Carpenter et al

Filing 9

ORDER DISMISSING CASE Signed by District Judge Victoria A. Roberts. (SSch)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
DEBRA JANE CARPENTER AND
PAUL CARPENTER,
Debtors,
Honorable Victoria A. Roberts
Case No: 15-10046
SAMUEL D. SWEET, ESQ. THE SUCCESSOR
THE CHAPTER 7 TRUSTEE OF THE ESTATE OF
DEBRA JANE CARPENTER AND PAUL LYNN
CARPENTER,
Plaintiff,
vs
MID-ISLAND MORTGAGE CORP.,
Defendant.
_______________________________________/

ORDER
In 2009, Paul and Debra Carpenter (“Debtors”) borrowed $422,262 from
Defendant Mid-Island Mortgage Corporation (“MIMC”). The loan was evidenced by a
note delivered to MIMC. The Debtors promised to pay the loan with interest. As
security for the note, Debtors executed a mortgage on the property located at 11 Ann
Drive North, Freeport, New York (“Property”) for the benefit of Mortgage Electronic
Registration Systems (“MERS”). MERS was the mortgagee nominee for MIMC. The
mortgage was recorded on November 24, 2009.
This appeal presents a straightforward question: Did the post-petition assignment
of the mortgage from MERS to MIMC: (1) amount to perfection of the mortgage lien and
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(2) violate the automatic stay provision of federal bankruptcy law, entitling the Plaintiff
Trustee to avoid the assignment of the mortgage against the Property? The Bankruptcy
Court answered "No" to both questions. This Court affirms that decision.
I.

BACKGROUND AND UNDISPUTED FACTS
The Debtors defaulted on the mortgage payment due February 1, 2013 and all

subsequent payments. On August 29, 2013, the Debtors filed a voluntary petition for
relief under Chapter 7 of Title 11, the Bankruptcy Code.
MIMC filed a motion to vacate the automatic stay under 11 U.S.C. § 362 so that it
could file a foreclosure action against the Property in New York. At the same time,
MERS executed the assignment of mortgage at issue here, assigning the Property
mortgage from it to MIMC. The mortgage assignment was recorded.
Michael Mason, Trustee, filed an adversary action to avoid the lien, arguing that
the assignment was an attempt to perfect the lien on the Property in violation of the
automatic stay.
Relying on Sixth Circuit precedent, the Bankruptcy Court held that the post-filing
execution and recording of the assignment was not an attempt to perfect legal title to
the Property, but merely transferred and recorded MIMC’s equitable interest in the
Property. The Bankruptcy Court also held that the post-filing execution and recording of
the assignment did not violate the automatic stay under 11 U.S.C. § 362.
The Trustee's appeal of the Bankruptcy Court's Order dated October 1, 2014,
Dismissing Adversary Proceedings, and Opinion Denying Plaintiff’s Motion for Summary
Judgment dated September 5, 2014, is now before the Court.

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II.

STANDARD OF REVIEW
An order dismissing an adversary proceeding is a final appealable order. The

Bankruptcy Court's findings of fact are reviewed under a clearly erroneous standard,
while its legal conclusions are reviewed de novo. In re Momentum Mfg Corp 25 F.3d
1132, 1136 (2d Cir. 1994). “The question is not how the reviewing court would have
ruled, but rather whether a reasonable person could agree with the bankruptcy court’s
decision; if reasonable persons could differ as to the issue, then there is no abuse of
discretion.” In re M.J. Waterman & Assoc. , 227 F.3d 604, 608 (6th Cir. 2000).
III.

ANALYSIS
There were no errors in the facts found by the Bankruptcy Court; other facts set

forth above appear to be unchallenged by the parties in their briefs. The Court relies
upon these facts in reaching its conclusions.
There were no errors in the law applied by the Bankruptcy Court.
The Trustee frames the issue this way: That MIMC did not have standing to
foreclose on the Property because it did not hold the mortgage on the Property at the
time of foreclosure; it only held the note. Therefore, according to the Trustee, the
mortgage was never properly perfected under New York law. The Trustee believes it
follows from that, that if MIMC had no perfected lien and no standing to foreclose: (1)
the foreclosure proceeding filed before the bankruptcy was invalid; (2) the bankruptcy
triggered the automatic stay; and (3) no legal action could be taken - such as attempts
to assign the mortgage to MIMC - in contravention of the automatic stay.

