Deutsche Bank Natl. Trust Co. v. Vasquez | NYSC Judge Adams reverses his own prior decision in a nine page decision on a motion to Reargue

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Deutsche Bank Natl. Trust Co. v. Vasquez | NYSC Judge Adams reversed his own prior decision, acknowledged that he misapprehended the controlling principles of law

Deutsche Bank Natl. Trust Co. v. Vasquez | NYSC Judge Adams reversed his own prior decision, acknowledged that he misapprehended the controlling principles of law

Via: Atty Brian M. Levine

SUPREME COURT – STATE OF NEW YORK
Present:
HON. THOMAS A. ADAMS.
Supreme Court Justice

DEUTSCHE BANK NATIONAL TRUST COMPANY AS
TRUSTEE FOR THE REGISTERED HOLDERS OF
MORGAN STANLEY ABS CAPITAL I INC. TRUST
2007-HE7 MORTGAGE PASS- THROUGH CERTIFICATES,
SERIES 2007- HE7
Plaintiff (s) ,

-against-

NELSON VASQUEZ, EDIS VASQUEZ, PETRO, INC.,
COMMISSIONERS OF THE STATE INSURACE FUN,
“JOHN DOE #1” through “JOHN DOE #12” et al,
Defendant (s) .

Motion by defendants Nelson and Edis Vasquez pursuant to CPLR 2221 for reargument
of this court’ s order dated September 7 2011 which denied defendants’ application to vacate
a default in timely answering the complaint is granted, and upon reargument the prior order is
vacated and the motion is granted and defendants’ default is excused and defendants ‘ proposed
answer annexed to the original moving papers as Exhibit “F” is deemed timely served.

This action in foreclosure is brought by plaintiff Deutsche Bank National Trust
Company as Trustee for the Registered Holders of Morgan Stanley ABS Capital I Inc. , Trust
2007-HE7, Mortgage Pass Through Certificates, Series 2007-HE7. The plaintiff Trust holds
securities backed by mortgages, one of which secures the subject property located in
Hempstead, New York, at 664 Wilis Street. The property was purchased by defendants
Nelson Vasquez and Edis Vasquez in 2006, and was originally encumbered by a mortgage in
the sum of$435 100.00 in favor lender New Century Mortgage Corporation (New Century).

Acting as nominee for New Century, Mortgage Electronic Registration Systems, Inc.
(hereafter MERS) recorded the mortgage in January of2007 with the Nassau County Clerk, and
on November 16, 2009, again acting as nominee for New Century, electronically assigned the
mortgage to the plaintiff Trust. The MERS signature affixed to the Assignment is dated January
2011. The County Clerk recording receipt for the Assignment is dated March 30, 2011. The
first default in payment occurred September 1 2010.
[* 1]

Regarding the authority ofthe nominee MERS, the Mortgage states:

MERS” is Mortgage Electronic Registration Systems, Inc. MERS is a
separate corporation that is acting solely as nominee for Lender and
Lender s successors and assigns. . . FOR PURPOSES OF RECORDING
THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD (italic
emphasis supplied).

Defendants defaulted in timely answering the complaint, and on the prior application
sought leave to vacate their default and serve a late answer. By order dated September 7, 2011
this court denied the motion holding that defendants failed to establish a reasonable excuse for
the default and failed to offer a meritorious defense. They now seek reargument.

The motion for reargument is designed to afford a part “an opportunity to establish that
the court overlooked or misapprehended relevant facts or misapplied (a) controlling principle
of law (Foley v. Roche 68 AD2d 558 567 (Ist Dept 1979)).

As this court has overlooked a principle of law, which is discussed below, the motion for
reargument is granted and the merits of the prior motion are examined.

When moving to extend the time to answer or to compel the acceptance of an untimely
answer, defendants must establish a reasonable excuse for the default and demonstrate a
meritorious defense to the action (Maspeth Federal Sav. and Loan Assoc. v. McGown
AD3d 890, 891 (2d Dept 2010)). On the prior motion defendants asserted “law office failure
to excuse the delay in serving an answer, and as a proposed meritorious defense, asserted interalia
that plaintiff lacked standing to bring this action, as the Trust was not an assignee or a
holder of the Mortgage Note at the time this action was commenced.

