Court Opinion

ID: 2675254
Source: CourtListenerOpinion
Date Created: 2014-05-21 19:00:35.644567+00
Date Added: 2024-06-11T13:06:12.121101
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                               No. 13-1821

JAMES P. SCHEIDER, JR.; TAFFY G. SCHEIDER,

                 Plaintiffs – Appellants,

           v.

DEUTSCHE BANK NATIONAL TRUST COMPANY, as Trustee of the
IndyMac INDA Mortgage Loan 2006−AR2 Mortgage Pass−Through
Certificates,   Series  2006−AR2   under  the   Pooling   and
Servicing Agreement dated August 1, 2006; INDYMAC MORTGAGE
SERVICES;   MORTGAGE    ELECTRONIC   REGISTRATION    SYSTEMS,
INCORPORATED; ONEWEST BANK, F.S.B.,

                 Defendants – Appellees,

           and

INDYMAC BANK FEDERAL BANK; MERS, INCORPORATED; MORTGAGE
NETWORK INCORPORATED; INTERNAL REVENUE SERVICE; JOHN DOE
1−1000, inclusive, representing a class of unknown persons
who claim or have the right to claim an interest in certain
real property located in Beaufort County, South Carolina;
INDYMAC MBS INCORPORATED,

                 Defendants.

Appeal from the United States District Court for the District of
South Carolina, at Beaufort.    Sol Blatt, Jr., Senior District
Judge. (9:11-cv-00395-SB)

Argued:   April 11, 2014                     Decided:   May 21, 2014

Before MOTZ, DIAZ, and FLOYD, Circuit Judges.
Affirmed by unpublished per curiam opinion.

ARGUED: Antonia T. Lucia, Roberts Vaux, VAUX & MARSCHER, PA,
Bluffton, South Carolina, for Appellants.       Jeffrey Michael
Anderson, BRADLEY ARANT BOULT CUMMINGS LLP, Birmingham, Alabama,
for Appellees. ON BRIEF: Mark S. Berglind, VAUX & MARSCHER, PA,
Bluffton, South Carolina, for Appellants.   B. Rush Smith, III,
Brian P. Crotty, Sarah B. Nielsen, NELSON MULLINS RILEY &
SCARBOROUGH LLP, Columbia, South Carolina; Marc James Ayers,
BRADLEY ARANT BOULT CUMMINGS LLP, Birmingham, Alabama, for
Appellees.

Unpublished opinions are not binding precedent in this circuit.

                                2
PER CURIAM:

      James and Taffy Scheider stopped paying their mortgage in

2010.      They believe that the securitization of their mortgage

has relieved them of the obligation to pay.                             Accordingly, the

Scheiders brought suit asserting a host of claims and seeking a

declaratory     judgment       that    the       entities    owning       and    servicing

their      mortgage    could     not   enforce       it.          The    district   court

disagreed, granting summary judgment to the defendants.                           Finding

that securitization--a process to which the Scheiders were not

party--cannot       trump     the   law   governing         the    mortgage      documents

themselves, we affirm.

                                          I.

                                          A.

      In    2006,     the    Scheiders    refinanced         their       South   Carolina

home.      They signed an adjustable-rate note for $1.178 million

plus interest, payable to the lender, Mortgage Network.                               The

note, executed in South Carolina, provides that Mortgage Network

is entitled to transfer the note and that “anyone who takes this

Note by transfer and who is entitled to receive payments under

this Note is called the ‘Note Holder.’”                 J.A. 251.

      The Scheiders simultaneously executed a mortgage securing

the   note.         The     mortgage   provides       that        Mortgage      Electronic

Registration Systems, Inc., commonly known as MERS, would act as

                                             3
the nominee for Mortgage Network.              The Scheiders “agree[d] that

MERS holds only legal title to the interests granted by [the

Scheiders] in this Security Instrument, but, if necessary to

comply with law or custom, MERS . . . has the right . . . to

foreclose and sell the Property; and to take any action required

of Lender.”       J.A. 262.    The mortgage is “governed by federal law

and   the   law     of   the   jurisdiction     in    which    the   Property   is

located.”     J.A. 268.         The mortgage was recorded in Beaufort

County, South Carolina.

