UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
August 23, 2011
IN RE: FELIPE DABAO ZULUETA, JR., DEBTOR. FELIPE DABAO ZULUETA, JR., APPELLANT,
MARTHA G. BRONITSKY, CHAPTER 13 TRUSTEE; ONEWEST BANK, FSB, APPELLEES.
Appeal from the United States Bankruptcy Court for the Northern District of California Honorable Edward D. Jellen, Bankruptcy Judge, Presiding Bk. No. 10-42479
SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
Argued and Submitted on June 16, 2011 at San Francisco, California
Filed - August 23, 2011
Before: HOLLOWELL, PAPPAS, and JURY, Bankruptcy Judges.
Felipe Zulueta, Jr. (the Debtor) challenges whether Deutsche Bank National Trust Company, as Trustee of the IndyMac INDX Mortgage Loan Trust 2006-AR14, Mortgage Pass-Through Certificates, Series 2006-AR14 under the Pooling and Servicing Agreement dated October 1, 2006 (Deutsche Bank), through its purported servicing agent, OneWest Bank, FSB (OneWest) was the real party in interest with standing to file a proof of secured claim.
The bankruptcy court determined that Deutsche Bank established it was the holder of the Debtor's note and, therefore, had standing to file the proof of claim. For the reasons stated below, we AFFIRM.
The Debtor filed a chapter 13*fn2 bankruptcy petition on March 8, 2010. On April 6, 2010, Deutsche Bank filed a proof of secured claim (Claim) in the amount of $686,250.87 for money loaned on real property. The Claim listed Deutsche Bank as the secured creditor and indicated payments should be made to OneWest.
The history of the loan, which serves as the basis of the
Claim, is as follows. In 2006, the Debtor and Eloisa Maru
Zulueta, Trustees of the Zulueta Family Trust, executed a
promissory note in the amount of $560,000 in favor of IndyMac
Bank FSB (IndyMac) (the Note). The Note has an
blank (the Endorsement). The Note is secured by a deed of
2 on the Debtor's house in Brentwood, California (the Deed
3 Trust). Mortgage Electronic Registration Systems, Inc. (MERS)
4 the beneficiary and nominee for IndyMac on the Deed of
On October 1, 2006, IndyMac entered into a Pooling and 6 Servicing Agreement (PSA) with Deutsche Bank, whereby IndyMac 7 transferred the Note to Deutsche Bank. Section 3.01 of the PSA 8 provided that IndyMac would service the Note. On April 30, 2008, 9 MERS, as nominee for IndyMac, assigned the Deed of Trust to 10 Deutsche Bank (the Assignment). Deutsche Bank recorded the 11 Assignment on June 6, 2008.
12 In support of the Claim, Deutsche Bank attached a document 13 listing the purported arrearages on the Note. Additionally, 14 Deutsche Bank attached copies of: (1) the Note, (2) the 15 Endorsement, which was undated and appeared as a separate 16 document, (3) the Deed of Trust, and (4) the Assignment. The 17 Debtor filed an objection to the Claim, contending that Deutsche 18 Bank was not the real party in interest to assert the Claim (the 19 Claim Objection).
20 In its response to the Claim Objection, Deutsche Bank 21 contended that IndyMac assigned it the Deed of Trust pursuant to 22 the PSA, and, because the Note included the Endorsement and 23 OneWest, as Deutsche Bank's agent, had physical possession of the 24 Note, Deutsche Bank was a holder of the Note under Cal. Comm. 25 Code § 3201(b). To substantiate its contention, Deutsche Bank 26 submitted a declaration by a OneWest employee, Champagne 27 Williams, that stated OneWest was the servicer and holder of the 28 Note (the Williams Declaration). A copy of the Assignment, Note, and Endorsement was attached to the Williams Declaration.
The Debtor filed a reply. Among the issues raised by the Debtor in his reply were:
(1) the documents provided in the Williams Declaration required authentication;
(2) OneWest was not the real party in interest and needed to submit proper documentation demonstrating its agency relationship with Deutsche Bank;
(3) the validity of the Endorsement was questionable because it had no identifying numbers and did not reference the Note;
(4) there was no indication that the Note was included in the PSA; and,
(5) an accounting was required since several months of payments were not accounted for in Deutsche Bank's arrearage calculation.
