The highest court in New York won’t be deciding whether the Empire State is the only state that allows transferring a note and mortgage by written assignment without physical delivery or endorsement of the note, because the Second Circuit ducked the issue, thus avoiding certification of the question to the New York Court of Appeals.
A corporate debtor obtained loans from individual lenders who were given notes to evidence the debt and mortgages to secure the obligations. The notes were negotiable instruments.
When the debtor needed additional financing, the original lenders assigned their notes and mortgages to new lenders by using written assignments. Significantly, however, the original lenders did not endorse the old notes to the new lenders, nor did they deliver the old notes to the new lenders.
After the corporate borrower filed bankruptcy, the chapter 11 trustee sued in bankruptcy court, contending that the new lenders were unsecured creditors because they were not entitled to enforce the mortgages since the original lenders neither endorsed nor delivered the old notes.
The bankruptcy judge granted summary judgment in favor of the new lenders, upholding their rights as secured creditors. Chief District Judge Frank P. Geraci, Jr., of Rochester, N.Y., upheld the lower court in November. For ABI’s discussion of Judge Geraci’s opinion, click here.
The trustee appealed and lost again, in an unsigned, non-precedential opinion from the Second Circuit on May 31.
To avoid New York’s mortgage recording tax, the loans from the new lenders were structured with written assignments of the existing mortgages in favor of the original lenders. Based on decisional law, the transactional lawyers may have figured that assignments of the original notes were sufficient without either delivery or endorsement.
The new lenders were not “holders” of the new notes because there had been no delivery required by UCC § 3-202. In every state aside from New York, the new lenders would not have received a “transfer” of the notes because a revision to UCC §3-203 that says that an “instrument is transferred when it is delivered.” However, New York alone has not adopted the amendment.
The New York Court of Appeals, the highest court in the state court system, has not been called on to decide whether a written assignment of a note is sufficient to confer standing to foreclose the note and accompanying mortgage. However, according to the Second Circuit, some lower courts in New York have held there is standing to foreclose merely by having a written assignment of the note.
Unlike the district court, the Second Circuit did not make an Erie guess about how the New York Court of Appeals would rule on whether a written assignment of a mortgage note alone is sufficient. Instead, the circuit court scoured the record and decided that an effective transfer of the old notes was not necessary because the new loan was structured with documents that would suffice as new notes.
Combining the new notes with written assignments of the original mortgages, the Second Circuit held that the new lenders were holders of notes and mortgages and thus had standing to foreclose. As a result, the Second Circuit had no reason to consider the trustee’s request to certify the UCC question to the New York Court of Appeals.
Consequently, neither the Second Circuit nor the New York Court of Appeals has definitively held whether New York, indeed, is unique among the states when it comes to assignments of notes.