ERIC L. FRANK, Bankruptcy Judge.
The Debtor commenced this bankruptcy case by filing a petition under chapter 13 of the Bankruptcy Code on July 2, 2010. On October 4, 2010, Everhome Mortgage Company ("Everhome"), as Servicer for Everbank ("Everbank"), filed a motion for relief from the automatic stay ("the Motion") (Doc. # 25), seeking permission to resume foreclosure proceedings against the Debtor's residence, 1618 E. Washington Lane, Philadelphia, PA 19138 ("the Property").
Everhome asserts that it is entitled to relief under both 11 U.S.C. § 362(d)(1) and (d)(2).
In his response to the Motion filed on October 20, 2010 (Doc. # 32), the Debtor did not deny unequivocally Everhome's allegation that he has not made any post-petition monthly instalment payments to Everhome.
After three continuances by agreement of the parties, (see Docket Entry Nos. 33, 37, 55), a hearing on the Motion was held and concluded on March 17, 2011. The primary focus of the hearing was the Debtor's contention that Everhome lacks standing to prosecute the Motion.
At the hearing, only one witness testified: George M. Ricketson, an individual employed by Everhome as a Senior Default Coordinator. He testified on Everhome's behalf. Six exhibits were admitted into evidence.
At the conclusion of the hearing, the parties' counsel requested the opportunity to file both initial memoranda of law in support of their respective positions and then reply memoranda. Consequently, I entered an order setting up a briefing schedule, with simultaneous memoranda due on March 31, 2011 and reply memoranda due one week later. (Doc. # 60).
This contested matter remains ready for decision.
Before proceeding further, however, it is necessary to mention a significant procedural development in the bankruptcy case that occurred just recently. On May 23, 2011, the Debtor filed a Notice of Conversion, converting this case from chapter 13 to chapter 7. (Doc. # 70). See Fed. R. Bankr.P. 1017(f)(3). Nevertheless, I will proceed to decide the Motion because the Debtor's lead argument—that Everhome is not a party that may seek relief from the automatic stay—remains available to the Debtor even after the conversion of the case and is dispositive.
For the reasons set forth below, the Motion will be denied without prejudice.
In order to place the present dispute in the proper procedural perspective, it is helpful to summarize certain background information regarding this chapter 13 case.
On July 27, 2010, less than four weeks after the commencement of the case, Everhome, as Servicer for Everbank, filed a proof of claim (Claim No. 3) ("the Proof of Claim"). The Proof of Claim is in the amount of $103,973.26 and states that the claim is secured by the Property. The Proof of Claim also states that instalment payments on the loan are delinquent from March 1, 2005 at $677.07 per month and that the total pre-petition delinquency on the loan is $63,703.80.
The Debtor filed his bankruptcy schedules on August 3, 2010 and a chapter 13 plan on August 4, 2010. (Doc. #'s 15, 16).
In his bankruptcy schedules ("the Schedules"), the Debtor disclosed a one-half ownership interest in the Property. (Doc. # 15, Schedule A).
In his bankruptcy schedules, the Debtor also disclosed that the Property is encumbered by a mortgage in the amount of $103,973.26. In Schedule D, the Debtor identified three creditors as mortgage holders:
(Doc. # 15, Schedule D).
In Schedule D, the Debtor also disclosed that the Property was encumbered by three municipal liens (two in favor of "Philadelphia Gas Works" and one in favor of "Water Revenue") in the aggregate amount of $12,364.30.
The Debtor filed a chapter 13 plan ("the Plan") on August 4, 2010. (Doc. # 16). In substance, the Plan proposed for the Debtor to pay $5.00 per month for 60 months ($300.00 total) to the Chapter 13 Trustee. In addition, the Plan provided for the Debtor to sell the Property and distribute the proceeds in full satisfaction of the allowed secured claim of the holder of the note and mortgage on the Property and the other claims secured by the Property, with any remaining sale proceeds to be turned over to the Trustee.
The Plan made no reference to value the of the Property or the fact that the total amount due on the secured claims, as disclosed on his Schedules, exceeds the value of the Property. The Plan did not explain how the Debtor would be able to consummate the proposed sale or how any net proceeds would be available to the Trustee from the sale of a $100,000 asset encumbered by more than $116,000.00 in liens.
I find the following facts based on the testimony presented and the documents introduced into evidence at the March 17, 2011 hearing.
