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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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[NYBKC] WELLS FARGO ASSIGNMENT, STEVEN J. BAUM P.C. COUNSEL UNABLE TO ANSWER QUESTIONS IN SUPPORT

[NYBKC] WELLS FARGO ASSIGNMENT, STEVEN J. BAUM P.C. COUNSEL UNABLE TO ANSWER QUESTIONS IN SUPPORT


In re: TANDALA MIMS AKA TANDALA WILLIAMS, Chapter 7, Debtor.

Case No. 10-14030 (MG).

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

October 27, 2010.

STEVEN J. BAUM, P.C., Amherst, NY, By: Phillip Mahony, Esq., Attorneys for Secured Creditor Wells Fargo Bank, N.A.

LAMONICA HERBST & MANISCALCO, LLP Wantagh, NY, By: Salvatore Lamonica, Esq., Chapter 7 Trustee.

LAW OFFICE OF DAVID BRODMAN, Bronx, NY, By: David Brodman, Esq., Attorney for Debtor Tandala Mims.

MEMORANDUM OPINION AND ORDER DENYING WELLS FARGO BANK, N.A.’S MOTION FOR TERMINATION OF THE AUTOMATIC STAY

MARTIN GLENN, Bankruptcy Judge

Wells Fargo Bank, N.A. (“Wells Fargo”) moves the Court for an order lifting the automatic stay with regard to 1167 Grenada Place, Bronx, NY 10466 (the “Property”) pursuant to section 362(d) of the Bankruptcy Code (the “Motion”). Wells Fargo desires to exercise its rights under a mortgage (the “First Mortgage” or “Mortgage”) and promissory note (the “Note”), including, but not limited to, the foreclosure of the Property. (ECF Doc. # 9.) The Court held a hearing on the Motion on October 20, 2010 and took the matter under submission. The Court denies Wells Fargo’s motion to lift the automatic stay for the reasons enumerated below.

BACKGROUND

Tandala Mims, a/k/a Tandala Williams (the “Debtor”), filed a voluntary petition under chapter 7 of the Bankruptcy Code on July 27, 2010. (ECF Doc. # 1.) Wells Fargo contends that it is a secured creditor of the Debtor by an assignment of mortgage dated September 13, 2010, in the principal amount of $374,037.00 (the “Assignment”). The property is subject to two mortgages. The First Mortgage to Wells Fargo, dated May 10, 2004, indicates that the lender was Lend America, and was recorded in the name of Mortgage Electronic Registration Systems (“MERS”), as nominee for Lend America.[1] Wells Fargo claims that the Debtor owes $355,398.13 on the First Mortgage. The Debtor also has a second mortgage with M&T Bank (the “Second Mortgage”), which when combined with the First Mortgage and lien, totals $389,647.13. In support of its standing to bring the Motion, Wells Fargo attaches (1) loan documents, including the First Mortgage and accompanying Note; (2) a copy of the Debtor’s Schedules A and D (the “Schedules”),[2] in which the Debtor lists Wells Fargo as a secured creditor with respect to the Property and (3) a lift-stay worksheet, dated September 16, 2010, pursuant to Local Rule 4001-1(c) (the “Worksheet”).

The Note attached to the Motion was originally made payable to Lend America. The last page of the Note, however, contains a stamped endorsement, “Paid to the Order of Washington Mutual Bank, FA, Without Recourse Lend America.” (ECF Doc. # 9, at Ex. 1.) No evidence is offered that Washington Mutual Bank ever assigned or transferred the Note to Wells Fargo or to any other party. Washington Mutual Bank was taken over by the FDIC on September 25, 2008, and its assets were sold to J.P. Morgan Chase (“Chase”) on that same date. Press Release, Fed. Deposit Ins. Corp., JP Morgan Chase Acquires Banking Operations of Washington Mutual (Sept. 25, 2008) (on file with FDIC). There is nothing in the record to indicate whether Chase acquired the Note and whether Chase, in turn, subsequently transferred the Note to Wells Fargo.

