Right to Foreclose Survives Bankruptcy, Panel Rules
A bank can proceed with foreclosure on a mortgage it was assigned after a property owner’s personal debt was discharged in bankruptcy, a state appellate court has ruled.
Justice Jeffrey Cohen of the Appellate Division, Second Department, wrote in Deutsche Bank Trust Co. Ams. v. Vitellas, 14695/12, that although a debtor’s liability can be extinguished through bankruptcy, a mortgage holder’s right to foreclose on the mortgage to seek repayment survives the bankruptcy.
In 2002, Stefanos Vitellas signed a $560,000 promissory note with Lyons Mortgage Services. As security for the note, he and his wife Maria Vitellas signed a mortgage on their property in Douglaston, Queens.
On May 1, 2004, he filed for Chapter 7 bankruptcy and listed the mortgage as a secured claim. He listed Homecomings Financial, which went out of business in 2013 as part of a Chapter 11 liquidation, as the creditor of the mortgage.
He was granted a discharge in bankruptcy on Oct. 14, 2004.
In 2010, Vitellas defaulted on his note by failing to make payments and, in 2012, plaintiff Deutsche Bank, which argued that it had been assigned the mortgage, filed to foreclose on Vitellas’ house.
Under New York law, a lender must be assigned both the mortgage and the underlying promissory note that it secures to have standing in a foreclosure action.
In its complaint, Deutsche Bank stated that it had been assigned Vitellas’ mortgage in writing in February 2011 and that it received a second written assignment of the mortgage in March 2012, though it did not provide any details at the time as to when it had been assigned the underlying note for the mortgage.
The defendants moved to dismiss Deutsche Bank’s complaint, arguing that the bank lacked standing because Vitellas had discharged the underlying note through bankruptcy in 2004.
Thus, the Vitellases argued, the note was no longer valid by the time that Deutsche Bank had received written assignments of the mortgage in 2011 and 2012. Under New York law, they argued, Deutsche Bank would need both the assignment of a valid note and a mortgage to have standing to foreclose.
Deutsche Bank submitted the affidavit of an officer with loan servicer GMAC Mortgage stating that both the note and the mortgage had actually been delivered to Deutsche Bank on March 25, 2004—more than a month before Stefanos Vitellas filed for Chapter 7 protection.
On Jan. 11, 2013, Queens Supreme Court Justice Bernice Siegal granted the Vitellases’ motion to dismiss the case, writing that Deutsche Bank failed to show evidence of the written assignment of underlying note.
Deutsche Bank filed to reargue the case, claiming that Siegal ignored the submitted affidavit from the GMAC Mortgage officer. In May 2013, Siegal tossed out her previous order, denied the Vitellases’ motion to dismiss and wrote that Deutsche Bank had met its burden for establishing standing.
But, on appeal, Cohen wrote that the Vitellases’ argument was without merit even if the note had been delivered to Deutsche Bank after the bankruptcy.
To support their reasoning that the note was not assignable after Stefanos Vitellas received the bankruptcy discharge, Cohen wrote, the defendants depended upon a Court of Appeals decision from 1867 in Merritt v. Bartholick, 33 N.Y. 44, in which the court wrote that a transfer of the mortgage without the debt is a nullity, and no interest is acquired by it.”
Cohen wrote that the Court of Appeals intended to convey in the decision that a transfer of a mortgage without an underlying note is invalid. The decision does not mean, as the Vitellases have argued, that the note must be “collectable” and “payable” at the time of transfer, Cohen wrote.
Although the bankruptcy extinguishes a personal action against Vitellas as a means of enforcing a note, Cohen wrote, it leaves intact a property action to enforce the note.
A mortgage secures an obligation, the judge wrote, but it is not necessary that the obligation involve personal liability for the obligation to remain valid after a bankruptcy discharge.
Citing Johnson v. Home State Bank, 501 U.S. 78, 84 (1991), Cohen wrote that, even after the debtor’s personal obligations have been extinguished, “the mortgage holder still retains a right to repayment in the form of its right to the proceeds from the sale of the debtor’s property.”
“Taken to its logical conclusion, the defendants’ argument would preclude any mortgagee from foreclosing in rem after a debtor’s discharge in bankruptcy because a note is extinguished in bankruptcy, giving the debtor broader relief than he or she is entitled to under the Bankruptcy Code,” Cohen wrote.
Bruce Bergman, a partner with Berkman, Henoch, Peterson, Peddy & Fenchel and a columnist with the Law Journal, said Vitellas’ argument in the case—that Deutsche Bank was incapable of foreclosing on the mortgage because he had discharged his underlying debt through bankruptcy—presented a “novel issue” and that the court ruled “quite correctly” that, even though the borrower’s debt has been discharged, his note was still assigned.
“The foreclosure of the mortgage can still go forward and the assignment of the note takes with it the mortgage even when the debt has been discharged in bankruptcy,” Bergman said.
Hinshaw & Culbertson partner Schuyler Kraus and Benjamin Noren, an associate with the firm, appeared for Deutsche Bank.
Elias Fillas, a founding partner of the Astoria-based Sacco & Fillas, and Sinan Aydiner, an associate and general counsel to the firm, represented the Vitellases.
“We are disappointed with, but still respect, the Second Department’s ruling,” the Vitellases’ attorneys said in a statement emailed to the Law Journal. “We believe strongly that a strict interpretation of stare decisis should have resulted in a victory. It is clear from the decision that the court gave significant weight to the perceived equities in finding for the bank. We are strongly contemplating a writ at this time and will continue to litigate the matter at the trial court level.”