Arnold v. First Citizens Nat'l Bank
| Decision Date | 18 November 2016 |
| Docket Number | Case # 16–CV–6012–FPG |
| Citation | 217 F.Supp.3d 696 |
| Parties | Michael H. ARNOLD, Chapter 11 Trustee of Cornerstone Homes Inc., Plaintiff–Appellant, v. FIRST CITIZENS NATIONAL BANK, The Community Preservation Corporation, and Elmira Savings Bank, Defendant–Appellees. In re: Cornerstone Homes, Inc., Debtor. |
| Court | U.S. District Court — Western District of New York |
Gregory J. Mascitti, LeClairRyan, Rochester, NY, for Plaintiff–Appellant.
Allan L. Hill, Phillips Lytle LLP, David D. Macknight, Lacy Katzen LLP, Rochester, NY, Ronald M. Terenzi, Stagg Terenzi Confusione & Wabnik LLP, Garden City, NY, for Defendant–Appellees.
DECISION & ORDER
This bankruptcy appeal raises the following question: under New York law, does a person have standing to enforce a mortgage and mortgage note where the note is a negotiable instrument and that person obtained their interest in the note and mortgage through a written assignment by the holder thereof, rather than through delivery and indorsement? The United States Bankruptcy Court for the Western District of New York (Warren, B.J. ) answered yes. In re Cornerstone Homes, Inc. , 544 B.R. 492 (Bankr. W.D.N.Y. 2015). This Court agrees. Accordingly, the bankruptcy court's decision is affirmed.
In the years prior to its Chapter 11 filing, Cornerstone Homes, Inc. ("Debtor") purchased and renovated single-family homes throughout the Southern Tier of New York, subsequently selling or renting the renovated homes to high-risk borrowers.
During this time, Debtor obtained financing from numerous individuals (the "Individual Lenders"). In exchange for their "investment"2 in Debtor's business, Debtor issued each of the Individual Lenders a promissory note payable to the order of the Individual Lender (the "Individual Lender Notes"). As security for the Individual Lender Notes, Debtor granted each of the Individual Lenders a mortgage (the "Individual Lender Mortgages") on a home owned by Debtor. It is undisputed that the Individual Lender Notes are negotiable instruments.
Faced with the burden of servicing "returns" on the debt owed to the Individual Lenders, Debtor sought to refinance those obligations. To that end, Debtor entered into a series of unrelated but structurally similar transactions.
First, on April 21, 2006, Debtor entered into a refinancing transaction with First Citizens National Bank ("First Citizens"). In connection with and to facilitate that transaction, certain Individual Lenders agreed to assign their Individual Lender Mortgages and Individual Lender Notes to First Citizens. Each of these Individual Lenders executed and delivered a written Assignment of Mortgage, which stated that the Individual Lender "hereby assigns unto [First Citizens] ... a certain mortgage made by Cornerstone Homes, Inc. ... together with the bond or obligation described in said mortgage." However, the Individual Lenders did not indorse or deliver the Individual Lender Notes to First Citizens. Relying on the written assignments, First Citizens loaned $1,000,000 to Debtor pursuant to the terms of a Consolidation, Extension, and Modification Agreement ("CEMA") between Debtor and First Citizens. The CEMA served to consolidate the Individual Lender Notes, Individual Lender Mortgages, and any additional financing provided by First Citizens such that the rights and obligations of Debtor and First Citizens were set out in a single "Consolidated Note" and a single "Consolidated Mortgage."
Then, on August 22, 2006, Debtor entered into a refinancing transaction with The Community Preservation Corporation ("CPC"). In connection with and to facilitate that transaction, certain Individual Lenders agreed to assign their Individual Lender Mortgages and Individual Lender Notes to CPC. Each of these Individual Lenders executed and delivered a written Assignment of Mortgage, which stated that the Individual Lender "hereby assigns unto [CPC] ... a certain mortgage made by Cornerstone Homes, Inc. ... together with the bond or obligation described in said mortgage." The Individual Lenders did not indorse or deliver the Individual Lender Notes to CPC. Relying on the written assignments, CPC loaned $4,000,000 to Debtor. Debtor and CPC agreed to consolidate the Individual Lender Notes, Individual Lender Mortgages, and any additional financing provided by CPC such that the rights and obligations of Debtor and CPC were set out in a single "Consolidated Note" and a single "Consolidated Mortgage."
