Verna v. U.S. Bank Nat'Lass'N

VENESHIA M. VERNA, Appellant, v. U.S. BANK NATIONAL ASSOCIATION, Appellee.

1:15-CV-1127 (LEK)

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK

September 20, 2016

MEMORANDUM-DECISION AND ORDER

I. INTRODUCTION

Appellant Veneshia M. Verna appeals a decision by U.S. Bankruptcy Judge Robert E. Littlefield, Jr. granting partial summary judgment in favor of Appellee U.S. Bank National Association. Dkt. Nos. 1 at 8-22 ("Bankruptcy Order"), 9 ("Appellant Brief"). Appellee filed a Response, and Appellant filed a Reply. Dkt. Nos. 13 ("Response"), 14 ("Reply"). For the reasons that follow, the Bankruptcy Order is affirmed.

II. BACKGROUND

On August 17, 2007, Appellant borrowed $149,651 from First Alternative Mortgage Corp., executing a note and mortgage against her residence. Bankruptcy Order at 9. The note bears two endorsements: from First Alternative to Appellee, and from Appellee in blank and without recourse. Id. at 10. The mortgage classifies Appellant as the borrower, First Alternative as the lender, and Mortgage Electronic Registration Systems, Inc. ("MERS") as the nominee for First Alternative. Id. Appellant and Appellee agreed to modify the loan on February 17, 2010, enabling MERS to serve as nominee for Appellee. Id. Later, on May 27, 2011, "the mortgage was assigned from MERS, as nominee for First Alternative, to MERS, as nominee for [Appellee]," and finally from MERS to Appellee. Id. After Appellant defaulted on the loan, Appellee initiated foreclosure proceedings against Appellant in November 2012. Id.

Appellant filed for Chapter 13 bankruptcy on April 25, 2014, staying Appellee's foreclosure action. Id. In her proposed bankruptcy plan, Appellant described Appellee's claim on Appellant's residence as unsecured. Id. Moreover, Appellant's plan made clear her intent to attack the validity of Appellee's mortgage lien. Id. Accordingly, on August 24, 2014, Appellant initiated an adversary proceeding against Appellee. Id. She sought relief against Appellee on two grounds. Id. First, she alleged that Appellee's mortgage lien was invalid because of defects in the mortgage assignments and the separation of rights in the mortgage and note. Id. Second, she challenged the amount Appellee claimed it was owed based on the note. Id. at 10-11.

Discovery commenced, and Appellant sent Appellee two interrogatories and two document requests related to the note. Id. at 11. One of Appellant's interrogatories asked for the location of the note on November 15, 2012, the day on which Appellee had begun foreclosure proceedings. Id. Appellee responded by claiming that it did not know exactly where the note was at that time, but that the note was somewhere in its possession then. Id. The other interrogatory asked for information about how and when Appellee received the note. Id. Appellant stated that the note originated on August 17, 2007, that it went active on Appellee's system on August 29, 2007, and that Appellee came to possess the note on or between those dates. Id. Appellee produced a copy of the note and other documents relating to the loan in response to Appellant's requests for copies of the note and evidence of the physical transfer of the note from origination to its current location. Id. at 11-12.

Appellant moved for summary judgment on March 5, 2015. Dkt. Nos. 4-4 ("Summary Judgment Motion"), 4-6 ("Summary Judgment Memorandum"). Appellant argued that the note and mortgage had been "fatally separated when Defendant assumed ownership of the Note on August 29, 2007, but did not receive an Assignment of the Mortgage until May 27, 2011." Summ. J. Mem. at 4. Appellant also claimed that the mortgage assignments were invalid. Id. at 5. Finally, Appellant made an argument that had not been raised before: Appellee could not enforce the mortgage because it could not prove that it possessed the note prior to the initiation of foreclosure proceedings. Id.

Appellee opposed Appellant's Summary Judgment Motion. Dkt. No. 2-7 ("Summary Judgment Opposition"). In its Summary Judgment Opposition, Appellee included evidence that it had not provided to Appellant during discovery. Bankruptcy Order at 12. Appellee provided affidavits of its employees regarding its continued physical possession of the note, an affirmation by its attorney stating that she currently possessed the note, and a copy of the note certified by that attorney. Id. Appellee argued that this evidence conclusively demonstrated its possession of note, and that such possession was sufficient to give it standing to enforce the mortgage. Id. at 14. Appellee also contested the two other grounds for summary judgment raised by Appellant. Id. at 13-14. Notably, Appellee never moved for summary judgment.

