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									               WHO’S GOT THE NOTE?
        A NEW VERSION OF “WHERE’S WALDO?”

(MORTGAGE FORECLOSURE IN AN AGE OF SECURITIZATION:
        MISSING ORIGINAL NOTES AND OTHER
            PROBLEMS FOR CREDITORS)


                     R. GLEN AYERS

                  LANGLEY & BANACK
                  SAN ANTONIO, TEXAS

                      210-736-6600
                gayers@langleybanack.com



                  STATE BAR OF TEXAS

    ADVANCED CONSUMER BANKRUPTCY COURSE 2009



             September 17-18 – Houston, Texas
           (Video – October 15-16 – Dallas, Texas)


                       CHAPTER 17
                                                   TABLE OF CONTENTS
I.   MISSING NOTES ................................................................................................................................. 1
     A. Persons Who May Enforce Notes – § 3-301 ................................................................................... 1
     B. UCC SECTION 3-309 ..................................................................................................................... 2
     C. Who‟s the Holder – The UCC Issues .............................................................................................. 2
        1. Generally ................................................................................................................................. 2
        2. Brief Review of UCC Provisions ............................................................................................ 2
     D. The Rules ......................................................................................................................................... 3
        1. In Bankruptcy Court ................................................................................................................ 3
        2. Standing and Party- in-Interest; the Difference Between Bankruptcy and District Court ....... 3
     E. A Brief Aside: Who is Mers? ......................................................................................................... 4
     F. Rules of Evidence – A Practical Problem ....................................................................................... 4
     G. Foreclosure or Relief from Stay ...................................................................................................... 4
     H. Relief from Stay Proceedings .......................................................................................................... 5
II. OTHER PROBLEMS FOR THE FORECLOSING CREDITOR ................................................... 6
     A. Servicing Company Abuses ............................................................................................................ 6
        1. Generally ................................................................................................................................. 6
        2. The Texas and Other Fifth Circuit Cases ................................................................................ 7
III. THE ETHICAL ISSUE ......................................................................................................................... 7
     A. The Lender ....................................................................................................................................... 7
     B. The Debtor‟s Counsel ...................................................................................................................... 7
IV. SUMMARY ............................................................................................................................................ 8
V. RECENT LEGISLATION – DOES IT MAKE A DIFFERENCE? ................................................. 8
VI. NOTE ON MADDENING COMPLEXITY OF SECURITIZATION ............................................. 8
                                                  TABLE OF AUTHORITIES

Cases
Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL 111227 (S.D. Ohio) January 8, 2008 .............................. 6
Greer v. O’Dell, 305 F.3d 1297, 1302-03 (11th Cir. 2002) .............................................................................. 4
HSBC Bank USA, N.A. v. Valentin, 21 Misc. 3D 1124(A), 2008 WL 4764816 (Table) (N.Y. Sup.)
   November 3, 2008 ........................................................................................................................................ 7
HSBC Bank, N.A. v. Valentin, 2l N.Y. Misc. 3d 1123(A), 2008 WL 4764816 (Table) (N.Y. Sup.), Nov. 3,
   2008 .............................................................................................................................................................. 5
In re Allen, 2007 WL 174708 (Bankr. SD. Tex. 2007) .................................................................................... 8
In re Beers, 2009 WL 1025402 (Bankr. N.J. 2009) ......................................................................................... 8
In re Cabero-Mejia, 402 B.R. 335 (Bankr. C.D. Ca. 2008) ............................................................................. 8
In re Foreclosure Cases, 521 F.Supp. 3d 650, 653 (S.D. Ohio, 2007) (citations omitted).............................. 4
In re Hayes, 393 B.R. 259 (Bankr. D. Mass. 2008) ......................................................................................... 6
In re Hwang, 396 B.R. 757 (Bankr. C. D. Cal. 2008) ..................................................................................... 3
In re Mounce, 390 B.R. 233 (Bankr. W.D. 2008) ............................................................................................ 8
In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008) ...................................................................................... 8
In re Pawson, Case No. 05-18239 (Bankr. S.D. N.Y. 2009 ............................................................................. 7
In re Porcheddu, 338 B.R. 729 (Bankr. S.D. Tex. 2006) ................................................................................. 8
In re Sanchez, 372 B.R. 289 (Bankr. S.D. Tex. 2007) ..................................................................................... 8
In re Schwartz, 366 B.R.265 (Bankr. D. Mass. 2007)...................................................................................... 5
In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008) ........................................................................................ 8
In re Vargas, 396 B.R. 511 (Bankr. C.D. Cal. 2008) at 520. ........................................................................... 4
In re Wilburn, 404 B.R. 841 (Bankr. S.D. Tex. 2009) ..................................................................................... 8
Liberty Savings Bank v. Redus, 2009 WL 41857 (Ohio App. 8 Dist.), January 8, 2009 ................................. 3
Maxwell v. Fairbanks Capital Corp., (In re Maxwell), 281 B.R. 101 (Bankr. D. Mass 2002)........................ 7
Nosek v. Ameriquest Mortgage Company (In re Nosek), 286 Br. 374 (Bankr D Mass. 2008) ........................ 6
U.S. Bank, N.A. v. Cook, 2009 WL 35286 (N.D. Ill. January 6, 2009) ............................................................ 6
United States v. Butner, 440 U.S. 48 (1979) .................................................................................................... 2
Wells Fargo Bank, N.A. v. Byrd, 897 N.E.2d 722 (Ohio App. 1 Dist, 2008)................................................... 5