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The Property is located in New York State. Litigation is pending there to
determine the validity and enforceability of MERS' mortgage. While the law in New York
may be unsettled as to the validity of a foreclosure when the mortgage and note are
held by different parties, standing to foreclose on a mortgage is a completely separate
issue from perfection of the lien and whether the assignment of the mortgage from
MERS to MIMC violated the automatic stay under Sixth Circuit law.
The Bankruptcy Court correctly declined to address the issue as framed by the
Trustee and correctly declined to address perfection of liens under New York law and
the issue of standing to foreclose.
Importantly, standing to foreclose and perfection of a mortgage lien cannot be
merged into one issue as the Trustee attempts to do. Secondly, standing to foreclose is
not one of the considerations in the automatic stay provision. 11 U.S.C. § 362 (a)(4),
says: “(a) Except as provided in subsection (b) of this section, a petition filed under
section 301, 302, or 303 of this title. . . operates as a stay, applicable to all entries of-(4) any act to create, perfect or enforce any lien against property of the estate.”
To be clear, MIMC's assignment efforts were not attempts to perfect legal title to
the Debtors' Property. Once the Property was mortgaged, the Debtors held legal title to
the Property and the bank held an equitable interest. In Rogan v Bank One (In re Cook),
457 F.3d 561, 568 (6th Cir. 2006). Cook, relying on Kapila v Atlantic Mortgage &
Investment Corp (In re Halabi), 184 F.3d 1335 (11th Cir. 1999), which held that "the
owner of a mortgage interest may transfer its interest after the mortgagor files for
bankruptcy, " Kapila, 184 F.3d at 1337 went on to hold that an assignee's recording of

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an assignment of mortgage post-petition did not violate the automatic stay, and the
bankruptcy trustee cannot avoid post-bankruptcy transfers of the mortgage interest
because "the perfected mortgage is neither actually nor potentially the property of the
debtor. " Cook 456 F.3d at 568.
This Court agrees with the Bankruptcy Court: Regardless of whether MIMC had
properly perfected the mortgage interest in the Property by the time the bankruptcy
petition was filed, MIMC did not attempt to perfect legal title to the Debtors' Property
with the assignment; it only transferred and recorded the bank's equitable interest,
which did not and does not belong to the Debtors. Under Sixth Circuit law, the Trustee
cannot avoid the post-petition assignment of the mortgage interest by arguing it is a
violation of the automatic stay; the mortgage interest is not the property of the Debtors.
The Trustee's efforts to distinguish Cook and Kapila because there was no
question in those cases that the loans were properly perfected before foreclosure, are
unavailing. While the Cook court does say the bankruptcy trustee is a bona fide
purchaser of the debtor’s real estate and may avoid certain obligations placed on the
property that are voidable under state law, see Id. at 566, the recorded deed on the
Property in this case removes the Property from the assets of the Debtors that the
Trustee can expect to marshall for the benefit of the Debtors’ creditors. The principles
set forth in Cook and Kapila make clear that once a debtor executes a mortgage, the
mortgage and note are assets of the creditor mortgagee and the subsequent
assignment of that mortgage does not violate the automatic stay nor activate the
trustee's powers under 11 U.S.C. § 544.

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IV.

CONCLUSION
In a well reasoned opinion, the Bankruptcy Court correctly concluded that the

post-petition transfer of the mortgage interest from MERS was only a transfer of those
entities’ equitable interest in the Property and cannot be considered a violation of the
automatic stay. The Court affirms the Bankruptcy Court's Order Dismissing Adversary
Proceedings and Opinion Denying Plaintiff's Motion for Summary Judgment.
IT IS ORDERED.

/s/ Victoria A. Roberts
Victoria A. Roberts
United States District Judge
Dated: August 11, 2015

The undersigned certifies that a copy of this
document was served on the attorneys of
record by electronic means or U.S. Mail on
August 11, 2015.
s/Linda Vertriest
Deputy Clerk

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