MORGAN (CHRISTOPHER), ET AL. VS. HSBC BANK USA, NA
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RENDERED: JULY 29, 2011; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2009-CA-000597-MR
CHRISTOPHER MORGAN
AND SHARON TAKVAM
v.
APPELLANTS
APPEAL FROM SHELBY CIRCUIT COURT
HONORABLE CHARLES R. HICKMAN, JUDGE
ACTION NO. 08-CI-00512
HSBC BANK USA, NA
APPELLEE
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE: LAMBERT AND MOORE, JUDGES; ISAAC, 1 SENIOR JUDGE.
LAMBERT, JUDGE: Christopher Morgan and Sharon Takvam appeal from the
Shelby Circuit Court’s entry of summary judgment in favor of HSBC Bank USA,
NA in a foreclosure action. After a careful review of the record and the parties’
briefs, we reverse and remand for proceedings consistent with this opinion.
1
Senior Judge Sheila R. Isaac sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statutes
(KRS) 21.580.
On August 22, 2005, Morgan and Takvam executed a note in the
amount of $101,200.00 to Ownit Mortgage Solutions, Inc. (Ownit). That same
day, Morgan and Takvam granted a mortgage to Mortgage Electronic Registration
Systems, Inc., (MERS) as nominee for Ownit. The mortgage encumbered the
property located at 12233 Mount Eden Road, Mount Eden, Kentucky 40046. After
executing the note and mortgage, Morgan and Takvam defaulted on their payments
and currently owe for their March 1, 2008, payment. At the time of this appeal,
they owed $101,066.87, plus interest at 9.875% per year from February 1, 2008, in
addition to court costs, advances, and other charges, including a reasonable
attorney fee, as allowed by law.
On July 31, 2008, HSBC Bank USA, National Association, as Trustee
for Ownit Mortgage Loan Trust, Mortgage Loan Asset Backed Certificates, Series
2005-5 (HSBC) instituted foreclosure proceedings by filing a complaint against
Morgan and Takvam, based on their alleged default under the note and mortgage.
In the complaint, HSBC claimed to be the holder of the note on Morgan and
Takvam’s home, but stated that a copy of the note was unavailable at the time the
complaint was filed. Rather than filing an answer, Morgan2 moved to dismiss the
complaint, arguing that HSBC did not have standing to sue and that the complaint
failed to state a claim for which relief may be granted. The basis for Morgan’s
2
We note that while Takvam was named on the Notice of Appeal, she does not appear to have
actively participated at the trial court level below, and she has not filed a separate brief on
appeal. Thus we refer only to Morgan throughout the opinion.
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motion to dismiss was that HSBC did not attach a copy of the note to its complaint,
and thus there was no proof that they had standing to enforce the note.
HSBC responded to the motion to dismiss on September 11, 2008,
and in its response attached a copy of an adjustable rate note between Ownit, as
lender, and Morgan and Takvam, as borrowers. HSBC was not a party to this note.
On August 11, 2008, an assignment of mortgage from Ownit to HSBC dated
August 4, 2008, was recorded in Shelby County, Kentucky. While Morgan’s
motion to dismiss was still pending, HSBC filed for summary judgment on
December 3, 2008. The copy of the note HSBC attached to the motion for
summary judgment included an undated “Note Allonge” signed by Richard
Williams as Vice President of Litton Loan Servicing, LP and as Attorney in Fact of
Ownit. This document purported to negotiate the note to HSBC.
On January 7, 2009, the trial court held a hearing on Morgan’s motion
to dismiss and HSBC’s motion for summary judgment. Subsequently, on February
25, 2009, the trial court denied Morgan’s motion to dismiss and entered summary
judgment in HSBC’s favor. Morgan filed a timely motion to vacate under
Kentucky Rules of Civil Procedure (CR) 59.05 on March 6, 2009, and on March
18, 2009, the trial court orally denied Morgan’s motion and noted the same on the
docket sheet.
Morgan filed a notice of appeal on April 2, 2009. On April 8, 2009,
this Court, sua sponte, raised the issue of jurisdiction and ordered Morgan to show
why the appeal should not be dismissed as being interlocutory because no order
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appeared in the record denying Morgan’s CR 59.05 motion. After considering
Morgan’s response, this Court entered another order on June 8, 2009, ordering that
the appeal be held in abeyance for thirty days to allow the circuit court to enter an
order in accordance with its March 18, 2009, docket sheet notation overruling
Morgan’s motion to vacate.
