BRUCE A. MARKELL, Bankruptcy Judge.
I. FACTS ......................................................................258A. The Home Loan ..........................................................258B. The Bankruptcy Proceedings .............................................2591. The Proof of Claim and the Objection ...............................2592. The Second Allonge .................................................2593. The Motion for Relief from Stay and the Opposition .................2604. The Evidentiary Hearing ............................................261
II. DISCUSSION .................................................................261A. Relationship Among the Parties, and the Role of Constructive Possession ............................................................261B. Phillips's Arguments ...................................................2641. Standing — Phillips's Articulation of the Legal Standard .....2652. Alleged Infirmities with the Note ..................................2653. Alleged Infirmities with the Deed of Trust .........................2664. Prima Facie Validity of the Proof of Claim .........................266C. Seterus's Arguments ....................................................2661. Standing ...........................................................2662. Prima Facie Validity of the Proof of Claim .........................2673. Cause to Grant Relief from Stay ....................................267D. Resolution of the Parties' Arguments ...................................2671. Standing ...........................................................2672. The Substantive Law — Article 3 of the UCC ...................268a. The Requirement of a "Person Entitled to Enforce" the Note .....268b. Validity of the Endorsement [Herein of Vera Logvynets's Signature] ...................................................2713. The Relief from Stay Motion ........................................2744. Whether the Claim is Secured .......................................274III. CONCLUSION .................................................................277
On August 20, 2007, debtor Debra Phillips executed a promissory note (the "Note"). The Note was in the principal amount of $377,910 and called for monthly payments of $2,357.67. Prem Mortgage, Inc. ("Prem Mortgage") was the named payee. Phillips incurred this debt to finance the purchase of a home in Henderson, Nevada (the "Property").
To secure her obligations under the Note, Phillips also executed a deed of trust encumbering the Property (the "Deed of Trust"). The Deed of Trust identified Prem Mortgage as the lender, but nominated Mortgage Electronic Registration System, Inc. ("MERS") as the beneficiary.
On July 1, 2010, Seterus, Inc. ("Seterus") obtained servicing rights to the Note as the agent of Federal National Mortgage Association ("Fannie Mae"). (Hr'g Tr. 82:10-12; 97:10-14.) Sometime before that date, Prem Mortgage endorsed the Note to the order of AmTrust Bank ("AmTrust") and AmTrust then endorsed it to the order of Fannie Mae. (Id. at 121:24-122:5; Seterus Ex. B at 4.) The signatory of both endorsements was Vera Logvynets, identified as an authorized agent for both Prem Mortgage and AmTrust. (Seterus Ex. B at 4.) These two endorsements are on the same page, known as the "First Allonge." (Id.)
On August 2, 2011, MERS executed a "Corporation Assignment of Deed of Trust" in favor of Fannie Mae (the "Assignment"). (Seterus Ex. C.) The Assignment was recorded on August 26, 2011. (Id.) It assigned to Fannie Mae:
(Id.)
The Assignment also conveyed the beneficial economic interest in the Note to Fannie Mae. See Edelstein v. Bank of N.Y. Mellon, 286 P.3d 249, 258, 260 (Nev.2012).
On December 30, 2011, Phillips filed for bankruptcy under Chapter 13 of the Bankruptcy Code.
On January 30, 2012, Seterus, acting as Fannie Mae's servicing agent, filed a proof of claim in the amount of $362,687.98 (the "Proof of Claim"). (P.O.C. No. 3-1.
On May 1, 2012, four months later and after Seterus had filed its motion for relief from stay (Dkt. No. 18), Phillips objected to the proof of claim. (Dkt. No. 33.) On May 17, Seterus filed its response, to which it attached copies of (i) the Deed of Trust; (ii) the Assignment; (iii) the Limited Power of Attorney by Fannie Mae granting Seterus various servicing powers (the "Power of Attorney"); (iv) the Note; and (v) the First Allonge. (Dkt. No. 39.)