Also on August 22, 2006, Debtor entered into another refinancing transaction with CPC. In connection with and to facilitate that transaction, certain Individual Lenders agreed to assign their Individual Lender Mortgages and Individual Lender Notes to CPC. Each of these Individual Lenders executed and delivered a written Assignment of Mortgage, which stated that the Individual Lender "hereby assigns unto [CPC] ... a certain mortgage made by Cornerstone Homes, Inc. ... together with the bond or obligation described in said mortgage." The Individual Lenders did not indorse or deliver the Individual Lender Notes to CPC. Relying on the written assignments, CPC loaned $4,800,000 to Debtor. Debtor and CPC agreed to consolidate the Individual Lender Notes, Individual Lender Mortgages, and any additional financing provided by CPC such that the rights and obligations of Debtor and CPC were set out in a single "Consolidated Note" and a single "Consolidated Mortgage."
Next, on December 21, 2006, Debtor entered into a second refinancing transaction with First Citizens. In connection with and to facilitate that transaction, certain Individual Lenders agreed to assign their Individual Lender Mortgages and Individual Lender Notes to First Citizens. Each of these Individual Lenders executed and delivered a written Assignment of Mortgage, which stated that the Individual Lender "hereby assigns unto [First Citizens] ... a certain mortgage made by Cornerstone Homes, Inc. ... together with the bond or obligation described in said mortgage." The Individual Lenders did not indorse or deliver the Individual Lender Notes to First Citizens. Relying on the written assignments, First Citizens loaned $2,479,050 to Debtor pursuant to the terms of a CEMA between Debtor and First Citizens. The CEMA served to consolidate the Individual Lender Notes, Individual Lender Mortgages, and any additional financing provided by First Citizens such that the rights and obligations of Debtor and First Citizens were set out in a single "Consolidated Note" and a single "Consolidated Mortgage."
Finally, on July 31, 2007, Debtor entered into a refinancing transaction with First Niagara Funding, Inc. ("First Niagara"). In connection with and to facilitate that transaction, certain Individual Lenders agreed to assign their Individual Lender Mortgages and Individual Lender Notes to First Niagara. Each of these Individual Lenders executed and delivered a written Assignment of Mortgage, which stated that the Individual Lender "hereby assigns unto [First Niagara] ... a certain mortgage made by Cornerstone Homes, Inc. ... together with the bond or obligation described in said mortgage." The Individual Lenders did not indorse or deliver the Individual Lender Notes to First Niagara. Relying on the written assignments, First Niagara loaned $1,267,500 to Debtor pursuant to the terms of a CEMA between Debtor and First Niagara. The CEMA served to consolidate the Individual Lender Notes, Individual Lender Mortgages and any additional financing provided by First Niagara such that the rights and obligations of Debtor and First Niagara were set out in a single "Consolidated Note" and a single "Consolidated Mortgage."
Unable to satisfy its obligations to creditors as they became due, Debtor filed for bankruptcy under Title 11, Chapter 11 of the United States Code on July 15, 2013. On January 22, 2014, the bankruptcy court appointed Michael H. Arnold as the Chapter 11 Trustee ("Trustee") of Debtor.
On August 31, 2015, the Trustee commenced an adversary proceeding by filing a complaint against First Citizens, CPC, and Elmira Savings Bank ("Elmira Savings")3 (collectively, the "Banks"). In its complaint, the Trustee sought a declaratory judgment that the Banks are not entitled to enforce the Consolidated Mortgages and that the amount owed by Debtor to the Banks under the Consolidated Notes is unsecured. The Trustee moved for summary judgment, followed by cross-motions for summary judgment by each of the Banks.
On December 23, 2015, the bankruptcy court issued a Decision and Order denying the Trustee's motion for summary judgment, granting the Banks' motions for summary judgment, and dismissing the Trustee's complaint. In re Cornerstone Homes, Inc. , 544 B.R. at 494. This appeal followed.
This Court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a)(1). In exercising appellate jurisdiction under that section, district courts review the bankruptcy court's conclusions of law de novo and its findings of fact for clear error. In re: Sterling United, Inc. , No. 14–MC–072S, 2015 WL 7573240, at *1 (W.D.N.Y. Nov. 25, 2015) (citing In re Ionosphere Clubs, Inc. , 922 F.2d 984, 988–89 (2d Cir. 1990) ). Here, the underlying facts are not in dispute and the Trustee only challenges the bankruptcy court's conclusions of law. See ECF Nos. 5, 6, 7, 8. Therefore, the appropriate standard of review is de novo .
Under longstanding and well-established New York law,4 "[a] mortgage is but an incident to the debt which it is intended to secure." Merritt v. Bartholick , 36 N.Y. 44 (1867). Thus, a valid transfer of the debt carries the mortgage with it by operation of law, Aurora Loan Servs., LLC v. Taylor , 25 N.Y.3d 355, 361, 12 N.Y.S.3d 612, 34 N.E.3d 363 (2015), but the inverse is not true. Rather, "a transfer of the mortgage without the debt is a nullity,...
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