The United States Bankruptcy Court for the District of Massachusetts recently denied a mortgage purchaser’s Motion for Relief from Automatic Stay of Chapter 13 proceedings on the ground that the purchaser lacked standing where it could not provide documentary evidence showing each transfer of the mortgage. In re Robin Hayes, Case No. 07-13967-JNF (August 19, 2008).
In November 2004, the Debtor, Robin Hayes, obtained a $324,000 mortgage from Argent Mortgage Company LLC (“Argent Mortgage”). The mortgage subsequently was sold and ultimately ended up with Deutsche Bank.
In June 2007, the Debtor filed a voluntary Chapter 13 petition. Deutsche Bank then filed a Motion for Relief from Automatic Stay under to foreclose on the mortgage. The Debtor objected to Deutsche Bank’s motion on grounds of Deutsche Bank’s standing.
At the hearing on Deutsche Bank’s Motion, Citi Residential Lending, Inc. (“Citi”), the servicer of the mortgage for Deutsche Bank, introduced multiple documents in support of Deutsche Bank’s ownership of the mortgage. The documents showed Deutsche Bank was a party to a Pooling and Servicing Agreement with Argent Securities Inc. (“Argent Securities”). No documents, however, showed the transfer of the mortgage from Argent Mortgage to Argent Securities or any relationship between those two entities.
The bankruptcy court noted that, in Massachusetts, a mortgagee or an entity with a valid assignment of a mortgage may foreclose on real estate and seek relief from the automatic stay to do so. However, in order to do so, Deutsche Bank was required to establish that it owned the mortgage and that it was asserting its own rights. The court noted that, according to Massachusetts Bankruptcy Rule 4001-1 (b)(f), a movant must show both the original holder of the obligation secured by the mortgage “and every subsequent transferee.”
The bankruptcy court held that Deutsche Bank failed to prove standing because it did not show that the mortgage in favor of Argent Mortgage was assigned to Argent Securities, the entity from whom Deutsche Bank ultimately received its interest. In other words, “Deutsche Bank failed to adequately trace the loan from the original holder, [Argent Mortgage], to it.” The court cited In re Nosek, 386 B.R. 374, 380 (Bankr. D. Mass. 2008), which discussed the misbehavior in bankruptcy mortgage claims and noted that parties “who do not hold the note or mortgage and do not service the mortgage do not have standing to pursue motions for relief….”
In the end, the bankruptcy court held not only that Deutsche Bank had failed to establish its standing because of the gap between Argent Mortgage and Argent Securities, but also issued an order for Deutsche Bank to show cause why it should not be sanctioned for pursuing its Motion for Relief from Automatic Stay without competent evidence of its standing. In its decision denying relief from stay, the bankruptcy court noted that sanctions may be appropriate because Citi introduced a “tangle of inconsistent and incomplete documents into evidence,” forcing the bankruptcy court to apply intensive scrutiny to hundreds of pages of documents during the two day hearing.
Much attention has been given to the plight of subprime borrowers who can no longer afford their subprime loans. As this case shows, there may be a silver lining to their cloud if the holders of those loans can not collect them because of their inability to prove the chain of ownership.