Stern v. Am. Home Mortg. Servicing, Inc. (In re Asher), Bankruptcy No. 8–11–78837–reg.

• Decision Date: 24 January 2013
• Docket Number: Adversary No. 8–12–08097–reg.,Bankruptcy No. 8–11–78837–reg.
• Citation: 488 B.R. 58
• Parties: In re Debra J. ASHER, Debtor. Richard Stern, Chapter 7 Trustee, Plaintiff, v. American Home Mortgage Servicing, Inc., as successor servicing agent to Option One Mortgage Corporation, and Deutsche Bank National Trust Company as Trustee for the Soundview Home Loan Trust 2005–OPT3 Asset Backed Certificates, Series 2005–OPT3, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

488 B.R. 58

In re Debra J. ASHER, Debtor.
Richard Stern, Chapter 7 Trustee, Plaintiff,
v.
American Home Mortgage Servicing, Inc., as successor servicing agent to Option One Mortgage Corporation, and Deutsche Bank National Trust Company as Trustee for the Soundview Home Loan Trust 2005–OPT3 Asset Backed Certificates, Series 2005–OPT3, Defendants.

Bankruptcy No. 8–11–78837–reg.
Adversary No. 8–12–08097–reg.

United States Bankruptcy Court,
E.D. New York.

Jan. 24, 2013.

[488 B.R. 60]

Charles H. Wallshein, Richard L. Stern, Macco & Stern, LLP, Melville, NY, Nicholas Heath Wooten, Nick Wooten LLC, Auburn, AL, for Plaintiff.

Khardeen I. Shillingford, Schuyler B. Kraus, Hinshaw & Culbertson LLP, New York, NY, for Defendants.

MEMORANDUM DECISION
ROBERT E. GROSSMAN, Bankruptcy Judge.
I. INTRODUCTION

The matter before the Court is pursuant to the complaint filed by Richard L. Stern (the “Plaintiff”), the Chapter 7 Trustee of

[488 B.R. 61]

the estate of Debra J. Asher (the “Debtor”). The Defendants are Deutsche Bank National Trust Company (“DBNTC”), in its capacity as trustee for the Soundview Home Loan Trust 2005–OPT3 Asset Backed Certificates, Series 2005–OPT3 (the “Soundview Trust”), and Homeward Residential, Inc. (“Homeward”) (collectively, the “Defendants”), incorrectly named “American Home Mortgage Servicing, Inc.” in the complaint and the servicing agent for the relevant mortgage (the “Option One Mortgage”). The Defendants filed a motion for summary judgment (the “Motion”) to dismiss the Plaintiff's complaint.

Before the Court is the issue of the proper interpretation of section 544(a)(3) of the Bankruptcy Code (the “Code”) (Title 11 of the United States Code).¹ In the complaint, the Plaintiff alleges that he is entitled to avoid the Option One Mortgage pursuant to § 544(a)(3) even though this particular adverse interest had been properly recorded prior to the Debtor's filing. According to the Plaintiff, a trustee is rendered “a bona fide purchaser of real property” (“BFP”), as a matter of federal law, § 544(a)(3) fully preempting all contrary state regulations and common law. By virtue of the Code, the Plaintiff argues, he is both a trustee and a BFP of the Debtor's property. Consequently, § 544(a)(3) allows the Plaintiff to avoid the Option One Mortgage. In the Motion, the Defendants instead contend that state law determines whether a trustee is a BFP pursuant to § 544(a)(3). As constructive notice of the Option One Mortgage would be attributed to any purchaser under New York Real Property Law (“N.Y. RPL”), this type of legal notice forecloses any chance for a purchaser to be a BFP in New York State. As such, the Plaintiff may not avoid the Option One Mortgage pursuant to § 544(a)(3), entitling the Defendants to judgment as a matter of law.

Based on the plain meaning of § 544(a)(3), the Court agrees with the Defendants' conclusion. This Court finds that § 544(a)(3) cannot be read to create a new form of BFP but rather grants the Trustee all the powers and rights of a BFP a subtle but critical distinction. To adopt the trustees position would empower a trustee to avoid all recorded adverse interests in all fifty states a preemptive application for which no textual support can be found. Rather, in accordance with longstanding traditions regarding the role of the states in defining and creating property rights, § 544(a)(3) recognizes that a party can only become a BFP by application of state law. Here, because constructive notice of the Option One Mortgage is imputed to all potential purchasers of the property pursuant to section 291 of N.Y. RPL, under New York State law there is no possibility of a party qualifying as a BFP and avoiding the subject lien. Since this construction of § 544(a)(3) is the only reading reasonably supported by this section's text and context, the Defendants' motion as to this issue will be granted.

The Court takes no position as to the enforceability of the Option One Mortgage, the significance of its allegedly flawed securitization, and the extent of the Plaintiff's other powers under the Code and applicable non-bankruptcy law.

II. JURISDICTION AND AUTHORITY TO ENTER FINAL JUDGMENT

This Court has subject-matter jurisdiction of this core proceeding under 28 U.S.C. §§ 157(b) and 1334(a) and (b) and in accordance with the Standing Order of

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Reference of the Eastern District of New York dated August 28, 1986, and reconfirmed on December 5, 2012.

