Secured lenders faced with loans in default may find themselves entangled in a borrower’s or guarantor’s bankruptcy case and thus forced to file a proof of claim (POC). In my April 27, 2007 post, I wrote about POCs, including when a creditor should file one. In the Matter of Larkin, 2010 Bankr. LEXIS 3609 (N.D. Ind. 2010) (click and save for .pdf), Judge Dees provides a thorough opinion surrounding the sufficiency of the documentation needed to support a POC, which opinion also touches upon the “standing” issue that has been prevalent in mortgage foreclosure law for the past three or four years.
POC general rules. The main POC rule is located at Federal Rule of Bankruptcy Procedure 3001. A POC, if executed and filed in accordance with the Rules, “shall constitute prima facie evidence of the validity and amount of the claim.” Fed. R. Bankr. P. 3001(f). If the claim is based on a writing, the original or a duplicate of the written document must be filed with the proof of claim. F.R.B.P. 3001(c). If the creditor asserts a security interest in the debtor’s property, the POC “shall be accompanied by evidence that the security interest has been perfected.” F.R.B.P. 3001(d). The POC is deemed allowed, unless a party in interest objects.
Entire document. In the Larkin matter, the debtor’s first objection surrounded the mortgagee creditor’s attachment of only certain pages of the underlying loan documents. The issue was whether this “substantially” complied with Rules 3001(c) and (d). The Court held that the attachment requirement in Rule 3001(c) mandates specific, not substantial, compliance and, as such, the Court initially ruled that the POC was not valid. (After a continuance of the hearing on the objection, the creditor corrected the problem by attaching a complete set of documents. You always should do the same.)
Mortgage assignment. The creditor in Larkin was an assignee of the loan. The mortgage assignment had not been recorded. Indiana’s recording statutes regarding assignments of mortgages “are designed to protect third party purchasers and mortgagees, not mortgagors.” The recording of an assignment of mortgage “is not necessary to the validity of the mortgage, but is simply a protection to a good-faith purchaser of the mortgage itself . . ..” Since the debtor was a mortgagor, not a subsequent purchaser, the debtor could not challenge the validity of her properly-recorded mortgage for failure to record a subsequent assignment. (We would advise recording all mortgage assignments as soon as possible, but the act of recording does not affect the enforceability of the mortgage as between the mortgagor and the mortgagee’s assignee.)
Post-petition assignment. The debtor also contended that, because the mortgage assignment was post-petition, it was ineffective because it violated the automatic stay. Not so, said the Court. Bankruptcy law provides that “once the original grant by the mortgagor to the mortgagee has been perfected, the later assignment of that mortgage does not involve a transfer of property of the debtor . . . and cannot constitute a violation of the automatic stay.” Larkin supports the notion that post-petition loan assignments are appropriate.
Note assignment. The debtor also attacked the validity of the transfer of the promissory note from the original holder to the current creditor. This is the “real party in interest” and “standing” defense advanced by debtors over the last few years. (See my November 15, 2007 post.) The Larkin opinion provides a solid summary of the law applicable to the assignment of promissory notes via endorsement or allonge. Endorsement is defined by Black’s Law Dictionary as “the placing of a signature, sometimes with an additional notation, on the back of a negotiable instrument to transfer or guarantee the instrument or to acknowledge the payment.” “Allonge” is a “French term used in legal contexts for a paper that is annexed to a note.” In Indiana, an endorsement “on an allonge is valid even though there is sufficient space on the instrument for an indorsement.” I.C. § 26-1-3.1-204(a). The Court in Larkin concluded that the subject allonge that was affixed to the debtor’s note (and included with the POC) was a part of the note, and thus constituted a valid endorsement.
POCs filed by our firm, whether secured or unsecured, that are based upon written documents include a complete copy of the underlying loan documents and any assignment papers. It is also our practice to prepare and attach an “Attachment to Proof of Claim” that gives a brief description of the nature of the claim and references the attachments. The Attachment would spell out, among other things, the factual and documentary basis that the creditor is the holder of the note and mortgage, and has the present ability to enforce the subject loan.