Although the case was returned to this Court’s active docket
automatically at the expiration of that thirty-day period per the Court’s order, the
record did not reflect that the trial court ever entered an order denying the motion
to vacate. On March 16, 2011, this court again held the matter in abeyance for
thirty days to permit the parties to petition the trial court to enter a proper order
denying the CR 59.05 motion. On March 31, 2011, the parties tendered an order
from the trial court denying the CR 59.05 motion, and this case was returned to our
active docket for consideration of the merits on appeal.
On appeal, Morgan raises two arguments; namely, 1) that HSBC was
not entitled to a judgment as a matter of law because it did not have authority to
enforce the note and 2) that summary judgment was premature because discovery
was incomplete and because he did not have time to conduct discovery to
determine whether HSBC breached an assumed duty.
In Lewis v. B & R Corp., 56 S.W.3d 432, 436 (Ky. App. 2001), this
Court set forth the standard of review in an appeal from the entry of a summary
judgment:
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The standard of review on appeal when a trial court
grants a motion for summary judgment is “whether the
trial court correctly found that there were no genuine
issues as to any material fact and that the moving party
was entitled to judgment as a matter of law.” The trial
court must view the evidence in the light most favorable
to the nonmoving party, and summary judgment should
be granted only if it appears impossible that the
nonmoving party will be able to produce evidence at trial
warranting a judgment in his favor. The moving party
bears the initial burden of showing that no genuine issue
of material fact exists, and then the burden shifts to the
party opposing summary judgment to present “at least
some affirmative evidence showing that there is a
genuine issue of material fact for trial.” The trial court
“must examine the evidence, not to decide any issue of
fact, but to discover if a real issue exists.” While the
Court in Steelvest[, Inc. v. Scansteel Service Center, Inc.,
807 S.W.2d 476, 480 (Ky. 1991),] used the word
“impossible” in describing the strict standard for
summary judgment, the Supreme Court later stated that
that word was “used in a practical sense, not in an
absolute sense.” Because summary judgment involves
only legal questions and the existence of any disputed
material issues of fact, an appellate court need not defer
to the trial court’s decision and will review the issue de
novo. [Citations in footnotes omitted.]
Morgan’s first argument addresses whether HSBC was entitled to judgment
as a matter of law based upon the argument that HSBC lacked standing to enforce
the note. Initially, we note that the particular facts of this case, in particular the
sequence of events that unfolded, is troubling. In its complaint, HSBC alleged that
it was the holder of the note on Morgan’s home but claimed that a copy of the note
was unavailable. Morgan moved to dismiss on grounds that HSBC failed to
produce the note and thus had no proof that, as the holder of the note, it was
entitled to proceed in foreclosure against Morgan and Takvam.
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KRS 355.1-201(2)(u) defines a “holder” as “[t]he person in possession of a
negotiable instrument that is payable either to bearer or to an identified person that
is the person in possession.” Morgan argues that at the time it filed suit, HSBC
was not a holder of the note and accordingly could not enforce the note. In support
of this argument, Morgan points out that the note was payable to a specific,
identified entity: Ownit. Morgan argues that Ownit could have transferred or
negotiated its rights to HSBC by endorsement, which requires a signature by an
authorized representative of Ownit in the signator’s official capacity, see KRS
355.3-402, but that it failed to properly do so.
Initially, HSBC produced a note between Ownit, Morgan, and
Takvam, and subsequently, at summary judgment stage, produced another note
with the aforementioned note allonge purporting to assign the note to HSBC. In its
order granting summary judgment, the trial court held that the endorsement in the
note allonge by Richard Williams, as president of Litton Loan Servicing LP and
attorney- in- fact for Ownit, was sufficient proof that HSBC was a holder of the
note. In support of this holding, the trial court explained that as an attorney- infact for Ownit, Williams was authorized to transact business for Ownit. However,
we find it troubling that when HSBC initially filed suit, a copy of this note was not
attached and that later, this undated note allonge purporting to indorse the note to
HSBC appeared in the record.
Further, HSBC argues that under KRS 355.3-203(2), it has the power
to enforce the note. That statute states that “[t]he transfer of an instrument,
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whether or not the transfer is a negotiation, vests in the transferee any right of the
transferor to enforce the instrument.” The Official comment to Section 203(2)
states: “If the transferee is not a holder because the transferor did not indorse; the
transferee is nevertheless a person entitled to enforce the instrument under Section
3-301 if the transferor was a holder at the time of transfer.”
