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AURORA LOAN SERVS., LLC v. LOUIS | Ohio: Court of Appeals “No demonstration that Aurora is the note holder, Chain of Title Deficit – Theodore Schultz Affidavit”

AURORA LOAN SERVS., LLC v. LOUIS | Ohio: Court of Appeals “No demonstration that Aurora is the note holder, Chain of Title Deficit – Theodore Schultz Affidavit”


2012 Ohio 384

Aurora Loan Services, LLC, Appellee,

v.

Dion T. Louis, et al., Appellant.

C.A. No. L-10-1289.

Court of Appeals of Ohio, Sixth District, Lucas County.

Decided: February 3, 2012.

Darryl E. Gormley, for appellee.

Brandon S. Cohen, for appellant.

DECISION AND JUDGMENT

YARBROUGH, J.

I. INTRODUCTION

{¶ 1} Appellant Dion T. Louis appeals from a judgment of the Lucas County Court of Common Pleas, which granted summary judgment in favor of appellee, Aurora Loan Services, LLC (“Aurora”), and denied appellant’s cross-motion for summary judgment. Thereafter, the trial court entered a judgment and decree of foreclosure and ordered the property sold. For the reasons that follow, we reverse.

A. Facts and Procedural History

{¶ 2} On April 16, 1999, appellant entered into a contract with Mayflower d.b.a. Republic Bancorp Mortgage, Inc. to purchase a property located in Toledo, Ohio. Appellant signed a note that contained a promise to pay $33,750 plus interest at the rate of 10.825 percent per annum. In exchange, Mayflower received a mortgage against the property as security for repayment of the note. The mortgage was later assigned to Mayflower d.b.a. Union Mortgage Services, and the assignment was recorded on October 13, 1999. Sometime after 1999, Aurora began to service the loan and appellant made his monthly payments to it.

{¶ 3} In early 2009, appellant stopped making payments on the loan. Aurora contends that appellant’s default enabled them to exercise an “option” clause contained in the note and mortgage to accelerate the debt. On July 6, 2009, Aurora filed an action for repayment of the note and foreclosure on the mortgage. Aurora attached copies of the note and mortgage to its complaint. Both the note and mortgage were endorsed by and made payable to Mayflower. There was no mention of Aurora on either document. In addition, Aurora requested that the trial court declare it a real party in interest as the holder of the note and mortgage. Aurora also submitted a preliminary judicial report which revealed that the assignment of the mortgage from Mayflower to Aurora was not recorded, and an attempted recording on January 13, 2006, revealed that the chain of title was defective.

{¶ 4} On September 22, 2009, appellant answered the complaint and raised six affirmative defenses, including that Aurora failed to state a claim upon which relief could be granted.

{¶ 5} On December 7, 2009, Aurora filed a motion for summary judgment in which it included an affidavit submitted by Cheryl Marchant, the vice president of Aurora. The affidavit states that Aurora exercised the “option” contained in the mortgage and note which were attached to the pleadings and had accelerated and called due the entire principal balance. The affidavit also declares that Marchant was authorized to make the affidavit and that she possessed personal knowledge of all of the facts therein.

{¶ 6} On December 28, 2009, appellant moved for summary judgment and filed a memorandum in opposition to Aurora’s motion for summary judgment based on the contention that Aurora lacked standing as a real party in interest. Appellant argued that Aurora’s first affidavit omitted the chain of title issues and did not address the issue of an assignment from Mayflower to Aurora. In response, on January 29, 2010, Aurora filed a brief in opposition to appellant’s motion for summary judgment, stating that Mayflower had intended to assign the mortgage to Aurora but the assignment was lost or unrecorded.

{¶ 7} Attached to its brief in opposition to appellant’s motion for summary judgment is an affidavit by Theodore Schultz, the assistant vice president of Aurora, as to the lost assignment of the mortgage. This second affidavit states that “[t]he Original Lender assigned its right, title and interest in the note to Mayflower * * * [w]hereas Mayflower assigned its right, title and interest in the note to Aurora.” The affidavit goes on to state that “[t]he original assignment of the Open-end Mortgage between Mayflower DBA Union Mortgage Services and Aurora Loan Services has been lost and or was not recorded.” The affidavit does not assert that Schultz had personal knowledge of the matters stated in the affidavit, nor does it provide the circumstances by which Schultz may have gained personal knowledge of the assignment. Since Mayflower is now out of business, Schultz asserts that a replacement assignment to confirm that it is the proper holder of the mortgage is unattainable. Schultz further asserts that Aurora is the holder of the promissory note in question.

