Anderson v. Burson

• Decision Date: 16 February 2012
• Docket Number: No. 8,Sept. Term,2011.,8
• Citation: 424 Md. 232,35 A.3d 452,76 UCC Rep.Serv.2d 255
• Parties: Hosea ANDERSON, et ux. v. John S. BURSON, et al.
• Court: Maryland Court of Appeals

35 A.3d 452

424 Md. 232

76 UCC Rep.Serv.2d 255

Hosea ANDERSON, et ux.

v.John S. BURSON, et al.

No. 8

Sept. Term

2011.

Court of Appeals of Maryland.

Dec. 20, 2011.Reconsideration Denied Feb. 16, 2012.

Randall L. Hagen (Law Office of Randall L. Hagen, LLC, Columbia, MD), on brief, for Petitioners/Cross–Respondents.

Bizhan Beiramee (Bizhan Beiramee, Esq., P.C., McLean, Virginia), on brief, for Respondents/Cross–Petitioners.

Phillip Robinson, Anthony DePastina, Jesse L. Iliff, Civil Justice Inc., Baltimore, MD, for Amicus Curiae brief of Civil Justice Inc.Argued before BELL, C.J., HARRELL, BATTAGLIA, GREENE, ^* MURPHY, ADKINS and BARBERA, JJ.HARRELL, J.

Petitioners, Hosea and Bernice Anderson (the Andersons), appear to be fairly typical representatives, in many ways, of the larger class of homeowners facing foreclosure during recent difficult economic times. The Andersons defaulted on their refinanced home mortgage ¹ because of financial hardships. Faced with foreclosure, the Andersons initiated, among other maneuvers, a request to enjoin the seemingly flawed foreclosure action filed by Respondents. Respondents—the substitute trustees under the mortgage (Substitute Trustees), agents of the trustee, Deutsche Bank Trust Company Americas (Deutsche)—possess and seek to enforce an “under-indorsed” ² mortgage note (the Anderson Note or Note), which, prior to coming into their possession, was transferred three times intermediately, bundled with a multitude of other mortgages, securitized, lost, and then discovered before the ultimate evidentiary hearing that paved the way for a foreclosure sale.

Securitization of residential mortgages, once a very lucrative practice, is denounced frequently now by the public and media, described as “ shoveling loans into trusts like coal into the Titanic's boilers.” Gretchen Morgenson, Guess What Got Lost in the Pool?, N.Y. Times, 1 Mar. 2009, at BU1. At best, it is a modern, fast-paced commercial practice that mis-aligns with some of the hoary law of negotiable instruments secured by realty. Yet only since the advent of the recent economic downturn have courts been called upon to consider the claims of borrowers challenging some of these industry practices and shortcomings.³ This case presents an opportunity to clarify Maryland law regarding enforcement of defaults under unindorsed mortgage notes.

We shall affirm the Court of Special Appeals's holding that the trial court did not abuse its discretion in denying injunctive relief to the Andersons. Deutsche and its agents, the Substitute Trustees, are nonholders in possession and entitled to enforce the Anderson Note and deed of trust, notwithstanding the pitfalls in the securitization process suggested by the course of this case.

I. FACTS

A. Precursor Events to the Foreclosure

The Andersons refinanced their home mortgage in October 2006.⁴ In accomplishing the refinancing, only Mr. Anderson signed the promissory note and both of the Andersons signed the deed of trust ⁵ (the Anderson Note and deed of trust may be referred to collectively as the Anderson Mortgage) in favor of Wilmington Finance, Inc. (Wilmington). Saxon Mortgage Services, Inc. (Saxon) serviced the Anderson Mortgage and collected Mr. Anderson's payments, such as they were. Due to economic hardships that ensued, Mr. Anderson defaulted quickly on his Note obligations in 2007, and the Substitute Trustees commenced foreclosure proceedings on 21 February 2008 in the Circuit Court for Howard County. The Substitute Trustees filed an order to docket, which included a motion for acceptance of lost note affidavit. ⁶ The Circuit Court judge granted the motion.

On 13 March 2008, the Andersons caused a temporary halt in the foreclosure action by filing for Chapter 13 Bankruptcy relief, in which they listed Saxon as a secured creditor. As part of a consent order in the federal court resolving Saxon's motion for relief from the bankruptcy stay, the Andersons acknowledged the mortgage debt, and Mr. Anderson agreed to cure the missed payments over six equal-monthly payments of $804.44. A prompt default ensued under this new payment plan.

Meanwhile, investors were securitizing the Anderson Note into an investment trust. To provide some appreciation of the securitization process, we shall divert briefly from our recitation of the material facts in this case.

