Kohler et al v. US Bank National Association as Trustee for Structured Asset Investment Loan Trust Mortgage Pass-Through Certificates Series 2006-4 et al

Filing 13

DECISION AND ORDER Affirming Bankruptcy Court Decision and Order signed by Judge Charles N Clevert, Jr on 6/21/13. (cc: all counsel)((cef), C. N. Clevert, Jr.)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
EDWARD B. KOHLER,
PATRICIA L. KOHLER,
Appellants,
v.

Case No. 11-C-0893

U.S. BANK NATIONAL ASSOCIATION
as Trustee for Structured Asset
Investment Loan Trust Mortgage
Pass-Through Certificates Series 2006-4,
CHASE HOME FINANCE LLC,
MORTGAGE ELECTRONIC REGISTRATION
SYSTEMS, INC.,
Appellees.
DECISION AND ORDER
AFFIRMING BANKRUPTCY COURT DECISION AND ORDER
On November 3, 2009, Edward and Patricia Kohler filed a chapter 7 bankruptcy
petition, which they converted to a chapter 13 case on February 16, 2010. (See Doc. 1 at
134.) U.S. Bank National Association (“U.S. Bank”), as trustee for the Structured Asset
Investment Loan Trust Mortgage Pass-Through Certificates Series 2006-4 (the “trust”),
moved for relief from the automatic stay imposed by 11 U.S.C. § 362 to proceed with a
state-court foreclosure action relating to notes and mortgages executed by the Kohlers.
Attached to the motion for relief from stay were copies of the first mortgage note executed
by the Kohlers, with an allonge dated December 2, 2009, and the second mortgage note
executed by the Kohlers, with an allonge dated March 8, 2010. (See Doc. 1 at 89, 119-28,
166-69.) In addition, U.S. Bank filed two claims (claims 12 and 13) related to the two
notes. The Kohlers objected to the claims and the motion for relief from stay. In addition,
they filed an adversary proceeding to determine the validity and enforceability of the first

and second mortgage liens. (See Doc. 1-3 at 22.) Thereafter, U.S. Bank amended claims
12 and 13, adding undated allonges endorsed in blank (Doc. 1-4 at 55-59, 87-90), and the
Kohlers objected again.
On May 25, 2011, Bankruptcy Judge Pamela Pepper conducted an evidentiary
hearing at which Chris Corcoran of Deutsche Bank, custodian of the note and mortgage
records, testified. Subsequently, in an oral decision of June 27, 2011, Judge Pepper
rejected the Kohlers’ arguments and issued her findings of fact. In a written order of July 6,
2011, Judge Pepper granted relief from the stay. (Doc. 101 at 212-13.) Thereafter, at a
hearing on August 9, 2011, Judge Pepper denied the Kohlers’ motion for reconsideration.
(Doc. 1 at 236-37; Doc. 11.)
The Kohlers appealed from these two decisions issued by Judge Pepper. The
matter is fully briefed, and this court heard oral argument on June 5, 2013. The Kohlers
contend that Judge Pepper erred in finding that U.S. Bank had standing to pursue relief
from the automatic stay. The Kohlers do not dispute that they executed the notes and
mortgages and that they defaulted in payment; their only objection is to the standing of
U.S. Bank to enforce the notes and mortgages.
When considering an appeal from the bankruptcy court’s judgment, a district court
reviews the bankruptcy court’s findings of fact for clear error and conclusions of law de
novo. Ojeda v. Goldberg, 599 F.3d 712, 717 (7th Cir. 2010). The clear error standard is
highly deferential. In re Davis, 638 F.3d 549, 553 (7th Cir. 2011). “‘If the bankruptcy
court's account of the evidence is plausible in light of the record viewed in its entirety, we
will not reverse its factual findings even if we would have weighed the evidence differently.’”