{¶ 8} After considering the motions and affidavits, the trial court granted summary judgment in favor of Aurora on August 30, 2010, in the amount of $30,472.27 plus interest on the principal amount at the rate of 10.825 percent per annum from January 1, 2009. In addition, the court found that Aurora had a valid lien and ordered the foreclosure of the property. The trial court reasoned that Aurora established its prima facie case when it submitted the affidavits as evidence. In so determining this, the trial court found that the burden shifted to appellant to show the existence of a genuine issue of material fact pursuant to Civ.R. 56(C). The trial court concluded that appellant “fail[ed] to bring any [additional] evidence under Civ.R. 56(C) to show a genuine issue of material fact” and denied appellant’s cross-motion for summary judgment.

B. Assignments of Error

{¶ 9} Appellant now appeals, asserting the following assignment of error:

The trial court erred in granting plaintiff-appellee’s motion for summary judgment because it failed to demonstrate that it is entitled to judgment as a matter of law; the unrefuted Civ.R. 56 Evidence demonstrates, at the least, that a genuine issue of material fact exists as to whether plaintiff appellee is the equitable party in interest.

II. ANALYSIS

A. Standard of Review

{¶ 10} When reviewing a trial court’s summary judgment decision, the appellate court conducts a de novo review. Grafton v. Ohio Edison Co., 77 Ohio St.3d 102, 105, 671 N.E.2d 241 (1996). Summary judgment will be granted when there are no genuine issues of material fact, and when construing the evidence most strongly in favor of the nonmoving party, reasonable minds can only conclude that the moving party is entitled to judgment as a matter of law. Harless v. Willis Day Warehousing Co., 54 Ohio St.2d 64, 66-67, 375 N.E.2d 46 (1978).

{¶ 11} On a motion for summary judgment, the moving party has the burden of demonstrating that no genuine issue of material fact exists. Dresher v. Burt, 75 Ohio St.3d 280, 292, 662 N.E.2d 264 (1996). The moving party must point to some evidence in the record of the type listed in Civ.R. 56(C). Id. at 292-293. The evidence permitted to be considered is limited to the “pleadings, depositions, answers to interrogatories, written admissions, affidavits, transcripts of evidence, and written stipulations of fact, if any, timely filed in the action * * *.” Civ.R. 56(C). The burden then shifts to the nonmoving party to provide evidence showing that a genuine issue of material fact does exist. Dresher at 293. See also Civ.R. 56(E).

B. Summary judgment improper

1. No demonstration that Aurora is the note holder

{¶ 12} In foreclosure actions, the real party in interest is the current holder of the note and mortgage. See, e.g., Deutsche Bank Natl. Trust Co. v. Greene, 6th Dist. No. E-10-006, 2011-Ohio-1976, ¶ 13. Civ.R. 17(A) requires that “a civil action must be prosecuted by the real party in interest,” that is, by a party “who can discharge the claim upon which the action is brought * * * [or] is the party who, by substantive law, possesses the right to be enforced.” (Citations omitted.) Discover Bank v. Brockmeier, 12th Dist. No. CA2006-057-078, 2007-Ohio-1552, ¶ 7. If an individual or one in a representative capacity does not have a real interest in the subject matter of the action, that party lacks the standing to invoke the jurisdiction of the court. State ex rel. Dallman v. Court of Common Pleas, Franklin Cty., 35 Ohio St.2d 176, 179, 298 N.E.2d 515 (1973), syllabus.

{¶ 13} In its complaint, Aurora alleged that it is the current holder of the note and mortgage. Nevertheless, the mortgage was not recorded and the title search revealed that the chain of title is deficient. In fact, Aurora admitted this in its complaint and asked the trial court for a declaratory judgment to establish that it is the holder of the note and mortgage. The only evidence submitted in support of Aurora’s motion for summary judgment were the Marchant and Schultz affidavits.

{¶ 14} In determining the sufficiency of these affidavits, we turn to the requirements set forth by Civ.R. 56.

{¶ 15} Pursuant to Civ.R. 56(C),

Summary judgment shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, written admissions, affidavits, transcripts of evidence, and written stipulations of fact, if any, timely filed in the action, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. No evidence or stipulation may be considered except as stated in this rule.

{¶ 16} Further, Civ.R. 56(E) provides:

Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated in the affidavit. Sworn or certified copies of all papers or parts of papers referred to in an affidavit shall be attached to or served with the affidavit. (Emphasis added.)

