Bank of America May Not Have Standing to Conduct Arizona Foreclosure
In early June, the Ninth Circuit Court of Appeals Bankruptcy Appellate Panel issued several decisions in similar cases dealing with the issue of whether lender has standing to prosecute a motion to lift the automatic bankruptcy stay. One of these cases, Sardana v. Bank of America, N.A., contains some interesting insights into the way Bank of America assigned notes and retained servicing rights.
Sardana involved a Chapter 13 debtor who fell behind on her mortgage payments during the course of her Chapter 13. Bank of America (BAC) moved to lift the automatic stay pursuant to 11 U.S.C. 362(d) so that it could proceed with a trustee sale of the property. In support of its motion, Bank of America produced a deed of trust and promissory note that identified Bank of America as the lender. Sardana opposed the lift stay motion on the grounds that the note had been assigned to Fannie Mae and that Bank of America only retained servicing rights. Therefore, Sardana argued that Bank of America was not a “real party in interest” pursuant to 11 U.S.C. 362(d) and did not have standing to lift the stay. The Bankruptcy court disagreed and granted Bank of America’s motion. Sardana appealed.
On appeal, the Ninth Circuit analyzed the note and deed of trust, pointing out that Bank of America was identified as the beneficiary under the deed of trust. As the Bankruptcy court judge had held, Arizona law provides that a beneficiary of a deed of trust is entitled to proceed with foreclosure pursuant to A.R.S. 33-807. The Ninth Circuit, however, went beyond the Bankruptcy court to point out a separate requirement of Arizona law that provides that “[t]he transfer of any contract or contracts secured by a deed of trust shall operate as a transfer of the security for such contract or contracts.” A.R.S. 33-817. According to the Ninth Circuit, if the holder of the beneficial interest of the note changes, even if the named beneficiary under the trust deed remains the same, the beneficiary’s right to enforce the note obligation and foreclose on the deed of trust must be based on some further agreement with the new owner or holder of the note. The Ninth Circuit vacated the Bankruptcy court’s order lifting the stay and remanded for an evidentiary hearing at which Bank of America could prove that it retained the beneficiary’s right to enforce the note obligation following its assignment to Fannie Mae.
In another case, Matson v. Citibank, N.A., the Chapter 13 debtors also fell behind on their post-petition mortgage payments.. Barclay’s Capital Real Estate, Inc. d/b/a HomEq filed a motion for relief from the automatic stay. The debtors argued, among other things, that HomEq lacked standing to bring the motion because it was not the real party in interest but was merely a servicer of the note, which had been pooled and sold to investors in an mortgage-backed securitized trust. Citibank then filed an amended motion for relief from the stay claiming that it was the successor trustee for the holders of MASTR Adjustable Mortgage Trust 2007-HF2 arising from a securitization transaction. From there the facts get very complicated. The Bankruptcy court granted Citibank relief from the stay and the Matsons appealed arguing essentially that Citibank was not the real party in interest because there was a violation of New York law at the time the note had been transferred to the MASTR Adjustable Mortgage Trust 2007-HF2. According to the debtors, MASTR never effectively acquired the promissory note because the assignment violated the pooling and servicing agreement. The Ninth Circuit noted that there appeared to be a gap in the assignment at some point but it nonetheless held that Citibank had met its burden of presenting a “colorable showing of the transfers.” The Ninth Circuit also pointed out that the issue of whether an assignment is valid would go beyond the intended limited scope of a hearing on a motion to stay. Thus, Citibank prevailed.