On May 25, 2012, Phillips replied, with the following attached exhibits: (i) MERS System Procedures Manual, Transfer of Beneficial Rights, Overview, Feb. 27, 2012; (ii) MERS System Procedures Manual, Transfer of Beneficial Rights, Overview, Draft, undated;
Sometime after the bankruptcy filing, on Fannie Mae's behalf, Seterus generated the "Second Allonge" — a single page containing only an endorsement in blank
On March 21, 2012, Seterus moved for relief from stay under Section 362(d). (Dkt. No. 18.) Seterus argued a lack of adequate protection — that Phillips was not making regular post-petition payments — and that she had no equity in the Property. (Id. at 3.) Seterus attached copies of (i) the Note; (ii) the First Allonge; (iii) the Deed of Trust; (iv) the Assignment; (v) a letter from Seterus to Max Default Services Corporation instructing it to record the included Deed of Trust and, once recorded, return the Deed of Trust to Seterus; (vi) a letter from Seterus's counsel to Phillips's prior counsel, Arun Gupta, informing Mr. Gupta that Phillips was in default and that Seterus intended to file a motion for relief from stay if Phillips did not timely cure the default; (vii) Phillips's Schedule A, which lists the Property's value as $385,000 and the amount of the secured claim as $388,094; (viii) Phillips's Schedule B; and (ix) an estimated valuation of the Property at $187,100 from the Zillow
On April 16, 2012, Phillips filed her opposition. (Dkt. No. 27.) She relied in part on an affidavit by William McCaffrey, a self-styled "securitization analyst" with many years in the lending business. (Dkt. No. 31.) The affidavit discussed alleged securitization of the Note, a topic which McCaffrey attempted to testify about at length during the Evidentiary Hearing. One month later, on May 16, Phillips amended her opposition. (Dkt. No. 37.) Several days later, Phillips filed another declaration by McCaffrey, which again alleged that the loan had been securitized. (Dkt. No. 45.)
On May 18, 2012, Seterus replied. (Dkt. No. 41.) The attached exhibits largely repeated previous submissions. (See id.) However, Seterus newly submitted a data sheet that appears to be from the Clark County assessor's office
The court heard both matters at a consolidated evidentiary hearing on September 26, 2012 (the "Evidentiary Hearing"). At the hearing, Phillips called herself and McCaffrey
At the hearing, the court did not admit Seterus's copy of the Note and two affixed allonges into evidence. The court, however, admitted a copy of the Note without the allonges, (Phillips Ex. H), and the original Note and both allonges. (Hr'g Tr. 9:13-11:5, 138:12-13.) Upon examination of the original Note and both allonges at the hearing, the court determined that it would treat Seterus Exhibit B as a fair and accurate representation of the original documents, a treatment to which Phillips's counsel did not object. (See id. at 90:9-92:25.)
The hearing lasted a half day. The parties submitted post-hearing briefs on November 1 and 2, 2012, and the matter was then deemed submitted for decision. (Dkt. Nos. 77, 79.)
There are a plethora of players here. It thus becomes important to sort them out, and to establish their various legal relations.
The primary focus is the Note. It is the source of value in this transaction, representing Phillips's promise to pay over $377,000. This promise initially ran in favor of Prem Mortgage, the initial payee on the Note, and its first holder. Being a negotiable instrument,
The Note was the subject of many transactions. The indorsements indicate that it passed from Prem Mortgage to AmTrust to Fannie Mae. As will be shown below, each of these indorsements was accompanied by a negotiation — "a transfer of possession... of an instrument by a person other than the issuer to a person who thereby becomes its holder." NEV.REV. STAT. § 104.3201(1) (2011). Fannie Mae's status as a "holder," through its agent, Seterus, is key to its claim to be a "person entitled to enforce" the Note. Id. § 104.3301(1).
When Phillips's case commenced, however, Seterus, and not Fannie Mae, had physical possession of the Note. Seterus held the Note as an agent of, and servicer for, Fannie Mae, a fact established by the customs of the industry generally and the terms of the Power of Attorney specifically.
Possession, however, is a key element of being a holder.
Historically, the propriety and ability of an agent to possess an instrument for its principal was explicit under the predecessor of Article 3, the Negotiable Instruments Law. Section 2 of that law provided that "`[d]elivery means transfer of possession, actual or constructive, from one person to another.'" See Irving Trust Co. v. Leff, 171 N.E. 569, 571, 253 N.Y. 359, 363 (1930) (quoting N.I.L. § 2) (emphasis supplied). As a consequence, delivery of an instrument, duly endorsed, to an agent sufficed to constitute delivery to the principal, making the principal the holder of the instrument. See, e.g., Worth v. Case, 42 N.Y. 362, 367 (1870); Wolfin v. Security Bank of N.Y., 156 N.Y.S. 474, 170 A.D. 519 (N.Y.App.Div.1915).
