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Claimant Standing: A Proposed Local BK Rule

by Amy Tucker Ryan
Martin, Leigh, Laws & Fritzlen, P.C.
USFN Member (KS)

In an attempt to streamline the proof of claim process and reduce its dockets, one bankruptcy court has proposed a local rule for consideration. The Local Rules Committee for the U.S. Bankruptcy Court for the Eastern District of Missouri proposed the rule and submitted it for public comment through August 5, 2011. The rule is pending approval by the 8th Circuit.

The proposed local rule reads as follows:

“Chapter 13 Liens on Principal Residence – Evidentiary Effect. In a Chapter 13 case, any claim filed by an entity identified by the Debtor in the schedules and Chapter 13 Plan as having a lien on the real property that is the principal residence of the Debtor shall be considered prima facie evidence of the right of such entity to receive payments during the pendency of the Chapter 13 case, subject to any properly filed transfer of claim, provided said claim is accompanied by a recorded copy of the original deed of trust or mortgage. Such a claim and its accompanying documents shall not be subject to the exhibit summary requirements of L.R. 9040 but shall be subject to the privacy and redaction requirements of L.R. 9037.”

The impetus behind the proposed rule was two-fold. Debtors and the chapter 13 trustee objected to some proofs of claim based on an issue of standing. The objecting parties alleged that the claimant needed to prove its right to receive money by producing recorded assignments of the deeds of trust showing it owned the loan. In objecting to the claims, the trustee cited a concern that his office could be liable for making distributions to an entity to which debtors did not, or alleged they did not, owe money. These objections led to an enormous backlog on the court dockets because several continuances were needed for creditors to prepare, execute, and record the assignments. In other cases, creditors failed to timely respond to the objection, and the trustee was unable to disburse arrearage or regular monthly mortgage payments.

Furthermore, most mortgage creditors, having had their proofs of claim challenged in several jurisdictions, were hesitant to file their claims in any court until any interest of MERS appearing on the loan documents had been assigned to a non-MERS entity. Also, fearing a challenge to the creditor’s right to receive funds in a case, several mortgage claimants waited until a chain of title, complete with all assignments of the deed of trust into the present claimant’s name, was finalized. Both processes often took several months to complete and resulted in hundreds of proofs of claim being filed after the claims bar date. This practice has caused dockets to be filled with motions to allow late claims to which no party objected.

It is important to note that under Missouri law, assignments of deeds of trust are not required to be recorded for an entity to have standing to enforce the underlying obligation. Therefore, the debtors and chapter 13 trustee were requiring gratuitous documentation that is not required in state courts, and is not required to conduct a nonjudicial foreclosure sale in Missouri. The proposed local rule was designed to alleviate the burden on the court by reducing the dockets from unnecessary objections and motions, and to facilitate the chapter 13 trustee’s office quickly disbursing funds to appropriate creditors.

In short, if both the debtor and creditor X agree that creditor X holds or services the debtor’s mortgage, creditor X’s proof of claim is prima facie evidence of creditor X’s right to receive distributions under the plan, provided a copy of the original deed of trust is filed with the claim. The accompanying recorded instrument will serve to eliminate concerns regarding lien perfection issues. Should the proposed rule be adopted, the Eastern District of Missouri will have made great progress in eliminating an issue in its court, one which arguably never should have been raised.

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