Bank of America, N.A. v. United States Bankruptcy Court for the District of Wyoming - Cheyenne ( 2015 )

FILED
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
July 24, 2015
UNPUBLISHED Blaine F. Bates
Clerk
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE RALPH GIFFORD and BETTY BAP No. WY-15-004
GIFFORD,
Debtors.
GARY A. BARNEY, Trustee, Bankr. No. 09-21257
Adv. No. 10-02029
Plaintiff – Appellant, Chapter 7
v. OPINION
BANK OF AMERICA, N.A., successor
by merger to BAC Home Loans
Servicing, L.P.,
Defendant – Appellee.
Appeal from the United States Bankruptcy Court
for the District of Wyoming
Submitted on the briefs: *
Before CORNISH, KARLIN, and JACOBVITZ, Bankruptcy Judges.
KARLIN, Bankruptcy Judge.
This case involves the bankruptcy trustee’s effort to avoid a mortgage on
the debtor’s property because of the involvement of Mortgage Electronic
Registration Systems, Inc. in the chain of title. Because the issues presented in
*
The parties did not request oral argument, and after examining the briefs
and appellate record, the Court has determined unanimously that oral argument
would not materially assist in the determination of this appeal. See Fed. R.
Bankr. P. 8019(b)(3). The case is therefore ordered submitted without oral
argument.
this appeal have been squarely resolved in the Trierweiler1 decisions from both
this Court and the Tenth Circuit Court of Appeals, we affirm.
I. Background
Co-debtor Betty Gifford (“Gifford”) obtained a loan from Jackson State
Bank and Trust (“JSB”) in January 2006. She executed a promissory note (the
“Note”) in the amount of $438,400 and as security for repayment, signed a
mortgage (the “Mortgage”) on real property in Sublette County, Wyoming. The
Mortgage listed JSB as the mortgagee, noted that the “Loan Servicer” could
change, and provided that both the Note and Mortgage could be sold without prior
notice to Gifford.2 The Mortgage was properly recorded in the county land
records on February 1, 2006. 3
In compliance with the Mortgage terms, Gifford was provided with (and
signed) a Notice of Assignment, Sale or Transfer of Servicing Rights (the
“Notice”) contemporaneously with her execution of the Note and Mortgage. The
Notice indicated that Countrywide Home Loans, Inc. (“Countrywide”) would
begin servicing the Mortgage, effective March 2006, and that all payments should
be made to Countrywide beginning April 2006.4 On the day Gifford executed the
Mortgage, JSB executed a Corporation Assignment of Real Estate Mortgage (the
“Assignment”), transferring it to Mortgage Electronic Registration Systems, Inc.
(“MERS”). 5
1
Royal v. First Interstate Bank (In re Trierweiler), 484 B.R. 783 (10th Cir.
BAP 2012) (“Trierweiler 1”), affirmed, 570 Fed. App’x 766 (10th Cir. 2014)
(“Trierweiler 2”).
2
Appendix to Appellant’s Brief (“Appx”) at 84-85, 94.
3
Id. at 84.
4
Id. at 104-05.
5
Id. at 106. The Tenth Circuit’s Trierweiler 2 decision fully explains
MERS’ role in the mortgage industry when it stated that “MERS is a private
(continued...)
-2-
While the Assignment did not expressly identify MERS as an agent or
nominee of JSB, there is no dispute that JSB was a MERS member and the
transfer was made pursuant to MERS membership rules.6 During the period that
MERS was the mortgagee on the Mortgage, it was the agent for and acted on
behalf of the Note owner, which retained the beneficial interest in the Mortgage. 7
The Assignment was recorded with the county land records on February 13, 2006.
At that time, JSB remained the holder of the Note and the beneficial owner and
servicer of the Mortgage, while MERS was the nominal mortgagee.
Two days later, on February 15, JSB transferred the Note to Countrywide,
which was slated to take over the Mortgage servicing duties effective March 1.
JSB’s Senior VP endorsed the Note as follows: “Pay to the order of Countrywide
Bank, N.A. without recourse.”8 Countrywide, which was also a member of
5
(...continued)
electronic database that tracks the transfer of the beneficial interest in home
loans. Many of the companies that participate in the mortgage industry---by
originating loans, buying or investing in the beneficial interest in loans, or
servicing loans---are members of MERS and pay a fee to use the tracking system.
At the origination of the loan, MERS becomes the mortgagee of record for
participating members through assignment of the members' interests to MERS.
