Kang Jin Hwang

OCR transcription for search; preserved printed pages are authoritative

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AUTHENTI
U.S. GOVER|
INFORMA}

Case 2:08-bk-15337-PC Doc 31 Filed 10/29/08 Entered 10/29/08 16:59:14 Des

In re:
KANG JIN HWANG,
Debtor.

OCT 29 2008 —) 012928
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|. Introduction

IndyMac Federal Bank
(“IndyMac Federal") brings this motion, which
the court grants, to reconsider its denial
of relief from the § 362' automatic stay to
foreclose on real property belonging to debtor
Kang Jin Hwang in Las Vegas. The property
is security for a promissory note that was sold
to the Federal Home Loan Mortgage Corp.
(‘Freddie Mac”), which has not joined and is
not a party to this motion. Freddie Mac, in

' Uniess otherwise indicated, all chapter,

section and rule references are io the
Bankruptcy Code, 11 U.S.C.A. §§ 101-1532
(West 2008) and to the Federal Rules of
Bankruptcy Procedure, Rules 1001-9036.

ATED
ENT

ON

GPO

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA

Case No.: LA08-15337SB
Chapter 7

AMENDED OPINION DENYING RELIEF
FROM AUTOMATIC STAY

Date: September 24, 2008
Time: 9:30 a.m.
Ctrm: 1575

turn, has most likely sold the note to unknown
third parties for securitization.

After trial on the motion for relief from
stay, and several rounds of briefing, the
question remains: to whom is the debt owed
(i.e., who owns the promissory note)? See fn
re Gavin, 319 B.R. 27, 31 (BAP. ist Cir.
2004) (same). The court denies the motion on
two procedural grounds: IndyMac Federal is
not the real party in interest pursuant to Rule
17 of the Federal Rules of Civil Procedure,
and the joinder of the owner of the note is
required by Rule 19.

Subject to these procedural infirmities,
the court finds that IndyMac Federal is entitled
to enforce the note under California law (and
the Uniform Commercial Code (“UCC”):
IndyMac Federal remains the holder of the
note, notwithstanding the sale, because it has

a le SR

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Case 2:08-bk-15337-PC Doc 31 Filed 10/29/08 Entered 10/29/08 16:59:14 Dest

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possession of the note and the note is payable
to its predecessor IndyMac Bank, F.5.E.
(“IndyMac Bank”).

ll. RELEVANT FACTS

Kang Jin Hwang filed this chapter 7
case on April 22, 2008. Hwang's residence in
Las Vegas, Nevada is encumbered by a first
deed of trust recorded on February 1, 2007,
supporting a promissory note in the amount of
$376,000. The original payee on the
promissory note, as well as the beneficiary of
the deed of trust, is Mortgageit, Inc.
(“Mortgageit’). Apparently, at some time
before this case was filed, Mortgageit
transferred the note to IndyMac Bank. After
this motion was filed, IndyMac Bank was taken
over by the Federal Deposit Insurance
Corporation (“FDIC”) and put into a
conservatorship that now operates under the
name IndyMac Federal, which has substituted
into this motion. (Because indyMac Bank,
IndyMac Federal and the conservatorship
have an identity of interests, they are referred
to collectively here as “IndyMac.”)

The deed of trust names MERS as
“the beneficiary under the Security Instrument
as a separate corporation that is acting solely
as a nominee for Lender and Lender's
successors and assigns.”” By Assignment of
Deed of Trust dated January 29, 2008, which
is attached to the motion, MERS transferred
the deed of trust to IndyMac. Thus, MERS is
no longer a party in interest as to this loan.

IndyMac sold the note to unidentified
“investors” through Freddie Mac, apparently at
some time prior to the filing of this bankruptcy
case. Most likely, Freddie Mac sold the note
into a securitization trust.° IndyMac does not

2 MERS, Inc. is an entity whose sole purpose
is to act as mortgagee of record for mortgage
loans that are registered on the MERS
System. This system is a national electronic
registry of mortgage loans, itself owned and
operated by MERS, Inc.’s parent company,
MERSCORP, Inc.

* See, e.g., James R. Barth et al., A Short
History of the Subprime Mortgage Market
Meltdown 5 fig.2 (Milken Institute 2008),
available at fittp:/Awww.milkeninstitute.org/

Page 2 of 13

know who owns the note today, although it still
has possession of the note and there is
nothing on the note to indicate that it has been
transferred. Neither Freddie Mac nor any of
the investors has joined in this motion. In
addition, IndyMac has failed to provide any
documents showing its sale of the note ar its
status as a servicing agent for the note’s new
owner.

IndyMac filed this motion for relief
from the automatic stay on May 23, 2008, and
set it for hearing on June 24. The motion
included a declaration by Erica A. Johnson-
Sect, an IndyMac vice president, providing the
factual grounds for the motion. Copies of the
promissory note and the deed of trust are
attached to her declaration. Pursuant to Local
Rule 9013-1(a}(13}(A), the court issued an
order on June 10 requiring that IndyMac bring
to court each declarant for whom a dectaration
had been submitted in support of its motion,
for the purpose of presenting testimony to
support the declaration.*

Erica A. Johnson-Sect, a Vice
President of IndyMac, testified at the trial on
this motion on July 15, 2008,° and brought the
original note to court. While the court was
satisfied with the declarant’s testimony on the
accuracy of the payment records, she testified
that IndyMac no longer owned the note, but
had sold it to investors through Freddie Mac.
The court finds her testimony credible on this
point.

