ROBERT E. LITTLEFIELD, Jr., Bankruptcy Judge.
The matter before the court is a motion for partial summary judgment filed by Veneshia Verna (hereinafter "Plaintiff") on the first count of her adversary complaint against U.S. Bank National Association (hereinafter "Defendant" or "US Bank"), which challenges the validity of Defendant's mortgage lien. The court's findings of fact and conclusions of law are set forth herein pursuant Federal Rule of Bankruptcy Procedure 7052.
The court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(K).
The following facts, many of which are undisputed, are derived from the record before the court, including Defendant's Counter-Statement of Facts (Def.'s R. 7056 Counter-St.),
On or about August 17, 2007, Plaintiff executed a note evidencing a $149,651 loan from First Alternative Mortgage Corp. (hereinafter "First Alternative") along with a mortgage against her residence located at 20 Bevan Street, Cohoes, New York.
The mortgage lists Plaintiff as the borrower, First Alternative as the lender, and Mortgage Electronic Registration Systems, Inc. (hereinafter "MERS") as the nominee for First Alternative. On February 17, 2010, Plaintiff entered into a loan modification agreement with US Bank, wherein the parties agreed MERS would act as nominee for US Bank (hereinafter "Modification Agreement"). (Def.'s R. 7056 Counter-St. Ex. C.) The Modification Agreement was filed with the Albany County Clerk on June 30, 2010. Id. On May 27, 2011, the mortgage was assigned from MERS, as nominee for First Alternative, to MERS, as nominee for US Bank. (Def.'s R. 7056 Counter-St. Ex. D.) On the same day, the mortgage was subsequently assigned from MERS, as nominee for US Bank, to US Bank. (Def.'s R. 7056 Counter-St. Ex. E.) US Bank commenced a mortgage foreclosure action against Plaintiff in November 2012 based upon Plaintiff's failure to make her mortgage payments.
On April 15, 2014, Plaintiff filed her chapter 13 petition, which stayed Defendant's foreclosure action. On schedule D of her petition, Plaintiff lists Defendant as a partially secured creditor holding a disputed claim. Plaintiff's proposed plan treats Defendant's claim as unsecured and indicates her intent to challenge Defendant's lien. On August 14, 2014, Plaintiff commenced this adversary proceeding by filing a complaint containing two counts. The first count challenges the validity of Defendant's mortgage lien based on allegations relating to certain mortgage assignments and the separation of rights in the note and mortgage. The second count disputes the amount Defendant claims it is owed under the note on its proof of claim. The complaint includes no claims or allegations challenging Defendant's rights in the note. On January 29, 2015, the court held an adjourned pre-trial conference at which the parties agreed discovery was closed. (Hr'g R., Jan. 29, 2015.)
On March 5, 2015, Plaintiff filed the instant motion for summary judgment on the first count of her complaint. In support of her motion, Plaintiff adds a new cause of action to her first count, arguing Defendant lacks rights in the mortgage by virtue of its lack of any rights in the underlying note. Specifically, Plaintiff alleges Defendant's discovery responses fail to demonstrate its holder rights in the note and, according to Plaintiff, without any such rights in the note, Defendant cannot have rights in the corresponding mortgage ("New Cause of Action"). Throughout discovery, Plaintiff made four requests relating to the note: two interrogatories and two demands for documents.
Plaintiff's first interrogatory sought the specific location of the note as of November 15, 2012, the date Defendant commenced its state court foreclosure action. Defendant responded that it could not provide the specific location of the note as of November 15, 2012, "other than that the note was in the physical possession of Defendant's officers, directors, employees, or other agents." (Ex. B to Def.'s Supp. Mem.) Plaintiff's second interrogatory asked Defendant to "[s]tate the date which [it] took physical possession of the original Note, from what entity it received the Note, and how much it paid for the Note." (Ex. A to Def.'s Supp. Mem.) Defendant responded: "[t]he origination date of the Note was August 17, 2007, and the loan went active on the Defendant's system August 29, 2007. Upon information and belief the Note came into the Defendant's physical possession on or between those dates." (Ex. B to Def.'s Supp. Mem.) Plaintiff's demand for documents requested Defendant "[p]rovide a first generation copy of the original Note and all original Allonges to the Note, and state the location at which the copy was made, and by whom." (Ex. A to Def.'s Supp. Mem.) In response, Defendant provided a copy of the note and allonge. Plaintiff also requested Defendant provide evidence of the physical transfer of the original note from origination to its current location. Defendant's response included various documents related to the loan. Along with each of its responses, Defendant raised several objections, including, inter alia, objections to the scope and relevancy of Plaintiff's requests. (Ex. B to Def.'s Supp. Mem.)
In Defendant's response to Plaintiff's motion, Defendant produced certain evidence it had not provided in discovery. In particular, Defendant's new evidence consists of affidavits of US Bank employees which track US Bank's receipt and continued possession of the note, an affirmation of Defendant's attorney attesting to her physical possession of the note, and a copy of the note certified by Defendant's attorney (collectively, "New Evidence"). The affirmation of Defendant's attorney indicates the original note was delivered to her by Defendant on December 30, 2014.
