ERIC L. FRANK, Bankruptcy Judge.
In this chapter 13 bankruptcy case, Debtor Janice Walker has filed an objection ("the Objection") to the secured proof of claim ("the Proof of Claim") of the Certificateholders CWALT, Inc., Alternative Loan Trust 2005-J14 Mortgage Pass Through Certificates ("the Trust"). The Trust filed the Proof of Claim through its trustee, the Bank of New York Mellon ("BNYM").
The Debtor's primary challenge to the validity of BNYM's claim is based on alleged defects in the process by which the underlying mortgage loan was "securitized"
As explained below, I conclude that:
Consequently, I will overrule the Objection.
The Debtor commenced this chapter 13 bankruptcy case on March 31, 2010. The Debtor's proposed chapter 13 plan provides for the Debtor to make post-petition payments on her residential mortgage and to cure the pre-petition delinquency on the mortgage through her chapter 13 plan payments to the chapter 13 trustee. (Debtor's Amended Plan ¶¶ 5-6) (Doc. # 35). See 11 U.S.C. § 1322(b)(5).
On September 17, 2010, BNYM filed a secured proof of claim in the amount of $264,855.72 ("the Proof of Claim"). BNYM filed the Proof of Claim through its agent, BAC Home Loans Servicing LP. The Proof of Claim also stated that the pre-petition arrears are $31,703.63.
The Debtor filed the Objection to the Proof of Claim on November 16, 2010. (Doc. # 50). After a number of continuances, a hearing on the Objection was scheduled on April 7, 2011. Following a colloquy in which the parties and the court canvassed the legal and factual issues raised by the Debtor, BNYM requested the opportunity to file a motion for summary judgment. See Fed. R. Bankr.P. 9014(c) (providing that Fed. R. Bankr.P. 7056, which incorporates Fed.R.Civ.P. 56, applies in contested matters). I granted that request and entered an order setting deadlines for filing BNYM to file a summary judgment motion ("the Motion") and the Debtor to respond. (Doc. # 97). BNYM subsequently filed the Motion, the Debtor responded and briefing was completed on July 22, 2011.
In her response to the Motion, the Debtor agreed there are no disputed issues of material fact and asserted that she is entitled to summary judgment disallowing the Proof of Claim. As requested by the Debtor, I will treat her response as a cross-motion for summary judgment ("the Cross-Motion"). See, e.g., Western World Ins. Co. v. Reliance Ins. Co., 892 F.Supp. 659, 661 (M.D.Pa.1995) (the weight of authority is that summary judgment may be granted in favor of a responding party
1. The Debtor is the owner of the residential real property located at 63 Buttonwood Drive Exton, PA 19341 ("the Property").
2. On August 31, 2005, the Debtor entered into a loan transaction ("the Loan") with Allied Mortgage Group, Inc. ("Allied").
3. The Debtor executed a note ("the Note") in the amount of $248,000.00 payable to Allied (Ex. A).
4. The Note provides for the Debtor to repay the loan of $248,000.00 by making monthly payments of $1,567.53 beginning on November 1, 2005 and ending on October 1, 2035. (Id. ¶ 3).
5. Paragraph 4 of the Note states that the Debtor may prepay principal at any time, but requires the Debtor "to tell the Note Holder in writing that [she is] doing so." (Id. ¶ 4)
6. The Note also makes reference to an accompanying mortgage as follows:
(Id. ¶ 10).
7. On August 31, 2005, in connection with the Loan, the Debtor also executed a mortgage on the Property in favor of Allied ("the Mortgage"). (Ex. B).
8. The Mortgage provides, inter alia, that for purposes of securing repayment of the Note, the Debtor granted a mortgage to MERS
9. The last page of the Note contains an undated endorsement signed by Shantanu Roy Chowdhury, as President of Allied, which states: "Pay to the Order of ____ Without Recourse." (Ex. A).
10. BNYM is the Trustee of the Trust under a PSA dated November 1, 2005. (See Ex. C).
11. In November 2005, Countrywide Home Loans Servicing, LP ("Countrywide"),
12. Pursuant to the PSA, Countrywide also was appointed as the "Master Servicer" on behalf of the Trust. (Id.).
13. The PSA established a "Closing Date" of November 30, 2005. (Id. at I-5).
14. The original Note has been in the possession or control of BNYM since January 6, 2006. (Ex. G).
15. On June 17, 2009, David Perez, Assistant Vice President of MERS, executed an Assignment of Mortgage ("the Assignment"), transferring the Mortgage from MERS, as nominee for Allied, to BNYM, as Trustee for the Trust. The Assignment states that its effective date is April 15, 2009. (Ex. F).
