Opinion ID: 621950
Heading Depth: 1
Heading Rank: 9

Heading: Deutsche Bank's Status as Party in Interest

Text: We return to the key question: is Deutsche Bank a creditor of the Millers with standing to seek relief from stay? To answer this question, we turn to the Bankruptcy Code. According to the Bankruptcy Code, a creditor includes an entity that has a claim against the debtor. 11 U.S.C. § 101(10)(A). A claim is a right to payment. Id. § 101(5)(A). Does Deutsche Bank have a right to payment from the Millers? In examining this question, we begin with the principle that [w]ithin the context of a bankruptcy proceeding, state law governs the determination of property rights. In re Mims, 438 B.R. 52, 56 (Bankr.S.D.N.Y. 2010). We must therefore turn to Colorado law, in particular that state's version of the Uniform Commercial Code (U.C.C. or Code). We ask first how Colorado law would classify the Note signed by the Millers. Under Colorado law, a promise or order such as the Note is payable to order if it is payable (i) to the order of an identified person or (ii) to an identified person or order. Colo.Rev.Stat. § 4-3-109(b). The Note at issue here is payable to the order of Lender. Lender is IndyMac Bank, F.S.B., a federally chartered savings bank[.] Aplt.App., Vol. I at 14. Thus, the Note is payable to the order of IndyMac Bank under § 4-3-109(b). But [a]n instrument payable to an identified person [such as IndyMac Bank] may become payable to bearer if it is indorsed in blank pursuant to section 4-3-205(b). Colo.Rev.Stat. § 4-3-109(c). [7] Section 4-3-205(b) provides that [i]f an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a `blank indorsement.' When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specifically indorsed. (emphasis added). Deutsche Bank presented evidence that IndyMac had indorsed the Note in blank. Is proof of this indorsement sufficient under the U.C.C. requirements to establish Deutsche Bank as the successor holder of the note? As we shall see, it is not, because Deutsche Bank must also prove it has possession of the Note. The U.C.C. identifies the requirements for negotiation of a note, that is, for transfer of possession ... to a person who thereby becomes its holder. Id. § 4-3-201(a). This statute provides that if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder. Id. § 4-3-201(b) (emphasis added). The Official Commentary to section 4-3-201 explains that negotiation  always requires a change in possession of the instrument because nobody can be a holder without possessing the instrument, either directly or through an agent. (emphasis added). See also Colo. Rev.Stat. § 4-1-201(b)(20)(A) (defining holder of negotiable instrument as person in possession of it). Possession is an element designed to prevent two or more claimants from qualifying as holders who could take free of the other party's claim of ownership. Georg v. Metro Fixtures Contractors, Inc., 178 P.3d 1209, 1213 (Colo.2008) (citation omitted). [8] With rare exceptions, those claiming to be holders have physical ownership of the instrument in question. Id. (citation omitted). [9] In the case of bearer paper such as the Note, physical possession is essential because it constitutes proof of ownership and a consequent right to payment. [10] While Deutsche Bank has offered proof that IndyMac assigned the Note in blank, it elicited no proof that Deutsche Bank in fact obtained physical possession of the original Note from IndyMac, either voluntarily or otherwise. [11] Under the U.C.C. requirements, Deutsche Bank has therefore failed to show that it is the current holder of the Note. Colorado law does not limit enforcement of an obligation to a holder who received the instrument through negotiation. A note may also be enforced by a transferee. See Colo.Rev.Stat. § 4-3-203. Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument. Id. § 4-3-203(b). But transfer requires delivery: An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument. Id. § 4-3-203(a) (emphasis added). Delivery with respect to an instrument means voluntary transfer of possession of the instrument. Id. § 4-1-201(b)(14). Because Deutsche Bank has failed to prove transfer of possession of the original Note it has failed to establish its status as a transferee. Deutsche Bank also argues that it has standing because under Colorado law it can initiate a public trustee foreclosure without producing the original Note. It cites Colo.Rev.Stat. § 38-38-101(1), which provides that the holder of an evidence of debt may initiate a foreclosure. An evidence of debt includes a promissory note such as the Note at issue here. Colo.Rev. Stat. § 38-38-100.3(8). Under certain circumstances, the holder of an evidence of debt can file a public trustee foreclosure without supplying the original note. See id. § 38-38-101(1)(b)(I)-(III). But this argument depends, first, on Deutsche Bank's ability to show that it is a holder of an evidence of debt. Article 38 defines a holder of an evidence of debt as a person  in actual possession of  or  entitled to enforce an evidence of debt. Colo.Rev.Stat. § 38-38-100.3(10) (emphasis added). Section 38-38-100.3(10) lists a number of presumptive holders of a debt presumed to be the holder of an evidence of debt. Each of these requires possession of the evidence of debt, which Deutsche Bank has thus far failed to demonstrate. See id. § 38-38-100.3(10)(a)-(d). Deutsche Bank appears to argue that notwithstanding its failure to prove it has actual possession of the Note, it qualifies as a person entitled to enforce an evidence of debt under § 38-38-100.3(10) and thus is a holder of an evidence of debt because (1) it holds a copy of the Note indorsed in blank and (2) it can initiate a foreclosure without presenting the original Note to the public trustee. Deutsche Bank contends that it is a qualified holder, see id. § 38-38-100.3(21), that would be permitted under Colorado law to foreclose without presenting the original note, see id. § 38-38-101(1)(b)(II). But foreclosure under this provision requires either the bank or its attorney to execute a statement citing the paragraph of section 38-38-100.3(20) under which the holder claims to be a qualified holder and certifying or stating that the copy of the evidence of debt is true and correct and that the bank agrees to indemnify and defend any person liable for repayment of any portion of the original evidence of debt in the event that the original evidence of debt is presented for payment to the extent of any amount, other than the amount of a deficiency remaining under the evidence of debt after deducting the amount bid at sale, and any person who sustains a loss due to any title defect that results from reliance upon a sale at which the original evidence of debt was not presented. Id. §§ 38-38-101(1)(b)(II), 38-38-101(2)(a). There is no evidence that Deutsche Bank or its attorneys have executed such a certification or intend to do so. We therefore reject Deutsche Bank's claim to standing founded on these statutes.