Securitization starts when a mortgage originator sells a mortgage and its note to a buyer, who is typically a subsidiary of an investment bank. Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L.Rev. 1359, 1367 (2010). The investment bank bundles together the multitude of mortgages it purchased into a “special purpose vehicle,” ⁷ usually in the form of a trust, and sells the income rights to other investors. Id. 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. Id.

Mortgage-securitization investors utilize the Mortgage Electronic Registration System (MERS), a private land-title registration system created by mortgage banking companies to expedite the securitization process. See Jackson v. Mortg. Elec. Registration Sys., 770 N.W.2d 487, 490 (Minn.2009). MERS increases the efficiency and profitability of mortgage markets by skirting the traditional land-title recording process in localities, which can be costly and time consuming, and replacing it with the industry's own electronic tracking system. See Jackson, 770 N.W.2d at 490–91. To do so, the mortgage broker names MERS as a nominal mortgagee ⁸ in the mortgage. Then, subsequent transfers of the mortgage are recorded electronically and entirely on MERS while the original mortgage, recorded in the public land title records, remains unchanged. Jackson, 770 N.W.2d at 490; Peterson, supra, at 1371. MERS's industry-appreciated virtues have made it a near ubiquitous aspect of contemporary residential mortgages; two-thirds of all newly originated residential loans in the United States name MERS as the nominal mortgagee. See Jackson, 770 N.W.2d at 491–92; Peterson, supra, at 1370.

While MERS enables investment banks to rush millions of mortgages through the securitization process at a rapid rate, the volume and profitability has come at a cost. Mortgage transferors frequently lose or misplace mortgage documents ⁹ and fail to indorse mortgage notes, shortcomings that transferees are willing to overlook lest they be slowed down by traditional negotiable instrument formalities. We shall return now to our regularly scheduled opinion.

B. The Anderson Note

In route to being securitized, the Anderson Note was transferred, but not indorsed correspondingly, three times. First, the initial lender, Wilmington, transferred the Note to Morgan Stanley Mortgage Capital Holding, Inc. (Morgan Stanley I), who in turn transferred the Note to Morgan Stanley ABS Capital I Inc. (Morgan Stanley II). Morgan Stanley II securitized the Anderson Note, along with a multitude of others, into the Morgan Stanley Home Equity Loan Trust 2007–2 (Morgan Stanley Trust). The Morgan Stanley Trust pooling and servicing agreement (PSA) named Deutsche as trustee (and Saxon as servicer), and so the note was transferred to Deutsche as trustee.

C. The Andersons Challenge the Substitute Trustees' Right to Enforce the Note

Upon Mr. Anderson's latest default in making payments under the bankruptcy plan, the Substitute Trustees, after reinstating the foreclosure process in the Circuit Court, scheduled a foreclosure sale for 18 November 2008. On 12 November 2008, the Andersons filed an injunction request in the foreclosure action. The Circuit Court enjoined temporarily the foreclosure proceeding until a hearing could be held regarding the sought-after injunction.

A total of three hearings took place. At the first hearing, on 26 November 2008, the Substitute Trustees, despite the earlier lost note affidavit, produced a photocopy of the unindorsed Note and stated that the original note was indorsed in blank (which ultimately proved to be an inaccurate statement). The Circuit Court judge, exercising commendable caution in the face of the curious turn of events, rescheduled the evidentiary hearing to determine the Substitute Trustees' right to enforce the Note.

At the second hearing, on 7 January 2009, the Substitute Trustees produced the original Note, unindorsed, and asserted, “We have the original Note, but we do not have an indorsement; we do not have an assignment; we do not have an allonge ....” ¹⁰ Because the Substitute Trustees failed to comply with the Andersons' discovery request for a copy of the Morgan Stanley Trust PSA, the parties and the Circuit Court judge agreed to continue again the evidentiary hearing.

At the third hearing, on 31 March 2009, the Substitute Trustees produced the following evidence to legitimize their claim to enforce the Anderson Note: testimony from Dennis Sugrue, Esquire, a lawyer from the Substitute Trustees' firm; ¹¹ a MERS report showing that Wilmington transferred the beneficial rights to the Anderson Note to Morgan Stanley I on 12 February 2007 and servicing rights to Saxon on 14 February 2007; the Anderson deed of trust naming MERS as the nominee; and the Andersons' Chapter 13 Bankruptcy Schedule D, which listed Saxon as a secured creditor. In addition, the Substitute Trustees (pulling yet another rabbit from their magician's hat) produced an undated, unattached allonge, signed by Wilmington purported transferring the Note to Deutsche, but which did not contain indorsements from the parties that possessed intermediately the Note. The Substitute Trustees argued that the allonge made them holders of the Note. The allonge contained a Saxon loan number, which matched a handwritten number on the Anderson Note but did not match the Wilmington loan...