Standing to Foreclose Even if Allonge to Note Is Not Affixed

Joy Harmon Sperling and Sarah Sakson Langstedt, New Jersey Law JournalOctober 8, 2015

On Sept. 9, the New Jersey Appellate Division, in an unpublished decision, found that the plaintiff in a commercial foreclosure action had established a prima facie case for foreclosure even though the allonge to the note was not physically attached when the allonge was initially executed. In U.S. Bank National Association v. Morris Bayonne Associates I, No. A-2279-13 (App. Div. Sept. 9, 2015), the court upheld the trial court’s granting of summary and final judgment for foreclosure in favor of U.S. Bank, after determining that U.S. Bank had adequately proven its standing to foreclose.

In Morris Bayonne, several LLCs entered into a loan agreement and executed a promissory note in 2007. They also executed a mortgage on commercial property, an assignment of rents and leases, and a security agreement and fixture filing to secure the loan. Two individuals guaranteed the note. The note, mortgage and all loan documents were assigned twice, the second time to U.S. Bank. The mortgage and assignments were properly recorded. When the loan documents were assigned to U.S. Bank, the allonge endorsing the note was not attached immediately to the note. Four years later, the special servicer for U.S. Bank obtained permission from U.S. Bank to attach the allonge to the note. Eight days after the allonge was attached to the note, U.S. Bank commenced a foreclosure action due to the defendants’ default under the terms of the note. Therefore, the allonge was affixed to the note prior to the filing of the foreclosure complaint. U.S. Bank filed a motion for summary judgment, which was supported by certifications and affidavits from two employees of the special servicer for U.S. Bank. The defendants opposed the motion, challenging U.S. Bank’s ownership of the note and raising a series of questions concerning the legitimacy and veracity of the affidavits and certifications. The court adjourned the motion to allow the defendants to depose the employees of the servicer. One of the employees was overseas for an extended period and was unavailable; however, the defendants did not request additional time to depose him.

Based on the deposition of the one employee, the defendants argued there were genuine issues of material fact as to the standing of U.S. Bank. The trial court found there were no disputed issues of material fact that would preclude summary judgment, and that U.S. Bank had established a prima facie case for foreclosure, including that U.S. Bank had standing. The trial court granted the motion, and final judgment was eventually entered in favor of U.S. Bank.

The defendants appealed, arguing that there was a genuine issue of fact regarding U.S. Bank’s ownership of the note. The defendants claimed that, because the allonge was not originally attached to the note, the foreclosing entity did not have standing to foreclose. They further alleged that the deposition testimony of the servicer’s employee conflicted with his affidavits, and questioned his personal knowledge.

The Appellate Division found that U.S. Bank was the holder of the note, as defined by Article III of New Jersey’s Uniform Commercial Code. The allonge (which U.S. Bank possessed since it was executed and which had been attached to the note prior to the foreclosure action, but after the time of execution) clearly identified the note, confirmed the prior holders, confirmed U.S. Bank as the new holder and, therefore, ownership of the note by the plaintiff was not in question. The court opined that the borrowers could not point to any binding authority indicating that physical attachment of the allonge to the note prior to the filing of the complaint is inadequate to show the note was properly assigned and endorsed.

The court also found that U.S. Bank had standing, in accordance with New Jersey case law and the Uniform Commercial Code, because the mortgage and related loan documents had been assigned to U.S. Bank prior to the filing of the foreclosure complaint. The court noted that, once U.S. Bank established a prima facie case for foreclosure, the burden shifted to defendants to present evidence of a genuine issue of material fact.

As to the defendants’ arguments and contentions regarding the proofs submitted by U.S. Bank through the special servicer’s employees, the court rejected those claims. As to the defendants’ arguments regarding the production of only one employee for a deposition, the court found that U.S. Bank was entitled to produce the one employee, especially considering the other employee was overseas. The court further noted that the defendants had not requested more time to depose the other employee, and did not ask the court to find that the production of the employee with less knowledge was in bad faith.

As to the defendants’ contentions regarding the alleged disparities between the testimony and affidavits of the deposed employee, the court noted that the defendants had not presented their own evidence to refute the facts regarding the transfer of the loan. Further, the court did not find the disparities sufficient to find an abuse of discretion on the part of the trial judge in relying on the affidavits.

Finally, as to the assertion that the servicer’s employees did not have sufficient personal knowledge, the court held that employees of the mortgage loan servicer could attest to the business records kept in the regular course of their business. In so doing, the court, relying on the rules of evidence and prior case law, noted that: “There is no requirement that the foundation witness certifying that a record is a business record must possess any personal knowledge of the act or event recorded.” (Citations omitted.) The court found the servicer’s employees’ knowledge of the computer system that maintained the servicer’s files was adequate to authenticate the business records.

By its decision, the New Jersey Appellate Division has recognized that, when a foreclosing entity provides sufficient proof of standing, objections by borrowers, which have no support in the documents, should be rejected. Here, while the allonge was not initially attached to the note, the proofs clearly showed that U.S. Bank had been properly assigned the loan and had the right to foreclose.

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