Clearing the Confusion: Misplaced Notes and Allonges

In a complex commercial financing, efforts to reduce liability for New York's mortgage recording tax result in long chains of active promissory notes encompassing a number of financings over decades. Some of the original notes may be missing altogether or may have been improperly endorsed along the way. Since ownership of the notes is critical to a party's ability to enforce the borrower's obligations, practitioners focus on confirming that possession of the notes themselves and the chain of ownership is clear.

While a review of note endorsements obviously aids this effort, until recently, the prevalent practice among lenders was to transfer notes by physical delivery, without any form of endorsement. Though customary, and in fact, not prejudicial, this practice creates deficiencies that can be problematic for the national commercial mortgage-backed securities (CMBS) industry. Despite the uncertainties attendant to incomplete loan documentation, lenders may rely on consolidated notes and language in assignments of mortgage documents to shore up any gaps in physical possession of the note.