07-51692
WATKINS MEMORANDUM OPINION SJ re Trustee
as judicial lien creditor
UNITED STATES
BANKRUPTCY COURT
EASTERN DISTRICT OF
KENTUCKY
LEXINGTON DIVISION
IN RE:
JAMES E. WATKINS CASE
NO. 07-51692
DIANA
L. WATKINS CASE
NO.
09-52455
DEBTOR(S)
J. JAMES ROGAN, TRUSTEE PLAINTIFF
VS. ADV. NO. 10-5009
ADV. NO. 10-5001
DEUTSCHE BANK NATIONAL TRUST COMPANY,
as Trustee under
Pooling and Servicing Agreement
dated as of May 1, 2006,
MORGAN STANLEY HOME
EQUITY LOAN TRUST 2006-3 Mortgage Pass-Through
Certificates, Series 2006-3, et al. DEFENDANTS
MEMORANDUM OPINION
The
issue before the Court on cross-motions for summary judgment is whether the
Trustee, as a hypothetical judicial lien creditor pursuant to 11 U.S.C. '
544, has priority over the interest of the Defendant Deutsche Bank National
Trust Company as Trustee under Pooling and Servicing Agreement dated as of May
1, 2006, Morgan Stanley Home Equity Loan Trust 2006‑3, Mortgage Pass‑Through Certificates, Series 2006-3 (ADeutsche
Bank@) in
the Debtors= real estate encumbered by a Mortgage properly recorded at
the time of the filing of the petition. Because the Trustee does not contest
that the Mortgage held by Deutsche Bank has been timely and properly recorded,
the Trustee may not avoid Deutsche Bank=s
Mortgage.
Factual and Procedural
Background
The
undisputed facts are as follows. On
December 8, 2005, the Debtors James Watkins and Diana Watkins executed a Note
and Mortgage in favor of Wilmington Finance, a division of AIG Federal Savings
Bank, on the Debtors= real property located in at
730 Kentucky Highway 1771, Cynthiana, Harrison County,
Kentucky 41031. The Mortgage was properly recorded with the Harrison County
Clerk on December 19, 2005. The Mortgage, prepared by Wilmington Finance,
identifies Wilmington Finance as the ALender@ and
Mortgage Electronic Registration Systems, Inc. (AMERS@) as
mortgagee Asolely
as nominee for Lender and Lender=s
successors and assigns.@ The Mortgage states that as
a security instrument, it secures to the Lender
(I)
the repayment of the Loan, and all renewals, extensions and modifications of
the Note; and (ii) the performance of Borrower=s
covenants and agreements under this Security Instrument and the Note. For
this purpose, Borrower does hereby mortgage, grant and convey to MERS (solely
as nominee for Lender and Lender=s
successors and assigns) and to the successors and assigns of MERS, with power
of sale, the following described property...
Quinteta
McNeill, a research specialist with Barclay=s
Capital Real Estate Inc., d/b/a HomEq Servicing (AHomEq@),
the duly appointed and authorized loan servicer for Deutsche Bank, testified by
affidavit that the Note and Mortgage were transferred from Wilmington Finance
to Deutsche Bank on or about December 8, 2005. Ms. McNeill states that the
original Note contains an allonge demonstrating the
transfer of the negotiable instrument from Wilmington Finance to Deutsche Bank.
The allonge is dated December 8, 2005 and is indorsed
specifically to Deutsche Bank. According to Ms. McNeill, Deutsche Bank took
possession of the original Note and Mortgage on or about January 14, 2006 and is the current holder and owner of the Note and Mortgage.
The assignment to Deutsche Bank was memorialized for the public record by the
filing of two separate Mortgage assignments with the Harrison County Clerk on
December 16, 2008 and October 21, 2009.
On
August 31, 2007, James Watkins and Diana Watkins filed for joint Chapter 13
bankruptcy. The matter was assigned Case No. 07‑51692. Schedule D of the
joint petition lists one secured creditor ‑ AHome
Q [sic]@ ‑
with a mortgage on the Harrison County residence.
On
October 29, 2007, HomEq filed a Proof of Claim for
the mortgage debt serviced by HomEq in the name of
MERS. The Proof of Claim included copies of the Note and Mortgage as exhibits.
The copy of the Note attached did not contain an allonge
and was not indorsed. The copy of the Mortgage attached did not contain an
assignment of the Mortgage. No objections were filed to the Proof of Claim.
