Court: United States Bankruptcy Court, S.D. New York; October 31, 2018; Us Bankruptcy; United States Bankruptcy Court
Debtors filed a Claim Objection on February 13, 2018, against Claim No. 16-1 by U.S. Bank National Association, citing 11 U.S.C. §§ 502(b)(1) and 506(d) and Fed. R. Bankr. P. 3007. The objection refers to a previous case involving Debtor Jack Pinnock, where U.S. Bank's motion for relief from stay was denied due to insufficient evidence of its standing to enforce the underlying note and mortgage. U.S. Bank's current claim included a note and an "Allonge to Promissory Note," which the Debtors argue is not valid under NY U.C.C. § 3-202(2) as it was not properly affixed to the note. They also assert the Allonge and mortgage assignment were fraudulent, alleging MERS lacked authority to assign the debt to U.S. Bank. The Debtors seek to have Claim No. 16-1 disallowed and the lien declared void under 11 U.S.C. § 506(d). At a hearing on May 23, 2018, U.S. Bank's counsel requested additional time to respond but ultimately failed to provide adequate evidence by the June 4 deadline. During the subsequent hearing on September 26, 2018, U.S. Bank presented an unsigned Allonge that was not firmly attached to the note and claimed physical possession of the note without further supporting evidence.
U.S. Bank failed to provide evidence regarding the acquisition of the Note or MERS's authority to act on behalf of First Meridian concerning the Note's rights. U.S. Bank argued it could enforce the Note and mortgage due to its possession of the Note, but the Court concluded it is not entitled to enforce either under New York law. The Court explained that the Debtors’ request under 11 U.S.C. § 506(d) was overly broad; relief should only declare U.S. Bank's lien on the Property void, not the original mortgage held by other parties. Jurisdiction over the Claim Objection is established under 28 U.S.C. §§ 157 and 1334, as it pertains to the core bankruptcy function of claims and liens against the Debtors' estate.
The burden of proof shifts in objections to proofs of claim under 11 U.S.C. § 502(b)(1). A proof of claim compliant with Bankruptcy Rules is prima facie valid. In this case, Proof of Claim No. 16-1 meets these requirements, necessitating the Debtors to provide evidence to challenge its validity. If the Debtors succeed, the burden shifts back to U.S. Bank to prove its claim under applicable law.
For U.S. Bank to have an allowed secured claim under New York law, it must be the proper holder of the Note. The law states that a mortgage automatically transfers with a promissory note unless the original parties agree otherwise. If U.S. Bank lacks standing, its claim will be disallowed. Courts have consistently ruled that a claim may be disallowed if it is unenforceable against a debtor under any applicable law, thus recognizing standing as a substantive objection under § 502(b)(1).
Debtors contest U.S. Bank's standing to enforce the Note, asserting it is neither a proper holder nor transferee. The burden of proof has shifted to U.S. Bank. Under New York law, a note can be transferred through written assignment or proof of delivery. U.S. Bank relies on possession of the Note rather than a written assignment, specifically the MERS Corporate Assignment of Mortgage. However, mere possession does not confer the right to enforce a note; a party must comply with NY U.C.C. 3-202(1) to establish itself as a "holder." This requires either negotiation through delivery with proper indorsement for notes payable to order or delivery for bearer notes. U.S. Bank must have the Note specifically indorsed by First Meridian or possess it with a blank indorsement to be a holder. The Allonge, which U.S. Bank claims serves as a blank indorsement, is not properly affixed to the Note, failing to meet NY U.C.C. 3-202(2) requirements. Consequently, U.S. Bank does not qualify as a holder, as it possesses a note payable to the original payee, insufficient for holder status. Although U.S. Bank might establish its right to enforce the Note as a transferee from a holder, the UCC does not clearly define the transfer mechanism when not involving a holder. Nonetheless, NY U.C.C. 3-201(1) suggests that transfers can occur to both holders and non-holders.
