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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.

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Scalia Sets Standard for Massive Mortgage Fraud Class Action Law Suit

Scalia Sets Standard for Massive Mortgage Fraud Class Action Law Suit


Via: The Economic Populist

by Michael Collins

There hasn’t been much in the way of justice for the average citizen for quite a while. Often, those accused of crimes cannot afford adequate representation and are subject to “let’s make a deal justice.” If you’re unfortunate enough to be sued or party to a divorce proceeding, you soon learn that the court system is an entitlement program for attorneys, not a civilized means of settling disputes. (Image)

The last decade has been devastating for what many thought were inviolable fundamental rights. The Bush administration dismantled as much of the Constitution as time allowed including habeas corpus which prevents detention without a charge. Through a presidential directive, an even older legal tradition went by the way, the right to be indicted and tried before facing capital punishment. I am, of course, referring to President Obama’s declared option to assassinate citizens of the United States identified as terrorists by anonymous bureaucrats.

The Scalia opinion in Wal-Mart Stores, Inc. v. Dukes seems like another brick in the wall that protects the powerful against the intrusions of civil rights and equal treatment sought by the rest of us. Brought in behalf of Wal-Mart’s female employees, the suit sought compensation for 1.5 million women subjected to wage discrimination.

Scalia’s opinion killed the case before the evidence was considered. He argued that the group of women suing failed were not a true “class” that met the requirements for a class action lawsuit. The women bring suit needed to show that Wal-Mart had a discriminatory evaluation procedure or “operated under a general policy of discrimination” (Wal-Mart v Dukes, pages 16-27).

Outcomes don’t matter to Scalia. The very real disparities in income highly correlated with gender were not relevant. Never mind that there was evidence of massive financial discrimination. It was all about a lack of evidence for specific prior acts by the company. Is he serious?

This doesn’t sound very good for class action law suits in general. What company has openly discriminatory assessments for promotion or an explicitly documented “general policy of discrimination?” Were Scalia any more obvious as a blocking back for the corporate elite, he’d have to wear company logos on his judicial robe while rendering decisions.

Lenders had a Specific Uniform Policy to Commit Illegal Acts against Borrowers

The Mortgage Electronic Registration System (MERS) was created by Fannie Mae, the Mortgage Bankers Association, and key big bank lenders in the real estate finance industry. Gretchen Morgenson reported that MERS is involved in 60 million mortgages. MERS created the electronic recording system and operates it through a subsidiary. It neither loans nor collects mortgage payments. You’d never know that reading a majority of mortgages.

Professor Christopher L. Peterson of the law school at the University of Utah noted the pervasive presence of MERS in United States mortgages:

“In boilerplate security agreements included in mortgages all around the country, lenders include this clause:

MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument. MERS is organized and existing under the laws of Delaware, and has an address and telephone number …” Peterson, September 19, 2010

This language represents a legal contradiction, clearly stated by lenders when they included this boilerplate in mortgages, notes and other lending documents. You are either a “nominee” (proxy) for the lender or the lender. This is a misrepresentation on its face. MERS could never be the mortgagee because it didn’t fund the mortgage, collect payments, or service the loans. Professor Peterson provided a detailed review of the flaws I MERS claims of legal standing in 2010. (Also see ForeclosureGate Deal – The Mandatory Cover Up re Peterson’s analysis)

The foundation of over of the 60 million MERS tainted mortgages is based on misrepresentation. MERS was not what said it was. It was something entirely different. The misrepresentation represents the most basic form of contract fraud.

On June 7, the Supreme Court of the State of New York, Appellate Division: Second Judicial Department dismissed a foreclosure action by the Bank of New York (Bank of New York, etc., respondent, v Stephen Silverberg, et al., appellants, et al., defendants). The New York Court stated: “In sum, because MERS was never the lawful holder or assignee of the notes described and identified in the consolidation agreement, the corrected assignment of mortgage is a nullity, and MERS was without authority to assign the power to foreclose to the plaintiff. Consequently, the plaintiff failed to show that it had standing to foreclose.” (Decided June 7, 2011)

In the opening line of the Wal-Mart decision, Justice Scalia noted, “We are presented with one of the most expansive class actions ever.”

