DEUTSCHE BANK NATIONAL TRUST COMPANY AS TRUSTEE
FOR THE CERTIFICATE HOLDERS OF ISAC 2006-5
MTG PASS-THROUGH CERTIFICATES AND BANK OF AMERICA, N.A.,
AS SUCCESSOR BY MERGER TO BAC HOME LOANS SERVICING, LP
v.
ANGELA BROCK
No. 55
COURT OF APPEALS OF MARYLAND
September Term, 2012
Filed: March 22, 2013
Summaries:
Source: Justia
This case arose out of a challenge by a borrower, Respondent, to the authority of various individuals and entities to effectuate a valid foreclosure on her residential property. After a foreclosure sale was scheduled by the substitute foreclosure trustees, but before the sale took place, Respondent filed a separate action seeking compensatory damages and declaratory and injunctive relief against the substitute trustees, Deutsche Bank, and BAC Home Loans Servicing for alleged defects in the foreclosure process and the authority of Defendants to foreclose on her property. Deutsche Bank and BAC (Petitioners) filed a motion for summary judgment on Respondent's action, which the circuit court granted. The court of special appeals reversed, finding that Petitioners did not prove they were persons entitled to enforce thepromissory note, and thus genuine issues of material fact precluded summary judgment. The Court of Appeals reversed, holding that BAC was entitled to enforce the note. Remanded.
Deutsche Bank National Trust Company as Trustee for the Certificate Holders of lSAC 2006-5 MTG Pass-Through Certificates and Bank of America, N.A., as Successor by Merger to BAC Home Loans Servicing, LP v. Angela Brock, No. 55, September Term 2012.
COMMERCIAL LAW - AUTHORITY TO ENFORCE THROUGH FORECLOSURE PROMISSORY NOTE INDORSED IN BLANK
Where there is no gap in the indorsements purporting to transfer a negotiable promissory note, and the last indorsement, made by a holder, is an indorsement in blank, the note may be negotiated by transfer of possession alone. Thus, the person or entity in possession of a negotiablepromissory note indorsed in blank is the holder of that note entitled to enforce it, free of any requirement to prove how he, she, or it came into possession of the note. If security for payment of the note in default is real property, the person or entity in possession of the note may authorize foreclosure.
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Circuit Court for Montgomery County
Case # 326936-V
Bell, C.J.,
Harrell
Battaglia
Greene
Adkins
Barbera
McDonald,
JJ.
Opinion by Harrell, J.
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This case arises out of a challenge by a borrower, Respondent Angela Brock ("Brock"), to the authority of various individuals and entities to effectuate a valid foreclosure on her residential property. After a foreclosure sale was scheduled in Montgomery County by the substitute foreclosure trustees, Edward S. Cohn, Stephen N. Goldberg, Richard E. Solomon, and Richard J. Rogers (referred to collectively as the "Substitute Trustees"), but before the sale took place, Brock filed a separate action in the Circuit Court for Montgomery County, seeking compensatory damages and declaratory and injunctive relief, against the Substitute Trustees, Deutsche Bank National Trust Company (as Trustee for the Certificate Holders of ISAC 2006-5 MTG Pass-Through Certificates) ("Deutsche Bank"), and BAC Home Loans Servicing LP ("BAC") (now known as Bank of America, N.A.), for alleged defects in the foreclosure process and the authority of the named Defendants to foreclose on her property. Deutsche Bank and BAC (referred to collectively as "Petitioners"1 ) filed a motion for summary judgment in Brock's action, which motion was granted by the Circuit Court, which concluded that no genuine dispute of material fact existed as to the Petitioners' authority to foreclose on the property and dismissed Brock's complaint in its entirety. The Court of Special Appeals reversed, in an unpublished opinion, finding, pursuant to this Court's decision in Anderson v. Burson, 424 Md. 232, 35 A.3d 452 (2011), that Petitioners did not prove they were persons entitled to enforce the promissory note, and thus genuine disputes of material fact existed precluding summary judgment. We are asked here to
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determine whether, based on the indorsements to the promissory note at issue, Petitioners are entitled to enforce the Note. For the reasons explained below, we determine that BAC is entitled to enforce the Note. Therefore, we reverse the judgment of the Court of Special Appeals.
