Bankruptcy Courts Enforce “Produce the Note” Defenses by Borrowers

On May 20, 2010, the Bankruptcy Court for the Eastern District of California followed several other courts in striking claims by lenders who are unable to prove that they are the actual holders or owners of the promissory note. Similar to the Kansas decision of Landmark National Bank v. Kesler, the Walker Court held that because Mortgage Electronic Registration System (MERS) claims no interest in the note, it therefore has no ability to transfer any rights under the note. The MERS business model has troubled courts in recent years because MERS is not the lender, nor the servicer, claims no interest in the loan but is the designated “nominee” of the lender for recording and assignment purposes.

As ownership of the promissory note is controlling as to who may collect the debt, any transfer of interest in the deed of trust without transfer of the underlying debt (Note) is void as a matter of law. Since MERS only has an interest in the deed of trust, it lacks the power or standing to effectively transfer the debt from lender to another unless the other elements of perfecting the transfer are met.

Rickie Walker filed for Chapter 11 bankruptcy in the Eastern District of California, Sacramento division (Case No. 2010-21656). Chapter 11 bankruptcy is a re-organization of debt for high-net worth individuals or businesses. Walker lives in a mansion (~5400 square foot “custom home” on a golf course with butler’s pantry and gourmet chef’s kitchen) that he or she managed to borrow over $1.4M against. Walker also lists another house on the schedules, presumably a rental home or a vacation home.

During the claims period, creditors may file a proof of claim. Citibank filed a $1.4M proof of claim and Walker objected, noting that the loan was originated by Bayrock Mortgage Corporation and then MERS purported to assign the deed of trust to Citibank. This is the heart of the “MERS problem,” that the debt is split with the Note floating around or remaining with the original Note holder’s vault and the Deed of Trust being “resold” as a security. This creates a question as to who may actually collect the debt.

The court sustained Walker’s objection to Citibank’s proof of claim. That does not eradicate the debt. The Walker Court is NOT saying that the borrower owns its house free and clear of any debt. The Walker Court noted that the holder of the promissory note could step forward and claim ownership of the mortgage. Further, while the Walker court suggests that physical transference of the note is necessary in order to perfect the claim, it also indicates that where there is a named beneficiary, an endorsement from the named beneficiary will be sufficient to prove the claim.

These findings were laid out in the Court’s tentative ruling, but are not evident in the final order. Here is the relevant section from the tentative ruling:

“The Proof of Claim at issue, listed as claim number 5 on the court’s official claims registry, asserts a $1,320,650.52 secured claim. The Debtor objects to the Claim on the basis that the claimant, Citibank, N.A., did not provided any evidence that Citibank has the authority to bring the claim, as required by Federal Rule of Bankruptcy Procedure 3001 (c), rendering the claim facially defective.

The court’s review of the claim shows that the Deed of Trust purports to have been assigned to Citibank, N.A. by Mortgage Electronic Registration Systems, Inc. as nominee for Bayrock Mortgage Corporation on March 5, 2010. (Proof of Claim No.5 p.36-37, Mar. 19,2010.) Debtor contends that this does not establish that Citibank is the owner of the underling promissory note since the assignor, Mortgage Electronic Registration Systems, Inc. (“MERS”), had no interest in the note to transfer. Debtors loan was originated by Bayrock Mortgage Corporation and no evidence of the current owner of the promissory note is attached to the proof of claim. It is well established law in the Ninth Circuit that the assignment of a trust deed does not assign the underlying promissory note and right to be paid, and that the security interest is incident of the debt. 4 Witkin Summary of California Law, Secured Transactions in Real Property §105 (10th ed).


Under California law, to perfect the transfer of mortgage paper as collateral the owner should physically deliver the note to the transferee. Bear v. Golden Plan of California, Inc., 829 F.2d 705,709 (9th Cir. 1986). Without physical transfer, the sale of the note could be invalid as a fraudulent conveyance, Cal. Civ. Code §3440, or as unperfected, Cal. Com. Code §§9313-9314. See Roger Bernhardt, California Mortgages and Deeds of Trusts, and Foreclosure Litigation §1.26 (4th ed. 2009). The note here specifically identified the party to whom it was payable, Bayrock Mortgage Corporation, and the note therefore cannot be transferred unless the note is endorsed. See Cal. Com. Code §§31 09, 3201, 3203, 3204. The attachments to the claim do not establish that Bayrock Mortgage Corporation endorsed and sold the note to any other party.


