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In Re: LIPPOLD | NY Bankruptcy Court Delivers TKO to MERS, US BANK

In Re: LIPPOLD | NY Bankruptcy Court Delivers TKO to MERS, US BANK


IN RE LIPPOLD

In re: MARK RICHARD LIPPOLD, Chapter 7, Debtor.

Case No. 11-12300 (MG).

United States Bankruptcy Court, S.D. New York.

September 6, 2011.

A P P E A R A N C E S:
SHELDON MAY & ASSOCIATES, P.C.

Attorneys for U.S. Bank, N.A.
255 Merrick Road
Rockville Centre, New York 11570
By: Brian P. Nelson, Esq.

MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE

MEMORANDUM OPINION AND ORDER DENYING MOTION FOR
RELIEF FROM THE AUTOMATIC STAY

In this chapter 7 case of debtor Mark Richard Lippold (the “Debtor”), U.S. Bank National Association (“U.S. Bank”), as trustee, on behalf of the holders of the Asset Backed Securities Corporation Home Equity Loan Trust (the “Trust”), Series AEG 2006-HE1 Asset Backed Pass-Through Certificates, Series AEG 2006-HEI, moves to vacate the automatic stay pursuant to section 362(d)(2) of the Bankruptcy Code to permit it to proceed with foreclosure of the Debtor’s primary residence (the “Property”) located at 3171 Fairmont Avenue, Bronx, NY 10465 (the “Motion”).1 (ECF Doc. #16.)

The issues discussed in this Opinion are neither novel nor complex, but highlight a well-publicized and persistent problem with inadequate mortgage foreclosure documentation. The failure to properly document the transfer of the note and mortgage raises the question whether the movant has standing to seek relief—here, an order vacating the automatic stay, but, if successful here, then a judgment of foreclosure in state court. Neither the Debtor’s counsel nor the Chapter 7 trustee filed an objection to the Motion. But the lack of objection does not relieve U.S. Bank from the burden of establishing its right to relief. The Court denies the Motion because U.S. Bank has not established its standing for stay relief.

BACKGROUND

On May 16, 2011, the Debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code (the “Petition”). (ECF Doc. #1.) The Debtor’s schedules disclose $352,617.00 in assets and $708,237.75 in liabilities. Schedule D shows the Property is encumbered by two mortgages, aggregating $461,616.00. Schedule A values the Property at only $350,000.00, admitting the Debtor’s lack of equity in the Property.2 The Debtor’s Statement of Intention states the Debtor’s intent to pursue a loan modification with respect to the Property.3

Aegis Funding Corporation (“Aegis”) was the original mortgage lender. The promissory note (the “Note”) names Aegis as the lender. The accompanying mortgage (the “Mortgage”) lists Mortgage Electronic Registration Systems, Inc. (“MERS”) as the mortgagee solely in its capacity as “nominee” for Aegis and its successors in interest. (Motion Ex. B, at 3.) The Mortgage further provides that MERS “holds only legal title to the rights granted by [Debtor] in [the Mortgage,]” and that “[f]or purposes of recording [the Mortgage],” MERS is the “mortgagee of record.” (Id. at 1, 3.) “MERS (as nominee for [Aegis] and [Aegis’s] successors and successors and assigns) has the right:

(A) to exercise any or all of those rights, including, but not limited to, the right to foreclose and sell the Property; and

(B) to take any action required of [Aegis] including, but not limited to, releasing and canceling [the Mortgage].”

(Id. at 3.)

The Note provides for the Debtor to pay Aegis principal in the amount of $344,000.00 plus interest. (Motion Ex. A.) Unlike the Mortgage, however, Aegis did not confer any rights in MERS with respect to the Note. (Id.)

The Motion is supported by a Corporate Assignment of Mortgage (the “Assignment”), whereby MERS, “as nominee for [Aegis] its successors and assigns at c/o [Select Portfolio Servicing,]” assigned to U.S. Bank, in its capacity as trustee of the Trust, the said Mortgage together with other evidence of indebtedness, said Mortgage having an original principal sum of $344,000.00 with interest, secured thereby, together with all moneys now owing or that may hereafter become due or owing in respect thereof, and the full benefit of all powers and of all the covenants and provisos therein contained, and the said Assignor hereby grants and conveys onto [U.S. Bank], [MERS’s] beneficial interest under the Mortgage.

(Motion Ex. C.)

The Assignment from MERS to U.S. Bank purports to transfer MERS’s rights in the Note; but it does not answer the question of what, if any, rights MERS has in the Note. At an August 30, 2011 hearing on the Motion (the “Hearing”), U.S. Bank’s counsel acknowledged that other than the Assignment, the record contains no evidence of U.S. Bank’s purported ownership of the Note.