Statutes, Rules & Secondary Sources
“Helping Families Save Their Homes Act of 2009”, Pub. L. No. 111-22, 123 Stat. 1632 .............................. 8
“Why Toxic Assets are so Hard to Clean Up,” Wall Street Journal, A13 (June 20, 2009) ............................. 8
15 U.S.C. § 1640(a) (2006) .............................................................................................................................. 8
F. R. Bankr. P. 9014 ......................................................................................................................................... 3
F.R Civ. Pro. 11 (F.R. Bankr.Pro. 9011) .......................................................................................................... 7
F.R. Civ. Pro. 17 ............................................................................................................................................... 4
F.R. Evid. 801................................................................................................................................................... 4
F.R.Bankr.Pro. 4001 ......................................................................................................................................... 3
F.R.Civ. Pro. 17 ................................................................................................................................................ 3
Porter, Katherine M., “Misbehavior and Mistake in Bankruptcy Mortgage Claims,” 87 Tex. L. Rev. 121
   (2008) ........................................................................................................................................................... 1
Tex. Prop. Code §51.0001 .............................................................................................................................. 4
T-I-L at § 404 (a)(1) ......................................................................................................................................... 8
T-I-L at § 404 (a)(2) ......................................................................................................................................... 8
Truth in Lending Act (“T-I-L”), 15 U.S.C. § 1641 et seq. ............................................................................... 8
MORTGAGE FORECLOS URE IN AN AGE OF S ECURITIZATION:
MISS ING ORIGINAL NOTES AND OTHER PROB LEMS FOR CREDITORS                                                 CHAPTER 17

MORTGAGE FORECLOSURE IN AN AGE OF                                movement.       The swap is an agreement of
SECURITIZATION: MISSING ORIGINAL                                 counterparties to exchange cash flow streams (or
NOTES AND OTHER PROBLEMS FOR                                     “legs”) based upon notional or nominal face amount
CREDITORS                                                        used to calculate payments. This is “notional,”
                                                                 because the face value does not change hands. For
* Author‟s Note: The first version of this paper was             explanations     of      these     transactions,     see
prepared with Judge Samuel L. Bufford, United States             www.enwikipedia.org/wiki/Mortgage-backed_security.
Bankruptcy Judge, Central District of California, Los            When derivatives such as swaps are taken into account,
Angeles, California. That Paper, titled Where’s The              then the entire volume of these investments probably
Note, Who’s The Holder?, was presented at the Spring             exceeded tens of millions of dollars before the collapse
Meeting of the American Bankruptcy Institute in                  of the home real estate bubble.
Washington, D.C., April 3, 2009.
                                                                      The vast flow of notes into the maw of the
     The second version was presented at the 2009                securitization industry meant that a lot of mistakes
“Advanced Real Estate Law Court in July 2009. This               were made. When the borrower defaults, the party
version contains references to the recently enacted              seeking to enforce the obligation and foreclose on the
“Helping Families Save Their Homes Act of 2009.”                 underlying collateral (usually the servicing company)
The research on this statute was done by Alan                    sometimes cannot find the note.              A lawyer
Gretzinger, a third year law student at the University of        sophisticated in this area has speculated to one of the
Texas School of Law.                                             authors that perhaps a third of the notes “securitized”
                                                                 have been lost or destroyed. There is little empirical
INTRODUCTION                                                     evidence, but what there is suggests that about forty
                                                                 percent of the notes may be missing. Porter, Katherine
      In an era where a very large portion of mortgage           M., “Misbehavior and Mistake in Bankruptcy
obligations have been securitized, by assignment to a            Mortgage Claims,” 87 Tex. L. Rev. 121 (2008)
trust indenture trustee, with the resulting pool of assets       (hereafter “Porter at ___”).
being converted into and sold as mortgage backed
securities, foreclosure becomes an interesting exercise,              Servicing companies are also notoriously slip-
particularly where judicial process is involved. We are          shod in their accounting or bookkeeping and other
all familiar with the securitization process. The steps,         practices. See “Is Misconduct in Bankruptcy Fueling
if not the process, are simple. A borrower goes to a             the Foreclosure Crisis?” 27 Am. Bankr. Inst. J. 10, 42-
mortgage lender. The lender finances the purchase of             45 (June 2008). (The article quotes Prof. Porter‟s
real estate. The borrower signs a note and mortgage or           testimony before the US. Senate Judiciary Committee
deed of trust. The original lender sells the note and            in 2008.)
assigns the mortgage to an entity that securitizes the
note by combining the note with hundreds or thousands                 The cases discussed below certainly indicate very
of similar obligation to create a package of mortgage            starkly that both of these sources may be correct.
backed securities, which are then sold to investors as
bonds. The mortgage note payments are those received             I.   MISSING NOTES
or “serviced” by an agent call a “servicing company.”
                                                                 A. Persons Who May Enforce Notes – § 3-301
       The total mortgage debt in the U.S. is about $14.6
trillion. There are approximately $8.9 trillion in                    Persons who may enforce notes under § 3-301
mortgage related securities. Around these financial              include two categories of persons who have possession
arrangements grew up a number of derivatives, the                of the instrument: holders – persons in physical
most important of which is the swap, which allegedly             possession with proper endorsements of order paper –
can be used to hedge risk but in fact can be used to             and transferees in possession who are not holders but
speculate on changes in the direction of price                   “have the rights of a holder . . . .” Only two categories
                                                             1
MORTGAGE FORECLOS URE IN AN AGE OF S ECURITIZATION:
MISS ING ORIGINAL NOTES AND OTHER PROB LEMS FOR CREDITORS                                                   CHAPTER 17