The Worksheet reflects that the Debtor’s total pre-petition and post-petition indebtedness to Wells Fargo on the Property, as of the petition date, was $355,398.13; that the Debtor’s last payment was received on June 4, 2010 (but was placed in a suspense account); and that the Debtor has missed six payments, from April 1, 2010 to September 1, 2010. In support of its claim that the Debtor lacks any substantial equity in the property, Wells Fargo attaches the Debtor’s Schedule A and Schedule D, which list the current value of the Property as $430,000. Assuming the accuracy of this figure, the Debtor would have exempt equity in the property.[3] The Debtor’s Schedules claim the property as exempt and states the Debtor’s intention to retain the property.

The signature on the Worksheet indicates that it was prepared by Craig C. Zecher, a Wells Fargo legal process specialist. Despite the fact that Wells Fargo did not obtain an assignment of the Mortgage until September 13, 2010, seven days before the lift-stay motion was filed on September 20, 2010, the Worksheet provides information about payment defaults dating back to April 1, 2010. Wells Fargo’s ability to certify the accuracy of the information provided in the Worksheet is questionable given its only recently acquired interest in the First Mortgage.[4]

Neither the Debtor’s counsel nor the chapter 7 trustee filed anything in response to the lift-stay motion.

DISCUSSION

The Court concludes that Wells Fargo lacks standing to request relief from the automatic stay.

A. Wells Fargo is Not a “Party in Interest” And Therefore Lacks Standing to Request Relief From the Automatic Stay

Section 362(a) of the Bankruptcy Code imposes 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). Section 362(d) of the Bankruptcy Code provides that “[o]n request of a party in interest and after notice and a hearing, the court shall grant relief from the stay . . . .” 11 U.S.C. § 362(d) (emphasis added). The term “party in interest” is nowhere defined in the Bankruptcy Code. However, the Supreme Court has suggested that when an undefined term is used in bankruptcy law, “[i]n determining the term’s scope—and its limitations—the purposes of the Bankruptcy Act `must ultimately govern.'” Kokoszka v. Belford, 417 U.S. 642, 645 (1974) (citing Segal v. Rochelle, 382 U.S. 375, 379 (1966)).

Though courts have interpreted the “purposes of the Bankruptcy Act” differently, the Second Circuit explained in In re Comcoach, 698 F.2d 571, 573 (2d Cir. 1983), “[b]ankruptcy courts were established to provide a forum where creditors and debtors could settle their disputes . . . .” The Comcoach court went on to find that in order to invoke the court’s jurisdiction to obtain relief from the automatic stay, the moving party had to be either a creditor or a debtor.[5]Id. In support of this assertion, the court cited to the Bankruptcy Code’s legislative history “which suggests that, notwithstanding the use of the term `party in interest’, [sic] it is only creditors who may obtain relief from the automatic stay.” Id. (citing H.R.REP. NO. 95-595, (1978), reprinted in 1978 U.S.C.C.A.C. 5787, 6136 (“Creditors may obtain relief from the stay if their interests would be harmed by continuance of the stay.”)). It follows from the Second Circuit’s analysis that unless Wells Fargo qualifies as a “creditor,” it does not have standing to request relief from the automatic stay.

Section 101(10) of the Bankruptcy Code defines a “creditor” as an:

(A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor;

(B) entity that has a claim against the estate of a kind specified in section 348(d), 502(f), 502(g), 502(h) or 502(i) of this title; or

(C) entity that has a community claim.

11 U.S.C. § 101(10). This definition requires consideration of what constitutes a “claim,” which conveniently is also a defined term in section § 101(5) of the Bankruptcy Code.

Section 101(5)(A) of the Bankruptcy Code defines a “claim” as the “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.” Even under this broad definition, Wells Fargo has not demonstrated its “right to payment” because, as discussed more fully below, it lacks the ability to seek the state law remedy of foreclosure. Johnson v. Home State Bank, 501 U.S. 78, 84 (1991) (finding that a mortgage foreclosure was a “right to payment” against the debtor).

