Alex Mitchel, a third-year evening student at Maryland Carey Law, provided the following summary of the recent opinion from the Court of Appeals on Deutsche Bank v. Brock:
In Deutsche Bank v. Brock, the Maryland Court of Appeals unequivocally upheld a key procedural fixture of the secondary market for residential mortgages. In doing so, the Court distinguished the rule it announced in Anderson v. Burson two years earlier, a seemingly favorable decision for plaintiff-consumers at the time.
Both cases revolved around borrowers challenging the foreclosure rights of a subsequent possessor of their promissory notes. In Anderson, the Court held that the servicer seeking enforcement of the note had to first establish the chain of transfer that led to its possession because the note was unindorsed and the servicer was a transferee.
In Brock, however, the Court viewed the circumstances to be in “stark contrast.” Here, the note was not unindorsed; rather it was indorsed “in blank.” The Court reasoned that this key distinction transforms the servicer into a rightful holder of the note, rather than a mere nonholder in possession as was the case in Anderson.
To elaborate, the note at issue in Anderson did not include an allonge executed by a holder assigning the note, thereby making it “unindorsed.” Whereas in Brock, the note was indorsed “in blank” where it included a fully intact chain of signatures from holders of the note and where it ended with a signature box executed by the last prior holder that left blank the field indicating to whom the note would become payable. This type of indorsement is a routine practice used in the securitization of mortgages and it is expressly contemplated by the Commercial Law Article of the Maryland Code. Indeed, the Court created the following syllogism out of the Maryland Commercial Law Article in order to reach its holding:
“…[T]he person or entity obligated on a promissory note must pay the obligation to…a person entitled to enforce the instrument.”
“…[A] promissory note may be enforced by…inter alia…(i) the holder of the instrument….”
“In this context, a holder is ‘[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.’”
AND, “A promise or order is payable to bearer if it…[inter alia]…(c) does not state a payee; or, (d) otherwise indicates that it is not payable to an identified person.”
In this case, Brock was obligated by her promissory note to pay the person entitled to enforce the instrument. The servicer was in physical possession of the note and the note did not state a payee, which means that the note was payable to, and enforceable by, the servicer as the bearer and official holder of the note. The Court synthesized this syllogism as follows: “Thus, the person in possession of a note, either specially endorsed to that person or endorsed in blank, is a holder entitled generally to enforce that note.”
So, is any of this of meaningful import beyond the circumstances of the present case? The business practice of bundling and securitizing residential mortgages, that is, indorsements made in blank, is recognized as valid and as imputing servicers with foreclosure rights. In this way, the Court’s ruling might be to the chagrin of those who call for increased restriction and accountability for the secondary mortgage market. The industry line, of course, is that transferability and alienability of loans is essential to keeping loan pricing down for consumers. That certainly has an inherent logic to it, even if the empirical data to support such a claim may be scarce. Perhaps of more central concern to the Court on these matters is that the selling of a borrower’s loan does not impact them adversely. The terms of Brock’s loan were not changed, and she knew to whom she was supposed to pay her obligation – she was simply unable to do so.