of persons who do not have actual possession may                 is a person entitled to enforce under §3-301 and was, at
enforce a note. Those persons who qualify under §3-              the time the instrument was lost, either a holder or a
309 and §30418(d). §3-309 covers lost or missing                 transferee under §3-301.
notes and is discussed below.
                                                                 C.   Who‟s the Holder – The UCC Issues
      §3-148(d) is very narrow in scope. Where an
instrument is paid by mistake and payment is either              1.   Generally
recover or acceptance revoked by the payor, the
instrument “is deemed not to have been paid . . . and is               Enforcement of a note always requires that the
treated as dishonored and the person from whom                   person seeking to collect show that it is the holder or a
payment is recover has rights as a persons entitled to           transferee who took from a holder. A holder is an
enforce the dishonored instrument” even though he or             entity that has acquired the note either as the original
she does not have possession of the instrument. This             payor or transfer by endorsement of order paper or
provision is designed to clarify the impact of certain of        physical possession of bearer paper.               These
the payment rules of Art. 4 dealing with checks.                 requirements are set out in Article 3 of the Uniform
                                                                 Commercial Code, which has been adopted in every
     Where the party seeking to enforce is only a                state, including Louisiana, and the District of
transferee, a few other sections and provisions must be          Columbia. Even in bankruptcy proceedings, State
considered. A “transfer” is physical delivery intended           substantive law controls the rights of note and lien
to give the transferee the right to enforce, including the       holders, as the Supreme Court pointed out almost forty
rights of a holder in due course. §3.203(a)&(b). In              years ago in United States v. Butner, 440 U.S. 48, 54-
order to enforce, then, a transferee must show physical          55 (1979).
possession. A mere receipt showing transfer of
ownership is not enough. §3.203, comment 2. There                      However, as Bankruptcy Judge Bufford has
must also be evidence of intent to transfer enforcement          recently illustrated, in the cases discussed below, in the
rights. Id., comment 2. If the transferee has no                 bankruptcy and other federal courts, procedure is
endorsement, it can “shelter if it can show its transferor       governed by the Federal Rules of Bankruptcy and Civil
was a holder or holder in due course.” Id., comment 3.           Procedure. And, procedure may just have an impact on
                                                                 the issue of “who,” because, if the holder is unknown,
     To summarize, ordinarily, except for §3-309, if a           pleading and standing issues arise.
person wants to enforce a note, he, she or it had better
be able to produce the original.                                 2.   Brief Review of UCC Provisions

B.   UCC SECTION 3-309                                                 Article 3 defines what a negotiable instrument is
                                                                 and defines how ownership of those pieces of paper is
      Where the note is simply missing, UCC §3-309               transferred. For the precise definition of “negotiable
provides a simple solution. A holder or transferee is            instrument”, see § 3-104(a) (“an unconditional promise
entitled to enforce an instrument which has been lost,           or order to pay a fixed amount of money, with or
destroyed or stolen may enforce the instrument. If the           without interest . . . .”) The instrument may be either
court is concerned that some third party may show up             payable to order or bearer and payable on demand or at
and attempt to enforce the instrument against the                a definite time, with or without interest.
payee, it may order adequate protection. But, and
however, a person seeking to enforce a missing                        Ordinary negotiable instruments include notes and
instrument must be a person entitled to enforce the              drafts (a check is a draft drawn on a bank). See § 3-
instrument, and that person must prove both the                  104(e).
instrument‟s terms and that person‟s right to enforce
the instrument. §3-309 (a)(1) & (b). To get there, the               Negotiable paper is transferred from the original
person asserting rights under §3-309 must show that it           payor by negotiation. §3-301. “Order paper” must be
                                                             2
MORTGAGE FORECLOS URE IN AN AGE OF S ECURITIZATION:
MISS ING ORIGINAL NOTES AND OTHER PROB LEMS FOR CREDITORS                                                  CHAPTER 17

