The New Jersey Supreme Court allowed a bank to foreclose on property without direct evidence that it had the right to foreclose. Ordinarily, the foreclosing entity must produce the note that memorializes the underlying debt. The UCC allows foreclosure when notes have been lost, UCC 3-309, if a “lost note affidavit” is filed with the court. In Investors Bank v. Torres, 2020 WL 3550701 (N.J. July 1, 2020), the homeowner borrowed money from one lender who filed a foreclosure action but subsequently dismissed that action and later executed a lost note affidavit. It then assigned the note and the mortgage to a second lender who brought foreclosure proceedings based on the lost note affidavit of the prior lender.

Some courts have held that a lost note affidavit must state that the party attempting to enforce the note is the party that lost the note. See Dennis Joslin Co., LLC v. Robinson Broadcasting Corp., 977 F. Supp. 491 (D.D.C. 1997). After cases like that were decided, the UCC was amended in 2002 to recognize a right to enforce the note if a person acquired the right from another person who was entitled to enforce the note when loss of possession of the note occurred. But the problem was that New Jersey had not yet adopted that change in the UCC. But never mind, the New Jersey Supreme Court interpreted the UCC as if it had already been expanded to include the new UCC provision.

It held that obligations are assignable and if the current owner of the note were not able to enforce it that this would give the borrowers a “free ride” and exempt them from their obligations to make payments om the note.

One of the world experts on real estate, Prof Dale Whitman, commented that “Perhaps the most important point the case makes is only by inference: that a mortgage can’t be foreclosed except by a party that has the right to enforce the note. This may seem patently obvious, and indeed a fundamental principle of mortgage law. Strangely, however, at least a dozen states (mostly in the West) with nonjudicial foreclosure procedures have rejected this principle, holding instead that a foreclosure can be pursued by a party with an assignment of the mortgage or deed of trust, without any proof or even any assertion that the foreclosing party has the right to enforce the note. It’s strange but true. See Whitman and Milner, Foreclosing on Nothing: The Curious Problem of the Deed of Trust Foreclosure without Entitlement to Enforce the Note, 66 Ark. L. Rev. 21 (2013).”

He further speculates that “The lost note affidavit process works fine with a judicial foreclosure or a suit on the note. But how is it supposed to work in a nonjudicial foreclosure? There’s no “proceeding” in which to introduce the affidavit. This is simply a question that the drafters of Article 3 failed to consider, and there’s really no case law solution either. Interesting, eh?”