IN RE BAILEY Case No. 09-bk-6979-RTBP, Adv. No. 09-ap-01728-SSC
ANDREW BAILEY, Chapter 11, Debtor. ANDREW BAILEY, Plaintiff, v. THE BANK OF NEW YORK MELLON, as trustee of the CWALT, Inc. Alternative Loan Trust 2007-HY4 Mortgage Pass-Through Certificates, Series 2007-HY4; BAC HOME LOANS SERVICING LP; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS INC; John Does 1-20 inclusive; and all persons claiming by, through or under such person, all persons unknown, claiming any legal or equitable right, title, estate, lien, or interest in the property described in the complaint adverse to Plaintiff's title thereto, Defendants.
United States Bankruptcy Court, D. Arizona.
May 3, 2011.
Not for Publication
MEMORANDUM DECISION DISMISSING COMPLAINT WITHOUT PREJUDICE
SARAH SHARER CURLEY, Bankruptcy Judge
Andrew C. Bailey, a debtor in a voluntary chapter 11 proceeding, filed a complaint against BAC Home Loans Servicing, LP ("BAC"); The Bank of New York Mellon ("BNY Mellon"), in its capacity as trustee of the CWALT, Inc. Alternative Loan Trust 2007-HY4 Mortgage Pass-Through Certificates, Series 2007-HY4 ("Trust"); Countrywide Home Loans Servicing, LP (erroneously named as Countrywide Home Loans) ("CHL"), and Mortgage Electronic Registration Service (erroneously named as The Mortgage Electronic Registration Service) ("MERS") (collectively, "Defendants") on December 23, 2009.
On August 20, 2010 the Plaintiff filed his Fourth Amended Complaint. The Complaint again failed to state any causes of action that could be asserted against these Defendants under applicable state or federal law. In response, the Defendants filed the current Motion to Dismiss, requesting that the Plaintiff's Adversary Proceeding be dismissed
At the hearing held January 19, 2011, the Court directed counsel for Defendants to supply the Court with certain additional information that, if produced, would lead to the dismissal of this Adversary with prejudice. Specifically, the Court requested the following information: (1) how the Plaintiff's loan was placed into the Trust under the control of BNY Mellon, (2) once the Plaintiff's loan was transferred into the Trust, whether it remained in the Trust, (3) whether the Pooling and Servicing Agreement concerning the Trust contained a requirement that any loan placed in the Trust must have a specific endorsement, or whether any loan could be placed in the Trust with only a blank endorsement, and (4) the original or an appropriate copy of the assignment of the original deed of trust concerning the Plaintiff's loan, which would transfer the interest from the original mortgagee to, presumably, BNY Mellon, in its capacity as Trustee for the Trust. In response, the Defendants filed a Supplemental Memorandum and various declarations. The Plaintiff then filed a Response and Objection. After receiving these documents, the Court vacated the hearing scheduled for March 22, 2011, and now dismisses the Plaintiff's Fourth Amended Complaint. However, for the reasons stated hereinafter, the dismissal shall be without prejudice.
In this Memorandum Decision, the Court has set forth its findings of fact and conclusions of law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure. The issues addressed herein constitute a core proceeding over which this Court has jurisdiction. 28 U.S.C. §§ 1334(b) and 157(b) (West 2010).
II. FACTUAL BACKGROUND
The Plaintiff executed a promissory note ("Note") on March 29, 2007. The Defendant, BNY Mellon, provided a series of endorsements on the Note, reflecting that Countrywide Bank, FSB, as the initial payee, transferred its interest to Countrywide Home Loans, Inc., which transferred its interest, by blank endorsement, to any holder in due course.
At the same time, the Plaintiff executed a deed of trust concerning the property located at 2560 North Page Springs Rd, Cornville, AZ 86325 ("Deed of Trust"), which was recorded in Yavapai County on May 4, 2007.
On May 1, 2007, several months after the closing on Plaintiff's loan, Bank of New York, now BNY Mellon, became the trustee of the Alternative Loan Trust 2007-HY4 pursuant to a pooling and servicing agreement ("PS Agreement").
BNY Mellon and the BNY Trust entered into a separate Servicer Level Agreement in which BNY Trust was designated the agent responsible for all collateral documents to be held by BNY Mellon, as Trustee for the Alternative Loan Trust 2007-HY4 under the PS Agreement.
