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North Carolina: Servicers Must Confirm Their Right to Enforce the Note before Commencing Foreclosure

Posted By USFN, Tuesday, June 14, 2016
Updated: Wednesday, May 18, 2016

June 14, 2016

by Graham H. Kidner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

A recent unpublished opinion from the North Carolina Court of Appeals serves as an important reminder with respect to who has the right to enforce a note. In U.S. Bank, N.A. v. Pinkney, 2016 WL 2647709 (N.C. App. May 10, 2016), U.S. Bank filed a foreclosure complaint against the Pinkneys who signed a note to Ford Consumer Finance. Ford indorsed the note to Credit Asset. Instead of indorsing the note, however, Credit Asset recorded an assignment of the note to U.S. Bank as the Indenture Trustee under a securitized indenture. U.S. Bank, Indenture Trustee, purported to indorse the note to U.S. Bank.

Affirming the superior court’s order dismissing the complaint for failure to state a claim, and rejecting U.S. Bank’s standing claim, the Court of Appeals held that a party seeking foreclosure must establish holder status according to North Carolina’s adoption of the Uniform Commercial Code. N.C.G.S. § 45-21.16(d); In re Rawls, 777 S.E.2d 796, 798-99 (2015).

Finding that neither the complaint nor the note evidenced the necessary indorsement from Credit Asset to U.S. Bank, and rejecting U.S. Bank’s contention that the assignment fulfilled the function of an indorsement based on a state statute enacted prior to North Carolina’s adoption of the UCC, the appellate court stated: “The UCC is clear that if a party in possession of a note is not the original holder, if the instrument is payable to an identified person, there needs to be an indorsement by each and every previous holder.” Pinkney, at *5. The court rejected the bank’s alternate note enforcement theory that it was a “nonholder in possession of the instrument who has the rights of a holder” pursuant to N.C.G.S. § 25-3-301(ii) because the bank did not allege this theory in its complaint.

The lessons here: Before foreclosure is commenced, the servicer must locate the original note and confirm that the chain of indorsements is complete. The servicer should be prepared to prove nonholder in possession status, if necessary, which will require adducing evidence that it is authorized to act for the holder.

The with-prejudice dismissal in this case is not the game-ender that it might appear to be. North Carolina recently adopted the Florida Supreme Court’s logic in Singleton v. Greymar, 882 So. 2d 1004 (Fla. 2004), holding that a noteholder is not barred by the doctrine of res judicata from filing a third power-of-sale foreclosure proceeding after two voluntary dismissals of prior foreclosure cases, notwithstanding the “two dismissal rule” found in N.C. R. Civ. P. 41(a). In re Foreclosure of Beasley, 773 S.E.2d 101 (N.C. App. 2015) (North Carolina courts “have required the strictest factual identity between the original claim, and the new action, which must be based upon the same claim … as the original action” and held that, because each foreclosure was based on a different period of default and a different amount owed, neither of the two dismissals implicated the two dismissal rule). Id. at 107. By extension, res judicata should not be a bar to refiling a judicial foreclosure case based on a new event of default.

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