Posted on Wednesday, December 1, 2010
State and federal judges in New Jersey are putting mortgage foreclosures under greater scrutiny, not letting them go forward without timely possession of the note in a pair of recent decisions.
On Nov. 16, a bankruptcy judge in Camden disallowed a proof of claim on a mortgage because the party seeking to enforce it did not acquire the mortgage note until after the claim was filed. The same day, the state judiciary published a trial court ruling to the same effect.
In both cases, attempts by the Bank of New York to enforce securitized mortgages failed because the paperwork did not satisfy the requirements of the New Jersey Uniform Commercial Code.
In Kemp v. Countrywide Home Loans, Adversary No. 08-2448, Chief Bankruptcy Judge Judith Wizmur found that when the mortgage was assigned, the note memorializing the underlying debt was not transferred to the Bank of New York or endorsed to it.
Countrywide Home Loans made the $167,000 mortgage loan on a Haddon Heights property to John Kemp in May 2006. The mortgage was securitized — pooled with other mortgages into a trust consisting of the mortgage loans and proceeds — and sold to the Bank of New York as trustee. The process was facilitated by the Mortgage Electronic Registration Systems (MERS), an electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans.
The pooling agreement stated that the note would be transferred with an appropriate endorsement but neither the transfer nor the endorsement was done.
In 2008, Kemp filed for Chapter 13 bankruptcy. Countrywide, which had been bought in the interim by Bank of America, filed a $211,202 proof of claim on the mortgage in June 2008, acting as the servicer for Bank of New York.
Kemp did not dispute that he signed the mortgage and note, but in an adversary action filed Oct. 10, 2008, he asked the court to expunge the claim because the lack of documentation meant it could not be proved.
Countrywide did not locate the note until shortly before the case was tried in September 2009, and the endorsement to the bank- via execution of a document known as an allonge that is supposed to be affixed to the note- was not done until several weeks before the trial and in anticipation of it.
At trial, a Countrywide supervisor testified that prior to filing the proof of claim, the note was transferred to the company's foreclosure unit without an attached allonge. She also testified it was customary for Countrywide to hold onto the original note and other loan documents.
In ruling for Kemp, Wizmur said the note could not be enforced because the possession and endorsement required by the UCC were lacking. Even if the newly prepared allonge was valid, the bank's lack of possession was enough to defeat the claim, she added.
She cited a federal case from Massachusetts decided on Sept. 14, Marks v. Braunstein, No, 09-cv-11402, where a district judge rejected enforcement of a note because the assignee did not have possession.
Wizmur also found that the written mortgage assignment, properly recorded with the county clerk, "created an ownership issue" but did not transfer the right to enforce the note.
The just-published state case, Bank of New York v. Raftogianis , F-7356-09, was a foreclosure action. A $1,380,000 mortgage loan from American Home Mortgage Acceptance Inc. in 2004 was securitized through MERS and wound up in the hands of Bank of New York as trustee.
After the borrower defaulted, the bank filed the foreclosure in 2009 and in January 2010, moved for summary judgment. It did not present the original note until oral argument, arguing that it could proceed based on the note alone.
Superior Court Judge William Todd III, the general equity judge for Atlantic and Cape May counties, disagreed. He denied summary judgment and scheduling a hearing on how and when the note was transferred and whether the bank had the right to enforce it at the time it filed the complaint.
The bank tried to rely on Rule 4:34-3, which allows a case to continue by or against the original party when there has been a transfer of interest, but Todd said the rule did not apply. “In actions involving a negotiable note, plaintiff should generally be in a position to establish that it did have possession of the note as of the date the complaint was filed” or face the possibility of dismissal without prejudice, he wrote.
After trial in June, Todd held the bank failed to prove it had the original note when it filed the case and he refused the bank's request for a presumption that it had the original note at the time of the filing based on its ability to produce it at the time of the argument and the trial.
He dismissed the foreclosure without prejudice and specified that if the bank refiled, the complaint must be accompanied by a certification from someone with personal knowledge confirming possession of the original note as of the refiling date and stating the physical location of the note and the name of the individual or entity in possession.
Todd's June 29 ruling was approved for publication on Nov. 16.
Eric Garrabrant, who represents Roman Krywopusk, the borrower in Todd's case, says now that the opinion is published, it is binding in Atlantic and Cape May and he hopes it will be followed by judges in other counties.
Garrabrant, of Flaster Greenberg in Linwood, notes that since 2008, the courts have been enforcing the R. 4:64-1 requirement that mortgage assignees show the chain of title, but the Todd and Wizmur rulings go further, to determine who actually owns the debt.
Kemp's lawyer, Bruce Levitt of Levitt & Slafkes in South Orange, says confirmation of the Chapter 13 plan has been held up by the uncertainty about the mortgage. Now that the proof of claim has been disallowed, his next move will be to try to knock out the mortgage, probably by filing another adversary action to discharge it.
The mortgage has not been allowed as a secured claim nor deemed a general unsecured claim, so in his view, there is no debt.
The attorneys for Bank of New York, Brian Nicholas of Zucker, Goldberg & Ackerman in Mountainside, and for Countrywide, Dori Scovish of Frenkel, Lambert, Weiss, Weisman & Gordon in West Orange, did not return calls.
The rulings were rendered against the backdrop of the increased scrutiny being paid to mortgage filings in the wake of recent disclosures of slipshod paperwork submitted by lenders, including assembly-line attestations by “robo-signers” who admittedly failed to read the papers or assure their accuracy.
Attorney General Paul Dow announced on Oct. 7 that she was investigating whether mortgage companies committed fraud in failing to verify their filings.
On the day of Wizmur's ruling, the U.S. Senate Banking Committee held hearings on the subject and the Congressional Oversight Panel issued a report discussing the impact on the courts and the financial industry of irregularities in mortgage foreclosure documents.Mary Pat Gallagher