DocketNumber: Bankruptcy No. 10-10993-WCH; Adversary No. 10-1092
Citation Numbers: 462 B.R. 347
Judges: Hillman
Filed Date: 1/4/2012
Status: Precedential
Modified Date: 11/22/2022
MEMORANDUM OF DECISION
I. INTRODUCTION
The matters before the Court are the Trustee’s Motion for Partial Summary Judgment (the “Motion”) filed by Warren Agin (the “Trustee”), the Chapter 7 trustee of the estate of James D. Bower (the “Debtor”), the Defendants’ Opposition to Trustee’s Motion for Partial Summary Judgment and Cross-Motion for Summary Judgment (the “Cross-Motion”) filed by the defendants Mortgage Electronic Registration Systems, Inc. (“MERS”) and The Bank of New York Mellon
II. BACKGROUND
The facts relevant to the present dispute are few and undisputed. On or about October 26, 2005, the Debtor, in connection with a refinancing, granted the Mortgage with respect to real property located at 240 Bradford Street, Unit 2, Provincetown, Massachusetts (the “Property”) to MERS as nominee for Pride Mortgage LLP.
BNYMellon filed an interlocutory appeal and an election to have the appeal heard by the District Court, but the leave was ultimately denied.
On August 22, 2011, the Trustee filed the Motion seeking judgment as a matter of law under 11 U.S.C. §§ 550(a)(1) and (2) from MERS and BNYMellon. The Defendants filed the Cross-Motion on September 26, 2011, and the Reply followed on September 29, 2011. On September 30, 2011, I held a hearing on the cross-motions and at its conclusion, took both under advisement.
III. POSITIONS OF THE PARTIES
The Trustee
Since I previously held that the Trustee may avoid the Mortgage, he contends that he may now recover a single satisfaction under 11 U.S.C. § 550 from either MERS or BNYMellon on account of the avoided Mortgage. First, relying on Bonded Fin. Servs. v. European Am. Bank,
Next, The Trustee argues that he can recover from BNYMellon as an immediate transferee under 11 U.S.C. § 550(a)(2) because it had actual knowledge of the defect and did not act in good faith. He contends that the Acknowledgment contained a material defect on its face and a reasonable person would have been induced to investigate it further. Therefore, the Trustee asserts that I should impute knowledge of the material defect to BNYMellon because it had the facts necessary to discover it. At very least, he argues that BNYMellon lacked good faith by failing to investigate the matter.
The Defendants
MERS argues that it was not an initial transferee because it is an entity acting merely as a conduit in the ordinary course of business. While MERS concedes that it had a legally sufficient interest to foreclose under Massachusetts law, it asserts that its interest is limited by its fiduciary duty to act on behalf of the note holder. Under the MERS rules, it states that its nominal authority may only be exercised at the direction of the note holders or their servi-cers.
BNYMellon contends that the Trastee cannot recover from it because it is a good faith transferee that took the Mortgage for value without knowledge of the Trustee’s claim. Relying on In re Bressman
IV. DISCUSSION
1. The Summary Judgment Standard
Pursuant to Fed.R.Civ.P. 56, “the court shall grant summary judgment if the mov-ant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
The party seeking summary judgment “always bears the initial responsibility ... of identifying those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,’ which demonstrate the absence of a genuine issue of material fact.”
2. Count III — Liability for Avoided Transfer Against MERS
Section 550(a)(1) of the Bankruptcy Code provides, in relevant part, that “to the extent that a transfer is avoided under section 544 ... the trustee may recover, for the benefit of the estate ... the value of such property, from ... the initial transferee of such transfer....”
The Bonded court reasoned that a “mere conduit” could not be deemed a transferee and that merely having the ability to control funds (as principals of companies often do) does not automatically render the possessor a transferee. [Bonded, 838 F.2d] at 893-94. “When A*353 gives a check to B as agent for C, then C is the ‘initial transferee’; the agent may be disregarded.” Id. at 893. “In order to be a transferee of the debtor’s funds, one must (1) actually receive the funds, and (2) have full dominion and control over them for one’s own account, as opposed to receiving them in trust or as agent for someone else.” Rupp v. Markgraf, 95 F.3d at 942.