16. The Assignment was recorded in the Office of the Chester County Recorder of Deeds on July 8, 2009. (Id.).
17. The Debtor commenced this chapter 13 bankruptcy case on March 31, 2010.
18. In both Schedule D of her bankruptcy schedules and in her amended chapter 13 plan filed on October 11, 2010, the Debtor identified the creditor holding the mortgage on the Property as "Countrywide Home Lending." (Doc. ## 1, 35).
Pursuant to Federal Rule of Civil Procedure 56(c), summary judgment should be granted when the "pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The standard for evaluating a summary judgment motion is well established and has been stated in numerous written opinions
Before a motion for summary judgment may be granted, the court must find that the motion alleges facts that, if proven at trial, would require a directed verdict in favor of the movant. See Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115 (11th Cir.1993). If the movant meets this initial burden, the responding party may not rest on his or her pleadings, but must designate specific factual averments through the use of affidavits or other permissible evidentiary material that demonstrate a triable factual dispute. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Such evidence must be sufficient to support a factfinder's factual determination in favor of the nonmoving party. Id. Evidence that merely raises some metaphysical doubt regarding the validity of a material facts is insufficient. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
In considering the evidentiary matter submitted in support of and in opposition to a summary judgment motion, the court's role is not to weigh the evidence, but only to determine whether there is a disputed, material fact for determination at trial. Anderson, 477 U.S. at 247-50, 106 S.Ct. 2505. A dispute about a "material" fact is "genuine" only if the evidence is such that a reasonable factfinder could return a verdict for the non-moving party. Id. at 248, 106 S.Ct. 2505. All reasonable inferences must be drawn in favor of the nonmoving party and against the movant. U.S. v. 717 S. Woodward St., 2 F.3d 529, 533 (3d Cir.1993).
The parties' respective burdens of proof also play a role in determining the merits of a summary judgment motion.
Newman, 304 B.R. at 193 (quoting Adams v. Consol. Rail Corp., 1994 WL 383633, at *1 (E.D.Pa. July 22,1994)).
Thus, as the party with the burden of proof, BNYM must show that there are no material facts in dispute, that the undisputed facts satisfy each element of its claim and that the evidence is such that no reasonable factfinder would disbelieve it. For the Debtor to prevail on the Cross-Motion, she must demonstrate that (1) material facts are not in dispute and that she is entitled to judgment as a matter of law in that the undisputed facts negate at least one element of BNYM's claim or (2) BNYM has not come forward with sufficient support at least one element of its claim. See, e.g., Newman, 304 B.R. at 194.
The Debtor does not deny that she is obligated to repay the Note she signed when she entered into the mortgage loan transaction with Allied in 2005. Nor does she contest the amount of either the total secured claim or the pre-petition arrears stated in the Proof of Claim. Nevertheless, she objects to BNYM's claim because she asserts that the Trust is not the party to whom she is obliged to pay under the Note, i.e., she disputes the Trust's right to enforce her repayment obligation under the Note. In effect, she contends that BNYM is not her "true" creditor.
The Debtor's argument is premised on the general, indisputable proposition that for a creditor to have an allowable claim in a bankruptcy case (be it secured or unsecured), the creditor must have a "right to payment." See 11 U.S.C. § 101(5)(A); see also FCC v. NextWave Pers. Communs., Inc., 537 U.S. 293, 303, 123 S.Ct. 832, 154 L.Ed.2d 863 (2003) (the "plain meaning of a `right to payment' is nothing more nor less than an enforceable obligation" (quoting Pennsylvania Dep't. of Pub. Welfare v. Davenport, 495 U.S. 552, 559, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990))). Thus, 11 U.S.C. § 502(b)(1) requires the court to disallow a claim to the extent that it is "unenforceable against the debtor ... under any agreement or applicable law for a reason other than because such claim is contingent or unmatured."
The Debtor's challenge to the Proof of Claim focuses on BNYM's rights under the Note, not the Mortgage. The Debtor contends that BNYM has not established that it has "an enforceable interest in the [N]ote." (Debtor's Memorandum of Law at 4 (unpaginated)).
The Debtor makes two (2) arguments in support of the Objection.
First, the Debtor contends that, assuming the Pa. UCC is applicable, BNYM has not established under the UCC that it is the party with the right to enforce the Note.
The Debtor devotes the most effort in her submissions to her second, far more sophisticated argument: that irrespective of the Pa. UCC or other applicable law, the PSA and New York trust law governs BNYM's rights in the Note and that application of New York law and the PSA compels the conclusion that BNYM does not have any rights under the Note.
