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New Jersey: Appellate Court Finds Lost Notes May Be Enforced Even if Not in Possession When Lost

Posted By USFN, Monday, May 20, 2019

by Michael B. McNeil, Esq.
Powers Kirn, L.L.C.
USFN Member (NJ, PA)

For years, lenders and servicers in New Jersey have faced uncertainty when seeking to prosecute a mortgage foreclosure where the underlying promissory note has been lost.

New Jersey’s version of the Uniform Commercial Code (UCC) uses the old language for section 3-309(a), which states that: “A person not in possession of an instrument is entitled to enforce the instrument if the person was in possession of the instrument and entitled to enforce it when loss of possession occurred[.]” N.J.S.A.12A:3-309(a).

Some courts around the country have strictly construed this language, holding that a party cannot enforce a lost note unless it was both in possession of and entitled to enforce the note when it was lost. See, e.g.,
Dennis Joslin Co., LLC v. Robinson Broadcasting Corp., 977 F. Supp. 491(D.D.C. 1997). Notably, in response to this case and its progeny, the drafters of the UCC amended section 3-309 in 2002 to remove the possession requirement.

However, the New Jersey Legislature has not adopted the amendment to section 3-309 and there had been no reported decision addressing whether the Joslin Court’s reading of the section will apply in this State.

Thus, the stage was set for the recent decision in
Investors Bank v.Torres, 197 A.3d 686, 457 N.J. Super.53 (N.J. Super. Ct. App. Div. 2018). In this case, the note was lost at least a year prior to the transfer of the lost note affidavit and mortgage assignment to Investors Bank.

Predictably, the borrower relied upon the Joslin Court’s reading of section 3-309(a) and argued that Investors Bank was not entitled to enforce the note since it was not in possession of the note when it was lost.

However, the court expressly rejected the holding of Joslin, and instead held that the right to enforce a lost note is transferrable by one who was both in possession of and entitled to enforce the note at the time it was lost, and that to enforce the lost note, the transferee need only prove the terms of the instrument and the transferee’s right to enforce the instrument as required by section3-309(b).

The court reached this decision by reading section 3-309 in conjunction with other provisions of the UCC, which lead the court to the conclusion that this result furthers the UCC’s purpose of expanding commercial practices and of not denying transacting parties the benefits of their bargains.

The court also relied upon common law principles of assignment and equitable principles of unjust enrichment to prevent what, in the court’s view, would have been an otherwise absurd and unjust result.

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