Vd

publications/publications.taf?function=detail&l
D=38801038&cat=Papers (showing _ that
approximately 85% of all home mortgages
originated in 2006 and 2007 were securitized).

“ The court requires such testimony because it
has found that numerous declarants in relief
from stay motions are not competent to testify
as to the information included in their
declarations. See, e.g., in re Vargas, ___B.R.
__ (Bankr. C.D. Cal. 2008) (finding that the
declarant was a low level clerk who was not
competent to provide any relevant testimony
contained in his declaration}.

5 The hearing was continued from June 28 to
July 15 at movant’s request, because Ms.
Johnson-Sect was not available to testify on
June 28.

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Ms. Johnson-Sect also testified that
lndyMac has brought this motion as the duly
authorized servicing agent for the new owner
of the note. The court disbelieves this
testimony, particularly in view of (a) her
testimony that she does not know who owns
the note at the present time, and (b) the failure
to offer in evidence any servicing agreement
with the new owner.

Ill. DISCUSSION

IndyMac argues that it is entitled to
enforce the note because it possesses the
note and the note shows it as transferee and
no indorsement transferring it to any other
party. IndyMac also argues that the court may
not raise sua sponte any deficiencies in the
evidence it has presented to the court.

A motion for relief from the automatic
stay must Satisfy both substantive and
procedural requirements. The substantive
requirements are provided by § 362(d). The
procedural requirements are imposed by the
United States Constitution (due process) and
the Federal Rules of Bankruptcy Procedure
(which mostly incorporate the Federal Rules of
Civil Procedure). The applicable rules here
are the “real party in interest” rule and the
“required joinder’” rule.

The court finds that IndyMac is
entitled to enforce the note, notwithstanding
the sale to Freddie Mac. However, in coming
to federal court, IndyMac must comply with the
applicable procedures in this court. Two of
these rules, the real party in interest rule and
the required joinder rule, each requires
IndyMac to join the present owner of the note
in this motion for relief from stay, which it has
refused to do.

A. Right to Enforce the Note

Since a party (such as IndyMac in this
case) that seeks relief under § 362(d) does so
in order to enforce rights that have been
stayed by § 362(a), it is necessary to consider
who is entitled to enforce the note under the
substantive flaw that governs those rights.
Thus, for a relief from stay motion based on a
promissory note, the court must look to the
substantive law that governs promissory
notes.

Page 3 of 13

Bankruptcy law does not provide for
the enforcement of promissory notes
generally. In the absence of bankruptcy law,
the legal obligations of the parties are
determined by the applicable non-bankruptcy
law, which is usually state law. See, e.g.,
United States v. Butner, 440 U.S. 48, 54-55
(1979).

In the United States, the law of
promissory notes is not unified at the federal
level. Instead, each state has its own law on
promissory notes. However, every state has
adopted a version of the UCC to govern
negotiable promissory notes. Thus, we tum to
the California Commercial Code (“CComC’),
the California version of the UCC.

1. Relevant Law of Negotiable Instruments

The substantive California law that
governs negotiable instruments is CComC
Division 3 (the California version of UCC
Article 3). See CComC § 3102(a). A
negotiable instrument® (or more briefly, for

® “Negotiable instrument” is defined in §
3104(a) (UCC § 3-104) as follows (with certain
exceptions not relevant in this case):

(a) “[NJegotiable instrument”
means an unconditional promise
or order to pay a fixed amount of
money, with or without interest or
other charges described in the
promise or order, if it is all of the
foliowing:

(1) Is payable to bearer or to
order at the time it is issued or
first comes into possession of a
holder.

(2) Is payable on demand or at a
definite time.

(3) Does not state any other
undertaking or instruction by the
person promising or ordering
payment to do any act in addition
to the payment of money, but the
promise or order may contain (i)
an undertaking or power to give,
maintain, or protect collateral to

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Division 3 purposes, an “instrument”)’ typically
takes one of two forms: a promissory note (b} . . . [If an instrument is

(designated as a “note”}, or a draft (such as a
check)." This case involves a note secured by
a deed of trust.

An instrument (including a secured
note) may only be enforced by the “holder” of
the note (with minor exceptions not retevant to
this case). See CComG § 3301(a); UCC § 3-
301(a). For an instrument payable to an
identified person (such as the note in this
case), there are two requirements for a person
to qualify as a holder: (a} the person must be
in possession of the instrument, and (b)} the
instrument must be payable to that person.
See CComC § 1201(20); UCC § 1-201(20).