endorsed; bearer paper need only be delivered. §3-                  According F.R.Civ. Pro. 17, “[a]n action must be
305. However, in all cases, for the note to be enforced,       prosecuted in the name of the real party in interest.”
the person who asserts the status of the holder must be        This rule is incorporated into the rules governing
in possession of the instrument. See UCC § 1-201 (20)          bankruptcy procedure in several ways. As Judge
and comments.                                                  Bufford has pointed out, for example, in a motion for
                                                               relief from stay, filed under F.R.Bankr.Pro. 4001 is a
     The original and subsequent transferees are               contested matter, and is governed by F. R. Bankr. P.
referred to as holders. Holders who take with no notice        9014, which makes F.R. Bankr. Pro. 7017 applicable to
of defect or default are called “holders in due course,”       such motions. F.R. Bankr. P. 7017 is, of course, a
and take free of many defenses. See §§ 3-305(b).               restatement of F.R. Civ. P. 17. In re Hwang, 396 B.R.
                                                               at 766. The real party in interest in a federal action to
      Transferees who take under § 3-301 – persons that        enforce a note, whether in bankruptcy court or federal
the holder intends to have the rights the holder has –         district court, is the owner of the note.              (In
are not helped in the context of the missing note              securitization transactions, this would be the trustee for
problem. While a transferee can certainly utilize              the “certificate holders.”) When the actual
§3.309, the transferee who has lost possession, like a         holder/owner of the note is unknown, it is impossible –
holder who has lost possession, must prove the terms           not difficult but impossible – to plead a cause of action
of the instrument and that it has the right to enforce         in a federal court (unless the movant simply lies about
(e.g., is an agent, etc.). In other words, both must           the ownership of the note). Unless the name of the
prove actual receipt and possession and not just some          actual note holder can be stated, the very pleadings are
transfer of title without evidence of transfer of              defective.
possession. The proof is obviously the same as the
proof required under §3.309, so where the instrument           2. Standing and Party-in-Interest; the Difference
cannot be found, §3-203 and 3-301 add nothing to                  Between Bankruptcy and District Court
§3.309.
                                                                    Often, the servicing agent for the loan will appear
     NOTE: Those who went through the bank and                 to enforce the note. Assume that the servicing agent
savings and loan collapse of the 1980‟s are familiar           states that it is the authorized agent of the note holder,
with these problems. The FDIC/FSLIC/RTC sold                   which is “Trust Number 99.” The servicing agent is
millions of notes secured and unsecured, in bulk               certainly a party in interest, since a party in interest in a
transactions. Some notes could not be found and                bankruptcy court is a very broad term or concept. See,
enforcement sometimes became a problem. Of course,             e.g., Greer v. O’Dell, 305 F.3d 1297, 1302-03 (11th
sometimes we are forced to repeat history. For a recent        Cir. 2002).
FDIC case, see Liberty Savings Bank v. Redus, 2009
WL 41857 (Ohio App. 8 Dist.), January 8, 2009.                      However, the servicing agent may not have
                                                               standing in the United State District Court, for the term
D. The Rules                                                   “party in interest” does not apply outside of the
                                                               bankruptcy context: “Federal Courts have only the
1.   In Bankruptcy Court                                       power authorized by Article III of the Constitutions
                                                               and the statutes enacted by Congress pursuant thereto.
     Judge Bufford addressed Rules of Procedure                ... [A] plaintiff must have Constitutional standing in
issues this past year. See In re Hwang, 396 B.R. 757           order for a federal court to have jurisdiction.” In re
(Bankr. C. D. Cal. 2008). First, there are the pleading        Foreclosure Cases, 521 F.Supp. 3d 650, 653 (S.D.
problems that arise when the holder of the note is             Ohio, 2007) (citations omitted). The Ohio cases arose
unknown. Typically, the issue will arise in a motion           following removal of a state foreclosure proceeding to
for relief from stay in a bankruptcy proceeding.               federal court on the basis of diversity; they are not
                                                               bankruptcy proceedings.

                                                           3
MORTGAGE FORECLOS URE IN AN AGE OF S ECURITIZATION:
MISS ING ORIGINAL NOTES AND OTHER PROB LEMS FOR CREDITORS                                                    CHAPTER 17