MERS is listed as the grantee in the official records maintained at county register
of deeds offices. The lenders retain the promissory notes, as well as the servicing
rights to the mortgages. If the lender sells or assigns the beneficial interest in the
loan to another MERS member, the change is recorded only in the MERS
database, not in county records, because MERS continues to hold the deed of
trust, or the mortgage on the new lender's behalf. If the lender transfers its
interest in the loan to an entity that is not a member of MERS, then the
assignment is once again recorded in the county land records, and the loan is no
longer tracked in the MERS system. Trierweiler 2, 570 F. App’x at 786 n.1
(internal citations, brackets, and quotes omitted).
6
See Declaration of Dan McLaughlin, VP of MERS, and Executive VP of its
parent company, MERSCORP, Inc., explaining MERS’ business and its
membership rules, in Appx. at 111-13.
7
Id. at p.3, ¶7 in Appx. at 113.
8
Id. at 82. Countrywide Bank, N.A. is not the same entity as Countrywide
Home Loans, Inc., which had previously been disclosed as the upcoming
Mortgage servicer. However, the parties did not discuss this discrepancy, and it
seems likely that the two entities are simply two parts of the same whole – one
(continued...)
-3-
MERS, took possession of the Note, while MERS remained the Mortgage’s
nominal mortgagee (but now acting as agent of Countrywide). Pursuant to MERS
rules, no formal documentation was necessary to effectuate the transfer of
beneficial ownership of the Mortgage from JSB to Countrywide. In any event,
under Wyoming law, a “mortgage follows the note,” and Countrywide
automatically became the beneficial owner of the Mortgage when it obtained the
Note from JSB. 9
Approximately three years later, Gifford defaulted on the Note, failing to
make any payment after the March 2009 payment. Shortly thereafter,
Countrywide merged with Bank of America, N.A. (“BANA”), and Countrywide’s
mortgage servicing arm became BAC Home Loans Servicing, LP (“BAC”). There
is also no dispute that BANA has physically possessed the Note, through its
custodian, at all relevant times since the merger. 10
Six months after this merger, MERS assigned the Mortgage to BAC. That
assignment was also recorded in the county land records on October 27, 2009 and,
as with the JSB Assignment, contained no designation of legal and/or equitable
ownership of the Mortgage.11 MERS assigned “all the rights, title and interest in
8
(...continued)
being a mortgage servicer and the other a mortgage lender. Both entities will be
referred to herein as “Countrywide,” unless stated otherwise.
9
See, e.g., Bradburn v. Wyoming Trust Co., 63 P.2d 792, 797 (Wyo. 1936)
(“assignment of the note carries the mortgage with it, while an assignment of the
latter alone is a nullity”) (quoting Carpenter v. Longan, 83 U.S. 271, 274 (1872)).
10
The Trustee has not disputed that the originally executed “wet-ink” Note is
contained in a collateral file held by counsel for appellee BANA, and that BANA
is the holder of the Note.
11
The Trustee contends that it is this transaction, which occurred within 90
days of the Gifford petition date, that he can avoid under 11 U.S.C. § 547(b) as a
preference. Unless otherwise noted, all further statutory references in this
opinion will be to the Bankruptcy Code, which is Title 11 of the United States
Code.
-4-
and to” the Mortgage and “its rights, title and interest in the [Note]” to BAC. 12
Approximately six weeks later, Gifford filed a Chapter 7 bankruptcy petition.
Nineteen months after the petition date, BAC also merged with BANA.
The following is a chronological list of these events:
01/26/06 Gifford signs Note, Mortgage, and Notice of Assignment of
Servicing
01/26/06 JSB executes assignment of Mortgage to MERS
02/01/06 Mortgage is recorded with county clerk
02/13/06 Assignment of Mortgage to MERS is recorded with county
clerk
02/15/06 JSB sells and transfers Note to Countrywide
04/01/09 Gifford defaults on the note and never cures
04/27/09 Countrywide merges with BANA and Countrywide Home Loan
Servicing becomes BAC Home Loan Servicing, LP
10/21/09 MERS’ assignment of Mortgage to BAC is recorded
12/11/09 Gifford files Ch. 7 petition
07/2011 BAC merges with BANA
II. Appellate Jurisdiction
The bankruptcy court’s opinion and judgment on the parties’ cross-motions
for summary judgment were entered on January 8, 2015. A summary judgment
order that fully disposes of an adversary proceeding is a final order for purposes
of appeal.13 The Trustee’s notice of appeal was timely filed on January 20, 2015,
and neither party to the appeal elected to have the federal district court for the
12
Appx. at 107.
13
This Court has jurisdiction to hear timely filed appeals from “final
judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit,
unless one of the parties elects to have the district court hear the appeal. 28
U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8005; 10th Cir. BAP L.R.