How about a class action brought by tens of millions of citizens, Mr. Justice (sic)?

Had the homeowner signed a name other than his or hers, the contract would be deemed null and void. The same applies to the misrepresentation of MERS as the mortgagee.

The behavior of MERS was and remains fraudulent. The lender contracts through MERS should all be declared null and void.

Proof that the Misrepresentation was Intentional

As mortgage backed securities (MBS) were taking off, Moody’s investment issued an opinion on the legal risk to mortgage backed securities (MBS) investors faced form investments based on MERS. This was the green light for the orgy of derivative trading based on mortgages, including the subprime fiasco.

Without citing one single court case or authority and absent any contradiction from lenders or MERS, Moody’s argued that “common law principles” supported the use of MERS. Moody’s predicted that foreclosures would not be “materially impacted” and that, after an “adjustment period,” courts and attorneys would “get familiar with MERS.”

This was wrong at the time it was published. The stunning inaccuracy has been demonstrated in court decisions acrosscountry. But the Moody’s opinion of 1999 was issued, ex cathedra, as it were. It stood unchallenged by the lenders. They knew or should have known that there was no legal support for this arrangement. the

MERS and lender behavior during foreclosure proceedings provides another powerful demonstration of illegal intent. Even though it was not entitled to do so as the mortgagee and note holder, MERS was the named party in tens of thousands of foreclosure actions.

The lenders also showed a clear pattern of knowing disregard for the law by filing defective claims in bankruptcy courts. Professor Katherine Porter of the University of Iowa and Harvard University law schools examined 1700 Chapter 13 bankruptcy filings. The study reported that over half of foreclosure claims lacked “one or more of the required pieces of documentation for a bankruptcy claim.” Lender fees were “poorly identified” and “seemed unreasonable.” Porter concluded:

“The bankruptcy data reinforce concerns about the overall reliability of the mortgage service industry to charge homeowners only the correct and legal amount of the debt and to comply with applicable consumer protection laws.” Katherine M. Porter, 2008

With all of their resources, lenders filing mortgage claims in court should be expected to make very few mistakes and almost never leave out documents required by law to make the foreclosure enforceable. They knew or should have known that this was happening. Their behavior shows major contempt for the law and is likely illegal.

MERS Mortgage Holders Meet Scalia’s Requirement for a “Class”

They have a common grievance, the fraudulent misrepresentation by MERS that it was the mortgagee.

They can prove specific violations of law prior, during, and after the fact. The contract contained a fundamental misrepresentation; one that MERS and lenders knew was a misrepresentation. For a subclass, those who were subject to foreclosure proceedings as part of a MERS contract, the illegality is demonstrated by the pattern of repeated incomplete filings while attesting to the court that the filings were complete.

Will the court ever hear a class action by millions of homeowners demanding the cancellation of mortgages contracted through MERS?

Will it cancel existing mortgages and reverse foreclosures with damages paid? Of course not. But it should. It meets the Scalia standard for class actions to a tee.

END

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Original Source: [THE ECONOMIC POPULIST]

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BANK OF NEW YORK v. SILVERBERG | NY 2nd APPELLATE DIVISION “MERS DOES NOT HAVE RIGHT TO FORECLOSE OR ASSIGN IF NOT HOLDER OF NOTE”

BANK OF NEW YORK v. SILVERBERG | NY 2nd APPELLATE DIVISION “MERS DOES NOT HAVE RIGHT TO FORECLOSE OR ASSIGN IF NOT HOLDER OF NOTE”


Decided on June 7, 2011

SUPREME COURT OF THE STATE OF NEW YORK

APPELLATE DIVISION : SECOND JUDICIAL DEPARTMENT

ANITA R. FLORIO, J.P.
THOMAS A. DICKERSON
JOHN M. LEVENTHAL
ARIEL E. BELEN, JJ.
2010-00131
(Index No. 17464-08)

[*1]Bank of New York, etc., respondent,v

Stephen Silverberg, et al., appellants, et al., defendants.

