31 Oct What is Proper “Standing”?
Standing, in the context of bankruptcy and state law, means the right to be a party to a litigated matter. A company claiming to own the right to file a claim in bankruptcy court or a lawsuit to foreclose in state court must be the owner of the underlying promissory note and mortgage.
Not only must that company be the owner and holder of the note and mortgage, but it must have be the owner and holder BEFORE any claim is filed in bankruptcy court or foreclosure suit filed in state court. More often than not, this is not the case.
What does it take to be the owner of a mortgage? The originator of the loan must execute and deliver an Assignment of Mortgage to the new party in interest. Under Florida law, the Assignment is not required to be recorded in the country in which the land is located, although this is clearly the better practice.
What does it take to be the owner of a promissory note? The Uniform Commercial Code, which was enacted more than 60 years ago, and common law, which has been around for a thousand years, requires the originator of the note to endorse (sign) it and physically deliver it to the new party in interest.
In reality, neither transfer takes place before the new company starts trying to assert a claim in bankruptcy court or state court. There is essentially one reason this transaction doesn’t take place it’s inconvenient. Amazing, when you think about it. It is too much of a hassle to acquire the right to assert a claim usually worth hundreds of thousands of dollars.
Usually, the company asserting this standing is a securitized trust, which was sold 10,000 home loans in exchange for cash paid to the originator of the loan. The trustee of this trust was responsible for assuring to the investors that each loan file was inspected and that these fundamental rules for transferring ownership rights were followed. Ha! It never happened.
So, when a creditor in bankruptcy files a proof of claim, asserting its standing to make such a claim, it can be contested by the debtor. The debtor can demand that the creditor prove it has the right to make such a claim that it actually has standing. If the creditor fails to convince the judge that it is the owner and holder of the debtor’s subject note and mortgage, the creditor’s claim will be denied.
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