Assuming arguendo that the Pa. UCC applies (an issue to which I will return and address "head-on" in Part V.C.2 and 3, below), the Debtor asserts that the Proof of Claim included "no attachment ... demonstrat[ing] where, how or when the original note was ever transferred from Allied ... to the Trust." (Objection ¶ 8). Thus, the Debtor questions whether BNYM has presented sufficient evidence to support its right to enforce the Note under applicable principles of contract law.
The following UCC principles may be distilled from Veal and Kemp:
See Veal, 450 B.R. at 910-13; Kemp, 440 B.R. at 630-34; see also 2011 UCC Ed. Bd. Report at 4-7.
In this case, BNYM has come forward with undisputed evidence that Allied endorsed the Note in blank without recourse and that BNYM has possession of the Note. See Finding of Fact No. 14 & n. 9 thereto.
In response to this analysis, the Debtor makes only a half-hearted argument, contending that "[p]roduction of an original note at trial does not, in itself, establish that the note was transferred to the party... with the purpose of giving that party the right to enforce that instrument." (Debtor's Mem. of Law at 4 (unpaginated)). The only authority the Debtor cites for this proposition is the North Carolina Court of Appeals decision in Simpson.
The Debtor has taken the Simpson court's statement regarding proof of the right to enforce a promissory note out of context. In In re Simpson, the court denied the plaintiff's request to foreclose on real property based on an asserted default under the note and concluded that the plaintiff's possession of the note, by itself, did not establish its status as the holder. However, the court reached that result because the note in question "was not indorsed to [the plaintiff] or to bearer," 711 S.E.2d 165, 172 (N.C.App.2011), reasoning that "[m]ere possession of a note by a party to whom the note has neither been indorsed nor made payable does not suffice to prove ownership or holder status," id. (quoting In re Adams, 204 N.C. App. 318, 693 S.E.2d 705, 710 (2010)) (internal quotations omitted).
The outcome in Simpson turned on the absence of an indorsement. Unlike the plaintiff in Simpson, BNYM has established its possession of the Note, endorsed in blank. This factual difference renders Simpson inapposite.
Based on this record, I conclude that, insofar as BNYM's rights are measured under the Pa. UCC, BNYM has the right to enforce the Note and, therefore, holds an allowable bankruptcy claim.
Undoubtedly recognizing the weakness of her argument under the Pa. UCC, the Debtor's attempts an "end-run" around the Pa. UCC. Simply put, the Debtor contends that the PSA and New York law, and not the Pa. UCC, is the source of law that should be consulted in evaluating BNYM's rights under the Note. The Debtor offers two justifications for this position: (1) the Note is not a negotiable instrument under Pa. UCC § 3104;
Based on the foundational premise that the PSA and New York law, rather than the Pa. UCC, control, the Debtor then asserts that the transfer of the Note to BNYM was not carried out in conformity with the requirements of the PSA, and that the lack of compliance with the PSA requires the disallowance of the Proof of Claim. Stated concisely, the Debtor contends that the Trust "never has, and never can own [the Note and that] ... [by] violating its own Pooling and Service Agreement, [the Trust] has prevented itself from
The Debtor reasons as follows:
As explained below, I conclude that this argument fails because:
The term "negotiable instrument" is defined in Pa UCC § 3104.
In her initial Memorandum, the Debtor appears to assume that the Pa. UCC governs
In making this argument, the Debtor does not dispute that the Note satisfies the requirements of Pa UCC § 3104(a)(1) and (2). Her position is based entirely on
The Debtor asserts that her non-monetary obligation to give the note holder notice of a prepayment of principal strips the Note of its status as a negotiable instrument. She cites no authority in support of her argument except for two (2) law review articles. See Dale A. Whitman, How Negotiability Has Fouled up the Secondary Mortgage Market, and What to Do About It, 37 Pepp. L.Rev. 737, 749-51 (2010); Ronald J. Mann, Searching for Negotiability in Payment and Credit Systems, 44 UCLA L.Rev. 951, 969-73 (1997).
There is no binding precedent on this issue. Indeed, there is very little case law at all. In my research, I have found only three (3) reported decisions. All three of them reject the Debtor's position. See Picatinny Fed. Credit Union v. Fed., National Mortgage Assoc., 2011 WL 1337507, at *7 (D.N.J. Apr. 7, 2011); In re Edwards, 2011 WL 6754073, at *5 (Bankr. E.D.Wis. Dec. 23, 2011); HSBC Bank USA, N.A. v. Gouda, 2010 WL 5128666, at *2-3 (N.J.Super.App.Div. Dec. 17, 2010).