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Arlington LF, LLC v. Arlington Hospitality, Inc., 637 F.3d 706, 713 (7th Cir. 2011) (quoting
Freeland v. Enodis Corp., 540 F.3d 721, 729 (7th Cir. 2008)).
To obtain relief from the automatic stay, a party need only establish that it has a
colorable claim to enforce a right against property of the estate. In re Veal, 450 B.R. 897,
914-15 (B.A.P. 9th Cir. 2011). Ultimate resolution of the parties’ dispute is left for other
proceedings. Id. at 914.
The concept of standing includes constitutional and prudential standing concerns.
A party must have a personal stake in the case and controversy, and the person asserting
standing bears the burden of establishing it, see Summers v. Earth Island Inst., 555 U.S.
488, 493, 129 S. Ct. 1142, 1149 (2009). Constitutional standing requires that a party
“present an injury that is concrete, particularized, and actual or imminent; fairly traceable
to the defendant’s challenged behavior; and likely to be redressed by a favorable ruling.”
Davis v. FEC, 554 U.S. 724, 733, 128 S. Ct. 2759, 2768 (2008). Prudential standing exists
when the litigant asserts the rights and interests of himself rather than a third party,
presents a claim falling within the zone of interests protected by the specific law invoked,
and advances more than abstract questions of wide public significance amounting to
grievances better handled by the legislative or executive branch. Elk Grove Unified Sch.
Dist. v. Newdow, 542 U.S. 1, 12, 124 S. Ct. 2301, 2309 (2004); see also Fed. R. Civ. P.
17 (requiring that an action be prosecuted in the name of the real party in interest).
Here, at heart, the issue is whether U.S. Bank is the proper party to enforce
payment of the notes under state law. No one disputes that if U.S. Bank can enforce the
notes under state law standing exists; if it cannot, standing is lacking. See In re Weisband,
427 B.R. 13, 18 (Bankr. D. Ariz. 2010) (“If GMAC is the holder of the Note, GMAC would
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be a party injured by the Debtor’s failure to pay it, satisfying the constitutional standing
requirement. GMAC would also be the real party in interest under Fed. R. Civ. P. 17
because . . . the holder of a note has the right to enforce it.”).
The Kohlers agree that on April 6, 2006, they signed notes relating to the first and
second mortgages on their property. When executed, the note regarding their first
mortgage was payable to BNC Mortgage, Inc., in the amount of $220,800, and the note
regarding their second mortgage was payable to Lehman Brothers Bank, FSB in the
amount of $55,200. The Kohlers admit they are in default on payments. However, they
challenge whether U.S. Bank has sufficiently established that it is the entity able to pursue
payment on the notes and foreclosure of the mortgages. The Kohlers’ mortgages were
bundled with others and securitized, and BNC Mortgage and Lehman Brothers apparently
no longer exist. The Kohlers challenge whether the notes have been properly endorsed
over or transferred to the trust or U.S. Bank as trustee. Moreover, they contend that U.S.
Bank has not shown ownership of the notes.
On the other hand, U.S. Bank maintains that it holds notes signed by the Kohlers,
endorsed in blank. If so, the notes are enforceable by the bearer. According to U.S. Bank,
ownership of the notes is immaterial. It further argues that because it holds bearer paper
more is not required to have standing to proceed.
The key provisions for determining whether U.S. Bank has standing come from the
Wisconsin Uniform Commercial Code, which governs enforcement of negotiable
instruments. According to Wisconsin law, an instrument may be payable to the bearer or
to the order of an identified person. Wis. Stat. § 403.109. Under Wis. Stat. § 403.301,
the “person entitled to enforce” an instrument includes, among limited others, the “holder
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of the instrument.” “Holder” means the person in possession of a negotiable instrument
that is payable either to bearer or to an identified person who is the person in possession.
Wis. Stat. § 401.201(2)(km).

A holder of the instrument is entitled to enforce the

instrument “even though that person is not the owner of the instrument or is in wrongful
possession of the instrument.” § 403.301.
Also, “negotiation” means a transfer of possession of an instrument “by a person
other than the issuer to a person who thereby becomes its holder.”

Wis. Stat.

§ 403.201(1). “[I]f an instrument is payable to an identified person, negotiation requires
transfer of possession of the instrument and its endorsement by the holder.

If an

instrument is payable to bearer, it may be negotiated by transfer of possession alone.”
Wis. Stat. § 403.201(2).
An endorsement payable to an identified person is a “special endorsement” that may
be negotiated only by another endorsement by that person. Wis. Stat. § 403.205(1). But
“[i]f an endorsement is made by the holder of an instrument and it is not a special
endorsement, it is a blank endorsement. If endorsed in blank, an instrument becomes
payable to bearer and may be negotiated by transfer of possession alone until specially
endorsed.” Wis. Stat. § 403.205(2). As stated by one court, “[n]egotiable instruments like
mortgage notes that are endorsed in blank may be freely transferred.

