In April 2006, owners of real property in Hinesburg, Vermont (“Borrowers”) sought to refinance the loan on such property and executed (i) a promissory note, indorsed in blank, in an amount of $221,650 (the “Note”) and (ii) a mortgage granting a lien on Plaintiff’s interest in the property to secure their obligations under the Note (the “Mortgage”). In March 2006, prior to finalization of Borrowers’ refinancing, J.P. Morgan Acquisition Corporation purchased a pool of current and future loans, including the Borrowers’ upcoming loan (the “Transaction”) and subsequently entered into an agreement with, among others, U.S. Bank, N.A. (“Trustee”) to establish a mortgage loan trust (the “Trust”) under which Trustee would serve as trustee.
In April 2006, Bank of New York Mellon (the “Custodian”) obtained custody of the Note as document custodian for the Trust. In December 2011, Borrowers filed a petition for relief under Chapter 13 of the Bankruptcy Code (the “Petition”). On the date of the Petition, the Custodian remained in possession of the Note. In December 2012, Trustee filed a proof of claim asserting ownership of the debt evidence by the Note and secured by the mortgage. Borrowers challenged Trustee’s claim, arguing that Trustee was not a “holder” of the Note.
The United States Bankruptcy Court for the District of Vermont began, “The Bankruptcy Code does not specify requirements to enforce a promissory note. In the absence of specific requirements in the Code, bankruptcy courts look to applicable non-bankruptcy law, usually state law.” Applying Vermont law (the Vermont UCC), the court stated, “An entity may be the holder of a note if two criteria are met: it is in possession of the note, and the note is either payable to it or indorsed in blank . . . To enforce a promissory note under [Vermont law], therefore, a person must be in possession of the instrument at the time the enforcement action is filed and the instrument must be made payable to the person or to bearer.” In the specific context of bankruptcy, “a party must demonstrate it was a holder on the date of the bankruptcy petition in order to be entitled to file a proof of claim . . . unless the party filing the proof of claim bases its ‘holder’ status on a post-petition transfer . . .”
The court then addressed each basis for Borrowers’ argument. First, Borrowers claimed there was no evidence suggesting Borrowers’ loan was actually transferred pursuant to the Transaction. The court held, “[Trustee] need not prove an uninterrupted chain of title, nor demonstrate that the loan was actually transferred . . . [Trustee]’s manner of obtaining possession of the Note is not material, so long as [Trustee] had possession of the Note as of the petition date.” Next, the court addressed the Borrowers’ claim that the Custodian was not entitled to judgment as a matter of law because of ambiguity regarding the date of indorsement (since the indorsement was not dated). The court acknowledged that “the date on which a promissory note is indorsed may be material to determining which party has the right to enforce that note” but found “the record unequivocally indicat[ing] the Note was indorsed prior to the critical date [i.e. the petition date]” since it had been entered into evidence prior to that date.
The Borrowers also claimed that it was unclear which entity served as the document custodian at any given time and thus it was unclear who had possession on the petition date. The court remained unpersuaded, reiterating that the Custodian need not prove a chain of title, and stating, “The undisputed material facts also demonstrate the beneficial owner of the Note has been [Trustee], as trustee for the trust . . . there is nothing in the record to support an inference that the entity who possessed the Note as of the petition date did not possess the Note as the document custodian on behalf of [Trustee] . . .” even if there was ambiguity as to how that entity came to serve as document custodian. Given that Trustee was in possession of the Note at the time of the petition and that the Note was indorsed in blank (i.e. payable to bearer) prior to the petition date, Trustee was entitled to enforce the Note against Borrowers and was granted summary judgment.