On Nov. 16, 2018, the New Jersey Appellate Division issued an opinion in the matter of Investors Bank v. Torres, Docket No. A-3029-16T4, which involved the appeal of an order granting summary judgment in a residential foreclosure matter. The Appellate Division affirmed the trial court's order granting the plaintiff's motion for summary judgment. The issue on appeal was whether standing could be established through a lost note affidavit when the note was lost prior to the assignment to the plaintiff. The court concluded that the holder of a lost note affidavit has standing to commence a foreclosure action, as long as the lost note affidavit was executed by the entity that was entitled to enforce the note when the loss occurred.

The facts of the case were as follows. The loan at issue was originated by ABN AMRP Mortgage Group (“ABN”). CitiMortgage (“Citi”) acquired the note and mortgage through its merger with ABN and subsequently assigned the note to plaintiff Investors Bank (“Plaintiff”). Citi lost the note before it was assigned to Plaintiff, and a Citi representative executed a lost note affidavit which stated that the note was “misplaced, lost, or destroyed” after execution by the defendant and after the original note was delivered to Citi (the “Lost Note Affidavit”). The language of the Lost Note Affidavit specified that, “after a thorough and diligent search, which consisted of [searching] loan files and imaged documents,” the original note could not be found. The Lost Note Affidavit was executed more than a year before the loan was assigned to Plaintiff.

On appeal, the borrower argued that Plaintiff lacked standing to commence the foreclosure action as it never owned or controlled the underlying debt because, in part, the note was lost before it was assigned to Plaintiff. The court rejected this argument and found that the Lost Note Affidavit, executed prior to the assignment to Plaintiff, was sufficient to establish Plaintiff's standing in the foreclosure action. In reaching that conclusion, the Appellate Division relied on N.J.S.A. §12A:3-309, which provides:

(a) 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, the loss of possession was not the result of a transfer by the person or a lawful seizure, and the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.

(b) 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. If that proof is made, 12A:3-308 applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.

In interpreting this statute, the Appellate Division determined that, under N.J.S.A. §12A:3-309, “a person who was both in possession of a note and entitled to enforce it when the loss occurred may enforce that note and may transfer that right to another.” (Citations omitted.) The subsequent transferee only needs to prove the terms of the instrument and the right to enforce it, under N.J.S.A. §12A:3-309(b). The court went on to hold that the transferee of a lost note has standing under subsection (a) of 3-309, as long as the entity which claims to have lost the note possessed it and was entitled to enforce it when the loss took place.

In arriving at this holding, the court considered the legislative intent of N.J.S.A. §12A:3-309, and found that its holding was consistent with other New Jersey Uniform Commercial Code (UCC) provisions. The court noted:

[p]ermitting the transfer of a lost note promotes [New Jersey's] UCC's purpose of expanding commercial practices of contract-parties such as Citi and plaintiff, which intended the transfer of rights to enforce the lost note along with the assignment of defendant's mortgage … [and it] is also consistent with equitable principles that guard against unjust enrichment.

The Appellate Division observed that, when drafting N.J.S.A. §12A:3-309(b), the legislature did not require the entity attempting to enforce the note to prove its possession of the note, as is required under N.J.S.A. §12A:3-309(a), thereby supporting the court's holding that “a lost note may be transferred by a person who meets subsection (a)'s criteria, and that instrument may be enforced by a transferee who meets subsection (b)'s requirements.” This interpretation of the statute is also consistent with the general principles of assignments of mortgages, which allow the assignor to transfer the totality of its rights, including its right to enforce the note, to the assignee.

The court acknowledged that Section 3-309 of the UCC, on which New Jersey's statute is based, was amended in 2002 to expressly state 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” has the right to enforce the instrument, thereby eliminating the possession requirement. U.C.C. §3-309(a)(1)(B). The court did not interpret the New Jersey Legislature's failure to adopt the amendment as a signal of legislative intent to preclude a transferee of a lost note from enforcing the note itself.

In reaching its holding, the court further reasoned that to adopt the borrower's argument would not only deprive foreclosure plaintiffs of their bargained for benefits, but would produce “an absurd result” as it would allow borrowers to stay in mortgaged premises without making their required payments. The court concluded that it would be unjust to preclude Plaintiff from enforcing the borrower's obligations, which the borrower had already disregarded for more than eight years.

The court also rejected the defendant's attacks on the sufficiency of the Lost Note Affidavit and concluded that it was, in fact, admissible and properly authenticated because it was signed before a notary public. The Lost Note Affidavit was also qualified as a business record because it was reviewed by Citi's vice-president who was an individual familiar with the business records maintained by Citi and certified that the pre-requisites under N.J.R.Evid. 803(c)(6) were met to qualify it as a business records.

The borrower's remaining arguments regarding the trial court's application of the summary judgment standard and any issues regarding alleged discrepancies in an interrogatory response provided by Citi's predecessor were also rejected. The Appellate Division ultimately concluded that the borrower failed to present any evidence of a genuine issue of fact for trial.

Courts in other jurisdictions are divided on this precise issue of whether a current plaintiff must have been the entity that lost the note in order to enforce the mortgage. Given the New Jersey Appellate Division's holding in this case, lenders seeking to enforce mortgages in New Jersey now have clarity as to where New Jersey courts stand in that divide.

Joy Harmon Sperling is a partner with Day Pitney in Parsippany, chairing the firm's Consumer Finance and Creditors' Rights group. Christina Parlapiano is a partner whose practice spans a wide range of litigation. Michelle Moshe is a staff attorney who represents mortgage and loan servicers in complex consumer finance litigation.