Arthur S. Weissbrodt, U.S. Bankruptcy Judge.
Before the Court are cross-motions for summary judgment filed by Plaintiff David Randall Smith and Defendants CitiMortgage, Inc. ("Citi"), and Federal Home Loan Mortgage Corporation ("Freddie Mac"). Plaintiff appears in this proceeding in pro per; Defendants are represented by attorney Ellen Cha.
Defendants seek dismissal of the Plaintiff's remaining claims in this adversary proceeding — for declaratory relief that Defendants have no lien on Plaintiff's real property and no claim in this bankruptcy, and to quiet title. Plaintiff seeks summary judgment on all of his remaining claims for relief.
For the reasons set forth below, Defendants' motion is granted, and Plaintiff's motion is denied.
In January 2006 Plaintiff and his spouse, Sandra K. Smith (collectively, "Borrowers"), were approved by Reunion Mortgage,
The loan was funded through a combination of advances from a line of credit Reunion maintained with First Collateral Services, Inc. ("First Collateral"), which is an affiliate of Citi. The proceeds of the loan were used to pay off the Borrowers' loan with Washington Mutual Bank. Hatfield decl., Exhibit D.
In February of 2006, Citi purchased a pool of loans from Reunion, which included the Loan. The acquisition of the Loan was funded on February 6, 2006. Hatfield decl., ¶ 7; Exhibit E. As part of the transaction, Ginger Mendoza, Assistant Vice President of Reunion, indorsed the Note in blank and transferred physical possession of the Note to First Collateral. See Declaration of Ellen Cha, Exhibit B, docket no. 170. That indorsement was subsequently converted to a special indorsement to Citi. Id.; Hatfield decl., Exhibit B.
Reunion notified Borrowers of the transfer of the loan to Citi by letter dated February 7, 2006. Hatfield decl., Exhibit F. In conjunction with the purchase of the Loan, Citi acquired the servicing rights to the Loan, and Citi notified Borrowers that Citi was the servicer on February 18, 2006. Hatfield decl., Exhibit G.
On March 13, 2006, Citi sold the Loan to Freddie Mac for $226,794.79. Hatfield decl., ¶ 12; Declaration of Dean Meyer, ¶ 5, docket no. 168; Cha decl., Exhibit D (Meyer transcript), page 57. The sale of the Loan is reflected in Citi's records as a sale to "Investor 3404," the internal code Citi uses to identify Freddie Mac.
In conjunction with its acquisition of the Loan, Freddie Mac required: (i) Citi to deliver the Note and Deed of Trust to Freddie Mac, or its designee to serve as the document custodian of the Loan; (ii) the Note to be indorsed in blank; and (iii) the designated document custodian to verify certain information contained in the Note and related documents for the Loan, and to certify that it performed the verification and that the original Loan documents, including the Note, were in its possession, a process Freddie Mac refers to as "certification" or "certifying" the Note. Meyer decl., p. 6; Cha decl., Exhibit C (Sims Transcript), pages 28, 66; Cha decl., Exhibit D (Meyer Transcript), pages 174-75. Before the sale to Freddie Mac closed, (i) Citi delivered the original Note, indorsed in blank, and Deed of Trust to Citibank, N.A. ("Citibank"), an affiliate of Citi, as Freddie Mac's designated document custodian; (ii) Citi represented and warranted to Freddie Mac that Citi was the owner of the Loan for purposes of the sale to Freddie Mac; and (3) Citibank, as designated document custodian of the Loan, completed the certification of the Note. Meyer decl., page 8; Cha decl., Exhibit D (Meyer Transcript), pages 72, 155; Cha decl., Exhibit C (Sims Transcript), page 28.
In addition, Janet Sims, as a Vice President of Citi, indorsed the Note in blank on behalf of Citi as seller, as required under section 56.7 of the Freddie Mac Single Family/Single-Family Seller/Servicer Guide (the "Guide"). See Cha decl., Exhibit C (Sims Transcript) and Exhibit F (the Guide), docket no. 170.
Freddie Mac offers Mortgage Participation Certificates ("PCs"), which are securities that represent interests in and receive payments from pools of one- to four-family residential mortgages. Meyer decl., ¶ 13. Shortly after purchasing the Loan, Freddie Mac issued a Pool Supplement to the original offering circular dated February 1, 2001, which indicated that the Loan was part of PC Pool Number A44088. Meyer decl., ¶ 16; Cha decl., Exhibit D (Meyer Transcript), page 92. The placement of the Loan into the pool did not change ownership of the Loan itself; according to Mr. Meyer's declaration, Freddie Mac has always owned a 100% interest in the Note since the Loan was purchased from Citi in 2006. Meyer decl., ¶ 19. As a result of Borrowers' default under the Loan, the Loan was removed from PC Pool A44088 on February 15, 2010. Meyer decl., ¶ 21.