1. Everhome and Everbank are separate entities.
2. Everbank is the parent company of Everhome.
3. Everhome "services" mortgages held by Everbank, by accepting payments from borrowers and tracking those payments and any defaults that arise under the mortgage.
4. On November 18, 1998, the Debtor entered into a mortgage loan transaction ("the Original Transaction") with Home Mortgage, Inc. ("HMI").
5. The mortgage loan transaction was guaranteed by the Federal Housing Administration.
6. In the Original Transaction, the Debtor signed a note ("the Note") and a mortgage ("the Mortgage") against the Property in favor of HMI. (See Ex. M-2).
7. The Mortgage states that it secures repayment of a debt evidenced by the Note. (Id.).
8. On June 30, 2000, HMI, acting through its Vice President, Teresa N. Jones, executed a written assignment, assigning the Mortgage to PrimeWest Mortgage Corporation ("PrimeWest").
9. The HMI-PrimeWest assignment was recorded in the Philadelphia Department of Records on July 28, 2000. (Ex. M-4).
10. On June 1, 2005, PrimeWest, acting through its Vice President, Tanya Ault, executed a written assignment, assigning the Mortgage to Mortgage Electronic Registration Systems, Inc. ("MERS"), "as nominee for Everhome Mortgage Company." (Ex. M-5).
11. The PrimeWest-MERS/Everhome assignment was recorded in the Philadelphia Department of Records on October 25, 2005. (Ex. M-5).
12. On March 8, 2011, MERS, again as "as nominee for Everhome Mortgage Company," and acting through Ann Johnson, Assistant Secretary, and Marcie Metcalf, Vice President, executed a written assignment, assigning the Mortgage to Everbank. (Ex. M-7).
13. The March 8, 2011 MERS-Everbank mortgage assignment was unrecorded as of March 17, 2011, the date of the hearing in this contested matter.
14. Attached to the Note is a blank endorsement executed by an individual purportedly acting on behalf of PrimeWest.
15. Everhome does not have physical possession of the Note.
16. U.S. Bank has physical possession of the Note.
17. Everhome considers U.S. Bank to be acting as Everhome's "custodian" in maintaining physical possession of the Note.
19. On September 14, 2005, MERS, acting in its own name (and without the qualifying reference "as nominee") filed a complaint in mortgage foreclosure ("the Complaint") against the Debtor in the Court of Common Pleas, Philadelphia County, Pennsylvania, docketed at No. 1150, Sept. Term 2005. (Ex. D-1).
20. In the Complaint, MERS alleged, without any qualification, that it is "the original Mortgagee named in the Mortgage, the legal successor in interest to the original Mortgagee, or is the present holder of the mortgage by . . . Assignment(s)." (Ex. D-1, Complaint ¶ 2).
21. As of July 2, 2010, MERS' motion for summary judgment, which the Debtor contested, was pending.
22. The Debtor commenced this chapter 13 bankruptcy case on July 2, 2010.
23. On July 27, 2010, Everhome, acting "as servicer for Everbank," filed a proof of claim, asserting a claim secured by the Property in the amount of $103,973.26, with pre-petition arrears of $63,703.80.
24. On October 4, 2010, Everhome, again acting "as servicer for Everbank," initiated this contested matter by filing the Motion, alleging that it is the "holder of a secured claim" against Debtor, secured by a first mortgage on the Property.
25. The Motion requests that the court grant Everhome relief from the automatic stay "to foreclose upon and to otherwise exercise its rights with respect to the [Property]."
26. Since the commencement of this bankruptcy case, the Debtor has made no payments to Everhome or Everbank.
The transformation of the home mortgage finance industry in the past 25 years, through the treatment of the stream of revenue generated by residential mortgage loans as a commodity to be sold freely in the marketplace, the rise of residential mortgage securitization
The propriety of a creditor's status as a party has arisen regularly in the bankruptcy courts, most commonly raised by debtors in defense of a motions for relief from the automatic stay or in objections to proofs of claim. Review of the reported decisions reveals that the litigation regarding the creditor's status as a proper party has given rise to a plethora of subsidiary issues. Depending upon the details of the loan assignment history, the level of evidentiary detail presented by creditor and the nature of the contested matter before the bankruptcy court, the subsidiary issues that arise include:
In this case, a loan servicer (Everhome), purportedly acting on behalf of its principal (Everbank), has requested relief from the automatic stay to proceed in state court to enforce the Mortgage on the Property. The Debtor asserts that Everhome has not established that it has the legal authority to enforce the Mortgage and therefore, it lacks standing, or it is not a "party in interest" or it is not the "real party in interest."
