New York Bankruptcy Court Expunges Mortgage After Lender is Unable to Produce Assignment

A recent ruling by the United States Bankruptcy Court for the Southern District of New York underscores the importance of making sure that all of the t's are crossed and i's dotted when it comes to documenting the assignment of any mortgage. In In Re Paredes¹, the Court took the drastic measure of expunging a lender's proof of claim after it was unable to prove that it owned the mortgage upon which its proof of claim was based. As demonstrated by the Court's ruling, failure to accurately and completely document an assignment of mortgage may have dire consequences for the assignee.

The debtor in In Re: Paredes filed a Chapter 13 bankruptcy petition in an attempt to save her home from foreclosure after she fell behind in making her mortgage payments. The originating lender of the mortgage was Mortgage World Bankers, Inc. Mortgage World Bankers, Inc., however, did not file a proof of claim in Paredes's bankruptcy. Instead, an entity named PHH Mortgage ("PHH") filed a proof of claim. In response to PHH's filing, debtor's counsel requested proof that PHH in fact had standing. PHH, rather than provide such documentation, advised debtor's counsel that PHH was the servicer of the mortgage in question and that U.S. Bank National, as Trustee ("U.S. Bank" or "U.S. Trust"), was the actual holder of the mortgage. This letter provided debtor's counsel with all of the ammunition he needed to file an objection to PHH's proof of claim.

In response to the debtor's objection, PHH submitted various documents including a copy of the Note which was endorsed to PHH shortly after the loan was originated, an affidavit signed by a Vice President to PHH stating that PHH is the servicer of the mortgage and U.S. Bank the holder, and a Power of Attorney authorizing PHH to act as Attorney in Fact for U.S. Trust. Missing from PHH's submissions, however, was an actual assignment of mortgage. At the hearing in connection with debtor's objection to PHH's proof of claim, the Court asked PHH's counsel two simple, straightforward questions: "[W]hen did U.S. Trust become the holder of the mortgage?" and "[H]ow do I know that U.S. Bank is the holder of the mortgage?" PHH's counsel's inability to answer either of these questions or otherwise provide proof that PHH or U.S. Bank held the mortgage resulted in the Court expunging the proof of claim.

According to the Court, since PHH failed to attach the relevant assignment documents to its proof of claim in compliance with Bankruptcy Rule 3001, the proof of claim was not entitled to a presumption of validity and the burden of proof shifted to the claimant to prove its claim. Since PHH failed to present any proof that the mortgage was assigned, the Court expunged the proof of claim which had the practical result of expunging the mortgage itself if the debtor/mortgagor completes a confirmed plan.

The Court's decision re-affirms the importance of accurately and timely documenting assignments of mortgages. Without appropriate assignment documents, lenders may see their foreclosure complaints dismissed for lack of standing or, even worse, their mortgage liens expunged.

¹ 09-22261(rdd), Doc. # 29, (Bankr. S.D.N.Y. Oct. 9, 2009).