Where mortgagee’s proof of claim was disallowed because it was unable to establish standing the mortgagee and its servicer were obliged to return nearly $85,000 in mortgage payments to the debtors and the trustee

The underlying bankruptcy proceedings in In re Thompson, No. 05-28262-SVK, (Bankr. E.D. Wis. Oct. 21, 2014) culminated in the disallowance of the mortgagee’s proof of claim after the mortgagee failed to establish that it was the holder of the mortgage note. Affirming the decision to disallow the claim the district court noted that even if each version of the note self-authenticates under FRE 902(9), without testimony or other evidence from [mortgage servicer] to ‘connect the dots’ between the disputed allonge and the note, the evidentiary record contained only equally-probable ‘authentic’ versions of the note countervailing one another. Proceeding from that finding, the debtors moved for reimbursement of the mortgage and trustee payments made to the mortgage servicer. In deciding this request, the mortgagee argued that the court must balance the equities. It should prevent unjustly enriching the debtors and take into account the funds the mortgagee expended during the course of the bankruptcy to prevent the debtors’ property from going into tax foreclosure. The mortgagee pointed out that the decision disallowing the claim did not alter the fact that the debtors borrowed money and have yet to repay the debt. So, as they are not required to repay it twice, if the court grants the debtors’ request the debtors will gain a free house. The mortgagee also argued that that while it may not have legal enforcement power under Wisconsin law, it does still hold physical possession of the note and since there have not been any competing claims for repayment on the loan, it would be inequitable for the court to require the mortgagee to take another loss on this delinquent account. The court was unmoved by these arguments and found the equities favor the debtors. According to the court, if the mortgagee is correct that the debtors owe the money to someone, then by paying the mortgagee the debtor has lost money without reducing the debt owed to the true owner. As a general rule, where money is paid under a mistake of fact, and payment would not have been made had the facts been known to the payor, such money may be recovered. If the mortgagee had no right under the mortgage loan to the payments it received and the debtors made the payments on the mistaken premise that mortgagee was the loan’s owner, then fundamental principles of justice, equity, and good conscience require that the lender disgorge the payments. The court therefore deducted the amount the lender paid in taxes from the refund and awarded the debtors $73,041.49 which the mortgagee was required to return to the debtors to avoid being unjustly enriched. Also, since the mortgagee had no standing to file the claim and the claim has been disallowed, it and its servicers should return all of the improper distributions received under the Chapter 13 plan: but not to the debtors. Instead, the amounts collected by the mortgagee and its servicer should be paid over to the trustee for disbursement to creditors holding valid proofs of claim in the debtors’ bankruptcy case.

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