B. Wells Fargo Lacks Standing to Exercise any State Law Remedies

Within the context of a bankruptcy proceeding, state law governs the determination of property rights. 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 “foreclosure 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). As the courts in Kluge and HSBC have recognized, this rule of law dates back over one hundred and forty years, when the New York Court of Appeals held:

[a]s a mortgage is but an incident to the debt which it is intended to secure the logical conclusion is that a transfer of the mortgage without the debt is a nullity, and no interest is acquired from the debt, and exist independently of it. This is the necessary legal conclusion, and recognized as the rule by a long course of judicial decisions. Merritt v. Bartholick, 36 N.Y. 44, 45 (1867). Because Wells Fargo has not offered evidence that it owns the original Note, Wells Fargo lacks standing to foreclose on the Mortgage and has therefore failed to demonstrate it is the holder of a “claim.”

According to N.Y. REAL PROPERTY LAW § 244, assignments in New York state may be effectuated by the delivery of the relevant note and mortgage. An assignment need not be evidenced by a written assignment. In re Conde-Dedonato, 391 B.R. 247, 251 (Bankr. E.D.N.Y. 2008) (citing Flyer v. Sullivan, 284 A.D. 697, 699 (1st Dept. 1954) (“Our courts have repeatedly held that a bond and mortgage may be transferred by delivery without a written instrument of assignment.”)). Delivery requires the physical transfer of the instrument from assignor to assignee. Bank of New York v. Mulligan, No. 29399-07, 2010 WL 3339452, at *6 (N.Y. Sup. Ct., Kings County Aug. 25, 2010).

Wells Fargo has not supplied the Court with any evidence that the Note was physically delivered or assigned pursuant to a written agreement. Here, the Note only indicates a transfer from Lend America to Washington Mutual Bank and not to Wells Fargo. Wells Fargo has not presented any evidence that it is in possession of the original Note, or that it received the Note via a valid written assignment. Arguably, Wells Fargo has proved that it is the title holder of the Mortgage, as of a date seven days before the filing of the Motion, but the Assignment of Mortgage does not include language assigning the Note along with the Mortgage. Had the assignor desired to assign the Note using the same instrument, it could have used different language to accomplish this end. MCKINNEY’S REAL PROPERTY LAW § 258 [Schedule O], contains a form “Assignment of Mortgage” which clearly assigns both the mortgage and the underlying debt. The form contains the following language:

Know that……, assignor, in consideration of …….. dollars, paid by…….., assignee, hereby assigns unto the assignee, a certain mortgage made by …….., given to secure payment of the sum of…….. dollars and interest, dated the …….. day of ………., recorded on the ……. day of ……., in the office of the…….. of the county of ………, in liber ……. of mortgages, at page …….., covering premises …….., together with the bond or obligation described in said mortgage, and the moneys due and to grow due thereon with the interest,

To have and to hold the same unto the assignee, and to the successors, legal representatives and assigns of the assignee forever. In witness whereof, the assignor has hereunto set his hand and seal this…… day of ……., nineteen hundred and ……. In presence of:

As one court recently cautioned, “[w]hile an assignor is not required to use statutory Form [sic] O, if it intends to assign the mortgage and the underlying debt, it is well advised to employ language that unambiguously does so.” Deutsche Bank Nat. Trust Co. v. McRae, 894 N.Y.S.2d 720, 722 (N.Y. Sup. Ct., Allegany County 2010). As Wells Fargo has failed to prove it owns the Note, it has failed to establish that it has standing to pursue its state law remedies with regard to the Mortgage and Property.