In October of 2009, following Borrowers' default, Citi retained Cal-Western Reconveyance Corporation ("Cal Western") to initiate foreclosure proceedings against the Property. Cal-Western was the duly appointed substitute trustee under the Deed of Trust. As authorized under the Guide, Freddie Mac authorized Citi to cause the Deed of Trust to be assigned to Citi. Cha decl., Exhibit D (Meyer transcript), page 79; RJN, Exhibit C, docket no. 171. On October 5, 2009, Yvonne Wheeler, who is an employee of Cal-Western, but in her capacity as Assistant Secretary of Mortgage Electronic Registration Systems, Inc. ("MERS") executed an assignment of Deed of Trust to Citi ("Assignment"), which was recorded on January 19, 2010. RJN, Exhibit D.
On March 10, 2010, before the foreclosure sale could be held, Plaintiff filed the instant bankruptcy proceeding under chapter 13. The case was converted to chapter 11 on February 14, 2011. On April 2, 2010, Citi filed a proof of claim for $222,926.35, secured by the Property, attaching an itemization of the amounts owed, and a copy of the Note, Deed of Trust, Notice of Loan Transfer letter dated February 7, 2006, and the Assignment. Citi also moved for relief from stay. Plaintiff objected to Citi's standing on the same grounds as raised in this adversary proceeding. The Court ordered supplemental declarations and briefing. On September 16, 2010, Citi filed in the main case the declaration of Travis J. Lillie, counsel for Citi. In his declaration, Mr. Lillie testified that he had received the original "blue ink" Note from Citi on September 16, 2010, at which time he made a copy of the note and attached that photocopy to the declaration. Thereafter the Court found that Citi had a colorable claim of standing to prosecute the motion. On June 16, 2011 the Court entered an adequate protection order requiring Plaintiff, among other conditions, to make regular monthly payments of $1,607.08 plus $1,888.42 per month toward post-petition arrears until paid in full. The Court subsequently denied Plaintiff's motion for reconsideration of that order.
Plaintiff filed the instant adversary proceeding on April 13, 2011. On July 7, 2011, the Court granted Defendants' motion to dismiss Plaintiff's third, fourth, and fifth causes of action.
Summary judgment shall be rendered by the Court if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56, incorporated in bankruptcy via Fed. R. Bank. P. Rule 7056; Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corporation, 475 U.S. 574, 584-85, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1985). All inferences must be drawn against the moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962). Where a rational trier of fact could not find for the non-moving party based on the record as a whole, there is no "genuine issue for trial." Matsushita Elec. Indus. Co., 475 U.S. at 587, 106 S.Ct. 1348.
The parties have filed cross-motions for summary judgment. Although Plaintiff asserts in his response to Defendants' motion that there are factual issues remaining vis-à-vis Defendants' motion, Plaintiff also asserts that the undisputed facts warrant granting summary judgment in Plaintiff's favor on Plaintiff's claims.
To resolve these motions, the Court need answer only one question: does Citi have the right to enforce the Note? Plaintiff asserts that Citi is not "a person entitled to enforce an instrument" under Cal. Comm. Code § 3301 (quoted below) because (1) the Note is not governed by Article 3 of the UCC, but by Article 9; (2) the original lender did not give consideration for the Note; (3) the Note is not properly endorsed to Citi; and (4) the securitization of the loan into a pool gave the pool investors rights in the Note or otherwise disrupted the chain of title so as to render the Note unenforceable. Plaintiff further argues that the Assignment of the Deed of Trust to Citi was a false conveyance because at the time the Assignment was executed, Citi did not own the loan and so was not the beneficiary with authority to instruct Cal-Western to execute the Assignment. Based upon the evidence provided, the Court finds that Citi is entitled to enforce the Note.
Plaintiff argues that the promissory note is governed by Article 9 of the Uniform Commercial Code ("UCC"). Plaintiff's argument is difficult to follow, but appears to pertain specifically to the securitization of the Note; Plaintiff argues that the Note could not be enforced while the Note was held in a securitized trust. Plaintiff offers no authority or evidence to support these contentions; nor does Plaintiff explain why, if Article 9 applies, this makes any difference as to whether Citi is entitled to enforce the Note. As discussed infra, securitization does not change the obligation of the borrower to pay the note or the note holder's right to foreclose. In re Nordeen, 495 B.R. 468, 479-80 (9th Cir. BAP 2013). Plaintiff misapprehends the application of Article 3 and Article 9 to promissory notes.
