Anderson v. Burson

HARRELL, J. Petitioners, Hosea and Bernice Anderson (the Andersons), appear to be fairly typical representatives, in many ways, of the larger class of homeowners facing foreclosure during recent difficult economic times. The Andersons defaulted on their refinanced home mortgage 1 because of financial hardships. Faced with foreclosure, the Andersons initiated, among other maneuvers, a request to enjoin the seemingly flawed foreclosure action filed by Respondents. Respondents — the substitute trustees under the mortgage (Substitute Trustees), agents of the trustee, Deutsche Bank Trust Company Americas (Deutsche) — possess and seek to enforce an “under-indorsed” 2 mortgage note (the Anderson Note or Note), which, prior to coming into their possession, was transferred three times intermediately, bundled with a multitude of other mortgages, securitized, lost, and then discovered before the ultimate evidentiary hearing that paved the way for a foreclosure sale. ²³⁵ Securitization of residential mortgages, once a very lucrative practice, is denounced frequently now by the public and media, described as “shoveling loans into trusts like coal into the Titanic’s boilers.” Gretchen Morgenson, Guess What Got Lost in the Pool?, N.Y. Times, 1 Mar. 2009 , at BUI.

At best, it is a modern, fast-paced commercial practice that mis-aligns with some of the hoary law of negotiable instruments secured by realty. Yet only since the advent of the recent economic downturn have courts been called upon to consider the claims of borrowers challenging some of these industry practices and shortcomings. 3 This case presents an opportunity to clarify Maryland law regarding enforcement of defaults under unindorsed mortgage notes. We shall affirm the Court of Special Appeals’s holding that the trial court did not abuse its discretion in denying injunctive relief to the Andersons. Deutsche and its agents, the Substitute Trustees, are nonholders in possession and entitled to enforce the Anderson Note and deed of trust, notwithstanding the pitfalls in the securitization process suggested by the course of this case.

I. FACTS A. Precursor Events to the Foreclosure The Andersons refinanced their home mortgage in October 2006. 4 In accomplishing the refinancing, only Mr. Anderson ²³⁶ signed the promissory note and both of the Andersons signed the deed of trust 5 (the Anderson Note and deed of trust may be referred to collectively as the Anderson Mortgage) in favor of Wilmington Finance, Inc. (Wilmington). Saxon Mortgage Services, Inc. (Saxon) serviced the Anderson Mortgage and collected Mr. Anderson’s payments, such as they were. Due to economic hardships that ensued, Mr. Anderson defaulted quickly on his Note obligations in 2007, and the Substitute Trustees commenced foreclosure proceedings on 21 February 2008 in the Circuit Court for Howard County. The Substitute Trustees filed an order to docket, which included a motion for acceptance of lost note affidavit. 6 The Circuit Court judge granted the motion. ²³⁷ On 13 March 2008, the Andersons caused a temporary halt in the foreclosure action by filing for Chapter 13 Bankruptcy relief, in which they listed Saxon as a secured creditor.

As part of a consent order in the federal court resolving Saxon’s motion for relief from the bankruptcy stay, the Andersons acknowledged the mortgage debt, and Mr. Anderson agreed to cure the missed payments over six equal-monthly payments of $804.44. A prompt default ensued under this new payment plan. Meanwhile, investors were securitizing the Anderson Note into an investment trust. To provide some appreciation of the securitization process, we shall divert briefly from our recitation of the material facts in this case.

Securitization starts when a mortgage originator sells a mortgage and its note to a buyer, who is typically a subsidiary of an investment bank. Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L.Rev. 1359, 1367 (2010). The investment bank bundles together the multitude of mortgages it purchased into a “special purpose vehicle,” 7 usually in the form of a trust, and sells the income rights to other investors.

Id. A pooling and servicing agreement establishes two entities that maintain the trust: a trustee, who manages the loan assets, and a servicer, who communicates with and collects monthly payments from the mortgagors. Id. Mortgage-securitization investors utilize the Mortgage Electronic Registration System (MERS), a private land-title regis ²³⁸ tration system created by mortgage banking companies to expedite the securitization process.