This reasoning applies under the current Uniform Commercial Code, as underscored by Comment 1 to the UCC's definition of negotiation: "[n]egotiation always requires a change in possession of the instrument because nobody can be a holder without possessing the instrument, either directly or through an agent." U.C.C. § 3-201 cmt. 1 (2002) (emphasis added). The reasoning for this position is examined in a leading treatise:
LARY LAWRENCE, LAWRENCE'S ANDERSON ON THE UNIFORM COMMERCIAL CODE § 1-201:265 (3d ed. 2012). See also RESTATEMENT (THIRD) OF AGENCY § 8.12 cmt. b (2006) ("An agent's possession or control of property on behalf of a principal is tantamount for many purposes to possession or control by the principal. For instances, see Uniform Commercial Code §§ 1-201(b)(21) (definition of "holder" of instrument and document of title), 3-203 (transfer of instrument), 3-301 (definition of "person entitled to enforce" an instrument), 8-104(a)(1) (when a certificated security is acquired), 8-106(d) (definition of "control" of securities account), 8-301(a)(2) (definition of "delivery of a security"), 9-104 (definition of "control" of deposit account), 9-106 (definition of "control" of investment property).").
Corporacion Venezolana de Fomento v. Vintero Sales Corporation sets forth the logic behind this position:
452 F.Supp. 1108, 1117 (S.D.N.Y.1978); see also Midfirst Bank, SSB v. C.W. Haynes & Co., Inc., 893 F.Supp. 1304, 1314-15 (D.S.C.1994); Bankers Trust (Del.) v. 236 Beltway Inv., 865 F.Supp. 1186, 1194 (E.D.Va.1994): Georg v. Metro Fixtures Contractors, Inc., 178 P.3d 1209, 1213-14 (Colo.2008); Billingsley v. Kelly, 274 A.2d 113, 117-19, 261 Md. 116, 123-26 (1971); Lazidis v. Goidl, 564 S.W.2d 453, 455 (Tex. Civ.App.1978) ("[A] person may be the owner and holder of a note when the note is held by an authorized agent of the owner.").
To the extent that Kemp v. Countrywide Home Loans, Inc. (In re Kemp), 440 B.R. 624 (Bankr.D.N.J.2010), is to the contrary, this court declines to follow it. In Kemp, Countrywide had originated mortgage notes and was in possession of them at the time of the debtor's bankruptcy. The notes, however, had been endorsed to Bank of New York as Trustee, but the bank had never taken possession from Countrywide. The debtor objected on the grounds that Bank of New York was not a holder because it was not in actual, physical possession of the notes.
Despite assuming that Countrywide was Bank of New York's authorized servicer for the notes, id. at 629 n. 8, the court held that Countrywide's failure to transfer possession of the notes to Bank of New York was fatal to Bank of New York's standing as a holder. "Because the Bank of New York never had possession of the note, it
As shown above, this conclusion is contrary to the history of negotiable instruments generally, and the present provisions of the Uniform Commercial Code specifically. The sole case Kemp relied upon, Dolin v. Darnall, 181 A. 201, 115 N.J.L. 508 (N.J.1935), is also inapposite. Dolin dealt with a person's expectancy to be a holder; it held that one who had a right of possession, without consideration of agency principles, was not a holder without actual possession. Indeed, Dolin recognized exceptions to the actual possession rule, including when the instrument was pledged to another and when the equitable principles of an assignee of the instrument by separate instrument dictated the contrary. Id. at 205, 115 N.J.L. at 516. Following Dolin's logic, it is difficult to distinguish an assignee's right to rely on his assignor's possession from the principal's right to rely on her agent's possession.
Further, Kemp never addresses the status of delivery under the current Uniform Commercial Code, as did Vintero Sales Corp. and the other cases cited above. Nor does it mention the explicit acknowledgment of the sufficiency of agency to establish possession set forth in Comment 1 to UCC § 3-201. In short, Kemp is not persuasive. See David A. Pisciotta & Oscar N. Pinkas, Kemp v. Countrywide: Problem of Possession, 30 AM. BANKR.INST. J. 20 (April 2011).
As a result, Seterus's possession of the Note raises no bar to Fannie Mae's enforcement. Seterus's agency has not been questioned, nor has the fact that it holds the Note for its principal, Fannie Mae. As such, to the extent that the Note has been indorsed to Fannie Mae, its possession by its agent Seterus would be sufficient to make Fannie Mae a holder.
