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Picatinny Federal Credit Union v. Federal National Mortgage Association

2011 WL 1337507 (U.S. Dist. Ct. D. N.J. 2011) (Unpublished)

NOTES; HOLDER IN DUE COURSE — A party that takes possession of a negotiable note through the purported agent of the prior holder has the burden to show that the purported agent had actual or apparent authority because if that is the not the case, then the possessor of the note is not a holder in due course.

A federally chartered credit union began making first mortgage loans to its members. It retained a company to originate, process, underwrite, close, and then service the loans. In addition, the credit union allowed the company to hold its original promissory notes. At some point, the servicing company’s chief operating officer announced to the credit union that he was forming his own company and could offer reduced pricing for the same services. Thereafter, the credit union selected the new company as its mortgage loan originator and servicer. In addition, the new company was to assist the credit union in selling its loans to the secondary market. The new company was a wholly owned subsidiary of a mortgage seller/servicer of loans to FannieMae.

At a point in time, the credit union learned from sources that the mortgage seller/servicer had sold certain credit union loans to FannieMae without the credit union’s knowledge or authorization, and did not remit the loan proceeds to the credit union. The credit union sued to recover these loans from FannieMae. FannieMae primarily took the position that it was a holder in due course who took the notes in good faith. During the course of litigation, both parties filed respective motions for summary judgment.

The United States District Court first addressed whether the mortgage seller/servicer had the apparent authority to indorse the notes to FannieMae. It found a factual dispute as to whether the credit union voluntarily placed the mortgage seller/servicer in a situation where it would appear to a person of ordinary prudence that the seller/servicer was the credit union’s agent with the authority to sell the notes in the secondary market. The credit union entered into a contract only with the wholly owned subsidiary of the mortgage seller, and there was evidence to suggest that FannieMae knew, or should have known, that the owner of the mortgage seller/servicer was never an assistant vice president of the credit union for purposes of indorsement. The evidence also seemed to show that the mortgage seller/servicer, in other instances, had been authorized by the credit union to sell its notes in the secondary market and was actually in possession of the original notes. Therefore, the Court could not conclude that, as a matter of law, the mortgage seller/servicer acted with apparent authority, and so denied summary judgment on this issue.

The Court next addressed whether the notes were actually negotiable instruments. The court said this turned upon whether the mortgage seller/servicer had apparent authority. If it had such authority, it could be concluded that the seller/servicer was a holder of the note. As there were disputes of fact as to apparent authority, the court denied summary judgment on this issue.

The Court also denied summary judgment on the issue of whether FannieMae was a holder in due course because there were factual disputes whether it had taken the notes in good faith. The credit union alleged that FannieMae had notice that the signatures on the governing documents were unauthorized, and yet continued to purchase loans from the mortgage seller/servicer.

Lastly, the Court denied summary judgment as to whether FannieMae’s affirmative defenses of waiver and estoppel were meritorious, based upon a pled allegation that the credit union’s actions were careless in causing FannieMae to believe that the mortgage seller/servicer was its agent, thereby justifying FannieMae’s purchase of loans.. The Court held that it could not conclude, as a matter of law, that the credit union was careless, because to do so required a finding of fact.

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