See Jackson v. Mortg. Elec. Registration Sys., 770 N.W.2d 487, 490 (Minn.2009). MERS increases the efficiency and profitability of mortgage markets by skirting the traditional land-title recording process in localities, which can be costly and time consuming, and replacing it with the industry’s own electronic tracking system.

See Jackson, 770 N.W.2d at 490-91 . To do so, the mortgage broker names MERS as a nominal mortgagee 8 in the mortgage. Then, subsequent transfers of the mortgage are recorded electronically and entirely on MERS while the original mortgage, recorded in the public land title records, remains unchanged. Jackson, 770 N.W.2d at 490 ; Peterson, supra, at 1371.

MERS’s industry-appreciated virtues have made it a near ubiquitous aspect of contemporary residential mortgages; two-thirds of all newly originated residential loans in the United States name MERS as the nominal mortgagee. See Jackson, 770 N.W.2d at 491-92 ; Peterson, supra, at 1370. While MERS enables investment banks to rush millions of mortgages through the securitization process at a rapid rate, the volume and profitability has come at a cost. Mortgage transferors frequently lose or misplace mortgage documents 9 and fail to indorse mortgage notes, shortcomings that transferees are willing to overlook lest they be slowed down by traditional negotiable instrument formalities.

We shall return now to. our regularly scheduled opinion. ²³⁹ B. The Anderson Note In route to being securitized, the Anderson Note was transferred, but not indorsed correspondingly, three times. First, the initial lender, Wilmington, transferred the Note to Morgan Stanley Mortgage Capital Holding, Inc. (Morgan Stanley I), who in turn transferred the Note to Morgan Stanley ABS Capital I Inc. (Morgan Stanley II). Morgan Stanley II securitized the Anderson Note, along with a multitude of others, into the Morgan Stanley Home Equity Loan Trust 2007-2 (Morgan Stanley Trust). The Morgan Stanley Trust pooling and servicing agreement (PSA) named Deutsche as trustee (and Saxon as servicer), and so the note was transferred to Deutsche as trustee.

C. The Andersons Challenge the Substitute Trustees’ Right to Enforce the Note Upon Mr. Anderson’s latest default in making payments under the bankruptcy plan, the Substitute Trustees, after reinstating the foreclosure process in the Circuit Court, scheduled a foreclosure sale for 18 November 2008. On 12 November 2008, the Andersons filed an injunction request in the foreclosure action. The Circuit Court enjoined temporarily the foreclosure proceeding until a hearing could be held regarding the sought-after injunction. A total of three hearings took place.

At the first hearing, on 26 November 2008, the Substitute Trustees, despite the earlier lost note affidavit, produced a photocopy of the unindorsed Note and stated that the original note was indorsed in blank (which ultimately proved to be an inaccurate statement). The Circuit Court judge, exercising commendable caution in the face of the curious turn of events, rescheduled the evidentiary hearing to determine the Substitute Trustees’ right to enforce the Note. At the second hearing, on 7 January 2009, the Substitute Trustees produced the original Note, unindorsed, and asserted, “We have the original Note, but we do not have an indorsement; we do not have an assignment; we do not have ²⁴⁰ an allonge____” 10 Because the Substitute Trustees failed to comply with the Andersons’ discovery request for a copy of the Morgan Stanley Trust PSA, the parties and the Circuit Court judge agreed to continue again the evidentiary hearing. At the third hearing, on 31 March 2009, the Substitute Trustees produced the following evidence to legitimize their claim to enforce the Anderson Note: testimony from Dennis Sugrue, Esquire, a lawyer from the Substitute Trustees’ firm; 11 a MERS report showing that Wilmington transferred the beneficial rights to the Anderson Note to Morgan Stanley I on 12 February 2007 and servicing rights to Saxon on 14 February 2007; the Anderson deed of trust naming MERS as the nominee; and the Andersons’ Chapter 13 Bankruptcy Schedule D, which listed Saxon as a secured creditor.