Plaintiff makes three arguments in support of her motion. First, Plaintiff argues Defendant's mortgage is invalid due to the separation of ownership rights in the note and mortgage. Plaintiff asserts the ownership rights in the mortgage and note were fatally separated when the note was conveyed from First Alternative to Defendant while the mortgage remained with MERS, as nominee for First Alternative.
Plaintiff next argues defects in each of the written mortgage assignments dated May 27, 2011 resulted in Defendant acquiring no rights in the mortgage. In support of this theory, Plaintiff alleges the written assignment from MERS, as nominee for First Alternative, to MERS, as nominee for US Bank, is defective on its face because it was notarized in Kentucky, the home of the assignee, not the assignor. Plaintiff also argues both of the May 27, 2011 written assignments are invalid because they were each signed by the same individual. Alternatively, Plaintiff argues the written assignments are invalid because they are each dated three years after the date of the Modification Agreement. Plaintiff argues these purported deficiencies resulted in Defendant never receiving any rights in the mortgage.
In response to Plaintiff's first two arguments, Defendant contends MERS never took an ownership interest in the mortgage because it was merely a nominee for the lenders. Therefore, according to Defendant, the ownership rights in the mortgage and note never separated. Defendant further argues any purported defects in the mortgage assignments became irrelevant once it demonstrated its holder rights in the note since, as a matter of New York law, the mortgage is deemed to follow the note.
Plaintiff's third argument supports the New Cause of Action, which challenges the validity of Defendant's mortgage lien based on its alleged lack of holder rights in the note. Plaintiff asserts without rights in the note, Defendant cannot have rights in the corresponding mortgage. According to Plaintiff, to prove holder status, one must demonstrate it has possession of a properly indorsed negotiable instrument and that it received the instrument through physical delivery. Plaintiff argues Defendant's discovery responses do not adequately demonstrate it received the note through physical delivery, or that it currently possesses the note. To the extent Defendant's New Evidence addresses these issues, Plaintiff argues the New Evidence should be excluded under Rule 7037 because the New Evidence consists of documents that were sought in discovery but were submitted only after the discovery deadline had lapsed. Conceding she did not file a motion to compel pursuant to Rule 7037, Plaintiff argues such a motion was not warranted in this case, as the New Evidence contradicts, rather than supplements, Defendant's discovery responses.
Defendant counters it has provided sufficient evidence to demonstrate its status as holder or, alternatively, assignee with the rights of a holder. Defendant argues the New Evidence demonstrates its physical possession of a note indorsed in blank, which proves its prima facie holder status, and that Plaintiff has failed to introduce any admissible evidence in rebuttal. Alternatively, Defendant avers it has demonstrated its status as an assignee with the rights of a holder based upon its physical possession of the note and its receipt of the note through physical delivery.
Defendant argues the court should consider its New Evidence because, contrary to Plaintiff's contention, its responses to Plaintiff's discovery requests do in fact demonstrate its possession of the note on the date the state foreclosure action commenced, which was the only date requested by Plaintiff. Therefore, according to Defendant, Plaintiff has no basis to question its possession of the note. Defendant also argues the New Evidence should be admitted because it was only submitted in response to the New Cause of Action. Defendant argues Plaintiff violated Rule 7015 when she added the New Cause of Action to her motion without first obtaining leave to amend her pleadings.
A court shall grant summary judgment if the movant shows there is no genuine dispute as to any material fact and that they are entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a); Fed. R. Bankr. P. 7056. The movant bears the initial burden of demonstrating that no genuine dispute exists as to any material fact. Vt. Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241, 244 (2d Cir. 2004). A fact is material only if its resolution would affect the outcome of the adversary proceeding. Bayle v. Allstate Ins. Co., 615 F.3d 350, 355 (5th Cir. 2010). A genuine factual dispute exists when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986). "In determining whether a genuine issue of material fact exists, a court must resolve all ambiguities and draw all reasonable inferences against the moving party." Webster v. City of New York, 333 F.Supp.2d 184, 193 (S.D.N.Y. 2004). If the movant meets its initial burden, in order to defeat summary judgment, the non-movant must offer sufficient evidence to demonstrate the existence of a genuinely disputed material fact. Anderson, 477 U.S. at 248. The non-movant must set forth specific facts that show there are triable issues and cannot rely merely on pleadings containing allegations or denials. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). If the facts are "so one-sided that one party must prevail as a matter of law," then summary judgment should be granted. Anderson, 477 U.S. at 248.
A ruling on Plaintiff's summary judgment motion requires a determination of Defendant's rights in the subject mortgage. In determining property rights, unless some federal interest requires otherwise, bankruptcy courts look to state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918 (1979); Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 450, 127 S.Ct. 1199, 1204-05 (2007). Accordingly, in determining Defendant's rights in the mortgage, the court will follow New York law.