Article 3 of the UCC pertains to negotiable instruments. Cal. Comm. Code § 3102. Article 9 governs the sale of most payment rights, including the sale of both negotiable and non-negotiable promissory notes. See Cal. Comm. Code § 9109(a)(3) (scope of Division 9 of the California Commercial Code includes sale of promissory notes); see also Report of the Permanent Editorial Board for the Uniform Commercial Code, Application of the Uniform Commerical Code to Selected Issues Relating to Mortgage Notes (ALI/NCCUSL, Nov. 14, 2011), at 2 and 8 ("Report"). However, the sale of a promissory note under Article 9 does not necessarily change the identity of the person entitled to enforce the note. Report, at 8 (citing UCC § 3-301, identical to Cal. Comm. Code § 3301, which provides that a person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument).
Under California law, a negotiable instrument is defined as "an unconditional promise or order to pay a fixed amount of money." Cal. Comm. Code § 3104(a). For an instrument to be negotiable under California law: (1) it must be made payable to bearer or order at the time it is issued or first comes into possession of a holder; (2) it must be payable on demand or at a definite time; and (3) it must not
Plaintiff argues that Reunion was not the lender or true originator of the Loan because the funds for the loan came from First Collateral. Plaintiff argues that Citi's rights as transferee of the Note are derivative of Reunion's, and because Reunion provided no consideration, the Note is not enforceable.
Plaintiff misconstrues the applicable law. It is undisputed that Plaintiff received consideration for the Note and Deed of Trust; as noted, the loan proceeds were used to pay off Plaintiff's loan with Washington Mutual Bank, which executed a full reconveyance. California law defines "good consideration" as
Cal. Civ. Code § 1605. Plaintiff has cited no authority to support the notion that the funding of a loan by a third party somehow invalidates a promissory note. Consideration for a contract, including a promissory note, may be provided by a third party.
In re Weisband, 427 B.R. 13, 22 (Bankr. D.Ariz.2010) (citing DCM Ltd. P'ship v. Wang, 555 F.Supp.2d 808, 817 (E.D.Mich. 2008); 3 Williston on Contracts § 7:20 (Richard A. Lord, 4th ed. 2009); Restatement (Second) of Contracts § 71(4) (2009)).
Under California law, a "person entitled to enforce" an instrument is defined as
Cal. Comm. Code § 3301.
Plaintiff argues that the Note itself defines who is the holder of the Note: "The Lender or anyone who takes this Note by transfer and who is entitled to receive payments under the Note is called
Plaintiff argues that the endorsements on the Note do not establish that the Note was transferred to Citi. The Note contains two undated endorsements. One endorsement appears on the back of the last page of the Note, and reads "Pay to the order of: CitiMortgage, Inc. Without Recourse," and is signed by Ginger Mendoza as Assistant Vice President of Reunion Mortgage, Inc. The other endorsement appears on the last page of the Note and reads "Pay to the order of ______________ without recourse on as [sic] CitiMortgage, Inc.," and is signed by Janet L. Sims, as Vice President of CitiMortgage, Inc. The blank on the endorsement stamp has not been filled in. Plaintiff argues that the fact that there is no date on either endorsement is inadequate to confer holder status. In the case cited by Plaintiff to support this contention, U.S. Bank Nat'l Ass'n v. Kimball, 190 Vt. 210, 217-18, 27 A.3d 1087 (2011), the Vermont Supreme Court upheld the trial court's conclusion that there was no evidence to show that U.S. Bank was the holder of the promissory note at issue when its complaint was filed, and therefore lacked standing. The court's conclusion was based on the fact that there was no evidence as to the timing of the endorsement. Here, Defendants have produced evidence that the Note was endorsed and physically transferred to Citibank, an affiliate of Citi, as Freddie Mac's designated document custodian, in February and March 2006, well before foreclosure proceedings were commenced.
Plaintiff next argues that the blank endorsement is not truly a blank endorsement because it contains restrictions in the form of language "pay to the order of" and "without recourse." Therefore, according to Plaintiff, Citi cannot be a holder of the Note.
