The Court of Special Appeals of Maryland (the Court), interpreting its version of UCC § 3-309, recently held that an entity that lost a note in its possession may assign that lost note, along with the right to enforce it, so long as the initial entity was entitled to enforce the note when it lost possession. Jones v. Ward, 2022 WL 556977, ___ A. ___ (Md. Court of Special Appeals, 2/24/22).
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In June 2004 Phyllis Jones obtained a loan from World Savings Bank (World), which was memorialized by a Note and Deed of Trust secured by her home. World recorded the Deed of Trust. In August 2004, a custodian of records for World signed a Lost Note Affidavit affirming that World was the lawful owner of the Note, the Note had not been “canceled, altered, assigned, endorsed, negotiated, or hypothecated,” and the Note was lost. After 2004, Wachovia acquired World and then Wells Fargo, N.A. acquired Wachovia, through which Wells Fargo became the owner of the Note. In 2014 Jones entered into a loan modification with Wells Fargo. In 2016-17 Wells Fargo executed a series of Lost Note Affidavits stating that it owned the Note which had been lost, repeating the language each time that it had not been “canceled, altered, … et al” before it was lost.
In 2017 Wells Fargo transferred its ownership of the Note to Truman I and transferred servicing rights to Rushmore, recording an assignment of the Deed of Trust to Truman I in the county records. Truman I transferred the Note to Truman II, also recording the assignment, with Rushmore remaining the servicer. Meanwhile, Jones had defaulted on the Note and in 2019 Rushmore initiated a foreclosure action, filing an affidavit certifying that Truman II owned the Note. Jones challenged the standing of Rushmore/Truman II to foreclose in the Maryland Circuit Court. In Truman II’s response, it argued that it was entitled to enforce the Note as lost under Maryland Commercial Law Article § 3-309, not as a nonholder in possession. The Circuit Court overruled Jones’ objection, finding that Truman II had standing based on the Lost Note affidavits and the numerous transfers, allowing the foreclosure to proceed.
After a reconsideration motion was denied, Jones timely appealed to the Court, which affirmed.
The Court’s treatment of rights under § 3-309 was extensive because it was revised in 1990, adopted by all 50 states, then revised again in 2002 because a controversy had arisen over the 1990 version. A district court in the District of Columbia in Denis Joslin Co. v. Robinson Broadcasting Corp., 977 F. Supp. 491 (D.D.C. 1997), had ruled that based on the language in the 1990 version, an assignee could not enforce a note lost by an assignor. That led to further amendment of § 3-309, which clarified that the assignee could enforce an instrument lost by its assignor if the assignor was entitled to enforce the lost note. However, Maryland had not adopted the 2002 amendment and therefore the Court was relying on the earlier language, which read:
A person not in possession of an instrument is entitled to enforce the instrument if (i) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred, (ii) the loss of possession was not the result of a transfer by the person or a lawful seizure, and (iii) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person.
The Court employed rules of statutory interpretation to ascertain legislative intent as well as Maryland law which has long permitted the assignment of mortgages to determine that the 2002 amended language was not necessary for Truman II to enforce the note, so long as Wells Fargo was entitled to enforce it when it was lost. It considered the Lost Note affidavits in the chain of transfers and found that they satisfied the criteria to show Wells Fargo could have enforced the Note before assignment. Therefore, assignee Truman II could do so as well. Several factors informed its decision, including that Jones had never disputed the loan nor the default, she had not asserted that Wells Fargo could not enforce the Note when she received a loan modification from it in 2014, and all the transfers in the chain had been adequately documented, with the Lost Note Affidavits and proper recording of the Deed of Trust assignment to Truman II. Therefore, it was satisfied that Rushmore had demonstrated Wells Fargo could enforce the Note when it was lost. It concluded the 1990 version of § 3-309 supported that the assignee of Wells Fargo received the same rights to foreclose as those held by the assignor.
This opinion implies that Maryland was among many states which did not adopt the 2002 amendment to §3-309. It is interesting that the drafters of the UCC were sufficiently concerned about the effect of a nonprecedential district court case on the rights of a transferee to enforce a lost note that they adopted the 2002 amendment to clarify language some courts had found ambiguous. That amendment could cut both ways: on one side, the Official Comment stated the amendment brought the specific language in line with the original intent, favoring an assignee trying to enforce a lost note; to the contrary, the old language was sufficiently imprecise to cause courts to doubt an assignee could enforce the lost note, a position which would go against the assignee. However, the Maryland Court of Special appeals laid the issue to rest for that state, and perhaps others which did not adopt the 2002 amendment. Its reasoning seems sounds; maybe now the controversy will die.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. Ca., Ret.) a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.