The cornerstone of any litigation is the ability to establish standing, or the right to pursue a lawsuit as the proper party in interest. In the foreclosure context, the issue often arises in the form of whether a party seeking to enforce the note can establish that it has legal standing to enforce the note terms.
The foreclosure crisis revealed a systemic problem related to assignees seeking to enforce assigned notes. Faulty transfers due to the prior holder’s failure to endorse the note, or an assignee’s inability to produce the physical note, resulted in borrowers asserting a plethora of technical objections to the right to foreclose during the course of litigation.
Notes are generally considered negotiable instruments; hence, Article 3 of the Uniform Commercial Code (“UCC”) (to the extent a particular state has adopted its provisions and the amendments thereto), primarily dictates whether an assignee can enforce a note. UCC § 3-302 provides that an assignee who takes over a defaulted note cannot be considered a holder in due course; however, this is not the critical inquiry. Rather, the primary issue to be examined is whether the assignee can acquire the rights of a holder in due course under UCC § 3-203, and whether the assignee qualifies as a person able to enforce under UCC § 3-301. Generally, the assignee will acquire all rights in the note so long as the note is delivered to the assignee for the purpose of enforcing its rights in the future. In the event, of a lost, destroyed or stolen note, an assignee must analyze the set of facts under UCC § 3-309 to determine if it is protected. UCC § 3-309 ultimately provides that a holder can enforce the terms of a note so long as it was able to enforce the terms of the note at the time the loss of possession occurred. In 2002 UCC § 3-309 was amended to state that so long as ownership of the note was acquired by one who had the right to enforce the note at the time of loss of possession, the assignee is protected. However, it is important to declare that not all states, including New Jersey, adopted the 2002 amendment to UCC § 3-309, leaving assignees of lost notes statutorily unprotected in those states.
On the other hand, as the foreclosure crisis worsened, courts throughout the country were forced to balance important public policy notions, i.e., housing/economic concerns versus consumer protection. As case law evolved, a borrower’s timeliness in bringing technical defenses with regards to note enforcement were balanced against a creditor’s ability to justify the entry of a judgment absent physical possession of the note. For example, in a New Jersey case entitled Bank of America, N.A. v. Alvarado, No. BER-F-47941-08, 2011 N.J. Super. Unpub. LEXIS 107 (Ch.Div.Jan.7.2011), the Court found that although the lender was unable to establish physical possession of the note, and the 2002 amendment to UCC § 3-309 had not been adopted, the Court held that a greater injustice would result should the defaulted borrower receive a windfall. It is noteworthy that this ruling represents a significant departure from other New Jersey rulings where physical possession of the note was found to be a critical component in establishing the right to foreclose.
In sum, an investor seeking to acquire the rights of a note holder would best be served to ensure that the assignor provides all applicable documentation, including the note, and if the note is lost, a lost note affidavit explaining the circumstances. Lastly, due diligence must be exercised prior to the decision to procure a note, and all documentation pertaining to the borrower’s account must be delivered.
Brian Rader is a partner at the law firm of Jardim Meisner & Susser, PC.