     The servicing agent does not have standing unless            F.   Rules of Evidence – A Practical Problem
it can prove that it is a transferee, for only a person
who is the holder or transferee of the note has standing               The securitization structure – with or without
to enforce the note – and only the holder is the real             MERS – also poses practical evidentiary problems
party in interest. The servicing agent may have                   where the party asserting a right to foreclose must be
authority to enforce the note if it is acting as an agent         able to show a default. At In re Vargas, 396 B.R. at
for the holder, but the agent must act in the name of its         517-19, Judge Bufford made a finding that the witness
principal under F.R. Civ. Pro. 17. Again, all federal             called to testify as to debt and default was incompetent.
lawsuits must be presented in the name of the real                All the witness could testify was that he had looked at
party in interest. See, e.g., In re Hwang, 2008 WL                the MERS computerized records. The witness was
4899273 at 8.                                                     unable to satisfy the requirements of the Federal Rules
                                                                  of Evidence, particularly Rule 803, as applied to
     The servicing agent must show both transferee                computerized records in the Ninth Circuit. See id. at
status and act in the name the real party in interest,            517-20. The low level employee could only testify that
which requires the servicing agent to show that its               the MERS screen shot he reviewed reflected a default.
principal is the actual holder. See, e.g., In re Vargas,          That really is not much in the way of evidence, and not
396 B.R. 511 (Bankr. C.D. Cal. 2008) at 520.                      nearly enough to get around the hearsay rule. F.R.
                                                                  Evid. 801.
E.   A Brief Aside: Who is Mers?
                                                                  G.   Foreclosure or Relief from Stay
      For those of you who are not familiar with the
entity known as MERS, a frequent participant in these                  In a foreclosure proceeding in a judicial
foreclosure proceedings:                                          foreclosure state, in a request for injunctive relief in a
                                                                  non-judicial foreclosure state, or in a motion for relief
      MERS is the “Mortgage Electronic Registration               proceeding in a bankruptcy court, the courts are
System, Inc. “MERS is a mortgage banking „utility‟                dealing with and writing about these problems very
that registers mortgage loans in a book entry system so           frequently.
that ... real estate loans can be bought, sold and
securitized, just like Wall Street‟s book entry utility for             In many if not almost all cases, the party seeking
stocks and bonds is the Depository Trust and                      to exercise the rights of the creditor will be a servicing
Clearinghouse.” Bastian, “Foreclosure Forms,” State               company. Servicing companies will be asserting the
Bar of Texas 17 th Annual Advanced Real Estate                    rights of their alleged principal, the note holder, which
Drafting Course , March 9-10, 2007, Dallas, Texas.                is, again, often going to be a trustee for a securitization
MERS is enormous. It originates thousands of loans                package. The mortgage holder or beneficiary under the
daily and is the mortgagee of record for at least 40              deed of trust will, again, very often be MERS.
million mortgages and other security documents. Id.
                                                                       Even before reaching the practical problem of
      MERS cannot, by its very nature, be either the              debt and default, mentioned above, the moving party
holder of a note or the servicing agent. All MERS                 must show that it holds the note or (1) that it is an
does is handle recordation of the lien documents.                 transferee (agent) of the holder and that (2) the holder
Supposedly, for example, the MERS entries will show               (transferee) remains the holder.
that it is the trustee or substitute trustee under a Deed
of Trust. As the cases below will reflect, however, that                Some states, like Texas, have passed statutes that
is often not the case. In some situations, MERS may               allow servicing companies to act in foreclosure
not have any idea who the current holder might be.                proceedings as a statutorily recognized agent of the
MERS also allegedly records defaults, but the                     noteholder. See, e.g., Tex. Prop. Code §51.0001.
admissibility of its records should generally be denied.          However, that statute refers to the servicer as the last
                                                                  entity to whom the debtor has been instructed to make
                                                              4
MORTGAGE FORECLOS URE IN AN AGE OF S ECURITIZATION:
MISS ING ORIGINAL NOTES AND OTHER PROB LEMS FOR CREDITORS                                                 CHAPTER 17