With respect to rights under the Deed of Trust, the Assignment conveyed the beneficial interests under the Deed of Trust to Fannie Mae, and this occurred before Phillips commenced her case. Seterus, as Fannie Mae's agent, can rely on this fact in asserting that Fannie Mae's claim is secured by the Deed of Trust so assigned.
The relations of the relevant parties are thus as follows: Seterus is Fannie Mae's agent, and the servicer of the Note on Fannie Mae's behalf. The Note is physically held by Seterus, but held as Fannie Mae's agent, and not in any individual capacity. Fannie Mae is the current beneficiary under the Deed of Trust, and the owner of all equitable interests in the Note. Seterus has standing as Fannie Mae's agent to assert that the Note is secured in Fannie Mae's favor. With these relationships in mind, we can move to the parties' contentions and responses.
Phillips's principal contention is that the Note and Deed of Trust have been "split" from each other — that the owners of the relevant interests in the Note and Deed of Trust were different when the Proof of Claim was filed, or that if they were the same entity then prior ownership by different entities effectuated an irreparable separation of the Note from the Deed of Trust. To support this position, she contends (i) various infirmities with the conveyances
Because of this "split," Phillips argues, Seterus does not have standing to prosecute a proof of claim or seek relief from the automatic stay. She also argues that the "split" rendered "the debt unenforceable against [Phillips] and her property," an argument the court interprets to be that the debt is, at most, unsecured.
To the extent that it is necessary or helpful, the court expands on these arguments, context for which is provided by Phillips's articulation of the legal standard for standing.
Phillips contends that "[t]o prove standing, an alleged Creditor must show that it is the holder of both the Debtor's promissory Note and a Deed of Trust. (Dkt. No. 79 at 7 (citing Edelstein, 286 P.3d at 255) (emphasis by Phillips).)
Phillips contends that Seterus does not possess the properly endorsed original Note on several grounds: (i) the Note was sold into a securitized mortgage trust (the "FNMA Trust")
Next, she contends that the Deed of Trust was not properly assigned to Seterus because (i) the Assignment occurred after the closing date of the FNMA Trust; (ii) this type of trust does not hold or possess deeds of trust; and (iii) the terms of the Deed of Trust precluded its assignment. (Id. at 10-11.)
Finally, Phillips contends that the presumption of validity under Rule 3001(f) does not apply because the Proof of Claim was not filed with the supporting written documentation required by Rule 3001(c)(1). (Id. at 6.) Further, she seems to assert that the presumption of validity can never be established because Seterus failed to initially comply with Rule 3001(c)(1) — that attaching the necessary documents to a later filing, as Seterus did by filing the Motion for Relief from Stay with the Note and First Allonge attached, did not cure the defect.
Seterus responds by arguing that the Note and Deed of Trust have not been split and that it has standing as the "person entitled to enforce" the Note. (Dkt. No. 77 ¶¶ 1-3, 37 (citing Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897 (9th Cir. BAP 2011)).)
Seterus first asserts that it is the Note's holder because it possesses the original Note and because the First Allonge contains a special endorsement to Fannie Mae. (Id. ¶ 3.) Seterus argues that the First Allonge is valid because its regular course of business is to obtain possession of notes when servicing rights are assigned, which occurred here in July 2010, and because the First Allonge was executed before that date. (Dkt. No. 77 ¶¶ 17-18, 21; Hr'g Tr. 82:6, 121:19-23, 122:2-5.)
Seterus next contends that there is no extrinsic evidence to prove that the FNMA Trust closed before the Assignment, and that, according to McCaffrey's testimony, the "closing date" for a securitized trust is merely the date by which certain documents must be delivered to the trustee and
Regarding the Assignment of the Deed of Trust, Seterus cites Edelstein for the proposition that MERS had express authority to concurrently transfer the Note with the Deed of Trust. (Id. ¶¶ 42-43.) Seterus also argues under Edelstein that the Note and Deed of Trust were reunified in Fannie Mae upon the Assignment and the special endorsement to Fannie Mae in the First Allonge. (See id. ¶ 53.)
Seterus contends that attaching the Note and First Allonge to the "Secured Creditor's Amended Proof of Claim" was sufficient to show prima facie evidence of the validity of the Claim under Rules 3001(c) and (f).
