Butler v. One W. Bank (In re Butler)

• Decision Date: 09 July 2014
• Docket Number: Bankruptcy No. 11–18996–MLB.,Adversary No. 12–01209–MLB.
• Citation: 512 B.R. 643
• Court: U.S. Bankruptcy Court — Western District of Washington
• Parties: In re Christina E. BUTLER, Debtor. Christina E. Butler, Plaintiff, v. One West Bank, FSB, a federally chartered savings bank; Mortgage Electronic Registration Systems, Inc., a Delaware corporation; Northwest Trustee Services, Inc., a Washington corporation; Federal Home Loan Mortgage Corporation, a United States Government sponsored enterprise; and Doe Defendants 1–10, Defendants.

512 B.R. 643

In re Christina E. BUTLER, Debtor.Christina E. Butler, Plaintiff,

v.One West Bank, FSB, a federally chartered savings bank; Mortgage Electronic Registration Systems, Inc., a Delaware corporation; Northwest Trustee Services, Inc., a Washington corporation; Federal Home Loan Mortgage Corporation, a United States Government sponsored enterprise; and Doe Defendants 1–10, Defendants.

Bankruptcy No. 11–18996–MLB.

Adversary No. 12–01209–MLB.

United States Bankruptcy Court,

W.D. Washington,

at Seattle.

Entered July 9, 2014.

Larry B. Feinstein, Vortman & Feinstein, Seattle, WA, for Debtor.

ORDER GRANTING DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT ON VIOLATION OF WASHINGTON'S DEED OF TRUST ACT, RCW 61.24 ET SEQ.

MARC BARRECA, Bankruptcy Judge.

This matter came before the Court on Federal Home Loan Mortgage Corporation, One West Bank FSB, and Northwest Trustee Service's motions for summary judgment on the only remaining claims in this action, violations of the Washington Deed of Trust Act (the “Motion for Summary Judgment,” Dkt. Nos. 173, 180). The Court heard oral argument on February 26, 2014, and took the matter under advisement. For the reasons set forth herein, the Motion for Summary Judgment is granted.

Jurisdiction

Subject matter jurisdiction is proper pursuant to 28 U.S.C. §§ 157, 1334, as the claims asserted in this adversary proceeding arise in, under, or are related to Christina Butler's bankruptcy case, Case No. 11–18996–MLB. Venue is proper pursuant to 28 U.S.C. §§ 1408, 1409.

Undisputed Facts

A. Background Information

There is no genuine dispute as to the following facts:

Long before the transaction at issue in this case, Federal Home Loan Mortgage Corporation (“Freddie Mac”), Bankers Trust Co. of California, N.A. (“Bankers Trust”), and IndyMac Bank F.S.B. (“IndyMac”), entered into a Custodial Agreement for Whole and Participation Mortgages Third–Party Custodian (the “Original Agreement”), effective February 6, 2002. For mortgage loans subject to the Original Agreement, Bankers Trust acted as the custodian of records for Freddie Mac, and IndyMac was the servicer for such loans. In April 2002, the name of Bankers Trust was changed to Deutsche Bank National Trust Company (“Deutsche Bank”).

On or about April 27, 2007, Plaintiff executed a promissory note (the “Note”) in favor of IndyMac, secured by a deed of trust (the “Deed of Trust”) on 18420 40th Avenue West, Lynnwood, WA 98037 (the “Property”) (all together, “Plaintiff's Loan”). The Deed of Trust named IndyMac as lender, Chicago Title Insurance Company as trustee, and Mortgage Electronic Registration Systems, Inc. (“MERS”) as beneficiary. Specifically, the Deed of Trust provided that “acting solely as nominee for the Lender and Lender's successors and assigns MERS is the beneficiary under this Security Instrument.” IndyMac was the original investor and servicer for Plaintiff's Loan.

Sometime in May 2007, IndyMac sold Plaintiff's Loan to a new investor, Freddie Mac. The Note was indorsed in blank, and IndyMac remained the loan servicer. Plaintiff did not deny that Plaintiff's Loan was sold to Freddie Mac or allege facts to genuinely dispute Freddie Mac's ownership of the Note.¹

On or about May 8, 2007, Deutsche Bank took physical possession of the Note as document custodian for Freddie Mac. Deutsche Bank placed the Note in a secure file room for safekeeping.

On or about July 11, 2008, IndyMac was deemed a failed financial institution and closed by the Office of Thrift Supervision (“OTS”). The OTS appointed the Federal Deposit Insurance Corporation (the “FDIC”) as receiver, chartered a new institution, IndyMac Federal Bank, FSB (“IndyMac Federal”), placed IndyMac Federal in conservatorship, appointed the FDIC as conservator, and effectuated the transfer of substantially all of IndyMac's assets to IndyMac Federal—including the servicing rights to Plaintiff's Loan. Therefore, on or about July 11, 2008, IndyMac Federal began servicing Plaintiff's Loan on behalf of Freddie Mac.

On or about March 19, 2009, the FDIC sold substantially all of IndyMac Federal's assets to One West Bank, F.S.B. (“One West”), thereby transferring the servicing rights for Plaintiff's Loan from IndyMac Federal to One West.