The bankruptcy court set an evidentiary hearing on the Claim Objection for November 3, 2010 (the Hearing). On November 1, 2010, Deutsche Bank filed an Evidentiary Hearing Brief along with a declaration from its counsel (the Chun Declaration). The Chun Declaration stated that in an effort to resolve the Claim Objection, the Debtor was provided with a copy of the PSA, as well as the accounting and application of the Debtor's payments on the Note. Furthermore, in response to the Debtor's concern regarding a lack of documentation establishing OneWest's relationship to Deutsche Bank, Chun stated he had emailed the Debtor a letter (the Letter), which allegedly had been previously sent to the Debtor in April 2009, that stated in part:
Effective on March 19, 2009, the servicing of your mortgage loan, that is, the right to collect payments from you, was assigned, sold or transferred from IndyMac Federal Bank, FSB to IndyMac Mortgage Services, a division of OneWest Bank, FSB.*fn3
The Debtor and OneWest attended the Hearing. OneWest stated its attendance at the Hearing was in its capacity as the servicing agent for Deutsche Bank.*fn4 OneWest presented to the bankruptcy court*fn5 the Note, the Deed of Trust, the PSA, the Assignment, the Letter, and the Williams Declaration. See Hr'g Tr. (Nov. 3, 2010) at 5-6.
The bankruptcy court issued a written decision on
November 9, 2010, overruling the Claim Objection. The bankruptcy
court determined that Deutsche Bank was a holder of the Note
because (1) the Deed of Trust and Note were assigned to Deutsche
Bank, (2) Deutsche Bank, through the PSA, had a servicing
arrangement with IndyMac, who subsequently transferred the
servicing of the Note to OneWest (as evidenced by the Letter),
and (3) Deutsche Bank (through its agent, OneWest) brought the
original Note and Deed of Trust to the hearing. Therefore,
determined that Deutsche Bank was the holder of the Note
2 standing to file the Claim. On November 23, 2010, the
3 court entered its Order Denying the Claim Objection. The
4 timely appealed.
On November 29, 2010, the bankruptcy court dismissed the 6 Debtor's bankruptcy case because the Debtor was unable to confirm 7 a feasible chapter 13 plan. The bankruptcy court also granted 8 the Debtor a stay pending appeal, staying the dismissal of the 9 case as long as the Debtor made monthly payments on the Note to 10 Deutsche Bank's counsel and made monthly payments sufficient to 11 fund a plan to the chapter 13 bankruptcy trustee.
13 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 14 § 157(b)(2)(B). We note that the bankruptcy court granted the 15 Debtor a stay of the dismissal of his chapter 13 case pending 16 appeal, and therefore, the appeal is not moot. Even if the 17 Debtor defaults on his monthly payments to Deutsche Bank's 18 counsel or the trustee, and the case is dismissed, we conclude 19 the appeal is still not moot. The Ninth Circuit has held that 20 "the allowance or disallowance of 'a claim in bankruptcy is 21 binding and conclusive on all parties or their privies, and being 22 in the nature of a final judgment, furnishes a basis for a plea 23 of res judicata.'" Bevan v. Socal Commc'ns Sites, LLC (In re 24 Bevan), 327 F.3d 994, 997 (9th Cir. 2003) quoting Siegel v. Fed. 25 Home Loan Mortg. Corp., 143 F.3d 525, 529 (9th Cir. 1998).
26 Because the bankruptcy court, in a claim objection proceeding, 27 makes a substantive ruling that binds the parties in all other 28 proceedings and may finally adjudicate the parties' underlying 1 rights, an affirmance by us could have preclusive effect if the 2 Debtor subsequently challenged the validity of the Claim. Id. 3 As a result, if we were to reverse, we would be able to provide 4 the Debtor effective relief. See People of Village of Gambell v. 5 Babbitt, 999 F.2d 403, 406 (9th Cir. 1993) (if there is a present 6 controversy as to which effective relief can be granted, then the 7 appeal is not moot). Consequently, we have jurisdiction under 8 28 U.S.C. § 158.
10 Did the bankruptcy court err in overruling the Claim 11 Objection?
IV. STANDARDS OF REVIEW
We review de novo whether a party has standing. Dunmore v. 14 United States, 358 F.3d 1107, 1111 (9th Cir. 2004); Kronemyer v. 15 Am. Contrs. Indem. Co. (In re Kronemyer), 405 B.R. 915, 918 (9th 16 Cir. BAP 2009). De novo review requires that we consider a 17 matter anew, as if it had not been heard before, and as if no 18 decision had been rendered previously. United States v. 19 Silverman, 861 F.2d 571, 576 (9th Cir. 1988).
21 Throughout this case, Deutsche Bank and OneWest have acted 22 almost as one interchangeable entity in their pleadings regarding 23 the Claim. It is not surprising, therefore, that the Debtor was 24 confused by the relationship between the two. The same attorney 25 represented both entities. The Claim was filed by Deutsche Bank 26 but directed that payments be made to OneWest. Additionally, the 27 response to the Claim Objection was submitted by Deutsche Bank 28 but referred to the Claim as being held by "the Secured 1 Creditor," defined as "[Deutsche Bank] and the servicing agent 2 [OneWest]." It contended that "[OneWest] properly filed [the 3 Claim]" because OneWest was the holder of the Note. 4 The arguments that the Debtor made to the bankruptcy court 5 challenging the standing of either Deutsche Bank or OneWest to 6 file the Claim are, on appeal, focused almost exclusively on 7 OneWest, not only in its purported capacity as Deutsche Bank's 8 agent, but as the purported holder of the Note.