On the merits, Seterus argues that there is cause to grant relief from stay under Section 362(d)(2) because its interest in the Property is not protected by an equity cushion and the Property's fair market value is declining. (Id. ¶¶ 54-60.)
Standing is an important challenge; it is a "threshold question in every federal case, determining the power of the court to entertain the suit." Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975). To establish its standing, a party must make the requisite showing under both constitutional standing requirements and prudential standing principles. Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 11, 124 S.Ct. 2301, 159 L.Ed.2d 98 (2004).
The Bankruptcy Appellate Panel of the Ninth Circuit has clarified how these prudential limitations on standing apply to mortgage notes. As stated by the Panel, a party seeking relief from stay with respect to a mortgage note has standing if it has "a colorable claim to receive payment pursuant to the Note, which it [can] accomplish either by showing it [is] a `person entitled to enforce' the Note under Article 3, or by showing that it [has] some ownership or other property interest in the Note." In re Veal, 450 B.R. at 913. With respect to standing to prosecute a proof of claim, an entity must "show that it [is] a
Common to both inquiries is the issue of whether the party is a "person entitled to enforce" the Note, a concept found in Article 3 of the UCC. Accordingly, Article 3 of the UCC as enacted in Nevada provides the law regarding Seterus's standing as to the Note,
Under Nevada law, Article 3 provides the rules governing payment obligations arising under a negotiable instrument
Under Article 3, unless the instrument indicates to the contrary, there is one, and only one, person that a note's maker need pay. See U.C.C. § 3-602(a) (2002) ("[A]n instrument is paid to the extent payment is made ... to a person entitled to enforce the instrument."). Nevada law follows this requirement; a maker is discharged of his or her obligations under an instrument only to the extent that payment is made to a "person entitled to enforce" that instrument. NEV.REV.STAT. § 104.3602(1) (2011).
Article 3 as adopted in Nevada defines a "person entitled to enforce" an instrument as "(a) The holder of the instrument; [or] (b) A nonholder in possession of the instrument who has the rights of a holder...."
The "holder" of a note is "[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession [of the note]."
A note "that is not payable to bearer is payable to order if it is payable to the order of an identified person or to an identified person or order." Id. § 104.3109(2). Article 3 defines this "identified person" by reference to the order or direction of the maker of the instrument, or to orders or directions made by the persons to whom the instrument was negotiated. See id. § 104.3109. These orders or directions will appear from the chain of endorsements contained on the instrument; an "order" under Nevada's version of Article 3 is "a written instruction to pay money signed by the person giving the instruction." Id. § 104.3103(1)(e).
U.C.C. § 3-109 cmt. 1 (2002).
In many cases, then, the issue is whether the signatures on an instrument were made for the purpose of negotiating the instrument.
There is an alternate way in which an entity or person can become a holder. If an instrument is endorsed "in blank," it becomes a bearer instrument, meaning that anyone who possesses or "bears" it is its holder. NEV.REV.STAT. § 104.3205(2) (2011). And if a bearer instrument, it can be "negotiated by transfer of possession alone...." Id.
Whether the Note was specially endorsed to Fannie Mae or endorsed in blank thus becomes a critical issue. As previously indicated, at the Evidentiary Hearing the court was able to examine the Note. On the front of the First Allonge, affixed to the last page of the Note as originally executed, was the following:
(Seterus Ex. B at 4.) It is hand-signed (not stamped)
Both endorsements — from Prem Mortgage to AmTrust and from AmTrust to Fannie Mae — are special endorsements, the latter rendering the Note payable to the order of Fannie Mae. Id. § 104.3205(1). Whenever Fannie Mae, or its agent, took possession of the Note, negotiation to Fannie Mae was complete and Fannie Mae became the Note's holder and thus a "person entitled to enforce." Id. §§ 104.3201(2), 104.3301.
The parties dispute if and when Seterus took possession of the Note and First Allonge. Phillips argues that Seterus's failure to attach the Note and First Allonge to the Proof of Claim proves that Seterus did not possess the First Allonge at that time, and that it "probably [was] created after the Proof of Claim was filed." (Dkt. No. 79 at 16.) Phillips also argues that the FNMA Trust (or, more specifically, its investors) possesses the Note. (Id. at 15.)