{¶ 17} Marchant does not assert or aver to any facts which support a finding that Aurora is the holder of the note or mortgage at issue. In fact, the note filed with her affidavit shows the following endorsement: “PAY WITHOUT RECOURSE TO THE ORDER OF: LIFE BANK BY: [ILLEGIBLE SIGNATURE] TIMOTHY A MERRITT, BRANCH MANAGER FOR MAYFLOWER D.B.A. UNION MORTGAGE SERVICES.” There is no explanation of any facts to illustrate how Aurora became the holder of the note. Rather, Marchant’s testimony is that “Aurora Loan Services, LLC has exercised the option contained in the note and mortgage and has accelerated and called due the entire principal balance due thereon.” This statement fails to establish Aurora as a real party in interest.

{¶ 18} Next, we turn to the Schultz affidavit and find that it is deficient in establishing Aurora’s status as a holder of the note and mortgage for three reasons.

{¶ 19} First, the Schultz affidavit states that: (1) “Aurora Loan Services LLC is the holder (`Holder’) of the following described promissory note (the `Note’): * * * Loan No: 0115933855 * * * Borrowers: Dion T. Louis, an unmarried man * * * Property address: 280 Knower St., Toledo, OH 43609 * * * Amount: $33,750.00;” and (2) “Mayflower DBA Union Mortgage Services assigned its right, title and interest in the note to Aurora.” A sworn or certified copy of the note was not attached or served with this affidavit as required by Civ.R. 56(E).

{¶ 20} Second, there is no explanation as to how Schultz came to know this information or whether he personally presided over appellant’s account. We note,

[t]he [affiant] need not have firsthand knowledge of the transaction, but must demonstrate [that] the [affiant] is sufficiently familiar with the operation of the business and with the circumstances of the record’s preparation, maintenance and retrieval, such that the witness can reasonably testify on the basis of this knowledge that the record is what it purports to be * * *. Wachovia Bank of Delaware, N.A. v. Jackson, 5th Dist. No. 2010-CA-00291, 2011-Ohio-3202, ¶ 36, citing State v. Patton, 3d Dist. No. 1-91-12, 1992 WL 42806 (Mar. 5, 1992).

{¶ 21} Moreover, Schultz’s position as assistant vice president of Aurora does not create a presumption that he had personal knowledge of the assignment from Mayflower to Aurora. For example, in TPI Asset Mgt. v. Conrad-Eiford, 193 Ohio App.3d 38, 2011-Ohio-1405, 950 N.E.2d 1018, ¶ 21, the affiant stated that “from my own personal knowledge the following facts are true as I verily believe, and * * * I am competent to testify to same.” The TPI court held that, regardless of the affiant’s position in the bank as team leader, the affidavits failed to demonstrate the particular basis on which the affiants gained their understanding of the facts. Id. at ¶ 23. Because the Schultz affidavit does not demonstrate that Schultz had personal knowledge of the assignment to Aurora, it does not meet the requirements for affidavits set forth in Civ.R. 56(E).

{¶ 22} Third, Schultz asserted that Aurora is the holder of the note, but failed to set forth any facts in support of this legal conclusion. Affidavits filed in support of summary judgment containing “inferences and bald assertions” rather than a “clear statement or documentation” proving that the original holder of the note and mortgage transferred its interest to Aurora are not sufficient to support a finding that Aurora is the holder of the note and mortgage. See First Union Natl. Bank v. Hufford, 146 Ohio App.3d 673, 678, 767 N.E.2d 1206 (2001) (inferences and bald assertions are insufficient evidence of a transfer of a note and mortgage). Furthermore, Schultz stated, “Mayflower DBA Union Mortgage Services assigned its right, title and interest in the note to Aurora Loan Services.” This statement is contradictory to the endorsement contained on the note which indicates that Mayflower d.b.a. Union Mortgage Services assigned the note to Life Bank.

{¶ 23} Ohio’s version of the Uniform Commercial Code governs who may enforce a note. R.C. 1301.01 et seq.[1] Article 3 of the UCC governs the creation, transfer and enforceability of negotiable instruments, including promissory notes secured by mortgages on real estate. Fed. Land Bank of Louisville v. Taggart, 31 Ohio St.3d 8, 10, 508 N.E.2d 152 (1987).

{¶ 24} Under the code, a “person entitled to enforce” an instrument means any of the following persons: (1) The holder of the instrument, (2) A non-holder in possession of the instrument who has the rights of the holder, (3) A person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 1303.38 or division (D) of section 1303.58 of the Revised Code. R.C. 1301.31.

