Standard foreclosure proceedings have been put on pause. This article endeavors to provide instruction on how to cure one of the most frequently stumbled upon legal impediments to litigating these actions—the lost note. Many foreclosure actions are sitting stagnant for months, or even years, as a result of not only a reticent judiciary, but also the lenders’ sloppy recordkeeping and loss of documentation evidencing their standing to foreclose on a secured property. A lost note, however, does not necessarily foreordain a losing case.
Many of today’s foreclosure actions are commenced, not by original lenders, but by parties who received the mortgages after a series of transfers. In the height of the housing boom, millions of mortgage notes were lost in transit, and the whereabouts of the original paperwork for each individual borrower is now anyone’s guess. As a result, since a lender must be the holder or assignee of both the mortgage and the note in order to foreclose,1 the “show me the note” defense to foreclosure actions became widespread, allowing defaulting borrowers to take advantage of the likelihood that the foreclosing lender or servicer does not physically possess the original note evidencing the right to foreclose.
Recent case law, however, demonstrates that the “show me the note” defense to foreclosure actions will not, in all cases, shield the defaulting borrower from liability. In New York, despite a lost mortgage note, a lender can still foreclose, so long as it proves to the court by competent evidence: (i) that it owns the note, (ii) the facts preventing the production of the note, and (iii) the terms of the note.2 The common characteristic among the cases upholding this procedure is the ability of the foreclosing party to fully detail the note’s chain of transfers, to prove the prior holders’ intent to transfer, and to explain the reasons for the lost note, coupled with the courts’ desire to decide cases in the most equitable fashion given the facts at hand.
Practitioners must learn how to prove a lender’s standing despite a lost note when possible, so that the foreclosures can be litigated on the merits, and the economy can start to fully rebound from the painful effects of the housing crisis.
There are two ways in New York for a lender to prove from the outset that the underlying note was properly transferred: (i) producing a valid written assignment of the note, or (ii) demonstrating that the note was physically delivered to it.3
As was reiterated by the Second Department on June 13, 2012 in U.S. Bank v. Cange, 96 A.D.3d 825, producing “…a written assignment of the underlying note…is sufficient to transfer the obligation.”4 A retroactively dated assignment, however, as was confirmed in Wells Fargo v. Marchione, 69 A.D.3d 204, cannot be used to prove ownership: “If an assignment is in writing, ‘the execution date is generally controlling and a written assignment claiming an earlier effective date is deficient unless it is accompanied by proof that the physical delivery of the note and mortgage was, in fact, previously effectuated.’”5 Further, the court in Countrywide v. Gress, 68 A.D.3d 709, deciphered that an assignment executed subsequent to filing the complaint, but prior to serving the defendants, will also fail to confer standing.6 Note that an assignment of the note must not be confused with an assignment of the mortgage, as a mortgage assignment without an assignment of the underlying note is a nullity, and standing will not be established.7 Indeed, it is a well established doctrine, not only in New York, but in all common law jurisdictions recognizing mortgages, that the mortgage instrument itself is not independently enforceable as a debt.8
The alternative to producing a written assignment of the note is to demonstrate to the court that the note was physically delivered to the lender.9 In U.S. Bank v. Collymore, 68 A.D.3d 752, the Second Department confirmed that “…the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation, and the mortgage passes with the debt as an inseparable incident.” New York courts have repeatedly held that a note and mortgage may be transferred by delivery without a written instrument of assignment.10
Determining what constitutes sufficient evidence to prove delivery of a note varies on a case by case basis. It is clear, though, that any affidavit produced in support of this contention should absolutely indicate when the note was physically delivered.11 In Collymore, for example, the Second Department held that an issue of fact remained as to whether the bank had standing because the affidavit of the bank’s vice president did not indicate when the note was physically delivered to the bank.12 Even more recently, in HSBC v. Hernandez, 92 A.D.3d at 844, the court held that “the affidavit from the plaintiff’s servicing agent did not give any factual details of a physical delivery of the note and, thus, failed to establish that the plaintiff had physical possession of the note prior to commencing this action.”13 Conversely, the court in Cange, however, held that an uncontroverted computer printout indicating the loan number, the lender’s name, and the acquisition date was sufficient to establish delivery.14
Production of the Note
After the lender demonstrates that it owns the note, it must then explain to the court the circumstances upon which the note was lost. In New York, the loss of negotiable instruments, such as promissory notes, are addressed in, and protected by, the Uniform Commercial Code. UCC §3-804 (Lost, Destroyed, or Stolen Instruments).