APPEAL by the defendants Stephen Silverberg and Fredrica Silverberg, in an action to foreclose a mortgage, from an order of the Supreme Court (Denise F. Molia, J.), dated September 24, 2008, and entered in Suffolk County, which denied their motion pursuant to CPLR 3211(a)(3) to dismiss the complaint insofar as asserted against them for lack of standing. Stephen C. Silverberg, PLLC, Uniondale N.Y., for appellants.

McCabe, Weisberg & Conway, P.C., New Rochelle, N.Y. (Lisa
L. Wallace and Doron Zanani of counsel), for respondent.

OPINION & ORDER

LEVENTHAL, J.This matter involves the enforcement of the rules that govern real property and whether such rules should be bent to accommodate a system that has taken on a life of its own. The issue presented on this appeal is whether a party has standing to commence a foreclosure action when that party’s assignor—in this case, Mortgage Electronic Registration Systems, Inc. (hereinafter MERS)—was listed in the underlying mortgage instruments as a nominee and mortgagee for the purpose of recording, but was never the actual holder or assignee of the underlying notes. We answer this question in the negative.

In October 2006 the defendants Stephen Silverberg and Fredrica Silverberg (hereinafter together the defendants) borrowed the sum of $450,000 from Countrywide Home Loans, Inc. (hereinafter Countrywide), to purchase residential real property in Greenlawn, New York (hereinafter the property). The loan was secured by a mortgage on the property (hereinafter the initial mortgage). The initial mortgage refers to MERS as the mortgagee for the purpose of recording, and provides that the underlying promissory note is in favor of Countrywide [FN1]. Further, the initial mortgage provides that “MERS holds only legal title to the rights granted by the [defendants] . . . but, if necessary to comply with law or custom,” MERS purportedly has the right to foreclose and “to take any action required of [Countrywide].” On November 2, 2006, the initial mortgage was recorded in the office of the Suffolk County Clerk.

On April 23, 2007, the defendants executed a second mortgage on the subject property in favor of MERS, as named mortgagee and nominee of Countrywide. The defendants [*2]simultaneously executed a note in favor of Countrywide, secured by the second mortgage. The promissory note secured by the second mortgage provided that payment would be made to Countrywide, and that Countrywide “may transfer this Note.” The second mortgage was recorded in the office of the Suffolk County Clerk on June 12, 2007.

In sections entitled “Borrower’s Transfer to Lender of Rights in the Property” set forth in both the initial mortgage and the second mortgage, those documents provide:

“[The Borrowers] understand and agree that MERS holds only legal title to the rights granted by [the Borrowers] in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right:

“(A) to exercise any or all of those rights, [granted by the Borrowers to Countrywide] including, but not limited to, the right to foreclose and sell the Property; and

“(B) to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.”

Consolidation Agreement

Also in April 2007, the defendants executed a consolidation agreement in connection with the property in the sum of $479,000 in favor of MERS, as mortgagee and nominee of Countrywide . Countrywide was the named lender and note holder. The consolidation agreement purportedly merged the two prior notes and mortgages into one loan obligation. The consolidation agreement was recorded in the office of the Suffolk County Clerk on June 12, 2007. The consolidation agreement, as with the prior mortgages, recites 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.” Countrywide, however, was not a party to the consolidation agreement.

In December 2007 the defendants defaulted on the consolidation agreement. Meanwhile, on April 30, 2008, by way of a “corrected assignment of mortgage,” MERS, as Countrywide’s nominee, assigned the consolidation agreement to the Bank of New York, as Trustee For the Benefit of the Certificate Holders, CWALT, Inc., Alternate Loan Trust 2007-14-T2, Mortgage Pass-Through Certificates Series 2007-14T2 (hereinafter the plaintiff). On May 6, 2008, the plaintiff commenced this mortgage foreclosure action against the defendants, among others.

