Wednesday, October 9, 2013

Mortgage Servicer Qualifies to Move for Stay Relief as Party in Interest and as Real Party in Interest

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.

The decision in In re Woodberry, ___ B.R. ___, 2008 WL 677810 (Bkrtcy.D.S.C.)(Duncan, J.) illustrated the issue whether the mortgage servicer qualified to file a motion for stay relief as a "party in interest" and "real party interest." Under the facts of this case, the court held that it was a "party in interest" and "real party in interest" and allowed it to pursue its motion for stay relief.

In this case, there was an original "Lender" and MERS as "Mortgagee". The allonge to the mortgage note contained a blank endorsement. The court explained that an "allonge" is a paper annexed to a negotiable instrument for endorsement too numerous or lengthy to be contained in the original. There was no recorded assignment of the mortgage prior to the filing of the motion. Wells Fargo Bank NA d/b/a America's Servicing Co. ("ASC") was the servicer for US Bank NA as trustee pursuant to a Securitization Sub Servicing Agreement (the "Sub Servicing Agreement"). US Bank NA was trustee for Structured Asset Investment Loan Trust Mortgage Pass-Through Certificates, Series 2005-8.

ASC filed a motion for stay relief in this chapter 7 case. The debtor objected to ASC's motion for stay relief although she did not dispute to being behind in her mortgage payments. The debtor argued that ASC is not the proper "party in interest." ASC offered testimony that it was in possession of the original note and that the Sub Servicing Agreement provides that it would be the custodian for US Bank NA and that its holds the documents in trust for US Bank NA. The Sub Servicing Agreement provides that the servicer collects payments due under the terms of the note and mortgage and will foreclose on the property in the event of a default. The Sub Servicing Agreement is filed with the SEC and is available on the SEC's website. MERS as nominee assigned the mortgage to US Bank NA as Trustee for the Structured Asset Investment Loan Trust Mortgage Pass-Through Certificates, Series 2005-8.

The Debtor argued that for the servicer ASC to be the proper "party in interest", it must hold both the note and be either the mortgagee or the assignee of the mortgage. The court found that applicable state law does not require both possession of the note and an assignment of the mortgage to prove ownership. The court found that when a negotiable note payable to order is indorsed by the payee, the note and its incidents pass in the commercial world by delivery. Dearman v. Trimmier, 26 S.C. 507, 2 S.E. 501. The law in the involved state does not require that assignment of mortgages be recorded. The court found that the allonge to the noted converted the note to a bearer instrument and as such, the ownership passes with delivery of the instrument and proof of ownership can be made by possession. The court noted that possession of a bearer instrument is prima facie evidence of ownership. The fact that the note is held in trust for another is not of significance. It is interesting to note that ASC apparently did not enter the original note into evidence, but only had a "default litigation specialist" and records custodian testify that she determined ownership of the involved note and mortgage by tracking it a computer screen of a computer based system.

The court found that the servicer ASC has standing as a "party interest" to seek relief from the stay as it had provided sufficient evidence as to ownership of the note and mortgage. The court stated that since ASC was in possession of the note and mortgage at the time it filed the motion for stay relief, it had made a prima facie case that it owned the note and mortgage albeit as custodian for the Trust.

The court noted that the Bankruptcy Code does not define "party in interest" but uses the term often. The term is not restricted to creditors and the determination of the status of a party in interest under a motion for stay relief under section 362(d) is made on a case by case basis with reference to the interest asserted and how the interest if affected by the automatic stay.

The court found that the servicer ASC had a contractual relationship with the US Bank NA and other parties as set forth in the Sub Servicing Agreement. The court noted that the transfer of the note to ASC by endorsement in blank vested it with the right of the transferor and that the owner or holder of a note has a right to payment. The court found that ASC is a "creditor" for purposes of the application of the term "party in interest."

But the court further analyzed that Fed.R.Bankr.P. 7017 applies to contested matters pursuant to Fed.R.Bankr.P. 9014(d). Fed.R.Bankr.P. adopts Fed.R.Civ.P. 17 which provides that "[e]very action shall be prosecuted in the name of the real party in interest". The term real party interest is on who under the applicable substantive law has the legal right which is sought to be enforced or is the party entitled to bring suit." In re Comcoach Corp., 698 F.2d 571, 573 (2nd Cir. 1983). The court found that the general principal of Comcoach is that "party in interest standing does not arise if a party seeks to assert some right that is purely derivative of another party's right in the bankruptcy proceeding." The court found that under the state's law, the plaintiff in a mortgage foreclosure suit should be the real, beneficial owner of the mortgage debtor." 27 S.C. Juris Mortgage Section 107. Despite this general proposition, the court noted that it appears that foreclosures and motions for relief from the stay are often brought by parties other than the beneficial owner.

The court found that other jurisdictions tend to favor the view that a loan servicer is a "party in interest" and a "real party in interest". "The general rule is that a mortgage servicer has standing by virtue of its pecuniary interest in collecting payments under the terms of the note and mortgage." See In re Tainan, 48 B.R. 205 (Bankr.E.D.PA. 1985), In re O'Dell, 268 B.R. 607, 618 (N.D.Ala.2001)(A servicer was allowed to defend a proof of claim on behalf of its principal). aff'd, 305 F.3d 1297, 1302 (11th Cir.2002)(A servicer is a party in interest in proceeding involving loans which it services"). The court noted that is seems to be the better view that a loan servicer, with a contractual duty to collect payments and foreclose a mortgage has standing to move from relief from stay in the Bankruptcy Court.