Since the Seventh Circuit’s decision in Bonded, it has become well settled that transferee status under § 550(a)(1) necessitates the transferee’s “dominion and control,” and that “dominion and control” refers to legal, as opposed to mere physical possession of the property transferred. Bowers, 99 F.3d at 156 (“[T]he dominion and control test set forth in Bonded requires legal dominion and control.”); Security First Nat. Bank v. Brunson (In re Coutee), 984 F.2d 138, 141 n. 4 (5th Cir.1993) (“Dominion and control means legal dominion and control.”). Thus, to be held to the standard of the initial transferee, a transferee must have the legal right to use the funds to whatever purpose he or she wishes, be it to invest in “lottery tickets or uranium stocks.” Bonded, 838 F.2d at 894.32
The Trustee argues that MERS had “dominion and control” over the Mortgage because it held legal title. While it is true that MERS was the mortgagee of record, it held that mortgage as a “nominee” of the note holder. Despite the Trustee’s assertions to the contrary, this distinction is both significant and dispositive.
Judge Young of the United States District Court for the District of Massachusetts recently conducted a thorough examination of MERS in Culhane v. Aurora Loan Servs. of Nebraska.
By the very terms of the mortgage instrument, MERS holds only bare legal title to each mortgage registered on its system. Consistent with its status as holder of bare legal title to the mortgage, MERS further agrees to act at the direction of the note holder, who retains a beneficial interest in the mortgage. Thus, MERS is hardly a principal; at most, it is an agent.
The term “nominee” in fact connotes a narrow form of agency: a “person designated to act in place of another, usu[ally] in a very limited way.” The MERS Rules likewise define “nominee” as a “limited agent,” although this appears to be a recent addition. Perhaps even more fitting to describe MERS’s role in the mortgage transaction is the second definition of “nominee” given in Black’s Law Dictionary: a “party who holds bare legal title for the benefit of others.” By holding bare legal title to mortgages for the purpose of recording them in its name, MERS allows for the underlying notes, which carry with them the beneficial interests in the mortgages, to be transferred freely and without clouding title.
As discussed above, the common law of Massachusetts permits the practice of splitting the mortgage from the debt that it secures (at least prior to foreclosure). Such a split results in the mortgagee holding legal title to the mortgage in trust for the note holder, who has an equitable right to obtain an assignment of the mortgage. The mortgagee is thus a mortgagee in a nominal sense only; its*354 rights are limited by its obligation as trustee. This is precisely the same scenario created by the standard MERS mortgage contract, irrespective of its use of the term “nominee” over “trustee.” Thus, the law is held to imply a trustee-beneficiary relationship between MERS and the note holder.34
With respect to MERS’s authority to assign mortgages, Judge Young explained that:
[W]here a mortgagee holds legal title to the mortgage in trust for the note holder, and where the note holder desires to foreclose, “law or custom” in fact necessitates that, prior to initiating foreclosure proceedings, the mortgagee must assign its interest to the note holder or the note holder’s servicing agent. The power to assign the mortgage’s legal title to its beneficial owner is arguably the one power that must be bestowed on a mortgagee who holds only legal title. Because the mortgagee holds the title in trust for the note holder, it may transfer that title only at the note holder’s request or by decree of court. In this sense, the mortgagee’s power of assignment is more akin to a duty that it owes as trustee. But, regardless whether it is best termed a power or a duty, equity requires that the holder of bare legal title to a mortgage have the capacity to assign it to the note holder or the note holder’s loan servicer, so that a valid foreclosure may be effectuated.35
With Judge Young’s observations in mind, I find that MERS was not an initial transferee because it did not have “dominion and control” over the Mortgage. As previously stated, the Seventh Circuit defined “dominion and control” as “the right to put the money [or asset] to one’s own purposes.”
3. Count IV — Liability for Avoided Transfer Against BNYMellon
Pursuant to 11 U.S.C. § 550(a)(2), the Trustee also “may recover, for the benefit of the estate, ... the value of such property, from ... any immediate or mediate transferee....”
“Knowledge,” as that term is used in 11 U.S.C. § 550(b)(1), does not mean “constructive notice.”
*355 Venerable authority has it that the recipient of a voidable transfer may lack good faith if he possessed enough knowledge of the events to induce a reasonable person to investigate. No one supposes that “knowledge of voidability” means complete understanding of the facts and receipt of a lawyer’s opinion that such a transfer is voidable; some lesser knowledge will do. Some facts strongly suggest the presence of others; a recipient that closes its eyes to the remaining facts may not deny knowledge. But this is not the same as a duty to investigate, to be a monitor for creditors’ benefit when nothing known so far suggests that there is a fraudulent conveyance in the chain. “Knowledge” is a stronger term than “notice.” A transferee that lacks the information necessary to support an inference of knowledge need not start investigating on his own.41
Therefore, the issue before me is whether BNYMellon was aware of facts that would have alerted a reasonable person to the avoidability of the Mortgage.
