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Although the Mortgage Note Was Discharged In Bankruptcy, the Bank Holding the Mortgage Note Had Standing to Bring a Foreclosure Action (In Rem) Seeking the Proceeds of the Foreclosure Sale—The Bank Could Not, However, Seek a Deficiency Judgment (In Personam) Against the Borrower

The Second Department, in a full-fledged opinion by Justice Cohen, determined that the assignee of a mortgage note discharged in bankruptcy (Deutsche Bank) has standing to bring a foreclosure action for the sale of the mortgaged property. The borrower, Stephanos, because of the discharge in bankruptcy, could not be held liable on the note in personam (no deficiency judgment was possible).  But the bank could proceed against the property in rem seeking the proceeds of a foreclosure sale:

Under New York law, in order to have standing to commence a foreclosure action, a plaintiff generally must be the holder or assignee of the note which the mortgage secures. On this appeal, we are asked to consider whether a note discharged in bankruptcy can be subsequently assigned, with the mortgage passing incident thereto, so as to convey standing to the assignee. … [W]e answer the question in the affirmative. Although a bankruptcy discharge extinguishes a debtor’s personal liability on a mortgage note, it does not impair a creditor’s right to assign that note, and an assignee who holds the discharged note and mortgage has standing to bring a foreclosure action and seek payment through the sale of the mortgaged property. Accordingly, even if the note at issue in this case was assigned or delivered to the plaintiff after it was discharged in bankruptcy, a fact which is not clear from this record, the defendant homeowners failed to establish their entitlement to dismissal of the complaint on the ground that the plaintiff lacked standing. * * *

A mortgage secures an obligation … . However, it is not necessary that an obligation involve personal liability in order for a mortgage to remain valid after a bankruptcy discharge. Here, Stefanos obtained a personal discharge in bankruptcy; thus, his personal liability for the obligation was released … . This did not affect the mortgage securing the note. Post-bankruptcy, the mortgage still secures an obligation; it is simply no longer personal, but in rem … . A discharge in bankruptcy is a discharge from personal liability only and, without more, does not affect a lien … . Although a bankruptcy discharge extinguishes one mode of enforcing a note—namely, an action against the debtor in personam, it leaves intact another—namely, an action against the debtor in rem … . * * *

… “[A]n assignee of a mortgage takes it subject to the equities attending the original transaction” … . After assignment, a note remains subject to any defense, legal and equitable, that existed between the original parties … . Thus, although Stefanos’s personal bankruptcy did not “extinguish” the note for every purpose, he maintains the right to assert, as a defense, his personal discharge in bankruptcy to the extent the note was to be enforced against him in personam. By amending the complaint to limit the relief sought against Stefanos, Deutsche Bank essentially recognized the defendants’ affirmative defense, such that, upon proof of a valid discharge in bankruptcy, Deutsche Bank would not seek a deficiency judgment against Stefanos. Deutsche Bank Trust Co. Ams. v Vitellas, 2015 NY Slip Op 05634, 2nd Dept 7-1-15

 

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