8005-1.
-5-
district of Wyoming rule on the appeal. 14 Therefore, this Court has valid
appellate jurisdiction.
III. Issue and Standard of Review
Are the Trustee’s avoidance claims valid under Trierweiler?
This is a legal issue arising out of a ruling on summary judgment, which is
reviewed de novo.15 De novo review requires an independent determination of the
issues, giving no special weight to the bankruptcy court’s decision. 16
IV. Bankruptcy Proceedings
When the Giffords filed bankruptcy, BAC was the mortgagee of the
Mortgage and soon filed a motion seeking relief from stay so it could foreclose
the Mortgage. Appellant Gary A. Barney, the trustee assigned to the Gifford
bankruptcy case (“Trustee”), objected. After BAC withdrew its motion, the
Trustee filed an adversary complaint against BANA, as “successor by merger” to
BAC.17 The Trustee’s complaint consisted of two counts: he alleged 1) the
transfer of the Mortgage by MERS to BAC was an avoidable preference under
§ 547, and 2) his powers under § 544(a) allowed him to avoid the Mortgage as
“unenforceable.” 18
14
Fed. R. Bankr. P. 8002(a)(1) (notice of appeal must be filed within 14 days
of entry of the judgment); 28 U.S.C. § 158(c)(1) (appeals “shall be heard by” the
BAP in the absence of an election).
15
Gen. Elec. Capital Corp. v. Manager of Revenue (In re W. Pac. Airlines,
Inc.), 273 F.3d 1288, 1291 (10th Cir. 2001).
16
Salve Regina Coll. v. Russell, 499 U.S. 225, 238 (1991).
17
In fact, at this time, BAC had not yet merged with BANA, as that merger
happened in July 2011. However, Countrywide had merged with BANA in April
2009, at which time, its mortgage servicing arm became BAC. Approximately 6
months later, MERS assigned the Mortgage to BAC, which had been servicing the
Mortgage (initially, as Countrywide Home Loan Servicing) since its transfer by
JSB to Countrywide in February 2006.
18
The Trustee alleged that the JSB assignment of the Mortgage to MERS
rendered it unenforceable because that transfer “split” the Note and the Mortgage.
(continued...)
-6-
Both parties filed opposing motions for summary judgment, relying on a
Statement of Undisputed Stipulated Facts.19 After a hearing, the bankruptcy court
certified the following question to the Wyoming Supreme Court: “Whether the
[M]ortgage must comply with the statutory requirements of Wyo. Stat. §§
34-2-122 and 34-2-123.”20 In December 2012, before the Wyoming Supreme
Court had rendered its decision, this Court issued Trierweiler 1. 21 The
Trierweiler trustee appealed Trierweiler 1 to the Tenth Circuit shortly thereafter.
In May 2013, the Wyoming Supreme Court responded to the bankruptcy
court’s certified question, stating:
The bankruptcy trustee argues that because the recorded assignments
of the Mortgage, first to MERS and then to BAC, did not identify
with specificity the terms of the agency relationship between the
holder of the Note and the holder of the Mortgage, the recorded
assignment did not comply with §§ 34–2–122 and 123. The trustee
further argues that the failure to comply with these statutory terms
renders the Mortgage unenforceable. We disagree that Sections 122
and 123 operate in the manner urged by the bankruptcy trustee and
instead conclude as BAC urges that the purpose and effect of these
provisions is to bar an undisclosed or improperly disclosed principal
from questioning an agent's authority to transfer a property interest to
a third party. Given the plain language of the provisions and their
narrow and specific purpose, we conclude that the provisions are not
implicated in this case, and the Mortgage was not required to comply
with Sections 122 and 123. 22
18
(...continued)
He also alleged unenforceability based on Wyoming Statutes § 34-2-122 and
§ 34-2-123.
19
Appx. at 75-78.
20
Certification Order from the United States Bankruptcy Court for the
District of Wyoming to the Supreme Court of the State of Wyoming, p.2 in Appx.
at 189. These statutes, which were also discussed in both Trierweiler decisions,
provide that conveyances of real property to a grantee that is described as a
trustee must define the trust under which the grantee operates. In this case,
neither MERS, Countrywide, nor BAC was ever described as anything other than
“mortgagee.”
21
Royal v. First Interstate Bank (In re Trierweiler), 484 B.R. 783 (10th Cir.
BAP 2012).
22
Barney v. BAC Home Loans Servicing, L.P. (In re Gifford), 300 P.3d 852,
(continued...)
