Shahid v. FNBN 1, LLC et al

Filing 18

MEMORANDUM AND ORDER IT IS HEREBY ORDERED that the judgment of the Bankruptcy Court is AFFIRMED. An appropriate Judgment accompanies this Memorandum and Order. IT IS FURTHER ORDERED that Shahid's Motion to Stay Pending Appeal (ECF Nos. 8-9) and Motion for Oral Argument (ECF No. 10) are DENIED. Signed by District Judge Ronnie L. White on 12/22/14. (JWJ)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
In re:

)
)
)
)
)

SHARHONDA T. SHAHID,
Debtor,
~~~~~~~~~~~~~~~

SHARHONDA T. SHAHID,
Plaintiff/Appellant,

vs.
FNBN I, LLC by PennyMac Loan Servicing,
LLC, its servicing agent,
Defendant/Appellee,
and
AMY QUINTERO,
Defendant/Appellee.

)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)

Case No. 4:14CV1211 RLW

MEMORANDUM AND ORDER

This matter is before the Court on the Notice of Appeal by Sharhonda T. Shahid
(hereinafter "Shahid") (ECF No. 1), under 28 U.S.C. §158(a)(3) from the Bankruptcy Court' s
Order granting summary judgment in favor of FNBN 1, LLC ("FNBN") and Amy Quintero
("Quintero") (Case No. 12-4006, ECF No. 88). In addition, Shahid has filed a Motion to Stay
Pending Appeal (ECF Nos. 8-9) and Motion for Oral Argument (ECF No. 10). The Court enters
Judgment in favor of FNBN and Quintero and denies all other pending motions as moot.
BACKGROUND

1

On March 8, 2007, Appellant Shahid entered into a loan agreement with The First National
Bank of Arizona ("FNB of Arizona"), predecessor in interest to Appellee FNBN.

Shahid

executed a Promissory Note ("Note") in the amount of $299,000. The Note was secured by a
Deed of Trust ("DOT"), which granted a security interest in favor of FNB of Arizona as to the real
property commonly known as 4335 Keevenshore Drive, Florissant, Missouri 63034. The Note
secured by the Deed of Trust defines "Lender" as "First National Bank of Arizona." The Note
further states that the Lender or anyone who takes the Note by transfer and who is entitled to
receive payments under the Note is called the "Note Holder."
On or around June 30, 2008, FNB of Arizona merged with The First National Bank of
Nevada ("FNB of Nevada"). On July 25, 2008, the Office of the Comptroller of the Currency
("OCC") closed FNB of Nevada and named the Federal Deposit Insurance Corporation ("FDIC")
as Receiver. FNBN took title to the aforementioned loan on December 29, 2008 pursuant to a
"Loan Contribution and Assignment Agreement" entered into between FNBN and FDIC as
Receiver for FNB ofNevada. Pursuant to the agreement, FDIC transferred to FNBN all of its right,
title, and interest in the loans described in the attachment thereto, which included Shahid' s loan.
On the same day, FNBN and PennyMac Loan Services ("PennyMac") entered into a "Servicing
Agreement" whereby PennyMac would act as servicer and agent of FNBN.
The Note has three allonges.

The first allonge bears two endorsements.

The first

endorsement indicates a transfer from FNB Arizona to FNB Nevada. The second endorsement
shows a transfer from FNB Nevada to FDIC as Receiver for FNB Nevada. The Note contains a
second allonge which contains an endorsement representing a transfer of the Note from the FDIC
as Receiver for FNB Nevada to FNBN. The Note contains a third allonge which contains an
endorsement in blank. All three allonges are physically attached to the Note. The original Note
is in the possession of the attorney for Creditor FNBN and is currently secured in a fire proof safe.