In addition, the Substitute Trustees (pulling yet another rabbit from their magician’s hat) produced an undated, unattached allonge, signed by Wilmington purported transferring the Note to Deutsche, but which did not contain indorsements from the parties that possessed intermediately the Note. The Substitute Trustees argued that the allonge made them holders of the Note. The allonge contained a Saxon loan number, which matched a handwritten number on the Anderson Note but did not match the Wilmington loan number. Seizing upon the absence of indorsements by the intervening transferors, the Andersons riposted that, other problems ²⁴¹ aside, Wilmington lacked the capacity to indorse the Note to Deutsche, via the allonge, because Wilmington had transferred previously its interest to Morgan Stanley I on 12 February 2007.

In support of this argument, the Andersons, during their counsel’s cross-examination of Mr. Sugrue, introduced into evidence an excerpt from the PSA establishing that Deutsche’s interest in the transactions regarding the Note was not created until 1 March 2007. The Andersons urged that, when Wilmington indorsed purportedly the Note to Deutsche (after 1 March 2007), Wilmington had transferred already its interest in the Note to Morgan Stanley I (on 12 February 2007), and, thus, had no interest left to convey to Deutsche at that time. The Circuit Court ruled in favor of the Substitute Trustees, finding that Wilmington indorsed successfully the Note to Deutsche via the allonge, despite acknowledging indorsement gaps in the Note’s overall transfer history. Thus, the trial judge determined that the Substitute Trustees were holders of the Note under Maryland Code, Commercial Law § 3-302(a), 12 and denied the Andersons’ demand for an injunction.

The Andersons noted timely an appeal to the Court of Special Appeals. Our appellate colleagues disregarded the allonge because Wilmington transferred its rights in the Note to Morgan Stanley I before it purported to indorse the Note to Deutsche via the allonge. The Court of Special Appeals concluded, nonetheless, that Deutsche was entitled to enforce ²⁴² the instrument. Under the “shelter rule,” Deutsche was held to be a nonholder in possession with the rights of a holder, pursuant to Maryland Code, Commercial Law § 3-301(ii) (LexisNexis 2002). 13 Anderson v. Burson, 196 Md.App. 457, 469-75 , 9 A.3d 870, 877-80 (2010).

The Andersons petitioned us for a writ of certiorari, which we granted, 418 Md.App. 586 , 16 A.3d 977 (2011), to consider the following questions: I. Did the Court of Special Appeals err in determining that the Substitute Trustee’s principal, Deutsche, was a “nonholder in possession of the Note who has the rights of a holder,” where Deutsche filed a Lost Note Affidavit in which Deutsche admitted that it did not possess the Note at the time this case was filed?

II

Did the Court of Special Appeals err in relying on the Uniform Commercial Code, as enacted in Maryland, to determine that the unindorsed Note was properly transferred to Deutsche, while disregarding contrary language in the Pooling and Servicing Agreement which created the securitized trust? We granted also the Substitute Trustee’s timely cross-petition in which they asked, “Did the Court of Special Appeals err in determining ineffective an indorsement by the named payee [the allonge] after it had transferred the note?” We shall affirm the Court of Special Appeals’s judgment and hold that the Circuit Court did not abuse its discretion in denying the Andersons’ request to enjoin the foreclosure sale of the home securing the loan. The Substitute Trustees, as agents for Deutsche, are nonholders in possession of the instrument and have the rights of holders. Because the ²⁴³ Andersons conceded the transfer history of the Note, the Substitute Trustees may enforce the Anderson Mortgage as nonholders in possession.

Consequently, we do not reach the question posed in the Substitute Trustees’ cross-petition. We shall not decide the Andersons’ second question either because they waived it. Ordinarily, we will consider an issue that has been raised in the petition for certiorari, but only if has been preserved for review by this Court. Md. Rule 8 — 131(b).

