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Bank of America, NA v. Alvarado

BER-F-47941-08 (N.J. Super. Ch. Div. 2011) (Unpublished)

FORECLOSURE; MORTGAGES; NOTES; UCC — Under the Uniform Commercial Code, a person not in possession of note is entitled to enforce the note if that person possessed the note and was entitled to enforce it when it was lost; thus, a mortgage foreclosure proceeding can go forward based on the foreclosing party holding a proper affidavit of lost note.

A homeowner executed a note and gave a mortgage to its lender, secured by a residential property, and then defaulted on the loan. The lender’s successor in interest commenced a foreclosure proceeding, and the homeowner challenged the successor’s claim that it had the right to foreclose. Specifically, the homeowner argued the successor had not established that it was in possession of the note at the time the foreclosure complaint was filed. The successor subsequently conceded that it was not in possession of the note because the note had been lost by the lender before the loan obligation was transferred to it.

The successor presented an affidavit of lost note, dated four years earlier. Under the New Jersey Uniform Commercial Code (UCC), a person not in possession of an instrument is entitled to enforce the instrument if the person possessed the instrument and was entitled to enforce it when it was lost. The Court held this section did not preclude enforcement of a lost note by the successor or assignee of the one who lost the instrument. Barring enforcement would otherwise lead to a result that no entity could enforce the defaulted note obligation, and would lead to a windfall to a borrower. To the Court, this would be inequitable.

As a result, the Court entered a default judgment and allowed the foreclosure action to proceed. It held the UCC did not displace common law principles of law and equity, such as the doctrine of unjust enrichment, which is based on the equitable principle that one party should not be allowed to enrich itself unjustly at the expense of the other. In this case, the homeowner admitted that she had not made loan payments for two years. To preclude enforcement of that obligation by the successor, whose predecessor paid valuable consideration to acquire that right from the original lender, would have unjustly enriched the homeowner.

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