The most fulsome explanation for the courts' holdings is provided by Gouda:
2010 WL 5128666, at *3 (emphasis added).
I find the Gouda court's analysis of the issue persuasive and I will follow its holding. Therefore, I reject the Debtor's sole ground for her contention that the Note is not a negotiable instrument. It follows from this conclusion that the Pa. UCC is presumptively the appropriate source of law to consult in determining the respective rights of the Debtor and BNYM under the Note.
The Debtor contends that even if the Note is a negotiable instrument, the parties to the PSA intended the PSA to be exclusive source of law for determining whether BNYM has the right to enforce the Note. The Debtor posits that notwithstanding the fact that the Note, on its face, is a negotiable instrument governed by article 3 of the UCC, the UCC's provisions regarding negotiability have been superseded by the PSA. While the Debtor does not phrase it in these terms, in effect, she contends that the PSA "occupies the field" to the exclusion of the UCC.
As one court has pointed out, while the provisions of the UCC simply serve as "default rules" which may be varied by contract, see Pa. UCC § 1102(c), there are limits to this principle. In particular, the UCC does not permit contracting parties to "vary" the provision governing the definition of negotiable instruments and their negotiation. Smoak, 461 B.R. 510, 521 (citing Comment 2, UCC 1-102). However, I need not base my decision on that ground. Even if the wholesale replacement of the UCC by agreement of the parties were permissible, the Debtor has made no factual showing to support the conclusion that the parties to the PSA intended such a dramatic, perhaps even counterintuitive, result. The far more intuitive inference is that the parties participating in the assignment of the Note to the Trust intended to rely on the Note's status as a negotiable instrument, along with the well-established body of commercial law that accompanies that status, as the source of law for determining their respective rights. Some evidentiary showing would be necessary to convince me otherwise, but there is no such record in this matter.
Furthermore, the Debtor overlooks the fact that the Note's status as a negotiable instrument was established at the outset of the transaction—when the Debtor executed the Note in favor of Allied—long before the assignment of the Note to the Trust. It therefore is difficult to understand how a later agreement (the PSA)—to which the Debtor is not a party—could alter the nature of the contract and instrument she executed years earlier.
In the past two (2) years, numerous courts have held that a borrower lacks
In this case, based on the facts before me, I come to the same conclusion. Because the Note is a negotiable instrument and that BNYM is the holder the instrument, the Debtor lacks standing to assert that BNYM cannot enforce the Note due to an alleged failure to comply with the PSA.
The threshold inquiry in analyzing a party's standing is to evaluate whether the party can demonstrate that the party has suffered or will suffer "injury in fact." E.g., Doe ex rel. Doe v. Lower Merion School District, 665 F.3d 524, 542 (3d Cir.2011); Global Indus. Techs., 645 F.3d at 210. If a borrower cannot demonstrate potential injury from the enforcement of the note and mortgage by a party acting under a defective assignment, the borrower lacks standing to raise the issue. See Livonia Prop. Holdings, 717 F.Supp.2d at 737 (citing Nicolls Pointing
Here, the element of "injury in fact" is lacking because the Note is a negotiable instrument and BNYM is the holder. As a result, even if the assignment to BNYM were defective and the original assignor retains ownership rights in the Note, any payments the Debtor makes to BNYM will discharge her liability under the Note. See Pa UCC § 3602(a) (subject to certain exceptions that are not applicable here, "[t]o the extent of the payment, the obligation of the party obliged to pay the instrument is discharged even though payment is made with knowledge of a claim to the instrument under section 3306 (relating to claims to an instrument) by another person").
Due to Pa. UCC 3602(a), the Debtor is in no danger of being subjected to double liability. Even if, as a result of a failure to comply with all of the transfer requirements of the PSA (or for any other reason), BNYM lacks the right to retain the economic benefit of the Note, BNYM is the holder and the Debtor cannot be harmed by paying the holder. In short, the Debtor is unaffected by any noncompliance with the PSA. Consequently, the Debtor lacks standing to contest the validity of the assignment of the Note to BNYM on the ground that BNYM failed to comply with the requirements under the PSA.
As the court in Smoak concisely stated, "the PSA does not relate to who is the `person entitled to enforce' the Note under the ... UCC." Smoak, 461 B.R. at 519. In a case involving a securitized mortgage note that is a negotiable instrument under the UCC, the argument that lack of compliance with the PSA vitiates an otherwise allowable claim,
Id. at 522.