      Mortgage      Network    subsequently     transferred      the   Scheiders’

note--the first of several such transactions.                    At some point,

Mortgage Network endorsed the note, writing “Pay to the order of

______    Without    Recourse.”       J.A.     340.    That    blank   was   later

filled with “IndyMac Bank F.S.B.”              J.A. 344.      IndyMac Bank, FSB,

then endorsed the note, writing simply “Pay To The Order Of” and

“Without    Recourse.”         J.A.   344. 1     The   note     is   now   in   the

possession of Deutsche Bank.

      1
       The Scheiders argue that there are “three versions” of the
note and express confusion as to which “version” is the real
thing.   The defendants have explained that the Joint Appendix
contains three copies of the note from various points in time:
the final “version” in the J.A., they aver, is simply a copy of
the real note as it presently exists. The district court found
that it “ha[d] been presented with multiple versions of the
negotiable instrument” and thus “believe[d] that a genuine issue
of material fact exists with respect to Deutsche Bank’s
foreclosure counterclaim.”    J.A. 417.   We, however, find that
the Scheiders have produced no evidence to support their bare
(Continued)
                                        4
       At     least     some     of   these   transfers      occurred     during    the

securitization of the loan, which involved its transfer into a

trust. 2         That securitization was effectuated by a Pooling and

Servicing Agreement, which is governed by New York law.                             The

Scheiders are not parties to the PSA.                     Rather, the PSA provides

that the depositor (at this point, IndyMac MBS) “will deliver to

the Trustee [Deutsche Bank] within the time periods specified

. . .       [t]he     original     Mortgage       Note,   endorsed   by    manual    or

facsimile signature in blank in the following form: ‘Pay to the

order       of     ______      without   recourse,’        with   all     intervening

endorsements showing a complete chain of endorsement from the

originator to the Person endorsing the Mortgage Note.”                              J.A.

434.       According to the Scheiders, the “time period[] specified”

is thirty days, ending on August 30, 2006.

       The Scheiders also assert that, as a condition of its REMIC

(real estate mortgage investment conduit) tax status, the trust

assertion that the later iterations of the note are somehow
misleading.   In the absence of any basis for doubting the
defendants’ eminently reasonable explanation, we decline to find
a “genuine dispute as to any material fact” regarding the note’s
negotiation. Fed. R. Civ. P. 56(a).
       2
       In securitization, numerous mortgages are grouped together
into a special purpose vehicle, such as a trust.      The vehicle
then issues mortgage-backed securities to investors.         Some
special purpose vehicles qualify as real estate mortgage
investment conduits, or REMICs, which receive favorable tax
treatment.

                                              5
must receive all related mortgages within a three-month clean-up

period, ending before December 2006.                   But MERS did not assign

the mortgage to Deutsche Bank as trustee until August 2011.

      Meanwhile, the Scheiders applied for a loan modification,

but were found ineligible.          In June 2010, the Scheiders stopped

making their loan payments altogether.

                                        B.

      The    Scheiders    then    filed       suit    in    South   Carolina      state

court.      They raised an array of claims, including actions for a

declaratory judgment and to quiet title, against the entities

that held and serviced their mortgage.                     The defendants removed

the   case      to     federal    court,        invoking        federal     question

jurisdiction.        Deutsche Bank brought a foreclosure counterclaim.

      The    district     court   granted       the    defendants’      motion     for

summary judgment as to all the Scheiders’ claims.                      See Scheider

v. Deutsche Bank Nat’l Trust Co., No. 9:11-cv-395-SB (D.S.C.

Apr. 11, 2013).          The court denied summary judgment as to the

foreclosure      counterclaim,      which        Deutsche       Bank    voluntarily

dismissed      without     prejudice.            The       Scheiders      moved     for

reconsideration, which the court denied.                   This appeal followed.

                                      II.

      The Scheiders argue primarily that the assignment of their

mortgage five years after the trust’s closing date violated the

                                          6
terms of the PSA and is thus void.                     As a result, they contend,

Deutsche Bank does not properly own their mortgage and is unable

to enforce it. 3

      But we need not evaluate the impact of the PSA.                               Under

South Carolina law and the terms of the instruments themselves,

Deutsche   Bank    holds    both     the    note       and   the    mortgage.       As    a

result, once the Scheiders defaulted on their mortgage, the bank

was   entitled     to   enforce     those       instruments.          We   need    go    no

further in affirming the district court’s judgment.

