In Re: Lorraine Santoli

Background

Lorraine Santoli’s Chapter 13 bankruptcy case began in 2016. Shellpoint Mortgage Servicing, which the opinion says is now known as Newrez LLC, filed a proof of claim for Bank of New York Mellon concerning a note and mortgage lien on Santoli’s real property. The initial filing included an unendorsed consolidated note and did not include documents showing how Bank of New York Mellon became the note’s owner.

Santoli moved to expunge the claim. After several missed appearances by Shellpoint and a hearing-notice problem, the Bankruptcy Court initially granted the motion. It later granted Shellpoint’s motion for reconsideration because Shellpoint had not been directly served with notice of a changed hearing date, and the expungement order was voided.

Shellpoint later submitted an endorsed-in-blank consolidated note as part of its reconsideration motion, but it never amended its proof of claim to include that document. At a June 2, 2021 hearing, Shellpoint conceded that none of its filed proofs of claim included an endorsed note. The Bankruptcy Court ruled that Shellpoint lacked standing to enforce the claim because it had not shown that it possessed the properly endorsed note when Santoli’s bankruptcy case began. Santoli then asked the Bankruptcy Court to void Bank of New York Mellon’s lien under Section 506(d) of the Bankruptcy Code. The Bankruptcy Court denied that request, and Santoli appealed.

Issues on Appeal

Santoli raised three issues: whether the claim had been disallowed on substantive rather than procedural grounds; whether the lien could be voided without an adversary proceeding, which is a separate lawsuit-like process used to determine the validity or extent of a lien; and whether the lien could be voided without an evidentiary hearing.

District Court’s Analysis

The district court held that the claim had been disallowed for procedural reasons. The Bankruptcy Court’s ruling rested on Shellpoint’s failure to properly amend its claim to include the endorsed note and to satisfy the documentation requirements for a proof of claim. The district court explained that the Bankruptcy Court had not substantively litigated whether Shellpoint possessed the note, considered the parties’ legal arguments about possession, or held an evidentiary hearing on standing. Because the disallowance was procedural, it did not provide a basis to void the lien under Section 506(d).

The district court also upheld the determination that lien avoidance had to proceed through an adversary proceeding. Bankruptcy Rule 7001(2) requires that process for proceedings determining the validity, priority, or extent of a lien. The court noted that Shellpoint had not agreed to proceed without an adversary proceeding and that the case relied on by Santoli involved an evidentiary hearing and different circumstances.

Finally, the district court concluded that the Bankruptcy Court properly exercised its discretion not to hold an evidentiary hearing. The parties had acknowledged that Shellpoint could still defend its right to enforce the lien in state court through a foreclosure or quiet-title action. The district court also found that there had been no evidentiary hearing or substantive determination establishing the lien’s invalidity.

Disposition

The district court affirmed the Bankruptcy Court’s decision in its entirety and dismissed Santoli’s bankruptcy appeal. The clerk was directed to close the case.