On
April 15, 2009, Deutsche Bank filed a Motion for Relief from Stay. The Motion for Relief from Stay referenced
exhibits including the filed Proof of Claim, Note,
and recorded Mortgage. The exhibit to the Motion did not contain the allonge to the Note or an assignment for the Mortgage. The
Debtors filed an objection to the Motion admitting that they failed to pay two post‑petition payments to Deutsche Bank and
requesting additional time to cure the delinquency. They did not raise any
issue regarding Deutsche Bank's standing or its entitlement to payment. By an Agreed Order entered on May 11, 2009,
the stay was terminated and the Chapter 13 Trustee discontinued payments to
Deutsche Bank based on the Debtors=
intent to surrender the property.
On
July 31, 2009, the Court granted a motion by Diana Watkins to bifurcate the
case. Diana Watkins= case was assigned case
number 09-52455. On August 18, 2009,
Diana Watkins converted her Chapter 13 case to a Chapter 7. J. James Rogan was appointed as the Chapter 7
Trustee. A day later, James Watkins
likewise converted his Chapter 13 case to a Chapter 7. Mr. Rogan was appointed as Trustee in that
matter as well.
On
September 4, 2009, Deutsche Bank filed a Motion in Diana Watkins' Chapter 7
case seeking an order directing the Trustee to abandon the real estate of the
Debtor in order for Deutsche Bank to enforce its lien. The Motion contained
exhibits including the filed Proof of Claim, Note,
and Mortgage, but did not include the allonge or the
assignment.[1]
The Trustee objected to the Motion by challenging Deutsche Bank's standing to
bring the Motion and its entitlement to payment under the Note based upon a
lack of documentation, including the allonge and
Mortgage assignment. The Motion was resolved by Agreed Order allowing the
Trustee 90 days to file an adversary complaint or abandonment would be granted.
The
Trustee timely filed substantively identical adversary proceedings in each of
the Debtors=
Chapter 7 bankruptcies. In each, the Trustee alleged that his status as a
hypothetical judicial lien creditor gave him priority over the interests of the
Defendants Wilmington Finance, HomEq, MERS, and
Deutsche Bank because the underlying Note and Mortgage were defective. In
particular, the Trustee alleged (1) the filing of a copy of the Note with no indorsement or allonge attached
to the proof of claim or Motion for Relief from Stay is a judicial admission
that the Note was not indorsed to Deutsche Bank; (2) Deutsche Bank cannot
enforce payment of a note payable to Wilmington Finance without an indorsement or permanently affixed allonge;
and (3) the Mortgage is void because Wilmington Finance, the lender named in
the Note and Mortgage, did not appoint MERS to act as its nominee. The adversary proceedings were consolidated
on April 13, 2010.
A
default judgment was entered against Wilmington Finance on August 12,
2010. Deutsche Bank, MERS, and HomEq filed a joint answer asserting that the Trustee
cannot avoid its secured mortgage lien pursuant to the strong arm power
appointed to him by 11 U.S.C. '
544(a) because the mortgage was properly recorded at the time the bankruptcy
petition was filed. These Defendants also defended on the grounds that MERS is
the appointed nominee for Wilmington Finance and Deutsche Bank is entitled to
enforce the Note because it is in possession of the original Note with an allonge indorsed specifically to Deutsche Bank.
The
parties have filed cross-motions for summary judgment. This Court has jurisdiction to hear this
matter pursuant to 28 U.S.C. '' 157
and 1334. This is a core proceeding
under 28 U.S.C. ' 157(b)(2).
Discussion
A. 11 U.S.C. ' 544
The
Trustee cannot assert his strong arm powers to avoid a timely and properly
recorded mortgage document. See Rogan v. MILA, Inc. (In re Allen),
Case No. 09-5007, 2010 WL 3168094 (Bankr.
E.D. Ky. August 11, 2010). As stated succinctly in In
re Allen,
What
the Plaintiff cannot get passed...is that his Ajudicial
lien@ is
inferior to the Defendants=
perfected lien. To prevail, the Trustee must be able to establish that a
judicial lien creditor could assert a superior lien on the date of the
bankruptcy filing B in this regard, a Trustee=s
powers are limited by section 544(a)(1) B if
a judicial lienholder cannot avoid the mortgage, the
Trustee has no other power to prevent the mortgagee from foreclosing on its
properly perfected mortgage.
The
same is true here. The Trustee does not dispute that the Mortgage was properly
recorded. The Trustee=s hypothetical judicial lien
is therefore inferior to Deutsche Bank=s
properly perfected security interest.
