New York is unique among the states in that it allows transfer of a note and mortgage by written assignment without physical delivery, according to an opinion by Chief District Judge Frank P. Geraci, Jr., of Rochester, N.Y., upholding a decision by Bankruptcy Judge Paul R. Warren.
The “judge got it right,” Prof. Bruce A. Markell of Northwestern Univ. Pritzker School of Law told ABI in an e-mail. The judge has a “good understanding of Article 3” of the Uniform Commercial Code, Prof. Markell said.
Before bankruptcy, the corporate debtor obtained loans from lenders who in return were given notes and mortgages. Concededly, the notes were negotiable instruments.
So that the debtor could obtain additional financing, the original lenders assigned their notes and mortgages to new lenders by using written assignments. However, the original lenders did not endorse the notes to the new lenders, nor did they deliver the notes to the new lenders.
The chapter 11 trustee filed a lawsuit in bankruptcy court contending that the new lenders were not entitled to enforce the mortgages and were unsecured creditors because the original lenders neither endorsed nor delivered the notes.
The bankruptcy judge granted summary judgment in favor of the new lenders, and Chief Judge Geraci upheld the lower courts in his Nov. 18 opinion.
Judge Geraci said there are two potentially applicable provisions in the New York Uniform Commercial Code, or NYUCC. If the instrument is payable to order or payable to holder, Section 3-202 provides that negotiation by delivery makes the transferee the holder.
Consequently, the new lenders were not holders of the notes.
The other applicable provision is NYUCC § 3-201, which provides that “transfer of an instrument vests in the transferee such rights as the transferor has therein.” The NYUCC, however, does not define “transfer.”
Similarly, the New York Court of Appeals has not defined “transfer” in the NYUCC context. Judge Geraci said his burden was to make a so-called Erie guess and decide how New York’s highest court would interpret Section 3-201.
If the New York legislature had intended to require delivery for all transfers, “presumably they would have used” language in Section 3-201 similar to Section 3-202, Judge Geraci said. By not using the same language, “the legislature may have intended the term ‘transfer’ under Section 3-201 to be a catch-all for otherwise valid conveyances that do not satisfy the prerequisites for negotiation under Section 3-202.”
Lower courts in New York, Judge Geraci said, consistently hold that a plaintiff has standing to enforce a mortgage if it is the holder or assignee of the note and mortgage.
The law in every other state is different, Judge Geraci said, because all states apart from New York have adopted a revision to Section 3-203 that says that an “instrument is transferred when it is delivered.” If the New York legislature had intended to require delivery to effect a transfer, Judge Geraci said that the state would have adopted the amendment.
Because the new lenders therefore had power to enforce the notes, they automatically had the right to enforce the mortgages, Judge Geraci said.
Although “it’s been eight years since the 2008 meltdown, we are still getting these cases,” Prof. Markell remarked.