The issue of standing involves both "constitutional 11 limitations on federal court jurisdiction and prudential 12 limitations on its exercise." Warth v. Seldin, 422 U.S. 490, 498 13 (1975). Only prudential standing is at issue in this appeal. 14 Prudential standing requires the plaintiff to assert its own 15 claims rather than the claims of another. Dunmore v. United 16 States, 358 F.3d 1107, 1112 (9th Cir. 2004). 17 Claim objections are contested matters under Rule 9014. 18 Rule 9014(c) makes Fed. R. Civ. P. 17(a)(1) (Civil Rule 17(a)(1)) 19 (incorporated by Rule 7017) applicable to contested matters. 20 Civil Rule 17(a)(1) provides that "[a]n action must be prosecuted 21 in the name of the real party in interest." To satisfy the 22 requirements of prudential standing and Civil Rule 17(a)(1), "the 23 action must be brought by the person who, according to the 24 governing substantive law, is entitled to enforce the right." 25 6A Wright, Miller, Kane & Marcus, Fed. Prac. & Proc. ¶ 1543 (3d 26 ed. 2010); Veal v. Am. Home Mortg. Serv., Inc. (In re Veal), 27 450 B.R. 897, 908 (9th Cir. BAP 2011). A party without the legal 28 right to enforce an obligation under substantive law is not a real party in interest. See Simon v. Hartford Life, Inc., 546 F.3d 661, 664 (9th Cir. 2008); In re Aniel, 427 B.R. 811, 815 (Bankr. N.D. Cal. 2010).
The requirement of prudential standing addresses the concern that the maker of a note pays the correct party and will not have to pay that amount again to another party. In re Veal, 450 B.R. 908-910. "The modern function of the rule . . . is simply to protect the defendant against a subsequent action by the party actually entitled to recover, and to insure generally that the judgment will have its proper effect as res judicata." Id. at 908 (internal citations omitted).
B. Right To Enforce The Note
Because the Note is a negotiable instrument, its enforcement is governed by Article 3 of California's version of the Uniform Commercial Code, Cal. Comm. Code (CCC) § 1101-16104.*fn6 Under California law, a note may be enforced by:
(1) a holder of the instrument (CCC §§ 3301, 1201(b)(21));
(2) a person who is in possession of the instrument who has the rights of a holder by subrogation or transfer (CCC §§ 3301, 3302(a)); or,
(3) a person who previously had the ability to enforce the note, but it was lost, destroyed, or stolen (CCC §§ 3301, 3309).
To qualify as a holder of the instrument, one must be in possession of the instrument that is either properly endorsed or payable to the person in possession of it.*fn7 CCC § 1201(b)(21), (b)(5). Accordingly, in order to be entitled to enforce the Note for purposes of defeating the Debtor's objection to its Claim, Deutsche Bank had the burden of proving that (1) it (or its agent) had possession of the Note; and (2) the Note was validly endorsed. See Summers v. Earth Island Inst., 555 U.S. 488 (2009) (the movant bears the burden of showing that he has standing for each type of relief sought); Hasso v. Mazsgai (In re La Sierra Fin. Servs., Inc.), 290 B.R. 718, 726 (9th Cir. BAP 2002) (same).
The bankruptcy court found that Deutsche Bank was the holder of the Note. That finding was entwined with a finding that OneWest was Deutsche Bank's agent and the servicer of the Note under the PSA. On appeal, the Debtor argues that OneWest does not have prudential standing even though it possessed the Note because the Endorsement was invalid, OneWest never demonstrated it was authorized to act on behalf of Deutsche Bank, and OneWest did not provide documentation of how it came to possess the Note.
After reviewing the evidence in the record, we agree with
the Debtor that OneWest did not prove it was Deutsche Bank's
agent. However, for the reasons explained below, we
conclude that the requirement of prudential standing
OneWest appeared at the Hearing as "the servicing agent for 5 Deutsche Bank." Hr'g Tr. (Nov. 3, 2010) at 4:14-15. To evidence 6 its agency relationship with Deutsche Bank, OneWest presented 7 Section 3.01 of the PSA, which provided that IndyMac would 8 service the Note for Deutsche Bank, the Letter, and the Williams 9 Declaration.
