Bankruptcy Real Estate Insight –
A Chapter 7 trustee objected to the proof of claim filed by a downstream assignee of a lost mortgage note. The trustee sought both to reject the claim and to avoid the mortgage (so that he could preserve the mortgage lien for the benefit of the estate). The bankruptcy court held for the trustee with respect to the note and for the mortgagee with respect to the right to enforce the mortgage. Both parties appealed.
The debtor acquired property for a purchase price of $1.00 plus assumption of all encumbrances, including a mortgage given by seller to the trustee of a real estate trust (Hansbury). The debtor did not incur any direct liability to Hansbury.
Hansbury subsequently assigned the note and mortgage to another party (CPIC). Hansbury had lost the note, so he gave CPIC (1) an assignment of the mortgage, (2) a lost note affidavit with a copy of the note, and (3) an allonge transferring rights into the note. The lost note affidavit had typical representations that a full and complete copy of the note was attached, Hansbury was the holder of the note (which had been lost but had not been transferred or discharged), the outstanding balance, and the consideration paid by Hansbury for the note and mortgage. CPIC in turn assigned its rights under the Murphy note and mortgage to another trustee of a trust (Green) as security for a loan.
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