2

On September 5, 2012, Shahid filed a Petition seeking relief under Chapter 13 of the
United States Bankruptcy Code in the Eastern District of Missouri. See Case No. 13-48698. In
Schedule A of her Petition, Shahid identified an interest in the property located at 4335
Keevenshore Drive, Florissant, Missouri 63034 ("Property"). FNBN filed a Proof of Secured
Claim on October 22, 2012. (Case No. 13-48698, ECF No. 20). Appellant filed two objections
to FNBN' s Proof of Claim. Upon denial of Shahid' s objection to FNBN' s Proof of Claim and
FNBN' s filing of a Motion for Relief from the Automatic Stay, Shahid initiated the Adversary
Action from which this appeal arises (Case No. 4:13- 4006). Shahid' s Adversary Complaint was
filed against FNBN and Amy Quintero ("Quintero"). After cross filings of motions for summary
judgment, the entered Judgment in favor of FNBN and Quintero on June 24, 2014.
STANDARD OF REVIEW
On appeal, "the district court reviews the bankruptcy court's legal conclusions de novo and
its findings of fact for clear error." In re Tasic, No. 4:13CV00479 ERW, 2013 WL 2425133 , at *3
(E.D. Mo. June 4, 2013)(citing In re O'Brien, 351 F.3d 832, 836 (8th Cir. 2003)).
The instant case was decided by cross motions for summary judgment pursuant to
Fed.R.Civ.P. 56. The Court may grant a motion for summary judgment if "the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,
show that there is no genuine issue as to any material fact and that the moving party is entitled to
judgment as a matter of law." Fed. R. Civ. P. 56(c); Celotex Corp. v. Citrate , 477 U.S. 317, 322
(1986); Torgerson v. City ofRochester, 643 F.3d 1031 , 1042 (8th Cir. 2011). The substantive law
determines which facts are critical and which are irrelevant. Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 248 (1986). Only disputes over facts that might affect the outcome will properly
preclude summary judgment. Id

Summary judgment is not proper ifthe evidence is such that a

reasonable jury could return a verdict for the nonmoving party. Id
3

A moving party always bears the burden of informing the Court of the basis of its motion.
Celotex Corp., 477 U.S. at 323. Once the moving party discharges this burden, the nonmoving
party must set forth specific facts demonstrating that there is a dispute as to a genuine issue of
material fact, not the "mere existence of some alleged factual dispute." Fed. R. Civ. P. 56(e);
Anderson, 477 U.S. at 248. The nonmoving party may not rest upon mere allegations or denials
of his pleading. Anderson, 477 U.S. at 258.
In passing on a motion for summary judgment, the Court must view the facts in the light
most favorable to the nonmoving party, and all justifiable inferences are to be drawn in his favor.
Celotex Corp., 477 U.S. at 331. The Court's function is not to weigh the evidence but to
determine whether there is a genuine issue for trial. Anderson, 477 U.S. at 249. "'Credibility
determinations, the weighing of the evidence, and the drawing of legitimate inferences from the
facts are jury functions, not those of a judge."' Torgerson, 643 F .3d at 1042 (quoting Reeves v.
Sanderson Plumbing Prods. , Inc., 530 U.S. 133, 150, 120 S. Ct. 2097, 147 L. Ed. 2d 105 (2000)).
DISCUSSION

Plaintiff raises four points on appeal:
(1) The Court's error in holding that the shelter rule authorizes the Court to
disregard Missouri legal precedence [sic] regarding unattached allonges to a note.
(2) The Court's misapplication of Missouri allonge law whereby the Court
erroneously held the unattached allonges conveyed a secured interest in the subject
property. (3) The Court's failure to consider whether the results of the FDIC
investigation which found the note was never transferred to FNBN, which
challenges the validity of any chain of title involving FNBN. (4) The bankruptcy
court' s error in granting Defendants' cross motions for summary judgment where
disputed issues of material fact remained and thereby summary judgment should
not have been entered in favor of Defendants to dispose of the disputed issues of
material fact.

(ECF No. 15 at 9-10).
