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Bankruptcy – Real Property – Mortgages – Prior Discharge – Standing

Even though the debtor’s promissory note was discharged in a prior bankruptcy, his mortgage remains enforceable, and the current servicer of the mortgage has standing to file a proof of claim to enforce the mortgage.

Creditor Ditech Financial LLC’s secured claim is allowed in the amount of $173,580.30.

In this Chapter 13 bankruptcy case, both parties allege that Fannie Mae is the owner and ultimate beneficiary of the collection of the mortgage debt (the debt).

In the debtor’s 2009 Chapter 7 bankruptcy case, Countrywide Home Loans was listed as the holder of the debt and given notice of the proceedings. After a determination of no assets, the court granted the debtor a discharge under 11 U.S.C. § 727.

A Chapter 7 discharge extinguishes only one mode of enforcing a claim, an action against the debt in personam, while leaving intact another, an action against the debt in rem. Therefore, a Chapter 7 bankruptcy discharge, without more, does not eliminate a creditor’s right to foreclose on a valid mortgage lien. The creditor’s in rem right to enforce the mortgage by foreclosure is a claim under 11 U.S.C. § 502(b) against property of the debtor’s estate and may be treated in a subsequent Chapter 13 plan.

Furthermore, under the South Carolina Commercial Code, a defense to the right to enforce a negotiable instrument is the “discharge of the obligor in insolvency proceedings.” S.C. Code Ann. § 36-3- 305.

In this case, the in personam liability under the debtor’s promissory note was discharged and enjoined under 11 U.S.C. § 524(b). Therefore, because the debtor was the only obligor, the note is unenforceable as remedy for collection against the debtor due to his prior Chapter 7 discharge. Nevertheless, the debtor’s residence remains subject to the collection of the debt through foreclosure of any surviving lien.

Under South Carolina law, the debt owed is separate from the note and mortgage and, in circumstances where an unsatisfied note has become unenforceable, the mortgage may stand on its own as evidence and security to enforce the debt.

In this case, the parties agree the debt which originated with the note and mortgage on Feb. 20, 2004, still exists and that Fannie Mae is the ultimate beneficiary of the collection of that debt. Therefore, to determine the proper party with standing to file the proof of claim, the court must determine who has standing to prosecute an in rem foreclosure action of the mortgage under South Carolina law.

The mortgage assignment from Countrywide successor Bank of America to Ditech’s predecessor Green Tree clearly indicates that the parties intended to transfer not only the mortgage, but also the related right to collect the underlying debt.

Given this and other evidence, the court finds there was a transfer of the right to collect the underlying debt on behalf of Fannie Mae from Bank of America to Ditech. Ditech, by testimony of its agent, indicated that it is acting on behalf of the owner of the debt, Fannie Mae, to collect the payments on the debt.

Ditech is, by assignment, the holder of the mortgage, as the security for the debt that remains enforceable. The court finds Ditech is a party with the rights to collect the debt on behalf of Fannie Mae. Ditech has standing, as the servicer of the debt on behalf of Fannie Mae, to file the proof of claim in this case.

Even though the debtor has been in default on the mortgage debt since 2009, the applicable statute of limitations, S.C. Code Ann. § 15-3-520, is 20 years. Consequently, the proof of claim is not barred by the statute of limitations.

A mortgagor, such as the debtor herein, does not have standing to question the validity of a mortgage assignment because the assignment of the mortgage is a separate contract to which the mortgagor is not a party.

Even if the debtor had standing to challenge the mortgage assignments, the court rejects the debtor’s contention that it was a fraudulent practice for litigation counsel for BAC Home Loans to execute a 2010 assignment from MERS to BAC Home Loans in counsel’s other role as an assistant secretary of MERS.

The mere fact that BAC Home Loans’ litigation counsel executed the assignment on behalf of MERS does not demonstrate that the assignment was fraudulent. The court has not identified any authority that precludes an individual from being simultaneously an employee or agent of one entity and an agent of another. In addition, the execution of assignments in this fashion appears to have been the customary practice of MERS.

The debtor’s filing of this bankruptcy action stayed a state-court foreclosure action. The court does not find that Ditech’s inability or delay in substituting itself as plaintiff in the foreclosure action would prohibit it from recovering the attorney’s fees and costs owed and paid pursuant to § 9 of the mortgage. Therefore, the court finds that the attorney’s fees and costs paid by Ditech or its predecessor related to the foreclosure action are recoverable and may be included in the proof of claim in the amount of $2,180.

In re Koola (Lawyers Weekly No. 003-005-18, 27 pp.) (Waites, J.) 18-01373. B.S.C.


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