DISCUSSION – STANDING

It is well established that “foreclosure of a mortgage may not be brought by one who has
no title to it and absent transfer of the debt, the assignment of the mortgage is a nullity” (Kluge
v. Fugazy, 145 AD2d 537, 538 (2d Dept 1988)). In answer to defendants’ prior motion , the
plaintiff Trust for the first time produced a copy of the Adjustable Rate Note dated December
2006 by which defendants Nelson and Edis Vasquez promised to pay $435 100.00 “to the
order” of the New Century Mortgage Corporation, the Lender. Plaintiff produced only a copy
the Note which is not indorsed, either to plaintiff or in blank, and thus has not been negotiated.
Negotiation is necessary to render plaintiff a “holder” as defined by the Uniform Commercial
Code.

At the outset, it us useful to review the governing statutes for the rules of transfer
regarding negotiable instruments. Pursuant to UCC 9 3-202 negotiation is defined as the “the
transfer of an instrument in such form that the transferee becomes a holder . If the instrument
is payable “to order , as is the Note here, it is negotiated “by delivery with any necessary
indorsement”. Only a “bearer” instrument can be negotiated by delivery without an indorsement
(UCC 9 3-202).

The types of indorsements are governed by UCC 9 3-204, and include “special”
indorsements and “blank” indorsements. A special indorsement specifies the person “to whom
or to whose order” the instrument is payable (UCC 93-204(1)). In contrast, an indorsement in
blank “specifies no particular indorsee and may consist of a mere signature” (UCC 93-204(2)).
The Note offered in support by plaintiff was payable “to the order” of New Century and
was not indorsed, neither specially nor in blank. Accordingly it does not evidence the requisite
negotiation by the lender and thus does not establish a prima facie showing that the plaintiff
Trust is a “holder” of the Note.

Inadequate documentation raises serious issues of public policy and it has been said that
it is “of the utmost importance that the attorneys practicing before (the) Court maintain integrity
in preparing the documentation of. . . mortgage obligations” as doing otherwise “causes risk
that’ (t )he debtor and his/her family may lose their home , and the debtor and other creditors may
lose significant equity in foreclosure.
‘ “
(In re Obasi WL 6336153, * 8 (Bkrtcy SDNY 2011)).
Real Property Actions and Proceedings Law practice commentary explains:

submissions of faulty documentation, unauthorized or missing assignments of notes
and/or mortgages, improper notarizations, conflicts of interest and inadequate review
of loan documentation by so-called robo-signers, prompted Chief Judge Lippman to
state that “(w)e cannot allow the courts in New York State to stand by idly and be
part to what we know is a deeply flawed process, especially when that process
involves basic human needs–such as a family home–during this period of economic
crisis,” which resulted in the issuance on October 20, 2010 by the Office of Court
Administration of Administrative Order 548/10 requiring counsel in residential
foreclosures to fie an affirmation certifying that counsel has taken reasonable steps
including inquiry with lenders and careful review of papers fied to verify the
accuracy of documentation

(Rudolph de Winter, Practice Commentaries, RP APL 9 1301 , 2011).

DOCUMENTATION

A foreclosure plaintiff has the requisite standing to commence a mortgage foreclosure
action if “it is both the holder or assignee of the subject mortgage and the holder or assignee
of the underlying note at the time the action is commenced”
(Bank of New York v. Silverberg,
86 AD3d 274, 279 (2d Dept.20 11) (emphasis supplied)). In this action plaintiff does not allege
that it is an assignee ofthe Note, but instead, as previously referenced, produced a copy of the
original Note between defendants and New Century. They argue that delivery of the unindorsed
Note was sufficient to confer standing. On the prior motion the court overlooked the necessity
of proper indorsement required to transfer ownership and render the transferee a holder.
The requirement of negotiation to effect a legal transfer and establish standing is
fundamental and well recognized, if not always explicitly stated. (compare First Trust Nat.
Assoc. v. Meisels 234 AD2d 414 (2d Dept 1996) with HSBC Bank USA v. Hernandez
AD3d , 2012 WL 579706 (2d Dept 2012)). Standing is established where the plaintiff
both the assignee ofthe mortgage and, by indorsement, the holder ofthe underlying note at the
time the foreclosure action was commenced” (First Trust Nat. Assoc. v. Meisels 234 AD2d 414
supra). When the note secured by the mortgage is a negotiable instrument it “requires
indorsement on the instrument” or “on a paper so firmly affixed thereto as to become a part
thereof’ in order to effectuate a valid assignment of the instrument
(Slutsky v. Blooming Grove

