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Opinions-Maryland Court of Special Appeals: 1/17/2011



Contract Law

Mortgage notes


BOTTOM LINE: The circuit court’s order lifting a stay of foreclosure on plaintiff’s residence was affirmed because the bank was a successor to the holder of the mortgage note and had the same rights as the original holder to enforce collection.


CASE: Anderson v. Burson, et al., No. 00434, Sept. Term, 2009 (filed Dec. 22, 2010) (Judges Eyler, D., Woodward & Salmon (retired, specially assigned)). RecordFax No. 10-1222-00, 21 pages.


FACTS: In 2006, Hosea and Bernice Anderson refinanced their home by signing an “Adjustable Rate Balloon Note” promising to pay the lender, Wilmington Finance, Inc., the amount borrowed, plus interest, in monthly installments over 30 years. Among its many provisions was the following: “[Borrower] understands that the Lender may transfer this note. The Lender or anyone who takes this Note by transfer and who is entitled to receive payment under this Note is called the ‘Note Holder.’”

 To secure payment of the amounts due under the Note, the Andersons signed a Deed of Trust on October 13, 2006, which referenced Wilmington as the “Lender,” and listed the “Trustee” as Dominican First Title, LLC. The Deed of Trust spelled out the involvement of Mortgage Electronic Registration Systems, Inc. (MERS), viz: “MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is the beneficiary under this [Deed of Trust].” Another section stated: “The beneficiary of this [Deed of Trust] is MERS and the successors and assigns of MERS….Borrower understands and agrees that MERS holds only legal title to interests granted by Borrower”

 Several important events took place about four months after the Note and Deed of Trust were executed. On Feb.12, 2007, MERS, as beneficiary and as nominee of Wilmington, transferred its beneficial rights under the Note and Deed of Trust to Morgan Stanley Capital Holdings, Inc. Two days later, MERS, as beneficiary and as nominee of Wilimington, transferred its servicing rights under the Note and Deed of Trust to Saxon Mortgage Services, Inc. The Andersons began making their mortgage payments to Saxon as a result of this assignment of servicing rights. Sometime between Feb. 12, 2007 and March 1, 2007, Morgan Stanley Mortgage Capital Holding transferred its ownership of the Note to Morgan Stanley ABS Capital I Inc. On March 1, 2007, Morgan Stanley ABS “sold, transferred, assigned, set-over and conveyed to Deutsche Bank Trust Company Americas, as Trustee and Custodian for Morgan Stanley Home Equity Loan Trust, MSHEL 2007-2 (Deutsche) all right, title, and interest in and to the Note.”

 In the spring of 2007, the Andersons fell behind on the payments. On Feb. 21, 2008, Erik Yoder of Shapiro & Burson LLP, as attorney for Substitute Trustees John Burson, William Savage, Gregory Britto, Jason Murphy, Kristine Brown and Erik Yoder (collectively, “Substitute Trustees”), filed a Line to Docket Foreclosure with respect to the Andersons and their Residence in the circuit court. The Line was accompanied by a Motion for Acceptance of Lost Note Affidavit.

 The Motion for Acceptance of Lost Note Affidavit asked the court “to accept a lost note affidavit in lieu of the original note in this case on the grounds that the original note is lost and cannot be found by the Plaintiff or the Noteholder.” The Affidavit stated, in relevant part: “Lender was the note holder under [the Deed of Trust] … and that said note … has been lost or destroyed and cannot be produced.” On Feb. 26, 2008, the court signed an Order stating that “a lost note affidavit evidencing the indebtedness secured by the deed of trust which is the subject of this foreclosure action be accepted in lieu of the original.”

 To prevent foreclosure, the Andersons, on March 13, 2008, filed for relief in the Bankruptcy Court for the District of Maryland. Their filings stayed the foreclosure proceeding then pending in the circuit court.

 The Andersons reached an agreement with Saxon, the servicer of the Deed of Trust, in the bankruptcy cases. On June 2, 2008, the bankruptcy court entered a Consent Order reflecting an agreement reached between the Andersons and Saxon in which the Andersons were given time to cure their arrearage. Due to a decline in Mr. Anderson’s income, the Andersons were unable to make the payments and as a consequence the foreclosure proceedings initiated by the Substitute Trustees recommenced.

 On Nov. 12, 2008, the Andersons filed a motion for injunction to stay foreclosure, alleging that the Substitute Trustees and Deutsche had no legal standing to foreclose on the Residence because they had failed to establish that Deutsche was the lawful owner or holder of the Note and Deed of Trust. The court filed a temporary restraining order (TRO) enjoining the sale scheduled for Nov. 18. A hearing on the TRO was set for Nov. 26, 2008. After the Nov. 26, 2008 hearing, the circuit court enjoined the foreclosure proceedings until an evidentiary hearing could be held to address the issue of whether the Substitute Trustees had a right to foreclose on the Residence.

