A chapter 11 trustee sought a judgment that a series of mortgages were unenforceable as a matter of law because the written assignments transferring them to the current mortgagees were insufficient. If the trustee prevailed, the mortgage loans would be transformed from secured to unsecured claims.
The debtor bought, renovated and then sold or rented single-family homes. At the time of its bankruptcy filing it owned over 700 properties valued at more than $18 million. Originally the debtor financed its operations by soliciting money from hundreds of individual investors. Later it obtained financing through commercial lenders that involved consolidating individual investor notes in combination with new advances.
Each individual investor held a note that was secured by a mortgage. In connection with consolidation of some of these notes, the individual investor executed a written assignment of its mortgage to a commercial lender that included the following language: “[T]he assignor … hereby assigns unto [the assignee] … a certain mortgage made by [debtor] … together with the bond or obligation described in said mortgage ….” The commercial lender both acquired the existing notes and mortgages and advanced new money, as evidenced by a consolidated note secured by a consolidated mortgage. The individual investors did not indorse or physically deliver the underlying notes.