Deutsche Bank Trust Co. Am. v. Vitellas

• Decision Date: 01 July 2015
• Docket Number: 2013-07197
• Citation: 131 A.D.3d 52,2015 N.Y. Slip Op. 05634,13 N.Y.S.3d 163
• Parties: DEUTSCHE BANK TRUST COMPANY AMERICAS, etc., respondent, v. Stefanos VITELLAS, et al., appellants, et al., defendants.
• Court: New York Supreme Court — Appellate Division

131 A.D.3d 52

13 N.Y.S.3d 163

2015 N.Y. Slip Op. 05634

DEUTSCHE BANK TRUST COMPANY AMERICAS, etc., respondent

v.Stefanos VITELLAS, et al., appellants, et al., defendants.

2013-07197

Supreme Court, Appellate Division, Second Department, New York.

July 1, 2015.

Sacco & Fillas, LLP, Astoria, N.Y. (Si Aydiner and Elias N. Fillas of counsel), for appellants.

Hinshaw & Culbertson LLP, New York, N.Y. (Benjamin S. Noren and Schuyler B. Kraus of counsel), for respondent.

MARK C. DILLON, J.P., L. PRISCILLA HALL, JEFFREY A. COHEN, and SYLVIA O. HINDS–RADIX, JJ.

Opinion

COHEN, J.

Under New York law, in order to have standing to commence a foreclosure action, a plaintiff generally must be the holder or assignee of the note which the mortgage secures. On this appeal, we are asked to consider whether a note discharged in bankruptcy can be subsequently assigned, with the mortgage passing incident thereto, so as to convey standing to the assignee.

For the reasons that follow, we answer the question in the affirmative. Although a bankruptcy discharge extinguishes a debtor's personal liability on a mortgage note, it does not impair a creditor's right to assign that note, and an assignee who holds the discharged note and mortgage has standing to bring a foreclosure action and seek payment through the sale of the mortgaged property. Accordingly, even if the note at issue in this case was assigned or delivered to the plaintiff after it was discharged in bankruptcy, a fact which is not clear from this record, the defendant homeowners failed to establish their entitlement to dismissal of the complaint on the ground that the plaintiff lacked standing.

Factual and Procedural Background

On April 1, 2002, the defendant Stefanos Vitellas (hereinafter Stefanos) executed a promissory note by which he agreed to repay the sum of $560,000, with interest, to Lyons Mortgage Services, Inc. (hereinafter Lyons). As security for the note, both Stefanos and his wife, Maria Vitellas (hereinafter together the defendants), executed a mortgage on their premises in Douglaston, Queens. Two years later, on May 1, 2004, Stefanos filed for bankruptcy protection under Chapter 7 of the United States Bankruptcy Code (11 USC, ch. 7). In Schedule D of his bankruptcy petition, Stefanos listed the subject mortgage as a secured claim against the premises, identifying Homecomings Financial, the servicer of the Lyons loan, as the creditor. According to the defendants, although Homecomings Financial was served with the bankruptcy petition and notices, it did not appear in the bankruptcy proceeding or otherwise object to Stefanos's discharge. Stefanos was subsequently granted a discharge in bankruptcy by order dated October 14, 2004.

Stefanos allegedly defaulted on his payment obligations under the note by failing to make the monthly payment due on March 1, 2010, and all subsequent payments due thereafter. More than two years after Stefanos's alleged default, by summons and complaint filed on July 16, 2012, the plaintiff Deutsche Bank Trust Company Americas, as Trustee for RAIL 2002QS6 (hereinafter Deutsche Bank), commenced the instant action to foreclose the mortgage on the defendants' premises. In its complaint, Deutsche Bank alleged that the subject mortgage was assigned to it in a written assignment dated February 8, 2011, which was recorded on March 1, 2011. Deutsche Bank also alleged that the mortgage was “further assigned” to it by a second written assignment dated March 7, 2012, which was recorded on March 26, 2012. Although the complaint did not set forth any factual details regarding assignment of the underlying note, it generally alleged that Deutsche Bank “is holder of the subject note and mortgage, or has been delegated the authority to institute a mortgage foreclosure action by the owner and holder of the subject mortgage and note.”

Notably, in its summons, Deutsche Bank specifically acknowledged its awareness that Stefanos had sought bankruptcy protection by stating that, in the event Stefanos had obtained an order of discharge from the Bankruptcy Court, Deutsche Bank would not seek a money judgment, but only a foreclosure and sale of the mortgaged premises. However, the ad damnum clause in the complaint demanded that Stefanos be “adjudged to pay any deficiency.”