At the September 30, 2011, hearing, BNYMellon argued that it had no such knowledge:
[U]nder the law as it was back when this transfer was first made back in 2006 with respect to this assignment, the law as it was, Bank of New York had no reason to know that at some later time a Chapter 7 Trustee could actually avoid the mortgage because of something I believe is a latent effect [sic] in that mortgage, that would not necessarily, under the law as it was, give rise and cause the Bank of New York to make further inquiry.
I believe that they — at the time, they were reasonable to rely on the fact that this was something presented before an officer, a Notary at the time, and could rely on, at the time, that this was not a defective document, and otherwise, why wouldn’t the mortgage be completely void at that time?42
This argument is premised on two assertions: (1) that Judge Feeney’s decision in In re Giroux is an unanticipated change in the underlying law; and (2) that the defect in the Acknowledgment was latent. Both of these assertions are false.
In In re Mbazira,
The debtor offers no persuasive argument as to how Giroux may be considered an unanticipated change in the substantive law governing the case. True, the bankruptcy court was called upon to predict whether the Supreme Judicial Court would consider the omission of a mortgagor’s name from the acknowledgment a material defect under Massachusetts law. But in doing so, it was guided by extensive precedent from Massachusetts and other jurisdictions. Had the debtor conducted research and identified the alleged defect in her mortgage prior to confirmation, she too could have raised the arguments made by the Gir-oux debtor under the existing governing*356 statutes and body of controlling case law. Under the circumstances, it was not an abuse of discretion to conclude that Giroux did not effect [sic] an unanticipated change in the law sufficient to overcome the clear basis for judicial es-toppel.44
Accordingly, while In re Giroux may have been the first case in this district to hold that the absence of a mortgagor’s name from an acknowledgment is a material defect, it was based entirely on existing law.
Turning to the second assertion, the defect in the Acknowledgment clearly was not hidden. To the contrary, it is apparent on its face that the Debtor’s name is missing from the Acknowledgment and BNYMellon cannot credibly argue otherwise. Therefore, by raising this argument, BNYMellon implicitly suggests that the defect was undiscoverable prior to In re Giroux. This fails for the same reason as the last — In re Giroux is not an unanticipated change in the law. In sum, given the patent defect in the Acknowledgement and that “Massachusetts is a strict formality state,”
V. CONCLUSION
In light of the foregoing, I will enter an order granting the Motion with respect to Count IV and denying it with respect to Count III, and granting the Cross-Motion with respect to Count III and denying it with respect to Count IV.
. f/k/a The Bank of New York as Successor Trustee to JPMorgan Chase Bank, N.A., as Trustee for the Certificate holders of Structured Asset Mortgage Investments II Trust 2006-AR4 Mortgage Pass-Through Certificates, Series 2006-AR4.
. See Agin v. Mortg. Elec. Registration Sys., Inc. (In re Bower), No. 10-1092, 2010 WL 4023396 (Bankr.D.Mass. Oct. 13, 2010).
. LR 56-1 Statement of Material Facts, Docket No. 97 at ¶ 5.
. In re Bower, 2010 WL 4023396 at *1.
. LR 56-1 Statement of Material Facts, Docket No. 97 at ¶ 5.
.Id. at ¶¶ 12-15. The Defendants dispute this fact "to the extent that it is an incomplete representation of the chain of transfer of the subject mortgage loan.” Defendants’ LR 56.1 Statement of Material Facts, Docket No. 107 at ¶ 1. According to the Declaration of Shari Middlebrooks, the HL Senior Research Specialist with JPMorgan Chase Bank, N.A., ”[o]n or about June 30, 2006, the Bank entered into a Pooling and Servicing Agreement ('PSA') whereby it became the trustee for the certificateholders of Structured Asset Mortgage Investments II Trust 2006-AR4 Mortgage Pass-Through Certificate Series 2006-AR4 ('Trust'). The mortgage and note of the Bower Loan was conveyed and assigned to
. LR 56-1 Statement of Material Facts, Docket No. 97 at ¶ 11.
