Assignor’s Loss of a Mortgage Note Does Not Preclude Foreclosure by an Assignee

Investors Bank v. Torres, 457 N.J. Super. 53 (App. Div. 2018).  In this foreclosure case, the plaintiff bank was the assignee of a note that was secured by a mortgage.  The note, however, was allegedly lost before plaintiff took the assignment of the note and mortgage.  Plaintiff’s assignor signed a “lost note affidavit” certifying that the note had been lost.  After defendant had stopped making required payments, plaintiff filed suit.

As Judge Moynihan recited in the Appellate Division’s opinion in this case, defendant “contend[ed] the plain language of N.J.S.A. 12A:3-309(a) [the Uniform Commercial Code] prohibits plaintiff’s enforcement of the note because plaintiff did not possess the note at the time it was lost.”  The Chancery Division disagreed and awarded plaintiff summary judgment.  The Appellate Division, applying de novo review, affirmed.

Applying settled principles of statutory interpretation, Judge Moynihan focused on the language of N.J.S.A. 12A:3-309.  Section (a) 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 the loss of possession occurred,” the loss of possession was not the result of a transfer by the would-be enforcer or a lawful seizure, and the person cannot reasonably obtain possession for reasons listed in the statute.  Defendant had acknowledged that plaintiff’s assignor was entitled to enforce the note at a time before the note was lost.

Though the statute did not say that an assignee would be able to step into the shoes of an assignor and assert the assignor’s enforcement rights, the panel here concluded that that was the right result.  Judge Moynihan recognized that some other courts, most notably Dennis Joslin Co., LLC v. Robinson Broadcasting Corp., 977 F. Supp. 491 (D.D.C. 1997), had reached the opposite result, finding that a plaintiff suing on a note had to be both “in possession of the note when it was lost and entitled to enforce the note when it was lost.”

But a post-Joslin amendment to section 309(a) made express that a person who “has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred” may enforce the instrument.  That amendment eliminated any need for the enforcer to possess, as opposed to owning, the instrument.

New Jersey did not adopt that amendment.  But Judge Moynihan found that legislative inaction to be a “weak reed” to lean on and a “poor beacon” to follow.  A number of factors, “grounded in both law and equity,” led to the conclusion that the statute, properly read, permitted plaintiff to enforce the note without possessing it.

One of those considerations was that section (b) of the statute states that “[a] person seeking enforcement of an instrument under subsection [(a)]  of this section must prove the terms of the instrument and the person’s right to enforce the instrument.”  There was no requirement of possession in this enforcement provision.

The panel’s result was consistent with common law principles of assignment, which Judge Moynihan noted were not superseded by the statute, since it was silent as to assignments.  The consistent understanding of the legal and business community also favored the outcome that the panel reached, as did the “strong tradition” of finding ways to allow assignees to bring suit.  That tradition vindicated the purpose of the Uniform Commercial Code to “permit the continued expansion of commercial practices through custom, usage, and agreement of the parties.”

Finally, Judge Moynihan said, a contrary result would be an absurd one, resulting in unjust enrichment.  Defendant, who had failed for years to make required payments under the note, would be allowed to remain in the mortgaged premises “obligation-free” despite that default.

Judge Moynihan also rejected defendant’s argument that the lost note affidavit had not been sufficiently authenticated.  It was proved “prima facie genuine” as required by Evidence Rule 901, it qualified as a business record, and the circumstances surrounding it were sufficient for authentication.