In June 2008 the defendants moved pursuant to CPLR 3211(a)(3) to dismiss the complaint insofar as asserted against them for lack of standing. In support of their motion, the defendants submitted, inter alia, the underlying mortgages, the summons and complaint, the second note, and an attorney’s affirmation. In the affirmation, the defendants argued, among other things, that the complaint failed to establish a chain of ownership of the notes and mortgages from Countrywide to the plaintiff. In opposition to the defendants’ motion, the plaintiff submitted, inter alia, the corrected assignment of mortgage dated April 30, 2008.
The Order Appealed From

In an order dated September 24, 2008, the Supreme Court denied the defendant’s motion, concluding that, prior to the commencement of the action, MERS, as Countrywide’s nominee, and on Countrywide’s behalf, assigned the mortgages described in the consolidation agreement. Hence, the Supreme Court determined that the plaintiff was the owner of the “consolidated Note and Mortgage” and, thus, the proper party to commence the action.

On appeal, the defendants argue that the plaintiff lacks standing to sue because it did not own the notes and mortgages at the time it commenced the foreclosure action. Specifically, the defendants contend that neither MERS nor Countrywide ever transferred or endorsed the notes described in the consolidation agreement to the plaintiff, as required by the Uniform Commercial Code. Moreover, the defendants assert that the mortgages were never properly assigned to the plaintiff because MERS, as nominee for Countrywide, did not have the authority to effectuate an assignment of the mortgages. The defendants further assert that the mortgages and notes were bifurcated, rendering the mortgages unenforceable and foreclosure impossible, and that because of such bifurcation, MERS never had an assignable interest in the notes. The defendants also contend [*3]that the Supreme Court erred in considering the corrected assignment of mortgage because it was not authenticated by someone with personal knowledge of how and when it was created, and was improperly submitted in opposition to the motion.
MERS

“In 1993, the MERS system was created by several large participants in the real estate mortgage industry to track ownership interests in residential mortgages” (Matter of MERSCORP, Inc. v Romaine, 8 NY3d 90, 96). MERS was intended to “streamline the mortgage process by using electronic commerce to eliminate paper.”[FN2] MERS’s implementation followed the delays occasioned by local recording offices, which were at times slow in recording instruments because of complex local regulations and database systems that had become voluminous and increasingly difficult to search (see Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U Cin L Rev 1359, 1366 [2010]).

“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, Inc. v Romaine, 8 NY3d at 96 [internal footnotes omitted]).

The MERS system facilitated the transfer of loans into pools of other loans which were then sold to investors as securities (see Peterson, at 1361-1362). MERS delivers savings to the participants in the real estate mortgage industry by allowing those entities to avoid the payment of fees which local governments require to record mortgage assignments (see Peterson at 1368-1369).

Lenders identify MERS as nominee and mortgagee for its members’ successors and assignees. MERS remains the mortgagee of record in local county recording offices regardless of how many times the mortgage is transferred, thus freeing MERS’s members from paying the recording fees that would otherwise be furnished to the relevant localities (id.; see Matter of MERSCORP, Inc. v Romaine, 8 NY3d at 100). This leaves borrowers and the local county or municipal recording offices unaware of the identity of the true owner of the note, and extinguishes a source of revenue to the localities. According to MERS, any loan registered in its system is “inoculated against future assignments because MERS remains the mortgagee no matter how many times servicing is traded.”[FN3] Moreover, MERS does not lend money, does not receive payments on promissory notes, and does not service loans by collecting loan payments.
Analysis

Relevant to our determination is the decision of the Court of Appeals in Matter of MERSCORP, Inc. v Romaine (8 NY3d 90), which held that the Suffolk County Clerk was compelled to record and index mortgages, assignments of mortgages, and discharges of mortgages that named MERS as the lender’s nominee or mortgagee of record. In a concurring opinion, Judge Carmen Beauchamp Ciparick specified that the issue of whether MERS has standing to prosecute a foreclosure action remained for another day (id. at 100). In a dissent, former Chief Judge Judith S. Kaye posited that the MERS system raised several concerns, including the elimination of the public records which document mortgage loan ownership (id. at 100-105).