The Andersons waived this argument by not raising it at trial or in their initial brief in the Court of Special Appeals. See Anderson, 196 Md.App. at 476 , 9 A.3d at 881 (citing Strauss v. Strauss, 101 Md.App. 490 , 509 n. 4, 647 A.2d 818 , 828 n. 4 (1994)) (“A reply brief cannot be used as a tool to inject new arguments.”). As interesting as an unpreserved question appears to us, we will not grant ordinarily to petitioners a new bob at a long-floating apple.

II

STANDARD OF REVIEW The grant or denial of injunctive relief in a property foreclosure action lies generally within the sound discretion of the trial court. Wincopia Farm, LP v. Goozman, 188 Md.App. 519, 528 , 982 A.2d 868, 873 (2009) (citing Jones v. Rosenberg, 178 Md.App. 54, 65 , 940 A.2d 1109, 1115 (2008)). Therefore, we review the trial court’s grant or denial of a foreclosure injunction for an abuse of discretion. Id.

(citing Jones, 178 Md.App. at 65 , 940 A.2d at 1115 ). Abuse of discretion means that a ruling will be reversed when that ruling “ ‘does not logically follow from the findings from which it supposedly rests or has no reasonable relationship to its announced objective.’ ” Eastside Vend Distrib., Inc. v. Pepsi Bottling Group, Inc., 396 Md. 219, 240 , 913 A.2d 50, 63 (2006) (quoting Dehn v. Edgecombe, 384 Md. 606, 628 , 865 A.2d 603, 616 (2005)). We review the trial and intermediate appellate courts’ legal conclusions, however, nondeferentially. Wincopia Farm, 188 Md.App. at 528 , 982 A.2d at 873 (citing Moscarillo v. Prof’l Risk Mgmt.

Servs., Inc., 169 Md.App. 137, 145 , 899 A.2d 956, 961 (2006)); see also Garfink v. Cloisters at ²⁴⁴ Charles, Inc., 392 Md. 374, 383 , 897 A.2d 206, 211 (2006) (stating that questions of law are reviewed without deference).

III

DISCUSSION The Andersons argue initially that, because the Substitute Trustees commenced the foreclosure action by filing a lost note affidavit stating that the Anderson Note was either lost or destroyed and cannot be produced, the Substitute Trustees could not have been in possession of the Note at the time the suit was instituted. The Substitute Trustees counter that they produced the Anderson Note, albeit at the third and final evidentiary hearing before the foreclosure occurred. They assert also that nothing more should be made of the lost note affidavit than that the Note was merely unavailable at the time they filed the action. The relief requested here by the Andersons — remand to the Circuit Court for new proceedings — is impractical and judicially inefficient on the conceded facts in this record.

See Bankers Trust of Cal., N.A. v. Neal, 64 Conn.App. 154 , 779 A.2d 813, 815 (2001) (stating that no practical relief was available to defendant where plaintiff amended its complaint to include a lost note affidavit). On remand, the Substitute Trustees would file a new or amended order to docket with a copy of the Note. In light of the Andersons’ acknowledgments of the Note’s transfer history, the affirmed existence of the debt, and Mr. Anderson’s default (and our conclusions of law discussed below), the Substitute Trustees would prevail most likely. The Andersons argue alternatively that the Substitute Trustees produced no evidence that they possess the Note currently and lawfully, and did not meet their burden of proof 14 in ²⁴⁵ that regard; therefore, they and their principal, Deutsche, cannot enjoy the rights of a holder.

We agree that, when put at issue properly (as was the case here), a reputed transferee in possession of an unindorsed mortgage note has the burden to establish its rights under that note — especially in instances where the mortgagor requests an injunction to foreclose enforcement by the possessor based on such a defense. Maryland Rule 14-207(b)(3) 15 requires a mortgagee to produce a copy of the note. Thereafter, the Maryland Commercial Law Article takes over and, as discussed below, requires a person in possession of an unindorsed mortgage note to prove that note’s prior transfer history (as opposed to a holder, whom the Commercial Code presumes is entitled to payment under § 3-308(a)). 16 Additionally, given the chain-of-possession document quagmire exemplified by this case, fairness dictates that ²⁴⁶ the mortgagee produce the necessary proof, when that matter is put at issue properly. The Maryland Code, Commercial Law Article governs a negotiable promissory note that is secured by a deed of trust.