FACTUAL AND PROCEDURAL BACKGROUND
On 28 September 2006, Brock executed a promissory note in the principal amount of $544,000 to her lender, Amerifund Mortgage Services, LLC ("Amerifund Mortgage"), for the purpose of financing the purchase of improved residential real property located in Silver Spring, Maryland. The promissory note (the "Note") was secured by a deed of trust, signed by Brock that same day, in favor of Amerifund Mortgage.2
Although the loan originated with Amerifund Mortgage, it was sold and securitized thereafter. As we explained in Anderson v. Burson,
[s]ecuritization starts when a mortgage originator sells a mortgage and its note to a buyer, who is typically a subsidiary of an investment bank. The investment bank bundles together the multitude of mortgages it purchased into a "special purpose vehicle," usually in the form of a trust, and sells the income rights to other investors. A pooling and servicing agreement establishes two entities that maintain the trust: a trustee, who manages the loan assets, and a servicer, who communicates with and collects monthly payments from the mortgagors.
424 Md. at 237, 35 A.3d at 455 (internal citations and footnote omitted). A special purpose vehicle "is a business entity that is exclusively a repository for the loans; it does not have any
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employees, offices, or assets other than the loans it purchases." Id. at 237 n.7, 35 A.3d at 455 n.7 (quoting Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L. Rev. 1359, 1367 (2010)).
Here, although the Note originated with Amerifund Mortgage, it appears that it was sold later. The allonge3 attached to the Note contains the following three indorsements:
PAY TO THE ORDER OF:
American Brokers Conduit
WITHOUT RECOURSE,
Amerifund Mortgage Services, LLC
PAY TO THE ORDER OF:
IMPAC FUNDING CORPORATION
WITHOUT RECOURSE:
American Brokers Conduit
PAY TO THE ORDER OF
WITHOUT RECOURSE
IMPAC FUNDING CORPORATION
The allonge does not indicate on what date each indorsement was made.4 Although not reflected in the Note's indorsements, Petitioners contend that ownership of the Note was
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assigned ultimately to a trust,5 the beneficiaries of which are the Certificate Holders of ISAC 2006-5 MTG Pass-Through Certificates. According to a Pooling and Servicing Agreement for the 2006-5 MTG Pass-Through Trust (the "Trust"), Deutsche Bank National Trust Company is the Trustee, and IMPAC Funding Corporation ("IMPAC") is denominated the Master Servicer. IMPAC entered into a Sub-Servicing Agreement with BAC,6pursuant to Section 3.02 of the Pooling and Servicing Agreement, to be the sub-servicer for the loan. Under the Pooling and Servicing Agreement, therefore, both BAC and IMPAC have the power of attorney from Deutsche Bank, as Trustee, to fulfill their duties - including, but not limited to, instituting legal proceedings and appointing attorneys for the purpose of effectuating foreclosure.7
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Due to personal financial difficulties, Brock fell behind on her loan payments. After she became delinquent, BAC appointed, in 2009, substitute trustees to initiate foreclosure proceedings.8 The Substitute Trustees filed an Order to Docket Foreclosure of Residential Property, pursuant to Maryland Rule 14-207, in the Circuit Court for Montgomery County, thus commencing a foreclosure proceeding against Brock and her property. The record in this case does not indicate when the Order to Docket was filed, but a foreclosure sale was
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scheduled for 24 February 2010.