The principal issue ripe for determination by this Court, and which was left unaddressed by the majority in Matter of MERSCORP (id.), is whether MERS, as nominee and mortgagee for purposes of recording, can assign the right to foreclose upon a mortgage to a plaintiff in a foreclosure action absent MERS’s right to, or possession of, the actual underlying promissory note.

Standing requires an inquiry into whether a litigant has “an interest . . . in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request” [*4](Caprer v Nussbaum, 36 AD3d 176, 182; see New York State Assn. of Nurse Anesthetists v Novello, 2 NY3d 207, 211; Wells Fargo Bank Minn., N.A. v Mastropaolo, 42 AD3d 239, 242). Where, as here, the issue of standing is raised by a defendant, a plaintiff must prove its standing in order to be entitled to relief (see U.S. Bank, N.A. v Collymore, 68 AD3d 752, 753; Wells Fargo Bank Minn., N.A. v Mastropaolo, 42 AD3d at 242). In a mortgage foreclosure action, a plaintiff has standing 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 (see U.S. Bank, N.A. v Collymore, 68 AD3d at 753; Countrywide Home Loans, Inc. v Gress, 68 AD3d 709, 709; Wells Fargo Bank, N.A. v Marchione, 69 AD3d 204, 207-208; Mortgage Elec. Registration Sys., Inc. v Coakley, 41 AD3d 674, 674; Federal Natl. Mtge. Assn. v Youkelsone, 303 AD2d 546, 546-547; First Trust Natl. Assn. v Meisels, 234 AD2d 414).

As a general matter, once a promissory note is tendered to and accepted by an assignee, the mortgage passes as an incident to the note (see Mortgage Elec. Registration Sys., Inc. v Coakley, 41 AD3d 674; Smith v Wagner, 106 Misc 170, 178 ["assignment of the debt carries with it the security therefor, even though such security be not formally transferred in writing"]; see also Weaver Hardware Co. v Solomovitz, 235 NY 321, 331-332 ["a mortgage given to secure notes is an incident to the latter and stands or falls with them"]; Matter of Falls, 31 Misc 658, 660, affd 66 App Div 616 ["The deed being given as collateral for the payment of the note [,] the transfer of the note carried the security”]).

By contrast, “a transfer of the mortgage without the debt is a nullity, and no interest is acquired by it” (Merritt v Bantholick, 36 NY 44, 45; see Carpenter v Longan, 83 US 271, 274 [an assignment of the mortgage without the note is a nullity]; US Bank N.A. v Madero, 80 AD3d 751, 752; U.S. Bank, N.A. v Collymore, 68 AD3d at 754; Kluge v Fugazy, 145 AD2d 537, 538 [plaintiff, the assignee of a mortgage without the underlying note, could not bring a foreclosure action]; Flyer v Sullivan, 284 App Div 697, 698 [mortgagee's assignment of the mortgage lien, without assignment of the debt, is a nullity]; Beak v Walts, 266 App Div 900). A “mortgage is merely security for a debt or other obligation and cannot exist independently of the debt or obligation” (FGB Realty Advisors v Parisi, 265 AD2d 297, 298). Consequently, the foreclosure of a mortgage cannot be pursued by one who has no demonstrated right to the debt (id.; see Bergman on New York Mortgage Foreclosures § 12.05[1][a][1991]).

