In my last article, I discussed whether inconsistent dates on a promissory note and deed of trust could cause problems in foreclosure.
But what if you can't even find the original promissory note? Perhaps it was inadvertently shredded, or perhaps it went missing during a merger or got misfiled. Whatever happened, your loan is in default, you have commenced foreclosure, and your borrower's defense is that you can't produce the note.
In In re Frucella, the North Carolina Court of Appeals recently held that in situations like these, all is not lost for creditors. The Frucellas borrowed money from The Lotham & Nettleton Co. to buy a home in 1985, signing a promissory note and deed of trust at closing. Over the years, the loan changed hands many times, eventually being acquired by CitiMortgage. When the Frucellas defaulted on the loan, CitiMortgage commenced a non-judicial foreclosure.
In a non-judicial foreclosure, North Carolina law requires the clerk of superior court to authorize a foreclosure sale if the lender establishes the existence of (1) a valid debt of which the party seeking to foreclose is the holder, (2) default, (3) the right to foreclose, (4) notice, (5) “home loan” classification and applicable pre-foreclosure notice, and (6) that the sale is not barred by the debtor’s military status. At a foreclosure hearing, a debtor can raise objections to these six findings.
At the Frucella foreclosure hearing, CitiMortgage revealed that it did not have the original note. The Frucellas argued that because CitiMortgage no longer possessed the original note, it failed to establish the requirement it was the "holder" of a valid debt. But in two lost note affidavits, CitiMortgage stated:
- When it lost possession of the original Note, it had the right to enforce the Note and Deed of Trust.
- Losing the original Note was not the result of it being assigned, endorsed, or delivered to another party, canceled, pledged, hypothecated or otherwise transferred, nor was the loss of possession the result of a lawful seizure of the Note.
- After a good faith, thorough, and diligent manual search, the hard copy collateral file pertaining to the Loan (which under CitiMortgage, Inc.’s regular business practice would be expected to contain the original note) was not located.
The Clerk of Court (and the Superior Court on appeal) allowed the foreclosure to proceed, and the North Carolina Court of Appeals affirmed their decisions.
The Court of Appeals held that under North Carolina's version of the Uniform Commercial Code, a party may enforce a lost instrument – like a promissory note – if they satisfy this three-part test:
- 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.
The Court of Appeals also held that a party can use affidavits as competent evidence to meet this test. Finding that CitiMortgage's affidavits passed the test, the Court of Appeals affirmed the foreclosure orders.
Lenders and debt buyers should pay particular attention to the first prong. You must first have possession of a note before you can lose it and then seek to enforce it. A critical fact is when the note is lost and who possessed it at the time. If you buy loan documents and the seller does not have the original note, you need the seller to provide you with a lost note affidavit that satisfies the three-part test.
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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.