On 16 February 2010, Brock filed a Complaint for Injunctive Relief, Breach of Fiduciary Duty, and Fraud in a separate action in the Circuit Court for Montgomery County, naming as defendants Deutsche Bank, BAC, and the Substitute Trustees (referred to collectively as "Defendants"). Brock contended that: (1) Deutsche Bank and BAC lacked authority to appoint the Substitute Trustees; (2) the Substitute Trustees breached their fiduciary duty to Brock by attempting allegedly to foreclose unlawfully on the property and failing to investigate the authority of Deutsche Bank and BAC to initiate foreclosure; and, (3) Deutsche Bank defrauded Brock by attempting to foreclose on the property. Brock sought: (a) a permanent injunction preventing the Defendants from selling or foreclosing on the property under the deed of trust; (b) a declaration that Deutsche Bank is neither the beneficiary nor the lender under the deed of trust and thus is not empowered to enforce it or appoint substitute trustees;9 (c) compensatory and punitive damages; and, (d) attorneys fees and costs. Brock filed additionally, on 18 February 2010, a motion for a temporary restraining order seeking to enjoin the Substitute Trustees from proceeding with the foreclosure sale until the court decided Brock's claims. In response, the Substitute Trustees cancelled voluntarily the foreclosure sale, pending the outcome of Brock's suit. In light of the Substitute Trustees' action, the trial court denied the motion for a temporary restraining
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order.
On 16 September 2010, Petitioners filed a motion for summary judgment, contending principally that, because indisputably BAC has physical possession of the Note, indorsed in blank, it is entitled to enforce it, regardless of who owns the Note. In support of its contentions, Petitioners attached portions of the Pooling and Servicing Agreement, as well as an affidavit from Ron Morrison, Executive Vice President of IMPAC, stating that the Trust is the owner, IMPAC the Master Servicer, and BAC the sub-servicer of the Note. Additionally, Petitioners provided an affidavit from Lindsay Weiss, a litigation specialist at BAC, stating that according to BAC's records, although the Trust is the owner of the Note, BAC is in physical possession of the Note. Both affidavits stated that, pursuant to the Pooling and Servicing Agreement, BAC has a Power of Attorney from Deutsche Bank to do "all things that are necessary to foreclose and sell the Property per the Deed of Trust."
Brock filed on 4 October 2010 an Amended Complaint for Injunctive Relief, Negligence,10 and Declaratory Judgment, claiming that, because the Trust made its last filing with the Securities and Exchange Commission ("SEC") in 2007 and terminated its SEC registration, the Trust exists no longer. Alternatively, Brock claimed, as she had in her original complaint, that the Trust does not own the Note and thus had no authority to appoint the Substitute Trustees or invoke the power of sale under the deed of trust. Brock sought a
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declaration that the deed of trust was "null and void," and an order requiring "such Deed of Trust and all related filings to be removed from the land records of Montgomery County." The same day, Brock filed a memorandum opposing Petitioners' summary judgment motion, arguing that genuine material facts existed as to the existence of the Trust and the ownership of the Note, and that Petitioners were required to support their motion for summary judgment with "the best evidence available to them," referring to the actual assignment documents. In support of her contention that the Trust existed no longer, Brock produced her personal affidavit, stating that, as a result of the Trust's Notice of Suspension of Duty to File Reports with the SEC in 2007, "[t]he inference to be drawn from this delisting action so soon after the Trust registered in December 2006 is that the Trust ceased to exist or perhaps never even was in existence." Further, she argued that only the lender may authorize foreclosure, and that "there is nothing in the Deed of Trust or in the Maryland Code which permits a mere holder of a note secured by a deed of trust to institute foreclosure proceedings under a deed of trust where the holder can not also establish it is the owner of the note and beneficiary of the deed of trust."
On 3 November 2010, Petitioners filed a second motion for summary judgment, arguing that the contentions raised in Brock's opposition memorandum were without merit, and that, because BAC is the sub-servicer and the holder of the Note, it was entitled to and could proceed properly with a foreclosure action. In support, Petitioners provided a second affidavit by Ron Morrison of IMPAC, stating: "The Trust is still in existence today. Securities and Exchange Commission Rules provide that the Trust is not required to continue
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to file reports after a certain time period runs. The transaction is no longer public so further filings are not required. That is the only reason the Trust no longer files SEC reports."
At a hearing on 1 December 2010,11 a Circuit Court judge granted Petitioners' motion for summary judgment and dismissed the complaint, with prejudice, finding that there was no material fact in dispute that would prohibit the foreclosure from proceeding, and that the Defendants had established that they were the appropriate entity entitled to proceed. The order dismissing the complaint was entered on 6 December 2010. Brock noted timely an appeal to the Court of Special Appeals.
Before the intermediate appellate court, Brock argued that the Circuit Court erred in granting summary judgment because a genuine dispute of material fact had been raised as to the following: (1) the legal existence of the Trust; (2) the authority of Deutsche Bank to appoint the Substitute Trustees; (3) the ownership of the Note; (4) the adequacy of the pre-foreclosure notice; (5) the duty of care owed by the Substitute Trustees; and, (6) the authority of specific entities to release the Deed of Trust.12 In an unreported opinion, the Court of
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Special Appeals reversed the Circuit Court's judgment granting Petitioners' motion for summary judgment. In so holding, the court considered primarily Brock's contentions regarding the existence of the Trust and the ownership of the Note.13 Noting that Petitioners bore the burden of establishing the Trust's continued existence in their second motion for summary judgment, the court determined that a genuine dispute of material fact existed with respect to the continued existence of the Trust. Specifically, because the Trust was a separate entity from IMPAC and the affidavit offered in support of the Trust's continued existence was signed by an IMPAC employee, Morrison, the court determined that "the affidavit is devoid of an explanation" regarding Morrison's personal knowledge of the Trust's continued existence. Thus, the court held that a genuinely disputed material fact existed with regard to the Trust's existence.
Additionally, the court examined the admissible facts offered by Petitioners to determine if there was generated a genuine dispute of material fact regarding the ownership of the Note. The court concluded that, because the affiants did not provide an adequate basis for their asserted personal knowledge, the two affidavits offered by Petitioners were
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insufficient to establish that the Trust owned the Note (citing The Great Atlantic & Pacific Tea Co. v. Imbraguglio, 346 Md. 542, 598, 697 A.2d 885, 897 (1997); Ehrlich v. Bd. of Educ. of Balt. City, 257 Md. 542, 546, 263 A.2d 853, 855 (1970)). Thus, the intermediate appellate court looked solely to the Note and allonge to determine ownership. In examining the Note, the court observed that, although Petitioners argued that the Note belonged to the Trust, the allonge did not reflect a transfer to the Trust. Thus, the court concluded that "the allonge demonstrates that there was a dispute of fact as to the owner of the Note."
The court went further, stating that, "[e]ven assuming there was no dispute [of material fact regarding ownership], a review of the enforcement rights demonstrate[s] that summary judgment should not have been granted." Describing the chronology of the life of the Note, the court stated that the original holder was Amerifund Mortgage. After subsequent negotiation and transfer, American Brokers Conduit, and later IMPAC, became holders of the Note. The court did not consider explicitly the last indorsement on the Note, made by IMPAC.
Noting the parties' agreement that BAC possessed the Note, the Court of Special Appeals characterized BAC as a "nonholder in possession of the Note," which permitted BAC to "enforce the Note [pursuant to § 3-301(ii) of the Commercial Law Article] as long as it had 'the rights of a holder, i.e., a transferee in possession or nonholder in possession.'" (quoting Anderson, 424 Md. at 248, 35 A.3d at 462). Because the court characterized BAC as a nonholder in possession, it noted that BAC did not "enjoy the statutorily provided assumption of the right to enforce the instrument that accompanies a negotiated instrument."
