UCC And The Importance Of A Paper Clip

Law360, New York (October 1, 2015, 10:48 AM ET) —

Christopher A. Gorman %>
Christopher A. Gorman

Oftentimes in litigation, the difference between prevailing on behalf of a client and not can be razor thin. The oversight of a fact that once was not thought to be significant, but later turned out to be so, can mean the difference in some instances between victory and defeat for a lawyer’s client.
However, never has the margin between victory and defeat been so thin as in HSBC Bank USA NA v. Roumiantseva, where a paper clip — yes, a paper clip — was the determining factor in awarding summary judgment to the defendant-borrowers in a residential foreclosure action. The significance of the paper clip, however, was rooted in provisions of the Uniform Commercial Code, which, had the lender attempted to comply with, would have made clear that the manner in which the endorsement to the subject promissory note was maintained was not sufficient under the UCC to confer standing upon the lender.

Roumiantseva teaches a lesson to all in the banking and lending industry that the manner in which the endorsements to a promissory note are maintained matter — indeed, if not done in compliance with the UCC, it can result in a lender being precluded from obtaining relief in a foreclosure action.

HSBC Bank USA NA v. Roumiantseva involved an action to foreclose a mortgage that was pending in New York State Supreme Court, Kings County.[1] The Supreme Court had granted the motion of the defendants, Svetlana Roumiantseva and Iouri Roumiantseva (hereinafter, “borrowers”), the borrowers under the subject promissory note and mortgage, to dismiss the complaint for lack of standing, and the plaintiff-lender, HSBC Bank USA NA (hereinafter, “lender”), appealed that ruling.

In the Supreme Court, the borrowers, in support of their motion to dismiss the complaint, submitted the lender’s response to their demand for documents supporting the lender’s basis for standing set forth in the complaint, which apparently showed that the “plaintiff allegedly obtained its right to foreclose by way of an assignment of the mortgage and note from Mortgage Electronic Registration Systems, Inc. … acting as nominee for the original lender.” The Appellate Division, Second Department, concluded that the Supreme Court was correct in determining that the borrowers had “demonstrated, prima face, that the plaintiff’s purported basis for standing was not valid” since the documents the lender produced in discovery showed that Mortgage Electronic Registration Systems Inc. “was never the holder of the note and, therefore, was without authority to assign the note.”

In opposition to the borrowers’ summary judgment motion, the plaintiff “submitted, among other things, a copy of an endorsement in blank dated December 7, 2006.” After submitting the endorsement in blank to the promissory note, “the Supreme Court directed the plaintiff to produce the original note and the endorsement.” As the Appellate Division, Second Department, noted, upon such production by the lender, it was determined that the “endorsement was attached to the original note by only a paperclip.”

In light of that fact, the Appellate Division, Second Department, concluded, citing UCC 3-202, that “the purported endorsement, attached by a paperclip, was not so firmly affixed to the note as to become a part thereof.” For this reason, according to the Appellate Division, Second Department, “the purported endorsement did not constitute a valid transfer of the underlying note to the plaintiff.” As a result, the Appellate Division, Second Department, concluded that the Supreme Court properly granted summary judgment in favor of the borrowers.

UCC 3–202, which was relied upon by the Appellate Division, Second Department, in Roumiantseva, provides that “[n]egotiation is the transfer of an instrument in such form that the transferee becomes a holder,” and that if “the instrument is payable to order it is negotiated by delivery with any necessary indorsement; if payable to bearer it is negotiated by delivery.”

UCC 3-202(2) states that “an indorsement must be written by or on behalf of the holder and on the instrument or on a paper so firmly affixed thereto as to become a part thereof.” Comment 3 to UCC 3-202 states that “[s]ubsection (2) follows decisions holding that a purported indorsement on a mortgage or other separate paper pinned or clipped to an instrument is not sufficient for negotiation,” and that “[t]he indorsement must be on the instrument itself or on a paper intended for the purpose which is so firmly affixed to the instrument as to become an extension or part of it.” According to Comment 3 to UCC 3-202, such a “firmly affixed” paper “is called an allonge.”

It is clear that the lender in Roumiantseva did not comply with UCC 3-202, including in particular the Comment 3 to UCC 3-202. Comment 3 to UCC 3-202 specifically states that a “separate paper” which is “pinned or clipped” to the promissory note is insufficient to negotiate the instrument to an assignee. The Appellate Division, Second Department’s decision in Roumiantseva, therefore, appears to comply with the requirements of the UCC.

Roumiantseva is significant for a number of different reasons. First, Roumiantseva can be read to give borrowers the right to seek discovery from lenders in cases where the plaintiff is an assignee of the originating lender on the basis of an endorsed promissory note into the manner in which an endorsement is affixed (or not) to the original promissory note. Second, and perhaps even more significantly, Roumiantseva could be read to stand for the proposition that the court itself can direct the lender to produce the original promissory note in order to determine how any endorsements are affixed to the promissory note. Of course, either or both of these issues occurring in a foreclosure action has the ability to delay the foreclosure action and, at worst and as was the case in Roumiantseva, could even lead to the dismissal of the action in favor of the borrower if the lender is deemed to have not complied with the requirements of the UCC.

The simplest way for lenders to avoid the result that occurred in Roumiantseva is to ensure that endorsements, rather than appearing on separate pages from the promissory note, actually are endorsed on the promissory note itself. UCC 3-202(2) states that the endorsement by the holder of the promissory note can be “on the instrument.” Indeed, if the endorsement is placed “on the instrument,” there is not any room for a borrower to argue that the endorsement was not properly affixed to the promissory note, as was the case in Roumiantseva. Affixing the endorsement on the promissory note itself, as opposed to on separate pages to the promissory note, can help to avoid discovery into issues concerning the manner in which the endorsement is affixed to the promissory note, and thereby ensure that the foreclosure action is not delayed (or derailed) by discovery into such issues.

—By Christopher A. Gorman, Westerman Ball Ederer Miller Zucker & Sharfstein LLP

Christopher Gorman is partner at Westerman Ball Ederer Miller Zucker & Sharfstein, based in Uniondale, New York. Gorman’s practice focuses on commercial litigation and business disputes, including commercial and residential mortgage foreclosure actions.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] 130 A.D.3d 983, 115 N.Y.S.3d 117 (2d Dep’t 2015)


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