                                           A.

      We review the district court’s decision to grant summary

judgment de novo.        Cosey v. Prudential Ins. Co. of Am., 735 F.3d
161, 170–71 (4th Cir. 2013).

                                           B.

      We   first        determine     the        law     that       will    guide       our

interpretation of the note and mortgage.                        Where, as here, “a

federal    court    addresses       state       law    claims      under   its    pendent

jurisdiction,” the court “must apply the choice of law rules of

the state in which it sits”--in this case, South Carolina.                               In

      3
       As the district court noted, the Scheiders have admitted
that if we “find[] that the bank has the right to foreclose,
then their [other] claims would ‘go out the window.’” J.A. 417
n.5.

                                            7
re Merritt Dredging Co., 839 F.2d 203, 205 (4th Cir. 1988).

South Carolina law provides that

       when a transaction bears a reasonable relation to this
       State and also to another state or nation the parties
       may agree that the law either of this State or of
       another state or nation shall govern their rights and
       duties.   Failing an agreement this title applies to
       transactions bearing an appropriate relation to this
       State.

S.C.    Code        § 36-1-105(1).                 “[T]o     determine      whether       [a

transaction] bears an ‘appropriate relation’ to South Carolina,”

we   apply    “the    most       significant        relationship        test.”     Merritt

Dredging, 839 F.2d at 207.

       In    this    case,       the    mortgage      is     expressly     governed      “by

federal      law    and    the    law    of    the    jurisdiction        in     which   the

Property is located”--South Carolina.                       J.A. 268.      The note does

not contain a governing-law provision, leading us to apply the

most significant relationship test.                        Given that the Scheiders

are South Carolina residents, their property is located in South

Carolina,     and    the     note      was    executed      in   South    Carolina,      the

answer is clear.          South Carolina law governs both instruments.

                                              C.

       We next conclude that under South Carolina law, Deutsche

Bank is the proper holder of the Scheiders’ note.                                 The bank

undisputedly        possesses          the    note,        and   that     possession      is

reconcilable with the note’s course of negotiation.

                                               8
     Under South Carolina law, “[i]f an indorsement is made by

the holder of an instrument, whether payable to an identified

person or payable to bearer, and the indorsement identifies a

person to whom it makes the instrument payable, it is a ‘special

indorsement.’        When specially indorsed, an instrument becomes

payable to the identified person and may be negotiated only by

the indorsement of that person.”             S.C. Code § 36-3-205(a).

     If,   however,     the   endorsement      is     not   “special,”     it   is    a

“blank   endorsement.”          Id.   § 36-3-205(b).         “When   indorsed        in

blank,   an   instrument      becomes    payable       to   bearer   and    may      be

negotiated     by    transfer    of   possession       alone   until     specially

indorsed.”    Id.

     “The holder may convert a blank indorsement that consists

only of a signature into a special indorsement by writing, above

the signature of the indorser, words identifying the person to

whom the instrument is made payable.”                 Id. § 36-3-205(c).          If,

for instance, there is an instrument “on which the space for the

name of the payee is left blank,” it “is an instrument but it is

incomplete.”        Id. § 36-3-115 cmt. 2.            The instrument is still

“enforceable in its incomplete form and it is payable to bearer

because it does not state a payee.”             Id.

     Analyzing similar Virginia statutes, we have concluded that

“[t]he upshot of these provisions is clear.”                 Horvath v. Bank of

New York, N.A., 641 F.3d 617, 621 (4th Cir. 2011).                         That is,

                                         9
“[n]egotiable instruments like mortgage notes that are endorsed

in blank may be freely transferred.                 And once transferred, the

old adage about possession being nine-tenths of the law is, if

anything, an understatement.               Whoever possesses an instrument

endorsed in blank has full power to enforce it.”                      Id.

      The   language       of    the    note      itself      accords       with    these

statutes, providing that “anyone who takes this Note by transfer

and   who   is   entitled       to   receive    payments      under      this    Note     is

called the ‘Note Holder.’”             J.A. 251; see also Horvath, 641 F.3d

at 622 (quoting identical language and explaining that “these

provisions do little to suggest that the parties intended to

depart from the Virginia code’s permissive approach to transfers

[but rather] suggest precisely the opposite”).

