The debtors objected to a proof of claim filed on behalf of a mortgagee based on issues arising from assignment of the mortgage note by the lender that originated the loan. The mortgagee responded by, among other things, challenging the standing of the debtors to raise these issues.
A servicer filed a proof of claim on behalf of a bank as trustee for a securitized pool of mortgage notes. The debtors objected, claiming that fraudulent documentation was provided in support of the claim, assignment of the note was impossible since the originating lender was in bankruptcy, and the amount claimed included fraudulent charges and expenses.
The mortgagee responded that the debtors did not have standing to object to the assignment, the note was properly assigned, and it was the proper party to enforce the note since it had possession of the note indorsed in blank.
Under Bankruptcy Rule 3001(f) a properly filed proof of claim is prima facie evidence of the validity and amount of the claim. Someone objecting to the claim must overcome the rebuttable presumption, but if they do, the burden shifts back to the claimant to establish the validity of the claim.
In an earlier state foreclosure proceeding a copy of the mortgage note had been submitted without the indorsement. However, when the debtors filed bankruptcy in 2012, and again in 2013, the mortgagee’s proof of claim included a copy of the note with an executed indorsement in blank attached.
The indorsement in blank was executed by a representative of the original lender. After it filed bankruptcy, it executed a limited power of attorney authorizing the servicer to take certain actions, including execution of mortgage assignments. An assignment of the deed of trust on the debtors’ property was executed by the servicer under this power of attorney.
The court commented that normally the mortgagee’s possession of the original note indorsed in blank would resolve the issue. Under the Uniform Commercial Code (UCC), a negotiable instrument indorsed in blank is a “bearer paper,” which can be enforced by anyone who has possession of the note. The court also noted that a mortgage follows the debt, so the right to enforce the note includes the right to enforce the mortgage.
However, the debtors alleged that the indorsement was fraudulently placed on the note, since it was not included in the copy submitted in the earlier foreclosure proceeding. In response, the mortgagee presented the original note with “wet signatures” and the indorsement in blank, its witness testified that the note was obtained from a vault maintained by the mortgagee, the debtors listed the servicer in both the current and prior bankruptcies, and the servicer submitted a loan history showing that it in fact had been servicing the debt.
The court commented that the “sudden appearance” of the indorsement might be suspicious but for the other evidence supporting the assignment. Consequently the allegation was insufficient to overcome the rebuttal presumption of validity
The court also determined that the debtors did not have standing to challenge the note and mortgage based on inadequacies in the assignment of the note. The court quoted cases holding that the “great weight of authority holds” and “a judicial consensus has developed holding” that a borrower does not have standing to challenge a mortgage securitization or the pooling and servicing agreement.
In this case, there were no allegations that the debtors were injured by the assignment. Since the debtors were not a party to the assignment and did not allege any injury resulting from the assignment, they did not have standing to challenge it.
The allegation that fees and expenses were fraudulent was based on the premise that the assignment of the note was fraudulent. However, given the court’s ruling on the debtors’ inability to challenge the assignment, the debtors also had no basis to attack the fees as fraudulently incurred. (Note that the debtors did not challenge the reasonableness of the fees, only whether the note and mortgage authorized them.)
It is interesting to note that the court’s analysis is consistent with the approach urged by UCC lawyers – namely that assignment of the note should be analyzed under the UCC, and the mortgage follows the note. For an interesting discussion from this perspective see the report of the Permanent Editorial Board for the Uniform Commercial Code on Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes (November 14, 2011).