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Connecticut Appellate Court Rules Modified Note is Still Negotiable under the UCC

Posted By USFN, Tuesday, April 25, 2017
Updated: Thursday, April 20, 2017

April 25, 2017

by Jeffrey M. Knickerbocker
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

In Deutsche Bank National Trust Company v. Pardo, 170 Conn. App. 642 (Feb. 14, 2017), the borrower appealed the trial court’s denial of his motion to dismiss and motion to open the judgment of strict foreclosure granted the plaintiff-foreclosing trust. The borrower claimed that the trial court improperly: (1) denied his motion to dismiss for lack of subject matter jurisdiction; and (2) dismissed, pursuant to Connecticut General Statutes § 49-15, his motion to open the judgment of strict foreclosure as moot. The borrower’s sole contention on appeal was that the plaintiff lacked standing because the note that was the subject of the foreclosure was no longer a negotiable instrument following the borrower’s default on a loan modification. The Connecticut appellate court affirmed the judgment of the trial court.

On April 9, 2007, the borrower executed the note. On May 4, 2010 and October 3, 2012, the borrower executed two separate loan modification agreements (both of which increased the principal balance due on the loan). The borrower then defaulted on the modifications.

Under Conn. Gen. Stat. § 42a-3-104 [which is Connecticut’s adoption of 3-104 of the Uniform Commercial Code (UCC)], in order to be a negotiable instrument, the note must be an unconditional promise to pay. The borrower contended that once the loan was modified, the note was no longer an unconditional promise to pay and, therefore, lost its status as a negotiable instrument as contemplated by Connecticut statute and the UCC — as the terms of the note were “subject to or governed by” other writings and thus rendered the note “conditional.” According to the borrower, because the note was no longer a negotiable instrument under § 42a-3-104, the plaintiff could not prove standing to foreclose by virtue of being a holder of the note. The borrower relied upon Conn. Gen. Stat. § 42a-3-106, which says that “… a promise or order is unconditional unless it states … 2) that the promise or order is subject to or governed by another writing.”

Review on Appeal
Standing — The appellate court pointed out that in order to have standing, the plaintiff must be entitled to enforce the promissory note secured by the property. A plaintiff may evidence that it is entitled to enforce the note by being a holder of the note or someone with the rights of a holder. The appellate court held that the plaintiff presented prima facie evidence that it is the holder with standing to commence the action by the mere allegation in the complaint that it was the holder of the note with a copy of the note attached to the complaint.

The appellate court rejected the borrower’s argument that the note was no longer a negotiable instrument as a result of the subsequent modifications. In finding that the note was a negotiable instrument, the appellate court upheld the trial court’s findings that the plaintiff was the holder of the note, and had established a prima facie case for foreclosure. Further, the court found that the plaintiff’s case was not rebutted merely because of the borrower’s argument (which the appellate court did reference as “novel”); the borrower’s contention was rejected outright. A later modification of the note did not strip the note of its status as a negotiable instrument in looking at the terms of the note. As the note itself did not reference or contemplate a separate document or agreement, and as the note was merely modified by a different agreement well after the execution of the document, § 42a-3-106 did not apply.

Vesting of Title — Connecticut utilizes both foreclosures by sale and strict foreclosures. In a strict foreclosure, title to the property vests in the plaintiff by operation of law absent redemption of the judgment debt by either the borrower or any other subsequent encumbrancer. In Pardo, the borrower also made the argument that merely filing a motion to open the judgment stopped the vesting of title with the plaintiff. The court disagreed. The trial court entered judgment on February 2, 2015 with the law days set to commence on May 19, 2015.

The law days are judicially-determined days in which the defendants have to redeem. If they fail to redeem, title passes to the plaintiff. The borrower filed the motion to open the judgment on May 12, 2015. The trial court did not hear the motion until May 26, 2015, which was after title vested with the plaintiff. Because title had passed to the plaintiff, despite the pending motion, there was no relief that the court could provide to the borrower.

Also worth noting is the court’s holding that the mere filing of a motion to dismiss purporting to challenge standing, and therefore subject matter jurisdiction, does not toll or stay the running of the law days. Generally, courts have held that when an issue of subject matter jurisdiction is raised, there can be no further movement on the case until the issue is decided. Some trial courts have taken the position that an issue of subject matter jurisdiction is raised upon the mere filing of a motion to dismiss. In deciding against that precept, the court in Pardo cited the need for an orderly foreclosure procedure that must, at some point, conclude. To adopt the defendant’s position, the court reasoned, would produce unnecessary delay and interrupt the orderly disposition of foreclosure proceedings.

Closing Words … for Now
Still, this matter is not over. There is another avenue of appeal: specifically, the Connecticut Supreme Court and the borrower has petitioned for review there. As of now, lenders should feel safe that entering a loan modification will not render a note and mortgage unenforceable in Connecticut.

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