payments. This status is certainly open to challenge.            note itself was assigned and no evidence as to who the
The statute certainly provides nothing more than prima           current holder might be.
facie evidence of the ability of the servicer to act. If
challenged, the servicing agent must show that the last              Nosek v. Ameriquest Mortgage Company (In re
entity to communicate instructions to the debtor is still        Nosek), 286 Br. 374 (Bankr D Mass. 2008):
the holder of the note. See, e.g., HSBC Bank, N.A. v.
Valentin, 2l N.Y. Misc. 3d 1123(A), 2008 WL                           Almost a year to the day after Schwartz was
4764816 (Table) (N.Y. Sup.), Nov. 3, 2008.                       signed, Judge Rosenthal issued a second opinion. This
                                                                 is an opinion on an order to show cause. Judge
     The Ohio judicial foreclosure cases have resulted           Rosenthal specifically found that, although the note
in a ruling that is very significant for both sides of the       and mortgage involved in the case had been transferred
argument. In a judicial foreclosure, where the debtor            from the originator to another party within five days of
objects, if the foreclosing party cannot show ownership          closing, during the five years in which the chapter 13
or authority, dismissed without prejudice. Since the             proceeding was pending, the note and mortgage and
real party in interest, the owner of the note, is not            associated claims had been prosecuted by Ameriquest
before the court, a final adjudication in favor of the           which has represented itself to be the holder of the note
debtor is not possible. Wells Fargo Bank, N.A. v. Byrd,          and the mortgage. Not until September of 2007 did
897 N.E.2d 722 (Ohio App. 1 Dist, 2008).                         Ameriquest notify the Court that it was merely the
                                                                 servicer. In fact, only after the chapter 13 bankruptcy
H. Relief from Stay Proceedings                                  had been pending for about three years was there even
                                                                 an assignment of the servicing rights. Id. at 378.
SOME RECENT CASE LAW
                                                                       Because these misrepresentations were not simple
     These cases are arranged by state, for no                   mistakes: as the Court has noted on more than one
particular reason.                                               occasion, those parties who do not hold the note of
                                                                 mortgage do not service the mortgage do not have
Massachusetts                                                    standing to pursue motions for leave or other actions
                                                                 arising form the mortgage obligation. Id at 380.
In re Schwartz, 366 B.R.265 (Bankr. D. Mass. 2007):
                                                                      As a result, the Court sanctioned the local law
      Schwartz concerns a Motion for Relief to pursue            firm that had been prosecuting the claim $25,000. It
an eviction. Movant asserted that the property had been          sanctioned a partner at that firm an additional $25,000.
foreclosed upon prior to the date of the bankruptcy              Then the Court sanctioned the national law firm
petition. The pro se debtor asserted that the Movant             involved $100,000 and ultimately sanctioned Wells
was required to show that it had authority to conduct            Fargo $250,000. Id. at 382-386.
the sale. Movant, and “the party which appears to be
the current mortgagee…” provided documents for the                   In re Hayes, 393 B.R. 259 (Bankr. D. Mass.
court to review, but did not ask for an evidentiary              2008):
hearing. Judge Rosenthal sifted through the documents
and found that the Movant and the current mortgagee                   Like Judge Rosenthal, Judge Feeney has attacked
had failed to prove that the foreclosure was properly            the problem of standing and authority head on. She
conducted.                                                       has also held that standing must be established before
                                                                 either a claim can be allowed or a motion for relief be
     Specifically, Judge Rosenthal found that there was          granted.
no evidence of a proper assignment of the mortgage
prior to foreclosure. However, at footnote 5, Id. at 268,        Ohio
the Court also finds that there is no evidence that the

                                                             5
MORTGAGE FORECLOS URE IN AN AGE OF S ECURITIZATION:
MISS ING ORIGINAL NOTES AND OTHER PROB LEMS FOR CREDITORS                                                 CHAPTER 17

    In re Foreclosure Cases, 521 F.Supp. 2d (S.D.                securitization pool. U.S. Bank relied exclusively on
Ohio 2007):                                                      the “pooling and serving agreement” to show that it
                                                                 was the holder of the note. Id.
     Perhaps the District Court‟s orders in the
foreclosure cases in Ohio have received the most press               Under UCC Article 3, the evidence presented in
of any of these opinions. Relying almost exclusively             Cook was clearly insufficient.
on standing, the Judge Rose has determined that a
foreclosing party must show standing.            “[I]n a         New York
foreclosure action, the plaintiff must show that it is the
holder of the note and the mortgage at the time that the             HSBC Bank USA, N.A. v. Valentin, 21 Misc. 3D
complaint was filed.” Id. at 653.                                1124(A), 2008 WL 4764816 (Table) (N.Y. Sup.)
                                                                 November 3, 2008:
     Judge Rose instructed the parties involved that the
willful failure of the movants to comply with the                     In Valentin, the New York court found that, even
general orders of the Court would in the future result in        though given an opportunity to, HSBC did not show
immediate dismissal of foreclosure actions.                      the ownership of debt and mortgage. The complaint
                                                                 was dismissed with prejudice and the “notice of
    Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL             pendency” against the property was cancelled.
111227 (S.D. Ohio) January 8, 2008:
                                                                      Note that the Valentin case does not involve some
     In Steele, Judge Abel followed the lead of Judge            sort of ambush. The court gave every HSBC every
Rose and found that Deutsche Bank had filed evidence             opportunity to cure the defects the Court perceived in
in support of its motion for default judgment indicating         the pleadings.
that MERS was the mortgage holder. There was not
sufficient evidence to support the claim that Deutsche           California
Bank was the owner and holder of the note as of that
date. Following In re Foreclosure Cases, 2007 WL                     In re Vargas, 396 B.R. 511 (Bankr. C.D. Cal.
456586, the Court held that summary judgment would               2008);
be denied “until such time as Deutsche Bank was able                                   and
to offer evidence showing, by a preponderance of
evidence, that it owned the note and mortgage when                   In re Hwang, 396 B.R. 757 (Bankr. C.D. Cal.
the complaint was filed.” 2008 WL 111227 at 2.                   2008):
Deutsche Bank was given twenty-one days to comply.
Id.                                                                   These two opinions by Judge Bufford have been
                                                                 discussed above. Judge Bufford carefully explores the
Illinois                                                         related issues of standing and ownership under both
                                                                 federal and California law.
      U.S. Bank, N.A. v. Cook , 2009 WL 35286 (N.D.
Ill. January 6, 2009):                                           II.   OTHER    PROBLEMS    FOR                    THE
                                                                       FORECLOSING CREDITOR
     Not all federal district judges are as concerned
with the issues surrounding the transfer of notes and            A. Servicing Company Abuses
mortgages. Cook is a very pro lender case and, in an
order granting a motion for summary judgment, the                1.    Generally
Court found that Cook had shown no “countervailing
evidence to create a genuine issue of facts.” Id. at 3.                Every lawyer who deals with this area understand
In fact, a review of the evidence submitted by U.S.              that there is another “elephant in the room” – servicing
Bank showed only that it was the alleged trustee of the          company abuse and incompetence. Professor Porter
                                                             6
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MISS ING ORIGINAL NOTES AND OTHER PROB LEMS FOR CREDITORS                                               CHAPTER 17

