Mortgagee Standing: This Time MERS Is Not The Problem (a/k/a Sloppy Securitization Procedures Strike Again)

In re Idicula, 484 B.R. 284 (Bankr. S.D. N.Y. 2013) –

A servicer acting on behalf of U.S. Bank National Association, as trustee on behalf of holders of asset backed pass-through certificates, moved for relief from the automatic stay in order to proceed with a mortgage foreclosure.  Although neither the debtor nor the chapter 7 trustee objected, the court denied the motion because it found no evidence that U.S. Bank owned or had a right to enforce the promissory note secured by the property.  Since U.S. Bank did not show that it had standing to pursue the foreclosure, it did not establish that it had a right to relief from the stay.

This case involved a servicer acting on behalf of a trustee and a mortgage that identified the mortgagee as Mortgage Electronic Registration Systems, Inc. (MERS) as nominee for the initial lender – which sometimes seems like an open invitation to litigate standing.  However, this did not trouble the Idicula court.  It noted that (1) it is well established that a mortgage servicer can seek relief on behalf of a lender, provided that the lender had standing, and (2) under the court’s analysis the only significant issue was who controlled the promissory note, so MERS was irrelevant since it did not have any rights with respect to the note.  Rather, the court’s objection was that there was no evidence that the promissory note was properly transferred to U.S. Bank.

Under the court’s analysis, relief from the automatic stay can be granted only on request of a “party in interest.”  Although not defined in the Bankruptcy Code, under Second Circuit law this means the party must be either a creditor or a debtor.  A creditor is an entity that has a claim, and claim is broadly defined so that it would include the right to foreclose a mortgage.  Consequently the key question was whether U.S. Bank had standing to foreclose the mortgage under state law.

The court cited state law for the proposition that transfer of a mortgage without the debt is a nullity, but that transfer of a promissory note causes the mortgage to transfer as an incident to the note.  According to the motion for relief from the stay and supporting affidavits, U.S. Bank was the current creditor because the note was transferred by way of an allonge.  However, the copy of the note attached as an exhibit to the pleadings did not include any allonge.

The note that was submitted with the motion did include two endorsements:  first, Aegis Lending Corporation (originating lender) endorsed the note to Aegis Mortgage Corporation, and then Aegis Mortgage Corporation endorsed the note in blank (“i.e., a result of the blank space between ‘PAY TO THE ORDER OF’ and ‘WITHOUT RECOURSE’ in the second endorsement”).  Delivery of an original note endorsed in blank is sufficient to transfer ownership under applicable state law.

Ownership of the note could have been established either by producing the allonge or by producing evidence that the note endorsed in blank had been delivered to U.S. Bank.  However, there was no evidence of either form of transfer in the record.

This is not the first case in which the Idicula judge held that a lender lacked standing because it could not show that the note was effectively transferred to it.  In a reported case involving Wells Fargo Bank, N.A., he found that Wells Fargo did not have standing because it could not show that the note was either physically delivered or assigned.  In a second reported case involving U.S. Bank as well as the same law firm involved in Idicula, he held that U.S. Bank did not establish standing because the only assignment was by MERS, which purported to transfer both the mortgage and the note.  However, MERS did not have any legal rights to the note, so could not transfer it.

One can understand why the court might start to feel exasperated at the continuing failures to address a simple, basic concept.  A footnote in
the Idicula opinion included the comment that it was unclear to the court whether the failure “to include the allonge, if there is one, was a result of sloppiness by counsel or of purposeful obfuscation by counsel or the moving party.”

There have been a number of confusing decisions that appeared to turn on a court’s failure to understand the role of a servicer or the nature of MERS.

In addition, the intersection between real estate law and Uniform Commercial Code (UCC) treatment of promissory notes secured by real estate can be less than clear.  According to a report of the Permanent Editorial Board for the Uniform Commercial Code on application of the UCC to mortgage notes, the UCC confirms the common law rule that an assignment of a note automatically transfers the mortgage securing the note.  On the other hand, the report notes that this does not address the effect of failing to record a mortgage assignment in the land records on the right to enforce the mortgage.  In many states assignment of the note without an assignment of the mortgage will not be sufficient to permit foreclosure of the mortgage.

However, none of these issues were implicated in this case.  Rather this was a straightforward question of whether the note itself had been properly transferred.  Regardless of the nuances noted above, a mortgagee that cannot establish that it has rights to the obligation secured by the mortgage will not have a leg to stand on if it attempts to get relief from the stay to permit a foreclosure.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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