Chain, Chain, Chain…

By Cara Cookson

Wells Fargo Bank v. Rouleau, 2012 VT 19

Praises to those who helped unbundle this secured transactions case full of promissory notes, assignments, securitization, and bunches and bunches of entities and transfers—oh, my!  At the end of the day, the SCOV boils the case down quite simply: the creditor with standing is the creditor with original negotiable instruments, made payable to the creditor, and the creditor need not prove how it came upon them.

Clear as mud.

Let’s [over]simplify the facts. Back in 2000, Defendant Debtor, an owner/agent of R&G Properties, personally guaranteed a $2.15 million loan to R&G, made by Column Financial.  Debtor himself signed the promissory note to Column, securing it with a mortgage on five mobile home parks owned by R&G.  The guaranty made Debtor personally liable should the five properties ever go into bankruptcy. Because this is the SCOV Law blog, and not the Solid-Transactions-That-Went-Really-Well blog, we probably don’t need to tell you that, well, bankruptcy happened. 

And so, Debtor is Defendant . . . but where does Wells Fargo fit in?  According to classic 21st Century American finance, all roads lead to Big Banking.  Column immediately securitized* the loan and evaporated into thin air—purchased by “Wells Fargo, Credit Suisse First Boston” in April 2001.  The R&G loan was then “pooled” with 200 similar loans, and Wells Fargo became special trustee, holding the promissory notes, mortgages, and other security documents associated with the loan pool.  Although no exact date is known, at some point an allonge became attached to the promissory note purporting to make an assignment to Wells Fargo, and an assignment of mortgage to Wells Fargo on each of the five properties was recorded in the land records.  The SCOV found more facts here, (you should read those portions of the case if you either practice in this area or enjoy playing ‘name-that-bankrupt-finance-agency,’) but for simplicity sake, we’ll cut to the law.

The primary defenses to creditor calls of “show me the money” are debtor responses of “show me the paper” and “who are you?”  Debtor here raises both in tandem.  Wells Fargo could and did produce the promissory note with allonge and the assignment of mortgage—both of which name Wells Fargo—but it did not have an assignment of guaranty.  In other words, Debtor claims that even if Wells Fargo has standing via assignment, it doesn’t have standing against him, the guarantor, without proof that the guaranty was assigned to Wells Fargo, too. 

In many more words, Wells Fargo replies, “come on, close enough.”

In even more words, the SCOV concurs. “Because of a guaranty’s link to the principal obligation, it follows that an obligee’s assignment of the principal obligation is sufficient to manifest the requisite intent to assign the guarantee.”  If assignment depends on the intent of the assignor, assigning the note and the mortgage demonstrates intent to assign the guaranty as well.

Now comes the fun part—the standing issue.  Wells Fargo has walked into the courthouse waving a note (with its fancy French paper, the “allonge”) and the mortgage, all with its name on them, looking to collect. To which Defendant says, “now tell us, Big Bank that processes a bazillion transactions a year, how and when did you come upon these pieces of paper? Prove the chain of title.”  Could this one spear be enough to take down the Cyclops?  

The SCOV’s holding derives from the law of negotiable instruments: “a plaintiff in an enforcement action establishes standing if it is in possession of the original note and mortgage at the time the complaint is filed and the instruments are made payable to the plaintiff.”  No chain of title required.  A rather anticlimactic dénouement.

The only remaining issue is whether, in addition to producing the actual documents at the bench trial, Wells Fargo made a sufficient showing that it held the original note and mortgage when it filed the complaint, which brings us back around to all that securitization business—Wells Fargo can’t prove exactly when the securitization occurred.  The SCOV takes the word of a loan servicer’s employee as sufficient evidence that Wells Fargo took possession sometime in 2003, long before filing its complaint. 

And with that, c’est tout. 

*Straight from the SCOV: “Securitization involves the pooling of many similar loans into a trust, which the trustee manages for the benefit of individual investors.  This process requires the assignment of the loans to the trustee.”