The foregoing is just my personal interpretation/opinion of the case and is not intended to be construed as legal advice or a substitute for legal advice. For specific questions consult a foreclosure and/or bankruptcy lawyer. Attorney Steve Vondran is licensed to practice law in California and Arizona. He is also a real estate broker in each state, and is listed on Neil Garfield’s Living Lies Websites under “lawyers who get it.” Jurisdictions can differ on their application and interpretation of legal cases and case law can, and does change over time.
California BK Case (Real Party in Interest): In re Hwang, 396 B.R. 757 (C.D. California 2008).
LINK: Here is a link to the Case Analysis: http://www.producethenoteattorney.com/2010/05/in-re-hwang-an-overview-of-motion-for-relief-from-automatic-stay-real-party-in-interest-and-constitutional-standing-requirements-in-a-california-bankruptcy-court/
I. Key Facts
This case involved a 376k loan originated by Mortgage IT, Inc. in 2007. The Borrower Hwang, gave a note to Mortgage IT and the loan was later transferred to Indymac Bank, FSB (no longer in business with assets sold to OneWest bank through the FDIC conservatorship). Indymac Bank was the “holder of the note” as they had physical possession of the note, but the note had been sold “through Freddie Mac” and presumably sold off to investors on Wall Street through a securitized trust.
So, Indymac had actual physical possession of the loan (apparently they produced an original copy at the stay hearing and also produced the Deed of Trust assigned from MERS), but the ownership of the loan was sold to a unknown third party and thus ownership of the loan was not in the hands of Indymac although the right to enforce the loan was (and in fact Indymac had been acting only as the loan servicer at the time the borrower Hwang filed for BK in 2008).
When the borrower filed for BK in 2008, Indymac Federal bank (as other so-called “lenders” normally will due when a chapter 7 bankruptcy is filed) filed a motion for relief from the automatic stay and sought to lift the stay so that the debtor’s property could be sold. So amazingly, although Indymac sold the loan to an unknown third party, they still sought to lift the automatic stay in bankruptcy alleging that is was the loan servicer, but yet they didn’t know who actually owned the loan (i.e. on whose principal’s behalf they were actually servicing the loan for). Welcome to the wonderful world of securitized loans.
The borrower challenged Indymac’s right to seek relief from the automatic stay from foreclosure afforded by the bankruptcy filing.
II. Legal Issue
Under what circumstances may a party to a bankruptcy action lift the Section 362 automatic stay from foreclosure? Or as the Court stated it: “the question remains, to whom is the debt owed”
III. Courts Holding:
The court essentially articulated a three-part test to determine when it was proper for a party to invoke the power of the bankruptcy court to lift the automatic stay that would prevent a foreclosure sale following the filing of bankruptcy chapter 7 by a debtor.
(1) Only a “holder” of a note can enforce it
(2) The “holder of the note must have constitutional “standing” to seek to lift the automatic stay in bankruptcy
(3) The holder of the note, who has standing, must also be the “real party in interest” to the transaction in order to be able to seek to lift the BK stay.
Indymac Federal (as predecessor to the failed Indymac bank through the FDIC conservatorship) at best was the loan servicer even though it did not know who actually owned the loan it had sold, and could not produce any loan servicing agreement. However, due to the mere fact that they had possession of the note (“holder”), they were entitled to enforce the note even though they had sold it off “through Freddie Mac” and apparently to a securitized trust on behalf of investors on Wall Street. Note that the Court said whoever DOES own the loan cannot presently enforce it because they do not have possession of the secured note, as Indymac Federal has actual possession of the note and deed of trust.
That being said, the Court determined that Indymac had standing as they had possession of the note and right to enforce it, but that they were not a real party in interest to the motion to lift the automatic stay (the real party is unidentified and needs to be joined) and therefore its motion to lift the stay, with attached declarations, and copy of the note (the original was produced in court) and deed of trust, do not make it the real party in interest, and the motion was therefore denied
THIS OUTCOME BEGS THE QUESTION: WHAT HAPPENS NEXT AFTER A SO-CALLED LENDER IS KICKED OUT OF COURT AND THE MOTION TO LIFT THE AUTOMATIC STAY IS DENIED, AND THE REAL PARTY HAS NOT BEEN IDENTIFIED? STAY TUNED.
IV. Rationale
(1) Legal obligations of parties to a bankruptcy proceedings (ex. the law governing negotiable notes) are controlled by applicable STATE LAW unless bankruptcy law is on point controlling the issues. In this event, who the owner of the loan is, and who has a legal right to enforce it is decided by State Law as the court set forth citing the applicable provisions of the California Commercial Code (“CComC”), the California version of the Uniform Commercial Code (“UCC”).