Prior to considering the parties' substantive arguments, the court must address the procedural issue relating to the New Evidence. For the reasons stated below, the court finds the New Cause of Action, which arose in Plaintiff's motion for summary judgment to the surprise of both the court and Defendant, violates Rule 7015.
Plaintiff's complaint does not provide any indication that she disputes Defendant's rights in the note, nor could it reasonably be inferred at the time Plaintiff filed her complaint that such dispute would arise over the course of the proceeding.
Having found a violation of Rule 7015, the question to follow is whether the court should nevertheless exercise its discretion to rule on the New Cause of Action, and if so, whether it should consider the New Evidence. See Fed. R. Bankr. P. 7015. In this case, the parties were given the opportunity to submit briefs in response to Plaintiff's objection to the admission of the New Evidence. Plaintiff's only argument supporting her objection is that the New Evidence is inadmissible because it was submitted after the discovery deadline had lapsed. Because up until the filing of her motion, Plaintiff provided no indication that she disputed Defendant's rights in the note, and then effectively blindsided Defendant with her New Cause of Action, it is clear that any risk of prejudice arising from the court's consideration of the New Cause of Action falls on Defendant, not Plaintiff. Defendant contends, however, that the New Evidence is dispositive on the issue. Moreover, Plaintiff is not at all prejudiced by the court's consideration of the New Evidence since the New Evidence relates only to the New Cause of Action and does not support any of the original causes of action contained in her complaint. Thus, finding no prejudice to either party, the court has little hesitation overlooking Plaintiff's Rule 7015 violation and ruling on the New Cause of Action. In doing so, it will consider the New Evidence.
A holder is "[a] person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession." N.Y.U.C.C. Law § 1-201 (McKinney 2015). An individual demonstrates their holder status by proving they have possession of a negotiable instrument and that the instrument is indorsed in their name, in blank, or to bearer. See Mortgage Elec. Registration Sys., Inc. v. Coakley, 838 N.Y.S.2d 622, 623 (App. Div. 2007); Dowland v. JPMorgan Chase Bank, N.A., 2012 WL 1392549, at *2 (S.D.N.Y. Apr. 23, 2012); Caraballo v. Homecomings Fin., 2014 WL 2117225, at *4 (S.D.N.Y. May 21, 2014). Once an individual has proven their status as holder, they have the right to enforce their negotiable instrument, subject to any claims and objections arising under N.Y. U.C.C. §§ 3-306 and 3-307. Moreover, a holder is entitled to a presumption of ownership, which means any party objecting to a holder's rights in a negotiable instrument faces the initial burden of proof on their objection. N.Y. U.C.C. §§ 3-306 & 3-307; Official Comment 2 to N.Y. U.C.C. § 3-307.
In this case, Defendant has established itself as the holder of the note. In particular, Defendant's holder status is evidenced by its attorney's affirmation, which establishes its possession of the original note, and the certified copy of the original note indorsed in blank, which shows the note is bearer paper. See N.Y. U.C.C. §§ 1-201 & 3-307. As the holder, Defendant has the right to enforce the note, subject to any defenses raised by Plaintiff. N.Y. U.C.C. §§ 3-306 & 3-307. Other than her allegations challenging Defendant's possession of the note, Plaintiff raises no factual objections to Defendant's holder status, nor does the record reflect any material questions of fact relating to Defendant's holder rights. Therefore, as a matter of law, the court finds Defendant holds the note.
Plaintiff argues to prove its holder status, in addition to demonstrating its physical possession of the properly indorsed note, it was incumbent upon Defendant to also provide specific details relating to the physical delivery of the note. The simple answer to Plaintiff's contention is that the physical delivery requirement does not apply to holders,
The remainder of Plaintiff's motion involves questions concerning certain assignments of the subject mortgage. The question of law underlying Plaintiff's remaining arguments, however, is settled among New York courts and weighs in favor of Defendant. Finding no factual barriers, the court therefore concludes as a matter of law that because Defendant holds the note, it also owns the incidental mortgage.
The longstanding and well-established law in New York, which has recently been affirmed by the New York Court of Appeals in Taylor, is that a holder's or assignee's rights in a mortgage note arise in the note, not in the mortgage. See 25 N.Y.3d 355. This enduring principle was long ago recited by the United States Supreme Court as follows: "[t]he note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity." Carpenter v. Longan, 83 U.S. 271, 274, 21 L. Ed. 313 (1872); see Silverberg, 926 N.Y.S.2d at 537 (citing Carpenter, 83 U.S. 271). In Taylor, the Court of Appeals reaffirmed this rule, while also including the narrow caveat that parties to an assignment may agree that the assignor retain its mortgage, and assign only the note.
In this case, Plaintiff does not allege, nor does the record reflect, any agreement between First Alternative and Defendant to assign the note without the mortgage.
For the reasons stated above, the first count of Plaintiff's adversary complaint is hereby dismissed.
It is SO ORDERED.
