In Re Barry Weisband, 427 B.R. Chapter 13 (Dist. Ariz. 2010). Case No. 4:09-bk-05175-EWH.
The following is general legal information only, and just my interpretation of the Weisband case. Other interpretations may be possible. In addition, law often changes, please check to make sure this is good and valid case law at the time if reading.
Barry Weisband filed for Chapter 13 Bankruptcy in March of 2009. One of his listed assets was his real property located at 5424 E. Placita Apan in Tucson, AZ. Weisband obtained the property when he executed a promissory note for $540,000 to GreenPoint Mortgage Funding secured by a deed of trust on October 6, 2006. The deed of trust was signed by Weisband on October 9 and recorded October 13 of the same year (2006). Importantly, the deed of trust named GreenPoint as the lender and MERS as the beneficiary “solely as nominee for GreenPoint, its successors and assigns.” On an undated and separate piece of paper, GreenPoint endorsed the note to GMAC. GMAC therefore had physical possession of the original note in late 2006.
LOAN SECURITIZATION – THE FIVE CONTRACTS AT ISSUE IN THIS CASE:
(1) 4/10/06 FLOW INTERIM SERVICING AGREEMENT (between Green Point and Lehman) – The “FISA” AGREEMENT.
According to GMAC, GreenPoint entered into an agreement with Lehman to sell loans it originated to Lehman Brothers Holdings under a “Flow Interim Servicing Agreement” (FISA) executed on an earlier date of 4/10/06. Under this Flow Agreement, GreenPoint agreed to sell certain loans to Lehman, and Green Point was to remain as servicer of these loans. As the Court later discussed, there was never any proof that Lehman got any transfer of notes from Green Point (recall the endorsement above was to GMAC, not to Lehman), and no assignment of the Deed of Trust from MERS.
(2) 11/1/06 MORTGAGE LOAN SALE AND ASSIGNMENT AGREEMENT (between Lehman and SASC Corporation) – The “MLSAA” AGREEMENT.
Under this agreement Lehman would sell/transfer the loans it received from Green Point to Structured Asset Securities Corporation (SASC). SASC Corporation would then create a securitized loan trust (called the “Green Point Funding Trust”) under a separate Trust Agreement (discussed below) and SASC would be entitled to receive the principle and interest payments. As discussed below, there was again no proof that SASC ever got any transfer of any note or deed of trust in regard to the debtors loan as GMAC had argued.
(3) 11/1/06 SECURITIZED LOAN TRUST AGREEMENT (between SASC, Aurora Loan Services, and US National Bank). Under this agreement, the following parties assumed the following roles:
(1) SASC, was Trustor
(2) U.S. Bank, was Trustee
(3) Aurora, was “Master Loan Servicer”
(4) 11/1/06 – RECONSTITUTED SERVICING CONTRACT (which essentially claimed Green Point would be the servicer of the loans in the trust. However, Green Point went out of business in 2007).
(5) 11/1/06 SECURITIZED SERVICING AGREEMENT – (“SSA”) (between GMAC, Lehman, and Aurora Loan Services)
Under this agreement, GMAC was to service the loans in the securitized loan trust (essentially leaving Aurora Loan Services as the “master servicer” and GMAC as the “sub-servicer”).
IF YOU ARE STILL FOLLOWING THE STORY YOU ARE TO BE COMMENDED. AT THIS POINT, TO RECAP, GREEN POINT ORIGINATES THE LOANS, MERS IS THE BENEFICIARY UNDER THE DEED OF TRUST IN A NOMINEE CAPACITY FOR GREEN POINT AND ITS SUCCESSORS AND ASSIGNS, AND THE ORIGINAL NOTE WAS TRANSFERRED AND ENDORSED TO GMAC, BUT THE LOANS ARE SOLD TO LEHMAN, AND THEN ASSIGNED TO SASC WHO CREATES A LOAN TRUST WHERE THE LOANS ARE ALLEGEDLY HELD AND SASC HAS THE RIGHT TO PRINCIPLE AND INTEREST PAYMENTS EVEN THOUGH GMAC HAS THE ORIGINAL NOTE. WELCOME TO SECURITZED LOANS.
