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Some Chapter 7 Trustees Beginning To Fight Mortgage Lenders Over Defective Mortgage Assignments

By Jonathan Alper

Motions for relief from stay filed by mortgage lenders are usually a formality when the Chapter 7 debtor intends to walk away from the property and the property has no equity. The debtor typically does not contest the bank?s motion and the trustee typically takes no position. Things are changing.

At least one of our trustees has been objecting to the mortgage lender?s stay relief motions when the originating lender has assigned the mortgage to an investor. The trustee is asserting mortgage foreclosure defenses associated with the mortgage assignment including, for example, that the assignment documents were not properly executed or that there is a break in the chain of ownership of the mortgage. If the trustee can show any defect in the assignment of the mortgage to the current mortgage holder the trustee?s bankruptcy lien would gain priority over the party asserting title to the mortgage. Then, the trustee could liquidate the property and wipe out the mortgage.

At a minimum, the trustee?s ability to assert a viable objection to the chain of mortgage title would force the bank to pay money to settle the trustee?s claim. Trustees are paid on commission so they and the creditors gain if they could force the bank to pay money to defend its mortgage ownership.

The mortgage lenders involved in these cases may say that trustee is trying to extort a settlement by objecting to the mortgage stay relief. So what? Our legal system is full of claims filed to extort money from deep pocket defendants, and I don?t blame a trustee for getting in on the action. Plus, the trustee?s objections are creative and the ?extortion proceeds? would go primarily to other creditors.

Full post as published by Florida Bankruptcy Law on November 05, 2010 (boomark / email).