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On July 1, 2020, the Supreme Court of New Jersey issued a unanimous opinion in Investors Bank v. Javier Torres, Docket Number A-55-18, which served to clarify and confirm the right of an assignee to enforce a mortgage note that has been lost by its predecessor. The court found that plaintiff, the assignee of defendants' mortgage and transferee of the related note, had the right to enforce the note under New Jersey law. This holding settles the issue and allows lenders, their assignees, and borrowers to proceed in future cases without uncertainty over the impact of a lost note, provided certain proofs are available and submitted by the foreclosing plaintiff.

The facts in Torres were straightforward. CitiMortgage had lost the original promissory note (Note) signed by defendant Javier Torres, who had also executed a residential mortgage (Mortgage) with his wife, defendant Dora M. Dillman. CitiMortgage discovered the Note was missing after Torres defaulted under the Note's terms. CitiMortgage had a digital copy of the Note in its business records, which set forth the terms of the Note.

After determining the Note was lost, CitiMortgage 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 plaintiff Investors Bank. Investors Bank sought to enforce the Note and foreclose on the Mortgage by filing a foreclosure action. Defendants argued as an affirmative defense that Investors Bank could not enforce the Note because the original was lost.

Investors Bank moved for summary judgment after discovery, relying on the Lost Note Affidavit and the digital copy of the Note. Defendants opposed the motion for summary judgment, arguing that Investors Bank could not enforce the Note without proving possession of the Note. The trial court determined that the digital copy of the Note established its terms and Investors Bank was able to enforce the Note as Investors Bank had shown that it had been validly assigned the Mortgage two months before filing the foreclosure action. The trial court ultimately granted the motion for summary judgment but ordered Investors Bank to indemnify Torres if another party eventually finds and attempts to enforce the Note against him.

On appeal, the Appellate Division affirmed the trial court's decision, determining Investors Bank could enforce the Note under New Jersey common law, as well as the provisions embodied in N.J.S.A. 2A:25-1 and N.J.S.A. 46:9-9, which specifically permit assignments of contractual rights including mortgages. The Appellate Division rejected the defendants' argument that N.J.S.A. 12A:3-309, which adopts a provision of the Uniform Commercial Code (UCC), prohibits mortgage assignees and transferees of notes that have been lost from enforcing the terms of those notes. The Appellate Division noted New Jersey's common and statutory law was supplemented by the equitable principle of unjust enrichment. Relying on common law, the above statutory provisions, as well as the doctrine of unjust enrichment, the Appellate Division held that the plaintiff was entitled to foreclose. In its decision, the Appellate Division also opined that it would unjustly enrich defendants if plaintiff was precluded from enforcing the Note while defendants continued living in the residence without paying any of their obligations under the Mortgage.

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. In its opinion, the 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 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.

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 nor 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 avoid expensive and unnecessary litigation over what is now a nonissue.

Erin Hodgson is an associate with Day Pitney in Parsippany, focusing her practice on complex commercial disputes. Joy Harmon Sperling is a partner at the firm and chairs its Consumer Finance and Creditors' Rights group.