 At the hearing it was revealed that the Note signed by the Andersons did not contain an endorsement. Instead, the Substitute Trustees produced a separate undated document entitled “Allonge to Note,” which read: “PAY TO THE ORDER OF Deutsche Bank National Trust Company, as Trustee for Morgan Stanley Home Equity Loan Trust, 2007-2 WITHOUT RECOURSE WILMINGTON FINANCE, INC. (signed by Christopher Kelly, Vice President).”

 The motions judge determined that the law does not require the production of the original note for the enforcement and, accordingly, lifted the injunction.

 The Andersons appealed to the Court of Special Appeals, which affirmed.


LAW: The issue was whether Deutsche had a right to enforce the Note.

 Maryland Code (2002 Repl.Vol.), Commercial Law Article, §3-301 provides: “Persons entitled to enforce” an instrument means (i) the holder of the instrument, (ii) a non-holder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to § 3-309 or § 3-418(d). A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.

 The Substitute Trustees claimed that Deutsche was the “holder” of the Note, but they did not demonstrate why this was so. The term “holder” is defined in CL §1-201(20) as a “person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.”

 Here, the Note signed by Mr. Anderson was not payable to bearer. Moreover, Deutsche did not qualify as an “identified person that is the person in possession.” The only “identified person” mentioned in the Note was Wilmington.

 The evidence at trial proved, without contradiction, that Deutsche was in possession of the Note signed by Mr. Anderson. The Official Comment to the Uniform Commercial Code, concerning section 3-301 reads, in material part, as follows: “A non-holder in possession of an instrument includes a person that acquired rights of a holder by subrogation or under §3-203(a). It also includes any other person who under applicable law is a successor to the holder or otherwise acquires the holder’s rights.”

The question then became: Did Deutsche fit within the definition of “a non-holder in possession of a note” because, “under applicable law, it was a successor to the holder or otherwise acquires the holder’s rights?” This was answered in the affirmative.

The documents introduced into evidence by the Substitute Trustees showed that the only entity that qualified as a “holder” in Deutsche’s chain of title was Wilmington, because no other entity had a valid endorsement. But, the evidence also showed, without dispute, that Deutsche was one of the “successors to the holder.” Therefore, the evidence produced showed that Deutsche met the definition of a “Note holder in possession of an instrument.” As such, under §3-301, Deutsche was a “person entitled to enforce” the Note.

Of course, the validity of the above analysis depends upon whether, “under applicable law,” Deutsche was a “successor to the holder or otherwise acquires the holder’s rights.” CL §3-203(a) reads: (a) An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.

In this case, all Deutsche’s predecessors in the chain of title received delivery of the Note with the purpose of giving them the right to enforce the Note. Without a right of enforcement, the Note would have been worthless. Walmart Store, Inc. v. Holmes, — Md. —-, —-, (No. 141, September Term 2009, slip op. at 27-8 (filed Oct. 25, 2010)) (“An obligation can only be ‘legal,’ however, when it is susceptible of legal enforcement. A duty without a means for enforcing it is not a legal duty at all.”).

CL §3-203(b) provides that “transfer of an instrument whether or not transfer is a negotiation [i.e., indorsed], vests in the transferee any right to the transferor to enforce the instrument, including any rights as a holder in due course, but the transferee cannot acquire rights of a holder in due course by a transfer, directly or indirectly, from a holder in due course if the transferee engaged in fraud or illegality affecting the instrument.” See Tackett v. First Sav. of Arkansas, 306 Ark. 15 (Ark.1991). This provision embodies what has come to be known as the “shelter” or “umbrella principle.” Adams v. Madison Realty & Dev., Inc., 853 F.2d 163, 169 (3d Cir.N.J. 1988).

If the transferor was a holder in due course, the transferee succeeds to the rights of a holder in due course, although – because the purported negotiation failed – he does not enjoy the status of holder in due course. See Security Pac. Nat’l Bank v. Chess, 58 Cal.App.3d 555 (1976). To attain its purpose of guaranteeing the transferor a ready market for his negotiable instrument, the shelter principle operates cumulatively. A transferee of a holder in due course takes through, rather than from, his transferor. Thus, if the transferor’s predecessor was a holder but the transferor was not, the ultimate transferee may succeed to the rights of the original holder: the holder’s rights pass through each assignee. See 5 Anderson §3-201:22; 1[R] Alderman … [a Transaction Guide to the Uniform Commercial Code] at 630.5.

