Posted by NCBRC – January 31, 2015
Wells Fargo lacked standing to assert a claim pursuant to a Note secured by a Deed of Trust, where a forged indorsement in blank did not give it “holder” status under applicable Texas law. In re Franklin, No. 10‐20010 (Bankr. S.D. N.Y. Jan. 29, 2015).
As evidence in support of its first proof of claim Wells Fargo submitted: 1) the Note, dated October 30, 2000, payable to Mortgage Factory Inc. with a specific indorsement by Mortgage Factory to ABN Amro Mortgage Group, Inc. (“ABN Amro”); 2) a Deed of Trust securing the Note; 3) an Assignment of Lien, pursuant to which Mortgage Factory assigned its rights to ABN Amro; 4) an Assignment of Deed of Trust by ABN Amro assigning “all beneficial interest in” the Deed of Trust, together with the Note, to Mortgage Electronic Registration System (“MERS”) as nominee for Washington Mutual Bank, FA; 5) various loan modification forms involving Freddie Mac and Wells Fargo; and 6) an Assignment of Mortgage from MERS to Wells Fargo (including neither rights under the Deed of Trust, nor the Note). The assignment was dated July 12, 2010—three days before the date of the first claim—and was executed on behalf of MERS “as nominee for Washington Mutual Bank, FA” by John Kennerty, Assistant Secretary, presumably of MERS.
Upon challenge by the debtor Wells Fargo filed an amended claim which was identical to the first except that the copy of the Note attached to the second claim offered a deus ex machina in the form of a blank indorsement, signed by Margaret A. Bezy, Vice President, for ABN Amro.
The debtor challenged the second claim for: 1) lack of standing because Wells Fargo did not own the loan yet filed the claim on its own behalf, not as agent or servicer for Freddie Mac, 2) the blank indorsement was forged. (The debtor’s motion for summary judgment on the first objection was denied because Texas follows the common law rule that “the mortgage follows the note,” and the note is enforceable by the Holder.)
At the close of discovery, the court held an evidentiary hearing in which it considered the debtor’s testimony, testimony of a witness offered by Wells Fargo and the transcript of John Kennerty’s deposition. The court found that Wells Fargo was not a “holder” and, therefore, lacked standing to enforce the Note.
Where the Note was indisputably in Wells Fargo’s possession, the question was whether the blank ABN Amro indorsement by Margaret A. Bezy made Wells Fargo a “holder” with the right of enforcement. Under Texas law, an indorsement is presumed to be valid but that presumption may be overcome by “the introduction of sufficient evidence so that a reasonable trier of fact in the context of the dispute could find in the defendant’s favor.”
Walking through the evidence, the court turned to the deposition testimony of Mr. Kennerty finding that: 1) when Mr. Kennerty signed the Assignment of Mortgage from MERS to Wells Fargo, he was an employee of both MERS and Wells Fargo; 2) he signed the document three days prior to the date Wells Fargo submitted the first claim; 3) during the period that he executed the assignment he typically signed between 50 and 150 default documents per day without any real understanding of the legal significance of what he was doing. The court found that the evidence surrounding Mr. Kennerty’s execution of the assignment, while not directly related to the indorsement in blank upon which Wells Fargo ultimately relied, was suggestive of Wells Fargo’s willingness to forge documents for the purpose of deception.
There was more. Mr. Kennerty further testified as to practices within Wells Fargo when proper paperwork and assignments were not available. From this testimony the court concluded: “It constitutes substantial evidence that Wells Fargo’s administrative group responsible for the documentary aspects of enforcing defaulted loan documents created new mortgage assignments and forged indorsements when it was determined by outside counsel that they were required to enforce loans.”
Based on these findings, the burden of proof that the blank indorsement was not forged shifted to Wells Fargo. Wells Fargo offered the testimony of Mr. Campbell who had no personal knowledge of the documents in question but offered testimony to qualify them as authentic and to explain that the blank indorsement appeared in Wells Fargo’s electronic file prior to its filing the second claim. Mr. Campbell had no understanding of the technology used to maintain Wells Fargo’s records, how the records were entered or stored, or whether they could be changed once entered. He exhibited no understanding of the difference between indorsing assignments from Wells Fargo and indorsing them to Wells Fargo. Noting that the “business records exception” to the hearsay rule is liberally construed, however, the court found that Mr. Campbell’s testimony was enough to satisfy the requirement that the document in question “was kept in the course of a regularly conducted business activity and that the making of such record was the regular practice of that activity.”
Nonetheless, Mr. Campbell’s testimony did not dispel the conclusion that the Note was originally transferred to Wells Fargo with only the specific indorsement to ABN Amro and no blank indorsement. The court reasoned: “why would only an outdated and unenforceable version of the Note have been logged in by Wells Fargo when it took over the file in February 2007 if the only enforceable version of the Note had in fact existed at that time (and should have existed since 2002)? The far more likely inference, instead, is that when the loan was transferred to Wells Fargo, the Note with the blank ABN Amro indorsement did not exist.” The next question, that Wells Fargo could not explain to the satisfaction of the court, was how the blank indorsement entered the picture 22 months later. The court noted that even Washington Mutual Bank, FA, one of the links in the transfer chain, could not have had the right of enforcement without the blank indorsement. Yet it did not appear until long after the Note was in Wells Fargo’s possession. The court surmised that the course of the debtor’s repayment (and lack thereof) on the loan and attempted modifications, did not trigger the need for the indorsement in blank until the time that indorsement suddenly appeared. There was no evidence that the indorsement in blank was generated anywhere but within the walls of Wells Fargo to give it entitlement to enforce the Note.
The debtor’s objection to the claim was sustained.