The payee of an instrument may
negotiate it by indorsing it and delivering it to
another person, who then becomes its holder?
(and entitled to enforce it), Commercial Code
§ 3201 (UCC § 3-201) defines “negotiation” as
follows:

(a) “Negotiation” means a

transfer of possession ... of an

instrument by a person other than

the issuer to a person who

thereby becomes its holder.

secure payment, (ii) = an
authorization or power to the
holder to confess judgment or
realize on or dispose of collateral,
or (iii) a waiver of the benefit of
any law intended for the
advantage or protection of an
obligor.

” For the purposes of Division 3, “[iJnstrument
means a negotiable instrument.” id. § 3104(b)
(internal quotations omitted).

® See id. § 3104(e); see also cmt. 4:
“instruments are divided into two general
categories: drafts and notes.” Negotiable
instruments also include cashiers checks, teller’s
checks, money orders, travelers checks and
certificates of deposit.

* In some circumstances, the transferee may
obtain better rights than the transferor, by
virtue of being a holder in due course. See
CComcC § 3305(b); UCC § 3-305{b). No such
issue arises in this case.

payable to an identified person,
negotiation requires transfer of
possession of the instrument and
its indorsement by the holder. If
an instrument is payable to
bearer, it may be negotiated by
transfer of possession alone.

A fundamental feature of negotiable
instruments is that they are transferred by the
delivery of possession, not by contract or
assignment. The transfer of an instrument
“vests in the transferee any right of the
transferor to enforce the instrument... .”
CComC § 3203(b); UCC § 3-203(b). Thus,
the right to enforce a negotiable instrument is
only transferable by delivery of the instrument
itself. CComC § 3203; UCC § 3-203,

The transfer of a negotiable
instrument has an additional requirement: the
transferor must indorse the instrument to
make it payable to the transferee. See
CComCG § 3205(a); UCC § 3-205({a).
Alternatively, the transferor may indorse the
instrument in blank, and thereby make it
enforceable by anyone in its possession
(much like paper currency). See CComC §
3205(b); UCC § 3-205(b). If the transferor
makes a transfer without indorsing the
instrument, the transferee has a right to
demand indorsement by the transferor. See
CComG § 3203(c); UCC § 3-203{c).

2. Who May Enforce the Note in this Case

IndyMac contends, and the court
assumes without deciding, that the note here
at issue is a negotiable instrument, as defined
in the CComC § 3104(a), (b} and (e). The
note is on a standard printed form that is used
in the finance industry for notes that are freely
bought and sold in a manner inconsistent with
treating it as a non-negotiable note. Thus
IndyMac must be the holder of the note to
entitle it to enforce the note (including bringing
this relief from stay motion). Accord, in re
Foreclosure Cases, 521 F. Supp. 2d 650, 653
(S.D. Ohio 2007) (“To show standing .. . the
plaintiff must show that it is the holder of the
note and the mortgage at the time the
complaint was fited.”).

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In this case, the note is payable to
IndyMac (pursuant to its negotiation from
Mortgageit to IndyMac), and IndyMac had
possession of the note at the time that the
motion was filed. Under these facts, IndyMac
qualifies as the holder of the note.

There if a second scenario, not
supported by the evidence in this case, in
which IndyMac would have a right to enforce
the note. If IndyMac held the note on behalf of
the new owner (Freddie Mac or its subsequent
transferee), this would constitute possession
by the new owner, and IndyMac would be
entitled to seek relief from stay on the new
owner's behalf (provided thai it joined the new
owner in the motion).’°

Notably, however, IndyMac does not
contend that it holds the note as an agent on
behalf of Freddie Mac or its transferee.
Indeed, it is doubtful that IndyMac could make
such a claim, because IndyMac does not know
who owns the note. Thus, this argument is not
available.

3. Sale of the Note to Freddie Mac

In this case IndyMac sold the note to
Freddie Mac, which in turn most likely sold it
again as part of a securitization transaction.
Insofar as the record before the court
discloses, the owner of the note today is
unknown.

In this case, IndyMac has _ not
delivered the note to Freddie Mac (or its
successor): IndyMac still possesses the note.
In addition, the note bears no indication of a
transfer: it still shows IndyMac as the payee
(pursuant to the indorsement from Mortgageit).
in consequence, IndyMac remains the holder
of the note and is entitled to enforce it under
CCome § 3301{a) (UCC § 3-301(a)}: the right
to enforce the note has not yet passed to
Freddie Mac or its successor owner of the
note. This interpretation of § 3203 is
supported by Note 1, which states in relevant
part:

[A] person who has an ownership

right in an instrument might not

'° In this scenario, Freddie Mac (or the note’s
true owner} would have to join as a moving
party. See infra.

be a person entitled to enforce
the instrument. For example,
suppose X is the owner and
holder of an instrument payable
to X. X sells the instrument to Y
but is unable to deliver immediate
possession to Y. Instead, X
signs a document conveying all
of X's right, title, and interest in
the instrument to Y. Although the
document may be effective to
give Y a claim to ownership of the
instrument, Y is not a person
entitled to enforce the instrument
until Y obtains possession of the
instrument. No transfer of the
instrument occurs under Section
3203(a) until it is delivered to Y.

An instrument is a reified
right to payment. The right is
represented by the instrument
itself. The right to payment is
transferred by delivery = of
possession of the instrument "by
a person other than its issuer for
the purpose of giving to the
person receiving delivery the right
to enforce the instrument."