I. Application of the Shelter Rule and Allegedly Unattached Allonges
4

The "shelter rule," codified in Section 400.3-203(b) provides that:
Transfer of an instrument, whether or not the transfer is a negotiation, vests in
the transferee any right of the transferor to enforce the instrument, including
any right as a holder in due course, but the transferee cannot acquire rights of a
holder in due course by a transfer, directly or indirectly, from a holder in due
course if the transferee engaged in fraud or illegality affecting the instrument.
Under the shelter rule, "the transferee of an instrument, notwithstanding a potential defense,
nevertheless acquires the rights of the transferor." Pitman Place Dev., LLC v. Howard
Investments, LLC, 330 S.W.3d 519, 535 (Mo. Ct. App. 2010)(citing Bremen Bank and Trust Co. of
St. Louis v. Muskopf, 817 S.W.2d 602, 607 (Mo. Ct. App. 1991) ("The transfer of an instrument

vests in the transferee such rights as the transferor has therein, but only to the extent of the interest
transferred."); Cantrell v. Cafourek, 513 S.W.2d 690, 694 (Mo. Ct. App. 1974)).
Shahid states that "[i]t is undisputed that no purported allonges were attached to the note."
(ECF No. 4 at 18)(citing the bankruptcy court' s findings of fact and conclusions of law, ECF No.
87). Shahid states that attaching the allonges to the Note "is not a technical requirement but a
substantive requirement under Missouri law that must be satisfied." (ECF No. 4 at 18). Shahid
asserts that, under Missouri law, "an unattached allonge does not and cannot effect [sic] a transfer
of the note." (ECF No. 4 at 18). Relying on the Third Restatement of Property, Shahid claims
that "when the right of enforcement of the note and the mortgages are split, the note becomes, as a
practical matter unsecured." (ECF No. 4 at 19).
Shahid contends that the Bankruptcy Court misapplied state law when it held that the
unattached allonges were "immaterial" to the secured status of the Note based upon the shelter
rule. (ECF No. 4 at 22). Shahid argues that, under Missouri law, "the shelter rule is not available
to ' shelter' the failure to attach the allonge [to] the note." (ECF No. 4 at 20). She states that
there are no Missouri court cases that cite to the shelter rule as a remedy for failure to attach an

5

allonge to the note. (ECF No. 4 at 21 ). Rather, Shahid states that Missouri courts have held that
allonges must be attached to the note to effect a transfer. (ECF No. 4 at 22).
In response, Defendant FNBN states that Shahid' s argument is based upon the presumption
that the allonges containing the endorsements of the Note are not physically attached to the Note.
(ECF No. 12 at 11). The Bankruptcy Court only found that Ms. Quintero did not mark the date
that she endorsed the First Allonge and did not personally affix the First Allonge to the Note.
(Id.) The Bankruptcy Court, however, only found that Quintero did not personally affix the

allonge to the Note when she made the endorsement, not that the allonges were not attached. (Id.)
FNBN notes that the Bankruptcy Court further found that FNB Arizona merged with FNB Nevada,
which was closed by the OCC and then appointed FDIC as Receiver. The Court also held that
FDIC agreed to transfer the Note on December 29, 2008 to FNBN, that PennyMac is the agent for
FNBN, and that PennyMac has maintained possession of the Note since December 29, 2008.
(Id.) Notably, the Bankruptcy Court held, in accordance with the affidavit of Rita Garcia, 1 that

all three allonges were physically attached to the Note and that the Note, Deed of Trust, and other
collateral documents are in PennyMac' s possession as agent for FNBN. (Id.)
The Court finds that the shelter rule is applicable to the present action. FNBN is entitled to
enforce the Note and Deed of Trust because it is in possession of the original Note. The Court
finds that the Bankruptcy Court' s relevant factual findings are not clearly erroneous.

The

Bankruptcy Court found that the third allonge contains an endorsement made payable to bearer.