Section 2.01(c)(i)(A) of the PS Agreement provides that the transfer of loans is effective upon the delivery to the trustee of the Trust of
The original Note
At the January 19 hearing, after reviewing what was held in the custodial file and to resolve all issues between the Plaintiff and the Defendants, the Court ordered the Defendants to provide the original or an assignment of the Deed of Trust. Defendants have failed to do so. The Plaintiff asserts that the PS Agreement requires the Defendants to record an assignment of the Deed of Trust within 120 days of the Loan being placed in the Trust. In support of his position, the Plaintiff cites to a portion of Section 2.01(c) of the PS Agreement, which provides as follows::
The Defendants argue that this portion of the PS Agreement relates to non-MERS loans only and is, therefore, inapplicable to the Plaintiff's loan. They state that there is no requirement that loans originated as MERS loans (such as the Plaintiff's loan) be accompanied by a separate assignment document. The Defendants rely on Section 2.01(c)(iii) of the PS Agreement in support of their position, which outlines the requisite documentation to be held by BNY Mellon, as Trustee, and states as follows:
The Court requested further information on the endorsements allowed under the PS Agreement because the Plaintiff insisted that only specific endorsements were valid. As noted in the portion of the PS Agreement cited herein, Plaintiff is mistaken. The PS Agreement clearly states that the Note may be endorsed "in blank in the following form: `Pay to the order of ____________ without recourse,'" Plaintiff also incorrectly argues that the other language in the same portion of the PS Agreement, requiring that "all intervening endorsements showing a complete chain of endorsements from the originator to the Person endorsing the Mortgage Note," requires something more than blank endorsements. Blank endorsements are clearly allowed under the PS Agreement, and a complete chain of endorsements is clearly contained on the Note. As mentioned above, the original Note is endorsed from the original lender, Countrywide Bank, FSB, to Countrywide Home Loans, Inc., who then endorsed the Note, in blank, as follows: "PAY TO THE ORDER OF ______________ WITHOUT RECOURSE." This was sufficient to transfer the interest in the Note pursuant to the PS Agreement.
The Court also requested information on the placement of the Plaintiff's loan into the Trust. The Plaintiff's custodial loan file was placed in the BNY Trust vault, as agent for BNY Mellon, on May 23, 2007. Since the PS Agreement was signed on May 1, 2007, the custodial loan file was properly placed in the custody of BNY Trust within the 30-day period. Therefore, any arguments of the Plaintiff to the contrary are not valid.
However, the Defendants have not produced an assignment of the Plaintiff's Deed of Trust reflecting its transfer to BNY Mellon. BNY Mellon argues that an assignment of the Deed of Trust is not required in this case, because Plaintiff's loan was a MERS loan and the PS Agreement does not require MERS loans to include a separate assignment of the deed of trust in order to be included in the CWALT Trust. The Defendants' conclusion misses the point. Even if the assignment is not required under the PS Agreement, it may create an issue as to the nature, extent, and validity of the security interest vis a vis the Plaintiff as a debtor in possession in this Chapter 11 case.
By way of background, in reviewing whether a creditor asserting a lien on real property has set forth a prima facie case (in a motion for relief from the automatic stay, for example), the court must consider under what chapter of the Bankruptcy Code the debtor has filed. For instance, if the individual debtor has filed a chapter 7 petition, a trustee in bankruptcy is appointed and is charged with collecting and liquidating, if necessary, the non-exempt property of the debtor for distribution to the debtor's creditors, according to the priorities set forth in the Bankruptcy Code.
Because of the avoidance powers of the bankruptcy trustee or the debtor in possession, this Court requires that if a party seeking relief from the automatic stay asserts a perfected security interest in any property of the estate, that moving party must be able to present at least a prima facie case that it has such a perfected security interest under applicable law.
The Court is aware of ARS § 33-817, which states, "The transfer of any contract or contracts secured by a trust deed shall operate as a transfer of the security for such contract or contracts." ARS § 33-817. The Court further acknowledges that the Supreme Court of Arizona has held that a mortgage is a "mere incident to the debt," and its "transfer or assignment does not transfer or assign the debt or the note," but "the mortgage automatically goes along with the assignment or transfer" of the note.
Given that the Arizona legislature has not rescinded Section 33-818, it must be interpreted in a manner that allows it to be consistent with other statutory provisions without reducing the Section to surplusage. An Arizona appellate court, in reviewing the issues, stated that Arizona law requires that if a secured creditor with a lien on the borrower's real property wishes to ensure that said interest is not subject to the claims of a bona fide purchaser, that secured creditor should record an assignment of its interest with the Recorder in the County in which the borrower's real property is located. If notice of the assignment has not been provided, through recordation, the secured creditor may have its interest avoided by a bona fide purchaser. See
The Court ordered BNY Mellon to produce the original or a a copy of the assignment of the Deed of Trust. It is unclear why BNY Mellon did not supplement the record to provide the document. Although BNY Mellon correctly points out that the PS Agreement does not require an assignment of a deed of trust for MERS loans, that does not change the requirements of Arizona or federal law, as outlined herein.
The fact that no assignment has been produced to the Court at this time does not vitiate BNY Mellon's loan or its security interest in the Plaintiff's real property. This Court does not absolve the Plaintiff of his responsibility to pay the Loan in question. BNY Mellon's failure to produce the assignment, however, does not allow this Court to dismiss this Complaint with prejudice and finally end the dispute between these parties. Therefore, the Court hereby dismisses this Adversary Proceeding without prejudice. However, the Plaintiff is cautioned not to file another adversary proceeding against any of these Defendants until he has carefully reviewed the law, or retained counsel to assist him, and is able to a cognizable claim against a third party.
Based upon the foregoing,
IT IS ORDERED that the Plaintiff's Fourth Amended Complaint is dismissed without prejudice.
IT IS FURTHER ORDERED that the Clerk's Office shall provide notice of this order to the Plaintiff, the Defendants, and the Defendants' counsel, and file an affidavit of service thereon.
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