III. PROCEDURAL HISTORY

The Plaintiff commenced this adversary proceeding with the “Complaint to Avoid Mortgage Pursuant to 11 USC 544(a)(3), Quiet Title to Real Estate, and Avoid a Preference” (the “Complaint”). On August 23, 2012, the Defendants filed the Motion and a supporting memorandum of law. On September 10, 2012, the Plaintiff responded with his opposition to the Motion, and on September 13, 2012, he filed a further memorandum of law. On October 17, 2012, the Court held a hearing on the Motion and reserved decision.

IV. FACTS

The Option One Mortgage is a consensual lien secured by the Debtor's primary residence, located at 46 Yacht Club Road, Babylon, New York 11702 (the “Property”). Filed on December 19, 2011, the Debtor's Chapter 7 Bankruptcy Petition (the “petition”) names American Home Mortgage, Inc., as the holder of the Option One Mortgage and Note in the amount of $368,499.89. The Option One Note and the Option One Mortgage, dated July 18, 2005, identify the mortgagee as Option One Mortgage Corporation and the mortgagor as the Debtor. Both documents were recorded at the Office of the County Clerk for Suffolk County, New York, on August 15, 2005, and properly listed and identified in the public land records. The Defendants assert and the Plaintiff concedes that this record exists, available for review by any prospective purchaser, and that the Option One Mortgage lies within the chain of title of the Property. Except for the Option One Mortgage, no evidence of any subsequent assignment, recorded in the proper clerk's office and dated prior to the Debtor's filing, has been submitted by the Defendants or uncovered by the Plaintiff. DBNTC has acknowledged its failure to record an assignment of mortgage.

In the two months following its perfection, the Option One Mortgage was purportedly twice transferred and securitized pursuant to the Pooling and Servicing Agreement (“PSA”) submitted by Financial Assets Securities Corporation to the Securities and Exchange Commission (“SEC”).² The originator, i.e. mortgagee, and the servicer of a surfeit of mortgages, Option One Mortgage Corporation, as this transaction's “seller,” later sold the Option One Mortgage and Note to Financial Asset Securities Corporation, which thereupon acquired a second technical title: “the Depositor.” Financial Asset Secs. Corp., Prospectus Supplement (Form 424B5) S–4 (Sept. 28, 2005). Sometime between September 28, 2005, and September 30, 2005, the Option One Mortgage, as one of thousands of assets valued at $1.5 trillion, was transferred to the Soundview Trust, a second type of special purpose vehicle (“SPV”), often labeled a qualifying special purpose entity (“QSPE”), and the purported current owner of the Option One Mortgage. Financial Asset Sec. Corp., Current Report (Form 8–K) Ex.–4.1 (Oct. 17, 2005). The PSA designated Defendant DBNTC

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as trustee and Defendant Option One Mortgage Corporation, the original mortgagee, as servicer. Financial Asset Secs. Corp., Prospectus Supplement (Form 424B5) S–4 (Sept. 28, 2005).

V. DISCUSSIONSummary Judgment

Defendants' motion is subject to the standard set out in Federal Rule of Civil Procedure 56,³ made applicable to this adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 7056. Fed. R. Bankr.P. 7056. Rule 56(a) provides that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A “material” fact is one that “might affect the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A “genuine” dispute means that “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Id.

As mandated by its plain language, Rule 56(c) requires that the party seeking summary judgment must first show that the nonmoving party has failed “to make a showing sufficient to establish the existence of an element essential to the [nonmoving] party's case, and on which that party shall bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The movant may cite to particular materials in the record, including the pleadings, depositions, answers, admissions, or affidavits, if any. Fed.R.Civ.P. 56(c)(1)(A); Davis v. State of New York, 316 F.3d 93, 100 (2d Cir.2002). While summary judgment may be decided based only on the cited materials, a court may consider the total record. Fed. R. Civ. P. 56(c)(3); Asociación De Periodistas De Puerto Rico v. Mueller, 680 F.3d 70, 79 n. 6 (1st Cir.2012). This Court is required to diligently construe the evidence in the light most favorable to the nonmoving party, drawing “all reasonable inferences in its favor.” Silverstein v. Penguin Putnam, Inc., 368 F.3d 77, 80 (2d Cir.2004) (citations omitted), cert. denied,543 U.S. 1039, 125 S.Ct. 815, 160 L.Ed.2d 605 (2004).

Once the movant has met its initial burden of proof, the nonmoving party must make a “sufficient showing” as to each “element of her case with respect to which she has the burden of proof” or which has been challenged by a movant's motion. Celotex Corp., 477 U.S. at 323, 106 S.Ct. 2548. Reliance on the pleadings is not enough, Weinstock v. Columbia University, 224 F.3d 33, 41 (2d Cir.2000), cert. denied,540 U.S. 811, 124 S.Ct. 53, 157 L.Ed.2d 24 (2003), and specific facts, sustained by “significantly...