(ECF No. 87 at 3); see In re Box, No. 10-20086, 2010 WL 2228289, at *5 (Bankr. W.D. Mo. June
3, 2010)("'Bearer' means the person in possession of an instrument, document of title, or
certificated security payable to bearer or endorsed in blank."); Mo.Rev.Stat.§ 400.3.-205(b). The
Bankruptcy Court further held that the third allonge is physically attached to the Note and
1

Rita Garcia is the Manager, Bankruptcy of PennyMac. (Case 13-4006, ECF No. 46-1 , i\2).
6

constitutes bearer paper. (ECF No. 87 at 3, 10-11). Bearer paper is transferred by the mere
transfer of possession. In re Box, No. 10-20086, 2010 WL 2228289, at *4 (Bankr. W.D. Mo. June
3, 2010)("If an instrument is payable to bearer, it may be negotiated by transfer of possession
alone."). Based upon the reasonable factual findings of the Bankruptcy Court, the Court holds
that PennyMac is in possession of the Note, with the three allonges attached. Because the third
allonge is made payable to bearer, it constitutes bearer paper and the shelter rule applies. The
Court holds that FNBN acquired the Note and Deed of Trust and, therefore, FNBN is a holder in
due course.

II. FDIC Investigation
Shahid argues that the evidence demonstrates that the FDIC did not sell or transfer the Note
to FNBN. Shahid states that, based upon an investigation by the FDIC, the Note was sold to
Pennymac LLC, not FNBN. (ECF No. 4 at 24). Shahid claims that the Bankruptcy Court erred
when it relied on the termination of consent order to demonstrate that FDIC transferred the note to
FNBN. (Id.) Shahid claims that there is no competent evidence to establish the authenticity of
the FDIC Loan Contribution Assignment Agreement, dated December 29, 2008, based upon the
affidavit of Rita Garcia. (ECF No. 4 at 25). Shahid further contends that Rita Garcia lacks
personal knowledge of what occurred prior to the Pennymac servicing agreement with FNBN.
(Id. )

Shahid states that because Pennymac Loan Services was not a party to the Loan

Contribution and Assignment Agreement between FNBN and FDIC, an affidavit from a
Pennymac representative, Ms. Garcia, is not admissible for purposes of admitting the Loan
Contribution and Assignment Agreement. (Id.) Shahid also claims that her motion for summary
judgment put forth evidence from the FDIC that the Note was sold to Pennymac LLC, not
Pennymac Loan Services. (ECF No. 4 at 26).

7

In response, FNBN notes that the bankruptcy court founds that the FDIC agreed to transfer
the Note on December 29, 2008 to FNBN. (ECF No. 12 at 11). The Bankruptcy Court also
found that PennyMac is the agent for FNBN and that PennyMac has maintained possession of the
Note since December 29, 2008. (Id.)
The Court holds that the factual findings of the Bankruptcy Court are not clearly erroneous.
The Bankruptcy Court relied on a letter from PennyMac, which clearly indicated the chain of
ownership and expressly told Shahid that the FDIC transferred the loan to FNBN and that
PennyMac Loan Services, LLC began servicing the loan as of February 2, 2009. (Case 13-4009,
ECF No. 72-6).

The Bankruptcy Court also relied on the affidavit of Rita Garcia.

(Case

13-4006, ECF No. 46-1). She created the affidavit based upon her own personal knowledge and
her review of relevant corporate documents and her investigation into the facts. (Id.)
Garcia detailed that the Note has three allonges attached to it. (Id.)

Ms.

Ms. Garcia stated that

PennyMac received possession of the Note on December 29, 2008, and has retained possession of
the Note, Deed of Trust, and other collateral documents since December 29, 2008. (Id.) The
Court holds that it can rely upon Ms. Garcia' s affidavit based upon her personal knowledge and
review of the relevant records. Baker v. Veneman , 256 F. Supp. 2d 999, 1005 (E.D. Mo. 2003)("1t
appears to the Court that Mr. Arnold based his Declaration upon his review of the loan files and his
experience as a Farm Loan Manager. His statements are therefore based upon his personal
knowledge and are not inadmissible hearsay."). Based upon the facts presented, the Court holds
that FDIC transferred the Note to FNBN and that PennyMac was its servicer since December 29,
2008.