And once

transferred, the old adage about possession being nine-tenths of the law is, if anything, an
understatement. Whoever possesses an instrument endorsed in blank has full power to
enforce it.” Horvath v. Bank of New York, N.A., 641 F.3d 617, 621 (4th Cir. 2011).
Endorsement requires a signature, other than that of the maker, made on the
instrument for the purpose of negotiation. Wis. Stat. § 403.204(1). And “[f]or the purpose
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of determining whether a signature is made on an instrument, a paper affixed to the
instrument is a part of the instrument.” Id. Such an endorsement affixed to an instrument
is called an “allonge.” Deluxe Black’s Law Dictionary 76 (1990 6th ed.).
ANALYSIS
A.

The Bankruptcy Court’s Findings of Fact
During the evidentiary hearing in the bankruptcy court, U.S. Bank called Corcoran

as its witness and produced two files, each containing an original note, an allonge, and
other mortgage-related documents. Judge Pepper found Corcoran to be a credible
witness. (Doc. 1-1 at 221.) Based on Corcoran’s testimony and the original files (copies
of the original files were placed in the record as exhibits (Doc. 1-2) and the original files
were apparently returned to the custody of Deutsche Bank), Judge Pepper further found
that:
(1)

On April 6, 2006, BNC loaned $220,800 to the Kohlers and the Kohlers executed
a note payable to BNC Mortgage for that amount; the original note was presented
in court as part of Deutsche Bank’s file, for which it was custodian, and a copy of the
note was attached to the proof of claim.

(2)

On April 6, 2006, Lehman Brothers loaned $55,200 to the Kohlers and the Kohlers
executed a note payable to Lehman Brothers for that amount; the original note was
presented in court as part of Deutsche Bank’s file, for which it was custodian, and
a copy of the note was attached to the proof of claim.

(3)

On April 20, 2006, Deutsche Bank received files for both of the loans. Each file
contained the original note plus an allonge payable in blank.

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(4)

Each allonge reflected the loan number—8336 and 8338 for the first and second
mortgage loans respectively—plus the address and names of the Kohlers as
borrowers.

(5)

There was a particular stacking order for the documents in each file when received,
and each of those documents appeared in the files maintained by Deutsche Bank.

(6)

Documents in the loan files had been separated at various points in time while
Deutsche Bank held them, whether by servicers who requested the file or someone
else.

(7)

The “note and the allonge had staple holes in the upper lefthand corners indicating
that at some point there had been attachment to other documents.” (Doc. 1-1 at
221.)

(8)

When Corcoran first saw the files the documents were all clipped together at the
top—they had been hole punched and clipped together.

(9)

Deutsche Bank has a custodial contract with the trust, its role under that contract
is to hold and maintain the files Corcoran testified about in court, and Deutsche
Bank was holding and maintaining those two files on behalf of the trust.

(Doc. 1-1 at 219-23.)
When denying the Kohlers’ motion for reconsideration, Judge Pepper recognized
that her statement that both notes and allonges had staple holes was erroneous; the
second mortgage allonge did not. (Doc. 11 at 11.) However, Judge Pepper indicated that
the correction in the findings of fact did not alter her legal conclusions. (Id.)
On appeal, the Kohlers challenge these findings as clearly erroneous. However, this
court finds no clear error. Corcoran’s testimony supported the bankruptcy judges findings,
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and the Kohlers presented no contrary evidence. Judge Pepper’s findings are plausible
in light of the record, and even under a de novo standard of review this court would find the
same. The original notes and allonges in the original files, plus Corcoran’s testimony,
support all of Judge Pepper’s factual determinations.
Corcoran testified as to the contents and condition of Kohler files when Deutsche
Bank received them on April 20, 2006. He testified that files submitted for custody by
Deutsche Bank contain documents in a particular “stacking order,” specifically first the note
and immediately thereafter any allonges, followed by other documents in a certain standard
order. He testified that each of the allonges at issue had stickers and the loan number for
each related mortgage loan with the borrowers’ names and addresses that matched the
information on each of the respective notes. Moreover, Corcoran stated that those stickers
were on the allonges when received on April 20, 2006. He further testified, and the original
documents showed, that both the note and allonge relating to the first mortgage to BNC
Mortgage had staple holes in the pages. Corcoran added, and the original documents
showed, that the original notes and allonges (and the remainder of the original files) had
two-hole punched at the top and when the files came to Deutsche Bank all of the
documents were bound together with metal fasteners at the top. However, the documents
had been separated at various times, perhaps by servicers who had requested the file to
proceed with foreclosure.