The foregoing makes it clear that no
successor to IndyMac presently has a right to
enforce the note, because IndyMac still has
possession of the note.

This raises the question of who, if
anybody, is presently entitled to enforce the
note in these circumstances. Two alternatives
are available. First, there may be no entity
that is entitled to enforce the note until its
delivery to its new rightful owner is
accomplished. Second, because IndyMac
continues to possess the note, it may be
entitled to enforce the note, even though the
note is owned by another entity.

There are good policy reasons for
adopting the first alternative. Disabling the
transferor from enforcing the note upon its
sale to a new owner encourages the parties to
complete the transaction by delivery of the
instrument to the new owner. In the present
configuration of the home mortgage industry,
this policy can be important: it would
discourage an apparently common practice in
the secondary mortgage market of failure to
deliver notes when they are sold, often

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numerous times, so that the possessor of the
note may be far removed from the real owner
of the note.

The second alternative also has
substantial policy support. A note supporting
a home mortgage ought to be enforceable,
and the homeowner should be required to
make the payments owing. If the owner fails
to pay, the markets rely on the ability of the
noteholder to bring foreclosure proceedings to
realize the value of the note. As the court in In
re Foreclosure Cases stated: “This Court is
well aware that entities who hold valid notes
are entitled to receive timely payments in
accordance with the notes, And, if they do not
receive timely payments, the entities have the
right to seek foreclosure on the accompanying
mortgages.” 521 F. Supp. 2d at 654.

Interposing a hiatus on the right to
foreclose (apart from the automatic stay
resulting from the filing of a bankruptcy case)
interferes with the security of lenders in the
home mortgage market. In addition, the
noteholder is in position to cancel the note
upon payment and to deliver the canceled
note to the obligor.

IndyMac cites no case holding that,
after selling (but not delivering) a secured note
to an unrelated third party, the seller is entitled
to enforce the note for its own account. The
court's independent research has discovered
two such cases, both involving transfers to
corporations wholly owned by the sellers:
Edwards v. Mesch, 763 P.2d 1169 (N.M.
1988); Spears v. Southerland, 23 P.2d 622
(N.M. 1933).'’ Both cases involved transfers
to corporations owned by the sellers (100% in
the Edwards case; 95% in the Spears case).
The sale of a note to an unrelated third party,
as in this case, is a very different situation.

In the court's view, the second
alternative is the better view: the holder of a
note is entitled to enforce it, notwithstanding
sale of the note to another party, until the note
is delivered to the purchaser (after
indorsement, if appropriate). This assures
that, notwithstanding the sale of the note and
the failure to deliver the note pursuant to the
sale, a holder exists that may enforce the note

" Spears was decided in 1933, long before
the drafting of the UCC that governs this case.

Page 6 of 13

against the obligor. Thus, the court holds that,
notwithstanding the sale of the note, IndyMac
remains the holder of the note and is entitled
to enforce it.

The debtor is not at risk in making
payments on the note to IndyMac instead of
the owner of the note. CComC § 3602 (UCC
§ 3-602} provides that any payment to a
“person entitled to enforce the instrument”
must be credited against the note, even if the
debtor knows that a different party is claiming
ownership of or an interest in the note. '?

B. Real Party in Interest

IndyMac’s substantive right to enforce
the note, as the holder, does not dispose of
the motion before the court. In coming to
federal court to enforce this right, IndyMac
must comply with the applicable procedures of
federal court. Two such procedures stand in
the way of granting the motion for relief from
stay in this case. The first procedural problem
arises from the real party in interest rule.

Rule 17 of the Federal Rules of Civil
Procedure provides: “An action must be
prosecuted in the name of the real party in
interest.”"> The purpose of this rule is to

CComC § 3602(a) provides in relevant part:

[Ajn instrument is paid to the
extent payment is made (i) by or
on behalf of a party obliged to
pay the instrument, and (ii) to a
person entitled to enforce the
instrument. To the extent of the
payment, the obligation of the
party obliged to pay the
instrument is discharged even
though payment is made with
knowledge of a claim to the
instrument under Section 3-306
by another person.

*? Rule 17 provides in relevant part:
(a) Real Party in Interest.

(1} Designation in General.

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require that an action be brought “in the name
of the party who possesses the substantive
right being asserted under the applicable law .

..” 6A WRIGHT, MILLER & KANE, FEDERAL
PRACTICE AND PROCEDURE: Civit 2d § 1541
(1990) (“WRIGHT”).

The analysis making the real party
in interest rule applicable to relief from stay
motions is complex. Rule 4001 provides:
“A motion for relief from an automatic stay . . .
shall be made in accordance with Rule 9014,”
which provides procedural rules for contested
matters. Rule 90174 provides, in turn, that
many of the rules for adversary proceedings
apply (with exceptions not relevant here) to
contested matters. Among the adversary
proceedings rules incorporated by reference in
Rule 9014 is Rule 7017, which provides: “Rule
17 F.R.Civ.P. applies in adversary
proceedings ... .” We thereby arrive at
IndyMac’s obligation to comply with Rule 17.
Thus, a party that seeks relief from stay must
be a “real party in interest.”