Seterus, as Fannie Mae's undisputed authorized agent, possesses the Note on Fannie Mae's behalf — rendering Fannie Mae the Note's holder and a person entitled to enforce the Note
Phillips argues, however, that Logvynets was not authorized to endorse the Note. (Dkt. No. 79 at 2-3.) Phillips first contends that Seterus was required to introduce written proof of Logvynets's agency relationships with Prem Mortgage and AmTrust because agents negotiating an interest in real property must have written authority. (Id.) She is correct on the law — the Nevada Statute of Frauds provides that an agent conveying interests in real property must have written authority to do so. NEV.REV.STAT. § 111.205(1) (2011). Negotiation of a promissory note, however, does not convey an interest in real property. Hofhines v. BAC Home Loans Servicing, L.P., 2012 WL 3440458, at *6 (D.Idaho 2012) ("[A] promissory note is not an instrument conveying or affecting an interest in real property but instead a promise to repay the loan and is not subject to the [Idaho Statute of Frauds].");
Phillips next argues that the allonges were not properly affixed to the Note, and thus cannot be considered effective to have negotiated the Note. But upon physical examination, it was evident that the two allonges were affixed to the Note by a staple, and were thus "part of the [Note]." NEV.REV.STAT. 104.3204(1) (2011); see In re Weisband, 427 B.R. 13, 19 (Bankr.D.Ariz. 2010).
Phillips also argued that the two allonges were inadmissible because Seterus did not meet the business records exception to hearsay for them under Evidence Rule 803(6). The endorsements are
The only remaining issues are whether Logvynets had the authority to sign and whether her signature is authentic, both of which the court resolves in the affirmative. Phillips contends that Seterus was required to introduce the power of attorney granting Logvynets the authority to sign as Prem Mortgage's agent because of the specific language of the first endorsement. Phillips concedes that a signature on a negotiable instrument is presumed to be both authentic and made by an authorized party, but argues that such presumption does not extend where the "alleged authority is expressly dependent on a Power of Attorney that was never produced by Seterus." (Dkt. No. 79 at 3 (citing NEV.REV.STAT. § 104.3308 (2011)).) This is a challenge to the first endorsement — from Prem Mortgage to AmTrust — which states that Logvynets was an "Authorized Agent by POA for Prem Mortgage, Inc." (Seterus Ex. B at 4.) In short, Phillips argues that "by Power of Attorney" is a magic phrase that somehow negates the statutory presumption of authority.
In spite of her concession, Phillips misapprehends the law governing negotiable instruments. The relevant statutory language is instructive:
U.C.C. § 3-308(a) (2002); NEV.REV.STAT. § 104.3308(1) (2011) (emphasis supplied). Under the UCC, the term "presumed" has a special and set meaning. Section 1-206 of the UCC states:
U.C.C. § 1-206 (2001). This section has been adopted in Nevada. NEV.REV.STAT. § 104.1206 (2011).
U.C.C. § 3-308 cmt. 1 (2002) (emphasis supplied). See also B & C Enters. v. Utter, 498 P.2d 1327, 1328-29, 88 Nev. 433, 435 (1972).
As stated in White and Summers, "merely by producing a properly indorsed or issued instrument the plaintiff proves that he is entitled to enforce it as a holder." 2 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 16.4.b (5th ed. 2008). Believing that Seterus had to establish Logvynets's authority to sign, Phillips introduced no evidence, let alone "some evidence ... which would support a finding that [Logvynets's] signature [was] forged or unauthorized." U.C.C. § 3-308 cmt. 1 (2002). The inclusion of the term "by Power of Attorney" on the endorsement did not alter Phillips's burden of production. In short, under NRS 104.3308, she has failed to carry her burden.
Phillips seems to argue that showing that the Proof of Claim lacked a copy of the Note and First Allonge satisfies her burden of showing fraud or forgery. (See Dkt. No. 79 at 15-16.) The argument appears to be since they were not produced at filing, and since the Proof of Claim was never amended formally, the subsequent appearance of the First Allonge in the relief from stay action means that it was forged at some point in between.
This sequence of events, however, does not constitute a threshold showing of fraud or forgery. Seterus's Proof of Claim on Fannie Mae's behalf was filed on January 30, 2012, and admittedly did not include the Note or First Allonge. (See P.O.C. No. 3-1.) But the motion to lift stay does attach copies of the Note and First Allonge, and it was filed on March 21, 2012, long before Phillips objected to the Proof of Claim. (Dkt. No. 18.) Indeed, without ever inspecting the Note, Phillips objected to the endorsements as a rogue or fugitive allonge, so it is undisputed that Phillips knew about the endorsements long before she sought to challenge them.
