“Confirming” a Mortgagee’s Chain of Title: The Case of Gifty Samuels Written by: Jeana Kim Reinbold Ablitt Law Offices PC; Woburn, Mass. email@example.com Editor’s Note: Please see the Trustee Talk column on page 38 for a discussion of chapter 13 trustees’ review of claims, including the issue of who is the creditor.
recent decision issued by Hon. Frank J. Bailey of the U.S. Bankruptcy Court for the District of Massachusetts addressed the issue of a mortgagee’s standing to file a proof of claim in a bankruptcy proceeding.1 In In re Samuels, the court carefully considered the chain of ownership with regard to the note and mortgage, before granting summary judgment in favor of the holder of the mortgage and overruling the debtor’s objection to the mortgagee’s claim.2 The case is instructive on the respective burdens of proof when an objection is raised to a proof of claim. Although the court agreed with the debtor that a defect in the chain of title Jeana Kim Reinbold existed with regard to the mortgage due to a missing assignment, the claimant successfully rebutted any presumption that its claim was not valid by providing that (1) undisputed evidence of its chain of custody with regard to the note and mortgage, and (2) a proper confirmatory assignment regarding the transfer of the mortgage.3 This article will provide a review of the statutory framework for the filing and allowance of a proof of claim in a bankruptcy proceeding, as applied in the context of Samuels. In particular, it discusses the evidentiary burdens in connection with an objection to a claim filed by the holder of a mortgage or deed of trust, as well as practical considerations.
About the Author Jeana Kim Reinbold is the department chair of the Bankruptcy Group at Ablitt Law Offices PC in Woburn, Mass. Her practice focuses on the representation of national and regional institutional lenders in bankruptcy cases, loan workouts and modifications, real estate conveyancing and related litigation. Code and Rules. Section 501 of the Code provides that a creditor may file a proof of claim 4 and defines “creditor” as an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.”5 “Claim” means the “right to payment” or “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment.”6 Bankruptcy Rule 3001 requires that a proof of claim conform substantially to the Official Form and be executed by
Standing to file a proof of claim is conferred broadly under the Bankruptcy 1 In re Samuels, No. 06-11656, slip op., 2009 WL 2032121 (Bankr. D. Mass. July 6, 2009). 2 Id. at *13. 3 As discussed herein, the assignment at issue was the first in a series of three assignments that the claimant believed had occurred through an agreement that provided for the regular and systematic sale and transfer of loans originated for securitization purposes. See id. at *8, 10-11.
4 11 U.S.C. §501(a). 5 11 U.S.C. §101(10)(A). 6 11 U.S.C. §§101(5)(A) and (B). 7 Fed. R. Bankr. P. 3001(a), 3001(b). 8 Fed. R. Bankr. P. 3001(f). 9 Fed. R. Bankr. P. 3001(c). 10 Fed. R. Bankr. P. 3001(d).
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Gifty Samuels Case
Gifty Samuels was an individual debtor who filed for chapter 13 protection in June 2006, and subsequently converted her case to chapter 11. Id. at *1. In August 2005, just nine months prior to commencing her bankruptcy case, Ms. Samuels granted a mortgage against her residential real property to Argent
Consumer Corner I the creditor or an authorized agent of the creditor.7 A proof of claim executed and filed in accordance with the Rules constitutes prima facie evidence of the validity and amount of the claim.8 The right to file a proof of claim is not without limits. In order for a proof of claim to be executed and filed in accordance with the Rules, a proof of claim must satisfy the two requirements set forth in Rule 3001, among other things. First, “[w] hen a claim, or an interest in property of the debtor securing the claim, is based on a writing, the original or a duplicate shall be filed with the proof of claim.”9 Second, “[i]f a security interest in property of the debtor is claimed, the proof of claim shall be accompanied by evidence that the security interest has been perfected.”10 Further, the filing of a proof of claim is a prerequisite to its allowance under §502 of the Code. Section 502(a) provides that “[a] proof of claim filed under Section
501, is deemed allowed, unless a party in interest...objects.”11 If a claim enjoys the prima facie validity afforded it by the Rules, an objecting party must produce “substantial evidence” in order to rebut this presumption.12 If the objecting party succeeds in producing such evidence, the burden will shift back to the claimant to establish the validity of its claim.13 Alternatively, if the proof of claim is not filed in accordance with the Rules, the burden of proof will rest at all times on the claimant.14
Mortgage Company LLC to secure repayment of a note in the original principal amount of $272,000. Id. In the bankruptcy proceedings, AMC Mortgage Services Inc. as loan servicer for Argent, timely filed a proof of claim and amended proof of claim. Both indicated that the claim in question was secured, but did not include supporting documentation or identify the property securing the debt. Id. In February 2008, Ms. Samuels objected to AMC’s amended claim based on two grounds of the claim’s alleged failure to identify the property in question and attach supporting documentation.15 Citi Residential Lending Inc., the new servicer for the loan, filed a response 11 11 U.S.C. §502(a). 12 Samuels, 2009 WL 2032121, at *6 (citing In re Long, 353 B.R. 1, 13 (Bankr. D. Mass. 2006) (citing United States v. Clifford (In re Clifford), 255 B.R. 258, 262 (D. Mass. 2000)), and Juniper Dev. Group v. Kahn (In re Hemingway Transp. Inc.), 993 F.2d 915, 925 (1st Cir. 1993)). 13 Id. 14 Id. 15 The court’s decision notes that prior to Ms. Samuels’ filing of her claim objection, AMC had been granted relief from the automatic stay to proceed with its rights under the note and mortgage. Her objection was apparently stylized as an “Omnibus Objection to Claims” but does not reference the import of the foregoing fact. See Samuels, 2009 WL 2032121, at *1.