1. Reai Party in Interest
After Securitization

lf a loan has been securitized, the real
party in interest is the trustee of the
securitization trust, not the servicing agent.
See LaSalle Bank N.A. v. Nomura Asset

An action must be prosecuted
in the name of the real party in
interest... .

(3) Joinder of the Real Party in
Interest.

The court may not dismiss an
action for failure to prosecute in
the name of the real party in
interest until, after an objection,
a reasonable time has been
allowed for the real party in
interest to ratify, join, or be
substituted into the action. After
ratification, joinder, or
substitution, the action
proceeds as if it had been
originally commenced by the
real party in interest.

Page 7 of 13

Capital Corp., 180 F. Supp. 2d 465, 469-71
(S.D.N.¥ 2001} (“LaSalle-Nomura”); accord,
LaSalle Bank N.A. v. Lehman Bros. Holdings,
inc., 237 F. Supp. 2d 618, 631-34 (D. Md.
2002) (“LaSaile-Lehman”}. This rule does not
turn on who is in possession of the note.

In the LaSaile-Nomura case, the bank
brought an action against Nomura Asset
Capital Corp., the asset securitization trustee,
“as Trustee for Certificate Holders of Asset
Securitization Corporation Commercial
Mortgage Pass-Through Certificates, Series
1997- D5.” Defendants moved to dismiss, in
part on the grounds that the real party in
interest, pursuant to Rule 17, was the
mortgage servicer, In denying the motion, the
court found that the real party in interest was
the trustee of the trust (the plaintiff in the
case), and not its loan servicer (which had not
been joined in the litigation). LaSalfe-Nomura,
180 F. Supp. 2d at 469-71.

The only reported opinion discovered
that disagrees with this conclusion is in re
Tainan, 48 B.R. 250 (E.D. Pa. 1985), an early
case that gives no analysis for its conclusion
that a servicing agent is a real party in interest
in seeking relief from the automatic stay. See
id. at 252. The court finds the Tainan case
unpersuasive.

In this case, although it is most likely
that the note here at issue has been included
in a securitization, IndyMac has refused to
provide any information about the present
owner of the note, to join the owner as a
moving party, or to provide copies of any of
the relevant contracts. Because IndyMac has
not provided the relevant documents, the court
cannot determine the identity of the real party
in interest.”*

If the note is part of a securitization,
the burden of joining the owner of the note is
not substantial. A securitization typicaily
involves the creation of a trust, the
appointment of a trustee, a transfer to the trust
of some ten thousand secured real estate
notes (such as the one involved in this case)
and the sale of interests in the trust to a
substantial number of investors. See

" Cf In re Viencek, 273 B.R, 354, 357-59
(Bankr. N.D.N.Y. 2002} (requiring — that
servicing agent amend a proof of claim to
identify the owner of the claim).

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generaily, Katherine Porter, Mistake and
Misbehavior in Bankruptcy Mortgage Claims,
87 Tex. L. Rev. , (2008). The trustee of
the trust is authorized, pursuant to trust law, to
act on behalf of the trust. hus only the
trustee, and not the investors, should be
joined as the owner of the note at issue.
Indeed, this is exactly what happened in both
LaSalle-Nomura and LaSalle-Lehman.

The right to enforce a note on behalf
of a noteholder does not convert the
noteholder's agent into a rea! party in interest.
“AS a general rule, a person who is an
attorney-in-fact or an agent solely for the
purpose of bringing suit is viewed as a
nominal rather than a real party in interest and
will be required to litigate in the name of his
principal rather than in his own name.” 6A
WRIGHT § 1553. Consequently, even if the
court had found that a proper agency
relationship exists between the holder of the
note and the party seeking to enforce its
security, this does not excuse the agent from
the requirement that an action be prosecuted
in the name of the notehalder, who is the real
party in interest. Feb. R. Civ. P. 17(a}{(1).
Thus, even if IndyMac is the loan servicer for
the unidentified owner of the note here at
issue (a fact that IndyMac has failed to prove),
it is not the real party in interest that is
required to bring the motion before the court."°

The court concludes that the real party
in interest has not joined in the motion before
the court. Indeed, neither the court nor
IndyMac even knows who the real party in
interest is. Pursuant to Rule 17(a)(3), the
court must give IndyMac a reasonable amount
of time to accomplish this joinder. Despite two
continuances (totaling more than two months)
to accomplish this joinder, IndyMac has
refused to join the owner of the note in this
motion. Thus, the motion must be denied on
these grounds.

© Counsel for IndyMac has failed even to
mention either LaSaile case in any of the three
briefs that it has filed in this matter, and has
thus forfeited the right to attempt to distinguish
them.

