The issues in the case concern the fact that a mortgage note is a negotiable instrument under the law, just like a check. And, just like an endorsed check, the bearer is entitled to payment, whether the check was originally written to the bearer as payee or not. The Court based its ruling on long-standing law applicable to negotiable instruments stating that the right of enforcement belongs to whoever has possession of the note after it has been endorsed by the original payee without naming any particular person or entity it is being endorsed to.
One interesting fact in the BAP decision is that the same note and mortgage had already been foreclosed by Chase, a prior holder of the note. A judgment was entered in the Chase foreclosure, but the debtor filed his first chapter 13 bankruptcy before the sheriff’s sale. The debtor’s first chapter 13 was subsequently dismissed, and Chase sold the mortgage note to Fannie Mae. After the sale to Fannie Mae, the debtor filed a second bankruptcy. It was this second bankruptcy in which Fannie Mae requested relief from the automatic stay. However, when the first foreclosure judgment was entered in the Chase foreclosure, the note and mortgage should have ceased to be enforceable under the doctrine of merger. The note and mortgage merge into the judgment which then becomes enforceable in its own right. Without a subsequent court order vacating the judgment and explicitly reinstating the note and mortgage, Fannie Mae cannot collect on the merged instruments.
The 10th Circuit ruling can be read here.
The BAP ruling can be read here.