I can resolve this dispute without reaching many of the issues described above. Notwithstanding 11 U.S.C. § 362(g), Everhome, as the moving party, bears the burden of proving that it is a party in interest under 11 U.S.C. § 362(d). See Wilhelm, 407 B.R. at 400-01; see also Tarantola, 2010 WL 3022038, at *6; Jacobson, 402 B.R. at 367. The present record is insufficient to support a finding that Everhome is either the holder of the Mortgage or the agent of the mortgage holder, with authority to enforce the Mortgage in judicial proceedings. Therefore, Everhome has not met its burden of establishing its status as a party in interest that may seek relief from the automatic stay under 11 U.S.C. § 362(d).
When a debtor challenges a creditor's status as a proper party to seek relief from the automatic stay, courts have analyzed the controversy by reference to the concepts of constitutional standing, prudential standing, "real party in interest" (within the meaning of Fed.R.Civ.P. 17)
Based on the recent decision of our Court of Appeals, In re Global Industrial Technologies, Inc., 2011 WL 1662792 (3d Cir. May 4, 2011) (en banc) ("GIT"), I find it unnecessary to engage in an extended discussion regarding the elements of and interrelationship among the legal concepts of constitutional standing, prudential standing, "real party in interest" and "party in interest."
GIT involved a challenge to the standing of a party to object to confirmation of a chapter 11 plan. In overruling certain objections to confirmation of the plan, the bankruptcy court held that the objectors lacked standing to object. That decision was affirmed by the district court. The Court of Appeals reversed.
Most significantly for present purposes, the GIT court stated:
2011 WL 1662792, at *6 (emphasis added).
The logical import of the Court of Appeals' statement is that a party that has constitutional standing is a party in interest under the Bankruptcy Code and, as such, is expressly authorized by 11 U.S.C. § 362(d) to prosecute a motion for relief from the automatic stay.
In GIT, the court summarized the requirements for constitutional standing as follows:
2011 WL 1662792, at *5 (citations omitted).
I read GIT to instruct that a party in interest in a bankruptcy case 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). Accord 3 Collier on Bankruptcy ¶ 362.07[2], at 362-105 (Alan N. Resnick, Henry J. Sommer eds., 16th ed. 2010) ("any party affected by the stay should be entitled to move for relief").
Further, inherent in the requirement that a party in interest must have some "legally protected" interest is the additional requirement that the party must be asserting its own rights and not that of another entity. See, e.g., Martinez, 2011 WL 996705, at *4; Hayes, 393 B.R. at 267; In re Woodberry, 383 B.R. at 379; see also Storino v. Borough of Point Pleasant Beach, 322 F.3d 293, 298-99 (3d Cir. 2003).
In the context of a motion for relief from the automatic stay to enforce a creditor's rights under a mortgage, courts have recognized that to have the "legally protected interest" that makes a party a "party in interest," the movant must be the party that has authority to enforce the mortgage under applicable nonbankruptcy law. E.g., Agard, 444 B.R. at 245. (Otherwise, the movant would be seeking relief to enforce the rights of a third party not before the court). Therefore, consideration of nonbankruptcy law is necessary in assessing whether Everhome, the movant here, is a party in interest. See, e.g., Densmore., 445 B.R. at 310; Martinez, 2011 WL 996705, at *4.
Under Pennsylvania law, a mortgage foreclosure action may be maintained by the original holder of the mortgage or a subsequent assignee. See 22 Standard Pennsylvania Practice 2d § 121:39 (2010) ("SPP 2d"); 8 Pennsylvania Law Encyclopedia, Commercial Transactions § 207 (2d ed. 2009). In a foreclosure complaint, the plaintiff must allege its status as the holder of the mortgage and, if the plaintiff is an assignee, it must allege that it is the holder by assignment. See Wells Fargo Bank, N.A. v. Lupori, 8 A.3d 919, 921-22 (Pa.Super.Ct.2010). However, it is not necessary that the assignment be recorded prior to filing the complaint. U.S. Bank, N.A. v. Mallory, 982 A.2d 986, 993 (Pa.Super.Ct.2009).
