In January, 2015, the United States Bankruptcy Court, S.D. New York issued
a scathing ruling against Wells Fargo that detailed a series of acts,
including forgery and deception,that ultimately led to the Court's
denial of Wells Fargo's ability to collect on its loan for 60 months
while its borrower trudged through the Chapter 13 bankruptcy process.
As detailed by the court in
In re: Carrsow-Franklin. 524 B.R. 33 (S.D.N.Y 2015), Cynthia Carrsow-Franklin (the "borrower")
filed for bankruptcy protection under Chapter 13 of the United States
Bankruptcy Code, in early 2010. Subsequently, on July 15, 2010, Wells
Fargo filed a claim (Claim 1-1) alleging it was the assignee of a secured
claim in the amount of $170,072.60, which was secured by a Promissory
Note and Deed of Trust encumbering the borrower's real property.
Id. at 35. Attached to the claim were the following documents:
- October 30, 2000 Deed of Trust in favor of Mortgage Factory, Inc., encumbering
the borrower's real property in Texas;
- October 30, 2000 Assignment from Mortgage Factory, Inc. to ABN Amro;
- June 20, 2002 Assignment from ABN Amro to Mortgage Electronic Registration
Systems ("MERS") as nominee for Washington Mutual Bank, FA;
- July 12, 2010 Assignment from MERS to Wells Fargo (executed three days
before Wells Fargo filed its claim);
- October 30, 2000 Promissory Note, payable to Mortgage Factory, Inc., and
signed by the borrower in the principal loan amount of $145,850; and a
Note endorsement by Mortgage Factory, Inc. to ABN Amro Mortgage Group, Inc.Id. at 36.
The borrower alleged Wells Fargo lacked standing to assert the claim because
it did not provide evidence that it owned the Promissory Note. Id. at
37. In response, Wells Fargo filed a second claim (Claim 1-2), which was
the same in all respects except one: the Promissory Note now included
a blank endorsement from ABN Armo. Id. Wells Fargo claimed the blank endorsement
substantiated its claim and validated its rights to enforce the terms
of the Promissory Note and Deed of Trust.
Id. at 38. The borrower objected to the amended claim and accused Wells Fargo
of submitting a forged endorsement.
Id at 41.
The issue before the Court was whether Wells Fargo had standing to enforce
the Note and assert its claim in the bankruptcy proceedings. The Court
did not need to determine standing to enforce the Deed of Trust because
in Texas (like in California), "when a mortgage note is transferred,
the mortgage or deed of trust is also automatically transferred to the
note holder." (See
California Civil Code section 2936, "[t]he assignment of a debt secured by mortgage carries
with it the security.")
In Texas, a promissory note is a negotiable instrument, and the person
entitled to enforce negotiable instruments is "the person in possession
of the negotiable instrument that is payable either to the bearer or to
an identified person that is in the person in possession."
In re: Carrsow-Franklin at 41. (California's law is the same: see
California Commercial Code section 3104(a)(2).) There was no question that Wells Fargo was in possession
of the Promissory Note; but even so, the Court had to determine whether
the Promissory Note was, in fact, payable to Wells Fargo.
Id. at 43. In that regard, the borrower was adamant that the endorsement
was a forgery, and Wells Fargo remained steadfast in its contention that
the Note had been validly endorsed.
Under Texas law, the signature is presumed valid unless and until the borrower
introduces evidence to the contrary, thus shifting the burden to the lender
to prove the validity of the endorsement.
Id. at 44. (California provides the same presumption in
California Commercial Code section 3308). Here, the borrower introduced evidence that the Note attached
to Wells Fargo's initial claim 1-1 did not include an endorsement
and suggested there was a "nefarious reason" why the endorsed
Note was not revealed until later.In re: Carrsow-Franklin at 45.
The Court recognized that this, standing alone, would not be sufficient
evidence to overcome the presumption that the endorsement is valid.
Id. However, the borrower additionally relied on the fact that the Assignment
from MERS had been executed by a Wells Fargo Officer
on behalf of the assignor, MERS.
Id. This Assignment was executed only three days before Wells Fargo filed
its claim in the bankruptcy Court and the Officer at Wells Fargo that
executed the Assignment testified that his department was in charge of
executing note endorsements "on a regular basis" to make sure
Wells Fargo had a complete file.
This combination of evidence showed "a general willingness and practice
on Wells Fargo's part to create documentary evidence, after-the-fact,
when enforcing its claims."
Id. at 47. Specifically, there was "substantial evidence that Wells
Fargo's administrative group responsible for the documentary aspects
of enforcing defaulted loan documents created new mortgage assignments
and forged indorsements when it was determined by outside counsel that
they were required to enforce loans."
The Court was perplexed and wondered, "Why would Wells Fargo's
defaulted document enforcement group be creating new assignments and adding
[signatures] on a regular basis from itself to, effectively, itself?"
Id. at 49. The only logical answer was that "Wells Fargo was improving
its own position by creating new documents 
from third parties to itself to ensure that it could enforce its claims."
Id. 49. This logical conclusion shifted the burden to Wells Fargo to establish
the validity of the endorsement.
Wells Fargo was not able to meet its burden of proof, and the Court ultimately
determined that at the time it acquired the loan, "Wells Fargo did
not have the original of the Note that bore the blank ABN Amro [e]ndorsement.
. . ."
Id. at 53. The endorsed Note did not appear in Wells Fargo's file until
22 months after it acquired the Note, and more importantly, it did not
appear until after the borrower went into default.
Id. at 54. Wells Fargo did not produce any evidence that the Note was stamped
and signed by someone outside of Wells Fargo, nor did Wells Fargo address
the inference that it forged the Note when the borrower went into serious default.
Id. at 54. For these reasons, the Court granted the borrower's claim
objection and "disallowed" Wells Fargo's claim-a harsh result
for Wells Fargo.
This case emphasizes to lenders the sheer importance of a properly documented
loan. Any lender who ultimately seeks to collect payment under a Promissory
Note can only do so if they are authorized—meaning, they are either
named on the Promissory Note or it was validly endorsed to that lender.
If you are unaware whether your documents authorize you to collect under
the Note or file a claim in a bankruptcy matter, contact Geraci Law Firm
and we can assist you. Avoiding litigation or the devastating denial of
your bankruptcy claim is our ultimate goal. If you have any questions
or would like assistance please
contact Geraci Law Firm associate attorney,
Amy Martinez or call us (949) 379-2600.