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The Utility of the Lost Note Affidavit

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  • Posted on: Jul 3 2019

In mortgage foreclosure actions, and other actions in which a party is suing on a promissory note (or other negotiable instruments) ( a “Note”), a plaintiff must allege that it is in possession of the underlying Note in order to establish that it has standing to prosecute the action.  As this Blog has previously noted in the Blog [The Second Department Denies Summary Judgment to Another Foreclosing Mortgagee Due to the Insufficiency of Evidence Presented on the Motion]:

…a foreclosing mortgagee makes its prima facie case by the production of the note, the mortgage and evidence of default. The Court did note, however, that “when a defendant places standing in issue, the plaintiff must prove its standing in order to be entitled to relief.” (Citations omitted.) The Brody Court further recognized that standing is conferred on a plaintiff in a mortgage foreclosure action “when it is the holder or assignee of the underlying note at the time the action is commenced.” A “holder,” according to the Brody Court, “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.  (Quoting, U.S. Bank National Assoc. v. Brody, 156 A.D.3d 839 (2nd Dep’t 2017)) (citations and internal quotation marks omitted).)

Because possession of a Note is a critical component of a mortgage foreclosure action (or actions involving other negotiable instruments) one may wonder whether a potential plaintiff is out of luck if a Note, for some reason, cannot be produced or otherwise is not in the potential plaintiff’s possession.  If the Note was lost, destroyed or stolen, the answer is provided by section 3-804 of New York’s Uniform Commercial Code, which provides that “[t]he owner of an instrument which is lost, whether by destruction, theft or otherwise, may maintain an action in his own name and recover from any party liable thereon upon due proof of his ownership, the facts which prevent his production of the instrument and its terms….”

UCC section 3-804 was recently discussed in Bank of New York Mellon v. Hardt (2nd Dep’t June 26, 2019).  The plaintiff in Hardt was a lender foreclosing on a mortgage delivered by borrower Hardt.  Plaintiff’s summons and complaint contained a lost note affidavit and a copy of the original note.

Hardt defaulted in answering the complaint and supreme court granted plaintiff’s motion for the appointment of a referee to compute the amounts due to the lender under the mortgage.  Thereafter, Hardt moved pursuant to CPLR 317 to vacate her default and for leave to file an answer.  In order to obtain relief pursuant to CPLR 317, a defendant must demonstrate that “he or she did not personally receive notice of the summons in time to defend the action and that he or she has a potentially meritorious defense.”  Deutsche Bank Natl. Trust Co. v. Russo, 170 A.D.3d 953 (2nd Dep’t 2019).

Presumably, in support of her motion to vacate her default, Hardt called plaintiff’s standing into question, which, if demonstrated, would provide a meritorious defense.  (This blog has previously addressed the issue of a foreclosing lender’s standing to bring a foreclosure action [here, here, here, here and here].)  In response, supreme court appointed a special referee to “hear and determine” the issue of plaintiff’s standing and, in conjunction with the hearing, the parties stipulated that the only issue that needed to be determined was “whether, in the absence of physical possession of the original note or valid assignment thereof, the plaintiff, as a matter of law, lacks standing.”  After reviewing the facts, the special referee concluded that the lender had standing to pursue the foreclosure action.  Supreme court agreed.

On Hardt’s appeal, the Appellate Division, Second Department, found that in denying Hardt’s motion to vacate her default, supreme court “in effect, … found that the defendant lacked a meritorious defense…”.  The Second Department agreed with the referee and rejected Hardt’s contention that “a mortgagee cannot, as a matter of law, establish standing where, as here, the original note was lost and there is no valid assignment of the note to the plaintiff.”  In so doing, the Court recognized that UCC 3-804 is an appropriate vehicle to prove ownership of a lost, destroyed or stolen note if the “holder” “prove[s] ownership of the notes, the circumstances of the loss and their terms”  (quoting, Marazzo v. Piccolo, 163 A.D.2d 369, 370 (2nd Dep’t 1990).  The Court also noted that it recently applied UCC 3-804 to a foreclosure action “reiterating that ‘[p]ursuant to UCC 3-804, the owner of a lost note may maintain an action upon due proof of [1] jhis [or her] ownership, [2] the facts which prevent his [or her] production of the instrument and [3] its terms’” (quoting U.S. Bank N.A. v. Cope, 167 A.D.3d 965, 967 (2nd Dep’t 2018) (brackets in original).

By way of contrast, the Second Department, in Deutsche Bank Nat. Trust Co. v. Anderson, 161 A.D.3d 1043 (2018), did not find lost note affidavits persuasive and denied summary judgment to the foreclosing lender.  While the Anderson Court found that the copy of the note produced by lender was “sufficient evidence of its terms,” it also found that the lost note affidavits submitted by the lender were “inconsistent with each other and contain[ed] vague and conclusory statements.”  Anderson, 161 A.D.3d at 1044.  Thus,

[i]t was not clear when the loan servicer or its agent acquired possession of the note, or whether the loan servicer or an agent of the loan servicer acquired the note. Moreover, Matz’s affidavit fails to provide sufficient facts as to when the search for the note occurred, who conducted the search, the steps taken in the search for the note, or when or how the note was lost.  Thus, the affidavits failed to sufficiently establish the plaintiff’s ownership of the note.

Anderson, 161 A.D.3d at 1044 – 45 (citations omitted).

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