Page 8 of 13

2. Contrast of “Real Party in Interest” with
“Party in Interest” and Standing

The concepts of “party in interest” and
“standing” are frequently confused with the
concept of “real party in interest.” This
confusion is reflected in the papers before the
court, and occasionally in the case law.
These concepts are quite different form the
concept of real party in interest. Furthermore,
there is no doubt in this case that while
IndyMac is not the real party in interest (that
must join in the motion) it both has standing
and is a party in interest.

a. Party in Interest

“Party in interest” is a very broad
concept in bankruptcy. It includes the debtor,
creditors, employees, officers of a corporation,
professionals active in the case, and many
others. In general, a party in interest, in the
bankruptcy context, is anyone who is entitled
to express a view with respect to a matter
before the court. Several opinions have held
that a real estate loan servicer is a party in
interest with respect to the enforcement of a
loan. See, e.g., Greer v. O'Dell, 305 F.3d
1297, 1302-03 (11 Cir. 2002).

b. Standing

It is important to distinguish the “real
party in interest” requirement from the
“standing” requirement. Standing — is
constitutional requirement, grounded in Article
Ill of the U.S. Constitution.

i. The Standing Requirement

The U.S. Supreme Court has stated
the standing requirement as follows: “To
qualify for standing, a claimant must present
an injury that is concrete, particularized, and
actual or imminent; fairly traceable to the
defendant's challenged behavier; and iikely to
be redressed by a favorable ruling.” Davis v.
Fed. Election Comm'n, 128 S. Ct. 2759, 2768
(2008).

Standing is a “threshold question in
every federal case, determining the power of
the court to entertain the suit.” Werth v.
Seldin, 422 U.S. 490, 95 S.Ct. 2197, 45
L.Ed.2d 343 (1975). Hence, “a defect in

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standing cannot be waived; it must be raised,
either by the parties or by the court, whenever
it becomes apparent.” U.S. v. AVX Corp., 962
F.2d 108, 116 n. 7 (1st Cir.1992).

The inquiry into standing “involves
both constitutional limitations on federal-court
jurisdiction and prudential limitations on its
exercise.” Warth v. Seldin, 422 U.S. 490, 498
(1975). “In its constitutional dimension,
standing imports justiciability: whether the
plaintiff has made out a ‘case or controversy’
between himself and the defendant within the
meaning of Art. Ili.” fd.

Apart from this minimum constitutional
mandate, the Supreme Court recognizes other
limits on the class of persons who may invoke
the courts' decisional remedial powers. /d. at
499. These prudential limitations are self-
imposed rules of judicial restraint, and
principally concern whether the litigant (1)
asserts the rights and interests of a third party
and not his or her own, (2) presents a claim
arguably failing outside the zone of interests
protected by the specific law invoked, or (3)
advances abstract questions of wide public
significance essentially © amounting to
generalized grievances more appropriately
addressed to the representative branches.
See In re Newcare Health Corp. 244 B.R. 167,
170 (B.A.P. 1st Cir. 2000).

ii. Contrast with Real Party in Interest

In the context of relief from the
automatic stay, the requirements of standing
and real party in interest are often confused
because of the similarity in language between
§ 362(d) and Rule 17 of the Federal Rules of
Civil Procedure. Section 362(d) provides that
relief from stay shall be granted “[Ojn request
of a party in interest.” This is a substantive
requirement, and it is relatively broad: many
parties are parties in interest for the purposes
of § 362(d). IndyMac rightly argues that it
qualifies as a party in interest for this motion.

The “real party in _ interest”
requirement, on the other hand, is generally
regarded as one of many “prudential”
considerations that have been “judicially
engrafted onto the Article Ill requirements for
standing.” See, e.g., In re Village Rathskeller,
147 B.R. 665, at 668 (Bankr. S.D.N.Y. 1992).
To obtain relief in federal court, a party must
meet both the constitutional requirements

Page 9 of 13

(standing) and the prudential requirements
(including real party in interest). Morrow v.
Microsoft Corp. 499 F.3d 1332, 1339 (9th Cir.
2007}; see also Village Rathskeller, Inc., 147
B.R. at 668 (citing Warth v. Seldin, 422 U.S.
490, 498 (1975) for the proposition that “[t]he
concept of standing subsumes a blend of
constitutional requirements and _ prudential
considerations”). A party may have standing —
having suffered an “injury in fact’ — but this
may not make it the real party in interest. See,
e.g., Whelan v. Abell, 953 F.2d 663, 672 (D.C.
Cir. 1992). Conversely, a party may be the
real party in interest, but jack standing. See,
6.9., Davis v. Yageo Corp., 481 F.3d 661 (9th
Cir. 2007).

Given that IndyMac has possession of
the note here at issue, no detailed analysis is
required to show that it clearly meets the
standing requirements. Accord, in re Conde-
Dedonato, 391 B.R. 247, 250-51 (Bankr. E.D.
N.Y. 2008) (standing to file a proof of claim).

This case is thus different from in re
Hayes, 393 B.R. 259 (Bankr. D. Mass. 2008),
where the movant seeking relief from stay
failed to show that it ever had any interest in
the note at issue. In that case, the court found
that the movant lacked standing altogether to
bring the motion because it failed to show that
the note was ever transferred to it, and thus it
had no rights of its own to assert. See jd. at
266-68; accord, in re Maisel, 378 B.R. 19, 20-
22 (Bankr. D. Mass. 2007) (denying standing
where movant did not acquire note until after
filing motion for relief from stay).