At some point, the debtor became delinquent on the loan, and filed for Chapter 13 bankruptcy protection. While the automatic stay was in effect, MERS assigned the Deed of Trust to GMAC (apparently trying to convey standing on GMAC to file the motion to lift the automatic stay). There was never any proof of any transfer of the loan or deed of trust to Lehman, or to SASC, and no proof the note or deed of trust wound up in the securitized trust, or that the debtors loan was subject to the SSA (servicing agreement purporting to confer sub-servicer status on GMAC).
GMAC then filed a motion to lift the automatic stay (to try to sell the property) and the Debtor objected to GMAC’s proof of claim. In filing its proof of claim in support of its motion to lift the automatic stay, GMAC attached a copy of the note and the MERS assignment of the Deed of Trust, and an endorsement on a separate piece of paper (the endorsement was on an allonge and not attached to the note).
This dispute set the stage for an evidentiary hearing to determine whether or not GMAC had the legal right to lift the automatic stay in bankruptcy.
As discussed in the case: “GMAC advances three different arguments in support of its claim to be a “party in interest” with standing to seek relief from stay:
(1) First, GMAC asserts it has standing because the Note was endorsed to GMAC and GMAC has physical possession of the Note (although recall the loans were supposedly sold to Lehman and then to SASC who would theoritcally own the debtors loan). In essence GMAC seemed to be claiming it owned the loan as evidenced by its attachment to the proof of claim. This simply was not true. This was GMAC’s so called “custodian assignee” argument (i.e. we hold the note as a custodial guardian for the true owner of the loan).
(2) Second, GMAC asserts that by virtue of the MERS Assignment of the Deed of Trust, it is a beneficiary of the DOT and entitled to enforce and foreclose the DOT under Arizona law. (again, how could GMAC have a security interest in the debtors property if the loans were sold to Lehman, and then to SASC who had the right to receive principle and interest payments – a traditional concept of “beneficiary”)? There is also legal authority that MERS assignment of the Deed of Trust, without the note, is null and void and conveys nothing. See our blog posting on In re Walker case in California Bankruptcy Court.
(3) Third, GMAC asserts it has standing because it is the servicer of the Note. The court addresses each of GMAC’s claims in turn.”
As a last resort, GMAC argued it was the authorized loan servicer (sub-servicer under the 11/1/06 SSA agreement). The Court would eventually hold there was no proof the trust ever got the note and deed of trust so there was no way to know for sure that GMAC was the authorized servicer of a loan that did not appear to be covered or included in the SSA.
Did GMAC have constitutional / prudential standing to bring the Motion to Lift the Automatic Stay in Bankruptcy Court and was it the real party interest to bring such claim?
No. GMAC was not the holder of the note under entitled to enforce such under Arizona law and did not have constitutional standing as a “custodian’s assignee,” and was not the real party in interest entitled to seek relief from the automatic bankruptcy stay. Their motion to lift the automatic stay was therefore denied.
The Court’s Rationale:
The Court first discussed the two relevant concepts of (a) CONSTITUTIONAL STANDING and (b) PRUDENTIAL STANDING – Real Party in Interest (both are required to bring the lift-stay motion:
CONSTITUTIONAL STANDING / PRUDENTIAL STANDING (REAL PARTY IN INTEREST)
To this point the Court held:
“Nevertheless, in order to establish a colorable claim, a movant for relief from stay bears the burden of proof that it has standing to bring the motion. In re Wilhelm, 407 B.R. 392, 400 (Bankr. D. Idaho 2009). The issue of standing involves both “constitutional limitations on federal court jurisdiction and prudential limitations on its exercise.” Warth v. Seldin, 422 U.S. 490, 498 (1975). Constitutional standing concerns whether the plaintiff’s personal stake in the lawsuit is sufficient to have a “case or controversy” to which the federal judicial power may extend under Article III. Id.; see also Lujan v. Defenders of Wildlife, 504 U.S. 555, 559-60 (1992); Pershing Park Villas Homeowners Ass’n v. United Pac. Ins. Co., 219 F.3d 895, 899 (9th Cir. 2000).