. Id. at ¶ 16.
. Id. at ¶ 17.
. Id. at ¶¶ 18-21.
. Agin v. Mortg. Elec. Registration Sys., Inc. (In re Giroux), No. 08-14708, 2009 WL 1458173 (Bankr.D.Mass. May 21, 2009).
. Mortg. Elec. Registration Sys., Inc. v. Agin, No. 09-CV-10988, 2009 WL 3834002 (D.Mass. Nov. 17, 2009).
. In re Bower, 2010 WL 4023396 at *1.
. LR 56-1 Statement of Material Facts, Docket No. 97 at ¶¶ 22, 26.
. Id. at ¶¶ 23-24.
. Id. at ¶ 25.
. Bonded Fin. Servs. v. European Am. Bank, 838 F.2d 890 (7th Cir.1988).
. Wasserman v. Bressman (In re Bressman), 327 F.3d 229 (3d Cir.2003).
. Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348 (8th Cir.1995).
. Fed.R.Civ.P. 56(a) made applicable in adversary proceedings by Fed. R. Bankr.P. 7056.
. Triangle Trading Co. v. Robroy Indus., Inc., 200 F.3d 1, 2 (1st Cir.1999) (quoting Smith v. F.W. Morse & Co., Inc., 76 F.3d 413, 427 (1st Cir.1996)).
. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); McCarthy v. Northwest Airlines, Inc., 56 F.3d 313, 314-315 (1st Cir.1995); Nereida-
. Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 764 (1st Cir.1994).
. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. at 248, 106 S.Ct. 2505.
. Triangle Trading Co., 200 F.3d at 2 (quoting Morris v. Gov’t Dev. Bank of Puerto Rico, 27 F.3d 746, 748 (1st Cir.1994)).
. Griggs-Ryan v. Smith, 904 F.2d 112, 115 (1st Cir.1990) (quoting Medina-Munoz v. R.I. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)).
. Nicolo v. Philip Morris, Inc., 201 F.3d 29, 33 (1st Cir.2000).
. Reich v. John Alden Life Ins. Co., 126 F.3d 1,6 (1st Cir. 1997).
. 11 U.S.C. § 550(a)(1).
. Richardson v. United States (In re Anton Noll, Inc.), 277 B.R. 875, 878 (1st Cir. BAP 2002) (citing Bonded Fin. Servs. v. European Am. Bank, 838 F.2d at 893). See also Christy v. Alexander & Alexander of New York, Inc. (In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey), 130 F.3d 52 (2d Cir. 1997); Bowers v. Atlanta Motor Speedway (In re Southeast Hotel Prop. Ltd. P'ship.), 99 F.3d 151 (4th Cir.1996); Schafer v. Las Vegas Hilton Corp. (In re Video Depot, Ltd.), 127 F.3d 1195 (9th Cir. 1997); Rupp v. Markgraf 95 F.3d 936 (10th Cir.1996); Nordberg v. Arab Banking Corp. (In re Chase & Sanborn Corp.), 904 F.2d 588 (11th Cir.1990).
. Bonded Fin. Servs. v. European Am. Bank, 838 F.2d at 893.
. In re Anton Noll, Inc., 277 B.R. at 879.
. Culhane v. Aurora Loan Servs. of Nebraska, - F.Supp.2d -, 2011 WL 5925525 (D.Mass. Nov. 28, 2011).
. Id. at *14-15 (citations and footnote omitted).
. Id. at *16 (citation omitted) (emphasis added).
. Bonded Fin. Servs. v. European Am. Bank, 838 F.2d at 893.
.11 U.S.C. § 550(a)(2).
. 11 U.S.C. § 550(b)(1).
. Smith v. Mixon, 788 F.2d 229, 232 (4th Cir.1986).
. In re Sherman, 67 F.3d at 1357; see also In re Bressman, 327 F.3d at 236.
. Bonded Fin. Servs. v. European Am. Bank, 838 F.2d at 897-898 (citations omitted).
. Trans. Sept. 30, 2011 at 6:7-22.
.Mbazira v. Litton Loan Serv'g, LLP (In re Mbazira), No. 10-11831-FDS, 2011 WL 3208033 (D.Mass. July 27, 2011).
. Id. at *4.
. Mortg. Elec. Registration Sys., Inc. v. Agin, 2009 WL 3834002 at *2.