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  • Posted on: Jan 10 2020

This Blog has addressed many issues related to mortgage foreclosure. [HERE], [HERE], [HERE], [HERE], [HERE], [HERE], [HERE], [HERE], [HERE], [HERE], [HERE],  [HERE], [HERE] and [HERE].  As to the issues relating to the standing of a lender to commence a foreclosure action, this Blog has noted that, in  general, a foreclosing mortgagee makes out its prima facie case by producing the “mortgage, the unpaid note, and evidence of default.”  Deutsche Bank Nat. Trust Co. v. Abdan, 131 A.D.3d 1001, 1002 (2nd Dep’t 2015).  When standing is raised as a defense, plaintiff must also prove its standing to obtain relief from the court.  Nationstar Mortgage, LLC v. LaPorte, 162 A.D.3d 784, 785 (2nd Dep’t 2018).  A plaintiff in a mortgage foreclosure action establishes its standing by demonstrating that it “is the holder or assignee of the underlying note at the time the action is commenced.”  Nationstar, 162 A.D.3d at 785.  A “holder” is “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.”  N.Y.U.C.C 1-201[b][21]; Deutsche Bank Nat. Trust Co. v. Brewton, 142 A.D.3d at 684 (2nd Dep’t 2016).  A written assignment of the note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation.  Brewton, 142 A.D.3d at 684 (citation omitted).  The mortgage, because it is merely security for the maker’s obligation to repay the underlying debt, passes with the debt as an inseparable incident when the note is assigned.  Brewton, 142 A.D.3d at 684 (citation omitted).  Where, however, a note is “neither indorsed in blank nor specifically indorsed” to the person in physical possession of the note, that person cannot be “the lawful holder thereof for purposes of enforcing it.”  McCormack v. Maloney, 160 A.D.3d 1098, 1100 (3rd Dep’t 2018) (citations omitted).  Therefore, such a person would not, inter alia, have standing to commence a mortgage foreclosure action.  McCormack, 160 A.D.3d at 1100 (citations omitted).

Section 3-202 of New York’s Uniform Commercial Code governs the “negotiation” of a negotiable instrument, which is the “transfer of an instrument in such form that the transferee becomes the holder.”  UCC § 3-202(1).  “If the instrument is payable to order it is negotiated by delivery with any necessary indorsement; if payable to bearer it is negotiated by delivery.” UCC § 3-202(1).    “Holder status is established where the plaintiff possesses a note that, on its face or by allonge, contains an indorsement in blank or bears a special indorsement payable to the order of the plaintiff.”  Wells Fargo Bank, NA v. Ostiguy, 127 A.D.3d 1375, 1376 (3rd Dep’t 2015) (citations omitted).  An allonge is an additional piece of paper “so firmly affixed [to the note] as to become a part thereof.”  NY UCC § 3-202(2); U.S. Bank National Assoc. v. Moulton (2nd Dep’t January 8, 2020).  An allonge may be needed where “there is insufficient space on the [note] itself for the endorsements; as long as the allonge remains firmly affixed to the note, it becomes part of the note.”  Id. (citation omitted).

The Moulton Court analyzed the importance of complying with the UCC’s rules concerning allonges.  The plaintiff in Moulton commenced a mortgage foreclosure action after defendants’ default on the underlying obligation.  In their answer, defendants, inter alia, raised plaintiff’s lack of standing to commence the action.  The motion court granted plaintiff’s motion for summary judgment, struck defendants’ answer and appointed a referee to compute the amounts due to plaintiff and denied the defendants’ cross-motion for summary judgment dismissing the complaint.

On appeal, the Second Department reversed holding that plaintiff “failed to establish, prima facie, its status as a holder of the note at the time the action was commenced.”  Moulton, at page 2.  In so doing, the Moulton Court found that “plaintiff failed to show that the note was properly endorsed and thus validly transferred to it.”  Moulton, at page 3 (citations omitted).  The note in question was made payable to “Chevy Chase Bank, F.S.B.” and not plaintiff.  The Court in strictly interpreting the UCC’s requirements relating to allonges, found that plaintiff’s “proof” of its standing was inadequate and stated:

In the record on appeal, the piece of paper immediately following the copy of the note contains only a purported endorsement specially endorsed to the plaintiff by Chevy Chase Bank, F.S.B. This page is not referred to at all in the affidavit of [the] servicer for the plaintiff (hereinafter the loan servicer), or any other evidence submitted in support of the plaintiff’s motion.  Although the affirmation of the plaintiff’s counsel refers to the document as an endorsement, and states that the note is specially endorsed to the plaintiff, the document does not meet the Uniform Commercial Code requirements necessary to constitute an allonge containing an endorsement, since no evidence was submitted to indicate that the paper containing the purported endorsement was so firmly affixed to the note so as to become a part thereof, as required under UCC 3-202(2). The last page of the note indicates that it is page 5 of 5 and has sufficient white space on the page to fit an endorsement; the purported allonge, which is undated, contains no pagination or writing in any way to demonstrate its connection to the note or that it was firmly affixed thereto. The affidavits of the plaintiff’s counsel and the plaintiff’s loan servicer, submitted in support of the plaintiff’s motion, also fail to indicate that the purported allonge is connected to the note or that it was firmly affixed thereto. Thus, this so-called allonge fails to meet the legal requirements of an allonge (see UCC 3-202[2]), and is not connected to the note by any admissible evidence, and cannot serve as an evidentiary basis for summary. Since the plaintiff failed to establish, prima facie, its standing, summary judgment should have been denied.

Moulton, at pages 3-4 (some citations omitted).

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