In re Pinnock

594 B.R. 609

IN RE: Jack PINNOCK and Mazie Pinnock, Debtors.

Case No. 16-23508 (RDD)

United States Bankruptcy Court, S.D. New York.

Signed October 31, 2018

Terelli & Walshein, LLP, counsel for the Debtors, by Linda M. Tirelli, Esq.

Sheldon May & Associates, P.C., counsel for U.S. Bank, National Association, as trustee, by Ted Eric May, Esq.

MEMORANDUM OF DECISION ON OBJECTION TO CLAIM NO. 16-1 OF U.S. BANK NATIONAL ASSOCIATION AS TRUSTEE, ON BEHALF OF THE HOLDERS OF CSMC MORTGAGE-BACKED PASS-THROUGH CERTIFICATES, SERIES 2007-1

Hon. Robert D. Drain, United States Bankruptcy Judge

The debtors herein (the "Debtors") filed an objection, dated February 13, 2018 (the "Claim Objection") under 11 U.S.C. §§ 502(b)(1) and 506(d) and Fed. R. Bankr. P. 3007, to Claim No. 16-1 filed in this case on behalf of U.S. Bank National Association as trustee on behalf of the holders of CSMC Mortgage-Backed Pass-Through Certificates, Series 2007-1 ("U.S. Bank"). The Claim Objection accurately states that in a prior case under the Bankruptcy Code of Debtor Jack Pinnock (Case No. 11-22011 (RDD) ), U.S. Bank filed a motion for relief from the automatic stay under 11 U.S.C. § 362(a) that the Court denied by an order dated December 10, 2012 based on U.S. Bank's failure to produce any evidence (a) that it was the holder of the underlying note or (b) that the underlying mortgage on the Debtor's property in the Bronx, New York (the "Property") had been properly recorded. See Exhibit B to the Claim Objection. The lift-stay motion attached a note issued by the Debtors to First Meridian Mortgage, A Limited Liability Company ("First Meridian") that contained no subsequent indorsements (the "Note"), and, notwithstanding being given several months to produce evidence of its standing to enforce the Note, U.S. Bank failed to do so.

In the Debtors' present case under the Bankruptcy Code, U.S. Bank's Proof of Claim No. 16-1, dated February 20, 2017, attached the Note along with an undated document titled "Allonge to Promissory Note" purporting to be indorsed in blank by First Meridian (the "Allonge"). Proof of Claim No. 16-1 also attached a Corporate Assignment of Mortgage, dated July 9, 2013, pursuant to which Mortgage Electronic Registration Systems, Inc. ("MERS"), purportedly "as nominee for First Meridian Mortgage Its Successors And Assigns," assigned the mortgage at issue, "together with all moneys now owing or that may hereafter become due in respect thereof," to U.S. Bank.

The Claim Objection contends that the Allonge is not a proper allonge under NY U.C.C. § 3-202(2) because it was not "firmly affixed" to the Note as required by such section¹ and as evidenced by the fact that it was not attached to the prior lift-stay motion. The Claim Objection further states that the Allonge and the purported assignment of the mortgage were prepared by Richmond Monroe Group, a company whose website states that it "prepares allonge[s]" among other documents for lenders and has a hyperlink to its services for "preparation of missing/intervening assignments," see Exhibit C to the Claim Objection, and therefore also contends that the Allonge and assignment were fraudulent. Further, the Claim Objection contends that MERS had no authority to assign the underlying debt to U.S. Bank.

Based on these allegations, the Debtors contend that U.S. Bank lacks the ability to enforce the Note and, accordingly, the underlying mortgage under New York law and, therefore, that Claim No. 16-1 should be disallowed and expunged. The Claim Objection further seeks an order declaring the lien securing the Note void pursuant to 11 U.S.C. § 506(d),² including as recorded on behalf of the original lender by MERS.³

After due notice, the Court held the initial hearing on the Claim Objection on May 23, 2018. Although U.S. Bank had not filed a response to the Claim Objection, notwithstanding the passage of over three months since service, at the initial hearing its counsel requested more time to do so. The Court therefore set June 4, 2018 as the objection deadline, adjourned the hearing on the Claim Objection, and informed counsel for U.S. Bank that by the deadline it would need to provide extrinsic evidence supporting its contention that it was the holder or transferee entitled to enforce the Note and, therefore, the mortgage under New York law.

U.S. Bank never filed a response to the Claim Objection. Instead, at the adjourned hearing on the Claim Objection, which was ultimately held on September 26, 2018, counsel for U.S. Bank only (a) handed the Court a separate page that appeared to be the original signed Allonge but which was not firmly attached to the Note, which counsel also handed to the Court, and (b) asserted that U.S. Bank had physical possession of the Note. Counsel made no showing, however, as to how, when or from whom U.S. Bank obtained the Note. Nor did U.S. Bank demonstrate MERS's authority to act on First Meridian's behalf with respect to any rights under the Note, as opposed to the mortgage. Nevertheless, counsel for U.S. Bank contended that U.S. Bank could enforce the Note and mortgage because it possessed the Note.

