October 8, 2015
by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)
The purchaser at a judgment execution sale of the secured property (subsequently identified as a respondent in the later foreclosure proceedings) challenged the right of the petitioner mortgage company to foreclose the title to the property, arguing that the petitioner’s production of the original note indorsed in blank at the hearing de novo before the superior court did not establish that the petitioner possessed the note. Following the statutory procedure for power-of-sale special proceeding foreclosures in North Carolina, the respondent had appealed from the order of the Clerk of Superior Court authorizing the foreclosure sale, and appealed again from the order of the superior court that also authorized foreclosure.
In the case of In Re: Rawls, No. COA15-248 (N.C. Ct. App., Oct. 6, 2015), North Carolina’s Court of Appeals took the opportunity to provide a concise explanation of the process in which negotiable instruments may be transferred under North Carolina’s Uniform Commercial Code. In its decision, the appellate court rejected the respondent’s contentions. Respondent’s position was that the production of the original note indorsed in blank at the foreclosure hearing was insufficient to establish petitioner as holder based on a partial quote from an earlier appellate decision in which the court stated that “[p]roduction of an original note at trial does not, in itself, establish that the note was transferred to the party presenting the note with the purpose of giving that party the right to enforce the instrument[.]” Rawls at 9, quoting In re Simpson, 211 N.C. App. 483, 491, 711 S.E.2d 165, 171 (2011). The respondent also contended that the petitioner’s affidavits contained hearsay that should not have been considered by the superior court. Rejecting this contention, the court noted that Simpson, “which did not hold that production of an original note could never be adequate to establish a petitioner’s right to enforce a note, is factually distinguishable from the instant case.” Rawls, at 9-10 (emphasis in original).
Simpson involved a note that had been specially indorsed to an entity that was “‘not the party asserting a security interest in Respondent’s property.’ at 493, 711 S.E.2d at 172. Significantly, Simpson specified that it was ‘[b]ecause the indorsement does not identify Petitioner and is not indorsed in blank or to bearer, [that] it cannot be competent evidence that Petitioner is the holder of the Note.’ [Simpson] at 493, 711 S.E.2d at 173 (emphasis added).” Rawls at 10.
Looking to N.C. Gen. Stat. § 25-3-205(b), as well as case law rationale, the court in Rawls held: “that a petitioner’s production of an original note indorsed in blank establishes that the petitioner is the holder of the note. In this case it is undisputed that petitioner produced the original note indorsed in blank, and we hold that this was sufficient to support the trial court’s conclusion that petitioner was the holder of the note.” Rawls at 9. Given its holding, the appellate court found it “unnecessary to reach respondent’s arguments concerning the admissibility of the affidavits proffered at the hearing.” Rawls at 10.
Borrowers and their counsel will often seek to delay foreclosure proceedings even though they lack any valid basis to do so, providing them with more time in the property without having to repay the loan. In Rawls, the foreclosure process was delayed for at least eighteen months, not by the borrowers but by someone who had taken title from them and had no obligation to pay the loan — allowing him to either reside in, or rent out, the property without making mortgage payments. There was, arguably, no good faith basis to file this appeal, which could provide grounds to the successful party to seek sanctions including the recovery of legal fees.
It is not the general practice to produce the original promissory note at a residential property foreclosure hearing in North Carolina. Instead, the substitute trustee usually relies on an affidavit from a competent witness at the creditor bank or mortgage company testifying that the affiant’s employer is the holder of the note, and attaching a copy of the fully endorsed note to the affidavit. There are times, however, when the production of the original note is a wise move, so as to avoid incurring the expense of a postponement, a contested hearing, or an appeal. With this reported Rawls decision, which has precedential effect across the state, appeals of orders authorizing foreclosure on the basis that the creditor bank or mortgage company producing the original note at the foreclosure hearing is not entitled to enforce it should be rare indeed.
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