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Sixth Circuit Orders Bankruptcy Court to Determine Which Mortgage Lender Owned Loan - In re: Collins

August 25, 2011

Increasingly, our posts on this blog about mortgage appellate decisions center around the very basic question of who owns the mortgage. As Riverside foreclosure defense attorneys, we're pleased to see the courts giving this issue the scrutiny it deserves, since allowing a non-owner to foreclose on a home unjustly allows the property to be taken from the true owner and may imply other major problems. In In re: Collins, the Bankruptcy Appellate Panel of the Sixth U.S. Circuit Court of Appeals reversed a lower court that declined to address issues of who owned the loan. The trustee in the bankruptcy of Elizabeth Collins of Kentucky had filed for a declaratory judgment seeking to determine the validity, extent and priority of loans claimed by Litton Loan Servicing, Bank of New York, GMAC Mortgage and Wilmington Finance.

Collins and her ex-husband took out two mortgage loans in 2005 from Wilmington. Collins alone filed for bankruptcy in 2010. How the mortgages were assigned in between is the matter of controversy. The first mortgage was assigned to MERS, the corporation that banks have created to control mortgage assignments, as is standard. On the day after Collins filed for bankruptcy, MERS assigned the mortgage to Bank of New York, as trustee for a security owned by Litton. Despite the late assignment, Collins listed Bank of New York as the secured creditor. Wilmington indorsed the note to Popular Financial Serivces and Popular ABS indorsed it to Chase, but there was no indorsement between the two Popular companies, and Chase transferred the note with an allonge to Bank of New York three months after the bankruptcy. There is no record of assignment at all for the second mortgage, though Collins listed GMAC as the creditor, and GMAC failed to file any proof of claim. The trustee filed an adversary complaint arguing that he had a right to sell the property free of the second mortgage and he had priority over the first mortgage because Bank of New York had not been able to prove its ownership. The bankruptcy court found for the banks in both cases and dismissed the case. It also dismissed the complaint as to Wilmington, finding it was not a party because other lenders were its successors in interest. The trustee appealed.

The Panel upheld the bankruptcy court as to Wilmington, agreeing that it was no longer a party to the bankruptcy. However, it reversed as to the other lenders. A trustee has status as a hypothetical loan creditor that is superior to the status of creditors with an unperfected interest. The trustee for Collins had argued that the lenders' interests were not perfected because the underlying debt was not enforceable. The Panel first tackled the issue of GMAC, which had never produced any paperwork proving its claim and indeed declined in oral arguments to assert that it owned the note. The court found that the bankruptcy court was wrong to dismiss the claim just because someone, somewhere owns the mortgage lien. The relevant issue is whether GMAC has it, the court said, and this is enough to survive a motion for dismissal for failure to state a claim. Similarly, the Panel found that the bankruptcy court should not have dismissed the claims against Bank of New York and Litton because the record was genuinely unclear as to who owned the note as of the date of filing. It vacated the court's orders and remanded with orders to determine this, and then consider whether there was a proper chain of title.

Our Anaheim foreclosure defense lawyers are pleased to see yet another ruling that acknowledges the paperwork problems lenders created for themselves during the housing bubble. Those problems gained the most public attention during the robo-signing scandal, but bankruptcy cases like this frequently also expose a lot of incomplete paperwork moving the loan from lender to lender. During the housing bubble, and especially for loans that were securitized, mortgages were moved around without proper supporting paperwork or in incomplete ways. When those loans go into foreclosure or become part of a bankruptcy, this creates a lot of confusion and unnecessary fuss. This creates an opportunity for Santa Fe Springs foreclosure defense attorneys like us to slow down or stop the foreclosure for lack of proof of ownership, but there's no guarantee, which is why it's vital to talk to an experienced lawyer.

Howard Law, P.C., represents clients across California who are fighting to hold on to their homes in the face of a lender's indifference or wrongdoing. If you'd like to tell us your situation and discuss how we can help, call us toll-free at 1-800-872-5925 or send us a message through our website.

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