This Memorandum of Decision states the Court's reasons for concluding that U.S. Bank is not entitled to enforce the Note, and therefore the mortgage, under New York law. It also states why the Debtors' request under 11 U.S.C. § 506(d) is too broad and that the proper relief under that section is to declare U.S. Bank's lien on the Property void but not to declare void the original mortgage on the Property in the hands of any party other than U.S. Bank, its successors and assigns.

Jurisdiction

The Court has jurisdiction over the Claim Objection pursuant to 28 U.S.C. §§ 157(a) - (b) and 1334(b), as a core proceeding under 11 U.S.C. § 157(b)(2)(B) that the Court may determine by a final order under the United States Constitution because it involves the core bankruptcy function of the allowance or disallowance of claims and liens against the Debtors' estate.

Discussion

1. Burden of Proof. A shifting burden of proof applies to objections under 11 U.S.C. § 502(b)(1) to proofs of claim in bankruptcy cases. Under Fed. R. Bankr. P. 3001(f), a proof of claim that complies with the Bankruptcy Rules constitutes prima facie evidence of the validity and amount of the claim. Here, Proof of Claim No. 16-1 conforms to the official claim form and attaches the supporting documents -- the Note, mortgage, and evidence of recordation -- required by Fed. R. Bankr. P. 3001(c), thus entitling it to a presumption of validity. The Debtors therefore must come forth with evidence that if believed would refute at least one of the allegations essential to the claim under applicable law. Sherman v. Novak (In re Reilly ), 245 B.R. 768, 773 (2d Cir. BAP 2000) ; In re Minbatiwalla, 424 B.R. 104, 111-12 (Bankr. S.D.N.Y. 2010). This would shift the ultimate burden of proof to U.S. Bank (to the extent applicable non-bankruptcy law places the burden on the claimant). In re Oneida Ltd., 400 B.R. 384, 389 (Bankr. S.D.N.Y. 2009), aff'd sub nom. Peter J. Solomon Co., L.P. v. Oneida Ltd. 2010 WL 234827, 2010 U.S. Dist. LEXIS 6500 (S.D.N.Y. Jan. 22, 2010).

A. U.S. Bank's Standing to Enforce the Note and Mortgage. Under New York law, which, based on the place of execution of the Note and of the Property,⁴ governs the Claim Objection, U.S. Bank would have an allowed secured claim in this case if it is the proper holder or transferee entitled to enforce the Note.⁵ Under New York law, "once a promissory note is transferred from assignor to assignee, the mortgage passes as an incident to the note." In re Idicula, 484 B.R. 284, 288 (Bankr. S.D.N.Y. 2013) (internal quotations omitted). See also Aurora Loan Servs., LLC v. Taylor, 25 N.Y.3d 355, 361, 12 N.Y.S.3d 612, 34 N.E.3d 363 (2015) ("A transfer in full of the obligation automatically transfers the mortgage as well unless the parties agree that the transferor is to retain the mortgage.").

If U.S. Bank lacks standing to enforce the Note, on the other hand, its claim would be disallowed for all purposes, including as a secured claim. In re Idicula, 484 B.R. at 288 ; GRP Loan, LLC v. Taylor, 95 A.D.3d 1172, 1173, 945 N.Y.S.2d 336 (2d Dep't. 2012) ("Where the issue of standing is raised by a defendant, a plaintiff must prove its standing in order to be entitled to relief."). See also Bank of New York Mellon v. Lane (In re Lane ), 589 B.R. 399, 407-08 (9th Cir. BAP 2018) ("In the context of a claim objection under § 502(b), the question of whether standing is a substantive or procedural objection has been addressed by only a few courts.

However, those courts are unanimous in stating that it is a substantive objection under § 502(b)(1), which provides that a claim may be disallowed to the extent it is unenforceable against a debtor under any applicable law, including state law."). Here, the Debtors challenge U.S. Bank's standing based on their allegation that it is not a proper holder or transferee entitled to enforce the Note. In light of the facts previously summarized, the Debtors have shifted the burden of proof to U.S. Bank.

There are two recognized ways to transfer a note under New York law: by written assignment and by proof of delivery of possession. In re Benyamin, 587 B.R. 243, 246 (Bankr. S.D.N.Y. 2018). See also GRP Loan, LLC v. Taylor, 95 A.D.3d at 1173, 945 N.Y.S.2d 336 ; U.S. Bank, N.A. v. Collymore, 68 A.D.3d 752, 754, 890 N.Y.S.2d 578 (2d Dep't 2009).⁶ Here, U.S. Bank does not rely on a written assignment, including the MERS Corporate Assignment of Mortgage, but, rather, the fact that it possesses the Note.

Although the terms "transfer," "owner," and "holder" can sometimes be muddied in the case law in this context, mere possession does not give a party the right to enforce a note and mortgage under New York law, however. New York law is clear that a party can establish itself as the "holder" of a negotiable instrument⁷ entitled to enforce it if it complies with...