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Bankruptcy Appellate Panel Rules Missouri Promissory Note Is Enforceable Even If Sold - Knigge v. SunTrust Mortgage

October 8, 2012

Vincent Howard and our San Bernardino foreclosure defense attorneys have written here several times about bankruptcy filers seeking to declare a mortgage debt void because of problems in the chain of title. Banks routinely buy and sell mortgages without the homeowners' permission or even knowledge, and during the run-up to the 2008 housing bust, they frequently transferred title without complying with applicable state laws or keeping track of physical ownership of the paperwork. As a result, when they started to foreclose, many lenders were unable to show ownership under the requirements of state law; a few kept such bad records that they even attempted to foreclose on properties they didn't own. In Knigge v. SunTrust Mortgage, bankruptcy filers Bruce Lawrence Knigge and Mary Ellen Knigge argued that under Missouri law, SunTrust did not have standing to collect on their debt.

The Knigges took out a mortgage in 2003 from Mid-America Mortgage Services and executed a promissory note in favor of Mid-America and its "successors and assigns," secured by a deed of trust. Mid America immediately sold and endorsed the note to SunTrust, which then endorsed it in blank. SunTrust later sold but then repurchased the note and has physical custody of it. The Knigges filed for Chapter 13 bankruptcy twice, and in the first bankruptcy, confirmed a plan that made mortgage payments to SunTrust. In the second bankruptcy, filed in 2011, they also listed SunTrust as a mortgage holder, but then brought an adversary proceeding arguing that SunTrust had no standing to enforce the note or deed, and asking that the deed be removed from the title to their home. While reserving their right to pursue this challenge, the Knigges did list SunTrust as a creditor on their confirmed plan. The bankruptcy court ultimately granted summary judgment to SunTrust.

The Knigges appealed to the Bankruptcy Appellate Panel of the Eighth U.S. Circuit Court of Appeals. They argued that the note is not a negotiable instrument under Missouri law because it is conditional, thus voiding the transfers, because it refers to the deed of trust in the section on payment. However, the panel pointed out, under Missouri law, a negotiable instrument is unconditional even if it refers to another "writing," as long as that other document doesn't govern the promise. The relevant section is not governed by the deed of trust, the panel said; it merely distinguishes payment obligations under the note from other payment obligations governed by the deed of trust. Indeed, the deed itself doesn't show payment provisions other than statements on prepayment, acceleration and collateral, nor would any of the nonmoney provisions of the deed destroy the note's non-negotiability. And because SunTrust is in physical possession of a properly endorsed note, it has standing. Thus, the panel upheld the bankruptcy court.

Vincent Howard and our Anaheim foreclosure defense lawyers have read several cases like this, including some that were decided for the homeowners. Frequently, the successful cases turn on problems with the chain of ownership for the mortgage documents. State law often requires physical ownership or at least a proper endorsement to prove ownership of the debt; clearly, states have an interest in preventing foreclosures by people who have no right to foreclose. However, particularly because the major lenders depend on MERS to establish ownership of mortgages, it has actually been impossible to prove in many cases. At Howard Law, P.C., our Rubidoux foreclosure defense attorneys carefully scrutinize all chain-of-title issues, particularly for loans made in the last decade, for these problems.

If you're facing default or foreclosure on a home you believe you could save, but your lender doesn't seem interested in trying, don't hesitate to call Vincent Howard and the experienced team of attorneys at Howard Law. You can send us an email or call toll-free at 1-800-872-5925.

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