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Consumer Corner I: “Confirming” a Mortgagee’s Chain of Title from page 18
that identified the relevant property and included as attachments the relevant promissory note and mortgage. After Citi so responded, however, Ms. Samuels continued to object. In particular, she alleged that the claimant failed to demonstrate that it was the holder of the note and mortgage by attaching a complete chain of assignments.16 Citi, acting on behalf of Deutsche Bank National Trust Company as trustee, in trust for the registered holders of Argent Securities Inc. Asset-Backed Pass-Through Certificates, Series 2005W3 (Deutsche Bank), subsequently moved to amend the claim, stating that AMC had incorrectly identified Argent as the holder of the claim. After the court granted this motion over the debtor’s objection, Citi, on behalf of Deutsche Bank, promptly filed a further amended proof of claim, complete with the following supporting documents: (1) the note; (2) the mortgage; (3) a copy of the registry stamp as evidence of the mortgage’s recording; (4) a confirmatory assignment of the mortgage from Argent to Deutsche Bank, executed by Citi; and (5) a limited power-of-attorney from AMC to Citi. Subsequently, Citi filed a notice of transfer of the claim pursuant to Rule 3001(e) to which AMC did not object.17 In December 2008, Deutsche Bank filed its motion for summary judgment with respect to the debtor’s objection to its claim. Id.
The Burden Shifts
Standing on its own in the absence of an objection, it was evident that Deutsche Bank’s claim would have enjoyed prima facie validity as provided for by the Code and Rules. Rule 3001 requires only that a proof of claim include as an attachment (1) a writing (when a claim or property interest is based on a writing) and (2) evidence of perfection for claims secured by a security interest in property of the debtor. For a claim secured by a mortgage or deed of trust, it is clear that including a copy of the note and recorded mortgage meets this standard.18 Under its claim, however, the difficulty that Deutsche Bank faced was the fact that the note and mortgage 16 The court observed that Ms. Samuels retracted her original grounds for objecting and raised new grounds. Id. at *2. 17 Id. at *2-3 (citing Fed. R. Bankr. P. 3001(e)(2)). 18 See, e.g., In re Sacko, 394 B.R. 90, 100 (Bankr. E.D. Pa. 2008) (citing In re Barnes, 2008 Bankr. Lexis 1932 (Bankr. N.D. Fla. June 6, 2008)).
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identified Argent as the holder, not Deutsche Bank. While the court was prepared to accept the validity of the confirmatory assignment from Argent to Deutsche Bank (as it ultimately did), this difficulty was compounded by the fact that the court determined that the limited power of attorney, as drafted, did not authorize the execution of the confirmatory assignment.19 The court agreed with Ms. Samuels to the extent that she identified a defect in the chain of title evidenced by the documents attached to the proof of claim (specifically, the limited power of attorney).20 Consequently, upon her objection, the burden shifted to Deutsche Bank to establish that it now held the rights given by Ms. Samuels in the original note and mortgage. Deutsche Bank was able to cure this apparent defect in the chain of title with regard to the mortgage by producing the appropriate power of attorney, which authorized the execution of the confirmatory assignment. Before arriving at its conclusion that the confirmatory assignment was sufficient, the court highlighted some interesting considerations in its discussion of the path of the note and mortgage from Argent to Deutsche Bank.
Uncontroverted evidence demonstrated that at the time of loan origination, Argent endorsed the note in blank, and also executed a written assignment of the note and mortgage in blank. Since that time, Deutsche Bank had maintained continuous possession of both the note and mortgage—first as custodian of Argent’s collateral files, and then subsequently as pool trustee for the securitized trust into which the mortgage was placed.21 Under this scenario, the court found that the basic principles of negotiable instruments under Article 3 of the Uniform Commercial Code as adopted in Massachusetts applied. In so doing, the court concluded that when endorsed in blank, an instrument becomes payable to the bearer and may be negotiated by transfer of possession alone until 19 The limited power of attorney expressly authorized two categories of assignments. The court determined that the confirmatory assignment was not included in either. See Samuels, 2009 WL 2032121, at *6. 20 Id. 21 Id. at *9.
