The U.S. Court of Appeals for the Tenth Circuit recently held that a foreclosing bank was not entitled to relief from an automatic stay, where the bank was unable to produce the original note indorsed in blank.
A copy of the opinion is available at:
A bank initiated foreclosure proceedings against two borrowers, and attempted to obtain an Order Authorizing Sale. The borrowers objected on the grounds that the bank lacked the requisite standing to seek such an order. The state court denied the borrowers' objection, on the grounds that the bank had produced a copy of the note indorsed in blank.
The borrowers then filed for bankruptcy. The bank obtained an order from the bankruptcy court relieving the stay. The borrowers appealed that decision to the Tenth Circuit Bankruptcy Appellate Panel ("BAP"), arguing that the bank had not produced the original note and therefore lacked standing. The BAP concluded that the bankruptcy court had relied on the Rooker-Feldman doctrine ("Rooker-Feldman"), and accordingly held that "the bankruptcy court properly declined to revisit the state court's decision" regarding standing. Again, the borrowers appealed.
The Tenth Circuit considered two main issues on appeal: (1) whether the bank was entitled to obtain relief from the stay; and (2) whether the Rooker-Feldman doctrine was properly applied.
The Court answered both questions in the negative. It began by examining Rooker-Feldman, noting that it "precludes a losing party in state court who complains of injury caused by the state-court judgment from bringing a case seeking review and rejection of that judgment in federal court." However, the Tenth Circuit held that Rooker-Feldman was inapplicable here, because "attempts merely to relitigate an issue determined in a state case are properly analyzed under issue or claim preclusion principles..."
Further, the Tenth Circuit noted that under Colorado law, "no final judgment is entered in a [proceeding seeking an Order Authorizing Sale] and the rulings of the court in such proceedings do not have a preclusive effect."
Having determined that the matter was not precluded, the Tenth Circuit turned to whether the bank was entitled to relief from the stay.
As you may recall, in order to receive relief from a stay, a party must be either a creditor or a debtor of the bankruptcy estate. See, e.g., Roslyn Savings Bank v. Comcoach Corp. (In re Comcoach Corp.), 698 F.2d 571, 573 (2d Cir. 1983). The Bankruptcy Code defines "creditor" as "an entity that has a [right to payment from] the debtor." 11 U.S.C. Sec. 101(10)(a).
As this matter was within the context of a bankruptcy proceeding, the Tenth Circuit applied state law to determine whether the bank qualified as a "creditor." Colorado law provides that "[w]hen indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone..." Colo. Rev. Stat. Sec. 4-3-109(c).
The Tenth Circuit noted that in the proceedings discussed above, the bank produced only a copy of the original note, and did not produce the original.
Because the bank "elicited no proof that [it] in fact obtained physical possession of the original Note...," the Tenth Circuit held that "the evidence is insufficient as it currently stands to establish that [the bank] is...entitled to seek relief from stay."
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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