DISCUSSION

A. U.S. Bank is Not a “Party in Interest” Under 11 U.S.C. § 362(d)(2)

Section 362(a) of the Bankruptcy Code provides an automatic stay on all litigation against the Debtor, as well as “any act to create, perfect, or enforce any lien against property of the estate.” 11 U.S.C. § 362(a). Under section 362(d)(2) of the Bankruptcy Code—the operative provision relied on by U.S. Bank in seeking relief—”[o]n request of a party in interest . . . the court shall grant relief from the stay . . . if—(A) the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization.” 11 U.S.C. § 362(d)(2) (emphasis added).

In In re Mims, 438 B.R. 52, 55 (Bankr. S.D.N.Y. 2010), this Court explained that the term “party in interest” is not defined in the Bankruptcy Code. Under Second Circuit law, however, “in order to invoke the court’s jurisdiction to obtain relief from the automatic stay, the moving party [must] be either a creditor or a debtor.” Id. (citing In re Comcoach, 698 F.2d 571, 573 (2d Cir. 1983)); see also Agard, 444 B.R. at 245. It follows that U.S. Bank must be a “creditor” to seek relief from the automatic stay.4 Mims, 438 B.R. at 55.

Section 101(10) of the Bankruptcy Code defines a “creditor,” in part, as an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” 11 U.S.C. § 101(10)(A) (emphasis added). A “claim” is a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, legal, equitable, secured or unsecured.” Id. § 101(5)(A) (emphasis added).

Despite the Bankruptcy Code’s broad definition of a “claim,” U.S. Bank “has not demonstrated its `right to payment’ because . . . it lacks the ability to seek the state law remedy of foreclosure.” Mims, 438 B.R. at 56 (citing Johnson v. Home State Bank, 501 U.S. 78, 81 (1991) (finding that a mortgage foreclosure was a “right to payment” against the debtor)).

B. U.S. Bank Lacks Standing to Foreclose on the Property

“Standing is a threshold issue for a court to resolve.” Agard, 444 B.R. at 245. State law governs the determination of property rights in a bankruptcy proceeding. See Butner v. United States, 440 U.S. 48, 54 (1979) (noting that absent an actual conflict with federal bankruptcy law, Congress “has generally left the determination of property rights in the assets of a bankrupt’s estate to state law”); In re Morton, 866 F.2d 561, 563 (2d Cir. 1989). Under New York law, a plaintiff has standing to commence a mortgage foreclosure action “where 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 N.Y. v. Silverberg, 926 N.Y.S.2d 532, 536 (2d Dept. 2011) (citing cases). “[F]oreclosure 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 A.D.2d 537, 538 (2d Dept. 1988) (citing cases); see also HSBC Bank USA, Nat. Ass’n v. Miller, 26 Misc.3d 407, 411-12 (N.Y. Sup. Ct., Sullivan County 2009).

While the transfer of the mortgage without the promissory note is a nullity, once a promissory note is transferred from assignor to assignee, “the mortgage passes as an incident to the note.” Id. at 537; see also In re Escobar, Nos. 11-71114-ast, 11-71135-ast, 2011 WL 3667550, at *9 (Bankr. E.D.N.Y. Aug. 22, 2011) (Trust, J.). An assignment of the note and mortgage can be effectuated by a written instrument or by physical transfer of the instrument from assignor to assignee. Mims, 438 B.R. at 56. In Mims, this Court held that the movant, Wells Fargo Bank, N.A. (“Wells Fargo”), failed to supply proof that it was the owner of a promissory note given as part of a home mortgage loan. Id. Wells Fargo could not show that the note was either physically delivered or assigned pursuant to a written agreement. Id. Wells Fargo supported its motion with a written assignment, but the document only assigned the mortgage, not the underlying debt. Id. at 56-57. Stay relief was denied—since Wells Fargo failed to prove it owned the note, it “failed to establish that it [had] standing to pursue its state law remedies with regard to the Mortgage and Property.” Id. at 57; see also Escobar, 2011 WL 3667550, at *8 (“[A] note or mortgage assignee must demonstrate rights to proceed under state law as against the property at issue to have bankruptcy standing.”) (emphasis added).

