By: Ronald S. Deutsch, Esq. and Richard Solomon, Esq.
Cohn, Goldberg & Deutsch, LLC
USFN Member (DC, MD)

Somewhere out there, lost notes occupy a forgotten drawer and outnumber the inventory of songs. What effect does this have on the foreclosure process?

Rule 14-207(b)(3) of the Maryland Rules of Procedure provides that in an action to foreclose, the complaint or order to docket shall … be accompanied by … “a copy of any separate note or other debt instrument….” If the note was transferred from the original payee, as a matter of court practice, the note must additionally be properly endorsed to establish the transfer of the right to enforce it, in a foreclosure proceeding.

Many notes are endorsed in “blank,” or alternatively, name a specific payee. These endorsements are typically found on the back of the note or contained on an “Allonge.” Endorsements are often scrutinized by courts and borrowers in attacks on the right to enforce.

How does one handle the situation where all assignments of the security instrument have been recorded but an endorsement is missing on the Note? A conclusive presumption exists under Md. Ann. Code, Real Property Section 7-103(a) that the title to any promissory note is vested in the person holding the record title to the “mortgage.” Will this conclusive presumption cited above cure the missing endorsement situation? The answer may possibly be found in Le Brun v Prosise, 197 Md. 466, 79 A.2d 543 (1951), which held that a deed of trust “need not, and properly speaking cannot be assigned like a mortgage.” If so, does the conclusive presumption in Section 7-103(a) apply to Deeds of Trust? As this is unclear, the conclusive presumption may, therefore, provide very limited comfort to a party relying on the recorded assignment to cure a missing endorsement. It should be noted that likely, more than 95% of all security instruments in Maryland are deeds of trusts, and mortgages are generally only used, as a matter of local practice in Baltimore City.

What if the original note is lost but the noteholder has a copy that can be filed in the foreclosure action? Under Maryland law, the courts may accept a lost note affidavit from the party who lost the note if the affidavit 1) identifies the owner of the debt and it states from whom and the date on which the owner acquired ownership; 2) states why a copy of the debt instrument cannot be produced and 3) describes the good faith efforts made to produce a copy of the debt instrument. In general, a person claiming to be a holder of a note must 1) establish a foundation for the admission of the evidence of the note and, if so established, 2) provide proof of the execution and contents of the instrument and 3) satisfy the court that the maker of the note is adequately protected against loss that might occur by reason of a claim by another person. Adequate protection may be provided by any reasonable means e.g. the posting of a bond.

The more difficult scenario is where a note has been lost and the Assignee purchases it from the Assignor or someone else in the chain who lost it. In most states, including Maryland, the version of Section 3-309 of the Uniform Commercial Code (UCC) adopted provides that persons seeking to establish a lost, destroyed, or stolen instrument by secondary evidence must first show that:

(i) The person was in possession of the instrument and entitled to enforce it when loss of possession occurred; (ii) the loss of possession was not the result of a transfer by the person or a lawful seizure, and (iii) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.

What is problematic in the statutory language is that if a creditor was NOT in possession of the note when it was lost, then the creditor cannot enforce it.

One lead case was decided in the District of Columbia. In Dennis Joslin Company, LLC v. Robinson Broadcasting Corp. 977 F. Supp. 491 (D.C. Cir. 1997) the federal court held that under the DC version of 3-309, in effect at the time, the assignee of the prior creditor could not enforce a note, since the note was lost by the prior creditor and not by the party seeking to enforce the note. This had the unfortunate result that the assignee could not collect a note with a balance of more than one million dollars.

The former version of Section 3-309, as interpreted by Joslin, was adopted by the District of Columbia when it originally adopted Article 3 of the Uniform Commercial Code. Prior to the adoption of Article 3, the section governing lost instruments provided that the “the owner of an instrument which is lost, whether by theft or otherwise, may maintain an action in his own name, and recover from any party liable thereon upon due proof of his ownership, the facts which prevent his production of the instrument and its terms.” The decision in Joslin caused a split in many state and federal courts over the interpretation of the provision. Some courts followed the literal holding in Joslin. (WV, CT, FL). Other courts disagreed with Joslin’s holding (5th Cir., TX, MN, NJ, NH, and PA). These courts held that the right to enforce could be assigned along with the assignment of the note.

To resolve this dispute section 3-309 of the Uniform Commercial Code was subsequently amended to omit the possession requirement, and to require only an entitlement to enforce the instrument when the instrument was lost, or the acquisition of ownership from a person who was so entitled, either directly or indirectly. The 2002 revision of section 3-309 states in part:

a) A person not in possession of an instrument is entitled to enforce the instrument if: (1) The person seeking to enforce the instrument (a) was entitled to enforce the instrument when loss of possession occurred, or(b) had directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred;
At least eighteen states and the District of Columbia (but not Maryland) have substantially adopted the 2002 amendment to the UCC, thereby eliminating the possession requirement under Section 3-309. Those states include Alabama, Arkansas, Florida, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, Ohio, Oklahoma, South Carolina, Tennessee, and Texas. In doing so, those states have explicitly rejected the reasoning of the Joslin holding. Additionally, despite not adopting the 2002 amendment, New Jersey recently held the right to enforce a note can be transferred by the party who lost the note to the assignee who was not in possession. Investor’s Bank v. Torres, 197 A. 3d 686, 457 N.J. Super. 53 (N.J. Super. Ct. App. Div 2018). To allow otherwise, the court reasoned, would violate the equitable principle of unjust enrichment. The District of Columbia, in response to the Joslin case, adopted the 2002 amendment and rejected the reasoning of the court. Many states, however, including Maryland, which adopted the original version of Section 3-309 have failed to either adopt the amended version or interpret the original version in accord with Torres, so the landmine remains.

Because of the complexity in the law for enforcing a note, it is critical that lenders and servicers maintain adequate controls of loan documentation. Moreover, when purchasing loans, the purchase agreements should provide for the seller’s repurchase of any loan that cannot be enforced due to lost notes of missing endorsements.