Further, as the court observed in Veal, under the UCC,
450 B.R. at 912 (emphasis added) (footnote omitted).
For the reasons set forth above, I conclude that because the underlying source of BNYM's right to payment (the Note) is a negotiable instrument and BNYM is the holder of the Note, the Debtor lacks standing to object to BNYM's Proof of Claim on the ground that BNYM failed to comply with all of the requirements of the PSA. As the party with the right to enforce the
An order consistent with this Opinion will be entered.
It is hereby
1. The Debtor's response to the Motion will be treated as a cross-motion for summary judgment ("the Cross-Motion").
2. The Motion is
3. The Cross-Motion is
4. The Debtor's Objection to BNYM's Proof of Claim (Claim No. 10-1) is
In re Smoak, 461 B.R. 510, 515-16 (Bankr. S.D.Ohio 2011).
The Affidavit of BNYM's Vice President, Glenn Mitchell, (Ex. G), also addresses the subject briefly. However, in referring to the transfer, Mr. Mitchell speaks in the passive voice, stating that the Note and the Mortgage "was [sic] deposited" into the Trust, with delivery made "by the servicer, Countrywide...." (Id.). Mr. Mitchell's Affidavit does not explain on whose behalf Countrywide was acting. While conceivably Countrywide could have delivered the Note in its capacity as Allied's agent, Allied does not appear to be a party to the PSA. This suggests that Allied may have assigned the Note to some other entity before Countrywide delivered it to the Trust.
Because the parties' dispute centers not on whether an obligation is owed, but on whether the correct party is seeking to enforce the obligation, it may be difficult to distinguish between "standing" and a defense on the merits of the claim. For a party to have standing to be heard in a bankruptcy proceeding, it "must have some legally protected interest that either has been adversely affected (thereby warranting judicial relief) or that is in actual danger of being adversely affected (if relief is not granted)." In re Alcide, 450 B.R. 526, 535 (Bankr.E.D.Pa.2011) (citing In re Global Indus. Techs., Inc., 645 F.3d 201, 210-11 (3d Cir.2011)). In addition there is an "inherent . . . additional requirement that the party must be asserting its own rights and not that of another entity." Id. (citing In re Martinez, 2011 WL 996705, at *2, 2011 Bankr.LEXIS 982, at *4 (Bankr.D.Wyo. Mar. 16, 2011) and Storino v. Borough of Point Pleasant Beach, 322 F.3d 293, 298-99 (3d Cir.2003)).
BNYM is the mortgagee of record with respect to the Property that secures the Note and has possession of the underlying Note. See Findings of Fact Nos. 14-16. While BNYM's claim is subject to defenses the Debtor might raise, it seems intuitive that BNYM has standing to be heard on the merits.
In any event, it is doubtful that the different ways of characterizing the issue have any practical consequences in this contested matter. However the Debtor's arguments are characterized, as explained below, I find them to be without merit.
The concept of "splitting" the note and the mortgage, and the consequences thereof, have been discussed by numerous courts and commentators. See, e.g., In re Veal, 450 B.R. 897, 915 (9th Cir. BAP 2011) (referring to common law rule that transfer of mortgage without transfer of obligation it secures renders mortgage ineffective and unenforceable in hands of transferee); Culhane, 2011 WL 5925525, at *7-12 (under Massachusetts law, transfer of note does not automatically transfer mortgage with it, unified ownership of mortgage and right to enforce underlying note must exist in order to foreclose); In re Mims, 438 B.R. 52, 56 (Bankr.S.D.N.Y.2010) (same principle under New York law); In re Dolata, 306 B.R. 97, 131 (Bankr.W.D.Pa.2004) (stating that in Pennsylvania, production of accompanying bond or note, as matter of law, is not essential to mortgagee's right of action on mortgage); Raftogianis, 418 N.J.Super. 323, 13 A.3d at 447-50; Restatement (Third) of Property, Mortgages § 5.4(a), (b) (absent contrary intent of parties, transfer of note secured by mortgage also transfers mortgage and transfer of mortgage securing note also transfers note); id. comment a. ("When the right of enforcement of the note and the mortgage are split, the note becomes, as a practical matter, unsecured"); Report of the Permanent Editorial Board For the Uniform Commercial Code, Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes at 8, 12 (Nov. 14, 2011) (Article 9 of the UCC governs the sale of negotiable and non-negotiable promissory notes and assignment of the note automatically transfers a corresponding interest in the mortgage) (citing UCC §§ 9-109(a)(3); 9-203(g)), http://www.ali.org/ 00021333/PEB%20Report%20-%20November %202011.pdf ("2011 UCC Ed. Bd. Report").
I express no opinion on these issues.
See also Pa. UCC § 3106(a)(1)-(3) (defining the meaning of "unconditional promise or order").
