Max Gardner on the Legal Implications of In re Veal

Max’s comments on In re Veal:

The remarkable aspect of the Veal decision is that the Bankruptcy Appellate Panel discusses almost every issue that comes into play when an alleged secured residential mortgage creditor is seeking to assert a claim or secure relief in a consumer’s Chapter 13 bankruptcy case.  For example, the Court discusses the issues of Constitutional standing, prudential standing, the real party in interest issue, the relationship of both Articles 3 and 9 of the Uniform Commercial Code to the sale and transfer of mortgage notes, and then brings all of these theories together under the central concept of who is the “person entitled to enforce the note.”  

The Court also applies some basic evidentiary rules to the facts of this case and dismisses as it should have the argument that by listing American Home on the sworn schedules the debtors some how admitted that American Home was the “party or the designated agent of the party entitled to enforce the note.”  And, the truly bizarre aspect of the evidence presented by American Home, was that its attorneys believe that an unauthenticated and non-sworn letter would withstand any type of evidentiary objection.

The legal implications of the decision arise out to the fact that the Court held that the Servicer (American Home) failed to prove that it held any legal rights to even file a sworn proof of claim for the party “entitled to enforce the note.”  The Court also noted that the contested case created by the Veals’ filing of an Objection to the proof of claim could result in a binding final decision on whether or not the party entitled to enforce the note held or did not hold a “secured claim” in bankruptcy or outside of the bankruptcy case.  The legal impact of a successful objection by the Veals would be to turn this claim from a loan secured by a mortgage on their home to a general unsecured claim that might not even be allowable in their bankruptcy case.  The lack of evidence submitted by American Home in this case is appalling to say the least but typical of what is normally filed by mortgage servicers in consumer bankruptcy cases.

The truly extraordinary thing about the decision, however, is that the the motion for relief from the bankruptcy case so as to proceed with a state court foreclosure was not filed by the mortgage servicer but by the mortgage-backed securitized trust that allegedly held and owned the Veals’ mortgage note (Wells Fargo Bank, N.A., as Trustee for Option One Mortgage Loan Trust 2006-3 Asset-Backed Certificates, Series 2006-3).  And, in reversing the Bankruptcy Courts order granting such relief, the Appellate Panel held that the Trust had failed to provide even minimal proof that it was the “person entitled to enforce the note” and therefore did not have standing to seek relief from the bankruptcy case.

The legal representation provided to the Veals in this case by Joe Volin and his law firm demonstrated a high level of knowledge in the complex law of mortgage securitization as well as a solid understating of the rules of evidence and standing in federal court proceedings.  It is not an easy proposition to secure the reversal of a bankruptcy court ruling on an objection to proof of claim and it is rare to secure a reversal of a relief from stay ruling in the same case.