Tag Archives: Mortgage Assignment

U.S. District Court for the Eastern District of New York Rules That a Party Perfects its Security Interests in Disputed Loans by Taking Possession of the Notes as Opposed to Recording the Mortgage Assignments, Pursuant to UCC Article 9

Posted on by

In Provident Bank v. Community Home Mortgage Corp., 498 F.Supp.2d 558, 558 (E.D.N.Y. 2007) the U.S. District Court for the Eastern District of New York ruled in favor of intervenor-plaintiff NetBank, granting its cross motion for summary judgment against intervenor-plaintiff, Southwest Securities Bank (herein described as Southwest) in a dispute regarding conflicting recorded mortgage assignments for nine loans. The court stated that “where parties assert competing interests in mortgage assignments,” under Article 9, “possession of the note perfects the assignee’s security interest regardless of whether any mortgage securing the note has been properly recorded.” It concluded that NetBank perfected its interest in eight of the nine disputed loans and took possession of them before Southwest, giving it a superior interest in those loans.

Confusion over who possessed the loans started when Defendant Community, a mortgage banker, entered into agreements with two banks, Southwest and RBMG (NetBank’s successor in interest), to fund a portion of its mortgage loans. Community entered Mortgage Purchase Agreements with both banks and engaged in a scheme known as “double booking,” where it “obtained duplicate funding for one loan from two different lenders and retained the entire value of the loan.” Essentially, “Community created two original notes and mortgages for each of the disputed loans.” Because of Community’s fraud “only one of the lenders would be paid in full,” and each bank claimed a priority interest in the nine loans that Community sold to it. Southwest recorded its assignments of the mortgages before RBMG for five of the loans, but RBMG received the original notes and assignments for eight of the loans before Southwest.

In determining which of the loans belonged to Southwest or NetBank and which of the mortgages were valid, the court had to decide “whether Article 9 or state real property law governs the security interests in mortgages.”  Under Article 9, a party perfects it security interest in a note by taking possession of it. Alternatively, under “race-notice statutes in state real property law,” a party perfects its security interest in a mortgage by recording the assignment. Southwest argued that the court should follow New York’s race-notice statute, whereas RBMG argued that Article 9 should govern.

Before reaching its decision, the court examined the New York Real Property Law Section 291, which states that a “bona fide purchaser for value, without notice of a junior mortgage, who records his assignment is entitled to priority over a prior unrecorded mortgage of which his assignor has full knowledge.” It explained that previous decisions applying the statute did not address instances where the “first party to record a mortgage assignment [had] a prior interest over another party who first takes possession of the note securing the mortgage.”  The court stated that in this case, the question depended on the “supremacy of perfecting the security interest in the note [as opposed to previous cases which regarded] perfecting the security interest in the mortgage.”

According to the statute’s language and precedent decisions regarding the same issue, Southwest would have a priority interest in five of the loans that it recorded before RMGA. Instead, the court applied Article 3 and Article 9 of the UCC in reaching its conclusions. It stated that “NetBank perfected its security interest in the loans and Southwest,” did not. The court agreed with previous cases in the Circuit which held that, “perfection of a security interest in the note (by taking possession under Article 9) should carry over to the mortgage incidental to it.” It explained that in New York, assignment of a note creates a security interest in the note, but a party perfects its security interest in the note by possessing it. From this reasoning, the court determined Southwest was not the first party to perfect its security interest in the loans, as it merely recorded its mortgage assignments but never possessed them. Therefore, the court denied Southwest’s motion for summary judgment requesting possession over the disputed loans.

Instead, the court granted NetBank’s motion for summary judgment, pursuant to Article 9, as it possessed eight of the disputed loans before Southwest. It also held that under UCC Article 3, NetBank qualified as a holder in due course (defined as a holder of a negotiable instrument who takes it for value, in good faith, and without notice that it is overdue or has been dishonored) in regards to seven of the loans, entitling it to those loans independent of its possession under Article 9.

Massachusetts District Court Interprets Ibanez Narrowly in Deciding That Plaintiff-Homeowner Lacked Standing to Challenge Bank’s Standing to Foreclose

Posted on by

This action arose out of an attempted foreclosure by defendant Aurora Loan Services on plaintiff David Kiah’s property. Based on the recent holding from U.S. Bank National Ass’n v. Ibanez, 458 Mass. 637, 941 N.E.2d 40 (2011), Kiah sought a declaratory judgment to make the “mortgage on record legally null and void.” The Massachusetts District Court in deciding Kiah v. Aurora Loan Services, LLC, No. 10-40161-FDA, 2011 WL 841282 (D.Mass. Mar.4, 2011) considered the Massachusetts Supreme Court’s holding from Ibanez, along with the plaintiff-homeowners’ arguments, and concluded that granting the defendant’s dismissal was proper.

