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All Is Not Lost: NJ Supreme Court Opines on Enforcement of Note Lost by Predecessor

Posted By USFN, Monday, August 17, 2020
by Caitlin M. Donnelly, Esq. 
KML Law Group, P.C.
USFN Member (NJ, PA)

The New Jersey Supreme Court unanimously held in Investors Bank v. Javier Torres, (Docket Number A-55-18), that a lender that was both the transferee of a lost note affidavit and assignee of a mortgage, had the right to enforce both instruments.    

Facts of the Case
CitiMortgage, Inc., discovered the note was missing after the defendant, Javier Torres and his wife, defaulted under the terms of the note and mortgage. CitiMortgage had a digital copy of the note in its business records, which set forth its terms.  At some point thereafter, it executed a Lost Note Affidavit describing the search for the note, explaining its loss, and asserting that CitiMortgage remained “the lawful owner of the [n]ote.” CitiMortgage then assigned the mortgage and note to Investors Bank, who initiated the foreclosure action.  Throughout the litigation, defendants maintained that Investors Bank lacked standing because it could not enforce a lost note if it was not in possession when the note was lost.

The trial court determined that Investors had met all of the criteria for enforcement of a lost instrument under UCC§ 3-309. First, the digital copy of the note established its terms and second, that Investors Bank was able to enforce the note as it had been validly assigned the mortgage two months before filing the foreclosure action Finally, Investors Bank was required to  indemnify defendants against any liability in the event that a third party ever attempted to enforce the original note.   

On appeal, the Appellate Division affirmed, relying on a line of New Jersey cases that hold that a foreclosing mortgagee must either be in possession of the note or a valid assignment prior to commencing a foreclosure action.  The Appellate Division also relied on two statutes, N.J.S.A. 2A:25-1 and N.J.S.A. 46:9-9, favoring the free assignment of contractual rights absent any prohibition by operation of law or public policy.  In conjunction with the language of the Uniform Commercial Code, as adopted by the New Jersey Legislature, and invoking the principles of the equitable doctrine of unjust enrichment, it found that Investors Bank was entitled to foreclose.  

The Supreme Court of New Jersey granted defendants’ petition for certification. Amicus briefing and argument was also permitted by Legal Services of New Jersey, the Seton Hall Law School Center for Social Justice, and the New Jersey Business & Industry Association. 

Avoiding results that are "arbitrary, unworkable, and unfair" 
In its opinion, the Supreme Court agreed with the Appellate Division that New Jersey common law and statutory law under N.J.S.A. 2A:25-1 have long provided for the assignability of contractual rights with mortgage assignability specifically permitted under N.J.S.A. 46:9-9. The court then explained that N.J.S.A. 12A:3-301 allows a person to enforce an instrument they do not possess if they meet the standard set forth by section 3-309 of the New Jersey UCC, which closely tracks the original section 3-309 of the Uniform Commercial Code. 

N.J.S.A. 12A:3-301 and -309 are part of New Jersey’s adoption of the UCC. In 2002, after various jurisdictions interpreted their own UCC-based statutes to only allow enforcement by the holder of a note at the time it was lost or misplaced (while barring transferees from enforcing lost notes), the drafters of the UCC enacted an update to UCC §3-309 which specifically allows for a transferee to enforce a note lost by a predecessor-in-interest. UCC§ 3-309(a)(1)(B), cmt. 2 (2002).

In Torres, defendants argued that, because New Jersey’s legislature did not adopt the updated version of the UCC, it intended to prevent the enforceability of lost mortgage notes for transferees. The court rejected this argument, finding nothing in the plain language of N.J.S.A. 12A:3-309 suggesting an intention to undermine the assignability of mortgages under New Jersey common law, N.J.S.A. 2A:25-1 or N.J.S.A. 46:9-9. Further, the court determined that to find otherwise would “generate results that are arbitrary, unworkable, and unfair,” listing hypothetical examples such as barring the enforceability of mortgage notes that were misplaced by a single bank employee’s mistake or were lost in a fire or flood.

The court further addressed and affirmed the trial court’s decision to admit the Lost Note Affidavit under the business records exception to hearsay set forth in N.J.R.E. 803(c)(6). In so doing, the court first noted the Lost Note Affidavit was properly authenticated under N.J.R.E. 901 before rejecting defendants’ argument that Investors’ presentation of a CitiMortgage record made it inadmissible. The court then found the unknown passage of time between the discovery that the Note had been lost and the execution of the Affidavit was inconsequential as “the date of that discovery is unclear, and CitiMortgage’s representative certified that its business records are generally produced ‘at or near the time’ of the event ‘from information provided by persons with knowledge of the activity.”

Finally, the court declined to adopt Defendants’ position that the affidavit was inadmissible because it had been prepared in anticipation of litigation. After noting that the affidavit had been prepared well in advance of either the transfer of the note or the filing of the foreclosure action, the court ruled that, even if the affidavit had been prepared in anticipation of litigation, CitiMortgage had “no incentive to fabricate a claim that it lost the original note and has searched for it, to no avail.” Importantly, as the court noted, the parties did not dispute either the terms of the note or the accuracy of the digital copy of the note. Accordingly, the court agreed with the Appellate Division that the trial court’s consideration of the affidavit was not an abuse of discretion.

Based on its holding that N.J.S.A. 2A:25-1, N.J.S.A. 46:9-9, and New Jersey common law collectively allow for assignees of mortgages and transferees of lost mortgage notes to enforce the notes, the court examined the trial court’s granting Investors Bank’s motion for summary judgment. It found CitiMortgage had the right to enforce the lost note itself as well as the right to assign that right to Investors Bank. After finding the summary judgment record supported the valid assignment and enforceability of the lost note, the court noted that the trial court’s requirement that Investors Bank indemnify defendant Torres from future claims based on the lost Note satisfied N.J.S.A. 12A:3-309’s requirements of protection for the person required to pay the instrument from future claims based on that instrument.

Ultimately, the court affirmed the Appellate Division’s judgment as modified. In a footnote, the court declined to rely on the equitable principle of unjust enrichment in support of its decision, preferring to rely upon the statutory and common law support for same.

In rendering its ruling in Torres, the court has settled the enforceability of a lost mortgage note by an assignee of the party that lost the note, allowing assignees to enforce a lost note provided the entity that lost the note properly executes an affidavit setting forth the necessary facts. This clarity strengthens the rights of lenders and their assignees to enforce mortgage notes and helps borrowers and servicers avoid expensive and unnecessary litigation over what is now a nonissue.

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August 2020 e-Update

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