(2) A Party filing a motion for relief from the automatic stay against foreclosure, in a bankruptcy Court must satisfy both substantive grounds for the motion (i.e. who has right to enforce note), and procedural grounds (i.e. that it hasstanding to file the motion – Article III of the US Constitution; and that it is a real party in interest to make the filing – FRCP 17). The real party in interest must be joined in an action under FRCP Rule 19 where necessary to avoid multiple litigation, or where needed to provide parties with effective relief in a single action, and if necessary to protect absent persons from the possible prejudicial effects of deciding a case without them. In this case the Court denied Indymac Federal’s motion for relief from the automatic stay ON PROCEDURAL GROUNDS because of Rule 17 (Indymac was not real party in interest) and Rule 19 (joinder of trustee of securitized trust was required).
(3) NOTE THAT THE MORTGAGE LOAN AT ISSUE WAS A “MERS LOAN” AND THAT MERS HAD TRANSFERRED THE DEED OF TRUST TO INDYMAC ON JANUARY 29, 2008. AT THAT POINT INDYMAC BANK WOULD HAVE HAD BOTH THE NOTE AND THE DEED OF TRUST. The case discussed how 85% of all mortgages originated in 2006 and 2007 were securitized and a link provided to a report from the Milken Institute:http://www.milkeninstitute.org/pdf/SubprimeMeltdownv2.pdf (registration required).
(4) Essentially the Court discussed California Commercial Code law and discussed what party has a right to enforce a note. The Court first discussed what a “negotiable instrument is” under California law. We have provided link to the law here: http://www.producethenoteattorney.com/2010/05/hwang-bankruptcy-case-motion-to-lift-the-automatic-stay-is-denied-what-is-a-negotiable-instrument-under-california-commercial-code-section-3104/. The Court determined that “the note here at issue is a negotiable instrument”
(5) Next, the Court discussed that only the “holder” of an instrument can enforce it. The Court discussed what a “holder” is under California Commercial Law. Again, here is a link to the code provision the court cited to:http://www.producethenoteattorney.com/2010/05/holder-in-due-course-challenging-motion-to-lift-stay-in-bankruptcy-in-california/. In short, the “holder” of the note is one with POSSESSION OF THE NOTE which is either payable to bearer, or to an identified person. Here, Indymac had possession of the note and the note was payable to Indymac.
(6) Next, the Court discussed “who can enforce a note” (persons entitled to enforce) and the Court cited California Commercial Code Section 3301. Here is a link to that code section:http://www.producethenoteattorney.com/2010/05/hwang-bankruptcy-case-who-is-a-holder-of-a-note-entitled-to-enforce-it-california-commercial-code-section-3301/.
(7) As a result of the foregoing sections of the California Commercial Code, the Court held that Indymac hadstanding to enforce the note (based on its actual possession of such and that the note was indorsed to Indymac), even though Indymac had subsequently sold the note through Freddie Mac – who was not a party to the case – and despite the fact that the true “owner” (and thus the current “lender” or beneficiary under the deed of trust) was not known or disclosed, and in fact was a total mystery as it seems.
(8) The Court then discussed the concept of “negotiating” secured instruments and cited the holder in due course rule under California law: http://www.producethenoteattorney.com/2010/05/what-is-a-holder-in-due-course-under-california-commercial-code-section-3302-in-relation-to-negotiable-instruments-such-as-a-secured-mortgage-note/. In this case, the loan was negotiated from Mortgage IT to Indymac, but not from Indymac to anyone else. Although there was a contract to sell ownership of the note through Freddie Mac, there was no such legal transfer of possession or negotiation.
(9) The Court presented two alternatives for Indymac to consider: (1) transfer the loan to its rightful owner and let them enforce it or let them file a motion to lift the automatic stay, or (2) Indymac can try to enforce the loan (although it cannot lift the stay) even though it does not own the loan. Under this scenario I suppose Indymac would sell the property after the BK is discharged and that would be the end of the story since you cannot argue PRODUCE THE NOTE IN A PRIVATE TRUSTEE SALE. See our blog posts in this regard:http://www.foreclosuredefenseresourcecenter.com/2010/03/can-a-california-homeowner-demand-that-the-lender-or-loan-servicer-produce-the-note-as-a-foreclosure-defense-strategy/. Now normally I would say this might be subject to a legal challenge (lawsuit and TRO keeping a “pretender lender” from foreclosing), but recall in the facts of this case Indymac had possession of both the (original) note and deed of trust with proper delivery and endorsement. So, under these facts, at least on paper, it does have the proper credentials to foreclose and they would seem to be liable to some “real owner” of the loan if such was ever found.
(10) The Court discussed the “common practice” of “failure to deliver notes when they are sold” on the secondary loan market, but also discussed that “entities who hold valid notes are entitled to receive timely payments” (evidencing that the Courts are not really interested in any “house for free” argument). But again this is not really a reason to ignore the legal challenge in a bankruptcy court and to challenge the alleged creditor of your loan. If a false creditor is filing a proof of claim, or alleging it has a lien on your property in the face of conflicting evidence, a bankruptcy Court would seem to be a good forum for raising these issues regarding ownership. Here, Indymac had a valid claim to enforce the loan even though it conceded it was not the owner.
