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Creditor May Not Request Relief From Automatic Stay Unless It Has Interest in Underlying Debt - Veal v. American Home Mortgage Servicing

August 16, 2011

Our Ontario foreclosure defense lawyers have written here many times about the practice among banks of submitting false paperwork in foreclosures. This is generally done when the mortgage has been transferred several times, but without the follow-up paperwork necessary to reflect a change in ownership under the law. Often, lenders realize this is a problem only after foreclosure, and the paperwork may even be dated after the date of the foreclosure filing itself. After the "robo-signing" scandal broke, many judges caught on to the practice and began requiring banks to follow basic court rules, even if that meant slowing the foreclosure process. A version of this happened in Veal v. American Home Mortgage Servicing and Wells Fargo Bank, a bankruptcy decision from the Bankruptcy Appellate Panel of the Ninth U.S. Circuit Court of Appeals.

Howard and Shelli Veal bought property in Illinois in 2006, but ran into financial trouble and filed for bankruptcy in Arizona in 2009. The original loan was endorsed to Option One, which was then purchased by American Home Mortgage Servicing Inc. (AHMSI). AHMSI was a servicer collecting for Wells Fargo. In their initial filing and two proposed bankruptcy plans, the Veals listed as a secured creditor. However, when AHMSI filed its proof of secured claim, it did not present admissible evidence that it was the successor to Option One, and the Veals responded by objecting to AHMSI's proof of claim. AHMSI responded with another filing full of inadmissible evidence. Meanwhile, Wells Fargo moved for relief from the bankruptcy stay so it could foreclose on the Veals, saying it was a secured creditor. However, the evidence it originally presented did not show it had any interest in the property. A supplementary filing did show an assignment from Option One to Wells Fargo, but it was dated after Wells Fargo moved for relief from the stay, was not authenticated and assigned only the mortgage, not the note. Nonetheless, the bankruptcy court granted relief from the stay and denied the Veals' objection to AHMSI's proof of claim.

The Veals appealed both decisions to the Ninth Circuit's bankruptcy appellate panel, arguing that neither institution had shown any interest in the note or right to be paid. The bankruptcy court had originally found that the chain of two assignments leading to Wells Fargo was enough to give it a "colorable claim" to the property; ownership of the note was irrelevant. The Veals argued that this was incorrect as a matter of law, because mortgages cannot successfully be assigned without the debt underlying them also being assigned. The appellate panel agreed. In order to have a colorable claim, Wells Fargo had to show some interest in the note, it said. The documents it submitted in court failed to do this, the panel said, despite caselaw it submitted. Thus, the bankruptcy court was wrong to grant Wells Fargo relief from the stay in order to foreclose, the court said, and overruled this ruling. It next ruled on the similar issue of AHMSI's standing to file a proof of claim, with no better results for AHMSI. AHMSI did not adequately show that it was representing Wells Fargo's interests in bankruptcy court or that either organization had standing to enforce the note, the Ninth said, and the bankruptcy court was wrong to follow ownership of the mortgage instead of the note. However, the bankruptcy court left open the question of who is entitled to enforce the note, it said. Thus, the Ninth remanded the case so the bankruptcy court could find those facts and make a ruling.

This ruling is long, but as Corona foreclosure defense attorneys, we think it's a strong ruling in the favor of clients like ours. The Bankruptcy Appellate Panel says in this ruling that financial institutions must prove their claims before they are permitted to take property or enforce huge debts. This should not be controversial, but in the past few years, it has become increasingly common for lenders to try end-running around the law when it becomes clear that they cannot prove their rights to the property or debt. Challenging this does not necessarily end the foreclosure, of course, but it does ensure that the borrower is legally protected. As Encinitas foreclosure defense lawyers, we appreciate that the courts understand how important this is, given the huge power imbalance between lenders and ordinary homeowners.

If you're in foreclosure or know you will be soon, and your loan servicer has done nothing but oppose your attempts to keep your home, you can fight back by calling Howard Law PC for help. For a free, confidential case evaluation, send us an email or call 1-800-872-5925 today.

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