      The   Scheiders’      note     was   first    endorsed        in   blank     by    the

lender, Mortgage Network.              See J.A. 340.          Under South Carolina

law, this act turned the note into bearer paper, negotiable by

possession alone.        At some point, the blank was filled in with

“IndyMac Bank F.S.B.”           See J.A. 344.       The note then became order

paper, and only IndyMac, FSB, could enforce it.                           But IndyMac,

FSB, then endorsed the note, again in blank--converting it to

bearer paper once more.              See J.A. 344.         Thus, the note may be

enforced    by   whoever    possesses       it,    and   it    is    undisputed         that

Deutsche Bank possesses it now.

                                           10
                                              D.

      South         Carolina          has   long        upheld          “the     familiar          and

uncontroverted proposition . . . that the assignment of a note

secured    by       a    mortgage      carries     with      it    an     assignment         of   the

mortgage, but that the assignment of the mortgage alone does not

carry with it an assignment of the note.”                                Hahn v. Smith, 154
S.E. 112, 115 (S.C. 1930); see also Ballou v. Young, 20 S.E. 84,

85   (S.C.     1894)          (“The   transfer     of    a   note        carries       with    it    a

mortgage given to secure payment of such note.”).                                Thus, because

Deutsche Bank is the holder of the note, it is also the holder

of the mortgage.

      This, too, accords with our conclusions in Horvath.                                           In

response       to       Horvath’s      arguments     that         the    note        and    mortgage

should be viewed separately, we found that in Virginia “the deed

of trust follows the note.” 641 F.3d at 624.                   “Indeed,” we

opined,    “common            sense    suggests    that      things       could       not    be   any

other way.”             Id.    If we permitted the split-the-note theory the

Scheiders propose, “there would be little reason for notes to

exist in the first place,” as “[o]ne of the defining features of

notes     is        their       transferability.”                 Id.          The     idea       that

“transferring a note would strip it from the security that gives

it value and render the note largely worthless . . . cannot be--

and is not--the law.”                 Id.

                                              11
       The     Scheiders   contend        that     this       longstanding        rule    is

unsuited to the complex securitization of mortgages so prevalent

today.       They cite to recent orders from South Carolina’s trial

courts       suggesting    that      ownership          of     the   note        alone    is

insufficient to initiate a foreclosure.                      See Deutsche Bank Nat’l

Trust Co. v. Heinrich, No. 2011-CP-10-1060 (S.C. Ct. Com. Pl.

July 31, 2013); One West Bank, FSB v. Torrence, No. 2010-CP-32-

4954   (S.C.     Ct.   Com.    Pl.    July       25,    2012).       But    we    are    not

persuaded that these trial court opinions demonstrate that South

Carolina       has   revisited      its     law    on    negotiable        instruments--

especially as its higher courts continue to apply it.                             See Bank

of America, N.A. v. Draper, 746 S.E.2d 478, 481 (S.C. Ct. App.

2013) (citing Hahn and Ballou).

                                            E.

       South    Carolina      law    thus    settles         the   question.        As    we

explained in Horvath, the “note plainly constitutes a negotiable

instrument under [South Carolina law].                       That note was endorsed

in blank, meaning it was bearer paper and enforceable by whoever

possessed it.          And [Deutsche Bank] possessed the note at the

time it attempted to foreclose on the property.                       Therefore, once

[the Scheiders] defaulted on the property, [South Carolina] law

                                            12
straightforwardly allowed [Deutsche Bank] to take the actions

that it did.” 641 F.3d at 622 (internal citations omitted). 4

                               III.

    For the foregoing reasons, we affirm the district court’s

judgment.

                                                           AFFIRMED

    4
       The Scheiders contend that the PSA somehow overrides these
principles.   But they fail to explain “how a later agreement
(the PSA)--to which the Debtor[s are] not a party--could alter
the nature of the contract and instrument [they] executed . . .
earlier.”   In re Walker, 466 B.R. 271, 284 (Bankr. E.D. Pa.
2012).

                                13