has spent a great deal of time analyzing actual cases –
1,700 recent chapter 13 filings. Her conclusion was            In re Hight, 393 B.R. 484 (Bankr. S.D. Tex. 2008).
that the majority of mortgage companies do not
comply with bankruptcy law, either inadvertently or            In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008).
because they don‟t know how or because they cannot.
Porter at 121.                                                 In re Mounce, 390 B.R. 233 (Bankr. W.D. 2008).

     Professor Porter‟s case law examples include              In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008).
Maxwell v. Fairbanks Capital Corp., (In re Maxwell),
281 B.R. 101 (Bankr. D. Mass 2002), where the                  In re Sanchez, 372 B.R. 289 (Bankr. S.D. Tex. 2007).
bankruptcy court stated that Fairbanks “repeatedly
fabricated the amount of the Debtor‟s obligation to it         In re Allen, 2007 WL 174708 (Bankr. SD. Tex. 2007).
out of thin air.” The court found that Fairbanks had
imposed extreme penalty and penalty interest charges,          In re Porcheddu, 338 B.R. 729 (Bankr. S.D. Tex.
and high charges for forced insurance. Id. at 117-18.          2006).
Accounting errors, misapplication of payments,
miscalculation of escrows are the innocent sounding            Almost all of these cases involve sanctions of one sort
mistakes. Porter at 134-36. Other, less innocent               or another, and some are quite severe.
events include violation of the various consumer
protection acts. See generally, Porter at 125 and              III. THE ETHICAL ISSUE
following.
                                                               A. The Lender
      The United States Trustee offices are becoming
very active in this area. See, e.g., In re Pawson, Case             For attorneys, the ethical framework has been
No. 05-18239 (Bankr. S.D. N.Y. 2009), where the U.S.           discussed above in the context of Rules 11 ad 9011 of
Trustee was instrumental in forcing Chase Home                 the Federal Rules of Procedure and Federal Rules of
Finance LLC to enter into a consent agreement. Chase           Bankruptcy Procedure. But for attorneys and bankers,
has agreed to hire an experienced bankruptcy attorney          the ethical issues are really deeper. Filing false,
to review all motions for stay before filing. The US.          misleading, or inaccurate claims, bad accounting
Trustee offices are also seeking sanctions for                 processes, sloppy bookkeeping, and the like all result
substantive abuses including incorrect statements, mail        in cheating the most vulnerable – people about to lose
fees, fax fees, unnecessary forced insurance and the           their homes to foreclosure. The lending industry
like. Since these usually appear on proofs of claim, the       should fee nothing but shame. No one needs to belabor
US. Trustees have invoked F.R Civ. Pro. 11 (F.R.               or elaborate. This conduct is simply wrong. And,
Bankr.Pro. 9011) to impose sanctions on counsel.               these cases often involve the Brahmins of the banking
Illustrative cases include In re Beers, 2009 WL                world, not the bottom feeders.
1025402 (Bankr. N.J. 2009) and In re Cabero-Mejia,
402 B.R. 335 (Bankr. C.D. Ca. 2008).                           B.   The Debtor‟s Counsel

2.   The Texas and Other Fifth Circuit Cases                        Debtor‟s lawyers in chapter 13 cases, in
                                                               particular, operate on a limited budget and with limited
     The following cases from the Fifth Circuit all deal       resources. Yet, failure to investigate and challenge the
with the misconduct of the lender, the servicer, or the        lending community is a violation of the fundamental
attorney for one or the other:                                 ethical duty of effective representation. How does a
                                                               consumer lawyer with a fixed fee take on Mega Bank?
In re Jones, 391 B.R. 577 (E.D. La. 2008).
                                                                   In part, the consumer bankruptcy practice works
In re Wilburn, 404 B.R. 841 (Bankr. S.D. Tex. 2009).           because lender lawyers and consumer lawyers work
                                                           7
MORTGAGE FORECLOS URE IN AN AGE OF S ECURITIZATION:
MISS ING ORIGINAL NOTES AND OTHER PROB LEMS FOR CREDITORS                                                 CHAPTER 17