The defendants contend, among other things, that because the plaintiff failed to provide proof of recording of the corrected assignment of the mortgage prior to the commencement of the action, it may be inferred that the plaintiff did not own the notes and mortgages prior to that date. However, this particular contention is without merit, as an assignment of a note and mortgage need not be in writing and can be effectuated by physical delivery (see LaSalle Bank Natl. Assn. v Ahearn, 59 AD3d 911, 912). Moreover, ” [n]o special form or language is necessary to effect an assignment as long as the language shows the intention of the owner of a right to transfer it’” (Suraleb, Inc. v International Trade Club, Inc., 13 AD3d 612, 612, quoting Tawil v Finkelstein Bruckman Wohl Most & Rothman, 223 AD2d 52, 55).

Here, the consolidation agreement purported to merge the two prior notes and mortgages into one loan obligation. Countrywide, as noted above, was not a party to the consolidation agreement. ” Either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation, and the mortgage passes with the debt as an inseparable incident’” (US Bank N.A. v Madero, 80 AD3d at 753, quoting U.S. Bank, N.A. v Collymore, 68 AD3d at 754; see LaSalle Bank Natl. Assn. v Ahearn, 59 AD3d at 912). The plaintiff relies upon the language in the consolidation agreement, which provides 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.” However, as “nominee,” MERS’s authority was limited to only those powers which were specifically conferred to it and authorized by the lender (see Black’s Law Dictionary 1076 [8th ed 2004] [defining a nominee as "(a) person designated to act in place of another, (usually) in a very limited way"]). Hence, although the consolidation agreement gave MERS the right to assign the mortgages themselves, it did not specifically give MERS the right to assign the underlying notes, and the assignment of the notes was thus beyond MERS’s authority as nominee or agent of the lender (see Aurora Loan Servs., LLC v Weisblum,AD3d, 2011 NY Slip Op 04184, *6-7 [2d Dept 2011]; HSBC Bank USA v Squitieri, 29 Misc 3d 1225[A], 2010 NY Slip Op 52000[U]; LNV Corp. v Madison Real Estate, LLC, 2010 NY Slip Op 33376[U]; LPP Mtge. Ltd. [*5]v Sabine Props., LLC, 2010 NY Slip Op 32367[U]; Bank of NY v Mulligan, 28 Misc 3d 1226[A], 2010 NY Slip Op 51509[U]; OneWest Bank, F.S.B. v Drayton, 29 Misc 3d 1021; Bank of N.Y. v Alderazi, 28 Misc 3d 376, 379-380 [the "party who claims to be the agent of another bears the burden of proving the agency relationship by a preponderance of the evidence"]; HSBC Bank USA, N.A. v Yeasmin, 27 Misc 3d 1227[A], 2010 NY Slip Op 50927[U]; HSBC Bank USA, N.A. v Vasquez, 24 Misc 3d 1239[A], 2009 NY Slip Op 51814[U]; Bank of N.Y. v Trezza, 14 Misc 3d 1201[A], 2006 NY Slip Op 52367[U]; LaSalle Bank Natl. Assn. v Lamy, 12 Misc 3d 1191[A], 2006 NY Slip Op 51534[U]; Matter of Agard, 444 BR 231; but see US Bank N.A. v Flynn, 27 Misc 3d 802).

Therefore, assuming that the consolidation agreement transformed MERS into a mortgagee for the purpose of recording—even though it never loaned any money, never had a right to receive payment of the loan, and never had a right to foreclose on the property upon a default in payment—the consolidation agreement did not give MERS title to the note, nor does the record show that the note was physically delivered to MERS. Indeed, the consolidation agreement defines “Note Holder,” rather than the mortgagee, as the “Lender or anyone who succeeds to Lender’s right under the Agreement and who is entitled to receive the payments under the Agreement.” Hence, the plaintiff, which merely stepped into the shoes of MERS, its assignor, and gained only that to which its assignor was entitled (see Matter of International Ribbon Mills [Arjan Ribbons], 36 NY2d 121, 126; see also UCC 3-201 ["(t)ransfer of an instrument vests in the transferee such rights as the transferor has therein"]), did not acquire the power to foreclose by way of the corrected assignment.

