Applewhite v. Carrington Mortgage Services, LLC et al
MEMORANDUM OPINION re 27 Order. Signed by Neal B. Biggers on 03/2/2014. (jlh)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF MISSISSIPPI
HENRY J. APPLEWHITE, Chapter 7 Trustee
CASE NO. 1:13CV83-NBB
CARRINGTON MORTGAGE SERVICES, LLC and
WELLS FARGO BANK, N.A.
Presently before the court is the appeal from bankruptcy court filed by Henry J.
Applewhite, Chapter 7 Trustee. Upon due consideration of the parties’ filings and supporting
and opposing authority, the court is ready to rule.
Factual and Procedural Background
On October 7, 2005, Jennifer Gardner (“Debtor”) and Willie Gardner obtained a loan
from New Century Mortgage Corporation and executed an Adjustable Rate Note. The Note was
endorsed in blank by New Century. The indebtedness evidenced by the Note was secured by real
property located in Lee County, Mississippi, described in a Deed of Trust from the Debtor and
Willie Gardner to The Weir Law Firm, Trustee for New Century. The Deed of Trust was
recorded on October 17, 2005, in Lee County, Mississippi and was never assigned.
Pursuant to an agreement with New Century, Wells Fargo, and a depositor, Carrington
Mortgage Services now services the Note for Wells Fargo and is currently in possession of the
Debtor initiated a Chapter 7 Proceeding on December 16, 2010. On September 27, 2011,
Trustee Applewhite commenced an adversary proceeding to avoid the Deed of Trust. Carrington
and Wells Fargo filed a motion to dismiss the Trustee’s complaint, which the United States
Bankruptcy Court granted.
In its Order of Dismissal, the bankruptcy court determined that “[a]lthough the Deed of
Trust has never been assigned, this does not affect its validity and any holder of the Note may
enforce the Deed of Trust. Thus the Trustee cannot avoid the Deed of Trust and bring the real
property identified therein into the bankruptcy estate.” Order of Dismissal, at 4. Trustee
Applewhite now appeals the Bankruptcy Court’s ruling.
Standard of Review
This court serves as an appellate court when reviewing a bankruptcy court’s decision
pursuant to 28 U.S.C § 158. See Webb v. Reserve Life Ins. Co., 954 F,2d 1102, 1103 (5th Cir.
1992). A bankruptcy court’s findings of fact shall not be set aside unless clearly erroneous, while
conclusions of law are reviewed de novo. Fed. R. Bankr. P. 8013; see also Matter of U.S.
Abatement Corp., 79 F.3d 393, 397 (5th Cir. 1996). The parties agree that the appeal before the
court involves questions of law, and therefore the court will employ the de novo standard of
Applewhite presents the following issues for the court’s review: (1) Whether the
Bankruptcy Court erred in its Order of Dismissal; (2) Whether the holder of the Note associated
with a Deed of Trust that was never assigned to said holder may enforce the Deed of Trust; and
(3) Whether the Trustee can avoid such Deed of Trust never assigned to the holder of the
associated Note and bring the real property identified therein into the bankruptcy estate.
The court’s consideration of potential error on behalf of the Bankruptcy Court in
dismissing the Trustee’s complaint to avoid and/or set aside lien, recover property, and for other
relief encompasses Applewhite’s remaining issues.
Trustee Applewhite maintains that the Bankruptcy Court erred in dismissing his
complaint because Wells Fargo is not a “person entitled to enforce” the Note under Mississippi
law. Appellees Carrington and Wells Fargo contend that the Trustee has waived his right to
challenge the Bankruptcy Court’s judgment because relief was sought pursuant to 11 U.S.C. §
544 and this section does not contemplate holder identity, but merely considers whether the
Trustee had notice of another secured interest in the property.
The court finds this argument is without merit. The Trustee’s Complaint states as part of
Count I that “Defendant Wells Fargo never had physical possession of the original Note,
therefore, there was no negotiation of the Note. Without negotiations of the Note, Defendant
Wells Fargo is not a holder. Because Defendant Wells Fargo is not a holder, it is not entitled to
enforce the Note. § 75-3-104, § 75-1-201(20), § 75-3-201(a) and (b), and § 75-3-301 Miss. Code
Ann. 1972.” Thus, the court will not deem the issue waived.
Finding that Trustee Applewhite preserved the issue, the court now considers whether
Wells Fargo is a holder of the Note. Trustee Applewhite relies on definitions from the
Mississippi Code in support of his contention that Wells Fargo is not a holder of the Note and
therefore, cannot enforce it.
