Rogan v. Litton Loan Servicing, L.P. (In re Collins)

2011 FED App. 0010p (6th Cir.)
1) As to 1st mortgage, dismissal of Trustee's complaint under §544(a) vacated and remanded for determination as to (i) who was 1st mortgage holder on petition date and (ii) whether either was the holder of a fully and properly endorsed note. 2) As to 2nd mortgage, dismissal of complaint vacated and remanded for determination of extent, validity and priority of lien. 3) Affirmed as to vacating of default judgment and dismissal of prior holder of mortgages and notes.
Procedural context:
Appeal by bankruptcy trustee ("Trustee") of (i) order dismissing action to avoid unperfected mortgages and to determine extent, validity and priority of liens on Debotr's real property as among Litton Loan Servicing, LP ("Litton"), Bank of New York, as trustee ("BNY"), GMAC Mortgage ("GMAC") and Wilmington Finance ("WF") and (ii) order vacating default judgment and dismissal of WF.
January 2005, Debtor granted a 1st mortgage to WF to secure a $135,200 loan and a 2nd mortgage to WF to secure a $33,800 loan. Both mortgages were recorded 5 days later. The day after the recording the 1st mortgage was assigned to MERS and the assignment was recorded on June 16, 2005. On March 25, 2010, the Debtor filed a voluntary chapter 7 petition. The Debtor scheduled BNY/Litton as a creditor holding a secured claim in her schedule D filed with her petition. On May 7, 2010, Litton filed a proof of claim attaching copies of the recorded 1st mortgage, the MERS assignment to BNY and the Note. GMAC did not file a proof of claim in the bankruptcy case. 1st MORTGAGE: (Litton/BNY) On March 26, 2010 (the day after the bankruptcy case was filed) MERS assigned the 1st mortgage to BNY as Trustee. The MERS assignment was recorded on April 7, 2010 (12 days after the case filing). Thus, neither BNY nor Litton apparently held an interest in the mortgage on the petition date. The note attached to the Litton proof of claim reflected an indorsement from WF to Popular Financial Services, LLC and from Popular ABS, Inc. to JP Morgan Chase Bank as trustee. No indorsement from Popular Financial Services, LLC to Popular ABS, Inc. appeared on the note. There was an allonge dated May 25, 2010 by JP Morgan Chase transferring the note to BNY. The Trustee sued under § 544(a) asserting that BNY had failed to produce a prepetition executed indorsement or assignment of the note originally payable to WF and asserted that BNY had no right to payment and, thus was not capable of perfecting its security interest via the deed of trust at any time prior to the filing of the bankruptcy case. Litton and BNY moved to dismiss under Rule 12(b)(6) contending that the complaint failed to state a claim because the Trustee had asserted deficiencies only in the indorsement of the note and not the 1st mortgage. The Bankruptcy Court held that the complaint failed to state a claim rejecting the Trustee’s arguments that there was no right to payment (i) due to the postpetition indorsement of the note and (ii) because the indorsements did not properly transfer the note. Instead the Bankruptcy Court held that because and assignment of a mortgage may be made postpetition it follows that a note may likewise be indorsed postpetition. Further, the Bankruptcy Court held that BNY did have a right to payment under the note because the assignment of the note provided BNY with that right by transferring all of the prior holder’s right, title and beneficial interest in the 1st mortgage. Applying § 544(a) and Kentucky state law, the Panel found the law to be that the Trustee’s interest as a hypothetical judicial lien creditor is superior to those security interests which were not perfected on the petition date. The Panel also held that, under Kentucky law, without evidence of debt, there is no valid enforceable mortgage. Because the record with regard to the 1st mortgage was unclear, the Panel vacated the order of dismissal and remanded to the Bankruptcy Court for a determination of who was the secured party on the date of the filing of the bankruptcy case and, if so, whether BNY and Litton could establish a proper chain of title of the note to evidence its right to payment. 2nd MORTGAGE (GMAC) In the Bankruptcy Court, the Trustee asserted that GMAC had failed to file a proof of claim or provide proof that it was the holder of the note and 2nd mortgage. As such, the Trustee asserted that the his interest under § 544(a) was superior and that he could sell the property free and clear of the 2nd mortgage. GMAC moved to dismiss and filed an answer asserting that it was not required to file a proof of claim and that it had possession of the note. The Panel found that the Trustee was not required to “prove his case” to survive a motion to dismiss and that he must simply assert a plausible argument that the creditor did not have a properly perfected mortgage on the petition date. Clearly troubled by the absence of the note, the Panel held that if the Trustee was able to prove the facts alleged in the complaint he would have a stated a valid claim for relief. As such, the Panel vacated the dismissal as to GMAC and remanded for the Bankruptcy Court to determine the extent, validity and priority of the 2nd mortgage. WF CLAIMS The Panel found that the Bankruptcy Court did not abuse its discretion in setting aside the prior default judgment and that the record established that WF was not a holder of the mortgages or notes on the petition date and, therefore, affirmed the dismissal of the complaint as to WF
Boswell, Harris and Rhodes

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