As per the NY General Business Law, the facts preventing production of the note can be demonstrated “by parol or other secondary evidence.”15 Most often, lenders submit affidavits describing exactly what happened to the note, in addition to setting forth a step-by-step explanation of all reasonable efforts taken to find the missing note. But, as was established in Citibank v. Lin, “…merely stat[ing] that ‘[p]laintiff and its servicing agent [are] now unable to locate the…note’” is insufficient.16
It is also prudent to confirm in any affidavit that the note has not been sold or transferred to any third party. Although outside the scope of this article, it should be mentioned that the court is authorized in these situations to require security indemnifying the borrower against the possibility of double liability, should the note later turn up in the hands of a holder in due course, who is not the lender.17 While such a holder of only the note would be unable to foreclose, it would be able to bring an ordinary lawsuit on the note itself, and would even have available the expedited procedures of CPLR 3213, to wit, a motion for summary judgment in lieu of complaint.
Proving the Terms
Finally, in order to foreclose despite a lost note, the lender must also prove the terms of the missing instrument.18 The terms of the note can be set forth in the same affidavit setting forth the facts preventing the production of the note, and should include details such as, without limitation, the name of the last holder in possession, the name of the borrower, the name of the person that signed on behalf of the borrower (whether the actual borrower or an agent19), the type of note, the effective date, the full value of the note, the payment terms, the loan number, and the amount currently unpaid under the note.
Courts have rejected affidavits, however, which are not based on personal knowledge. For example, in Lin, the court denied the lender standing because the “…affidavit relie[d] only ‘upon personal knowledge, based on books and records of [the bank].’”20 The Second Department has suggested, though, as in Brown Bark v. Weiss & Mahoney, 90 A.D.3d 963, that attaching a copy of a form note to the affidavit, assuming a form was used to create the lost note, could help prove the terms of the lost instrument.21
The Future of Foreclosures
Penalizing the purchasers of notes and mortgages on the secondary market, by interfering with their rights to foreclose on defaulted loans, under which loans the original lenders unequivocally lent hundreds of thousands of dollars per transaction, will do nothing but keep our court system clogged and our economy befogged.
For our economy to fully rebound from the housing crisis, we need to put the homes into the hands of people that can afford them. Once the foreclosures are pushed through the pipes, there will be more open houses on the market, the prices will drop, and housing will resultantly be made more affordable. We cannot keep looking into the past and throwing blame, since there were really no innocent parties to our housing crisis. Rather, we must focus on getting the economy back into shape, and we humbly submit that this article provides an ample framework for expediting the foreclosures that are trapped in our court system simply due to a lost note.
Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. Jackie Halpern Weinstein is an associate at the firm.
1. HSBC Bank USA v. Hernandez, 92 A.D.3d 843, 939 N.Y.S.2d 120 (App. Div. 2d Dept. 2012).
2. UCC §3-804; Clovine Associates Ltd. Partnership v. Kindlund, 211 A.D.2d 572, 621 N.Y.S.2d 606 (App. Div. 1st Dept. 1995); Marrazzo v. Piccolo, 163 A.D.2d 369, 558 N.Y.S.2d 103 (App. Div. 2d Dept. 1990).
3. Bank of New York v. Silverberg, 86 A.D.3d 274, 281, 926 N.Y.S.2d 532, 538 (App. Div. 2d Dept. 2011); Hernandez, 92 A.D.3d at 844.
4. U.S.Bank, N.A. v. Cange, 96 A.D.3d 825 (App. Div. 2d Dept. 2012).
5. Wells Fargo Bank, N.A. v. Marchione, 69 A.D.3d 204, 207, 887 N.Y.S.2d 615, 617 (App. Div. 2d Dept. 2009).
6. Countrywide Home Loans, Inc. v. Gress, 68 A.D.3d 709, 888 N.Y.S.2d 914 (App. Div. 2d Dept. 2009).
7. U.S.Bank, N.A. v. Sharif, 89 A.D.3d 723, 725, 933 N.Y.S.2d 293, 296 (App. Div. 2d Dept. 2011).
8. Carpenter v. Longan, 83 U.S. 271 (1872).
9. U.S.Bank, N.A. v. Collymore, 68 A.D.3d 752, 754, 890 N.Y.S.2d 578, 580 (App. Div. 2d. Dept. 2009).
10. Flyer v. Sullivan, 284 A.D. 697, 134 N.Y.S.2d 521 (App. Div. 1st Dept. 1954).
11. Collymore, 68 A.D.3d at 754.
13. Hernandez, 92 A.D.3d at 844.
14. Cange, 96 A.D.3d 825.
15. NY General Business Law §394-a(1).
16. Citibank, N.A. v. Lin, 2007 WL 2176294 (N.Y.Sup. 2007).
17. NY General Business Law §394-a(2).
18. UCC §3-804; Kindlund, 211 A.D.2d at 62; Piccolo, 163 A.D.2d at 369.
19. If it is an agent, the affidavit should set forth any proofs of agency the lender may possess.
20. Lin, 2007 WL 2176294.
21. Brown Bark II, L.P. v. Weiss & Mahoney, Inc., 90 A.D.3d 963, 965, 935 N.Y.S.2d 637, 638 (App. Div. 2d Dept. 2011).