Notwithstanding the foregoing, the plaintiff contends that case law supports its position that MERS has the power to foreclose, where, as here, MERS is identified in a mortgage as nominee and mortgagee for the purpose of recording. In this regard, the plaintiff relies upon Mortgage Elec. Registration Sys., Inc. v Coakley (41 AD3d 674), wherein this Court held that MERS had standing to foreclose a mortgage. In that case, unlike in the current case, the lender had transferred and tendered the promissory note to MERS before the commencement of the foreclosure action (id. at 674). Therefore, we held that MERS had standing to bring the foreclosure action because it “was the lawful holder of the promissory note and of the mortgage, which passed as an incident to the promissory note” (id. at 674 [citations omitted]). Although that determination was a sufficient basis upon which to conclude that MERS had standing, we elaborated, stating,

“further support for MERS’s standing to commence the action may be found on the face of the mortgage instrument itself. Pursuant to the clear and unequivocal terms of the mortgage instrument, [the mortgagor] expressly agreed without qualification that MERS had the right to foreclose upon the premises in the event of a default” (id. at 675).

According to the plaintiff, Coakley indicates that this Court has determined that such broad provisions in mortgages, such as the initial mortgage and second mortgage here, standing alone, grant MERS, as nominee and mortgagee for the purpose of recording, the power to foreclose. On the contrary, the Coakley decision does not stand for that proposition. This Court’s holding in Coakley was dependent upon the fact that MERS held the note before commencing the foreclosure action. In the absence of that crucial fact, the language in the mortgage instrument would not have provided “further support” for the proposition that MERS had the power to foreclose in that case. Furthermore, the language in the initial mortgage and the second mortgage in this case, purportedly granting MERS the right to foreclose, was superseded by the consolidation agreement. Moreover, as discussed above, the broad language relied upon by the plaintiff 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.

In sum, because MERS was never the lawful holder or assignee of the notes described and identified in the consolidation agreement, the corrected assignment of mortgage is a nullity, and MERS was without authority to assign the power to foreclose to the plaintiff. Consequently, the plaintiff failed to show that it had standing to foreclose.

MERS purportedly holds approximately 60 million mortgage loans (see Michael Powell & Gretchen Morgenson, MERS? It May Have Swallowed Your Loan, New York Times, March 5, 2011), and is involved in the origination of approximately 60% of all mortgage loans in the United States (see Peterson at 1362; Kate Berry, Foreclosures Turn Up Heat on MERS, Am. [*6]Banker, July 10, 2007, at 1). This Court is mindful of the impact that this decision may have on the mortgage industry in New York, and perhaps the nation. Nonetheless, 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.

Accordingly, the Supreme Court should have granted the defendants’ motion pursuant to CPLR 3211(a)(3) to dismiss the complaint insofar as asserted against them for lack of standing. Thus, the order is reversed, on the law, and the motion of the defendants Stephen Silverberg and Fredrica Silverberg pursuant to CPLR 3211(a)(3) to dismiss the complaint insofar as asserted against them for lack of standing is granted.
FLORIO, J.P., DICKERSON, and BELEN, JJ., concur.

ORDERED that the order is reversed, on the law, with costs, and the motion of the defendants Stephen Silverberg and Fredrica Silverberg pursuant to CPLR 3211(a)(3) to dismiss the complaint insofar as asserted against them for lack of standing is granted.

ENTER:

Matthew G. Kiernan

Clerk of the Court

Footnotes

Footnote 1: The promissory note executed in connection with the initial mortgage is not included in the record.

Footnote 2: About Us-Overview, MERS, http://www.mersinc.org/about/index.aspx (last visited Apr. 26, 2011).

Footnote 3: see About Us-Overview, MERS, http://www.mersinc.org/about/index.aspx (last visited Apr. 26, 2011).

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