B. Judicial Admission
The
Trustee=s
remaining arguments attacking the Note and Mortgage are not new to this Court.
The Trustee argues that the failure to include the allonge
and indorsement in the filing of the proof of claim
and Motion for Relief from Stay is a judicial admission that the Note is not
indorsed to Deutsche Bank. Deutsche Bank has countered this assertion with
affidavit testimony and an allonge indorsed
specifically to Deutsche Bank, as well as representations by the Debtors that
Deutsche Bank is the holder of the note.
The Court found this Ajudicial
admission@
argument unpersuasive when the Trustee raised it in Rogan v. Citimortgage, Inc. (In re Jessup), No. 09-5229, 2010 WL
2926050 at *4 (Bankr. E.D. Ky. July 22, 2010) and
believes it to be similarly unpersuasive in this situation as well.
Judicial
admissions are unequivocal statements of fact which require evidentiary
proof. See In re LRP Mushrooms, Inc.,
2010 WL 2772510, *10 (Bankr. E.D. Pa. July 13,
2010). While statements of fact made in
a Proof of Claim can be judicial admissions, see, e.g., In re Jordan,
403 B.R. 339, 352 (Bankr. W.D. Pa. 2009), the Trustee
here argues that the absence of documents to support a proof of claim
should constitute a judicial admission that such documents do not exist. The Trustee cites no authority for the
proposition. The omission of documents
from Deutsche Bank=s Proof of Claim cannot
overcome the undisputed facts set forth in Quinteta
McNeill=s
affidavit.
C. MERS as Nominee
The
Trustee has also previously attacked the appointment of MERS as nominee. Id. at *3.
The Court held in In re Jessup that the
language in the Lender=s own instrument is
sufficient to identify MERS as nominee and no further extrinsic evidence to
validate the terms of the mortgage is necessary. Id. The Mortgage at issue
here was prepared by Wilmington Finance. It specifically names MERS as
mortgagee Asolely
as nominee for Lender and Lender=s
successors and assigns.@ This is sufficient to
identify MERS as nominee.[2]
Further,
the Trustee=s
reliance on Cohen v. Kallock (In re JRA 222, Inc.),
365 B.R. 508 (Bankr.
E.D. Pa. 2007) to support his argument that the default judgment entered
against Wilmington Finance, the original Lender on the Note, is an admission
that Wilmington Finance did not appoint MERS as its nominee is misplaced. The general effect of a default judgment is
to deem the factual allegations contained in the complaint as admitted by
the defaulting party. In re JRA 222, Inc., 365 B.R. at 513 (emphasis
added). This does not apply to those
parties not in default.
D. Enforcement of Note
Finally,
the Trustee argues that Deutsche Bank is not entitled to enforce the Note. In
Kentucky, Aa
person entitled to enforce@ an
instrument means Athe holder of the
instrument.@ K.R.S. '
355.3-301 (2010). AHolder@ is Athe
person in possession of a negotiable instrument that is payable either to
bearer or to an identified person that is the person in possession.@
K.R.S. '
355.1-201(u)(1) (2010). As the holder of a Note indorsed specifically
to Deutsche Bank, Deutsche Bank is entitled to enforce the Note.
Conclusion
Federal
Rule of Civil Procedure 56(c)(2), made applicable in bankruptcy by Bankruptcy
Rule 7056, provides that summary judgment is appropriate Aif
the pleadings, the discovery and disclosure materials on file, and any
affidavits show that there is no genuine issue as to any material fact and that
the movant is entitled to judgment as a matter of law.@ The
Trustee does not dispute that the Mortgage was properly recorded prior to the
filing of the bankruptcy. Deutsche Bank has produced evidence sufficient to
show that it is entitled to enforce the Note and the Trustee has failed to
contradict this evidence. There being no
genuine issue of material fact, the Defendants= are
entitled to summary judgment as a matter of law.
The
foregoing constitutes the Court's Findings of Fact and Conclusions of Law. A separate order shall be entered
accordingly.
Copies to:
Holly Wolf, Esq.
J. James Rogan, Esq.
[1]The Proof of Claim was later
amended on July 29, 2010, to change the name of the creditor entitled to
payment from MERS to Deutsche Bank and to include a copy of the allonge, indorsement, and
assignment.
[2]Deutsche Bank has also produced a
corporate resolution dated January 24, 2005 in which MERS appoints certain
employees of Wilmington Finance, Inc., a member of MERS, as assistant
secretaries and vice presidents of MERS as further proof of MERS appointment as
nominee.