The evidence established that Seterus, at worst, neglected to copy the Note and the First Allonge when it filed the Proof of Claim. Although alerted to the omitted endorsements, Phillips failed to produce any evidence that would tend to show that
In addition, as Fannie Mae is the Note's holder and Seterus is Fannie Mae's agent — a fact not in dispute as set forth above — Seterus has established the requisite colorable claim to receive payment pursuant to the Note, and thus has made a sufficient showing to sustain its standing for relief from stay. In re Veal, 450 B.R. at 913. And as Phillips has not introduced any evidence on her ability to reorganize if Seterus's claim were allowed in its full amount — an issue upon which she bears the burden of proof under Section 362(g)(2) — her lack of equity in the Property, see supra Section I.B.3, means that Seterus should prevail on its motion for relief from stay if the Note is secured by interest in the Property.
Even though Seterus's claim under the Note is an allowed claim, that does not necessarily mean that it is allowed as a secured claim. Finding that Seterus is a person entitled to enforce establishes only that Seterus's principal, Fannie Mae, is entitled to the amount stated in the Proof of Claim (and that Phillips gets credit against the Note for all amounts paid to Fannie Mae or Seterus); it does not establish that the Note is secured by the Property. That can only be determined by reviewing Nevada law on real property security. Accordingly, Phillips challenges Seterus's status as a secured creditor with respect to the Note, alleging deficiencies in the Assignment and that Phillips, Prem Mortgage, and MERS intended to split the Note and Deed of Trust at inception and to disallow reunification. (Dkt. No. 79 at 10-13.)
In particular, Phillips argues that "[w]ithout a proper Assignment of the Deed of Trust, Seterus has no standing to proceed with any foreclosure against the property." (Id. at 10.) Phillips leaps from the flawed premise that the purportedly defective Assignment defeats Seterus's standing to foreclose
With respect to the status of the claim as secured, Section 502 provides that when a party in interest has objected to a proof of claim, "the court ... shall allow [a claim for which a proof of claim is filed] except to the extent that ... such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured...." 11 U.S.C. § 502(b)(1) (2012). The court thus turns to state law to decide whether, as Phillips contends, Seterus has lost the security for its claim against her.
Before examining Nevada law in detail, a brief review of the facts is again in order. Seterus is Fannie Mae's agent and possesses the Note. The Note is specially endorsed to Fannie Mae, and thus Fannie
Is this combination of facts sufficient to confer secured status on Seterus? A recent Nevada Supreme Court decision indicates that it is. Edelstein, 286 P.3d 249. In Edelstein, the Nevada Supreme Court held that "to have standing to foreclose, the current beneficiary of the deed of trust and the current holder of the promissory note must be the same." Id. at 255. Here, Fannie Mae is the current beneficiary of the Deed of Trust, satisfying the first element of Edelstein. Fannie Mae is also the current holder of the Note, even though the Note is in Seterus's possession. See supra Section II.A. Thus, the second element of Edelstein has been met, and Seterus has established that it has standing under Nevada law as a secured creditor with the Property as collateral.
Phillips counters that the Assignment was invalid on two grounds. First, it named Fannie Mae as the assignee yet Fannie Mae had already transferred its interest in the Note to the FNMA Trust; second, it occurred after the closing date of the FNMA Trust. (Dkt. No. 79 at 10-11.) She seems to argue that a deed of trust assignment to a party that has no interest in the related promissory note is invalid.
At the hearing, Phillips offered McCaffrey's testimony to prove that the FNMA Trust exists and that it "owns" and "possesses" the Note.
Second, Phillips contends the Assignment was invalid because "the Deed of Trust states that the Note ... may be sold `together with' the Deed of Trust." (Dkt. No. 79 at 11 (emphasis added).) Phillips's own language defeats her argument. The instruments may be sold together; there is nothing in the Deed of Trust to indicate that the failure to convey them together defeats an assignment of only the Deed of Trust. (See Seterus Ex. A.) Also, Edelstein expressly held that a MERS deed of trust assignment concurrently transfers
Accordingly, the Assignment was valid.