Additionally, the “prudential doctrine of standing has come to encompass several judicially self-imposed limits on the exercise of federal jurisdiction.’” Pershing Park Villas, 219 F.3d at 899. Such limits are the prohibition on third-party standing and the requirement that suits be maintained by the real party in interest. See Warth v. Seldin, 422 U.S. at 498-99; Gilmartin v. City of Tucson, 2006 WL 5917165, at *4 (D. Ariz. 2006). Thus, prudential standing requires the plaintiff to assert its own claims rather than the claims of another. The requirements of Fed. R. Civ. P. 17, made applicable in stay relief motions by Rule 9014, “generally falls within the prudential standing doctrine.” In re Wilhelm, 407 B.R. at 398.
NEXT, THE COURT APPLIED THE LAW TO THE FACTS OF THE CASE TO DETERMINED WHETHER GMAC HAD STANDING TO BRING THE LIFT-STAY MOTION.
As to GMAC’s first argument, GMAC did not demonstrate it was the holder of the note under Arizona law (A.R.S. 47-3301 says only the “holder” of the note can enforce it). The court cited A.R.S. Section 47-1201(B)(21)(a) defining a holder as “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.” Because GMAC’s endorsement was on a separate piece of paper (allonge) rather than fixed to the note, it could not be considered the holder of the loan. The allonge must be affixed to the note to effectuate a legal transfer of the note. Therefore, the possession of the original note (one GMAC produced in court) meant nothing as GMAC “didn’t prove the note was properly payable to GMAC.” In addition, the allonge endorsement was not included with GMAC’s proof of claim, further indicating that it had not been affixed to the note at the time of transfer.
NOTE: the Court noted an exception to the allonge rule (the allonge endorsement need not be attached to the note) if 4 elements are shown: (1) if the assignment of the note was signed and notarized on the same day as the trust deed, (2) if the assignment specifically referenced the escrow number, (3) if the assignment identified the original note holder, and (4) if the assignment recited that the note was to be attached.See in re Nash, 49 B.R. 254, 261 (Bankr. D. Ariz. 1985) where “holder” in due course status was established.
Nevertheless, the court concluded that GMAC did not qualify under this exception because there was no proof that that the allonge containing the special endorsement from GreenPoint to GMAC was executed at or near the time the note was executed. SPECIFICALLY, THE COURT STATED:
“GMAC cannot overcome the problems with the unaffixed Endorsement by its physical possession of the Note because the Note was not endorsed in blank and, even if it was, the problem of the unaffixed endorsement would remain. As a result, because GMAC failed to meet its burden of demonstrating that the Endorsement was proper, it has failed to demonstrate that it is the holder of the Note.”
As to their second argument, the MERS assignment of the deed of trust DID NOT provide GMAC with Standing. The Court noted that an assignee of a deed of trust “stands in the shoes” of the assignor, taking only those “rights and remedies the assignor held. SINCE MERS HAD NO FINANCIAL INTEREST IN THE NOTE, THERE WAS NONE TO TRANSFER TO GMAC, AND NO STANDING CONFERRED TO GMAC BY ASSIGNING THE DEED OF TRUST.
HERE IS WHAT THE COURT SAID AS TO THE MERS ASSIGNMENT OF THE DEED OF TRUST TO GMAC:
“GMAC argues that it has standing to bring the Motion as the assignee of MERS. In this case, MERS is named in the DOT as a beneficiary, solely as the “nominee” of GreenPoint, holding only “legal title” to the interests granted to GreenPoint under the DOT. A number of cases have held that such language confers no economic benefit on MERS. See, e.g., In re Sheridan, 2009 WL 631355, *4 (Bankr. D. Idaho 2009); In re Mitchell, 2009 WL 1044368, *3-4 (Bankr. D. Nev. 2009); In re Jacobson, 402 B.R. 359, 367 (Bankr. W.D. Wash. 2009). As noted by the Sheridan court, MERS “collect[s] no money from [d]ebtors under the [n]ote, nor will it realize the value of the [p]roperty through foreclosure of the [d]eed of [t]rust in the event the [n]ote is not paid.” 2009 WL 631355 at *4.
