James Scheider, Jr. v. Deutsche Bank National Trust ( 2014 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-1821
JAMES P. SCHEIDER, JR.; TAFFY G. SCHEIDER,
Plaintiffs – Appellants,
v.
DEUTSCHE BANK NATIONAL TRUST COMPANY, as Trustee of the
IndyMac INDA Mortgage Loan 2006−AR2 Mortgage Pass−Through
Certificates, Series 2006−AR2 under the Pooling and
Servicing Agreement dated August 1, 2006; INDYMAC MORTGAGE
SERVICES; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS,
INCORPORATED; ONEWEST BANK, F.S.B.,
Defendants – Appellees,
and
INDYMAC BANK FEDERAL BANK; MERS, INCORPORATED; MORTGAGE
NETWORK INCORPORATED; INTERNAL REVENUE SERVICE; JOHN DOE
1−1000, inclusive, representing a class of unknown persons
who claim or have the right to claim an interest in certain
real property located in Beaufort County, South Carolina;
INDYMAC MBS INCORPORATED,
Defendants.
Appeal from the United States District Court for the District of
South Carolina, at Beaufort. Sol Blatt, Jr., Senior District
Judge. (9:11-cv-00395-SB)
Argued: April 11, 2014 Decided: May 21, 2014
Before MOTZ, DIAZ, and FLOYD, Circuit Judges.
Affirmed by unpublished per curiam opinion.
ARGUED: Antonia T. Lucia, Roberts Vaux, VAUX & MARSCHER, PA,
Bluffton, South Carolina, for Appellants. Jeffrey Michael
Anderson, BRADLEY ARANT BOULT CUMMINGS LLP, Birmingham, Alabama,
for Appellees. ON BRIEF: Mark S. Berglind, VAUX & MARSCHER, PA,
Bluffton, South Carolina, for Appellants. B. Rush Smith, III,
Brian P. Crotty, Sarah B. Nielsen, NELSON MULLINS RILEY &
SCARBOROUGH LLP, Columbia, South Carolina; Marc James Ayers,
BRADLEY ARANT BOULT CUMMINGS LLP, Birmingham, Alabama, for
Appellees.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
James and Taffy Scheider stopped paying their mortgage in
2010. They believe that the securitization of their mortgage
has relieved them of the obligation to pay. Accordingly, the
Scheiders brought suit asserting a host of claims and seeking a
declaratory judgment that the entities owning and servicing
their mortgage could not enforce it. The district court
disagreed, granting summary judgment to the defendants. Finding
that securitization--a process to which the Scheiders were not
party--cannot trump the law governing the mortgage documents
themselves, we affirm.
I.
A.
In 2006, the Scheiders refinanced their South Carolina
home. They signed an adjustable-rate note for $1.178 million
plus interest, payable to the lender, Mortgage Network. The
note, executed in South Carolina, provides that Mortgage Network
is entitled to transfer the note and that “anyone who takes this
Note by transfer and who is entitled to receive payments under
this Note is called the ‘Note Holder.’” J.A. 251.
The Scheiders simultaneously executed a mortgage securing
the note. The mortgage provides that Mortgage Electronic
Registration Systems, Inc., commonly known as MERS, would act as
3
the nominee for Mortgage Network. The Scheiders “agree[d] that
MERS holds only legal title to the interests granted by [the
Scheiders] in this Security Instrument, but, if necessary to
comply with law or custom, MERS . . . has the right . . . to
foreclose and sell the Property; and to take any action required
of Lender.” J.A. 262. The mortgage is “governed by federal law
and the law of the jurisdiction in which the Property is
located.” J.A. 268. The mortgage was recorded in Beaufort
County, South Carolina.
Mortgage Network subsequently transferred the Scheiders’
note--the first of several such transactions. At some point,
Mortgage Network endorsed the note, writing “Pay to the order of
______ Without Recourse.” J.A. 340. That blank was later
filled with “IndyMac Bank F.S.B.” J.A. 344. IndyMac Bank, FSB,
then endorsed the note, writing simply “Pay To The Order Of” and
“Without Recourse.” J.A. 344. 1 The note is now in the
possession of Deutsche Bank.
1
The Scheiders argue that there are “three versions” of the
note and express confusion as to which “version” is the real
thing. The defendants have explained that the Joint Appendix
contains three copies of the note from various points in time:
the final “version” in the J.A., they aver, is simply a copy of
the real note as it presently exists. The district court found
that it “ha[d] been presented with multiple versions of the
negotiable instrument” and thus “believe[d] that a genuine issue
of material fact exists with respect to Deutsche Bank’s
foreclosure counterclaim.” J.A. 417. We, however, find that
the Scheiders have produced no evidence to support their bare
(Continued)
4
At least some of these transfers occurred during the
securitization of the loan, which involved its transfer into a
trust. 2 That securitization was effectuated by a Pooling and
Servicing Agreement, which is governed by New York law. The
Scheiders are not parties to the PSA. Rather, the PSA provides
that the depositor (at this point, IndyMac MBS) “will deliver to
the Trustee [Deutsche Bank] within the time periods specified
. . . [t]he original Mortgage Note, endorsed by manual or
facsimile signature in blank in the following form: ‘Pay to the
order of ______ without recourse,’ with all intervening
endorsements showing a complete chain of endorsement from the
originator to the Person endorsing the Mortgage Note.” J.A.
