Saturday, December 13, 2008

Who's On First? (Stop that Foreclosure Now!)

Bankruptcy Court Decision Pronounces Holder of Note and Real Party in Interest Requirements For Foreclosure

In both Chapter 13 and Chapter 7, real estate lenders can not continue foreclosure proceedings against real estate without first getting permission from the Bankruptcy Court. This permission is most commonly pursued by filing a motion for “relief of stay.” In other words, the lender requests the court to grant permission to continue their foreclosure proceedings against the real estate and relieve the lender from the restraining order as instituted under 11 USC 362. This bankruptcy Code provision prohibits any collection efforts against the debtor or property of the debtor once a bankruptcy case is filed.

Typically, a relief of stay motion is an expedient proceeding requiring little evidence before the bankruptcy court. In chapter 7, they are typically unopposed. In chapter 13, they are ether granted or resolved by an adequate protection order(stipulation between the debtor and lender to hold off relief of stay provided the debtor complies with getting current on the loan by a date certain).

Nevertheless, the requirement to move for relief of stay just got a little tougher, at least in one bankruptcy court in the Central District of California. On October 29, 2008, Judge Samuel Bufford rendered his decision in the Hwang Case.

In that case, Judge Bufford ruled that lenders need to meet both the substantive and procedural requirements in moving for relief of stay. More specifically, lenders must satisfy both 11 USC 362(d) of the Bankruptcy Code and Rule 17a of the Federal Rules of Civil Procedure.

Ironically, even though the Court found that only Indymac (who moved for relief of stay in the first place) could move forward on a foreclosure sale (since it could enforce the note by being in possession of the note with its endorsement, thus satisfying the holder requirements of CCC 3301(a)), it still was not entitled to relief of stay. Instead, Indymac’s ability to foreclose only satisfied the substantive requirements of 362(d) as being the “party in interest.”

Indymac failed, however, to satisfy the “real party in interest” requirement to move for relief of stay as required by FRCP 17a. This was because no one knew who the owner of the note was. Indymac never transferred the note upon sale, and admitted at trial that it sold the note and was no longer the owner. Instead, Indymac was servicing the note for some entity, but could not say for who. Accordingly, since the owner was not joined via FRCP 19 or did not ratify or move for relief as the original party in the action under 17a, the real party in interest requirement was not met, and the motion for relief of stay was denied.

This was a very ironic twist, since the Court agreed that Indymac was the proper party under California Law that could foreclose since it possessed the note with its endorsement. “Thus, the court holds that, notwithstanding the sale of the note, IndyMac remains the holder of the note and is entitled to enforce it.”

Yet, despite Indymac having the ability to foreclose under California Law, relief of stay could not be granted to Indymac because they admitted that they did not OWN the note. ”The court concludes that the real party in interest has not joined in the motion before the court. Indeed, neither the court nor IndyMac even knows who the real party in interest is. Pursuant to Rule 17(a)(3), the court must give IndyMac a reasonable amount of time to accomplish this joinder. Despite two continuances (totaling more than two months) to accomplish this joinder, IndyMac has refused to join the owner of the note in this motion. Thus, the motion must be denied on these grounds……….. IndyMac gives no explanation for its failure to join the owner of the note in this motion. The likely reason is that IndyMac does not know who the owner is, and thus cannot have any authority to join the owner voluntarily.”

So what can one take from this decision? If a lender attempts to move for relief of stay, be sure to make them prove that they meet the substantive and procedural requirements for a relief of stay action:

1) SUBSTANTIVE: They must prove they have the ability to foreclose (under California, that means they must possess the physical note and have it endorsed to them or their principal), and

2) PROCEDURAL: They must also actually own the note. If the note was securitized (sold in a pool of notes on wall street) that means the real party in interest is the Trustee of the securitization trust, not the servicing agent. See LaSalle Bank N.A. v. Nomura Asset Capital Corp., 180 F. Supp. 2d 465, 469-71 (S.D.N.Y 2001) (”LaSalle-Nomura”); accord, LaSalle Bank N.A. v. Lehman Bros. Holdings, Inc., 237 F. Supp. 2d 618, 631-34 (D. Md. 2002) (”LaSalle-Lehman”).

Since most relief of stay actions typically only meet one of these requirements, relief of stay should not be granted. The next hurdle, of course, is then attempting to convince your local Bankruptcy Judge to agree.Judge Bufford’s analysis.

Written by Michael G. Doan in Bankruptcy Law Network

In re Hwang is the 600 lb Gorilla in the Room - The MERS Debacle

The Mortgage Backed Securities ("MBS")industry (remember, "lenderless loans")created an electronic registration system for tracking purchase, sale and transfers of home ad other mortgages (promissory notes and their related security, mortgages or deeds of trust) and called it MERS.

The problem with MERS legally speaking is that while this facilitated the trading of mortgages as securitized intruments in vast numbers, this Wall Street driven device did not necessarily meet state by state requirements for the physical possession of documents by a real party in interest to foreclose on a defaulted mortgage This gives rise to a defense of "lack of standing to sue"

Foreclosure Defense and Loan Modification Significance

In addition to Reg Z, RESPA, HOEPA, "tortious making of loan" and servicing fraud legal analyses to determine the enforceability of any mortgage loan, an investigation into the actual "ownership" of the servicer or putative "lender" trying to foreclose must be done.

How to:

California Foreclosure Law

California Commercial Code

If you are considering a "loan service" company for your loan modification instead of representation by an attorney, it should be able to discuss these issues and defenses with you. If they don't, or don't give you a clear understanding of these issues, ask them why.

Being evicted after foreclosure? Tenant eviction law. State law in California gives you 60 days from foreclosure. Cities have additional laws that may assist you in staying longer, depending on your circumtances. Generally, it is just a matter of time if the new owner after foreclosure wont reach agreement to let you stay on.

California Court Forms

California Codes
(including Civil Procedure and Evidence)

California Rules of Court

Los Angeles County Superior Court Case Information

Federal Rules

(c) copyright New Dawn Law all rights reserved

No comments: