A recent bankruptcy decision confirms that loan servicers for a securitized trust have standing to pursue relief from the automatic stay. In re Woodberry, 383 B.R. 373 (Bankr. D. S.C. Feb. 4, 2008). In Woodberry, the loan servicer moved for relief from stay to allow it to foreclose on real property held as collateral by the securitized trust on whose behalf the servicer was acting. Id. at 374. In opposing the motion, the debtor challenged the servicer's standing to pursue relief from the automatic stay. Id. at 376. The debtor argued that in order to have standing as of the time of filing, the servicer must be (1) the current holder of the note and (2) the current holder of the mortgage securing the note (either as the original named mortgage-holder or by recorded written assignment). Id.
In rejecting the debtor's arguments, the bankruptcy court followed South Carolina law pertaining to the recording of instruments affecting real property, as well as the Uniform Commercial Code (UCC). Id. at 376-77. As is typically the case, neither the servicer, the trustee of the trust nor the trust itself was the original named holder of the note and mortgage. Id. at 375-76. Thus, the court analyzed ownership rights in the note and mortgage that had been acquired by the trust subsequent to loan origination. In this case, the servicer held an unrecorded assignment of the loan to the trust. In addition, the court considered the servicer's contractual obligations to the trust regarding enforcement of the note, mortgage and related loan documents. Id. at 377-78.
The court readily disposed of the debtor's arguments regarding the unrecorded assignment. The court observed that under South Carolina law an assignment of a mortgage need not be recorded. Id. at 376. The court then addressed the fact that the note in question was a bearer instrument under South Carolina's version of the UCC, by virtue of an endorsement in blank. Id. at 377-78. At the time of filing the stay motion, the servicer had physical custody of the original note and mortgage. Id. Under the UCC, physical custody of the original note (a negotiable instrument) created a prima facia case of the servicer, on behalf of the trust, being the owner of the note. Id. at 377. Ownership of the note, however, was not determinative of the court's ruling. Id. at 378.
In holding that the servicer had standing to pursue relief from stay, the court focused on the servicer's contractual obligations under its Securitization Subservicing Agreement. Under the trust agreement, the servicer had authority to collect payments due under the note and to foreclose on collateral in the event of a default. Id. at 377-78. The court stated that the servicer held the loan instruments as custodian for the trust. Id. at 376-78. Based on these custodial and other contractual obligations to the trust, the court held the servicer to have provided sufficient evidence that it was a "party in interest." Therefore, for purposes of pursuing relief from stay, the servicer is deemed a creditor under §101(10) of the Bankruptcy Code. Id. at 378. The court further held the servicer to be a "real party in interest" under Bankruptcy Rule 7017, which, as interpreted by case law, requires that actions be prosecuted in the name of the person or entity holding the legal right "which is sought to be enforced or is the party entitled to bring suit." Id. at 379.
The court concluded that "a loan servicer, with a contractual duty to collect payments and foreclose mortgages in the event of default, has standing to move for relief from stay in the bankruptcy court." Id. at 379. As further support for its holding, the court referenced prior bankruptcy decisions in other jurisdictions with similar outcomes: See In re Tainan, 48 B.R. 250, 252 (Bankr. E.D. Pa. 1985) (servicer, as representative of holder for collection purposes, was real party in interest with standing to seek relief from automatic stay); Bankers Trust (Delaware) v. 236 Beltway Inv., 865 F.Supp. 1186, 1191 (E.D. Va. 1994) (in light of terms of pooling agreement, both trustee and servicer had standing to foreclose and sue for deficiency); In re O'Dell, 268 B.R. 607, 618 (N.D. Ala. 2001) (servicer allowed to file and prosecute proof of claim on behalf of debt-holder), aff'd, 305 F.3d 1297, 1302 (11th Cir. 2002) (servicer determined to be real party in interest with standing to conduct, through licensed counsel, legal affairs involving loans it serviced); In re Miller, 320 B.R. 203, 206 n.2 (Bankr. N.D. Ala. 2005) (acknowledging servicing agent's authority to litigate motion for relief from stay on behalf of securitized trust).
While not a surprising result, the Woodberry opinion serves as a reminder that debtors and bankruptcy trustees continue to challenge servicer's standing to prosecute relief from stay. Servicers must have all assignment and servicing agreements in order to effectively prosecute relief from stay. Understanding the applicable underlying law regarding ownership of documents and authority to prosecute is important. In addition, some courts have implemented local rules regarding servicers proving standing to prosecute such motions. One example is the guidelines set forth by the Southern District of Florida in proving relief from stay. These guidelines for servicers require, among other items:
(1) If the motion seeks relief to enforce a lien secured by an interest in real property, the motion must include all of the following (or indicate in the motion whether any of the following information is not applicable):
(a) the name of the movant, and if the movant is not the holder of the note and mortgage or other security instrument (lender), a description of the movant's standing to bring the motion on behalf of the lender.
(2) The motion must have the following attachments, identified clearly by exhibit number:
(a) copies of the documents that support the movant's interest in the real property. For purposes of example only, these documents should include a complete and legible copy of the promissory note or other debt instrument together with a complete and legible copy of the mortgages recorded in the public record as well as all assignments in the chain from the original mortgagee to the current moving party; and
(b) copies of all documents establishing proof of movant's standing to bring the motion for stay relief.