On the present record, Everhome has not established that it is a party in interest entitled to seek relief from the automatic stay under 11 U.S.C. § 362(d) in order to prosecute a foreclosure action against the Property. Everhome has not presented sufficient evidence to permit a finding that it is either: (1) the holder of the mortgage, with the concomitant right to enforce it under Pennsylvania law or (2) an agent authorized by the holder of the Mortgage to initiate court proceedings to enforce the Mortgage on the holder's behalf.
When it filed the Motion, Everhome had a record interest in the Mortgage in the form of the 2005 mortgage assignment from PrimeWest to MERS "as nominee for Everhome."
Most significantly, during the hearing, Everhome made no claim that it is the mortgage holder. All of the evidence it presented, through Mr. Ricketson's testimony, was designed to prove that Everhome is servicing the Mortgage on behalf of its parent company, Everbank. Everhome
Further, by the time the hearing was held in this contested matter, another mortgage assignment had been executed, which on its face removed Everhome as the beneficial mortgagee. Although the March 2011 assignment from MERS to Everbank was not recorded, under Pennsylvania law, the allegation that a party is the owner of a mortgage that is not yet recorded is sufficient to permit that party to proceed as a plaintiff in an action in mortgage foreclosure. Mallory, 982 A.2d at 993. Thus, Everhome's own evidence tended to prove that Everbank, not Everhome, is the party in interest with the right to enforce the Mortgage under applicable nonbankruptcy law.
Everbank has not made a preliminary showing that it is a holder of the Mortgage with a right of enforcement. Therefore, Everhome may be a party in interest only if the evidence shows that Everhome has been authorized by the party that has the right to enforce the Mortgage to initiate legal proceedings on its behalf.
Everhome's position is that the Mortgage is held by Everbank and that as the servicer of the Mortgage, it has authority to file a motion for relief from the automatic stay. The Debtor does not concede this.
A number of courts have upheld the authority of a mortgage loan servicer to file a proof of claim on behalf of the mortgage holder.
Most commonly, as in this case, a motion for relief from the automatic stay requests that the bankruptcy court authorize the movant to initiate or resume a foreclosure against the secured property. The purpose of the foreclosure action is to subject the secured property to sale, thereby permitting the secured creditor to realize its collateral. In Pennsylvania, it is the mortgage holder that has the right to pursue an action in mortgage foreclosure. Therefore, even though the servicer has an economic interest in the revenue stream generated by the mortgage, the relief requested in a stay relief motion—the right to pursue foreclosure proceedings against the collateral—involves the enforcement of the rights of the mortgage holder, not the servicer. Thus, the servicer's economic stake in the mortgage does not necessarily mean that the servicer is a party in interest that may seek relief from the automatic stay in order to proceed with foreclosure.
That said, even though the in rem rights to be enforced following the grant of relief from the automatic stay may be those of the mortgage holder and not the servicer, the servicer may nonetheless be a party in interest in the bankruptcy case, with the right to prosecute a stay relief motion, if the servicer is acting within the scope of its authority as the mortgage holder's agent. Whether it has such authority depends on the content of the servicing agreement between the mortgage holder and the servicer. That agreement may or may not be broad enough in scope as to delegate to the servicer the authority to initiate and manage foreclosure litigation on the mortgage holder's behalf.
A servicer can establish its authority to initiate the legal action if it demonstrates that its contractual duties to the mortgage holder include not just the collection of payments, but also the conduct of mortgage foreclosure and other legal proceedings on the holder's behalf. Such authority includes the power to move for relief from the automatic stay in the bankruptcy court. See Martinez, 2011 WL 996705, at *5; Jacobson, 402 B.R. at 367; Woodberry, 383 B.R. at 379. Stated in slightly different terms, a servicer may have standing and be a party in interest if it files the motion for relief from the automatic stay in its capacity as the holder's attorney-in-fact. See Hwang I, 396 B.R. at 767.
In this case, assuming arguendo that the record supports a finding that Everbank is the mortgage holder with the authority to enforce the Mortgage in foreclosure proceedings, but see n. 21, supra, there is a paucity of evidence regarding the scope of Everhome's authority as servicer. The parties' servicing agreement was not introduced into evidence; nor were its particulars described by Everhome's trial witness. In his testimony, Mr. Ricketson described Everhome as having the authority to collect payments, track payments and determine when an the account is in default. There was no evidence that Everbank has appointed Everhome as its agent for the purpose of initiating legal proceedings to enforce the Mortgage.