Inn 147 AD2d 208, 212 (2nd Dept. , 1989), cf, UCC 3-202(3), (4); see also, HSBC Bank USA
Nat. Assoc. v. Miler 26 Misc3d 407 (Sup. Ct. Sullvan County 2009); HSBC Bank USA, Nat.
Assoc. v. Miler 26 Misc.3d 407, 412 (Sup. Ct. Sullvan County 2009)). So vital is the
indorsement, as a foundation of negotiable instruments law, that “mere possession of a
promissory note endorsed in blank Gust like a check) provides presumptive ownership of that
note by the current holder (Deutsche Bank Nat. Trust Co. v. Pietranico, 33 Misc.3d 528, 545
(Sup. Ct. Suffolk County 2011)). The indorsement must predate commencement of the
foreclosure action. (HSBC Bank USA, Nat. Assoc. v. Miler, supra: Deutsche Bank Nat. Trust
Co. v. McRae, 27 Misc.3d 247, 251 (Sup. Ct. Allegany County 2010)).

In Deutsche Bank Nat. Trust Co. v. McRae, the plaintiff, to establish standing,
submitted an additional copy of a note which was different from the one attached to the
complaint. The court rejected it, stating:

Plaintiff submitted a second copy of the Note, which for the first time
contained … an endorsement in blank by First Franklin Financial
Corporation. The endorsement in blank, however, is undated. In stark
contrast, the copy of the Note attached to the complaint bears no such
endorsements. Obviously, the endorsements . post-date the
commencement of this case. .. and are ineffective.

(Deutsche Bank Nat. Trust Co. v. McRae, supra (emphasis original)).
Documentation often has been addressed in the context of an application in bankptcy
court to lift the automatic stay of a foreclosure, where state substantive law governs the inquiry
(In re Escobar 457 BR 229 239 (Bkrcy EDNY 2011)). Relying upon Bank of New York
Silverberg (86 AD3d 274 supra)), Escobar required an assignment ofthe note to the plaintiffs
in banptcy or a properly indorsed note evidencing negotiation as proof of status as owner or
holder of the note at issue (In re Escobar 457 BR 229, 239 (Bkrcy EDNY 2011), supra).
Escobar held that the movants “met this burden of proofthrough their uncontroverted affidavit
testimony that they are holders of the Notes by virtue of possession of the original notes
executed with endorsements in blank. . . (In re Escobar, supra at p 241). In re Agard held
that under New York law the movant can prove holder status “by providing the Court with proof
of a written assignment of the Note, or by demonstrating that (the movant) has physical
possession of the Note endorsed over to it” (In re Agard, 444 BR 231 , 246 (Bkrcy EDNY
2011)).

The court finds that absence of an indorsement on the subject Note constitutes a
meritorious defense regarding plaintiff s standing, and now turns to the reasonable excuse
required of defendants for their default. On the prior motion, counsel for defendants asserted
that he believed he had mailed the answer but was “confused” on that issue, and had not done
so.

Law office failure, in the discretion ofthe court, may be considered a reasonable excuse.
Indeed, in the banptcy context, which is equitable in nature, the equitable powers ofthe court
may be called upon (Deutsche Bank Nat. Trust Co. v. Luden 91 AD3d 701 (2d Dept 2012)).
In Luden the Second Deparment found circumstances similar to those here acceptable where
the attorney prepared an answer which the defendants signed ” but, unbeknownst to the
defendants, the attorney failed to fie and serve the answer unti some two months later (supra).