things out.   But, if lenders cannot be trusted, what            creditor may be liable for actual damages, attorney‟s
happens?                                                         fees and court costs, and twice the amount of any
                                                                 finance charge in connection with the transaction. 15
IV. SUMMARY                                                      U.S.C. § 1640(a) (2006). However, a creditor is not
                                                                 liable if he can show by a preponderance of the
      The cases, cited and Prof. Porter‟s study and              evidence that the violation was unintentional and
article illustrate enormous problems in the loan                 resulted from a bona fide error, notwithstanding the
servicing industry. These problems arise in the context          maintenance of procedures reasonably adapted to avoid
of securitization and illustrate the difficulty of               any such error. Id. at § 1640(c). Additionally, a
determining the name of the holder, the assignee of the          creditor who willfully and knowingly fails to provide
mortgage, and the parties with both the legal right              the required disclosure may be held criminally liable
under Article 3 and standing under the Constitution to           and fined up to $5,000 or imprisoned up to one year, or
enforce notes, whether in state court or federal court.          both. Id. at § 1611.
These cases and Prof. Porter‟s work also show that
lenders, as often as not, cheat.                                      While this statute might avoid some of the
                                                                 problems described above, the impact will perhaps be
     Interestingly, with the exception of Judge Bufford          negligible. First, for compliance could and probably
and a few other judges, there has been less than                 will be limited. Second, this notice does not avoid the
adequate focus upon the UCC title issues than on the             central issue of identifying a holder or transferee.
abuses of services and lenders. The next round of                Many purchasers may assume that they are holders or
cases may and should focus upon both.                            transferees. Without the actual note, however, the
                                                                 puzzle has no solution.
V.   RECENT LEGISLATION – DOES IT MAKE
     A DIFFERENCE?                                               VI. NOTE ON THE MADDENING                       COM-
                                                                     PLEXITY OF SECURITIZATION
     On May 20, 2009, President Obama signed into
law the “Helping Families Save Their Homes Act of                     A recent Wall Street Journal attempts to describe
2009”, Pub. L. No. 111-22, 123 Stat. 1632 (the “Act”).           the “sheer complexity” of mortgage securitization.
Section 404(a) of the Act amends the Truth in Lending            Scott, Kenneth E., and Taylor, John B., “Why Toxic
Act (“T-I-L”), 15 U.S.C. § 1641 et seq., to require any          Assets are so Hard to Clean Up,” Wall Street Journal,
creditor who purchases or is otherwise assigned a                A13 (June 20, 2009). The focus of the article is on
mortgage loan to provide the borrower with written               increased transparency, which the authors argue “will
notice of the transfer within thirty days. Within the            unleash the market mechanisms needed to clean … up”
meaning of the Act, a mortgage loan includes any                 these “toxic assets.”
consumer credit transaction that is secured by the
principal dwelling of a consumer. Act at § 404 (a)(2).                Whether the authors are correct about the “clean
Such written notice must provide: (a) the identity,              up”, and transparency could be debated, the article
address, and telephone number of the new creditor; (b)           does an excellent job of describing the securitization
the date of the transfer; (c) how to reach an agent or           process.
party having authority to act on behalf of the new
creditor; (d) the location of the place where the transfer            For home loans, the wizards on Wall Street
of ownership of the debt is recorded; and (e) any other          created “residential mortgage-backed securities”
relevant information regarding the new creditor. Act at          (RMBS). Large numbers of residential mortgages
§ 404 (a)(1).                                                    were placed into a pool, or rather, to be more accurate,
                                                                 the notes secured by those mortgages are pooled.
     Section 404(b) of the Act creates a private right of        These pools were then “sliced” into “tranches” based
action against any creditor who fails to comply with             upon potential returns, and the tranches were sold
the new notice requirement. In such a private action, a          separately. The tranches were treated as if each
                                                             8
MORTGAGE FORECLOS URE IN AN AGE OF S ECURITIZATION:
MISS ING ORIGINAL NOTES AND OTHER PROB LEMS FOR CREDITORS         CHAPTER 17

tranche was a separate or new instrument. The
equivalent tranches of several pools might be sold as
“Collateralized Mortgage Obligations” (CMOs)(these
are bonds) or the tranches might be combined with
other tranches of other types of debt, including
commercial mortgages, student loans, etc., called
“Collateralized Loan Obligations” (CLOs). When
CMOs and CLOs were combined, the result was
referred to as a Collateralized Debt Obligation (CDO).
When two or more CDOs were combined, the result
was called a CDO².

    In this scheme, the title to the individual notes
should remain in the hands of an indenture trustee for
the original pool, and the indenture trustee for the
bonds actually sold to investors (based upon the CDO
or CDO²) would only own an interest in a portion of
each of the underlying notes.

      The Wall Street Journal article focuses on the
difficulty of determining the value of these complex
pools of assets to determine the value of the bonds
after issuance, analysis of a potentially massive
number of underlying assets must be analyzed:

        [A]ssume [a] CDO² held 100 CLOs,
        each holding 100 RMBS comprising a
        mere 2,000 mortgages [each] – the
        number now rises to 20 million.

     In other words, to understand the hypothetical
CDO² described above, it is necessary to review 20
million mortgages or, if tranched, the expected return
on portions of 20 million mortgages.

      The focus of this CLE article is on the location of
a note. The Wall Street Journal article shows the
difficulty of locating the actual assets – the notes – that
have been securitized.




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