This is a fatal gap in the evidence. I am unwilling to assume that the mere label of "servicer" is sufficient to cloak Everhome with authority to file a legal action on Everbank's behalf.
Given the Debtor's denial of Everhome's asserted party in interest status in his written response to the Motion, some evidence of Everhome's authority was necessary and that evidence was not offered. As the Wilhelm court stated
407 B.R. at 400 (citation omitted); see also Jacobson, 402 B.R. at 370 ("At a minimum, there must be an unambiguous representation or declaration setting forth the servicer's authority from the present holder . . . to collect on the note and enforce [the mortgage]").
Accordingly, the Motion must be denied.
This is a case in which the Debtor was substantially in arrears on his home mortgage when he commenced this bankruptcy case, has not paid his monthly mortgage payment over a number of months since filing the case and proposed a chapter 13 plan that contemplates the sale of his residence and that, on its face, is of questionable feasibility due to the apparent lack of equity in the Property. Without prejudging the merits of the motion for relief from the automatic stay, there is no question that the mortgagee has a good faith basis for pressing a motion for relief from the automatic stay.
At the same time, however, it is understandable why the Debtor responded to the Motion by demanding proof that Everhome was the proper party to come before the court. From his perspective, Everhome's role in the mortgage relationship is, at best, opaque. Prior to the bankruptcy filing it was MERS (purporting, at least initially, to act in its own right), not Everhome or Everbank, that filed the foreclosure action against Debtor in state court. And, as the evidence revealed, Everhome holds itself out as merely the mortgage servicer and not the mortgage holder. There is no doubt that the Debtor acted in good faith in disputing Everhome's status as a party in interest. In fact, the Debtor's position was meritorious. At trial, Everhome failed to come forward with sufficient evidence to establish its party in interest status, resulting in the denial of the relief Everhome requested from this court.
To the extent that the outcome in this matter may appear anomalous due to the apparent merits of the request for stay relief and the seemingly technical nature of the issue regarding the identity of the proper moving party, the fault lies with the moving party. When a party claiming to be a secured creditor seeks relief from the automatic stay, the Debtor and the bankruptcy court are entitled to insist that the moving party show that it is the holder of the secured claim or that it is the authorized agent of the holder. This imposes an evidentiary burden "that is not difficult to meet," requiring only "present[ation of] the rudimentary elements of its claim." In re Salazar, 2011 WL 1398478, at *2, *3 (Bankr.S.D.Cal. Apr.12, 2011). Indeed, in this case, the evidentiary shortfall does not appear to have been insurmountable.
In the age of mortgage securitization, meeting the evidentiary burden imposed by the "party in interest" requirement of 11 U.S.C. § 362(d) may be a somewhat more cumbersome task for certain stay relief movants than it was for residential mortgagee—movants in the past, but that does not justify diluting the fundamental constitutional and statutory requirement that a party be a "party in interest" before it may obtain redress from a federal bankruptcy court. Any added burden is a product of the business model chosen by the mortgage finance industry and therefore, is simply part of the mortgage loan industry's cost of doing business. Presumably, the cost is offset by the benefits of the mortgage securitization system.
Furthermore, while a moving creditor may believe that its status as a party in interest is self-evident, the court cannot rule based on factual assumptions or evidentiary leaps. Our legal system is governed by the core principle that court decisions
For these reasons, I will deny the Motion without prejudice.
It is hereby
Respectfully, I disagree with the Hwang court's conclusion that Rule 7017 mandates dismissal of a motion in which the mortgage servicer demonstrates that it has full authority to act on behalf of the mortgage holder in enforcement of the mortgage. Typically, as occurred in this case, motions for relief from the automatic stay are filed in the name of the servicer "as servicer" for the mortgage holder. If one assumes, as the Hwang court did, that the servicer is acting within the scope of its authority in filing the motion, the servicer could simply style the motion as being filed by the holder, "through its agent," instead of saying that the motion is filed by the servicer, "as servicer" for the mortgage holder. Either way, the real party in interest and the identity of the real party in interest has been disclosed, thereby effectuating the purpose of Fed.R.Civ.P. 17. In my view, the dismissal of such a motion, as suggested in Hwang, exalts form over substance and is unnecessary.