Silver Spring Title Co. v. Chadwick, 213 Md. 178, 181 , 131 A.2d 489, 490 (1957); Le Brun v. Prosise, 197 Md. 466, 474-75 , 79 A.2d 543, 548 (1951); Md.Code Ann., Com. Law § 9-203(g) & cmt. 9 (LexisNexis 2002). The deed of trust cannot be transferred like a mortgage; rather, the corresponding note may be transferred, and carries with it the security provided by the deed of trust. Le Brun, 197 Md. at 474 , 79 A.2d at 548 .

Therefore, we analyze the parties’ dispute here in light of the Commercial Law Article. Whether a negotiable instrument, such as a deed of trust note, is transferred or negotiated dictates the enforcement rights of the note transferee. A transfer has two requirements: the transferor (any person that transfers the note, except the issuer) must intend to vest in the transferee the right to enforce the instrument (thieves and accidental transferees are excluded) and must deliver the instrument so the transferee receives actual or constructive possession. Com.

Law § 3-203(b); 6B Lary Lawrence, Anderson on the Uniform Commercial Code § 3-203:5R (3d ed.2003). A transfer vests in the transferee only the rights enjoyed by the transfer- or, which may include the right to enforce the instrument. Com. Law § 3-203(a)-(b). 17 A negotiation, by contrast, occurs when a holder — who is either the named payee of an instrument or the transferee of a ²⁴⁷ negotiated instrument — transfers possession of an instrument, payable to bearer, to another.

Com. Law § 3-201 (a)-(b) & cmt. 1. A negotiation of an instruments payable to an identified person, however, requires the holder to transfer possession and indorse the instrument, i.e., negotiate the instrument. Id.

Importantly, only a holder may negotiate an instrument. Com. Law § 3-203 cmt. 1. Thus, a recipient of a transferred instrument is a transferee, but a recipient of a negotiated instrument is a holder.

With that distinction in mind, Commercial Law § 3-301 explains that a person entitled to enforce a negotiable instrument may be either of three varieties: “(i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder [i.e., a transferee] or (iii) a person not in possession of the instrument who is entitled to enforce pursuant to § 3-309....” 18 On the record before us, Deutsche is not a holder of the Anderson Note. Deutsche possesses the Note, which is payable to Wilmington, but Wilmington did not indorse the Note itself. Although the Substitute Trustees urge that the allonge indorses purportedly the Note to Deutsche, the allonge is anachronistically impossible. Deutsche’s role as trustee did ²⁴⁸ not arise until after Wilmington had transferred its rights to Morgan Stanley I; thus, by the time Wilmington reputedly made the allonge to Deutsche, Wilmington had no rights in the Note to transfer.

Therefore, Wilmington did not negotiate the Note to Deutsche. The Commercial Law Article recognizes alternatively that an instrument may be enforced, under Commercial Law § 3-301(ii), by a nonholder in possession of an instrument who has the rights of a holder, i.e., a transferee in possession or nonholder in possession. Com. Law § 3-301 cmt.

(“The definition [of person entitled to enforce instrument] recognizes that enforcement is not limited to holders.”). A nonholder in possession may enforce an instrument under Commercial Law § 3 — 301(ii) if his/her transferor was a holder, because a transferee obtains the rights of his transferor/holder, which includes the right to enforce the instrument. Com. Law § 3-203, cmt. 2.

A transferee obtains also the rights that his transferor obtained from his own transferor. This principle is known as the “shelter rule.” Lawrence, supra, § 3-203:15R to 16R (3d ed.2003). Deutsche, as transferee, obtained from Wilmington the rights of a holder from Wilmington under the shelter rule. Wilmington was a holder because Wilmington possessed the Note, which is payable to it.

See Com. Law § 1-201(20). Based on