8

III. Other Purported Disputed Issues of Fact
In Count VIII of Shahid's First Amended Adversary Complaint, Shahid contends that
Quintero engaged in a conspiracy to defraud Shahid by fraudulently endorsing a note without
authority.

Shahid contends that the evidence demonstrates that Amy Quintero was not an

employee of FNB of Nevada when she endorsed the allonge. (ECF No. 4 at 23). Shahid states
that Quintero put forth "no evidence of her employment with Nevada" and "[t]here is no
evidentiary basis for the establishment of Ms. Quintero' s employment after July 2008." (ECF
No. 4 at 23).
In response, FNBN notes that the bankruptcy court found only that Ms. Quintero did not

herself personally affix the allonge to the Note at the time she made the endorsement. (ECF No.
12 at 11).

FNBN states that Shahid incorrectly assumes that none of the allonges are now

physically attached to the Note. (ECF No. 12 at 11). Further, FNBN contends that Quintero
provided adequate evidence of her employment with FNB of Nevada and its successor entities, as
well as knowledge of Shahid' s loan. (ECF No. 12 at 15).
There is a presumption of authorization and authenticity afforded endorsements on
negotiable instruments under Mo.Rev.Stat. §400.3-308(a). Section 400.3-308 provides:
In an action with respect to an instrument, the authenticity of, and authority to
make, each signature on the instrument is admitted unless specifically denied in the
pleadings. If the validity of a signature is denied in the pleadings, the burden of
establishing validity is on the person claiming validity, but the signature is
presumed to be authentic and authorized unless the action is to enforce the liability
of the purported signer and the signer is dead or incompetent at the time of trial of
the issue of validity of the signature. If an action to enforce the instrument is
brought against a person as the undisclosed principal of a person who signed the
instrument as a party to the instrument, the plaintiff has the burden of establishing
that the defendant is liable on the instrument as a represented person under Section
400.3-402(a).
The Court finds that Shahid has failed to rebut this presumption.

Rather, the

overwhelming evidence is that Ms. Quintero provided an affidavit detailing her
9

employment by FNB Arizona and its successor entities through Oncall Staffing. Ms.
Quintero also submitted W-2 ' s that evidenced her employment with Oncall Staffing.
(ECF No. 12 at 15). From January 1, 2007 through approximately March 2009, Quintero
was employed as an assistant Vice President within the Collateral Warehouse Division of
FNB of Arizona and its successor entities FNB of Nevada and the FDIC as Receiver.
(ECF No. 11 at 8). During the Receivership, Quintero remained in her same role and was
employed by OnCall Staffing. (Id) Quintero' s endorsement of allonges was within the
course and scope of her duties of employment as an Assistant Vice President in the
Collateral Warehouse Division of the FNB of Arizona and its successor entities FNB of
Nevada and the FDIC as Receiver. (ECF No. 11 at 9). Therefore, the Court holds that
the evidence does not demonstrate that Quintero engaged in a conspiracy to defraud Shahid
by fraudulently endorsing a note without authority because Quintero clearly had authority
to endorse the allonges.
Accordingly,
IT IS HEREBY ORDERED that the judgment of the Bankruptcy Court is AFFIRMED.
An appropriate Judgment accompanies this Memorandum and Order.

IT IS FURTHER ORDERED that Shahid's Motion to Stay Pending Appeal (ECF Nos.

8-9) and Motion for Oral Argument (ECF No. 10) are DENIED.

Dated this 22nd day of December, 2014.

~wf~

UNITED STATES DISTRICT JUDGE

10