Plaintiff cites to no authority that an endorsement that does not identify a payee is not a blank endorsement if the stamp contains "pay to the order of" or "without recourse" language. The Court has found no authority that the presence of extraneous language on an endorsement invalidates an otherwise blank endorsement. Under Cal. Comm. Code § 3205, an endorsement by the holder that identifies a person to whom it makes the instrument payable is a special endorsement; an endorsement made by the holder of an instrument that is not a special endorsement is a blank endorsement; and the holder may convert a blank endorsement into a special endorsement by writing words identifying the person to whom the instrument is made payable. See also In re Lee, 408 B.R. 893, 899-900 (Bankr.C.D.Cal. 2009) (if endorsement does not specify a payee, it constitutes a blank endorsement).
Plaintiff argues, without authority, that physical possession of the Note is not sufficient to establish Citi's status as a holder. Plaintiff also argues that there is no proof that Citi holds the Note as a servicer for Freddie Mac or that Citi is authorized to enforce the Note on behalf of Freddie Mac. However, as noted, Janet Sims (Senior
California's nonjudicial foreclosure statute, Cal. Civ. Code § 2924, provides a "comprehensive framework for the regulation of a nonjudicial foreclosure sale pursuant to a power of sale contained in a deed of trust." Lona v. Citibank, N.A., 202 Cal.App.4th 89, 134 Cal.Rptr.3d 622 (2011). Under Cal. Civ. Code § 2924, the party initiating foreclosure proceedings is not required to have a beneficial or economic interest in the note in order to foreclose. Lane v. Vitek Real Estate Indus. Grp., 713 F.Supp.2d 1092, 1099 (E.D.Cal.2010); Castaneda v. Saxon Mortgage Servs., 687 F.Supp.2d 1191, 1201 (E.D.Cal.2009) (no requirement that entity initiating foreclosure has physical possession of the underlying note). Instead, a "trustee, mortgagee, or beneficiary, or any of their authorized agents" may commence the nonjudicial foreclosure process. Cal. Civ. Code § 2924(a)(1).
The evidence submitted by Defendants shows that Citi both holds the Note and also services the loan for Freddie Mac. Nothing more is required to establish Citi's right to enforce the Note.
Plaintiff contends that there is no evidence of an assignment of the Loan either into or out of a pool. Plaintiff argues that if the Loan was placed into a pool and not removed, Plaintiff may still have liability to pool investors, because the investors became the holders of the Note. Contrary to Plaintiff's assertion, Defendants have provided evidence of the transfers both in and out of the pool. According to the Meyer declaration, Plaintiff's loan was placed into PC Pool A44088 on or around March 6, 2006, and removed from the pool on February 15, 2010. Plaintiff offers no contrary evidence.
Even if the Loan had not been removed from the pool, securitization does not change the obligation of the borrower to pay the note or the note holder's right to foreclose. Nordeen, 495 B.R. at 479-80:
The uncontested evidence before the Court is that the Loan was transferred into the pool and removed from it. The transfer of the Loan into and out of the pool did not impact Citi's right to enforce the Note.
Plaintiff argues that the Assignment to Citi recorded on January 19, 2010
Plaintiff argues that Ms. Wheeler was not an officer of MERS when she executed the Assignment. However, Ms. Wheeler was appointed as Assistant Secretary of MERS in accordance with MERS' Corporate Resolution dated July 14, 2000, Cha decl., ¶ 3, Exhibit A (Wheeler transcript), page 20, and in that capacity she was authorized to assign the lien of any mortgage loan naming MERS as the mortgagee when Cal-Western is under contract with a MERS Member who is also the current promissory note holder. Id. at 118-119.
In any event, even if there were irregularities in the Assignment, any transfer of the note automatically carries with it a transfer of the deed of trust. Davidson v. Countrywide Home Loans, Inc., 2010 WL 962712, at *5 (S.D.Cal. Mar. 16, 2010); Cal. Civ. Code § 2936 ("The assignment of a debt secured by mortgage carries with it the security.") As the note holder, Citi was authorized to initiate foreclosure.
Because Defendants have established that Citi is entitled to enforce the Note, Defendants are entitled to summary judgment of dismissal of Plaintiff's claims. Defendants' motion is granted, and Plaintiff's motion is denied. Defendants may submit a proposed form of judgment.
Here, Ms. Wheeler was appointed as Assistant Secretary of MERS in accordance with MERS' Corporate Resolution dated July 14, 2000. In her capacity as Assistant Secretary, Ms. Wheeler was authorized to assign the lien of any mortgage loan naming MERS as the mortgagee when Cal-Western is under contract with a MERS Member who is also the current promissory note holder. Cha decl., Exhibit A (Wheeler Transcript), pages 118-19.
