On June 5, 2013, Federal Bankruptcy Judge Marvin Isgur decided Saldivar v. JPMorgan Chase, 2013 WL 2452699 (Bky. S.D. Texas 6/5/13).   In this case Judge Isgur allowed Saldivar’s claims against JPMorgan in a federal bankruptcy adversary proceeding to go forward.

The case is significant because Judge Isgur found that JPMorgan’s securitized mortgage claim against Saldivar may be void if the evidence shows that JPMorgan did not dot its I’s and cross its T’s in the original securitization of the Saldivar loan.  Most specifically, Judge Isgur found that, if JPMorgan fails to show that the securitization trustee Deutsche Bank (the legal owner of the Saldivar loan) actually physically received the Saldivar note and mortgage within 90 days of the closing of the securitization, then the mortgage will be void according the New York trust law.  Judge Isgur’s decision relied on Judge Wayne Saitta’s decision and analysis of New York Trust Law in Wells Fargo v. Erobobo, 2013 WL 1831799, 2013 N.Y. Slip. Op. 50675(U) (NY Supreme Court, Kings County, 4/29/13).

This case is significant for the following reasons.  First, New York trust law governs all 62 million securitized loans.  This “choice of law” provision is generally found in section 11 of the securitization pooling and servicing agreement (“PSA”).

Second, Judge Isgur is the first federal judge to acknowledge that a securitization trustee’s timely acceptance of physical delivery of the note (and an executed assignment of mortgage) is relevant to whether the trustee (or a servicer acting on its behalf like JPMorgan in this case) has any right to obtain a legal remedy against a borrower.   Judge Isgur is asking JPMorgan to “show him the note” and further asking JP to show him whether and how Deutsche Bank claims the right to collect on the note.

Third, if the Saldivar case goes forward and is litigated fairly, Judge Isgur will find that neither JPMorgan nor anyone else delivered the Saldivar note to Deutsche Bank within 90 days of the securitization closing.  Further, if the original note exists, it will not have been endorsed by any party from whom the PSA requires endorsement.  There will be no endorsement by the PSA Originator, Sponsor or Depositor.  Nor will Deutsche Bank be in possession of PSA-required assignments of mortgage to and from these entities.

All PSAs require that the PSA Trustee certify a “complete chain of title” with duly endorsed notes and required assignments of mortgage.   This is found in section 2.01 of most PSAs.  In the Saldivar case, absent fraud, JPMorgan will be unable to show that Deutsche Bank accepted delivery of the note within 90 days of the closing of the PSA.  JPMorgan will be completely unable to establish that Deutsche Bank holds legal title to the note and mortgage with a complete chain of title to and from all PSA parties.  If Judge Isgur rigorously cross examines JPMorgan’s claim, he will find that JPMorgan is perpetrating a fraud upon the court, as neither JPMorgan nor Deutsch Bank can show that they loaned anything to the Saldivars.  Neither JPMorgan nor Deutsche Bank will be able to show that they are in any way injured as a result of Salidivar failing to pay on a 2004 loan originally payable to Long Beach Mortgage Company.  If the truth is uncovered, Judge Isgur will find that the Deutsche Bank/JPMorgan PSA is a “daisy chain” fraud that victimized both the Saldivars and the MBS investors who falsely believed they were investing in the Saldivar loan.

Fourth and finally, Judge Isgur’s decision is important because it represents a sane and sober analysis of securitized loan transactions.  Saldivar’s demand that JP Morgan “show me the note” is relevant because a note is a promise to pay and is a negotiable instrument governed by Article 3 of the UCC.  Only a valid “holder” of a negotiable instrument can enforce it.  A mortgage is a security instrument that gives the note holder the right to take a home for non-payment of the note.  If the holder of the mortgage is not entitled to enforce the note, then it cannot enforce the mortgage and seize the collateral, the Saldivar home.  This is 2 + 2 = 4.

Judge Isgur’s decision may finally cause other courts to recognize that there are 62 million void securitized mortgages and that this massive Wall Street fraud was the reason for the October 2008 Bank Bailouts, which only made matters worse.

All judges evaluating these cases should read Isaiah 1:21-31.  Our silver has become dross and our leaders companions with thieves.  If judges don’t recognize and seek to correct the problems in 1:21-22, God tells us in 1:24-31 what He will do.

And it won’t be pretty.