{¶ 25} More specifically, under former R.C. 1301.01, “holder” means either of the following:

{¶ 26} “(a) if the instrument is payable to bearer, a person who is in possession of the instrument;

{¶ 27} “(b) if the instrument is payable to an identified person, the identified person when in possession of the instrument.” (Emphasis added.)

{¶ 28} Schultz failed to assert any facts indicating that Aurora is entitled to enforce the instrument. On the face of the note, it is impossible for Aurora to be a “holder” as defined by former R.C. 1301.01. The instrument is not bearer paper, and Aurora is not an identified person on the instrument. Thus, Aurora has failed to meet its Dresher burden of establishing that it is the current note holder.

2. No demonstration that Aurora is the mortgage holder

{¶ 29} “`Holder of the mortgage’ means the holder of the mortgage as disclosed by the records of the recorder or recorders of the county or counties in which the mortgaged premises are situated.” R.C. 5301.232(E)(3).

{¶ 30} In support of Aurora’s motion for summary judgment, Schultz, in his affidavit, stated: “The Loan is secured by an Open-end Mortgage dated 4/16/1999 Book 99 1465 at Page B11 Instrument 24635 in the County of Lucas, State of Ohio.” We note that a certified copy of the mortgage assignment was not attached to the Schultz affidavit as required by Civ.R. 56(E). Furthermore, in regards to the mortgage assignments, the preliminary judicial report filed on July 6, 2009, indicates that the mortgage was initially given to Mayflower d.b.a. Republic Bancorp Mortgage Inc., filed April 21, 1999, in File No. 99 1465B11 of the Lucas County Records. Thereafter, the mortgage was assigned to Mayflower d.b.a. Union Mortgage Services, and filed October 13, 1999, in File No. 99 3915C12 of the Lucas County Records.

{¶ 31} The report goes on to state:

Attempted assignment of mortgage to First Union National Bank as Trustee of the Amortizing Residential Collateral Mortgage Trust 2000-BC1, (by Life Bank), by separate instrument dated April 18, 2001 and filed April 18, 2001 in File No. 01 4794 E01 of Lucas County Records. There is no assignment of mortgage to Life Bank.

Attempted assignment of mortgage to Aurora Loan Services LLC FKA Aurora Loan Services Inc., (by Pacific Premier Bank, FSB, FKA Life Bank, FSB or Life Bank), by separate instrument dated January 13, 2006 and filed March 6, 2006 in file No. 20060306-0013641 of Lucas County Records. The chain of mortgage assignment is defective. (Emphasis added.)

{¶ 32} Thus, the record reflects that Aurora is unable to establish that there is no genuine issue of material fact as to whether it is the current holder of the mortgage, given the chain of assignments and transfers of the mortgage.

{¶ 33} Furthermore, courts have been reluctant to rely on affidavits as a basis for granting summary judgment in foreclosure actions where there is an absence of supporting evidence or circumstances. In DLJ Mtge. Capital, Inc. v. Parsons, 7th Dist. No. 07-MA-17, 2008-Ohio-1177, ¶ 17, the Seventh District Court of Appeals stated that summary judgment could not be granted for the mortgagee where there was no evidence of an assignment of the note and mortgage besides an affidavit by an employee. Although the employee presided over Parson’s account, the affidavit was deemed insufficient to support a motion for summary judgment because it failed to mention “how, when, or whether appellee was assigned the mortgage and note.” Id. Similarly, in First Union, 146 Ohio App.3d at 679, 767 N.E.2d 1206, the Third District Court of Appeals declined to grant summary judgment based exclusively on an affidavit where there was no evidence of an assignment to the mortgagee. The court stated that “though inferences could have been drawn from [the affidavit], inferences are inappropriate, insufficient support for summary judgment and are contradictory to the fundamental mandate that evidence be construed most strongly in favor of the nonmoving party.” Id. However, where other evidence of a transfer exists, such as a valid transfer of one instrument as evidence of the other, courts have relied on affidavits to confirm such facts. See, e.g., Greene, 6th Dist. No. E-10-006, 2011-Ohio-1976, at ¶ 15. In Greene, we held that the assignment of the mortgage, in conjunction with interlocking references in the mortgage and the note, transferred the note as well. We cannot find the same here. As in DLJ Mtge. and First Union, the affidavits in this case were the only evidence that a transfer of the note and mortgage occurred. As discussed, these affidavits fail to establish Aurora as the holder of either the note or the mortgage.

