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The Lost Note Defense - Appeals Court Allows Testimony In Lieu of Note

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The Appeals Court Holding

The decision in Tropicana Atlantic City Corp. v. M&J at Melrose LLC, 2014 N.J. Super. Unpub. LEXIS 221 (App. Div. Feb. 6, 2014), just came down from the appellate division.  M&J failed to make a payment due on a Note to Tropicana Entertainment, LLC.  Plaintiff, Tropicana Entertainment, LLC could not locate the original Note.  Plaintiff’s in-house counsel, Tama Hughes testified at deposition that Tropicana acquired the Note “through an assignment and assumption through the sale of bankruptcy.” 

Subsequently, Tropicana produced a Certification of Lost Note and accompanying Mortgage and stated that the original Note was “inadvertently and mistakenly either lost or destroyed.  Diligent efforts have been made to locate the original [N]ote which to date have been unsuccessful.”  The trial court credited this deposition testimony and found it to be satisfactory evidence that Tropicana Atlantic City Corp. received a transfer. 

The Appeals Court analyzed this proof of standing under N.J.S.A. 12A:3-309 of the New Jersey Uniform Commercial Code, which states, “[T]he loss of possession [must] not [be] the result of a transfer by the person or a lawful seizure.” N.J.S.A. 12A:3-309.  “An entity seeking enforcement under this subsection must prove (1) the terms of the instrument and (2) the entities’ right to enforce the instrument.” N.J.S.A. 12A:3-309(b).  “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. Id.

The Court found production of a copy of the Note as persuasive evidence that satisfied N.J.S.A. 12A:3-309.

Application to Residential Foreclosures

The “produce the Note defense” is all but dead.  If the lender cannot produce the original Note in the litigation, they must provide evidence, by way of testimony, that establishes “nonholder in possession” status.  To prove this, the lender must show it had possession of the Note and was assigned rights in the Note prior to commencing the litigation.  In this regard, trial courts in New Jersey are increasingly willing to accept a recorded assignment as sufficient evidence of standing.

Increasingly, lenders use Document Retention or Foreclosure Reviewer testimony from the Servicer to establish transfer of the Note prior to the initiation of litigation.  In most cases, the trial courts will accept this testimony.  The one exception is when there is a true question of standing supported by a third-party claiming ownership.

How to Deal With the Court’s Low Standards for Establishing Standing

If you have had your loan passed around like a hot potato, you know the frustration of sending in countless modification packets to one lender/servicer, only to get a letter that a new party has stepped into their shoes.  Now the process must start anew.

The trial courts in New Jersey turn a blind eye to these tactics in the ordinary course.  To prevail, you must show the Court that you have made payments and/or offered terms to the bank and received promises from the bank to modify or rehabilitate the loan.  Simply relying on the “show me the Note” defense without also showing genuine and diligent efforts to rehabilitate or modify is not powerful. 

However, the “show the Note” defense can work in combination with a real third-party claim from another lender.  If you are getting multiple communications about your bank from different servicers or different lenders at the same time – save them!  You need to show this overlap and confusion if it exists.  It’s your home!  You should be a detective who is gathering evidence to turn over to your attorney, so you can make the case to the Court.  Don’t think that the judge will grant you victory just because the bank is disorganized.  This isn’t a “gotcha” regime.  You have to show a real dispute about who owns the Note.  If you can’t, don’t rely on these technical defenses.

The “show the Note” defense can also work in combination with detailed proof of efforts to rehabilitate or modify.  Get everything in writing!  Keep a contemporaneous log of all contacts with the bank, who you spoke to and what you were told!  These are the holy grail of showing that the bank failed to deal with your efforts in good faith.  The trial judge hates to see citizens treated unfairly under the law.  They know that you’ve been treated unfairly by the bank’s byzantine practices, but it is ON YOU to show the proof and show what you were told and what was agreed to.  It’s your house!  If you show the judge you’ve taken efforts to fix the problem, the judge will come to your aid.  But, don’t expect the trial judge to do your job for you. 

If you don’t take determined action showing your unwavering intent to keep your house, through constant communication with the bank, don’t expect the trial judge to feel sorry for you.  It is your home!  You are behind!  It is up to you to show you’ve done everything possible to make something happen.  It is a bit unfair, and dealing with bank loss mitigation departments is excruciating, but if you do the work, it will pay huge dividends later.  If you do nothing, the trial judge will assume you don’t care what happens and are just delaying the inevitable.  The trial judges see hundreds of cases where homeowners get behind on their loans and go months or years with virtually no concrete evidence of all the efforts they’ve made to rectify the problem.  This makes the judge think you don’t intend to bring the loan back into good standing, that you are just delaying the inevitable, and probably never had any intention of paying the loan in the first place.  Trial judges are human.  They want to see proof that you went above and beyond the call of duty.  You have to show that you stand out from the crowd and you are not another deadbeat homeowner looking for free rent while the foreclosure process takes its course.  Show the judge you have communicated with the bank and tried to work things out and you will win them to your cause much more effectively than by relying on technical “gotcha” rules.

Yes, the banks made bad loans.  Yes, they took advantage of millions of innocent homeowners.  Yes, they make it nearly impossible to get any meaningful response about workout options.  The trial judge knows all of this.  But it is your job to show that you hit an impassable wall of resistance and the bank seemed hell-bent on taking your home rather than negotiating with you fairly.  Only then will the trial judge hold the bank’s feet to the fire and employ technical rules designed primarily to deal with genuine disputes and situations where promises were not kept.  Mere missing paperwork is not a strong enough argument to sway most trial judges, and the banks are too smart not to get the kind of testimony the Plainitff produced in Tropicana Atlantic City Corp., so don’t pin your hopes on the bank failing to come up with sufficient proof – be proactive and SHOW the trial judge you’ve fought tooth and nail, day and night, giving no quarter to try and save your home.

You must show the trial court YOU were the one standing up to rectify the delinquency in the loan and that YOU made the effort, including sending payments, in an attempt to bring yourself into good standing and THE BANK was the one who failed to negotiate fairly or follow-through on promises, or made unreasonable demands.

The trial judge is not a technocrat.  Trial judges will not give you a windfall because of a small defect in bank paperwork or document retention strategies.  But, if they see a struggling homeowner in distress that has done everything right to help themselves, who has made late payments and proposed modifications and sent in packages and received promises from the bank and has mercilessly communicated a desire to workout the delinquent loan balance – the judge will then step in to a mediation role and try to resolve the dispute by taking the bank to task.

The old adage goes that “God helps those who help themselves.”  The trial judge is the God of your foreclosure case, and the trial judge follows the same rule.

Category: Foreclosure Law


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