In Re Veal 9th Cir. BAP

The United States Bankruptcy Appellate Panel of the Ninth Circuit recently overturned a bankruptcy court’s orders granting stay relief and allowing the filing of a proof of claim. Under the facts at issue, the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) held that the parties seeking relief from the automatic stay and filing a proof of claim lacked  standing to enforce the mortgage and promissory note at issue.
In two related bankruptcy appeals, the debtors asserted that the asset securitization trust ("Trust") and mortgage loan servicer ("Servicer") lacked standing as real parties in interest to obtain the relief they sought from the bankruptcy court. In one the debtors' Chapter 13 bankruptcy, Trust filed a motion for relief from the automatic bankruptcy stay in order to foreclose its interest in the debtors’ mortgage loan that it purportedly acquired by way of assignment. Similarly, Servicer filed  a proof of claim in the bankruptcy as Trust’s servicing agent.

Based in part on the documentation submitted by Trust and Servicer, the bankruptcy court determined that Trust had standing to obtain relief from the stay and also allowed Servicer’s proof of claim, over the debtors’
objection. The debtors appealed, and the BAP reversed.

As to the appeal regarding Servicer’s proof of claim on behalf of the Trust, the BAP noted that the bankruptcy court failed to make any findings necessary to determine the central issue of Servicer’s standing as a “person entitled to enforce” the mortgage obligation or as the agent of such a person. The BAP held that Servicer presented insufficient evidence showing that it had enforcement rights under the Note or that it had an agency relationship with the Trust. The BAP also held that Servicer presented insufficient evidence as to who possessed the Note and insufficient evidence showing indorsement of the Note either in its favor or in favor of the Trust, for which Servicer was allegedly acting as servicer. Thus, according to the BAP, Servicer could not establish that it held enforcement rights under the Note.

Here, Servicer submitted: (1) a copy of the Note bearing indorsement to Servicer's predecessor in interest; (2) a letter from Servicer's in-house counsel attesting to the indorsee's status as predecessor in interest to Servicer; (3) a copy of the Mortgage; and (4) a copy of the Assignment of Mortgage to Servicer's predecessor in interest. The BAP objected to and refused to allow into evidence the unauthenticated letter from Servicer's in-house counsel attesting to the indorsee's status as predecessor in interest to Servicer.

According to the BAP, to obtain stay relief, Trust had to show that it either was a “person entitled to enforce” the Note under Article 3 of the UCC (as a “holder” of the Note or as a “nonholder in possession . . . who has the rights of a holder”), or that it had an “ownership or other property interest in the Note” under Article 9. See UCC §§ 3-301(i); 3-301(ii); 9-109(a)(3)(respectively pertaining to a holder of a note, a nonholder in possession, and transfer of ownership of a note).

As to the appeal regarding Trust's motion for relief from stay, the BAP noted that none of the evidence submitted by Trust placed it into one of these categories. Indeed, the evidence failed to show that the
assignment of the mortgage to Trust included any interest in the promissory Note itself. The BAP pointed out that the record lacked any evidence of an indorsement of the Note to Trust. The BAP further noted that under applicable law, the assignment of a mortgage without the Note is a “nullity,” thereby rendering the mortgage ineffective and the Note an unsecured debt. Thus, the BAP concluded that the bankruptcy court erred in determining that Trust had an enforceable interest in the Note and erred in granting Trust’s motion for relief from stay.

Here, the Trust submitted the following documents: (1) a copy of the Mortgage; (2) an itemization of postpetition amounts due; (3) the debtors' Schedules A and D; (4) a copy of the Note, indorsed to Servicer's predecessor in interest; (5) a copy of the Assignment of Mortgage to Servicer's predecessor in interest; and (6) a copy of another Assignment of Mortgage, recorded after the filing of the first relief from stay motion, from Servicer's predecessor in interest to Trust. The BAP noted that, although the first assignment of mortgage included an assignment of the Note to Servicer's predecessor in interest, the second assignment of mortgage to Trust did not contain such an assignment of the Note. The BAP also noted that the documents were not authenticated.

In summary, the BAP reversed the stay relief order and vacated the bankruptcy court’s order overruling the debtors’ claim objection, and remanded for further proceedings on the proof of claim.