In re Bryant

• Decision Date: 11 July 2011
• Docket Number: Adversary No. 10–01091.,Bankruptcy No. 10–10959.
• Citation: 452 B.R. 876
• Parties: In re Frances G. BRYANT, Debtor.Frances G. Bryant, Plaintiffv.HSBC Mortgage Services, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Georgia

452 B.R. 876

In re Frances G. BRYANT, Debtor.Frances G. Bryant, Plaintiff

v.HSBC Mortgage Services, Inc., Defendant.

Bankruptcy No. 10–10959.

Adversary No. 10–01091.

United States Bankruptcy Court, S.D. Georgia, Augusta Division.

July 11, 2011.

Lee Ringler, Augusta, GA, for Plaintiff.Barbara B. Liu, Sicay–Perrow, Knighten & Bohan, PC, Mark L. Wilhelmi, Mark L. Wilhelmi, PC, Augusta, GA, for Defendant.

ORDER

SUSAN D. BARRETT, Chief Judge.

The matters before me are: Frances G. Bryant's (“Bryant” or “Debtor”) complaint against HSBC Mortgage Services, Inc. (“HSBC”) to determine HSBC's standing and secured status and requesting declaratory judgment, injunctive and equitable relief, including actual and punitive damages; her request to determine the validity, priority or extent of HSBC's purported lien; and HSBC's motion for relief from the automatic stay. These are core proceedings under 28 U.S.C. § 157(b)(2)(G) and (K), and jurisdiction is proper pursuant to 28 U.S.C. § 1334.

FINDINGS OF FACT

Debtor's bankruptcy schedules list HSBC's mortgage debt as disputed in the amount of $98,341.00. See Chap. 13 Case No. 10–10959, Dckt. No. 1, Sch. D. Debtor's pleadings dispute the amount owed and challenge whether HSBC has standing to pursue a claim and whether HSBC actually holds a valid and enforceable secured claim against property of Debtor's bankruptcy estate, namely the property at 368 Carriage Lane, North Augusta, South Carolina (“Carriage Lane”). While Debtor did not appear at the hearing, it is undisputed that Debtor does not reside at the Carriage Lane property.

Conversely, HSBC moved for relief from the automatic stay. HSBC asserts it has a valid secured claim and argues the property is not necessary for Debtor's reorganization. HSBC further contends there is no equity in the property and Debtor is significantly delinquent in her pre- and post-petition payments to HSBC. Debtor concedes there is no equity in the property.

The underlying debt is evidenced by the promissory note and mortgage. Def.'s Ex. Nos. 1 and 2. The initial lender was Choice Capital Funding, Inc. (“Choice”). Debtor acknowledges that this is the only mortgage of record on the property. Counsel for HSBC filed a proof of claim asserting a secured claim of $108,292.32. Def.'s Ex. No. 9. Debtor complains the proof of claim fails to include documentation supporting the $17,027.77 charge for pre-petition arrearage and assessed fees and costs. Debtor further complains that the proof of claim does not include any evidence of a transfer and delivery of the note and mortgage from Choice to HSBC. The promissory note attached to the proof of claim discloses that it was indorsed in blank by the purported president of Choice, but the indorsement is not dated. HSBC provided the original note and mortgage at the hearing and offered them into evidence. Def.'s Ex. Nos. 1 and 2.¹

Dana St. Claire–Hougham, a conflict resolution analyst with HSBC, testified this indorsement was done in connection with the terms of the 2005 Bulk Continuing Loan Purchase and the Flow Loan Purchase agreements entered between Household Financial Services, Inc. and Choice in March 2000. Def.'s Ex. Nos. 3 and 4. In 2003, Household Financial Services, Inc. filed a name change certification with the Georgia Secretary of State reflecting it changed its name to HSBC, the named defendant in this proceeding. Def.'s Ex. No. 8.

Ms. St. Claire–Hougham further testified that HSBC purchased this loan from Choice in January 2005, producing two internal reports reflecting the transfer. Def.'s Ex. Nos. 5 and 7. Ms. St. Claire–Hougham testified that HSBC received the original indorsed promissory note and mortgage contemporaneously with this 2005 transaction.²

In July 2007, Choice filed a chapter 7 bankruptcy petition in the Northern District of Georgia. Chap. 7 Case No. 07–70717–JEM (Bankr.N.D.Ga. July 5, 2007). Debtor filed for chapter 13 bankruptcy relief in April 2010. Thereafter, in May 2010, two assignments of the mortgage and note were executed and filed in the Aiken County, South Carolina real estate records by Mortgage Electronic Registration Systems, Inc. (“MERS”) as nominee for Choice assigning and transferring to HSBC all beneficial interest of MERS in the mortgage and the promissory note. Debtor's Ex. No. 3 and Def.'s Ex. No. 6.³