Mississippi law defines “holder” as “(A) [t]he person in possession of a negotiable
instrument that is payable either to bearer or to an identified person that is the person in
possession; or (B) [t]he person in possession of a document of title if the goods are deliverable
either to bearer or to the order of the person in possession.” Miss. Code. Ann. § 75-1-201.
A “‘person entitled to enforce’ an instrument means (i) the holder of the instrument, (ii) a
nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in
possession of the instrument who is entitled to enforce the instrument pursuant to Section 75-3309 or 75-3-418(d). . . . Miss. Code. Ann. § 75-3-301. Trustee Applewhite concludes that
because Carrington, not Wells Fargo, is in possession of the Note, the bank cannot enforce the
Appellees rely on the UCC Comment to Mississippi Code’s statute on negotiation for the
proposition that Mississippi law authorizes constructive possession of a Note through an agent.
Courts may “‘look to official comments about uniform laws, when those laws have been adopted
all but verbatim by the [L]egislature, as the most informed source explaining provisions of the
original enactment.’” See National Bank of Commerce v. Shelton, 27 So.3d 444, 448-49 (¶ 10)
(Miss. 2009) (quoting Holifield v. BancorpSouth, Inc., 891 So.2d 241, 248 (¶ 28) (Miss. Ct. App.
2004)). There is no variation between Mississippi’s version of 3-201 and the UCC version,
therefore, the court finds the official comment of the UCC instructive.
The UCC comment provides, inter alia, that “ nobody can be a holder without possessing
the instrument, either directly or through an agent.” Miss. Code. Ann. § 75-3-201 U.C.C. cmt. 1.
It is undisputed that Carrington, as servicer of the loan, is the agent for Wells Fargo. Since Wells
Fargo’s agent Carrington has actual possession of the Note, the court finds that Wells Fargo so
too possesses the Note, constructively.
The court now turns to the issue of whether the failure to assign the Deed of Trust
prevents enforcement under Mississippi law.1
The Mississippi Supreme Court has determined that when “the mortgage and the note
are sufficiently connected . . . [t]he assignment of the note operate[s] as assignment of the
mortgage also.” Holmes v. McGinty, 44 Miss. 94 (Miss. 1870). Mississippi case law further
provides that “the assignment of the note carries with it the mortgage, which is a mere incident to
the debt, and the assignee of the note is entitled to resort to the mortgage and all other securities,
which were given for the purpose of assuring its payment, as its incidents. Lindsey v. Bates, 42
Miss. 397, 400 (Miss. Err. & App. 1869). Thus, “under Mississippi case law, which is consistent
with general principles of mortgage law, the mortgage follows the note.” Kirby v. Bank of
America, N.A., No. 2:09-cv-182-DCB-JMR, 2012 WL 1067944, at *4 (S.D. Miss. Mar. 29, 2012)
(citing Restatement (Third) of Property (Mortgages) § 5.4).2
There is no express provision requiring assignment of the Deed of Trust under
Mississippi law and this court declines to impose such a requirement. Like the Bankruptcy
Court, this court sees no limitations on the holder of the Note enforcing the Deed of Trust that
was never assigned.
Trustee Applewhite argues that Mississippi law requires assignment of the Deed of
Trust, while citing case law from other state courts and circuits. The only Mississippi law cited
by the Trustee is inapplicable to the issue before the court as it details requirements in the event a
Deed of Trust is assigned, not a mandate that it be assigned. See Miss. Code Ann. § 89-5-15.
The court notes that Mississippi law is further consistent with the Uniform Commercial
Code. See U.C.C. § 9-203 (“A security interest attaches to collateral when it becomes
enforceable against the debtor with respect to the collateral, unless an agreement expressly
postpones the time of attachment.”)
Further, the Deed of Trust may not be avoided by the Trustee pursuant to 11 U.S.C. § 544
because the Deed of Trust was perfected and enforceable against a bona fide purchaser at the
time of the Debtor’s bankruptcy filing and the Trustee had constructive notice of the Deed of
Trust through its recording. See In re Martin, 276 B.R. 552, 557-61 (N.D. Miss 2001); see also
Miss. Code Ann. §§ 89-3-1, -5-1. Therefore, the Bankruptcy Court did not err in finding that the
Trustee cannot bring the real property into the bankruptcy estate.
For the foregoing reasons, the court finds that the Order of Dismissal entered by the
United States Bankruptcy Court for the Northern District of Mississippi should be AFFIRMED
and this appeal DISMISSED. A separate order in accord with this opinion will issue this day.
This, the 28th day of March, 2014.
/s/ Neal Biggers
NEAL B. BIGGERS, JR.
UNITED STATES DISTRICT JUDGE
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