Thus, according to HSBC, even if Ownit did not properly indorse the
note, as Morgan claims on appeal, it can enforce the note if Ownit was a holder at
the time of the transfer, or at the time the note allonge was signed. The difficulty
in determining the applicability of the note allonge is the fact that it is not dated,
and thus there is nothing in the record to determine whether the transferor, Ownit,
was a holder at the time it allegedly transferred its interest in the note to HSBC.
This case is further complicated by the fact that the mortgage was not
assigned to HSBC until August 4, 2008, and was subsequently recorded on August
11, 2008. HSBC filed suit on July 31, 2008, and the parties were served on August
2, 2008. Morgan argues that because HSBC did not have possession of the note
and the mortgage when it filed suit, and thus had no standing, it cannot cure its
lack of standing by subsequently acquiring an interest in the mortgage.
Because this is an issue of first impression in the state of Kentucky,
Morgan cites to Wells Fargo Bank, N.A. v. Marchione, 887 N.Y.S.2d 615
(N.Y.A.D. 2 Dept. 2009), in support of this argument. In that case, the parties
executed a mortgage with Option One Mortgage Corporation on September 2,
2005. Id. at 616. The parties allegedly failed to make payments beginning on
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April 1, 2007, and Wells Fargo initiated suit by filing a summons and complaint on
November 30, 2007. Id. Option One assigned its “right, title and interest” in the
aforementioned mortgage to Wells Fargo in an assignment dated December 4,
2007. Id. The assignment contained a provision stating that it became effective on
October 28, 2007. Id. The Appellate Court held that because Wells Fargo did not
have an interest in the note and mortgage before they filed suit and only acquired
such an interest after filing suit, the bank lacked standing to bring the suit. Id. at
617. Specifically, the trial court held, “[i]n order to commence a foreclosure
action, the plaintiff must have a legal or equitable interest in the mortgage. . . .
Here, Wells Fargo lacked standing to bring this foreclosure action because it was
not the assignee of the mortgage on November 30, 2007, the day the action was
commenced.” Id. Ohio also requires that banks have an interest in the mortgage
when suit is filed. See Wells Fargo Bank, N.A. v. Byrd, 897 N.E.2d 722 (Ohio
App. 1 Dist. 2008) (“bank that was not the mortgagee when suit was filed cannot
cure its lack of standing by subsequently obtaining an interest in the mortgage.”).
Because it is impossible to determine from the record when Ownit
transferred its interest in the note to HSBC and because the mortgage was not
assigned to HSBC until August 4, 2008, after HSBC filed suit against Morgan, we
simply cannot say that HSBC had standing to bring the instant action. CR 17.01
provides that “every action shall be prosecuted in the name of the real party in
interest, but…an assignee for the benefit of creditors…may bring an action…” It
follows that, where a cause of action has been assigned, the assignee becomes the
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real party in interest. See CR 17.01. However, “[i]n no event may an assignee
maintain an action for any part of a claim which has not been assigned to him.”
Works v. Winkle, 234 S.W.2d 312, 315 (Ky. App. 1950). A mere expectancy is not
enough to establish standing, a party must prove a “present or substantial interest.”
Plaza B.V. v. Stephens, 913 S.W2d 319, 322 (Ky. 1996) (quoting Ashland v.
Ashland F.O.P. No.3, Inc., 888 S.W.2d 667 (Ky. 1994)). In the instant case,
HSBC cannot prove when it obtained a present or substantial interest in the note
and it did not receive an interest in the mortgage until after it filed suit.
Accordingly, the trial court’s judgment as a matter of law that HSBC had standing
to pursue its claims was in error.
For the foregoing reasons, we reverse the Shelby Circuit Court’s
summary judgment and remand this matter for further proceedings consistent with
this opinion.
ISAAC, SENIOR JUDGE, CONCURS.
MOORE, JUDGE, CONCURS IN RESULT BY SEPARATE
OPINION.
Respectfully, I concur with the result that HSBC Bank did not establish that
it had standing to file a complaint at the time it commenced this action. Although a
bankruptcy action, I agree with the analysis and detailed explanation set forth in In
re Veal, ---B.R. ---, 2011 WL 2304200 (9th Cir. BAP, June 20, 2011) and find it to
be persuasive and an excellent explanation relevant to the issue presently before
the Court.
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BRIEF FOR APPELLANTS:
BRIEF FOR APPELLEE:
J. Hays Lawson
Louisville, Kentucky
Kimberlee S. Rohr
Cincinnati, Ohio
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