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The Second Department Determines That A Line Of Credit Agreement Is Not A Negotiable Instrument Under The UCC When Addressing Plaintiff’s Standing To Commence A Mortgage Foreclosure Action

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  • Posted on: Sep 21 2018

This Blog has addressed numerous issues relating to mortgage foreclosure actions.  [HERE][HERE][HERE][HERE][HERE][HERE].  “The Second Department Denies Summary Judgment To Another Foreclosing Mortgagee Due To The Insufficiency Of Evidence Presented On The Motion” addressed the sufficiency of evidence necessary for a lender to demonstrate that it is the holder of the underlying note and mortgage and, thus, has standing to prosecute the foreclosure action.

On September 19, 2018, the Supreme Court of the State of New York, Appellate Division, Second Department issued an Opinion and Order in OneWest Bank, N.A. v. FMCDH Realty, Inc., in which it addressed a unique standing/holder in due course issue.  Put simply, the Court was tasked with deciding whether a certain line of credit agreement “constitutes a negotiable instrument as defined in section 3-104 of the Uniform Commercial Code,” as such a determination related directly to plaintiff’s standing to prosecute a mortgage foreclosure action and the required proof to demonstrate standing.

In OneWest, borrower entered into a reverse mortgage transaction with lender evidenced by a “Cash Account Adjustable Rate Reverse Mortgage Loan Account Disclosure Statement and Agreement” (the “Agreement”) and an “Adjustable Rate Home Equity Conversion Deed” (the “Mortgage”), “which created a security interest in the borrower’s home…to guaranty the payment of up to twice the stated advance limit under the…Agreement, i.e., a maximum principal sum of $1,612,304.”  Subsequently, through one or more assignments, the Mortgage was assigned to plaintiff.

An action was commenced to foreclose the Mortgage and, in its answer, defendant raised the issue of lack of standing.  Supreme court granted plaintiff’s motion for summary judgment and denied defendant’s cross-motion for summary judgment dismissing the action for lack of standing.  Generally, 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).  Standing is established by the plaintiff 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].  Where a note is indorsed in blank, the holder establishes standing to maintain an action by demonstrating that it “was in physical possession of the note endorsed in blank prior to commencement of the action.”  Deutsche Bank Nat. Trust Co. v. Brewton, 142 A.D.3d 683, 685 (2nd Dep’t 2016).

In the trial court, the OneWest plaintiff based its standing on the 14-page Agreement and the affidavit of bank representative averring that the indorsed in blank Agreement was in plaintiff’s possession prior to the commencement of the foreclosure action.  In opposition, defendant argued that in a prior action by plaintiff’s assignor, an attempt was made to prove standing “based on the physical delivery of the…Agreement, to which an undated allonge, indorsed in blank by an unidentified representative of [the prior lender] and referring specifically to the borrower and the address of the subject premises, was affixed.”  The proof submitted on the prior motion differed from the proof submitted on the subject motion.  Supreme court granted plaintiff’s motion for summary judgment notwithstanding the differences in proof.

“Because the plaintiff is seeking to establish standing on the basis that it is a valid holder in due course of the…Agreement, [the Second Department] requested postargument submission on the threshold question of whether the…Agreement falls within the definition of a negotiable instrument as contemplated by section 3-104 of the Uniform Commercial Code.”  Pursuant to N.Y.U.C.C. 3-104, in order for a writing to be a negotiable instrument, it must “be signed by the maker or drawer,” “contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or drawer except as authorized by this Article,” “be payable on demand or at a definite time,” and “be payable to order or to bearer.”

The Second Department determined that the Agreement was not a negotiable instrument under the UCC.  In so doing, the Court determined that the Agreement contained provisions “that go well beyond what is permitted under the UCC.”  For example, the Agreement created a $800,000 revolving line of credit, of which borrower could have drawn an additional $440,000.  The Court noted that it found no New York case law determining that similar line of credit agreements were negotiable instruments, although other jurisdictions have held similar agreements “to be distinct from an agreement to pay a sum certain.”  The Court also noted, among other things, that the Agreement: provides for periodic adjustment of advance limits; and, allows the lender to suspend, terminate or reduce borrower’s right to future advances.

Simply stated, the Court determined that the Agreement did much more than “memorialize the borrower’s unconditional promise to pay a sum of money” and, accordingly, the “specific language of several provisions of the … Agreement, read in context of the agreement as a whole, provides compelling evidence that the … Agreement is not, and was never intended to be, a negotiable instrument.”

Based in its determination, and in denying summary judgment to the plaintiff, the Court determined that plaintiff’s standing could not be established simply by “showing that it possessed the original … Agreement, indorsed in blank, on the date [the] action was commenced….”  Similarly, defendant’s cross-motion was denied because it “failed to eliminate triable issues of fact as to whether the plaintiff had standing.”


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