Furthermore, the facts of this case are remarkably similar to two cases decided after Mims. In Agard, U.S. Bank, through its servicer, moved for relief from the automatic stay. 444 B.R. at 237. U.S. Bank submitted (i) a note executed by the debtor as borrower, and First Franklin, a Division of Na. City Bank of In. (“First Franklin”), as lender, and (ii) a mortgage executed by the debtor listing First Franklin as lender, and MERS as nominee for First Franklin and its successors and assigns. Id. While MERS was named as a party to the mortgage, it was not a party to the note. Id. at 246. U.S. Bank supplied an assignment of mortgage listing MERS as nominee for First Franklin, as assignor, and U.S. Bank, in its capacity as trustee for a mortgage loan trust, as assignee. Id. Judge Grossman found that U.S. Bank failed to meet its burden of showing that it was the holder of the note by an assignment from First Franklin: MERS was “not a party to the Note” and no evidence was produced demonstrating MERS’s “authority to take any action with respect to the Note.” Id. at 246. Moreover, U.S. Bank did not establish that it retained physical possession of the note to evidence a valid transfer.5 Id.

More recently, in Silverberg, the Appellate Division for the Second Department held that since MERS was not the lawful holder of notes identified in a mortgage and note consolidation agreement, MERS did not have the authority to assign the power to foreclose. 926 N.Y.S.2d at 538. The borrowers had entered into two loan agreements with Countrywide Home Loans, Inc. (“Countrywide”) to purchase residential real property—each loan included a promissory note and a mortgage securing the borrowers’ obligations under the note. Id. at 533-34. The borrowers subsequently executed a consolidation agreement, merging the two notes and mortgages into one obligation in favor of MERS, as mortgagee and nominee of Countrywide. Id. at 534. But Countrywide alone was the named lender and note holder. Id. The consolidation agreement recited that MERS was “acting solely as a nominee for [Countrywide] and [Countrywide’s] successors and assigns. . . . For purposes of recording this agreement, MERS is the mortgagee of record.” Id. Countrywide was not a party to the consolidation agreement. Id. Several months later, MERS, as Countrywide’s nominee, assigned the consolidation agreement to the Bank of New York. Id. When the borrowers defaulted, the Bank of New York commenced a foreclosure action in state court. Id. On appeal, the Second Department concluded that while the consolidation agreement gave MERS the right to assign the mortgages, it did not give MERS the authority to transfer the underlying notes. Id. at 538. MERS’s authority, as “nominee,” was “limited to only those powers which were specifically conferred to it and authorized by the lender.” Id. Since MERS could not transfer the notes, any such assignment exceeded MERS’s authority as the lender’s nominee.6 Id.

In this case, the Mortgage transferred “those rights that are stated in [the Mortgage]” to MERS, solely as Aegis’s nominee, so that “MERS [holds] only legal title to the rights granted by [Debtor] in [the Mortgage].” (Motion Ex. B, at 3.) According to the Mortgage, MERS is the “mortgagee of record[,]” and has the right, inter alia, to foreclose on the Property. (Id. at 1, 3). This language mirrors the terms of the consolidation agreement in Silverberg. At the Hearing, U.S. Bank’s counsel conceded that the facts of this case were “on all fours” with Silverberg.

The language of the Assignment in this case purports to transfer both the Mortgage and the Note to U.S. Bank. But MERS, as the purported assignor, could not legally assign the Note; it only had legal rights with respect to the Mortgage. Aegis did not confer any rights on MERS in the Note—MERS is not a party to the Note nor is there any indication that MERS was authorized to take any action with respect to the Note. See Agard, 444 B.R. at 246. Thus, “assignment of the note[] [is] . . . beyond MERS’s authority as nominee or agent of the lender.” Silverberg, 926 N.Y.S.2d at 538. There is also no evidence in the record showing that U.S. Bank received physical delivery of the Note, or that U.S. Bank is in possession of the Note. Since U.S. Bank failed to “provide satisfactory proof of its status as the owner or holder of the note at issue,” see Escobar, 2011 WL 3667550, at *9, the Court concludes that U.S. Bank does not have standing to obtain stay relief.7

CONCLUSION

For the reasons explained above, U.S. Bank’s motion to lift the automatic stay is denied without prejudice.

IT IS SO ORDERED

Footnotes

1. As an initial matter, the identity of the movant is unclear. In the papers submitted with the Motion, the movant is referred to as either U.S. Bank or Select Portfolio Servicing, Inc. (“Select Portfolio Servicing”)—U.S. Bank’s servicer. For purposes of this Opinion, the Court shall refer to U.S. Bank as the movant. Even if Select Portfolio Servicing is the movant, it is well-established that a mortgage servicer has standing to seek relief from the automatic stay, see, e.g., In re Agard, 444 B.R. 231, 235 n.1 (Bankr. E.D.N.Y. 2011) (citing cases), presuming, however, that the servicer is acting on behalf of a lender that has standing to seek stay relief. Id.

