Mortgage Assignee Claims: Hang on To That Promissory Note

In re Benyamin, 587 B.R. 243 (Bankr. S.D. N.Y. 2018) –

Chapter 11 debtors objected to a proof of claim that appeared to be filed by a servicer on behalf of an assignee of the original mortgagee. The court considered both standing and grounds for disallowing the claim.

The debtors executed a promissory note in favor of IndyMac Bank, F.S.B. secured by a mortgage on their condo. After IndyMac failed the FDIC sold most of its assets to OneWest Bank, which in turn was acquired by CIT Group.

The debtors filed bankruptcy in September 2017. Their bankruptcy schedules reflected a disputed claim of $410,000 held by IndyMac and a lien on their condo securing the claim.

Ditech Financial LLC (Ditech) filed a proof of claim in December 2017 for ~$455,000. The attachments included a copy of the IndyMac promissory note and mortgage and an affidavit stating that Green Tree Servicing, LLC was merged into DT Holdings LLC and Ditech Mortgage Company resulting in Ditech. There was no evidence that Ditech acquired assets from or had any contractual relationship with IndyMac, OneWest or CIT.

In March 2018 the debtors raised the issue of Ditech’s standing to file the proof of claim. Ditech’s counsel entered an appearance in April and filed a letter advising the court that counsel had asked Ditech to provide the original collateral file and was agreeable to making the file available to debtors’ counsel upon receipt.

After Ditech’s counsel failed to provide proof that Ditech had the original promissory note endorsed in blank, the debtors filed an objection to the claim in May 2018. Ditech then failed to appear at a June hearing on the matter and did not file any response until after the hearing (which the court disregarded as untimely).

The court began by analyzing standing to file a proof of claim: To file a claim the claimant must be a creditor or the creditor’s authorized agent. A creditor is an entity that has a prepetition claim. A claim is a right to payment or a right to an equitable remedy for a breach if the breach gives rise to a right to payment. If a proof of claim is filed, the claim is deemed allowed unless a party objects.

The court noted that a mortgage servicer is “clearly a creditor and has standing to file a proof of claim against the debtor pursuant to its duties as a servicer.” An assignee of a note and mortgage also has standing. However, under state law an assignment requires transfer of the note and mortgage.

Transfer can be accomplished by delivery of either (1) the note and mortgage by the assignor with the intention of transferring ownership interests or (2) a written instrument of assignment. Further, state law “invariably requires possession of the original note underlying the mortgage” as a condition of standing to file a proof of claim or to foreclose a mortgage and state court. As the court has “repeatedly reminded” mortgagees, under applicable state law the mortgage follows the note and assignment of the mortgage without the note is insufficient to support standing. (This is a typical real estate concept, although UCC and real estate lawyers do not necessarily see eye to eye on this issue.)

Thus, in order to have standing to file a proof of claim it was critical that Ditech have physical possession of the note that on its face or by allonge had an endorsement in blank or a special endorsement payable to the order of the assignee.

Under FRBP 3001(f) the proof of claim filed in accordance with the bankruptcy rules provides prima facie evidence of the validity and amount of the claim. FRBP 3001(c) requires that supporting documentation be attached.

The court noted that in the mortgage context initially a summary of the claim may be sufficient. However, upon the debtor’s request there is an obligation to provide additional documentation, such as the original note and mortgage or a written assignment.

Failure to provide sufficient documentation means that the proof of claim does not establish prima facie evidence of the validity of the claim, but does not necessarily mean that the claim is invalid. But under some circumstances, such as the lack of documentation followed by a failure to appear or respond to objections, may result in disallowance of the claim. However, if the debtor acknowledges that a debt is owed to someone and that a lien exists, a court may give the claimant an opportunity to file a new proof of claim.

The court laid out in detail deficiencies in Ditech’s documentation. Not only did Ditech not provide the original note, an assignment or appropriate affidavit, it failed to identify its relationship to the mortgage loan. (For example, was it the servicer?)

Thus, the court concluded that Ditech did not have standing and did not satisfy its burden to support the proof of claim. Accordingly, it sustained the debtors’ objection and expunged the claim. However, since it appeared that some claim and lien existed, the court suggested that Ditech could seek reconsideration of the claim under section 502(j) of the Bankruptcy Code if it acted promptly.

In connection with the sale of a portfolio of residential mortgage loans it seems that sometimes the parties can be relatively cavalier about rounding up and turning over all of the promissory notes. The assignee may come to regret this if it needs to take action to enforce one of the loans. A court may be influenced by the fact that precluding enforcement would be a windfall to the debtor, but there is no assurance that a court will be as willing as this court was to give the assignee multiple opportunities to establish its claim.

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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