The court found that the plaintiff’s claims were merit-less, as he challenged neither the note nor the note’s assignment to Aurora. As expressed in Ibanez “By law, the transfer of the note automatically transfers an equitable interest in the underlying mortgage, even without a formal assignment.” An equitable right to the mortgage was thus transferred to Aurora along with the note.

The court noted that the Ibanez holding did not require a reconsideration of the lower court’s judgment. In Ibanez the Massachusetts Supreme Court held that a foreclosure sale made by a party who holds the note but not the mortgage is void as a matter of law. In that case, the note holder provided no evidence of assignment prior to foreclosure. However here, there was a facially valid assignment of the mortgage from MERS to Aurora prior to the foreclosure sale. To the extent the assignment was defective, the court interpreted Ibanez required, at most, that a confirmatory assignment be executed and recorded.

Ohio Bankruptcy Court Rules in Favor of Wells Fargo: Failure to Properly Record Mortgage Assignment Does Not Invalidate Mortgage

Posted on by

In In re Williams, 395 B.R. 33 (Bankr. S.D. Ohio 2008), the Ohio Bankruptcy Court granted the defendant, Wells Fargo Bank, N.A.’s motion to dismiss the Plaintiff’s complaint, holding that mortgage assignments must be recorded under Ohio law, but that failure to do so does not terminate the underlying mortgage. Additionally, the Trustee could not be a bona fide purchaser and avoid the mortgage since he possessed constructive knowledge of this mortgage.

On May 2, 2005, Earl and Belinda Williams (the Debtors) executed a promissory note in the amount of $137,730 to United Wholesale Mortgage (UWM), secured by Debtors real property, and named MERS as a “nominee for UWM, its successors and assigns.” In November 2007, the Debtors filed a petition for relief under Chapter 7 of Title 11, under the US Bankruptcy Code. Plaintiff Thomas Nolan was appointed Chapter 7 Trustee. In February 2008, Mortgage Electronic Registration Systems, Inc. (MERS) filed a motion for relief from the automatic stay on the Property, and subsequently the Trustee initiated an adversarial proceeding to avoid the mortgage lien filed in the name of  MERS and alleged that under Ohio law, the assignment of the mortgage must be recorded on behalf of the holder of the note.

The plaintiff brought suit on two accounts. First, under the Trustee’s strong arm powers granted by the Bankruptcy Code § 544,  he alleged that “as a bona fide purchaser for value, he may avoid the mortgage held by Wells Fargo on account of the failure to record an assignment of the Mortgage.” The court elucidates that the Bankruptcy Code gives the Trustee power of a bona fide purchase for value if a hypothetical purchaser could have obtained that bona fide status. Under Ohio law, the assignment of a mortgage must be “recorded to protect those lien interests from avoidance by a bona fide purchaser of real property.” The parties disagree whether mortgages must be recorded under the terms of the Bankruptcy Code, and the Court ultimately determined that the Bankruptcy Code did include mortgages under the requirement to record “instruments of writing properly executed for the conveyance or unencumbrance of lands. . . . ” but that the failure to record the assignment of the mortgage did not terminate “the underlying mortgage and the lien of the underlying mortgage.” Since the Trustee had constructive knowledge of the mortgage, he could not then avoid and acquire bona fide purchaser status due to Wells Fargo’s failure to record its assignment. The Court then dismissed the first cause of action.

Second, the Trustee argued for the Disallowance of Wells Fargo’s claim on based his ability to avoid the mortgage (as argued above). The Trustee’s claim falls under § 502(b) of the Bankruptcy Code, which establishes “grounds upon which a claim that has been objected to by a party in interest may be disallowed.” The Court relied upon subsection 1 which permits disallowance of a claim that is “unenforceable against the debtor or property of the debtor.” The claim was then dismissed “without prejudice to the Trustee’s ability to object under Code § 502 and the Bankruptcy Rules of Procedure to any proof of claim filed by Wells Fargo or any other party claiming to be a creditor of the Debtors in connection with the Note on grounds not determined through this adversary proceeding.”