The Devil Is in the Documentation

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Contributed by Rebecca Thomas

The recent decision by the bankruptcy court for the Southern District of New York in In re Tandala Mims aka Tandala Williams, Case No. 10-14030 (MG) (Bankr. S.D.N.Y. Oct. 27, 2010) (Docket No. 13) shows that the devil is in the details when it comes to relief from stay.  In denying a lender’s request for relief from the automatic stay to foreclose on its mortgage, Judge Glenn found the lender lacked standing to seek the requested relief because, despite the fact that the debtor scheduled the lender as a secured creditor, the lender did not provide sufficient documentation evidencing that the lender held a note securing an interest in the debtor’s property.

The circumstances in Mims appear typical: when the debtor filed its petition for relief, the debtor listed Wells Fargo Bank, N.A. as a secured creditor on the debtor’s schedules.  Wells Fargo subsequently filed a motion seeking relief from the automatic stay to exercise its rights under a mortgage and note to foreclose on the debtor’s property.  In support of its motion, Wells Fargo included a copy of the mortgage and note, a copy of the debtor’s schedules, and the United States Bankruptcy Court of the Southern District of New York’s required lift-stay worksheet evidencing six months of delinquent payments on the mortgage.

The mortgage and note indicated that the lender was Lend America.  The note contained an endorsement to Washington Mutual Bank, FA, but no further evidence was offered to indicate that the note was ultimately assigned to Wells Fargo.  In addition, Wells Fargo did not provide any evidence of the assignment of the mortgage to Wells Fargo.  However, seven days prior to the hearing on the lift stay motion, Wells Fargo obtained assignment of the mortgage.

While the actions of the debtor and Wells Fargo suggest that they both believed that Wells Fargo had a secured interest in the debtor’s property, the court was not satisfied.  The court concluded that Wells Fargo was not a “party in interest” in the debtor’s chapter 7 case and, therefore, lacked standing to seek relief form the automatic stay.  Pursuant to section 362(d) of the Bankruptcy Code, a movant must be a “party in interest” to seek relief from the automatic stay.  In In re Comcoach, 698 F.2d 571 (2d Cir. 1983) the Second Circuit interpreted “party in interest” to mean that the movant must be a “creditor.”  Consequently, the court found that Wells Fargo was required to establish that it was a “creditor” within the meaning of section 101(10) of the Bankruptcy Code.  And, to be deemed a “creditor,” Wells Fargo had to establish that it held a “claim,” which is defined as a “right to payment,” pursuant to section 101(5)(A) of the Bankruptcy Code.

The Court found Wells Fargo failed to establish that it had a “right to payment” because Wells Fargo failed to demonstrate it had the ability to seek the state law remedy of foreclosure.  Pursuant to New York state law, which governed the mortgage and note, Wells Fargo was required to establish ownership of both the mortgage and the note to foreclose on the debtor’s property.  While Wells Fargo provided evidence that it owned the mortgage, it did not provide evidence that it owned the note, and ownership of the mortgage alone was not sufficient to establish a “right to payment.”  The court went further and clarified that absent a credible explanation of how Wells Fargo obtained its rights, relief from the automatic stay would not be granted.

In the wake of the increase of individual debtor bankruptcy cases and the heightened focus on mortgage lending practices, Judge Glenn’s decision serves as a stringent reminder that, in New York, a secured lender must ensure it has sufficient documentation to establish its ownership of both the mortgage and note underlying its claim before seeking relief from the automatic stay to foreclosure upon a debtor’s property, even where the debtor has acknowledged the existence of its obligations to the lender and that such obligations are secured.