3. Sua Sponte Raising of
Real Party in Interest Issue

IndyMac argues that it is improper for
the court to raise sua sponte the issue of
whether IndyMac is the real party in interest
fer this motion. The court overrules this
objection.

The governing principle on this issue
was articulated more than sixty years ago by
Judge Learned Hand, perhaps the most
distinguished U.S. jurist who never sat on the
U.S. Supreme Court. Judge Hand stated: “A
judge is more than a moderator; he is charged
to see that the law is properly administered,
and it is a duty which he cannot discharge by
remaining inert.” United States v. Marzano,
149 F.2d 923, 925 (2d Cir. 1945).

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The continuing vitality of this principle
is shown in Jn re Bear Stearns High-Grade
Structured Credit Strategies Master Fund,
Lid., 389 Bankr, 325, 335 (S.D.N.Y. 2008),
where the district court quoted this statement
from Judge Learned Hand in rejecting a
similar attack on the bankruptcy court’s sua
sponte raising the issue of the qualification of
a foreign debtor to obtain recognition of a
foreign proceeding under § 1517. The district
court specifically approved the bankruptcy
court’s procedure in requiring an evidentiary
hearing sua sponte (as the court has done in
this case), pursuant to which the bankruptcy
court had found that the evidence was
insufficient to show that the foreign proceeding
qualified for recognition as either a main
proceeding or a nonmain proceeding.

The propriety of the court's raising sua
sponte the real party in interest qualifications
of IndyMac is specifically supported in addition
by the only circuit court decision to address
this issue, Weissman v. Weener, 12 F.3d 84,
85-86 (7th Cir. 1993}, which affirmed the
district court’s raising sua sponte the Rule 17
issue. IndyMac concedes that this is the
Seventh Circuit rule.

IndyMac contends that there is a split
among the circuits on this issue, and that the
Sixth Circuit has adopted the opposite view in
an ancient case, Kardo Co. v, Adams, 231 F.
950 (6th Cir. 1916). However, IndyMac (and
perhaps the Weissman court as well) have
misread the Kardo case. The issue in Kardo,
which the trial court raised sua sponte, was
quite different: whether the corporate plaintiff
was in fact a corporation at all, and thus had
capacity to sue, in light of its apparently
defective incorporation under Ohio law. The
circuit court found that the defendant could not
raise the lack of corporate status as a
defense, under the facts of the case. See id.
at 959-72.

The circuit court’s additional comment
in Kardo, that the corporation was the real
party in interest, is given no analysis at all
(after fourteen pages of analysis of the
plaintiff's corporate status), and is purely dicta.
In addition, the court made no reference at all
to Equity Rule 37 (the predecessor of Rule
17}, which contained the “real party in interest”
language now found in Rule 17. This court
concludes that the Sixth Circuit’s reference to
“real party in interest” in Kardo is a different

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Page 10 of 13

concept from that found in Rule 17, and is of
no relevance in this case.

C. Required Joinder of Parties

Rule 17 is not the end of the
procedural difficulties before the court.
Movant must also comply with the joinder
requirements of Rule 19 by bringing before the
court every person with an interest in the note.

Rule 17 must be interpreted together
with Rule 19, which requires the joinder of
parties in appropriate circumstances. See 6A
WRIGHT § 1543. IndyMac fails to satisfy the
required joinder of parties rule in this case.

Joinder of a person under Rule 19 is
required whenever nonjoinder would produce
one of the following effects: (a} nonjoinder
prevents complete relief from being accorded
among those who are parties to the action; (b)
the absentee claims an interest relating to the
subject matter of the action and is so situated
that disposing of the matter in that person’s
absence may (i) as a practical matter impair or
impede that person’s ability to protect the
interest, or (ii} Jeave an existing party subject
to a substantial risk of incurring double,
multiple or otherwise inconsistent obligations
because of that party’s interest."© The

® Rule 19 provides in relevant part:

(a) Persons Required to Be
Joined if Feasible.
(1) Required Party.
A person who is subject to
service of process .. . must be
joined as a party if:
(A) in that person's absence,

the court cannot accord
complete relief among existing
parties; or

(B) that person claims an
interest relating to the subject of
the action and is so situated
that disposing of the action in
the person's absence may:

(i} as a practical matter
impair or impede the person's
ability to protect the interest; or

(ii) leave an existing party
subject to a substantial risk of
incurring double, multiple, or

ne

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otherwise inconsistent
obligations because of the
interest.
(2) Joinder by Court Order.

If a person has not been joined
as required, the court must
order that the person be made
a party. A person who refuses
to join as a plaintiff may be
made either a defendant or, in a
proper case, an_ involuntary
plaintiff... .

(b}) When Joinder Is Not
Feasible.
lf a person who is required to
be joined if feasible cannot be
joined, the court must
determine whether, in equity
and good conscience, the
action should proceed among
the existing parties or should be
dismissed. The factors for the
court to consider include:

{1) the extent to which a
judgment rendered in the
person's absence might
prejudice that person or the
existing parties;

(2) the extent to which any
prejudice could be lessened or
avoided by:

(A) protective provisions in
the judgment;

(B} shaping the relief; or

(C) other measures;

(3) whether a judgment
rendered in the person's
absence would be adequate;
and
(4) whether the plaintiff would
have an adequate remedy if the
action were dismissed for
nonjoinder.