-7-
A year later, in July 2014, the Tenth Circuit issued its Trierweiler 2 decision,
affirming the decisions of the bankruptcy court and the BAP. 23
Due to the strong factual similarities between the Trierweiler and Gifford
cases, the bankruptcy court requested the Gifford parties address the impact of the
Tenth Circuit’s Trierweiler decision on their case. After that supplemental
briefing, the bankruptcy court granted BANA’s summary judgment motion and
denied the Trustee’s.
V. Discussion
A. § 544(a) Strong-arm Power
This appeal presents facts that are nearly identical to those in Trierweiler.
The attorney for the Trustee is the same in both cases (although the
Trustee/Appellant is not), and he makes essentially the same arguments here that
have already been rejected in Trierweiler. The Trustee attempts to distinguish
Trierweiler by arguing that in that case, MERS was specifically designated as the
“nominee” of the loan’s owner, whereas here, MERS was simply designated the
“mortgagee.” He argues that this fact renders the Mortgage unenforceable under
the Wyoming statutes that require a trust or agency relationship to be disclosed in
the conveyance instrument.24 However, the Wyoming Supreme Court has already
rejected this argument, holding that failure to comply with the cited Wyoming
22
(...continued)
855-57 (Wyo. 2013) (determining the statutes upon which the Trustee relied
inapplicable to the present facts because they: 1) “apply only to instruments in
which the grantee is described as a trustee, agent, or as serving in any other
representative capacity”; and 2) “operate to protect third parties from conflicting
claims of principals and agents”).
23
Royal v. First Interstate Bank (In re Trierweiler), 570 Fed. App’x 766
(10th Cir. 2014).
24
See Wyo. Stat. §§ 34-2-122 and 34-2-123.
-8-
statutes does not render a mortgage unenforceable. 25 The statutes “operate to
protect third parties from conflicting claims of principals and agents (or the
conflicting claims of beneficiaries/trustees, or of the parties to any other
representative relationship);” not to protect the mortgagor. 26 Accordingly, this
purported distinction does not lead us to a different result.
The original recording in the county land records perfected the Mortgage,
and the record of that Mortgage provides constructive notice of the existence of a
prior lien on the property to all subsequent creditors and purchasers. 27 A
mortgage even the Trustee stipulates was properly perfected at its inception
cannot be avoided on the basis that the identities of all its assignees are not of
record.28 Since a properly recorded mortgage provides notice to everyone that the
described property is subject to a lien, it is not necessary to its enforcement that
all subsequent transfers of it or the underlying note be of record. Neither
prospective property buyers nor potential creditors of the property owner need to
know the precise identity of either a mortgage’s equitable owner or note holder in
order to decide whether or not to consummate a transaction with the property
owner. Statutes that do require mortgage assignments be recorded are not
intended to protect such parties. Instead, those statutes “are intended to govern
priorities between lenders, not the validity of liens.”29 Consequently, such
statutes do not invalidate mortgages, as the Trustee asserts. Rather, they simply
determine the rights of those claiming an interest in the mortgage.
25
In re Gifford, 330 P.3d at 855.
26
Id. at 857.
27
Dep't of Revenue & Taxation v. First Wyoming Bank, N.A., 718 P.2d 31, 34
(Wyo. 1986) (mortgagee perfects its interest in land by recording the mortgage).
See also Wyo. Stat. § 34-2-109 (2009).
28
Trierweiler 1, 484 B.R. at 795; Trierweiler 2, 570 Fed. App’x at 771-73.
29
Trierweiler 1, 484 B.R. at 795.
-9-
The Trustee also argues, as his counsel also unsuccessfully argued in both
Trierweiler appeals, that assignment of a mortgage to a party that is not also the
holder of the underlying promissory note results in a “split” of the note from the
mortgage that renders the mortgage unenforceable and the note unsecured.
Pursuant to that premise, he argues the Mortgage is subject to avoidance using his
§ 544(a) “strong-arm” powers. However, this split note theory was specifically
and emphatically rejected by the Tenth Circuit in Trierweiler, 30 which is not only
binding precedent in this Circuit, but is undistinguishable since it is based on the
same Wyoming law that is applicable here.
In Wyoming, a mortgage is “perfected” by recording it with the appropriate
county clerk31 and, again, this Trustee never disputes that the Mortgage was
properly recorded in 2006. Perfected mortgages provide constructive notice of
the existence of a lien, and such notice prevents any subsequent purchaser from
qualifying as a “bona fide purchaser.” Consequently, constructive notice
precludes a bankruptcy trustee’s avoidance of a perfected lien using § 544(a)’s
strong arm powers. 32
30
Trierweiler 2, 570 Fed. App’x at 773 (noting it is a “fundamental rule that
the security follows the note”); Trierweiler 1, 484 B.R. at 792 (same). The split-
note theory has been rejected in many other jurisdictions, as well. See, e.g.,
Harris Cty. v. MERSCORP Inc., No. 14-10392, 2015 WL 3937927, at *13 (5th
Cir. June 26, 2015) (rejecting split note theory under Texas law); Scheider v.