434. According to the Scheiders, the “time period[] specified”
is thirty days, ending on August 30, 2006.
The Scheiders also assert that, as a condition of its REMIC
(real estate mortgage investment conduit) tax status, the trust
assertion that the later iterations of the note are somehow
misleading. In the absence of any basis for doubting the
defendants’ eminently reasonable explanation, we decline to find
a “genuine dispute as to any material fact” regarding the note’s
negotiation. Fed. R. Civ. P. 56(a).
2
In securitization, numerous mortgages are grouped together
into a special purpose vehicle, such as a trust. The vehicle
then issues mortgage-backed securities to investors. Some
special purpose vehicles qualify as real estate mortgage
investment conduits, or REMICs, which receive favorable tax
treatment.
5
must receive all related mortgages within a three-month clean-up
period, ending before December 2006. But MERS did not assign
the mortgage to Deutsche Bank as trustee until August 2011.
Meanwhile, the Scheiders applied for a loan modification,
but were found ineligible. In June 2010, the Scheiders stopped
making their loan payments altogether.
B.
The Scheiders then filed suit in South Carolina state
court. They raised an array of claims, including actions for a
declaratory judgment and to quiet title, against the entities
that held and serviced their mortgage. The defendants removed
the case to federal court, invoking federal question
jurisdiction. Deutsche Bank brought a foreclosure counterclaim.
The district court granted the defendants’ motion for
summary judgment as to all the Scheiders’ claims. See Scheider
v. Deutsche Bank Nat’l Trust Co., No. 9:11-cv-395-SB (D.S.C.
Apr. 11, 2013). The court denied summary judgment as to the
foreclosure counterclaim, which Deutsche Bank voluntarily
dismissed without prejudice. The Scheiders moved for
reconsideration, which the court denied. This appeal followed.
II.
The Scheiders argue primarily that the assignment of their
mortgage five years after the trust’s closing date violated the
6
terms of the PSA and is thus void. As a result, they contend,
Deutsche Bank does not properly own their mortgage and is unable
to enforce it. 3
But we need not evaluate the impact of the PSA. Under
South Carolina law and the terms of the instruments themselves,
Deutsche Bank holds both the note and the mortgage. As a
result, once the Scheiders defaulted on their mortgage, the bank
was entitled to enforce those instruments. We need go no
further in affirming the district court’s judgment.
A.
We review the district court’s decision to grant summary
judgment de novo. Cosey v. Prudential Ins. Co. of Am., 735 F.3d
161, 170–71 (4th Cir. 2013).
B.
We first determine the law that will guide our
interpretation of the note and mortgage. Where, as here, “a
federal court addresses state law claims under its pendent
jurisdiction,” the court “must apply the choice of law rules of
the state in which it sits”--in this case, South Carolina. In
3
As the district court noted, the Scheiders have admitted
that if we “find[] that the bank has the right to foreclose,
then their [other] claims would ‘go out the window.’” J.A. 417
n.5.
7
re Merritt Dredging Co., 839 F.2d 203, 205 (4th Cir. 1988).
South Carolina law provides that
when a transaction bears a reasonable relation to this
State and also to another state or nation the parties
may agree that the law either of this State or of
another state or nation shall govern their rights and
duties. Failing an agreement this title applies to
transactions bearing an appropriate relation to this
State.
S.C. Code § 36-1-105(1). “[T]o determine whether [a
transaction] bears an ‘appropriate relation’ to South Carolina,”
we apply “the most significant relationship test.” Merritt
Dredging, 839 F.2d at 207.
In this case, the mortgage is expressly governed “by
federal law and the law of the jurisdiction in which the
Property is located”--South Carolina. J.A. 268. The note does
not contain a governing-law provision, leading us to apply the
most significant relationship test. Given that the Scheiders
are South Carolina residents, their property is located in South
Carolina, and the note was executed in South Carolina, the
answer is clear. South Carolina law governs both instruments.
C.
We next conclude that under South Carolina law, Deutsche
Bank is the proper holder of the Scheiders’ note. The bank
undisputedly possesses the note, and that possession is
reconcilable with the note’s course of negotiation.
8
Under South Carolina law, “[i]f an indorsement is made by
the holder of an instrument, whether payable to an identified
person or payable to bearer, and the indorsement identifies a
person to whom it makes the instrument payable, it is a ‘special
indorsement.’ When specially indorsed, an instrument becomes
payable to the identified person and may be negotiated only by
the indorsement of that person.” S.C. Code § 36-3-205(a).
If, however, the endorsement is not “special,” it is a
“blank endorsement.” Id. § 36-3-205(b). “When indorsed in
blank, an instrument becomes payable to bearer and may be
negotiated by transfer of possession alone until specially
indorsed.” Id.