MERS acted only as a “nominee” for Bayrock Mortgage under the Deed of Trust. Since no evidence has been offered that the promissory note has been transferred, MERS could only transfer whatever interest it had in the Deed of Trust. However, the promissory note and the Deed of Trust are inseparable. “The note and the mortgage are inseparable; the former as essential, the later as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.” Carpenter v. Longan, 83 U.S. 271, 274 (1872); accord Henley v. Hotaling, 41 Cal. 22, 28 (1871); Seidell v. Tuxedo Land Co., 216 Cal. 165, 170 (1932); Cal. Civ. Code §2936. Therefore, if on party receives the note an another receives the deed of trust, the holder of the note prevails regardless of the order in which the interests were transferred. Adler v. Sargent, 109 Cal. 42, 49-50 (1895).

Further, several courts have acknowledged that MERS is not the owner of the underlying note and therefore could not transfer the note, the beneficial interest in the deed of trust, or foreclose upon the property secured by the deed. See In re Foreclosure Cases, 521 F. Supp. 2d 650,653 (S.D. Oh. 2007); In re Vargas, 396 B.R. 511,520 (Bankr. C.D. Cal. 2008); Landmark Nat’l Bank v. Kesler, 216 P.3d 158 (Kan. 2009); LaSalle Bank v. Lamy, 824 NY.S.2d 769 (N.Y. Sup. Ct. 2006). Since no evidence of MERS’ ownership of the underlying note has been offered, and other courts have concluded that MERS does not own the underlying notes, this court is convinced that MERS had no interest it could transfer to Citibank.

Since MERS did not own the underling note, it could not transfer the beneficial interest of the Deed of Trust to another. Any attempt to transfer the beneficial interest of a trust deed with out ownership of the underlying note is void under California law. Therefore Citibank has not established that it is entitled to assert a claim in this case.


Debtor also points out that four separate entities have claimed beneficial ownership of the deed of trust. (Obj. to Claim 3-5, Apr. 6, 2010.) The true owner of the underling promissory note needs to step forward to settle the cloud that has been created surrounding the relevant parties rights and interests under the trust deed.


11 U.S.C. §502(a) provides that a claim supported by a Proof of Claim is allowed unless a party in interest objects. Once an objection has been filed, the court may determine the amount of the claim after a noticed hearing. 11 U.S.C. §502(b). Since the claimant, Citibank, has not established that it is the owner of the promissory note secured by the trust deed, Citibank is unable to assert a claim for payment in this case. The objection is sustained and Claim Number 5 on the court’s official register is disallowed in its entirety, with leave for the owner of the promissory note to file a claim in this case by June 18, 2010.

The court disallowing the proof of claim does not alter or modify the trust deed or the fact that someone has an interest in the property which can be subject thereto. The order disallowing the proof of claim shall expressly so provide.

The court shall issue a minute order consistent with this ruling.”


Essentially, the court needs proof that only one lender can collect on the debt. Some courts are starting to require the production of the original note showing interest by the collecting party because an assignment by MERS is insufficient evidence of ownership. The original is not always necessary, as evidence by the holder in the form of a declaration attesting that the copy is a true and accurate copy of the original and that the declarant has possession of the original promissory note is sufficient.

As an additional practice note, it may be critical to make the assignment prior to the filing of the claim. In Ohio, Judge Boyko’s dismissed a series of cases because lenders were unable to prove an interest in the loan at the time of filing. Judge Boyko noted that all of the assignments had been made by the firm which made it unlikely that the assignments had been made prior to the complaint. [See In Re Vargas (California Bankruptcy Court), Landmark v. Kesler (Kansas decision), LaSalle Bank v. Lamy (New York), and In Re Foreclosure Cases (the “Boyko” decision from Ohio Federal Court).]