The section addresses the enforceability of note transfers, emphasizing that both possession and proper indorsement are critical in establishing ownership and enforcement rights. Courts, such as the Second Circuit in *Arnold*, have indicated that mere possession of a note, while insufficient alone for prima facie standing, can support ownership and enforcement under certain conditions. Specifically, physical delivery of the note must be paired with a dated allonge or indorsement in blank. Limited circumstances allow for the transfer of mortgage rights through possession alone, particularly if the note is specifically indorsed or accompanied by an allonge.
Cases like *Hilton v. U.S. Bank* and *Bank of N.Y. Mellon v. Deane* illustrate that possession can confer rights to enforce a note, even when it is improperly indorsed. The *Hilton* court noted that a proper assignment of ownership might occur through written assignment or physical delivery, with some courts extending this to include holder rights under New York Uniform Commercial Code (U.C.C.) provisions. The *Deane* case reinforces that one does not need to be the holder to enforce a note, citing that physical delivery suffices for transferring obligations, despite the specific definition of "holder" tied to proper indorsement under the U.C.C. The consistent judicial interpretation highlights that physical delivery of the note is often viewed as a sufficient condition for transferring rights, regardless of the indorsement status.
Certain legal opinions suggest that proper proof of possession alone may suffice to enforce a note and mortgage, without requiring discussion of indorsement. However, many cases indicate that a plaintiff must demonstrate "holder" status through a properly indorsed note. An entity in possession of a negotiable instrument indorsed in blank does not need to prove how it obtained the instrument to enforce it. Nonetheless, if a note's transfer is claimed solely through possession and lacks proper indorsement, the claimant must show it originated from someone entitled to enforce it. This requirement is rooted in the New York Uniform Commercial Code's definition of "delivery," which necessitates evidence tracing the note's custody back to the last legitimate holder. In the current case, U.S. Bank failed to provide evidence of how it received the Note, despite multiple opportunities and court warnings, contrasting with cases where possession was adequately demonstrated.
Plaintiff failed to provide evidence regarding the specific entity responsible for the physical delivery of the note, which is necessary for enforcing the mortgage. The New York Court of Appeals has established that even with proper indorsement, a records custodian's affidavit is required to confirm the chain of ownership of the note. Consequently, U.S. Bank has not sufficiently demonstrated its right to enforce the note or mortgage, leading to the disallowance of Claim No. 16-1.
Under 11 U.S.C. § 506(d), a lien that secures a disallowed claim is void only to the extent of that claim, which applies specifically to U.S. Bank's interest. The lien of other potential claimants remains intact, as they did not fail to file a proof of claim. Additionally, declaring the lien void without including all relevant parties would infringe upon their due process rights.
The court concludes that the objection to Claim No. 16-1 should be upheld, but the lien will only be voided for U.S. Bank and its successors. The excerpt also notes that an endorsement must be on the instrument or a firmly attached paper to be valid, referencing U.C.C. § 3-202(2). The proof of claim includes documentation from the NYC Department of Finance, indicating the original lender's claim.
The Note is classified as a "New York Fixed Rate Note," with paragraph 16 of the mortgage establishing New York law as applicable. The Bankruptcy Code defines a "claim" broadly, encompassing various forms of rights to payment. There is legal uncertainty regarding whether a party can be considered a transferee through assignment without possessing the note, as demonstrated by differing case law. The Note qualifies as a negotiable instrument under New York U.C.C. § 3-104. To establish standing to foreclose, mere possession of the note is insufficient; a party must show that it holds the note through negotiation, specifically by indorsement and physical delivery. If holder rights are not evident on the note's face, the foreclosing party must provide extrinsic evidence of ownership. New York U.C.C. § 1-103(b) allows for principles of law and equity to fill gaps not covered by the U.C.C. Additionally, U.C.C. § 3-603(2) states that payment can be made to any person with the holder's consent, granting them transferee rights upon surrender of the instrument. The U.C.C. specifies that without indorsement, a transferee is not a holder and must prove the transaction through which they acquired the note. U.C.C. § 3-307(2) entitles a holder to recover on the instrument upon production, unless a defense is established. The court found that a purported assignment relied upon by the plaintiff did not constitute an actual assignment. In some cases, the physical delivery of the note from its owner may suffice to transfer the mortgage obligation and confer standing to foreclose.
