by The Bankruptcy Court for the Southern District of New York denied U.S. Bank’s motion for relief from stay on the basis that U.S. Bank had failed to show that it had standing to obtain such relief. In re Idicula, No. 12-12120 (Bankr. S.D. N.Y. Jan. 10, 2013). Although neither the debtor nor the trustee objected to the motion for relief from stay, the court found that U.S. Bank failed to produce sufficient evidence that it owned the promissory note secured by the property. The court traced the now-standard circuitous path the mortgage and note followed to arrive in U.S. Bank’s coffers. The original note and mortgage were with Aegis Lending Corp. Aegis transferred the mortgage, but not the Note, to MERS. MERS transferred its interest to U.S. Bank. When debtor filed for chapter 7 bankruptcy, U.S. Bank, through its servicer Select Professional Service, Inc., sought relief from stay so it could proceed with foreclosure.
U.S. Bank claimed standing to seek such relief because it possessed the original Note endorsed in blank (the court noted that the same person signed forms in the capacity as secretary for Aegis Lending, and for Aegis Mortgage) and claimed that the note was transferred to it by MERS by way of an allonge, attached to the original note. No allonge was attached to the papers filed with the court. (The court revealed its impatience with U.S. Bank noting that the attorney representing that the Bank had standing due to the allonge, had made and failed on the identical issue and representation in another case before that court. In re Lippold, 457 B.R. 293 (Bankr. S.D.N.Y. 2011)).
The court found that U.S. Bank failed to prove that it was a “party in interest” as required by section 362(d)(1) for seeking relief from stay. Although “party in interest” is not defined in the Code, the Second Circuit requires that the movant be a creditor or a debtor. The court walked through the Code definitions of “creditor” and “claim” (sections 101(10) and 101(10)(A) respectively) and found that because U.S. Bank had no right to seek foreclosure under state law, it did not have the requisite “right to payment” that ultimately defines both a “creditor” and a “claim.” In New York, in order to foreclose, the creditor must be the holder of the Note and mortgage. Assignment of the mortgage without transfer of the underlying debt is a nullity (although the reverse is not likewise true – transfer of the Note is presumed to transfer the mortgage as well). Because MERS’ rights were limited to the mortgage and the note does not automatically travel with the mortgage, MERS could not transfer any rights under the Note to U.S. Bank.
The court did not decide the significance of U.S. Bank’s possession of the original note endorsed in blank because U.S. Bank made no argument in that regard, instead relying on the phantom allonge as the basis for its right to foreclose.