Court: District Court, D. Massachusetts; September 30, 2013; Federal District Court
An appeal is underway from a final order issued by the United States Bankruptcy Court for the District of Massachusetts, initiated by David M. Nickless, Trustee, against several defendants including HSBC Bank USA, MERS, and U.S. Bank. The case centers on a 2009 promissory note for $316,000 and a second note for $79,000 executed by Robin H. Soroko-Marron, secured by mortgages on her Haverhill, Massachusetts property.
Following a series of corporate mergers and a Chapter 11 filing by Fieldstone Mortgage Company in 2007, MERS assigned the mortgage to HSBC in 2009 after Soroko-Marron defaulted. HSBC subsequently sought to rectify the title issue, leading to a Land Court judgment that required the Marrons to provide a confirmatory mortgage, which eventually was executed by HSBC's attorney. HSBC later pursued foreclosure after the Marrons filed for Chapter 7 bankruptcy in 2010.
The Trustee's adversary proceeding requests the Bankruptcy Court to declare the Mortgage and Confirmatory Mortgage invalid on several grounds: Fieldstone's lack of acceptance, MERS' loss of assignment rights following Fieldstone's contract rejection, restrictions on MERS' ability to transfer interests without court consent, and the Trustee's rights under Bankruptcy Code § 544 to invalidate the First Mortgage.
The Mortgage and Confirmatory Mortgage should be subordinated under Bankruptcy Code § 510(c)(1) due to Fieldstone's rejection of the MERSCORP contract. Additionally, the Land Court's settlement and judgments are deemed void for violating the automatic stay during Fieldstone's bankruptcy. HSBC is not recognized as the holder of the Note, resulting in unjust enrichment from payments made by the Marrons. The Defendants' motion to dismiss the action was granted by the Bankruptcy Court on January 9, 2012, and the Trustee's motion for reconsideration was denied. The Trustee is appealing this decision, arguing that the Bankruptcy Court made several errors: 1) misapplication of the dismissal standard under Fed. R. Civ. P. 12(b)(6); 2) incorrect ruling regarding the necessity of mortgage and note unity for foreclosure under Massachusetts law; 3) denial of the Trustee's standing to challenge the MERS assignment and unjust enrichment claim; 4) erroneous finding on MERS' ability to assign mortgages to HSBC; 5) failure to determine the validity and priority of the mortgages; and 6) ruling that none of the mortgages could be avoided under 11 U.S.C. § 544. The Trustee believes these errors warrant reversing the Bankruptcy Court's decision. However, the Bankruptcy Court's decision is affirmed. The District Court reviews legal conclusions de novo and factual determinations for clear error. The Bankruptcy Court appropriately applied the 12(b)(6) dismissal standard, taking the Trustee's factual allegations as true while rejecting those that were legal conclusions or contradicted by the Trustee's own concessions. Consequently, the Bankruptcy Court deemed that the remaining facts did not support a valid legal claim.
The Trustee contends that the Bankruptcy Court incorrectly determined that Massachusetts law does not necessitate the unity of mortgage and note for a valid foreclosure. The Supreme Judicial Court (SJC) clarified this issue in Eaton v. Fed. Nat. Mortg. Ass'n, concluding that the entity entitled to foreclose must either hold the mortgage note or act on behalf of the note holder. However, the SJC recognized prior ambiguity on this matter, which led to opinions that permitted foreclosures based solely on holding the mortgage. Consequently, the SJC's ruling applies only to foreclosure sales with notice given after June 22, 2012. In this case, HSBC provided notice before this date, qualifying it as a "pre-Eaton mortgagee" permitted to foreclose without proving it held the note.
Regarding the Trustee's standing, the Bankruptcy Court ruled that the Trustee lacked standing to contest MERS assignments, asserting that the assignment's validity did not impact the underlying mortgage and therefore did not benefit the bankruptcy estate. However, the First Circuit's decision in Culhane v. Aurora Loan Services established that Massachusetts mortgagors can challenge mortgage assignments, affirming the right to contest the status of a foreclosing entity. This principle also extends to the Trustee's challenges on behalf of the mortgagors' estate, indicating the Bankruptcy Court erred in denying the Trustee's standing to contest the MERS assignment. Despite this error, the Court will not reverse the Bankruptcy Court's decision since it upheld the assignment's validity.
Additionally, the Trustee disputes the Bankruptcy Court's finding that it lacked standing to pursue a claim for unjust enrichment, which is based on the obligation to make restitution for unjust enrichment.
A debtor's claim for unjust enrichment was dismissed by the Court, which determined that the entity holding the mortgage, not the debtor, would have standing for such a claim. Similarly, in the current case, the Trustee's unjust enrichment claim against HSBC was dismissed, affirming the Trustee lacked standing as the entity in question should be the one holding the mortgage. The Bankruptcy Court found that even if the Trustee had standing, the assignments from MERS to HSBC were valid. The Trustee argued that MERS only held bare legal title and needed authorization from the noteholder, Fieldstone, to make assignments. However, courts have consistently upheld MERS's authority to assign mortgages under Massachusetts law, rejecting the notion that beneficial interest is required for such capacity. MERS’s authority to assign remains intact despite the bankruptcy filing of Fieldstone, and no permission from the bankruptcy court was necessary as the assignment was not outside the ordinary course of business. Thus, the Bankruptcy Court affirmed that MERS validly assigned the mortgage to HSBC. Additionally, the Trustee claimed the Bankruptcy Court erred by not addressing whether HSBC had standing to file a complaint in Land Court. Nonetheless, the Bankruptcy Court indirectly addressed this by confirming MERS's valid assignment to HSBC, establishing HSBC's standing to reform the mortgage. The Trustee's concerns regarding the C-Bass bankruptcy proceeding were deemed irrelevant to this determination.
The Trustee contested the Bankruptcy Court's ruling that he could not avoid the mortgages under 11 U.S.C. § 544, arguing that the court erred. The Bankruptcy Court dismissed the Trustee's claim due to insufficient factual support, stating that the Trustee failed to demonstrate how the lien could be avoided under § 544. It noted that the mortgages could not be invalidated due to an invalid transfer, which would not impact the underlying mortgage, nor could they be challenged based on the mortgage not being held continuously by the noteholder. The court emphasized that the Trustee did not meet the pleading standards established by Iqbal and Twombly, which require factual content to infer liability rather than mere legal conclusions. The Trustee's complaint simply referenced the statute and claimed that the mortgages were subject to his powers without providing specific supporting facts. Even in his reply, he failed to substantiate his claims with facts, relying instead on vague assertions.
The court highlighted that under § 544, the Trustee has rights akin to those of a judicial lien creditor, judgment creditor, or bona fide purchaser, which are subject to constructive knowledge of properly recorded mortgages. The mortgages in question were duly recorded, providing notice of the security interest. The Trustee's argument that the mortgages were inferior due to HSBC's lack of possession of the underlying note or an invalid assignment was rejected. Consequently, the court affirmed the Bankruptcy Court's ruling to dismiss the Trustee's claims on all counts. It also noted that MERS, holding legal title as a nominee, retained the right to foreclose and act on behalf of the lender. The court confirmed that the enforceability of the Mortgage does not depend on the unity of the note and mortgage, affirming the validity of the Mortgage assignment to HSBC. Lastly, it concluded that since the Mortgage survived the Trustee's challenge, there was no need to further analyze the validity of the second mortgage.