The defendants filed a pre-answer motion to dismiss the complaint pursuant to CPLR 3211(a) on the ground that Deutsche Bank lacked standing to maintain a foreclosure action, and could not seek a deficiency judgment against Stefanos in view of his bankruptcy discharge. In support of their motion, the defendants noted that Stefanos had been granted a bankruptcy discharge by order dated October 14, 2004, and submitted that order as an exhibit. Although the defendants conceded that a creditor's in rem right to foreclose a mortgage on real property survived a bankruptcy discharge, they argued that since the discharge had extinguished Stefanos's personal liability on the note, the note was no longer valid and legally operable at the time the written assignments of the mortgage were made in February 2011 and March 2012. The defendants then contended that “New York law requires the assignment of a valid note and mortgage before an assignee has standing to foreclose” (emphasis in original) and, thus, that the assignment of a note that was unenforceable could not convey standing.

Deutsche Bank opposed the motion to dismiss, and cross-moved to amend its complaint pursuant to CPLR 3025(b). Addressing the defendants' contentions, Deutsche Bank maintained that it had standing because both the note and mortgage had actually been physically delivered to it on March 25, 2004, more than one month before Stefanos sought bankruptcy protection, and more than six years before the commencement of the action. To substantiate its claim, Deutsche Bank submitted the affidavit of Jaime M. Sperbeck, an officer of its loan servicer, GMAC Mortgage, LLC. In her affidavit, Sperbeck averred that, based on her review of business records relating to the servicing of the loan, both the note and mortgage were delivered to Deutsche Bank on March 25, 2004, and Deutsche Bank remained in possession of the note and mortgage at the time of the commencement of the action on July 16, 2012.

Deutsche Bank further contended that Stefanos's bankruptcy discharge did not impair its ability to seek foreclosure. In this regard, Deutsche Bank pointed out that the United States Supreme Court had held in Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 that, while a bankruptcy discharge extinguishes the personal liability of a debtor, the mortgage holder still retains a “ ‘right to repayment’ in the form of its right to the proceeds from the sale of the debtor's property.” Deutsche Bank maintained that, as the “holder of the loan interest by physical delivery of the note and mortgage,” it had the right to foreclose that interest, because the bankruptcy discharge only extinguished Stefanos's personal liability under the note, and not the note itself. Deutsche Bank reasoned that while Stefanos was no longer personally liable, the note itself “still forms the basis for the agreement which is secured by the mortgage,” and to contend otherwise “would mean that in rem relief cannot be sought.”

Deutsche Bank also briefly noted that it was seeking leave to amend the complaint to clarify that it would not be seeking a deficiency judgment against Stefanos if he had obtained a valid discharge in bankruptcy.

In reply, the defendants argued that the Sperbeck affidavit was insufficient to prove that Deutsche Bank in fact had possession of the note on March 25, 2004, prior to the bankruptcy discharge. In support of their position, they asserted that the Sperbeck affidavit was deficient because it simply “amorphously referenced ‘Records,’ ” without identifying those records, and failed to annex documents “manifesting or otherwise buttressing the conclusion” that Deutsche Bank was assigned the subject note “pre-discharge in March 2004.” The defendants further submitted that there would have been no reason for the mortgage to have been assigned to Deutsche Bank in February 2011, and again in March 2012, as alleged in the complaint, if the note and mortgage had already been physically delivered. The defendants also continued to maintain that while “the right to foreclose survives bankruptcy discharge, the ability to subsequently assign that mortgage under New York law is impaired because there is no legally valid interest in a note accompanying it as required” (emphasis in original).

In an order dated January 11, 2013, the Supreme Court granted the defendants' motion to dismiss the complaint, and denied, as academic, Deutsche Bank's cross motion to amend the complaint. The court reasoned that since the defendants had raised the defense of lack of standing, Deutsche Bank was required to demonstrate its standing to prosecute this action, but that Deutsche Bank had failed to do so because it had not submitted any evidence to demonstrate either a written assignment or physical delivery of the note. The Supreme Court did not address the issues arising from, or the arguments made by the parties relating to, the bankruptcy discharge.

Deutsche Bank's Motion for Reargument and Renewal

Deutsche Bank promptly moved for leave to renew and reargue its opposition to the defendants' motion, and its cross motion. In support of its request for reargument, Deutsche Bank contended that the Supreme Court had apparently overlooked the Sperbeck affidavit, which provided evidence that the note was physically delivered to it on March 25, 2004, prior to the bankruptcy discharge. Although Deutsche Bank maintained that the Sperbeck affidavit was sufficient to establish that the note was delivered into its possession prior to the commencement of the action, in support of its request for renewal, it also submitted a copy of the subject note. An allonge affixed to the note endorsed it to...