(11) NO RISK OF FINANCIAL DOUBLE JEOPARDY BY PAYING INDYMAC WHO DOES NOT OWN THE LOAN. The Court recognized that although Indymac does not own the loan, it does have the legal right to “enforce” the loan. If the owner pays Indymac (instead of the true owner) the borrower is entitled to a credit to their payments underCalifornia Commercial Code Section 3602 which we have provided here for you:http://www.producethenoteattorney.com/2010/05/hwang-bankruptcy-case-financial-double-jeopardy-borrower-is-entitled-to-credit-for-payments-made-on-an-instrument-california-commercial-code-section-3602/.
(12) Despite the fact that Indymac had a ‘right to enforce the note’ (which gives them legal standing for constitutional purposes) this is not the same as saying that they are the “real party in interest.” To invoke the power of Federal Courts, both are required to be established. Again, the Court determined that Indymac had no real concrete stake in the outcome and thus was not the real party to the transaction. The Court stated if they wanted to prove they were a real party in interest under Rule 17 of the Federal Rules of Civil Procedure. SEEhttp://www.producethenoteattorney.com/2010/05/who-is-the-real-party-in-interest-under-frcp-rule-17-hwang-case-california-bankruptcy-motion-to-lift-the-automatic-stay-in-chapter-7-bk/. THE COURT WENT ON TO STATE THAT “IF A LOAN HAS BEEN SECURITIZED, THE REAL PARTY IN INTEREST IS THE TRUSTEE OF THE SECURITIZED TRUST AND NOT THE SERVICING AGENT.” BECAUSE INDYMAC PROVIDED NO EVIDENCE, THE COURT COULD NOT DETERMINE WHO THE REAL PARTY IN INTEREST WAS. THE COURT ESSENTIALLY DETERMINED THAT THE MOTION TO LIFT THE AUTOMATIC STAY IN BANKRUPTCY COURT SHOULD BE BROUGHT OR PROSCUTED IN THE NAME OF THE TRUSTEE OF THE SECURITIZED TRUST (WHICH ACCORDING TO THE COURT LIKELY SECURITIZED THE NOTE WITH 10,000 OTHER NOTES). THE COURT THINKS JOINDER OF THE TRUSTEE IS NECESSARY.
What principles of law might derive from this case?
(1) A secured note (essentially MERS loans that wind up on Wall Street) is a negotiable instrument and can be freely bought and sold on the secondary loan market, including securitizing them into securitized trusts with thousands of other notes.
(2) Where one lender (ex. MortgageIT) wants to transfer ownership of the loan to a new entity (such as Indymac Bank here), “negotiation” of the instrument is accomplished by proper endorsement of the note (to a specific person or payable to a bearer) and delivery of the note to the new “holder” who will have “possession” of the note and can enforce it as such, and may even be a “holder in due course.”
(3) Where one entity holds the note and deed of trust assignment (the Court did not really get into the assignment of the deed of trust) they have the rights of a holder and can enforce the loan, seek to lift an automatic stay in bankruptcy and probably also file proof of claims in a Chapter 13 case, or properly respond to adversary proceedings challenging the extent or validity of a lien (ex. in a TILA rescission case).
(4) However, where the bankruptcy courts are involved, it should be required that any alleged “lender” “creditor” or “loan servicer” (agent) who is seeking to invoke the power of a bankruptcy court to do, or refrain from doing something, the Court should require valid credentials (such as proof of the note and deed of trust assignment) with proper endorsements and physical possession of the note.
(5) In cases dealing with OneWest bank (who bought ‘assets’ from the FDIC) the Loan Sale Agreement between the FDIC and OneWest bank require the “purchaser” (OneWest Bank) to perfect its security interest through MERS. In this event, if you are in litigation with OneWest bank, you should seek to find out whether or not OneWest (sometimes referred to as “new Indymac” since they occupy the same campus as the failed Indymac once occupied) actually got an assignment of the note and deed of trust from MERS or whether or not there are challenges as to standing, or real party in interest (joinder) that should be raised and/or evaluated.
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If you are having issues trying to determine who owns your loan, who the beneficiary is, who has the right to foreclose, and if you are thinking of filing bankruptcy, have a foreclosure defense lawyer review your notice of default, notice of sale, chain of title, deed of trust, and other critical documents to see who the true lender might be. There may be legal challenges you can raise in “stay litigation (motions for relief from automatic stay), challenges to proofs of claims filed in bankruptcy court, and in adversary proceedings challenging the validity of an alleged lien. Just who your true creditor is, and who their truly authorized agents are is becoming an interesting issue in the age of loan securitization.