Here, Wilmington was a holder in due course. Wilmington transferred the Note to Morgan Stanley Mortgage Capital Holding, Inc., which thereby acquired all of Wilmington’s rights to enforce the instrument including any right as a holder in due course. The second transferee, Morgan Stanley ABS Capital I Inc., in turn, acquired all the rights held by its transferor, Morgan Stanley Mortgage Capital Holding, Inc. And, when Morgan Stanley ABS Capital I Inc. “sold, transferred, assigned, and conveyed” to Deutsche all its rights, title, and interest it had in the Note, Deutsche acquired all the rights that had vested in its transferor because the shelter principle operates cumulatively. Thus, under applicable law, because it was not alleged that anyone in the chain of title had engaged in fraud or illegality, Deutsche was a “successor to the holder” of the Note and had the same rights as Wilmington had to name the Substitute Trustees to enforce its collection rights.

Under the facts proven at the evidentiary hearing, the Andersons did not have a right to an injunction because Deutsche was a non-holder in possession of the Note who had the rights of a holder.

Accordingly, the judgment of the circuit court was affirmed.

COMMENTARY: In support of their claim that they had a right to have the court keep the injunction in force, the Andersons raised several issues not raised in their opening brief and not raised in the trial court. For instance, they stressed that in the deed of appointment, in which the appellees were named as Substitute Trustees, the holder of the Note was said to be Deutsche Bank Trust Company Americas. Appellants pointed out, however, that additional documents that were introduced into evidence at the hearing identified the holder of the Note as “Deutsche Bank National Trust Company.” According to the Andersons, because of this misnomer, the Substitute Trustees have no power to exercise the power of sale in the Deed of Trust.

The Court of Special Appeals declined to address any of the issues raised by the Andersons for the first time in their reply brief because “the scope of a reply brief is limited to the points raised in the appellee’s brief, which, in turn, address[es] the issues originally raised by appellant … A reply brief cannot be used as a tool to inject new argument.” See Strauss v. Strauss, 101 Md.App. 490, 509, n. 4 (1994).



Department of Human Resources

Child Abuse and Neglect – Foreseeable Risk of Harm

Appellant v. Baltimore City Department of Social Services

OAH No.: DHR-BCNY-51-10-16902

Decision by: ALJ Henry Abrams

Decision Issued: October 7, 2010

Record Fax: 10-1007-50.

On May 7, 2010, the Baltimore City Department of Social Services (local department) notified the Appellant that it found him to be a person responsible for indicated child neglect.  The Appellant requested a contested case hearing to challenge the local department’s decision.

The Appellant has worked in the Baltimore City public school system as an administrator or teacher since 1999.  He had a generally exemplary record as a teacher.  The Appellant received an overall rating of Satisfactory on his 2006-2007 Annual Evaluation Report (AER).  In both 2007-2008 and 2008-2009 he received overall ratings of Proficient, the highest available rating. The 2007-2008 AER noted that the Appellant experienced occasional difficulties with classroom management, which was an area targeted for improvement.  This was not mentioned as an area of concern in the 2008-2009 AER.

On April 23, 2010, the Appellant was teaching his last class of the day, a ninth grade French class.  The student desks in the classroom were arranged in a semi-circle, with a middle aisle separating the two sides.  The Appellant stationed himself in a chair in the front of the room.  Next to him was a teacher’s desk and chair which he did not use during the class.  There were approximately 34 students in the class.  There were two or three students at their desks in the front row on the right side of the aisle facing the Appellant.  J*, a student in the class, was at a desk in the second row on that side.  Toward the end of the class, the Appellant was handing out report cards to the students.  Many students were out of their seats, talking and moving about the room.  J* and many other students were not paying attention.  J* was at her desk with her back to the Appellant, talking to someone behind her.  The Appellant asked once more for order, without success.

The Appellant then grabbed either the teacher’s desk or desk chair (furniture piece) next to him and banged it on the floor, hoping the noise would get the students’ attention so he could settle them down.  That effort also failed.  The Appellant approached the students in the front right row facing and just in front of him and asked them to move, so he did not hit them with the furniture piece.  He then banged the furniture piece on the floor again, this time with greater force than before.  This effort, too, failed.  Then mustering “all the force [he] had within [him]” (Appellant’s testimony), he either banged the furniture piece against the floor or threw it.  The furniture piece flew forward and hit a desk near J*.  J* began to turn toward the noise just as the furniture piece ricocheted off the desk and hit her in the face (the incident).  J* went to the hospital, where she was diagnosed and treated for a displaced nasal bone fracture and a laceration to the bridge of her nose, requiring a stitch-like substance to close.  At the time of the incident, J* was 15 years old.