(c) Pleading the Reasons for
Nonjoinder.

When asserting a claim for
relief, a party must state:

(1) the name, if known, of any
person who is required to be

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Page 11 of 13

purpose of Rule 19 is “te bring before the court
all persons whose joinder would be desirable
for a just adjudication” of the matter before the
court. 7 WRIGHT § 1604.

It is the (b)(i) alternative that applies in
this case. Proceeding with relief from stay
without the joinder of the owner of the note
makes it impossible (and impractical} to
protect the interest of the real owner with
respect to the note here at issue. Indeed, the
protection of its interest is particularly
problematic, given that the FDIC has taken
over IndyMac, and the reat owner may be
reduced to making a claim in the IndyMac
receivership instead of collecting on the note.

Unlike Rule 7017 (incorporating the
Rule 17 real party in interest rule}, Rule 7019
(incorporating Rule 19 by reference) is not
applicable automatically to contested matters
(including relief from stay motions) in a
bankruptcy case. However, after specifying
the Part VII rules that apply automatically to
contested matters, Rule 9014(c) states: “The
court may at any stage in a particular matter
direct that one or more of the other rules in
Part VII shall apply.” In this case, the court
has directed that Rule 7019 applies to this
motion for relief from stay."”

There is no precise formula for
determining whether a particular non-party
must be joined under Rule 19(a). The
application of the rule turns on the facts of the
individual case in light of the general policies
of (a) avoiding multiple litigation, (b) providing
the parties with complete and effective relief in
a single action, and (c) protecting the absent
persons form the possible prejudicial effect of

VI

joined if feasible but is not
joined; and

(2) the reasons for not joining
that person.

” Rule 9014 further requires the court to give
notice to the parties of an order making any
non-specified rule applicable “to afford them a
reasonable opportunity to comply with the
procedures presecribed by this rule.” The
court has given this notice to IndyMac, which
has refused to jain the owner of the note as a
party to this motion, and has refused to plead
or otherwise state any reasons for its
nonjoinder,

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deciding the case without them. 7 WRIGHT
§ 1604.

IndyMac gives no explanation for its
failure to join the owner of the note in this
motion. The likely reason is that IndyMac
does not know who the owner is, and thus
cannot have any authority to join the owner
voluntarily. If IndyMac were the duly
authorized loan servicer for the owner, the
servicing agreement would presumably
authorize IndyMac to join the owner of the
note in this motion, and the problem would
disappear. If the servicing agreement did not
grant this authority, IndyMac should have
obtained authority from the owner to join the
owner as a movant in this case.

Consequently, if a loan servicer
wishes to seek relief from the automatic stay,
either as agent or nominee of the noteholder,
the servicer may do so only if the noteholder
either joins or ratifies the motion. Absent
joinder or ratification, the noteholder must
substitute into the servicer’s place, and
prosecute the motion on its own. See Fed. R.
Civ. P. 17(a)(3).”

lf the servicer has mistakenly failed to
seek relief in the noteholder’s name, the court
must allow a reasonable time for the
noteholder to join or substitute into the action.
ld. As stated above, the court has given
IndyMac more than two months to join the
owner of the note, and IndyMac has failed and
refused to do so.

IV. CONCLUSION

In conclusion, the court finds upon
reconsideration that IndyMac is entitled to
enforce the secured note here at issue.

® Rule 17(a)(3) provides:

The court may not dismiss an action
for failure to prosecute in the name of
the real party in interest until, after an
objection, a reasonable time has been
allowed for the real party in interest to
ratify, join, or be substituted into the
action. After ratification, joinder, or
substitution, the action proceeds as if
it had been originally commenced by
the real party in interest.”

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However, it must satisfy the procedural
requirements of federal law in seeking relief
from the automatic stay for this purpose.
These requirements include joining the owner
of the note on two separate grounds: it is the
real party in interest under Rule 17, and it is a
required party under Rule 19.

Because IndyMac has failed and
refused to join the owner of the secured note,
the motion for relief from stay is denied.

Dated: October 29, 2008

/

on. Samuel L. Bufford
fitted States Bankruptcy Judge

VI

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PROOF OF SERVICE

| certify that a true copy of ths AMENDED OPINION DENYING RELIEF FROM

AUTOMATIC STAY was served ONCF 2-9 20980.

Kang Jin Hwang
1635 4th Street
Los Angeles, California 90019

Robert K. Lee, Esq.

3435 Wilshire Boulevard

Suite 2741

Los Angeles, California 90010

William G. Malcolm, Esq.

Malcolm Cisneros, A Law Corporation
2112 Business Center Drive

2nd Floor

Irvine, California 92612

Sam S. Leslie, Trustee

6310 San Vicente Boulevard
Suite 320

Los Angeles, California 90048

U.S. Trustee

Department of Justice

725 South Figueroa Street
26h Floor

Los Angeles, California 90017

pated: OCT 29 2008

DEPUTY CLERK

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Cd