The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
A bankruptcy court in New York has held that a note and mortgage were unenforceable because the alleged assignee failed to show that it was the holder of the note, despite an endorsement in blank, a corporate assignment, and physical possession of the note. [In re Pinnock, 2018 Westlaw 5794442 (Bankr. S.D.N.Y.).]
Facts: Two individuals executed a home mortgage in favor of a lender. That lender later transferred the mortgage to an assignee. Following the borrowers’ Chapter 13 petition, the assignee filed a proof of claim, asserting that it held a lien on the borrowers’ home. The assignee’s proof of claim included a copy of the note, along with a separate undated document titled “Allonge to Promissory Note,” which was endorsed in blank by the original mortgage lender. Finally, the proof of claim included a “Corporate Assignment of Mortgage,” pursuant to which Mortgage Electronic Registration Systems, Inc. (“MERS”) purported to assign the mortgage.
The Chapter 13 debtors objected to the proof of claim on the grounds that the allonge was not affixed to the note itself, that the purported assignment by MERS was ineffective, and that mere possession of the note by the assignee did not confer standing on it to enforce the note.
Reasoning: Construing the New York version of Article 3 of the UCC, the court held that “mere possession does not give a party the right to enforce a note and mortgage under New York law . . . .” The note had not been specifically endorsed by the original lender to the assignee, nor was the allonge “firmly affixed” to the note.
The court observed that there were some New York cases in which a party in possession of a note had standing to enforce it, despite the lack of a proper endorsement. Here, however, the assignee did not provide any evidence as to how or from whom it received possession of the note. The court therefore held that the assignee’s lien was void, but only as to the assignee itself, its successors, and its assigns; to the extent that other parties were entitled to enforce the note, their lien, if any, would not be affected by the court’s ruling.
Author’s Comment: This is a disaster for the assignee, which was almost certainly the rightful owner of the note. If the lien is gone, and the note is unenforceable, the assignee will have no remedy at all. Worse yet, if some other court reaches the merits and finds that the assignee was really the true owner of the note, then no one will ever have standing to enforce the note, since any other party would have to receive an assignment of that note from the assignee (and would thus be a “successor” to the losing party).
In terms of doctrine, I am not sure that this court reached the right result. This case is the mirror image of the usual “show me the note” dispute. Here, the assignee showed the note, and the court’s response was, in essence, “Great, but who are you, and where did you get that note?”
Does the court think that the assignee somehow stole the note from the originating lender? Why isn’t physical possession of the note prima facie evidence of the right to enforce it? Nor did the court discuss why the corporate assignment executed by MERS was inadequate to establish a valid chain of assignments from the originating lender to the assignee. I would not be surprised if this decision were to be reversed on appeal.
In terms of practice, the lessons for the future are fairly obvious:
- First, make sure that there is a clear paper trail leading from the originating lender to the assignee.
- Second, don’t rely on endorsements in blank unless absolutely necessary.
- Third, it wouldn’t hurt to staple the allonge “firmly” to the note. (For readers born after 1990, a “stapler” is a little machine that drives a small piece of wire through two or more hard copy pieces of paper and then crimps the metal, thereby joining the papers. Quaint, but effective. Try doing that with a PDF!).
- Fourth, if the original lender neglected to staple the allonge, the assignee should do so before the proof of claim is filed. There is no time-stamp on a staple. As far as I know, there is no rule that the original assignor has to be the one to do the stapling. (To paraphrase Rodney King, “Can’t we all just get allonge?”)
- Fifth, don’t rely on MERS to clean up the mess. Just like a leaky roof, MERS works perfectly, except on the proverbial rainy day.
- Sixth, when the bankruptcy court challenges the adequacy of your documentation and gives you one last chance to fill in the gaps, say “Thank you, Your Honor,” and then do it right away. For whatever reason, the bank in this case did not.
For discussions of cases involving related issues, see:
- 2013-26 Comm. Fin. News. NL 54, Foreclosing Creditor Need Not Produce Original Promissory Note before Pursuing Nonjudicial Foreclosure under Arizona Law.
- 2012 Comm. Fin. News. 30, Assignee Of Senior Trust Deed Seeking Nonjudicial Foreclosure Need Not Show Possession of the Underlying Promissory Note, Despite Commercial Code Provisions Governing Enforcement Of Negotiable Instruments.
- 2011 Comm. Fin. News. 95, Assignee of Mortgage May Not Have Standing to Pursue Foreclosure Unless It Can Establish Assignment of Corresponding Promissory Note.
- 2011 Comm. Fin. News. 52, Purported Assignee of Mortgage Lacks Standing to Obtain Relief from Automatic Stay Because Assignment Transferred Mortgage Without Underlying Note.
These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.