On or about May 12, 2009, Freddie Mac, Deutsche Bank, and One West replaced the Original Agreement with the Custodial Agreement: Single–Family Mortgages Freddie Mac Form 1035 (rev. 2/08.2) (the “Custodial Agreement”), to govern “the deposit and custodianship of the original Notes for Mortgages sold to and serviced for Freddie Mac.” Deutsche Bank was identified as the “Custodian,” and One West was identified as the “Seller/Servicer.”

The Custodial Agreement required, among other things, that the parties adhere to the Freddie Mac Single–Family Seller/Servicer Guide (the “Guide”) and Document Custody Procedures Handbook (the “Handbook”). Specifically, Section 2(a) of the Custodial Agreement provided that “Custodian hereby represents and warrants to, and covenants with, Seller/Servicer and Freddie Mac that Custodian will perform the functions and fulfill the duties set forth in Sections 18.6, 18.7, 56.9 and other relevant portions of the Guide. Section 2(g) provided that: “Custodian shall release Notes only pursuant to Section 18.6(e) of the Guide.... Seller/Servicer shall hold in trust and for the sole benefit of Freddie Mac all Notes released to it.” Section 3(b) provided that: “Pursuant to Section 18.1 of the Guide, compensation for Custodian's services, including (without limitation) any action taken at the request or demand of Freddie Mac, is the sole responsibility of Seller/Servicer.” In Section 4, Seller/Servicer “represent[ed] and warrant[ed] to, and covenant[ed] with, Freddie Mac” that it would, among other things, promptly notify Freddie Mac if it discovered that the Custodian failed to comply with operations requirements or the terms of the Custodial Agreement.

One West's responsibilities as Seller/Servicer were articulated in more detail in the Guide and Handbook. Guide Section 18.1 gave One West the latitude to choose the document custodian, so long as the document custodian satisfied all of Freddie Mac's specified requirements set forth in Section 18.2. Notably, under Section 18.2(c), One West had the option of acting as its own custodian. Section 18.2 also reiterated that “[c]ompensation for the Document Custodian's ... services is the sole responsibility of the Seller/Servicer.” Section 18.3 provided that “before delivering any Notes and assignments to a Document Custodian ..., the Seller/Servicer must deliver a Form 1035, Custodial Agreement: SingleFamily Mortgages, executed by the Seller/Servicer and the Document Custodian to Freddie Mac.” In other words, once One West identified and engaged the document custodian it sought to employ, here Deutsche, Freddie Mac indicated its assent to that Document Custodian by entering into a Custodial Agreement with One West and Deutsche Bank. Section 18.4 sets forth the Seller/Servicer's responsibilities, including (1) ensuring that the Document Custodian complies with all applicable Freddie Mac requirements, and (2) monitoring the eligibility status of the Document Custodian. Specifically, Section 18.4 provides in relevant part:

(a) Responsibility for documents and Document Custodian compliance

The Seller/Servicer agrees to indemnify Freddie Mac and hold Freddie Mac harmless for any loss, damage or expense (including court costs and reasonable attorney fees) that Freddie Mac may incur as a result of the Seller/Servicer's Document Custodian holding Notes and any other documents.

The Seller/Servicer is responsible for ensuring that its Document Custodian complies with all applicable Freddie Mac requirements regarding Note custody. Freddie Mac's Document Custody Procedure Handbook is available to Seller/Servicers and Document Custodians on AllRegs, or at http:// www. Freddie Mac. com/ cim/ handbook. html. Seller/Servicers and Document Custodians will find this handbook to be a useful resource in fulfilling these requirements.

(b) Monitoring the eligibility status of the Document Custodian.

The Seller/Servicer is responsible for monitoring its Document Custodian for compliance with Freddie Mac's Document Custodian eligibility requirements, and must ensure that its Document Custodian is in compliance with all eligibility requirements at all times.

Section 18.6 articulated the Document Custodian's functions and duties. In particular, Deutsche Bank was responsible for “[m]aintaining custody and control of the original Notes and assignments on behalf of Freddie Mac,” and storing those documents “in secure, fire resistant facilities.” Section 18.6(a)(1)(2). Deutsche Bank was also required to release Notes to One West upon request. Section 18.6(e) provided in relevant part:

The Seller/Servicer may require Notes and related documents in conjunction with the maturity, prepayment, foreclosure, repurchase, substitution, conversion, modification, or assumption of a Mortgage or the recordation of the assignment of a Security Instrument to Freddie Mac.

The Document Custodian will release to the Seller/Servicer any Note and related documents in the Document Custodian's custody upon receiving from the Seller/Servicer a properly completed and executed [request].

The Guide reiterated these duties:

As Document Custodian, you are responsible for safeguarding Freddie Mac's Notes. When you receive a ... Request for Release of Documents, from the Servicer, you are responsible for releasing the requested documents to the Servicer. The Servicer will hold in trust, for Freddie Mac's benefit, all Notes and assignments that you release to the Servicer.

Sometime in August 2009, Plaintiff defaulted on the Note.

On or about November 4, 2009, Erica Johnson–Seck (“Johnson–Seck”), on behalf of One West, executed a Beneficiary Declaration (the “Beneficiary Declaration”) identifying One West as the “actual holder” of Plaintiff...