2. U.S. Bank’s lift-stay worksheet (Motion Ex. E), see Local Rule 4001-1(c), lists the value of the Property as $450,000.00.

3. This case does not present the issue whether the same standing analysis should be applied if a debtor’s stated intention is to surrender the property. In such a case the mortgagee can also pretermit the standing analysis with a stipulation to lift the stay with the debtor and any chapter 7 or 13 trustee.The docket does not show that the Debtor ever sought to take advantage of this Court’s Loss Mitigation Program. See SOUTHERN DISTRICT OF NEW YORK LOSS MITIGATION PROGRAM PROCEDURES (available at www.nysb.uscourts.gov).

4. A creditor’s authorized agent, such as a loan servicer, may also seek stay relief. See supra n.1.

5. The Agard court nevertheless granted U.S. Bank’s motion to vacate the automatic stay—the court held that the Rooker-Feldman doctrine applied, barring the debtor’s challenge to U.S. Bank’s standing, because of an earlier state court determination that U.S. Bank was a secured creditor. 44 B.R. at 233-34. But Judge Grossman concluded “in all future cases which involve MERS, the moving party must show that it validly holds both the mortgage and the underlying note in order to prove standing before this Court.” Id. at 254.

6. In In re Veal, 450 B.R. 897 (9th Cir. B.A.P. 2011), the court’s ruling substantially mirrors this Court’s ruling in Mims as well as the legal principles stated in Agard and Silverberg—namely, that in order to have standing to obtain stay relief, the moving party must establish ownership or an interest in the note. Id. at 917. The Ninth Circuit Bankruptcy Appellate Panel addressed whether the party seeking stay relief “established its standing as a real party in interest to pursue [relief from the automatic stay].” Id. at 902. The Veal court stated “a party seeking stay relief need only establish that it has a colorable claim to enforce a right against property of the estate.” Id. at 914-15. In order to show a “colorable claim” against the property, the movant “had to show that it had some interest in the Note, either as a holder, as some other `person entitled to enforce [under applicable UCC Art. 3 law],’ or that it was someone who held some ownership or other interest in the Note.” Id. at 917. The court concluded that the movant lacked standing because:without any evidence tending to show it was a `person entitled to enforce’ the Note, or that it has an interest in the Note, [the movant] has shown no right to enforce the Mortgage securing the Note. Without these rights, [the movant] cannot make the threshold showing of a colorable claim to the Property that would give it prudential standing to seek stay relief or to qualify as a real party in interest.

Id. at 918.

7. U.S. Bank cannot argue that it has standing because the Mortgage states that MERS is the mortgagee of record for purposes of recording. (Motion Ex. B, at 1.) The Silverberg court rejected that very same argument— such language “cannot overcome the requirement that the foreclosing party be 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.” Silverberg, 926 N.Y.S.2d at 539. Also, since U.S. Bank offered no evidence that it owns any interest in the Note, by assignment, transfer or delivery, this case does not present the issue discussed in Escobar, 2011 WL 3667550, at *7, about the evidentiary threshold for lifting the automatic stay, leaving the issue for state court whether the evidence is sufficient to support granting a foreclosure judgment.

[ipaper docId=64175861 access_key=key-x82xy2m9rfqiduz0858 height=600 width=600 /]

© 2010-15 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.



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MERS VP | 27 Job Titles for Brian Burnett of IndyMac

MERS VP | 27 Job Titles for Brian Burnett of IndyMac


Brian Burnett has signed mortgage documents using the job titles listed below during the approximate same period of time. All of these were notarized in Travis County, Texas, where IndyMac Mortgage Services is located. IndyMac Mortgage Services is now a division of One West Bank.

A certified signer for Mortgage electronic Registration Systems, Inc. was authorized to sign on behalf of the affiliated mortgage entity that employed him. Burnett, for example, would have been authorized to sign as an officer of MERS, as nominee for IndyMac Bank.

MERS signers were never authorized to sign on behalf of all other lenders.

[ipaper docId=53758521 access_key=key-vakbq9sniymd894p23c height=600 width=600 /]

© 2010-15 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.



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The cautionary tale of Aegis Mortgage's bankruptcy – Aug. 17, 2007

The cautionary tale of Aegis Mortgage's bankruptcy – Aug. 17, 2007


Not Much Has Changed! What could we have learned?

The darker side of buyout firms

The case of Aegis Mortgage shows that when private equity loses a high-risk bet, ordinary employees are the ones who suffer, reports Fortune’s Katie Benner.

