New Jersey Courts Require Original Note and Endorsements in Mortgage Lending Proceedings

New Jersey courts keep putting the screws to mortgage lenders in bankruptcies and foreclosures.

The recent In re Kemp, 440 B.R. 624 (Bkrtcy D.N.J. 2010) and Bank of New York v. Raftogianis, 10 A.3d 236 (N.J. Super. Ch. 2010) opinions refused to let a “securitized” mortgage proof of claim or foreclosure proceed without demonstrable possession of the note at “filing” or satisfying New Jersey’s Uniform Commercial Code (“UCC”) requirements.

In re Kemp involved a Countrywide Home Loans securitized mortgage loan, i.e., pooled with other mortgages into a trust consisting of mortgage loans and proceeds, that was sold to the Bank of New York as trustee. Although the pooling agreement stated that the note would be transferred with an appropriate endorsement, neither the transfer nor endorsement occurred.

After borrower filed for Chapter 13 bankruptcy, Countrywide filed a proof of claim acting as Bank of New York’s servicer but did not locate the note until trial and the endorsement, via execution of an “allonge” that is supposed to be affixed to the note, did not occur until several weeks before trial.

The In re Kemp court disallowed the proof of claim ruling that the note could not be enforced because UCC-required possession and endorsement were lacking and, while reflecting ownership, the recorded mortgage assignment did not transfer enforcement rights because the note memorializing the underlying debt was not transferred or endorsed to the Bank of New York when the mortgage was assigned.

Similarly, Bank of New York v. Raftogianis also involved a securitized mortgage loan winding up in the Bank of New York as trustee’s hands.

After the borrower defaulted, the bank filed the foreclosure and moved for summary judgment, but did not present the original note until oral argument and arguing that New Jersey Rule of Court Rule 4:34-3 allowed a case to continue by the original party following a transfer of interest.

In denying summary judgment, the Raftogianis Court held that Rule 4:34-3 did not apply in actions involving negotiable instruments like mortgage notes where plaintiffs should be able to establish possession of the note at the complaint’s filing or face dismissal.

After holding that the bank failed to prove it had the original note at the case’s filing and refusing a presumption of “possession at filing” based on bank’s ability to produce the note at trial, the Bank of New York v. Raftogianis court dismissed the foreclosure without prejudice specifying that the re-filed complaint must contain a certification confirming possession of the original note as of re-filing date and stating note’s physical location and name of entity in possession.

Both opinions reflect the increasing level of scrutiny to which mortgage lender are being subjected in New Jersey proceedings and the decreasing level playing field in which banks must defend their interests.