Because MERS has no financial interest in the Note, it will suffer no injury if the Note is not paid and will realize no benefit if the DOT is foreclosed. Accordingly, MERS cannot satisfy the requirements of constitutional standing. GMAC, as MERS’ assignee of the DOT, “stands in the shoes” of the assignor, taking only those rights and remedies the assignor would have had. Hunnicutt Constr., Inc. v. Stewart Title & Trust of Tucson, Trust No. 3496, 187 Ariz. 301, 304 (Ct. App. 1996) citing Van Waters & Rogers v. Interchange Res., Inc., 14 Ariz. App. 414, 417 (1971); In re Boyajian, 367 B.R. 138, 145 (9th Cir. BAP 2007). Because GMAC is MERS’ assignee, it cannot satisfy the requirements of constitutional standing either.”
Third, the Court rejected GMAC’s argument that they had standing to pursue the lift stay motion as the servicer of the note. The court reasoned that because there was insufficient evidence that the note and the deed of trust were transferred to the final Trust (ex. from Green Point to Lehman, to SASC to the Trust), GMAC could not claim that it was the servicer of the note as claimed – there was no proof the NOTE AND DEED OF TRUST were part of the Trust. To this point the Court discussed the nature of securitized loans:
Securitization of residential mortgages is “the process of aggregating a large number of notes secured by deeds of trust in what is called a mortgage pool, and then selling security interests in that pool of mortgages.” Kurt Eggert, Held Up In Due Course: Predatory Lending, Securitization, and the Holder in Due Course Doctrine, 35 CREIGHTON L. REV. 503, 536 (2002). The process begins with a borrower negotiating with a mortgage broker for the terms of the loan. Then, the mortgage broker either originates the loan in its own name or in the name of another entity, which presumably provides the money for the loan. Almost immediately, the broker transfers the loan to the funding entity. “This lender quickly sells the loan to a different financial entity, which pools the loan together with a host of other loans in a mortgage pool.” Id. at 538.
The assignee then transfers the mortgages in the pool to another entity, which in turn transfers the loans to a special purpose vehicle (“SPV”,) whose sole role is to hold the pool of mortgages. Id. at 539. “The transfer to the special purpose trust must constitute a true sale, so that the party transferring the assets reduces its potential liability on the loans and exchanges the fairly illiquid loans for much more liquid cash.” Id. at 542. Next, the SPV issues securities which the assignee sells to investors. Id. at 539.
Once the securities have been sold, the SPV is not actively involved. It “does not directly collect payments from the homeowners whose notes and deeds of trust are held by the SPV.” Id. at 544. Rather, servicers collect the principal and interest payments on behalf of the SPV. Id. Fees are associated with the servicing of loans in the pool. Therefore, GMAC WOULD HAVE constitutional standing if it is the servicer for the Note and DOT because it would suffer concrete injury by not being able to collect its servicing fees. In re O’Kelley, 420 B.R. 18, 23 (D. Haw. 2009). In this case, however, the evidence does not demonstrate that the Note and DOT were transferred to the Trust, and, without that evidence, there is no demonstration that GMAC is the servicer of the Note.
NOTE: AFTER DETERMING THERE WAS NO STANDING FOR GMAC TO PURSUE THE MOTION TO LIFT THE BANKRUPTCY STAY, THE COURT ADDRESSED THE DEBTORS ARGUMENT THAT “ONLY THE SECURITIZED LOAN INVESTORS HAVE STANDING TO LIFT THE STAY.” The court, in rejecting this argument stated:
The Debtor argues that, in an asset securitization scheme, only the securities investors have standing to seek stay relief because they are the only parties with a financial interest in the securitized notes. However, because the Debtor executed the Note and received consideration (which he used to purchase the house), the contract is enforceable regardless of who provided the funding. In other words, the fact that the funds for a borrower’s loan are supplied by someone other than the loan originator, does not invalidate the loan or restrict enforcement of the loan contract to the parties who funded the loan. A number of cases and treatises recognize that consideration for a contract, including a promissory note, can be provided by a third party. See, e.g., DCM Ltd. P’ship v. Wang, 555 F. Supp. 2d 808, 817 (E.D. Mich. 2008); Buffalo County v. Richards, 212 Neb. 826, 828-29 (Neb. 1982); 3 WILLISTON ON CONTRACTS 7:20 (Richard A. Lord, 4th ed. 2009); RESTATEMENT (SECOND) OF CONTRACTS 71(4) (2009).
