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In recent months, embattled homeowners striving to fend off mortgage foreclosures have increasingly turned to the courts for relief. This has resulted in an emerging body of law involving the validity of the underlying loans. Because virtually all mortgages are assigned by the original lender soon after execution, questions concerning the validity of the assignment often arise. Thus, one particular avenue in which homeowners have enjoyed particular success in defending against foreclosure proceedings involves contesting the current noteholder’s standing to maintain a foreclosure action.
This point is well illustrated in Wells Fargo Bank, N.A. v. Ford, No. A‑3627‑06T1, 2011 WL 250561 (N.J. Super. Ct. App. Div. Jan. 28, 2011), a case recently decided by the Superior Court of New Jersey, Appellate Division. In that case, Sandra Ford executed a negotiable note on March 6, 2005 to secure repayment of $403,750 she had borrowed from Argent Mortgage Company and a mortgage on her New Jersey home, a transaction in connection with which Ford was alleging that Argent had engaged in fraudulent and predatory acts.
On March 11, 2005, Argent assigned the mortgage and note to Wells Fargo Bank, N.A. Ford defaulted on the loan, and, in July 2006, Wells Fargo instituted foreclosure proceedings. After various proceedings in the lower courts, Wells Fargo was granted summary judgment, and a final judgment of foreclosure was entered. The appellate division granted a stay on a scheduled sheriff’s sale of the property pending the outcome of Ford’s appeal.
Holding that Wells Fargo had “failed to establish its standing to pursue this foreclosure action,” the appellate division reversed the trial court’s order of summary judgment in Wells Fargo’s favor and remanded the case to the lower court. Id. at *3. In reaching this decision, the appellate division noted that in order to have a right to foreclose on a mortgage, the party seeking to foreclose “must own or control the underlying debt.” Id. (internal quotation marks omitted). Ford’s debt was evidenced by a negotiable note made payable to Argent. This note had originally been owned and controlled by Argent. Thus, the case turned upon the question as to “whether Wells Fargo established that it subsequently acquired ownership or control of the note from Argent.” Id.
Because the note Ford signed was a negotiable instrument, “the answer to this question is governed by Article III of the Uniform Commercial Code (UCC)[.]” Id. Under the 2002 version of U.C.C. § 3-301, three categories of persons are entitled to enforce a negotiable instrument: (1) the holder of the instrument; (2) a nonholder in possession of the instrument who has the rights of the holder; and (3) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to § 3-309 or § 3-418(d). Wells Fargo did not fall into any of these three classifications. Id. at *3-5.
To begin with, although Wells Fargo argued that it was the “holder” of Ford’s note within the meaning of the first classification, U.C.C. § 3-201(a) expressly provides that a person other than the one to whom a negotiable instrument is made payable may become a “holder” only if a “negotiation” of the instrument is made. The U.C.C. further specifies that “negotiation” requires both the transfer of possession of the instrument and its indorsement by the holder. U.C.C. § 3-201(b). Wells Fargo was unable to provide any evidence that the note had been properly indorsed by Argent. Wells Fargo Bank, 2011 WL 250561, at *3. As a result, Wells Fargo was not a “holder” within the first category of persons entitled to enforce a negotiable instrument. Id.
Wells Fargo also did not fall within the third category. Id. at *4. Section 3-309 concerns the enforcement of instruments which have been lost, destroyed, or stolen. Section 3-418(d), in turn, focuses on situations in which an instrument has been paid or accepted by mistake and the payor or acceptor recovers payment or revokes acceptance. Neither of those circumstances was involved in the Wells Fargo Bank case. Id.
Finally, under the circumstances, Wells Fargo could not be classified within the second category of persons entitled to enforce a negotiable instrument under U.C.C. § 3-301. Id. To support its right of foreclosure, Wells Fargo submitted a certification by attorney Josh Baxley, which stated that Wells Fargo “is still the holder and owner of the said Note/Bond and mortgage,” with a copy of the mortgage and note attached to the certification. Id. In addition, “Wells Fargo submitted a document that purported to be an assignment of the mortgage, which stated that it was an assignment of ‘the described Mortgage, together with certain note(s) described therein with all interest, all liens, and any rights due or to become due thereon.'” Id. The court found that if these documents had been properly authenticated, they might have been sufficient to establish that Wells Fargo did, in fact, fall within the second category of persons entitled to enforce an instrument. Id. Baxley’s certification, however, was not properly authenticated, because it did not allege that he had personal knowledge that Wells Fargo was the holder and owner of the note, nor did it indicate how he had obtained this alleged knowledge. Id. In addition, the purported assignment of the mortgage “was not authenticated in any manner; it was simply attached to a reply brief.” Id. at *5. The document should not have been considered in evidence “unless it was authenticated by an affidavit or certification based on personal knowledge.” Id.
Because Wells Fargo did not fall within any of the three classes of persons entitled to enforce a negotiable instrument under U.C.C. § 3-301, the appellate division concluded that Wells Fargo had not established its standing to pursue the foreclosure action by competent evidence. Id. Hence, the court reversed the grant of summary judgment and remanded the case to the trial court. Id.
Although in dicta, the appellate division then went on to provide some “guidance for the trial court in the event Wells Fargo is able to establish its standing on remand.” Id. In this respect, the court noted that even if Wells Fargo were to produce an indorsed copy of the note from Argent on remand, it would not necessarily follow that Wells Fargo would become a “holder in due course” under U.C.C. § 3-203. Id. Only a holder in due course could avoid any defenses Ford would have to a claim by Argent to enforce the note. Id. To be classified as a holder in due course, Wells Fargo could not have known of Ford’s defenses against Argent. Id. This, in turn, would mandate that the indorsement have occurred near the date the original note was executed. Id.
As Wells Fargo Bank demonstrates, courts will not allow an assignee of a mortgage note to foreclose upon the property unless the assignee is able to show that it falls into one of the three categories of persons entitled to enforce a negotiable instrument under U.C.C. § 3-301. In most cases, the original mortgage note is payable to a specific lender. For such a note to be validly negotiated, that lender must properly indorse the note either in blank or specially to the assignee. In addition, the indorsement should have been executed at or near the time the original note was executed. Moreover, in several states, the indorsement must also be affixed to the original note. Unless each of these requirements is satisfied, the assignee lacks standing to pursue a foreclosure action. See, e.g., In re Weisband, 427 B.R. 13, 18-21 (Bankr. D. Ariz. 2010); In re Willhelm, 407 B.R. 392, 402-03 (Bankr. D. Idaho 2009).