Code of Maryland Regulations 07.0207.12 sets forth the criteria for a finding of indicated child abuse.  A finding of indicated child abuse is appropriate if there is credible evidence, which has not been satisfactorily refuted, that it is more likely than not that the following four elements are present: (a) a current or prior physical injury; (b)  the injury was caused by a parent, caretaker, or household or family member; (c)  the alleged victim was a child at the time of the incident; and (d) the nature, extent, and location of the injury indicate that the child’s health or welfare was harmed or was at substantial risk of harm.  Intentional conduct is not required.  Instead, the risk of harm must be foreseeable.

Applying the above definitions and factors, the Administrative Law Judge (ALJ) found that the local department met its burden of proof by producing credible evidence, not satisfactorily refuted, that it is more likely than not that the Incident amounted to indicated child physical abuse.  While the ALJ found there was no dispute that the Appellant was in all respects a strong teacher, liked by students and parents, and that the Appellant did not intend to harm J**, it was nevertheless clear that the Appellant’s conduct did harm her and that such harm was foreseeable as a result of all the Appellant knew or should have known at the time.  The ALJ held that the Appellant clearly anticipated the possibility that the chair or desk, however put in motion, could fly forward, harming those students he asked to move.  J* was seated immediately behind them with her back toward the Appellant and thus, could not anticipate the potential harm in time to avoid it.  J* was clearly in the field of danger and there was no credible basis to consider that the possibility of harm to J* was unreasonably remote.

The ALJ concluded as a matter of law that the local department established by a preponderance of the evidence that the finding of indicated child physical abuse was supported by credible evidence, was consistent with the law, and that the Appellant was the individual responsible for indicated child abuse.  The ALJ further concluded that the local department may indentify the Appellant in a central registry as an individual responsible for indicated child abuse.


Medical Assistance

Maryland Children’s Health Program

Appellant v. Anne Arundel County Health Department

OAH No: DHMH-AARU-64-10-30125

Opinion by: ALJ Neile Friedman

Decision issued September 27, 2010

Record Fax: 10-0927-50, 8 pages.

On July 9, 2010, the Appellant filed a redetermination application on behalf of her two sons, T* and M*, for the Maryland Children’s Health Program (MCHP) benefits that were set to expire on October 31, 2010.  On the application, the Appellant listed herself and four minor children as members of the household.  Two of those children are ineligible aliens; the application was filed on behalf of the two who are eligible for MCHP benefits.  On September 13, 2010, the Anne Arundel County Health Department (local department), acting on behalf of the Maryland Department of Health and Mental Hygiene, denied the application because the Appellant’s household income exceeded MCHP’s limit.  The Appellant appealed the local department’s decision and requested a hearing which was held on September 21, 2010.

The MCHP regulations for calculating countable net family income are straightforward.  The first step is to calculate countable gross family income, which includes earned and unearned income.  Code of Maryland Regulations (COMAR)  Earned income includes wages, salaries, and profit from self-employment.  Countable gross family income is reduced by subtracting appropriate income disregards, including an earned income disregard of $90.00 per month for each employed family member to determine countable net family income.

In 2009, the Appellant was self-employed.  She owned a business and was also employed part time at a restaurant.  The local department denied the Appellant’s application based on her 2009 business tax return.  The local department calculated household income to be $70,000.00, using 50 percent of the gross income from her business.  The Administrative Law Judge (ALJ) found that this was in error.  She pointed out that simply using 50 percent of gross business income ignores the costs of generating that income, specifically the amounts paid to others.  The Appellant’s 2009 tax return details all of her business expenses, which are the costs to produce that business income.  The Appellant’s business had gross receipts of $288,446.00 and the cost of goods sold was $146,463.00, leaving a gross profit of $141,983.00.  However, her business expenses amounted to $139,817.00.  These expenses included salaries and wages for employees, rent, repair and maintenance, taxes, advertising, insurance, utilities, security and other expenses.  These are not monies available to the family.

The Appellant’s business’ income for 2009 was a profit of $2,166.00.  The Appellant, as the sole owner, received compensation from her business of $13,320.00.  She also earned $11,520 from her part time employment in a restaurant.  Therefore, the Appellant’s gross family income was $27,006.00 for 2009.  The Appellant’s countable gross family income was $25,926.00 ($27,006 minus $90.00 x12 earned income disregard).

As the MCHP annual income guideline for a family of five is $51,600.00, the ALJ found that the Appellant’s two minor children were eligible for MCHP benefits.  Therefore, the ALJ reversed the local department’s decision on the Appellant’s application, and ordered that the local department approve the Appellant’s children for the MCHP for the period under consideration based on her July 9, 2010 application.