In the exercise of this court’ s discretion and in light of the proposed defense regarding
standing, and the further issues discussed below, this court is prompted to accept the proffered
excuse, and not sit “idly by” in this foreclosure action in which the defendants have touched
upon serious issues of public policy and standing. Accordingly, the prior order is vacated and
upon reargument the proposed answer is deemed timely served nunc pro tunc. Plaintiff shall
have thirt days after service of a copy of this order to respond to counterclaims.

Also influencing this court’ s determination on reargument are the repeated issues
regarding standing which revolve around proper assignments, particularly of mortgage notes
which have ensued following creation of the MERS system and the birth of mortgage backed
securities.

MERS

Courts have struggled with the MERS system since it was created in 1993. In Matter of
MERSCORP v. Romaine (8 NY3d 90, 96 (2006)), the Court of Appeals addressed the first
MERS issue and held that the Suffolk County Clerk was obligated to record and index MERS
mortgages, assignments and discharges thereof. The court touched upon MERS history, in
relevant part as follows:

In 1993 , the MERS system was created by several large participants
in the real estate mortgage industry to track ownership interests in
residential mortgages. Mortgage lenders and other entities, known as
MERS members, subscribe to the MERS system and pay annual fees for
the electronic processing and tracking of ownership and transfers of
mortgages. Members contractually agree to appoint MERS to act as their
common agent on all mortgages they register in the MERS system.

(Matter of MERSCORP. v. Romaine, 8 NY3d 90, 96 (2006)). The process dispenses with
public recording of interim transfers; “instead they are tracked electronically in the MERS’
private system (Matter of MERSCORP. v. Romaine, 8 NY3d 90, 96 (2006)).

In other words, MERS is privately retained by financial institution to keep records of
secondary market mortgage transfers displacing the official public record keepers, e. , the
various state County Clerks. MERS’ records, unlike official public documents , are not entitled
to a presumption of regularity (see, Prince, Richardson on Evidence (Farrell, 11th ed.) 9
120), nor are they transparent to non members or the mortgagor. MERS has no ownership
interest in the principal or interest ofthe various holdings, cannot collect interest or principal
and generally remains listed as nominee and/or mortgagee for the original lender in the public
record for the life of the mortgage regardless of the number of assignments in the secondary
market. MERS claims authority to assign mortgages, and to foreclose upon a default, based
upon the agreements between it and its clients as well as the original mortgagor (see in general
In re Agard, 444 B.R. 231 , 248-249 (Bkrcy EDNY 2011), and cases cited therein).

Much judicial scrutiny has been give to the impact and effect MERS private
agreements on the legal sphere of foreclosure, with judicial opinions ranging from full
recognition ofMERS standing to foreclose on properties in default , and authority to the assign
not only mortgages and servicer agreements, but also promissory notes (see Deutsche BankNat.
Trust Co. v. Pietranico, 33 Misc.3d 528, 545 (Sup. Ct. Suffolk Cty. 2011)).

In high contrast is a line of cases represented by In re Agard (444 B.R. 231, 245-46
(Ban.E.D.N. Y.20 11)) where MERS is limited to recording mortgage assignents as nominee
of the original lender “with no other legal power or standing

Indeed, in a terse description the court found the allegations of the parties and
documentation they provided at odds, to wit:

it is notable in this case that the Assignment of Mortgage was by MERS
as nominee for First Franklin, the original lender.

By the Movant’s and MERS’s own admission, at the time the assignment
was effectuated, First Franklin no longer held any interest in the Note.

The documentation provided to the Court in this case… is stunningly
inconsistent with what the parties define as the facts of this case.