C. The Court Has Additional Reservations Regarding the Validity of the Mortgage Assignment

In support of its Motion, Wells Fargo annexed a copy of the Mortgage as Exhibit A to the Motion. While there is nothing that undermines the facial validity of the Mortgage, there are issues surrounding the Assignment from MERS, as nominee for Lend America, to Wells Fargo. The September 13, 2010 Assignment suggests that it may have been executed simply for purposes of enabling Wells Fargo to file a lift-stay motion. An assignment in anticipation of bringing a lift-stay motion does not in and of itself indicate bad faith. However, in the absence of a credible explanation, describing how, when and from whom Wells Fargo derived its rights, relief from the stay will not be granted. Second, MERS, as nominee for Lend America, and presumably its Assistant Vice President, John Kennerly, whose signature is on the assignment, have an address in Ocala, Florida. Kennerly’s signature on the Assignment was, however, notarized in South Carolina, the address shown on the Assignment for Wells Fargo. Did Kennerly personally appear before the notary as represented? If not, is the Assignment valid? When asked about these issues during the October 20, 2010 hearing, Wells Fargo’s counsel was unable to answer any questions about the supporting documents. All of these matters will need to be addressed if Wells Fargo renews its lift-stay motion. Under FED. R. BANKR. P. 9014(a), the Motion to lift the automatic stay created a contested matter. Under that Rule, “No response is required . . . unless the court directs otherwise.” Id. In the event a new lift-stay motion is filed, Debtor’s counsel and the chapter 7 trustee are directed to file a response.

CONCLUSION

For the reasons explained above, Wells Fargo’s motion to lift the automatic stay is DENIED without prejudice.

IT IS SO ORDERED.

[1] The State of New York’s Banking Department website indicates that, “[o]n November 30, 2009, The Federal Housing Administration (FHA) withdrew the FHA approval of . . . [Lend America]. As a result, Lend America was prohibited from originating and underwriting new FHA-insured mortgages or participating in the FHA single family insurance program. Effective December 1, 2009, Lend America discontinued its mortgage origination operations. However, the company continues service [sic] mortgage loans.” IDEAL MORTGAGE BANKER D/B/A LEND AMERICA, http://www.banking.state.ny.us/lendamerica.htm (last visited October 21, 2010).

[2] The Schedules were attached to the Debtor’s petition. Schedule A lists Real Property and Schedule D lists Creditors Holding Secured Claims. (ECF Doc. # s 1, 9.)

[3] The Bankruptcy Code contains a set of federal exemptions and permits debtors to choose between either federal or state exemptions. 11 U.S.C. § 522(b)(1). However, the Bankruptcy Code also permits individual states to “opt-out” of the federal exemption scheme. See e.g., In re Corio, 190 B.R. 498, 499 (Bankr. E.D.N.Y. 1995). Pursuant to N.Y. DEBT. & CRED. LAW § 284, New York is one state that has opted-out from the federal exemption scheme. Consequently, the real property exemptions of CPLR § 5206 govern. Contained within CPLR § 5206(a) is New York’s homestead exemption, which provides that qualifying real property is exempt from “application to [satisfy] a money judgment” if the value of the real property does not “[exceed] fifty thousand dollars in value above liens and encumbrances, [and is] owned and occupied as a principal residence.” Qualifying real property under CPLR § 5206(a)(1) includes “a lot of land with a dwelling thereon.”

[4] The Worksheet states: “I certify that the information provided in this form and/or any exhibits attached to this form (other than the transactional documents attached as required by paragraphs 1, 2 and 3, immediately above) is derived from records, that were made at or near the time of the occurrence of the matters set forth by, or from information transmitted by, a person with knowledge of those matters, were kept in the course of the regularly conducted activity; and were made by the regularly conducted activity as a regular practice.” The Worksheet was then signed by Craig C. Zecher, Legal Process Specialist. (ECF Doc. # 9.)

[5] The facts in Comcoach involved a bank, and therefore this language should not be read to exclude from the definition of a “party in interest” the United States Trustee or other corporate or corporeal entities specifically given standing in the Bankruptcy Code or applicable case law.

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