Further, Corcoran testified that Deutsche Bank acted as

custodian for about three million files, that it acted as custodian for BNC Mortgage and
Lehman Brothers when the files were delivered on April 6, 2006, and that by the time of
the hearing Deutsche Bank was maintaining the two original files as custodian for the trust.

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The Kohlers argue that no custodial contract was ever produced (Doc. 9 at 2).
Regardless, Corcoran’s testimony supported Judge Pepper’s finding that there was a
custodial contract.
This does not involve a situation as in In re Weisband, where evidence failed to
demonstrate that the allonge was “stapled or otherwise attached to the rest of the Note”
executed at or near the time the note was executed and failed to include any identifying
numbers (such as an account or escrow number) or any other reference to the note. See
427 B.R. at 19-20.
Although the existence of another two allonges, dated after the Kohlers’ filed their
bankruptcy case, raises questions about how endorsements were made and tracked by
U.S. Bank, BNC Mortgage, and Lehman Brothers, the existence of the additional allonges
does not draw into question the validity of the allonges produced at the evidentiary hearing.
Corcoran’s testimony established that the allonges produced during the bankruptcy
proceedings, and payable in blank, were the ones in the original files with the original
notes, and that those allonges were in those files no later than April 20, 2006. The later
allonges were not included in the original files and would not alter the validity of the blank
allonges. Therefore, Judge Pepper correctly disregarded the later allonges.
In sum, all of the bankruptcy court’s factual findings are affirmed.
B.

The Bankruptcy Court’s Conclusions of Law
The Kohlers’ main arguments relate to Judge Pepper’s legal conclusions that (1)

both original notes were transferred by endorsement; (2) the endorsements were in blank;
and (3) U.S. Bank as trustee was and is the holder of the notes. (Doc. 1-1 at 230.) The
Kohlers contend that the allonges in the original files were and are not “affixed” to the notes
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as required by statute and that the notes were never transferred to the possession of the
trust or U.S. Bank as trustee.
All of Judge Pepper’s legal conclusions were correct. Sufficient evidence supports
the legal determination that each allonge was “affixed” to the pertinent note for purposes
of the Wisconsin UCC. Each allonge endorsed in blank was affixed to the pertinent note
as understood in Wisconsin law.
Corcoran testified that the notes and allonges came to Deutsche Bank in the
“stacked order” of the original note immediately followed by the allonges. Especially as to
the first mortgage note, the evidence shows that the allonge was affixed to the note, as
staple holes appeared in both note and allonge, making it more likely than not that the note
and allonge were once stapled together. See Sw. Resolution Corp. v. Watson, 964 S.W.2d
262, 264 (Tex. 1997) (holding as a matter of law that an allonge stapled to a note was
“firmly affixed” under a prior, stricter version of the UCC1). That the pages may have been
detached for photocopying did not mean they were not otherwise “firmly affixed.” Id. The
evidence as to the first note easily supports the conclusion that the allonge was affixed.
But even as to the second mortgage note (or even without the existence of the
staple holes for the first note), the allonge was affixed at one time. Corcoran testified that
when received the documents were hole punched at the top and bound (together with other
documents behind them) with metal fasteners. The Kohlers seem to contend that stapling
was required, but the statute does not expressly require stapling. The statute says

1
The Kohlers adm it that a prior version of the UCC, in effect before 1990, required that an allonge
be “firm ly affixed” but that the UCC provisions on endorsem ent were later relaxed, and that the applicable
version now requires sim ply that the allonge be “affixed.” (Doc. 9 at 6.)

