be granted.
Ohio
In re Foreclosure Cases, 521 F.Supp. 2d (S.D. Ohio 2007).
Perhaps the District Court’s orders in the foreclosure cases in Ohio
have received the most press of any of these opinions. Relying almost
exclusively on standing, the Judge Rose has determined that a
foreclosing party must show standing. “[I]n a foreclosure action, the
plaintiff must show that it is the holder of the note and the mortgage
at the time that the complaint was filed.” Id. at 653.
Judge Rose instructed the parties involved that the willful
failure of the movants to comply with the general orders of the Court
would in the future result in immediate dismissal of foreclosure actions.
Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL 111227 (S.D. Ohio) January 8, 2008.
In Steele, Judge Abel followed the lead of Judge Rose and found that
Deutsche Bank had filed evidence in support of its motion for default
judgment indicating that MERS was the mortgage holder. There was not
sufficient evidence to support the claim that Deutsche Bank was the
owner and holder of the note as of that date. Following In re
Foreclosure Cases, 2007 WL 456586, the Court held that summary
judgment would be denied “until such time as Deutsche Bank was able to
offer evidence showing, by a preponderance of evidence, that it owned
the note and mortgage when the complaint was filed.” 2008 WL 111227 at 2. Deutsche Bank was given twenty-one days to comply. Id.
Illinois
U.S. Bank, N.A. v. Cook, 2009 WL 35286 (N.D. Ill. January 6, 2009).
Not all federal district judges are as concerned with the issues
surrounding the transfer of notes and mortgages. Cook is a very pro
lender case and, in an order granting a motion for summary judgment,
the Court found that Cook had shown no “countervailing evidence to
create a genuine issue of facts.” Id. at 3. In fact, a review of the
evidence submitted by U.S. Bank showed only that it was the alleged
trustee of the securitization pool. U.S. Bank relied exclusively on the
“pooling and serving agreement” to show that it was the holder of the
note. Id.
Under UCC Article 3, the evidence presented in Cook was clearly insufficient.
New York
HSBC Bank USA, N.A. v. Valentin, 21 Misc. 3D 1124(A), 2008 WL 4764816 (Table) (N.Y. Sup.) November 3, 2008.
In Valentin, the New York court found that, even though given an
opportunity to, HSBC did not show the ownership of debt and mortgage.
The complaint was dismissed with prejudice and the “notice of pendency”
against the property was canceled.
Note that the Valentin case does not involve some sort of
ambush. The Court gave every HSBC every opportunity to cure the defects
the Court perceived in the pleadings.
California
In re Vargas, 396 B.R. 511 (Bankr. C.D. Cal. 2008)
and
In re Hwang, 396 B.R. 757 (Bankr. C.D. Cal. 2008)
These two opinions by Judge Bufford have been discussed above. Judge
Bufford carefully explores the related issues of standing and ownership
under both federal and California law.
Texas
In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008)
and
In re Gilbreath, 395 B.R. 356 (Bankr. S.D. Tex. 2008)
These two recent opinions by Judge Jeff Bohm are not really on
point, but illustrate another thread of cases running through the
issues of motions for relief from stay in bankruptcy court and the
sloppiness of loan servicing agencies. Both of these cases involve
motions for relief that were not based upon fact but upon mistakes by
servicing agencies. Both opinions deal with the issue of sanctions and,
put simply, both cases illustrate that Judge Bohm (and perhaps other
members of the bankruptcy bench in the Southern District of Texas) are
going to be very strict about motions for relief in consumer cases.
SUMMARY
The cases cited illustrate enormous problems in the loan servicing industry. These
problems arise in the context of securitization and illustrate the
difficulty of determining the name of the holder, the assignee of the
mortgage, and the parties with both the legal right under Article 3 and
the standing under the Constitution to enforce notes, whether in state
court or federal court.
Interestingly, with the exception of Judge Bufford and a few other judges, there
has been less than adequate focus upon the UCC title issues. The next
round of cases may and should focus upon the title to debt instrument. The person seeking to enforce the note must show that:
(1) It is the holder of t his note original by transfer, with all necessary rounds;
(2) It had possession of the note before it was lost;
(3) If it can show that title to the note runs to it, but the original
is lost or destroyed, the holder must be prepared to post a bond;
(4) If the person seeking to enforce is an agent, it must show its
agency status and that its principal is the holder of the note (and
meets the above requirements).
Then, and only then, do the issues of evidence of debt and default and assignment of mortgage rights become relevant.
PREV
by filing a lawsuit against Bank of New York & Saxon Mtg Services,
the foreclosing entities. On 11/24/08 I served the foreclosing
attorneys with formal discovery which included all your
interrogatories, requests for admissions and requests for the
production of documents. According to NH law they had 30 days to
comply, before the 30 days were up they requested and received an
extension of 30 days which ran out on 1/24/09. I have heard nothing,
nor received any correspondence whatsoever. It seems as you have said
many times, that they don’t want to come to the fight, even with a
lowly pro se litigant like myself. According to NH Rules of Civil
Procedure my options would include a motion to compel, or a motion for
conditional default. Do you recommend that I go forward aggressively
and try to end the case, or file a quiet title action? Or should I just
stop right here? My concern if I were to stop would be that they would
be able to come back and refile a foreclosure acion as my ultimate goal
would be to remove them completely from county records and own the
property free and clear. Obviously the foreclosing party does not own
or hold the note or I would have gotten a copy by now. Also, this loan
was securitized. Any suggestions would be appreciated. Also, thanks for
all the hard work that you’ve put into the Foreclosure Defense
Institute, along with Brad. You’ve not only helped me save my home, but
I’d venture to say, thousands of others.
dave // February 19, 2009 at 6:57 PM
my assignment of mortgage purports fdic as conservator for superior bank sells… effective dec 31, 2001 to lasallle
problem with that is superior bank sold the loan to lasalle eff july 33, 1998 according to itts pooling & service agreement, they nevered recorded that assignment, isn’t the fdic bogus fraudper se, becaus eit purports a sale that never happened and the fdic had to mortgage to sell lasalle?
Jake // February 19, 2009 at 10:22 PM
This post is epic. Excellent walk-through the issues and examination of case-law. Thanks for contributing.