Additional briefing then took place on the question whether the new evidence submitted by Appellee could be considered by the bankruptcy court. Dkt. Nos. 3-2 to -5. Appellant urged the bankruptcy court to strike the new evidence, arguing that Appellee failed to comply with its discovery obligations when it did not produce that evidence in response to Appellant's interrogatories and document requests. Bankruptcy Order at 14. Appellee claimed that thebankruptcy court should consider the new evidence because it was submitted in response to Appellant's new argument in its Summary Judgment Memorandum. Id. Although Appellee never moved for summary judgment, on September 4, 2015, Judge Littlefield granted partial summary judgment in favor of Appellee on the first count of Appellant's Adversary Complaint, which alleged that the mortgage lien was invalid. Id. at 22. Judge Littlefield ruled that given the new evidence, which he agreed to consider, Appellee was entitled to judgment as a matter of law on the question whether its mortgage lien was enforceable. Id. Appellant filed a Notice of Appeal on September 17, 2015. Dkt. No. 1 at 23-24.

III. LEGAL STANDARD

On appeal, a district court reviews a bankruptcy court's factual findings for clear error and its legal conclusions de novo. Cty. of Clinton v. Warehouse at Van Buren St., Inc., No. 12-CV-1636, 2013 WL 2145656, at *1 (N.D.N.Y. May 15, 2013) (citing R2 Invs., LDC v. Charter Commc'ns, Inc., 691 F.3d 476, 483 (2d Cir. 2012)). "A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948). Further, "[w]here the appellant challenges a grant of summary judgment, the appellate court reviews the lower court's ruling de novo because the determination that there are no genuine issues of material fact is a legal conclusion." Jacobowitz v. Cadle Co. (In re Jacobowitz), 309 B.R. 429, 435 (S.D.N.Y. 2004) (citing FDIC v. Giammettei, 34 F.3d 51, 54-55 (2d Cir. 1994)). Therefore, a district court reviews a bankruptcy court's grant of summary judgment de novo. See Schackner v. Breslin Realty Dev. Corp., No. 11-CV-2734, 2012 WL 32624, at *3 (E.D.N.Y. Jan. 5, 2012). Following review, a district court "may affirm,modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." Fed. R. Bankr. P. 8013.

IV. DISCUSSION

At the outset, Appellant and Appellee appear to disagree about how to characterize the Bankruptcy Order. At one point, Appellant describes it as a summary judgment order, Appellant Br. at 2, though she also refers to the bankruptcy court's "sua sponte dismiss[al]" of the first count of her Adversary Complaint, id. at 5. Appellee, for its part, describes the Bankruptcy Order as a sua sponte dismissal. Resp. at 4. The confusion is understandable. The Bankruptcy Order begins by stating that "[t]he matter before the court is a motion for partial summary judgment filed by [Appellant] on the first count of her adversary complaint against [Appellee], which challenges the validity of [Appellee's] mortgage lien." Bankruptcy Order at 1-2. It then recites the standard for granting summary judgment. Id. at 14-15. These two passages suggest a summary judgment ruling. But the bankruptcy court ends its opinion with the following order: "the first count of [Appellant's] adversary complaint is hereby dismissed." Id. at 15. That suggests a sua sponte dismissal. Nowhere does the bankruptcy court explicitly apply the standard for granting summary judgment to the relevant facts, and, as noted above, Appellee never moved for summary judgment on any issue. However, because the bankruptcy court chose to consider evidence outside the pleadings and to set out the framework governing summary judgment, the Court construes the Bankruptcy Order as a sua sponte partial summary judgment ruling in favor of Appellee. The Court will address the propriety of that procedural mechanism below.

Appellant argues for reversal of the Bankruptcy Order on three grounds. First, she argues that the bankruptcy court erred in considering the new evidence offered by Appellee. AppellantBr. at 6-7. Second, she asserts that, even if the new evidence was properly before the bankruptcy court, summary judgment was inappropriate because Appellee's mortgage lien was unenforceable. Id. at 11-15. Third, she claims that it was procedurally improper for the bankruptcy court to sua sponte grant summary judgment in favor of Appellee, which never moved for summary judgment. Id. at 5. Appellee responds that it was clearly entitled to enforce the mortgage due to its status as the holder of the note, Resp. at 7-15, and that the bankruptcy court was within its discretion in considering the new evidence and in ruling in its favor, id. at 15-18.

A. Appellee's New Evidence

Under Rule 37(b)(2) of the Federal Rules of Civil Procedure, courts may impose sanctions on parties that fail to obey discovery orders. Fed. R. Civ. P. 37(b)(2). Moreover, "[e]ven in the absence of a discovery order, a court may impose sanctions on a party for misconduct in discovery under...