{¶ 34} We note that appellant also argues in his first assignment of error that, “[u]nder statute of frauds principles, Plaintiff-Appellee’s would have to show a signed `option’ or `assignment’ from Lender — Mortgage Holder — to be the real party in interest against Louis.” To support his argument, appellant claims that “without a signed document expressly granting Aurora an assignment in the mortgage to Louis’ property — the trial court cannot grant summary judgment based solely on Aurora’s (self-serving) affidavit.” However, it has been a longstanding rule in Ohio that whenever a promissory note is secured by a mortgage, the note constitutes the evidence of the debt and the mortgage is mere incident to the obligation. U.S. Bank Natl. Assn. v. Marcino, 181 Ohio App.3d 328, 2009-Ohio-1178, 908 N.E.2d 1032, ¶ 52, citing Edgar v. Haines, 109 Ohio St. 159, 164, 141 N.E. 837 (1923). Thus, a transfer of an obligation secured by a mortgage also acts as an equitable assignment of the mortgage, even though the mortgage is not assigned or delivered. Kuck v. Sommers, 59 Ohio Law Abs. 400, 100 N.E.2d 68, 75 (3d Dist.1950). Also, “`[s]ubsection (g) [of U.C.C. 9-203] codifies the common law rule that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the security interest or lien.'” Marcino at ¶ 53, quoting Official Comment 9 to U.C.C. 9-203. Thus, there is no requirement that a signed assignment of a mortgage be contained in the record. Finally, both instruments that Aurora seeks to enforce were signed by appellant and an option in the mortgage enables the holder to accelerate the debt upon default. Therefore, we do not believe that the statute of frauds argument is pertinent to this appeal.

{¶ 35} In sum, Aurora submitted affidavits that fail to demonstrate that Aurora is the holder of the note or mortgage. Therefore, we hold that Aurora has failed to satisfy its initial burden of demonstrating that no genuine issue of material fact exists as to whether it is the real party in interest, and thus, summary judgment is inappropriate.

{¶ 36} Accordingly, appellant’s first assignment of error is well-taken.

III. CONCLUSION

{¶ 37} Because a genuine issue of material fact exists as to whether Aurora is a real party in interest, the judgment of the Lucas County Court of Common Pleas is reversed and this case is remanded to the trial court for further proceedings. Pursuant to App.R. 24, appellee is ordered to pay costs of this appeal.

Judgment reversed.

A certified copy of this entry shall constitute the mandate pursuant to App.R. 27. See also 6th Dist.Loc.App.R. 4.

Mark L. Pietrykowski, J., Arlene Singer, P.J. and Stephen A. Yarbrough, J., Concur.

[1] R.C. 1301.01 was repealed by Am.H.B. No. 9, 2011 Ohio Laws File 9, effective June 29, 2011. That act amended the provisions of R.C. 1301.01 and renumbered that section so that it now appears at R.C. 1301.201. Because R.C. 1301.201 only applies to transactions entered on or after June 29, 2011, we apply R.C. 1301.01 to this appeal.

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Judge Bufford, Judge Ayers, MERS & The UCC Committee

Judge Bufford, Judge Ayers, MERS & The UCC Committee


UNIFORM COMMERCIAL CODE COMMITTEE

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.  CookId. 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. 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.”

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 cancelled.

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 this 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.


MORE INFO LINK

UNIFORM COMMERCIAL CODE AND NOTE TRANSFERS AND DEED OF TRUST-1


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Posted in conflict of interest, conspiracy, CONTROL FRAUD, corruption, deed of trust, foreclosure, foreclosure fraud, foreclosures, Judge R. Glen Ayers, judge samuel bufford, mbs, MERS, MERSCORP, mortgage, MORTGAGE ELECTRONIC REGISTRATION SYSTEMS INC., note, rmbs, securitization, servicers, trustee, Trusts, ucc, uniform commercial code committeeComments (1)

WHERE’S THE NOTE, WHO’S THE HOLDER | ENFORCEMENT OF PROMISSORY NOTE SECURED BY REAL ESTATE

WHERE’S THE NOTE, WHO’S THE HOLDER | ENFORCEMENT OF PROMISSORY NOTE SECURED BY REAL ESTATE


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).

continue below…

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More on….MERS

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Posted in conspiracy, CONTROL FRAUD, foreclosure, foreclosure fraud, foreclosures, investigation, MERS, MORTGAGE ELECTRONIC REGISTRATION SYSTEMS INC., Mortgage Foreclosure Fraud, note, stopforeclosurefraud.comComments (1)


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