Phillips next contends that language in the MERS Systems Procedures Manual
In Edelstein, the Nevada Supreme Court had to decide whether a loan structure nearly identical to the one at issue here irrevocably split the note and deed of trust so that the note became unsecured. 286 P.3d at 252-53. A lender had made a loan secured by a Nevada residence, and named MERS as the beneficiary under the deed of trust. Id. The note was later negotiated through various entities, and eventually was endorsed in blank on an allonge affixed to the note. Id. At the relevant times, it was held by ReCon Trust Company, N.A. (a subsidiary of Bank of America), as agent for Bank of New York Mellon. Id. The deed of trust was transferred as well, ultimately being assigned to Bank of New York Mellon. Id.
Against this background, the Nevada Supreme Court summarized its holding:
Id. at 252.
More specifically, Edelstein adopted the approach of the Restatement, which in turn states that "a transfer of a [deed of trust] also transfers the obligation the [deed of trust] secures unless the parties to the transfer agree otherwise." Id. at 260; RESTATEMENT (THIRD) OF PROPERTY: MORTGAGES § 5.4(b) (1997). Such agreement is not shown by the MERS Documents, which appear to bind only MERS and the "Member." (Phillips Exs. B, C.) By the language of the exhibits, a member appears to be a financial institution that participates in MERS's internal system of document tracking. (See id.) Phillips does not seem to be a member and was not bound by the MERS Documents. In addition, the MERS Documents were not attached to the Deed of Trust, nor were they incorporated by reference. (See Seterus Ex. A.)
More importantly, the specific language of the Deed of Trust overrides the general boilerplate language of the MERS Documents. Idaho v. Shoshone-Bannock
(Seterus Ex. A.) Edelstein interpreted identical language and determined that it grants MERS the right to convey the lender's interest in the Note. 286 P.3d at 252, 260. The court will not supercede the Nevada Supreme Court's interpretation of the precise language at issue with boilerplate from documents that were not even incorporated into the Deed of Trust.
In short, the MERS Documents Phillips points to are irrelevant; the parties did not agree to disallow reunification. Consequently, the instruments were reunified in Fannie Mae once (i) Fannie Mae became a holder of the Note, by operation of the special endorsement from AmTrust and constructive possession through Seterus; and (ii) Fannie Mae acquired the beneficial interest in the Deed of Trust by operation of the Assignment from MERS.
Given the isomorphism between the facts in Edelstein and the facts here, there can be no doubt that Phillips's claim is not well taken under Nevada law. As Phillips has not raised any additional issues of possible invalidity with respect to the Deed of Trust or the Assignment, they will be taken as valid. The result is that Seterus's claim is secured by the Property.
For the reasons set forth above, the court hereby overrules Phillips's objection to Seterus's Proof of Claim. Seterus has an allowed secured claim in the amount set forth therein.
In addition, Seterus has established that it is entitled to relief from stay as to the Property, and the court hereby grants that relief.
This order constitutes the court's findings of fact and conclusions of law under Rule 7052, made applicable here by Rule 9014(c). The court will enter separate orders disposing of each motion.
A "`negotiable instrument' means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:
NEV.REV.STAT. § 104.3104(1) (2011); see Leyva, 255 P.3d at 1280.
Under the UCC, sometimes the qualifier "negotiable" is dropped. U.C.C. § 3-104(b) (2002) ("`Instrument' means a negotiable instrument."); see NEV.REV.STAT. § 104.3104(2).
Even if it weren't a negotiable instrument, however, the evidence was such that it would be "appropriate, consistent with the principles stated in § 1-102(2) [now § 1-103], for a court to apply one or more provisions of Article 3 to the writing by analogy, taking into account the expectations of the parties and the differences between the writing and an instrument governed by Article 3." U.C.C. § 3-104 cmt. 2 (2002); see also Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 909 n. 14 (9th Cir. BAP 2010); FRED H. MILLER & ALVIN C. HARRELL, THE LAW OF MODERN PAYMENT SYSTEMS § 1.03[1][b] (2003).
Alternatively, she may be arguing that Fannie Mae owns the economic interest in the Note and that the FNMA Trust possesses the Note. Under this framework, the FNMA Trust cannot be the holder because there is no endorsement to the FNMA Trust, and nor can Fannie Mae be the holder because it does not possess the Note. As discussed below, however, the nature of her confusion is irrelevant because Seterus has established that it is a party entitled to enforce the Note and thus has standing.
John Krahmer, Uniform Commercial Code Issues and Developments: 2010-2011 UCC Update, 65 CONSUMER FIN. L.Q. REP. 64, 64 n. 2 (2011).