Notes are regularly assigned and the assignment does not change the nature of the contract. The assignee merely steps into the shoes of the assignor. In re Boyajian, 367 B.R. 138, 145 (9th Cir. BAP 2007); In re Trejos, 374 B.R. 210, 215 (9th Cir. BAP 2007). No additional consideration is required, as opposed to a novation which creates a new obligation. Id. at 216-17 citing RESTATEMENT (SECOND) OF CONTRACTS 280, cmt. e. Therefore, the Debtor’s argument that the Note is unenforceable because the funder of the Note was not the payee fails. The Note is still valid and can be enforced by the party who has the right to enforce it under applicable Arizona law.
THE COURT ALSO ADDRESSED WHAT TYPE OF PROOF OF NOTE ASSIGNMENT IS REQUIRED TO LIFT THE AUTOMATIC STAY:
A movant for stay relief need only present evidence sufficient to present a colorable claim not every piece of evidence that would be required to prove the right to foreclose under a state law judicial foreclosure proceeding is necessary. In re Emrich, 2009 WL 3816174, at *1 (Bankr. N.D. Cal. 2009). Accordingly, not every movant for relief from stay has to provide a complete chain of a note’s assignment to obtain relief.
Arizona’s deed of trust statute does not require a beneficiary of a deed of trust to produce the underlying note (or its chain of assignment) in order to conduct a Trustee’s Sale. Blau v. Am.’s Serv. Co., 2009 WL 3174823, at *6 (D. Ariz. 2009); Mansour v. Cal-W. Reconveyance Corp., 618 F. Supp. 2d 1178, 1181 (D. Ariz. 2009); Diessner v. Mortg. Elec. Registration Sys., 618 F. Supp. 2d 1184, 1187 (D. Ariz. 2009). It would make no sense to require a creditor to demonstrate more to obtain stay relief than it needs to demonstrate under state law to conduct a judicial or non-judicial foreclosure. Moreover, if a note is endorsed in blank, it is enforceable as a bearer instrument. See In re Hill, 2009 WL 1956174, at *2 (Bankr. D. Ariz. 2009). Therefore, this Court declines to impose a blanket requirement that all movants must offer proof of a note’s entire chain of assignments to have standing to seek relief although there may be circumstances where, in order to establish standing, the movant will have to do so.
The Weisband Court held that GMAC lacked standing to move for relief of stay (both constitutional and prudential standing – real party in interest). GMAC’s possession of the original note did not entitle it to enforce the note because the allonge was not properly affixed to the note meaning there was no right to seek payment on the note. MERS has no financial interest in a deed of trust (because is collects no loan payments and is not injured in the event of foreclosure) so it has no real interest to transfer to the assignee (who stands in the shoes of the assignor) and so the assignment of the deed of trust (security for payment of the loan) is essentially a transfer of no legal interests. The in re Walker blog we wrote and cited above also lends credence to this position. Finally, without proof that a note and deed of trust was transferred to the underlying securitized loan trust (at least evidence sufficient to raise a colorable claim of transfer of ownership of the trust), GMAC could not claim standing as a loan servicer (although it is injured in the sense that it loses the right to collect loan payments when a borrower is in default). The Court did not make exactly clear what kind of proof was required, and indicated a full chain of transfer may not be required, but there may be some cases where it is. As such, GMAC’s motion was denied, and they could not lift the stay. What the consequences of that are is anybody’s guess. Perhaps it is time for the debtor to file an adversary proceeding to challenge the validity of the lien? Perhaps there is some type of settlement?