Deutsche Bank Nat’l Trust Co., 572 F. App’x 185, 190 (4th Cir. 2014) (same,
South Carolina law); Robinson v. Am. Home Mortg. Servicing, Inc. (In re Mortg.
Elec. Registration Sys., Inc.), 754 F.3d 772, 786 (9th Cir. 2014) (same, Nevada
law); Macon Cty. v. MERSCORP, Inc., 742 F.3d 711, 712 (7th Cir. 2014) (same,
Illinois law); Culhane v. Aurora Loan Servs., 708 F.3d 282, 292 (1st Cir. 2013)
(same, Massachusetts law); PHH Mortg. Corp. v. Garner, No. A-2920-11T1, 2013
WL 2459868, at *6 (N.J. Super. Ct. App. Div. June 10, 2013) (same, New Jersey
law); Commonwealth Prop. Advocates, LLC v. Mortgage Elec. Registration Sys.,
Inc., 263 P.3d 397, 402–04 (Utah Ct. App. 2011) (same, Utah law).
31
Dep't of Revenue & Taxation v. First Wyoming Bank, N.A., 718 P.2d at 34
(mortgagee perfects its interest in land by recording the mortgage). See also
Wyo. Stat. § 34-2-109 (2009).
32
Trierweiler 2, 570 Fed. Appx. at 773; Hamilton v. Wash. Mut. Bank FA (In
(continued...)
-10-
The recorded Mortgage gave notice to everyone, including prospective
purchasers and creditors, that Gifford’s property was subject to a lien. Because
this Trustee thus had constructive notice of the Mortgage, he cannot qualify as a
hypothetical bona fide purchaser and thus he cannot avoid the Mortgage under
§ 544(a)(3). 33
B. § 547(b) Preference
The Trustee also argues that he can avoid MERS’ assignment of the
Mortgage to BAC as a preferential transfer under § 547(b). That provision allows
a bankruptcy trustee to avoid a “transfer of an interest of the debtor in property”
that meets other requirements, in particular, debtor’s insolvency when the transfer
occurred and the timing of the transfer with respect to the petition date. But this
Court’s analysis of such transfers in Trierweiler is equally applicable here. In
considering essentially the same language as it appears in § 544(a)—“may avoid
any transfer of property of the debtor...,” this Court specifically held that transfers
of mortgages are not transfers of an interest of the debtor in property34 because
debtors have no property interest in their own perfected mortgages.35 As a result,
we affirm this part of the bankruptcy decision, as well.
32
(...continued)
re Colon), 563 F.3d 1171, 1186 (10th Cir. 2009); Loyd v. Ball (In re Dailey), 463
B.R 142, Adv. No. 08-01010, 2009 WL 2431254, at *2-*4 (10th Cir. BAP Aug.
10, 2009).
33
Id.
34
The transfer of a mortgage by the mortgagee is distinguishable from the
debtor's voluntary or involuntary transfer of an interest in the real property itself,
such as by the initial grant of a mortgage on the property or the perfection of the
lien of the mortgage.
35
Trierweiler 1, 484 B.R. at 797 (noting that the trustee’s argument ignored
the fact that when the note was transferred—there to Fannie Mae—it was an asset
of the creditor that was being transferred, i.e., merely an assignment from one
creditor to another, not a transfer of the debtor’s property). Sections 544(a) and
547(b) both expressly require a transfer of the debtor’s property. Although a
mortgage may give certain rights to a debtor, they are not property rights that can
preclude transfer of that mortgage.
-11-
VI. CONCLUSION
The issues presented by the Trustee in this case were resolved by the Tenth
Circuit Court of Appeals in its Trierweiler 2 decision. Under Wyoming law, a
note holder’s use of MERS as the mortgagee on a mortgage does not render the
mortgage ineffective or the note unsecured, whether or not MERS is expressly
named as a “nominee” (or “agent”) of the note holder on the face of the mortgage.
In addition, a trustee may not use the strong-arm powers under § 544(a) to avoid a
properly perfected mortgage. Finally, a debtor who grants a mortgage on her
property does not retain an “interest in property” in that mortgage that a trustee
can avoid under § 547(b); the mortgage may be freely transferred without
becoming avoidable. We therefore affirm the bankruptcy court’s summary
judgment in BANA’s favor.
-12-