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(quoting Anderson, 424 Md. at 249, 35 A.3d at 462). Thus, the court concluded that BAC was required to provide evidence demonstrating how BAC obtained the Note, but did not do so on the record before the court. As a result, the court determined that "Deutsche Bank and BAC failed to establish that BAC had the authority to appoint the Substitute Trustees."
Petitioners filed a motion for reconsideration with the Court of Special Appeals, which was denied on 5 June 2012. We issued, on Petitioners' petition, a writ of certiorari, 427 Md. 606, 50 A.3d 605 (2012), to consider the following question:
Whether an entity in possession of a promissory note indorsed in blank - the most common type of indorsement for thousands of notes owned by mortgage-backed security trusts - is not a holder and is merely a non-holder in possession, in conflict with Title 3 of the Maryland UCC and a misinterpretation of this Court's decision in Anderson v. Burson, 424 Md. 232, 35 A.3d 452 (2012)?
STANDARD OF REVIEW
On review of an order granting or denying summary judgment, we must first determine whether a genuine dispute of material fact was made manifest on the record before the trial court. D'Aoust v. Diamond, 424 Md. 549, 574, 36 A.3d 941, 955 (2012) (quoting Appiah v. Hall, 416 Md. 533, 546, 7 A.3d 536, 544 (2010)). The mere presence of a factual dispute, however, will not generally render inappropriate summary judgment.O'Connor v. Balt. Cnty., 382 Md. 102, 111, 854 A.2d 1191, 1196 (2004) (citing Beatty v. Trailmaster, 330 Md. 726, 738, 625 A.2d 1005, 1011 (1993)). Rather, the crux of the inquiry is whether the disputed fact is material, or, "a fact the resolution of which will somehow affect the outcome of the case." Lippert v. Jung, 366 Md. 221, 227, 783 A.2d 206, 209 (2001) (quoting King
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v. Bankerd, 303 Md. 98, 111, 492 A.2d 608, 614 (1985)). "If no genuine dispute of material fact exists, this Court determines 'whether the Circuit Court correctly entered summary judgment as a matter of law,'" Whitley v. Md. State Bd. of Elections, 429 Md. 132, 148, 55 A.3d 37, 47 (2012) (quoting Anderson v. Council of Unit Owners of the Gables on Tuckerman Condo., 404 Md. 560, 571, 948 A.2d 11, 18 (2008)), without deference to the lower courts' assessment of the law. Rhoads v. Sommer, 401 Md. 131, 148, 931 A.2d 508, 517-18 (2007).
DISCUSSION
Petitioners argue that, in determining that a genuine issue of material fact existed as to the ownership of the Note and the existence of the Trust, the Court of Special Appeals erred in failing to recognize that the last indorsement of the Note (by IMPAC) was an indorsement in blank. Thus, Petitioners argue, because BAC was in possession of the Note, indorsed in blank, BAC was the holder of the Note pursuant to § 3-205 of the Commercial Law Article and was, therefore, entitled to enforce it. See Md. Code (1975, 2002 Repl. Vol.), Com. Law Art., § 3-301. Because the Commercial Law Article gives BAC the right to enforce the Note, Petitioners contend, in essence, that any issues of fact regarding the existence of the Trust and the ownership of the Note are not material and may not defeat their motion for summary judgment. Brock does not appear to contradict Petitioners' assertion that BAC is the holder of the Note, but rather counters that the alleged factual disputes are indeed material. Specifically, she argues that summary judgment is inappropriate because (1) if the Trust does not exist, the Deed of Appointment was executed on behalf of a non-
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existent legal entity and thus is insufficient to grant the Substitute Trustees the authority to seek foreclosure; and (2) it is Deutsche Bank, as Trustee, and not BAC, which is seeking to foreclose on the property; thus it is Deutsche Bank's, and not BAC's, status as a holder, or a non-holder, of the Note that is relevant.14