specially endorsed; and accordingly, by virtue of its possession of a note endorsed in blank, Deutsche Bank had the standing and authority to enforce it.22
In Samuels, however, while Deutsche Bank’s possession of the note conferred upon it sufficient standing to enforce it, Deutsche Bank’s mere possession of the mortgage was not deemed sufficient to convey the same right. The court noted that as a matter of Massachusetts law, because a mortgage is an interest in real property, the statute of frauds accordingly requires that an assignment of a mortgage be in writing.23 In anticipation of the court’s conclusion to this effect, to establish that it had the rights granted by the mortgage, Deutsche Bank sought to rely on two alternative strategies. In the first instance, Deutsche Bank sought to demonstrate that the chain of title of the mortgage was completed by these three assignments following loan origination: 1. Argent to Ameriquest Mortgage Company Inc. under a mortgage loan purchase and warranties agreement (MLPWA), dated Jan. 2, 2003; 2. Ameriquest to Argent Securities Inc. (ARSI) by a certain mortgage loan purchase agreement (MLPA) dated Oct. 26, 2005, for subsequent deposit by ARSI into the ARSI Series 2005-W3 pool trust; and 3. ARSI to Deutsche Bank, by deposit into the pool trust pursuant to a pooling and servicing agreement (PSA) dated Oct. 1, 2005, among ARSI, Ameriquest and Deutsche Bank. The court found that since the MLPA and PSA each specifically referenced Ms. Samuels’ loan, each could serve as the actual written instrument of the assignment of the mortgage, as indicated. The court determined that while the MLPWA was the agreement under which governed the transfer of Ms. Samuels’ loan for securitization purposes, it did not in itself effectuate the transfer of the mortgage. However, the court found that the MLPWA could not serve as an assignment of the loan at 22 Id. at *10 (citing Mass. Gen. Laws ch. 106, §3-301; First Nat’l Bank of Cape Cod v. North Adams Hoosac Savings Bank, 7 Mass. App. Ct. 790, 797 (1979)). 23 Id. (citing Warden v. Adams, 15 Mass. 233 (1818)); compare In re Conde-Dedonato, 391 B.R. 247, (Bankr. E.D.N.Y. 2008) (finding written assignment not needed where mortgage could be transferred by delivery alone under New York law).
issue, as Deutsche Bank could not adduce evidence that the agreement specifically included the loan.24 Despite this, Deutsche Bank was able to successfully rely on the confirmatory assignment from Argent to Deutsche Bank attached to its proof of claim, which expressly and in writing conveyed from Argent to Deutsche Bank the mortgage and note. Although the confirmatory assignment was executed by Citi acting under a further power of attorney from Argent postdating the confirmatory assignment, the court determined that Argent ratified Citi’s actions by its subsequent execution of the power of attorney.25 It is also worth noting that the court determined that the direct assignment was sufficient, without need to trace all of the transfers through the intermediary transferees.26 24 Id. at *8, 10. 25 Id. at *10-11 (citing Linkage Corp. v. Trustees of Boston Univ., 425 Mass. 1, at 18 (1997)). 26 The court rejected Ms. Samuels’ argument that the direct assignment somehow constituted a breach of the PSA, as well as her arguments that the assignment was insufficient based on an unauthenticated deposition of a Citi executive, and that its execution and recording was a violation of the automatic stay. Id. at *11-12.
The right to file a proof of claim is broadly conferred under bankruptcy cases. Rule 3001 only requires that creditors attach appropriate evidence of their claims; for a claim secured by a mortgage, it is evident that a copy of the note and mortgage is enough. If a debtor successfully produces substantial evidence purporting to rebut the validity of a proof of claim, a creditor must be prepared to meet its burden of proof with regard to establishing its rights under its claim. In the case of a claim secured by a mortgage or deed of trust, this may involve providing additional documentation of the various rights of mortgagees, which may have been complicated by transfer through the securitization process. As evidenced by Samuels, a clear, unambiguous chain of title of custody of the note and mortgage will be crucial to satisfy a court’s inquiry into the rights of such transferees. The cost and purpose of such proceedings must also be carefully considered; as a practical matter, the party
that holds the note and mortgage will have the rights to enforce them in most cases. As in Samuels, many initial defects in mortgage proof of claim documentation are ultimately curable. Therefore, it will be difficult, costly and ultimately unlikely that parties can show a mortgagee does not hold mortgage documentation enforcement rights. Objections under Rule 3001 are not to be used to frustrate creditors or waste time.27 Requiring extensive documentation from creditors and pursuing vigorous litigation on the issues as in Samuels in every case would be impracticable and vastly increase the costs to all debtors. Where the purpose of a bankruptcy debtor is to propose a plan to cure arrearages under a mortgage loan and obtain an opportunity to pay such a claim, debtors or objecting parties should be mindful of not unduly adding to the cost of servicing the loan. Parties should work together towards a proper reorganization goal where attainable. n 27 Sacko, 394 B.R. at 100 (quoting In re Kincaid, 388 B.R. 610, 618 (Bankr. E.D. Pa. 2008)).
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CONSUMER CORNER I: (citation: Jeana Kim Reinbold, "Confirming" a Mortgagee's Chain of Title: The Case of Gifty Samuels, XXVIII ABI Journal 7...