The Ninth Circuit U.S. Bankruptcy Appellate panel has determined that a “Lost Note Affidavit”, with the endorsement in blank appearing on its face, is sufficient to replace a promissory note where the original note was lost.
On June 8, 2012, Bankruptcy Judge Pappas, writing for the panel, explained that the U.S. Bank National Association (USB) had standing to assert its claim where a lost note affidavit was endorsed in blank, giving its bearer status as the ‘person entitled to enforce’ the instrument.
The underlying facts in Allen v. US Bank National Association (In re Allen) (11-1537) were that the Allens executed a promissory note in 2006 in favor of Dream House Mortgage Corp. (DHMC). Shortly thereafter, the president of DHMC executed a “Lost Note Affidavit and Agreement” stating that DHMC “was the current holder of the indebtedness evidenced by the” promissory note, the note had been lost, and attached was a photocopy of the original. DHMC then assigned its rights, title, and interest in the mortgage loan to DLJ Mortgage Capital Inc. In September 2006, DLJ entered into a Pooling and Serving Agreement (PSA) that named U.S. Bank National Association (USB) as trustee.
About 30 months later, The Allens filed a bankruptcy petition under Chapter 13. USB filed an amended proof of claim, to which the Allens objected. The lower bankruptcy court decided that USB’s amended proof of claim was valid because:
- The Lost Note Affidavit satisfied the requirements of applicable Washington state law, RCW 62A.3-309, and therefore constituted an acceptable substitute for the original Note;
- The endorsement in blank on the face of the Note complied with the applicable requirements of the Bankruptcy Code to evidence transfer, and therefore, the allonge was superfluous;
- The contents of the Lost Note Affidavit demonstrated that the transfer from DHMC to DLJ included the right to enforce the Note, and that such right could thereafter be transferred by DLJ to another [USB]; and
- There was no evidence to indicate, or from which it could be inferred, that the transfer of the Note by DLJ was a transfer of less than all rights under the Note.
The Allens argued on appeal that USB failed to demonstrate standing to assert its claim.
The panel affirmed the decision in favor of USB, citing the lower court’s correct application of state law, which provides that a person no longer in possession of an instrument is nonetheless entitled to enforce it if that person was in possession and entitled to enforce it when the loss of possession occurred.
In summary, the panel determined that the Lost Note Affidavit, with the endorsement in blank appearing on its face, was sufficient to replace the original note. Once it was established that the note was endorsed in blank, the note became a bearer instrument. As a bearer instrument, the note was negotiable by transfer of possession alone. The bankruptcy court found that the note was authentic and admissible in evidence, and was in the possession of USB. Possession of a valid bearer instrument to which the Allens were obligated gave USB standing to assert its claim in the Allens’ bankruptcy proceedings.
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