Legal Opinion-John T. Kemp v. Countrywide Home Loans, Inc.

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US Bankruptcy Court, District of New Jersey - Opinion

Monday, November 22, 2010

Case 08-02448-JHW Doc 25 Filed 11/16/10 Entered 11/17/10 09:29:50

Discussion: [Excerpted]

Countrywide's claim here must be disallowed, because it is unenforceable under New Jersey law on two grounds. First, under New Jersey's Uniform Commercial Code ("UCC") provisions, the fact that the owner of the note, the Bank of New York, never had possession of the note, is fatal to its enforcement. Second, upon the sale of the note and mortgage to the Bank of New York, the fact that the note was not properly indorsed to the new owner also defeats the enforceability of the note.

...A party is entitled to enforce a negotiable instrument if it is "the holder of the instrument, a non-holder in possession of the instrument who has the rights of a holder, or a person not in possession of the instrument who is entitled to enforce the instrument pursuant to 12A:3-309 or subsection d. of 12A:3-418." N.J.S.A. 12A:3-301. In this case, the creditor may not enforce the instrument under any of the three statutory qualifiers.

...A "holder" is defined as "the person in possession.

"If the instrument is payable to bearer or, in the case of an instrument payable to an identified person, if the identified person is in possession." N.J.S.A. 12A:1-201(20). "Mere ownership or possession of a note is insufficient to qualify an individual as a 'holder'." Adams v. Madison Realty & Dev. Inc., 853 F.2d 163, 166 (3d Cir. 1988). Where, as here, the ownership of an instrument is transferred, the transferee's attainment of the status of "holder" depends on the negotiation of the instrument to the transferee. N.J.S.A. 12A:3-201(a). The two elements required for negotiation, both of which are missing here, are the transfer of possession of the instrument to the transferee, and its indorsement by the holder. N.J.S.A. 12A:3-201(b).

As to the issue of possession, we are not certain on this record whether the party in possession of the note is Countrywide or Countrywide Servicing.

What we do know is that the note was purchased by the Bank of New York as Trustee, but never came into the physical possession of the Bank. Because the Bank of New York never had possession of the note, it can not qualify as a "holder" under the New Jersey UCC. See Dolin v. Darnall, 115 N.J.L. 508, 181vA. 201 (E&A 1935) ("Since the plaintiff was not 'in possession of the notes in question, he was neither the 'holder' nor the 'bearer' thereof. ").11

The second element required to negotiate an instrument to the transferee, Le., indorsement of the instrument by the holder, is also missing here.

The significance of indorsement and affixation requirements to achieve holder status, and thereby qualify to enforce a note against the maker, was explained by the Third Circuit in Adams v. Madison Realty & Dev. Inc., supra. The court explained that the maker of the note must have certainty regarding the party who is entitled to enforce the note.

From the maker's standpoint, therefore, it becomes essential to establish that the person who demands payment of a negotiable note, or to whom payment is made, is the duly qualified holder. Otherwise, the obligor is exposed to the risk of double payment, or at least to the expense of litigation incurred to prevent duplicative satisfaction of the instrument. These risks provide makers with a recognizable interest in demanding proof of the chain of title. Consequently, plaintiffs here, as makers of the notes, may properly press defendant to establish its holder status.

853 F.2d at 168.

...In this case, we had neither a proper indorsement on the note itself, nor an allonge that was executed at the time the proof of claim was filed.

An allonge purporting to negotiate the note to the Bank of New York was not executed until shortly before the original trial date, and was not affixed to the original note until the second trial date. Even if the newly executed allonge is recognized as a valid indorsement of the note, under these circumstances, the Bank of New York does not qualify as a holder, because it never came into possession of the note. 13

...Nor does the claimant qualify as a non-holder in possession who has the rights of a holder. "A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument." N.J.S.A. 12A:3-301. The Official Comment to section 3-301 adds that this definition:

includes a person in possession of an instrument who is not a holder. A non-holder in possession of an instrument includes a person that acquired rights of a holder by subrogation or under Section 3-203(a).

...Because the Bank of New York does not have possession of the note, and never did, it may not enforce the note as a nonho1der in possession.

...The third category that would enable a claimant to enforce the note would be a person not in possession of the note who is entitled to enforce the note pursuant to N.J.S.A. 12A:3-309 or subsection d. of N.J.S.A. 12A:3-418. Section 12A:3-309 concerns the enforcement of lost, destroyed or stolen instruments.'4 The defendant presented a lost note certification to this court, but the factual predicate of the certificate conflicted with other facts presented on this record, and we have determined to disregard the certificate. '5 Section 12A:3-418, concerning payment or acceptance by mistake, does not apply here.

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