“The holder may convert a blank indorsement that consists
only of a signature into a special indorsement by writing, above
the signature of the indorser, words identifying the person to
whom the instrument is made payable.” Id. § 36-3-205(c). If,
for instance, there is an instrument “on which the space for the
name of the payee is left blank,” it “is an instrument but it is
incomplete.” Id. § 36-3-115 cmt. 2. The instrument is still
“enforceable in its incomplete form and it is payable to bearer
because it does not state a payee.” Id.
Analyzing similar Virginia statutes, we have concluded that
“[t]he upshot of these provisions is clear.” Horvath v. Bank of
New York, N.A., 641 F.3d 617, 621 (4th Cir. 2011). That is,
9
“[n]egotiable instruments like mortgage notes that are endorsed
in blank may be freely transferred. And once transferred, the
old adage about possession being nine-tenths of the law is, if
anything, an understatement. Whoever possesses an instrument
endorsed in blank has full power to enforce it.” Id.
The language of the note itself accords with these
statutes, providing that “anyone who takes this Note by transfer
and who is entitled to receive payments under this Note is
called the ‘Note Holder.’” J.A. 251; see also Horvath, 641 F.3d
at 622 (quoting identical language and explaining that “these
provisions do little to suggest that the parties intended to
depart from the Virginia code’s permissive approach to transfers
[but rather] suggest precisely the opposite”).
The Scheiders’ note was first endorsed in blank by the
lender, Mortgage Network. See J.A. 340. Under South Carolina
law, this act turned the note into bearer paper, negotiable by
possession alone. At some point, the blank was filled in with
“IndyMac Bank F.S.B.” See J.A. 344. The note then became order
paper, and only IndyMac, FSB, could enforce it. But IndyMac,
FSB, then endorsed the note, again in blank--converting it to
bearer paper once more. See J.A. 344. Thus, the note may be
enforced by whoever possesses it, and it is undisputed that
Deutsche Bank possesses it now.
10
D.
South Carolina has long upheld “the familiar and
uncontroverted proposition . . . that the assignment of a note
secured by a mortgage carries with it an assignment of the
mortgage, but that the assignment of the mortgage alone does not
carry with it an assignment of the note.” Hahn v. Smith, 154
S.E. 112, 115 (S.C. 1930); see also Ballou v. Young, 20 S.E. 84,
85 (S.C. 1894) (“The transfer of a note carries with it a
mortgage given to secure payment of such note.”). Thus, because
Deutsche Bank is the holder of the note, it is also the holder
of the mortgage.
This, too, accords with our conclusions in Horvath. In
response to Horvath’s arguments that the note and mortgage
should be viewed separately, we found that in Virginia “the deed
of trust follows the note.” 641 F.3d at 624. “Indeed,” we
opined, “common sense suggests that things could not be any
other way.” Id. If we permitted the split-the-note theory the
Scheiders propose, “there would be little reason for notes to
exist in the first place,” as “[o]ne of the defining features of
notes is their transferability.” Id. The idea that
“transferring a note would strip it from the security that gives
it value and render the note largely worthless . . . cannot be--
and is not--the law.” Id.
11
The Scheiders contend that this longstanding rule is
unsuited to the complex securitization of mortgages so prevalent
today. They cite to recent orders from South Carolina’s trial
courts suggesting that ownership of the note alone is
insufficient to initiate a foreclosure. See Deutsche Bank Nat’l
Trust Co. v. Heinrich, No. 2011-CP-10-1060 (S.C. Ct. Com. Pl.
July 31, 2013); One West Bank, FSB v. Torrence, No. 2010-CP-32-
4954 (S.C. Ct. Com. Pl. July 25, 2012). But we are not
persuaded that these trial court opinions demonstrate that South
Carolina has revisited its law on negotiable instruments--
especially as its higher courts continue to apply it. See Bank
of America, N.A. v. Draper, 746 S.E.2d 478, 481 (S.C. Ct. App.
2013) (citing Hahn and Ballou).
E.
South Carolina law thus settles the question. As we
explained in Horvath, the “note plainly constitutes a negotiable
instrument under [South Carolina law]. That note was endorsed
in blank, meaning it was bearer paper and enforceable by whoever
possessed it. And [Deutsche Bank] possessed the note at the
time it attempted to foreclose on the property. Therefore, once
[the Scheiders] defaulted on the property, [South Carolina] law
12
straightforwardly allowed [Deutsche Bank] to take the actions
that it did.” 641 F.3d at 622 (internal citations omitted). 4
III.
For the foregoing reasons, we affirm the district court’s
judgment.
AFFIRMED
4
The Scheiders contend that the PSA somehow overrides these
principles. But they fail to explain “how a later agreement
(the PSA)--to which the Debtor[s are] not a party--could alter
the nature of the contract and instrument [they] executed . . .
earlier.” In re Walker, 466 B.R. 271, 284 (Bankr. E.D. Pa.
2012).
13