By Katie Benner, Fortune reporter
August 20 2007: 1:24 PM EDT

 

NEW YORK (Fortune) — Buyout firms like to present themselves as a can’t-fail combination of operational genius and financial support that can heal sick businesses and create thriving companies. But sometimes, as in the case of Aegis Mortgage, genius fails and bankruptcy is declared. The private investment firm Cerberus bought a controlling stake in the Houston-based mortgage lender in 1998, but despite an infusion of cash and talent, Aegis ceased operations on Monday, August 6. Now hundreds of employees have been laid off – all without health insurance. It’s a reminder that risky turnarounds can mean real pain for more than just investors raising questions about how Cerberus will treat other ailing companies it has purchased, notably Chrysler.

Aegis, which was founded in 1993, closed its mortgage production operations on August 6. Two days later, employees were warned that there would be layoffs within 60 days and that benefits would be terminated effective midnight August 10, according to Aegis employees. They were also told that earned paid-time off would not be paid out and that there would be no severance. When the layoffs came on Monday, August 13, 782 people out of 1,302 employees were fired. Those let go were shocked to find that they were not eligible for COBRA. While Federal law requires businesses with more than 20 employees to offer departing workers the chance to buy an extra 18 months of health insurance, it is only required for companies with an active benefit plan, and Aegis had terminated its plan days before. Moreover, Aegis admitted in its bankruptcy filing that it didn’t have the money to pay employee benefits anyway.

Those actions have some up in arms. Richard Thompson, who co-founded Aegis in 1993, is asking Cerberus and Aegis to take care of its employees. “As a founder of Aegis, one of our stated corporate values was to always do the right thing,” says Thompson, who was CEO until October 2006, when Cerberus ousted him. “The right thing is to reinstate the company’s health insurance policy for the thousands of families affected by their actions last week.”

Thompson, of course, has reason to dislike Cerberus. Not only was he fired, he is suing Cerberus for mismanaging the company and destroying its chance to go public. Other observers note that many companies that go bankrupt leave their employees stranded. John Challenger, head of executive outplacement firm Challenger Gray Christmas, says: “Creditors will line up, so the company is taking these harsh actions to save what they can. You’re going to see lots of fighting over the company assets.” In its bankruptcy filing, Aegis said it had $625 million in debt and owed banks including Goldman Sachs, Deutsche Bank, Merrill Lynch and Morgan Stanley. Madeleine LLP, a subsidiary of Cerberus, is also in line for money.

Cerberus declined to comment; an Aegis spokesman said that the company is doing what it can to help its remaining 500 or so employees, including providing health care and job training.

What happened to Aegis? The company managed to survive the mortgage meltdown and S&L problems of the ’90s, but it had been wounded. Plans in 1997 to hold an IPO for its REIT business were scrapped when the REIT sector began to exhibit problems. The conditions were perfect for a company like Cerberus, which regularly scoops up distressed businesses it believes will be winners in the future. The mortgage business was suffering in the late 1990s, but the industry is cyclical and Cerberus was betting on returns during the upswing. (Indeed, even as the subprime business began to melt down this spring, Cerberus agreed to buy sub-prime lender Option One Mortgage from H&R Block this April.)

So in 1998, Cerberus agreed to buy a controlling stake in Aegis, which had $2.5 million in equity. Following a familiar pattern, Cerberus immediately injected a huge amount of money into the company ($47 million), placed its own people on the board and kept the management team, including Thompson, in place. It rolled pieces of other dying lenders into Aegis and built a thriving mortgage lending operation.

In late 2006, the company had grown its capital in reserves to $361 million, and like all other lenders it couldn’t issue mortgages fast enough for the Wall Street machine that used them to create high-risk, very profitable bonds. At the height of the mortgage origination boom, Aegis employed about 3,500 people, mostly in the Houston area. But Aegis lost it all in just nine months when the market for mortgage loans tanked.

The failure calls into question the management and health of Cerberus’s other loan plays. Cerberus owns a majority stake in GMAC and its mortgage subsidiary ResCap. Thanks to the credit crunch, the ratings agencies have downgraded ResCap, thus making it more expensive for the company to operate. The rising cost of capital may hurt Chrysler Financial, too, the healthy operation within Chrysler that should have been able to help fund the ailing automaker’s turnaround. At a minimum, Cerberus will take a financial hit because of Aegis and the bankruptcy is an embarrassment amid the firm’s recent spate of high-profile acquisitions.

“Cerberus has become a major player in the global economy. Its many constituents rightly will expect a higher standard of behavior than was exhibited last week with Aegis,” says Thompson. It’s a sober reminder that even the vaunted geniuses of private equity can’t save every company, and that employees – more than investors – are the real victims when they go under.

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