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Bank of New York v. Raftogianis

417 N.J. Super. 467, 10 A.3d 236 (Ch. Div. 2010)

MORTGAGES; FORECLOSURE; NOTES; UCC — Under the Uniform Commercial Code, a party seeking to enforce a note must have taken delivery of the note beforehand and, consequently, a foreclosing plaintiff has the burden to establish that it had possession of the note prior to filing the foreclosure complaint.

A borrower took a mortgage loan to purchase a home. While the note listed the lender as the payee, the mortgage listed the mortgagee as “Mortgage Electronic Registration System” (MERS) as the lender’s nominee. The note and mortgage were subsequently pooled with many other loans and “securitized” without notice to the borrower. After the securitization, the new lender was a trustee on behalf of the bondholders who purchased bonds for that pool of loans. When the borrower defaulted, the trustee filed a foreclosure complaint to foreclose the mortgage. The borrower challenged the trustee’s right to proceed with the foreclosure.

The borrower argued that since the note was made payable to the original lender, but the mortgage was in the name of MERS as “nominee” for the original lender, the note and mortgage were held by separate entities. Therefore, under that theory, MERS, as the holder of the mortgage, but not the note, could not assign the note to the trustee. The Court, however, disagreed with the borrower. The Court found that the note was clearly payable to the original lender. The mortgage, while in the name of MERS, was owned by the lender using MERS as its nominee. The purpose of recording the mortgage in the name of MERS was to facilitate future transfers of the mortgage from the original lender to other lenders without being required to record multiple assignments of the mortgage. But, at all times, it was intended that the original lender would be the owner of both the note and the mortgage until the time the loan was securitized.

The Court, however, was concerned with the timing of the trustee’s acquisition of the note. It found that the trustee could not proceed with the foreclosure unless it could prove that it had possession of the note before it filed the complaint. A mortgage secures the payment of the obligations in the note. In order to foreclose the mortgage, the trustee must also be the holder note. However, the Court noted that under the Uniform Commercial Code, the note has to have been delivered to the trustee in order that the trustee will have the right to enforce it. The transfer is effectuated by the physical delivery of the note. In the context of the foreclosure, the trustee had to establish that it had possession of the note as of the date it filed the complaint. The Court rejected the trustee’s argument that it was entitled to a presumption that it was in possession of the note at the time it filed the complaint based on its ability to produce the note at the time of trial. The Court reviewed the affidavits of the trustee, the securitization transaction documents, and the schedules. Based on those documents, it was not clear to the Court when the trustee actually secured possession of note. The Court did not find it unreasonable to impose the burden on the trustee to establish that it had possession of the note prior to filing the complaint. The Court dismissed the complaint, without prejudice, and permitted the lender to file a new complaint as long as it contained a certification confirming that at the time of filing the lender had possession of the note.

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