Ms. St. Claire–Hougham also testified as to the payment history on the loan. Def.'s Ex. No. 12. HSBC filed a proof of claim in the amount of $108,292.32. Def.'s Ex. No. 9. She testified there was a pre-petition arrearage of $17,027.77, and as of the hearing date, Debtor had made only one post-petition payment, resulting in Debtor being delinquent in at least seven post-payments as of the hearing date. In addition, as of the petition date, Debtor was delinquent in at least nine pre-petition payments. Furthermore, HSBC has advanced funds for the ad valorem taxes and insurance as a result of Debtor's failure to timely pay these sums. Ms. St. Claire–Hougham also testified that HSBC's proof of claim actually omitted a claim of $5,965.00 for deferred interest. According to Ms. St. Claire–Hougham, the payoff as of the hearing date exceeded $120,000.00.

CONCLUSIONS OF LAW

At the conclusion of the evidence, I orally ruled in HSBC's favor and lifted the stay. After the hearing and before a written order was entered, Debtor filed two motions for reconsideration citing two recent cases from Massachusetts and New York, respectively, as grounds for reconsideration, U.S. Bank Nat'l. Ass'n v. Ibanez, 458 Mass. 637, 941 N.E.2d 40 (2011) and In re Agard, 444 B.R. 231 (Bankr.E.D.N.Y.2011). Debtor argues these cases negate the holding that the “mortgage follows the note.” After considering these cases, and Debtor's arguments, I deny Debtor's motion to alter my previous ruling.

First, these cases involve the respective laws of Massachusetts and New York, not South Carolina which is the applicable law ⁴ in the case sub judice. Interpreting the law of Massachusetts, the court in Ibanez noted:

In Massachusetts, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage. [ ] Rather the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment. (“In some jurisdictions it is held that the mere transfer of the debt, without any assignment or even mention of the mortgage, carries the mortgage with it, so as to enable the assignee to assert his title in an action at law.... This doctrine has not prevailed in Massachusetts, and the tendency of the decisions here has been, that in such cases the mortgagee would hold the legal title in trust for the purchaser of the debt, and that the latter might obtain a conveyance by a bill in equity”). See Young v. Miller, 72 Mass. 152, 6 Gray 152, 154 (1856).Ibanez at 54. This is contrary to the law of South Carolina. In South Carolina, a mortgage travels with the promissory note even without a written assignment.

[South Carolina] law does not require both possession of the note and a written assignment of the mortgage to prove ownership.... When a negotiable note payable to order is indorsed generally by the payee the note and its incidents pass in the commercial world by delivery.... There is no law in [South Carolina] that requires assignments of mortgages to be recorded.

In re Woodberry, 383 B.R. 373, 376–77 (Bankr.D.S.C.2008), citing Union Nat'l Bank v. Cook, 110 S.C. 99, 96 S.E. 484 (1918) (internal citations omitted). “South Carolina recognizes the ‘familiar and uncontroverted proposition’ that ‘the assignment of a note secured by a mortgage carries with it an assignment of the mortgage.’ ” Midfirst Bank, SSB v. C.W. Haynes & Co., Inc., 893 F.Supp. 1304, 1318 (D.S.C.1994), citing Hahn v. Smith, 157 S.C. 157, 154 S.E. 112 (1930); Ballou v. Young, 42 S.C. 170, 20 S.E. 84 (1894). “ ‘The assignment of a mortgage as distinct from the debt it secures is nugatory and confers no rights upon the transferee....’ ” Id. citing South Carolina Nat'l Bank v. Halter, 293 S.C. 121, 359 S.E.2d 74, 77 (1987) ( citing Hahn, 157 S.C. 157, 154 S.E. 112 (1930)). The indorsement of the promissory note in blank converts the note at issue to a bearer instrument. S.C.Code Ann. § 36–3–204(c) (“For the purpose of determining whether the transferee of an instrument is a holder, an indorsement that transfers a security interest in the instrument is effective as an unqualified indorsement of the instrument”); S.C.Code Ann. § 36–3–205 (“If an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a ‘blank indorsement’. When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone....”). “As such, ownership passes with delivery of the [note] and proof of ownership can be made by possession. No written assignment of the mortgage is required under [South Carolina] law.” In re Woodberry, 383 B.R. at 377.

Because the note establishes the terms of the debt and the mortgage secures the debt with the mortgaged property, the assignment of the mortgage is generally done in conjunction with the assignment of the note. The transfer of a note operates as an assignment of the mortgage given to secure it, in the absence of any provision to the contrary. The assignment and delivery of the note carry with it the mortgage securing the underlying debt. The note is the principal and the mortgage is the incident and follows the note in its delivery from one person to another.

27 S.C. Juris. Mortgages § 173 (2011) citing Union Nat'l Bank v. Cook, 110 S.C. 99, 96 S.E. 484 (1918).

Debtor also cites the case of In re Agard in support of her argument that the mortgage does not pass with...