10 The Letter that referred to the transfer of the servicing 11 role from IndyMac to OneWest was not included in the record. 12 Without the Letter, we cannot determine by whom it was sent or 13 what information regarding the purported transfer of servicing 14 rights was provided with the Letter. At most, the Letter was 15 notice to the Debtor of a change in servicers. Standing alone, 16 it does not constitute admissible evidence of an agency 17 relationship between OneWest and Deutsche Bank.
18 Furthermore, as a general rule, the fact of agency cannot be 19 proved by the declaration of the agent alone. Kast v. Miller & 20 Lux, 159 Cal. 723, 727-28 (1911). While the declarations of a 21 principal are admissible to prove the agency relationship, 22 declarations of an agent are not admissible to prove the fact of 23 his agency or the extent of his powers of agency. Howell v. 24 Courtesy Chevrolet, Inc., 16 Cal.App.3d 391, 401 (Cal. Ct. App. 25 1971). There must be either some other competent evidence 26 establishing the fact of agency, or, the agent's testimony as a 27 witness in order to prove his authorization. Stewart v. 28 Workmen's Comp. Appeals Bd., 264 Cal.App.2d 947, 952 (Ct. App. 1968).
2 OneWest did not present a servicing agreement between it and 3 Deutsche Bank. There was no declaration or testimony from 4 Deutsche Bank that confirmed OneWest was authorized to act as the 5 servicing agent for Deutsche Bank with respect to the Note. 6 There was no declaration, testimony or documentation from IndyMac 7 establishing its relationship with OneWest. OneWest did not 8 provide witness testimony regarding its role as the servicer for 9 Deutsche Bank. As a result, the agency relationship between 10 OneWest and Deutsche Bank was not established. 11 Nevertheless, because OneWest appeared at the Hearing with 12 the original Note in its possession, endorsed-in-blank, it was 13 the holder of the Note under CCC § 1201(b). The Debtor asserts, 14 however, that the Endorsement was invalid, which precluded 15 OneWest from being a holder entitled to enforce the Note under 16 CCC § 3301.
18 An endorsement is a signature made on an instrument for the 19 purpose of negotiating the instrument. CCC § 3204(a). An 20 endorsement-in-blank is an endorsement that is not payable to an 21 identified person. CCC § 3205(b). Thus, an instrument endorsed- 22 in-blank becomes payable to bearer and any person who possesses 23 the instrument becomes its holder. In re Aniel, 427 B.R. at 815- 24 16.
25 The Debtor argues that the Endorsement is invalid
26 the Endorsement appeared on a separate paper, or allonge,
27 did not reference the Note. The Debtor asserts that the use
28 an allonge is appropriate only when there is no longer room
the negotiable instrument itself to write an endorsement.
2 Pribus v. Bush, 118 Cal.App.3d 1003, 1008 (Ct. App. 1981).
3 oral argument before the Panel, OneWest explained that
4 Endorsement was on the back of the Note; however, because
5 one-sided documents may be uploaded onto the electronic
6 system, it appeared in the record as being on a separate
An endorsement on an allonge is valid even though there is 8 sufficient space on the instrument for an endorsement as long as 9 the allonge is affixed or attached to the note such that it 10 becomes part of the instrument. CCC § 3204 cmt. 1; § 3204(a). 11 Because the Endorsement was on the Note itself, it was valid. 12 A party in physical possession of an endorsed-in-blank note 13 qualifies as a holder of a note under CCC § 1201(b). Because 14 OneWest appeared at the Hearing with possession of the endorsed- 15 in-blank Note, it was a holder of the Note entitled to enforce 16 it.
17 As we noted above, the reason behind the prudential standing 18 requirement is to ensure that "if a maker makes a payment to a 19 'person entitled to enforce,' the obligation is satisfied on a 20 dollar for dollar basis, and the maker never has to pay that 21 amount again." In re Veal, 450 B.R. at 910. It is immaterial 22 that there was insufficient evidence in the record to establish 23 the agency relationship between OneWest and Deutsche Bank because 24 the Debtor's payments to OneWest (as directed by the Claim) 25 discharge his obligation to Deutsche Bank under the Note. See 26 id. at 910, 912. Therefore, "so long as the maker's obligation 27 is discharged by payment, the maker should be indifferent as to 28 whether the 'person entitled to enforce' the note satisfies his 1 obligations, under the law of agency, to the ultimate owners of 2 the note." Id. at 912 n.27.
At oral argument on appeal, the Debtor stated he was making 4 any arrearage payments on the Note to the trustee and was paying 5 OneWest monthly payments under the Note. He stated that the 6 basis of his Claim Objection was a matter of wanting to know to 7 whom he should make payments. Indeed, the purpose of a 8 prudential standing challenge is to ensure that a debtor pays the 9 right party. In this case, the Debtor may rely on OneWest's 10 status as a holder of the Note.
For the reasons given above, we AFFIRM.