(In re Agard 444 B.R. 231 , 254 supra). Agard is informative for the breadth of authority
it reviews in considering the issues generated by the MERS system, some presaged by then
Chief Judge Judith Kaye and Judge Ciparick in MERSCORP, Inc. v. Romaine ( NY3d 90
(2006)). Agard rejected the parties contention that the Note and Mortgage traveled together in
all transfers effectuated by MERS, stating:

By MERS’s own account, the Note in this case was transferred among its
members, while the Mortgage remained in MERS’s name. MERS admits
that the very foundation of its business model as described herein requires
that the Note and Mortgage travel on divergent paths. Because the Note and
Mortgage did not travel together, Movant must prove not only that it is
acting on behalf of a valid assignee of the Note, but also that it is acting on
behalf of the valid assignee of the Mortgage.

(In re Agard, 444 B.R. 231 , 247, supra).

As noted, The Court of Appeals of the State of New York held that the Suffolk County
Clerk was “compelled to record and index mortgages, assignments of mortgage and discharges
of mortgage” naming MERS “the lender s nominee or mortgagee of record” (MERSCORP, Inc.
v. Romaine, 8 NY3d 90 (2006)). Judge Ciparick, concurring, sought “to highlight the narow
breadth” of the holding, to frame those issues not decided and identify policy concerns needing
attention, stating:

if MERS succeeds in its goal of monopolizing the mortgage nominee
market, it wil have effectively usurped the role of the county clerk that
inevitably would result in a county’s recording fee revenue being
substantially diverted to a private entity. . . MERS’ s success will arguably
detract from the amount of public data available concerning mortgage
ownership. . . that are used to analyze trends in lending practices. .. once
an assignment of the mortgage is made, it can be difficult, if not
impossible, for a homeowner to find out the true identity of the loan holder
(MERSCORP, Inc. v. Romaine 8 NY3d 90, 100 supra (Ciparick, 1. concurring)).

In a prescient partial dissent, former Chief Judge Judith Kaye, emphasized the very
foundation and purpose of the Recording Act, which is to “protect the rights of innocent
purchasers… without knowledge of prior encumbrances and to establish a public record which
would furnish potential purchasers with notice. . . of previous conveyances . She noted the
incongruity presented between the business and public interests, one a system “developed as
a tool for banks and title companies” and the other “venerable real property laws regulating
the market” (MERSCORP, Inc. v. Romaine 8 NY3d 90, 101 supra (Kaye, J. dissenting)
(internal quotations deleted)).

Judge Kay identified important issues which remained unresolved such as those
concerning the underlying validity of the MERS mortgage instrument-in particular, whether
its failure to transfer beneficial interest renders it a nullity under real property law, whether
violates the prohibition against separating the note from the mortgage, and whether MERS has
standing to foreclose on a mortgage. . . (MERSCORP, Inc. v. Romaine. supra at p 102 nl).

The Second Department had cause recently to address one of those issues, whether
MERS had authority to assign the power to foreclose. In Bank of New York v. Silverberg (86
AD3d 274 (2d Dept 2011)), where a consolidation agreement gave MERS the right to assign
the mortgages but did not “specifically” give it the right to assign the underlying notes, the
court held that “because MERS was never the lawful holder or assignee of the notes. . . MERS
was without authority to assign the power to foreclose to the plaintiff’ (Bank of New York
Silverberg, 86 AD3d 274 281 283 (2d Dept 2011)). Regarding the impact of this failure of
documentation on MERS recording of “approximately 60 million mortgage loans , the court
stated that it was “mindful” of the possible impact of its decision on the mortgage industry, yet
notwithstanding such impact,

the law must not yield to expediency and the convenience of lending
institutions. Proper procedures must be followed to ensure the reliability of
the chain of ownership, to secure the dependable transfer of property, and
to assure the enforcement of the rules that govern real property.

(Bank of New York v. Silverberg, 86 AD3d 274 283 supra).

The court notes that it has not overlooked plaintiff s contention that this motion is
untimely. The court clerk’ s return of defendants ‘ timely motion for re argument for correction
of a scrivener s error using January 2011 when January 2012 was intended and correcting the
return date is deemed timely.

Dated: MAY 08 2012
ENTERED
MAY 11 2012
NASSAU COUNTY
COUNTY CLERK’S OFFICE
4924-11+. wpd
[* 9]

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