A deed of trust securing a negotiable promissory note "cannot be transferred like a mortgage; rather, the corresponding note may be transferred, and carries with it the security provided by the deed of trust." Anderson, 424 Md. at 246, 35 A.3d at 460 (citing Le Brun v. Prossise,197 Md. 466, 474, 79 A.2d 543, 548 (1951)). Thus, once the note is transferred, "the right to enforce the deed of trust follow[s]." Svrcek v. Rosenberg, 203 Md. App. 705, 727, 40 A.3d 494, 507 (2012); Md. Code (1975, 2002 Repl. Vol.), Com. Law Art., § 9-203(g) & cmt. 9 (codifying "the common-law rule that a transfer of an obligation secured by a security interest or other lien on . . . real property also transfers the security interest or lien"). As a result, because a negotiable promissory note secured by a deed of trust is governed by the Commercial Law Article of the Maryland Code, so too is the resolution of the parties' dispute in the present case. Shepherd v. Burson, 427 Md. 541, 551, 50 A.3d 567, 573 (2012); Anderson, 424 Md. at 246, 35 A.3d at 460. We determine that, contrary to the panel of the Court of Special Appeals, BAC is a holder of the Note and that, therefore, the remaining
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disputes of fact are not material to the resolution of this case.
The Commercial Law Article provides that the person or entity obligated on a promissory note15 must pay the obligation to, in relevant part, "a person entitled to enforce the instrument." Md. Code (1975, 2002 Repl. Vol.), Com. Law Art.,§ 3-412; see also In re Veal, 450 B.R. at 910 (noting that "the person obligated on the note . . . must pay the obligation represented by the note to the 'person entitled to enforce' it"). If the maker of a note - in this case, Brock - pays a person entitled to enforce that promissory note, the maker's obligations under the note are discharged to the extent of the payment. Md. Code (1975, 2002 Repl. Vol.), Com. Law Art., § 3-602(a). Thus, any payment that Brock made to a person or entity entitled to enforce the Note - and thus any action taken to foreclose on the collateral secured by the Deed of Trust - is sufficient, to the extent paid, to discharge Brock's liability on the Note.
Pursuant to the Commercial Law Article, a promissory note may be enforced by:
(i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to § 3-309 or § 3-418(d). A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.
Id. at § 3-301. In this context, a "holder" is "[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in
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possession." Id. at § 1-201(b)(21)(i). A promise or order is payable to bearer if it states that: (a) it is payable to bearer or to cash; (b) indicates that an individual or entity in possession of the promise or order is entitled to payment; (c) does not state a payee; or, (d) otherwise indicates that it is not payable to an identified person. Id. at § 3-109(a). Thus, the person in possession of a note, either specially indorsed to that person or indorsed in blank,16 is a holder entitled generally to enforce that note.17
Brock contends that, regardless of which entity is the holder of the Note, only the owner may enforce the Note and bring an action to foreclose. The Commercial Law Article makes clear, however, the distinction between a holder and an owner. As the Comment to §
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3-203 states, "[t]he right to enforce an instrument and ownership of the instrument are two different concepts." The holder of a note is "entitled to enforce the instrument even [if it is] not the owner of the instrument or is in wrongful possession of the instrument." Id. at § 3-301. See also In re Veal, 450 B.R. 897, 909 (B.A.P. 9th Cir. 2011) ("Article 3 does not necessarily equate the proper person to be paid with the person who owns the negotiable instrument."); SMS Financial, LLC v. ABCO Homes, Inc., 167 F.3d 235, 238-39 (5th Cir. 1999) (noting that a party's status as a holder and its attendant right to enforce an instrument is separate from the party's status as the owner of that instrument); In re Walker, 466 B.R. 271, 280 (Bankr. E.D. Pa. 2012) ("[T]he borrower's obligation is to pay the person entitled to enforce the note (who need not be the 'owner' of the note).");<a href="https://apps.fastcase.com/Research/Pages/Document.aspx?LTID=rHz5TgsnMEXV