The following is an update analyzing a recent case of interest:
Many, perhaps most, home loan foreclosures are commenced on behalf of parties who were not the original lenders. The homeowner will often challenge the standing of a successor mortgagee to conduct the foreclosure, alleging that a formal defect occurred at some point in what may be a chain of assignments. In JPMorgan Chase Bank, N.A. v Syed, 2020 WL 1967527 (Conn App. April 28, 2020) the mortgage note was endorsed for assignment by the original lender bank using the stamped signature of a person who had left the bank’s employ years earlier. An intermediate appellate court in Connecticut has given effect to that endorsement, carefully applying the law governing negotiable instruments, as set forth in Article 3 of Uniform Commercial Code. A copy of the opinion may be found here: https://jud.ct.gov/external/supapp/Cases/AROap/AP197/197AP219.pdf
The original home mortgage loan was made to defendant Sonia Syed by Washington Mutual Bank, FA. It was assigned to JPMorgan Chase Bank, N.A. under the authority of the FDIC as receiver for WAMU. Stamped on the face of the note were the words “Pay to the order of ____________ Without Recourse WASHINGTON MUTUAL BANK, FA” above the stamped facsimile signature of one Cynthia Riley. The blank was not filled in to name the transferee.
In May, 2013 JP Morgan commenced a foreclosure action against Ms. Syed in Connecticut Superior Court. Following the commencement of the foreclosure, the loan changed hands two more times. JPMorgan and the successor plaintiffs were, at all relevant times, in possession of the original, stamped mortgage note.
It was revealed in discovery that Ms. Riley never actually signed any endorsements, that there were several stamps with her name and signature, and that WAMU staff used those stamps to endorse notes. Ms. Riley left the employ of WAMU in 2006, about seven years before the signature stamp was used to endorse the Syed note.
A successor to JPMorgan as substitute plaintiff filed a motion for summary judgment as to liability. The motion was opposed by Ms. Syed based in part on the irregularity of the WAMU endorsement. The trial court granted summary judgment and Ms. Syed appealed. The Connecticut Appellate Court has now upheld that decision.
The decision was based on the law of negotiable instruments set forth in Article 3 of the Uniform Commercial Code. As is typical under the UCC, the answer required the Court to follow a daisy chain of related provisions. The Syed opinion begins by citing UCC § 3-301, which provides in part that a “[p]erson entitled to enforce an instrument means (i) the holder of the instrument, [or] (ii) a nonholder in possession of the instrument who has the rights of a holder. . .” and that “[a] person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.”
JP Morgan and its successors in interest were admittedly in possession of the original note at all relevant times. Therefore, under UCC § 3-301, the issue of standing to enforce the note (and the mortgage securing it) depended on whether JPMorgan was a “holder” of the note, or had “the rights of a holder.” The Court omitted citing UCC § 1-201(21) which defines “holder” as “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession . . . .” The opinion picks up the thread by quoting UCC § 3-205(b), which says in part that “[w]hen endorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially endorsed.” The Court concluded (consistent with § 3-205 Official Comment 2) that the words on the stamp were an “endorsement in blank” because they did not identify a transferee. Because the note was endorsed in blank, it became “payable to bearer” under § 3-205(b), and the party in possession of the original note became the “holder” as defined in § 1-201(21), and as the holder was entitled to enforce the instrument under §3-301.
The critical question remained whether a stamp bearing the name of someone who was no longer an employee of the original holder, and who was therefore not authorized to take any action on the holder’s behalf, constituted an “endorsement” in the first place. To that point, the Court cited UCC § 3-204, which states in part that the word “endorsement” means “a signature . . . that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument . . . .” The opinion then quotes UCC § 3-401(b), which states that “[a] signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing.” The Official Comment to § 3-401 elaborates that “[a] signature may be handwritten, typed, printed or made in any other manner. . . . [and] may be made in any name, including any trade name or assumed name, however false and fictitious, which is adopted for the purpose.” In finding that the stamp constituted a “signature” the Court cited In re Bass, 366 N.C. 464, 738 S.E.2d 173 (2013), which held that a stamp which did not include the name of a human being, but only of a bank, constituted an endorsement.
Based on the above authority, the Court concluded that “any argument regarding Riley’s lack of authority to make the endorsement is misguided because it was Washington Mutual that endorsed the note, and there is no evidence in the record to suggest that it did not have the ‘present intention to authenticate [the] writing.’” Thus, the Court concluded that the Syed note had been legally transferred to JPMorgan.
The courts in Syed and Bass were required to navigate a seemingly prolix stream of UCC provisions to arrive at the conclusion that a legally effective endorsement of a negotiable instrument can be any set of words applied to the instrument with the intention of transferring it. An endorsement need not contain the name of a human (the holding of Bass) and can even contain the name of the wrong human, or an imaginary human (the holding of Syed). Another relevant provision of Article 3 points in the same direction. UCC § 1-201(27) defines “person” to mean “an individual, corporation . . . or any other legal or commercial entity.” So when UCC § 3-401(b) speaks of a signature “adopted by a person” with “the present intention” to negotiate an instrument, it can refer to an institutional person and intention.
Still, unless the words of a writing are legally unambiguous, how does one prove that a bank, for example, had a particular “present intention?” That would presumably require the testimony of humans about their human intentions and how those intentions are implemented through complex systems which are designed not to involve humans in their day to day workings. Such proof may be even more problematic in a future where transactions like the transfer of mortgages (themselves represented by electronic documents) are initiated by artificial intelligence. Viewed in this context, a case like Syed, involving the application of rubber stamps to paper promissory notes, may prove helpful only by way of strained analogy until the UCC catches up. Of necessity, watching the UCC “catch up” is akin to being a spectator at a glacier race.
The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association’s (CLA) Business Law Section. These materials were written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., located in San Diego, California. Mr. Kirby is a member of the ad hoc group and a member of the Commercial Transactions Committee of the Business Law Section. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.