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“affixed,” and in this case hole punching with metal fasteners inserted through the holes
sufficed.
Moreover, even if the allonges had not been physically attached soon after
execution (which the evidence shows they were), the information on the allonges
established that they were intended to be affixed. The sticker on each allonge matches
the allonge to the particular note signed by the Kohlers, with the pertinent loan number.
Thus, the information on each allonge indicates an intent to serve as an endorsement of
the respective note. See, e.g., In re Nash (Palo Verde Mgmt. & Fin. Servs. Co. v. Nash),
49 B.R. 254, 261 (Bankr. D. Ariz. 1985) (finding under the prior version of the UCC
requiring that an allonge be “firmly affixed” that an allonge was a valid endorsement where
the allonge specifically referenced an escrow number, identified the maker of the note and
the note’s date, and recited that the note was to be attached to the allonge), aff’d, 60 B.R.
27 (B.A.P. 9th Cir. 1986). The lack of a statement in the allonge indicating that it was to
be attached to the note is not persuasive; the loan number referencing the same number
on the note indicates such intent.
Although in Adams v. Madison Realty & Development, Inc., 853 F.2d 163 (3d Cir.
1988), the Third Circuit found that allonges placed within a folded note were not valid, the
UCC at the time required that the allonge be “firmly affixed” to the note, and the court
concluded that compliance with that formalistic and technical requirement was justified for
several reasons. However, as conceded by the Kohlers (see note 1 above), the UCC
provisions in Wisconsin and elsewhere have since been amended to require only that an
allonge be “affixed,” not “firmly affixed.” And even the Adams court assumed that stapling
constituted firm affixation. See id. at 166-67. Here, one allonge was likely stapled to the
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note, both allonges had at one time been fastened with a metal fastener to the respective
notes, and both allonges specifically referenced their pertinent note loan numbers. Under
the present version of Wisconsin’s UCC, the allonges were affixed.
The Kohlers contend that the notes and allonges, even if affixed, were never
transferred to possession of the trust or U.S. Bank as trustee because the original files
were delivered to Deutsche Bank as custodian for BNC Mortgage and Lehman Brothers,
and the trust or U.S. Bank never took physical possession of them.

However,

notwithstanding that the files were delivered by BNC Mortgage and Lehman Brothers and
thereafter physically in possession of Deutsche Bank until the hearing, Deutsche Bank’s
agency pursuant to which it held them changed. Corcoran’s testimony supports, and
Judge Pepper found, that at the time of the hearing Deutsche Bank was holding the files
for U.S. Bank. This court is unpersuaded that reliance on a custodian agent for physical
custody of the note and allonge disqualifies an entity from becoming the “holder” entitled
to enforce a note. In fact, U.S. Bank’s production of the two files at the hearing shows
transfer or custody of the original notes and allonges to U.S. Bank. If Deutsche Bank did
not hold the files on behalf of the trust or U.S. Bank as trustee, it would not have produced
them at the hearing at the direction of U.S. Bank. Moreover, production of the files at the
hearing placed the notes and allonges in the hands of U.S. Bank’s counsel, another agent
of the trustee.
Under the Wisconsin UCC provisions, the holder can enforce a note, even if that
person is not the owner of the instrument or is in wrongful possession of it. And if an
instrument is payable in blank or to bearer, it may be negotiated by transfer of possession
alone. The trust, of which U.S. Bank is trustee, is the holder of the two notes. It possesses
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notes endorsed and now payable in blank. Thus, it has standing to enforce the notes and
to seek relief from the automatic stay. The matter of ownership is immaterial. See, e.g.,
In re Veal, 450 B.R. at 912 & n.25 (“[O]ne can be a ‘person entitled to enforce’ without
having any ownership interest in the negotiable instrument, such as when a thief swipes
and absconds with a bearer instrument. . . . [T]he Veals should not care who actually owns
the Note—and it is thus irrelevant whether the Note has been fractionalized or
securitized—so long as they do know who they should pay.”); In re Smoak, 461 B.R. 510,
518 (Bankr. S.D. Ohio 2011) (stating that “because it has been established that Bank of
NY Mellon is the holder of the Note, the Smoaks, as the maker of the Note, need not be
concerned with who the owner of the Note is”) (footnote omitted).
Other courts have found, under similar provisions in other states, that the holder
who can enforce a note has standing for relief from the automatic stay or filing a proof of
claim. See, e.g., In re Smoak, 461 B.R. 510; In re Hwang, 438 B.R. 661 (C.D. Cal. 2010).
No other outcome is warranted here.
Therefore, for the foregoing reasons,
IT IS ORDERED that the decision of the bankruptcy court is AFFIRMED.
Dated at Milwaukee, Wisconsin, this 21st day of June, 2013.
BY THE COURT
/s/ C.N. Clevert, Jr.
C.N. CLEVERT, JR.
U.S. DISTRICT JUDGE

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