New Mexico:  BONY v Romero – weekend reading with a closer look at the language of the Original Appeal on Certiorari Opinion.

Due to a majority of readers being individuals an academic approach would be to start breaking down these valuable cases by reading them in sections in order to digest or glean from them what the court is conveying. 

Read in sections carefully and make note of how these sections may (or may not) apply to a homeowner’s unique situation and begin to read the cases cited by the Court.

BONY v Romero Opinion (begin page 5):

A.     The Bank of New York Lacks Standing to Foreclose

1.     Preservation

{14}     As a preliminary matter, we address the Bank of New York’s argument that the Romeros waived their challenge of the Bank’s standing in this Court and the Court of Appeals by failing to provide the evidentiary support required by Rule 12-213(A)(3) NMRA.  See Bank of N.Y., 2011-NMCA-110, ¶¶ 20-21 (dismissing the Romeros’ challenge to standing as without authority and based primarily on the note’s bearer-stamp assignment to JPMorgan Chase); see also Rule 12-213(A)(3) (“A contention that a verdict, judgment or finding of fact is not supported by substantial evidence shall be deemed waived unless the summary of proceedings includes the substance of the evidence bearing upon the proposition.”).

{15}     We have recognized that “the lack of [standing] is a potential jurisdictional defect which ‘may not be waived and may be raised at any stage of the proceedings, even sua sponte by the appellate court.’” Gunaji v. Macias, 2001-NMSC-028, ¶ 20, 130 N.M. 734, 31 P.3d 1008 (citation omitted).

While we disagree that the Romeros waived their standing claim, because their challenge has been and remains largely based on the note’s indorsement to JPMorgan Chase, whether the Romeros failed to fully develop their standing argument before the Court of Appeals is immaterial.

This Court may reach the issue of standing based on prudential concerns. See New Energy Economy, Inc. v. Shoobridge, 2010-NMSC-049, ¶16, 149 N.M. 42, 243 P.3d 746 “Indeed, prudential rules’ of judicial self-governance, like standing, ripeness, and mootness, are ‘founded in concern about the proper—and properly limited—role of courts in a democratic society’ and are always relevant concerns.” (citation omitted)).

Accordingly, we address the merits of the standing challenge.

2.     Standards of Review

{16}     The Bank argues that under a substantial evidence standard of review, it presented sufficient evidence to the district court that it had the right to enforce the Romeros’ promissory note based primarily on its possession of the note, the June 25, 2008, assignment letter by MERS, and the trial testimony of Kevin Flannigan.

By contrast, the Romeros argue that none of the Bank’s evidence demonstrates standing because

    (1)     possession alone is insufficient,

    (2)     the “original” note introduced by the Bank of New York at trial with the two undated indorsements includes a special indorsement to JPMorgan Chase, which cannot be ignored in favor of the blank indorsement,

    (3)     the June 25, 2008, assignment letter from MERS occurred after the Bank of New York filed its complaint, and as

a mere assignment of the mortgage does not act as a lawful transfer of the note, and

    (4)     the statements by Ann Kelley and Kevin Flannigan are inadmissible because both lack personal knowledge given that Litton Loan Servicing did not begin servicing loans for the Bank of New York until seven months after the foreclosure complaint was filed and after the purported transfer of the loan occurred.

    For the following reasons, we [court] agree with the Romeros.

{17}     The Bank of New York does not dispute that it was required to demonstrate under New Mexico’s Uniform Commercial Code (UCC) that it had standing to bring a foreclosure action at the time it filed suit. 

    See NMSA 1978, § 55-3-301 (1992) (defining who is entitled to enforce a negotiable interest such as a note);

    see also NMSA 1978, § 55-3-104(a), (b), (e) (1992) (identifying a promissory note as a negotiable instrument);

    ACLU of N.M. v. City of Albuquerque, 2008-NMSC-045, ¶ 9 n.1, 144 N.M. 471, 188 P.3d 1222 (recognizing standing as a jurisdictional prerequisite for a statutory cause of action);

    Lujan v. Defenders of Wildlife, 504 U.S. 555, 570-71 n.5 (1992) (“[S]tanding is to be determined as of the commencement of suit.”);

    accord 55 Am. Jur. 2d Mortgages § 584 (2009) (“A plaintiff has no foundation in law or fact to foreclose upon a mortgage in which the plaintiff has no legal or equitable interest.”).

  One reason for such a requirement is simple:

        “One who is not a party to a contract cannot maintain a suit upon it. 

If [the entity] was a successor in interest to a party on the [contract], it was incumbent upon it to prove this to the court.”

        L.R. Prop. Mgmt., Inc. v. Grebe, 1981-NMSC-035, ¶ 7, 96 N.M. 22, 627 P.2d 864 (citation omitted).

The Bank of New York had the burden of establishing timely ownership of the note and the mortgage to support its entitlement to pursue a foreclosure action. See Gonzales v. Tama, 1988-NMSC-016, ¶ 7, 106 N.M. 737, 749 P.2d 1116 (“One who holds a note secured by a mortgage has two separate and independent remedies, which he may pursue successively or concurrently; one is on the note against the person and property of the debtor, and the other is by foreclosure to enforce the mortgage lien upon his real estate.” (internal quotation marks and citation omitted)).

3.     None of the Bank’s Evidence Demonstrates Standing to Foreclose

{19}     The Bank of New York argues that in order to demonstrate standing, it was required to prove that before it filed suit, it either

    (1)     had physical possession of the Romeros’ note indorsed to it or indorsed in blank or

    (2)     received the note with the right to enforcement, as required by the UCC.

        See § 55-3-301 (defining “[p]erson entitled to enforce” a negotiable instrument).

While we agree with the Bank that our state’s UCC governs how a party becomes legally entitled to enforce a negotiable instrument such as the note for a home loan, we disagree that the Bank put forth such evidence.

a.     Possession of a Note Specially Indorsed to JPMorgan Chase Does Not Establish the Bank of New York as a Holder

{20}     Section 55-3-301 of the UCC provides three ways in which a third party can enforce a negotiable instrument such as a note. Id. (“‘Person entitled to enforce’ an instrument means

    (i)     the holder of the instrument,

    (ii)     a nonholder in possession of the instrument who has the rights of a holder, or

    (iii)     a person not in possession of the instrument who is entitled to enforce the [lost, destroyed, stolen, or mistakenly transferred] instrument pursuant to [certain UCC enforcement provisions].”);

  see also § 55-3-104(a)(1), (b), (e) (defining “negotiable instrument” as including a “note” made “payable to bearer or to order”).

Because the Bank’s arguments rest on the fact that it was in physical possession of the Romeros’ note, we need to consider only the first two categories of eligibility to enforce under Section 55-3-301.

{21}     The UCC defines the first type of “person entitled to enforce” a note—the “holder” of the instrument—as “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.” NMSA 1978, §55-1-201(b)(21)(A) (2005);

    see also Frederick M. Hart & William F. Willier, Negotiable Instruments Under the Uniform Commercial Code, § 12.02(1) at 12-13 to 12-15 (2012)

    (“The first requirement of being a holder is possession of the instrument. However, possession is not necessarily sufficient to make one a holder. . . .

    The payee is always a holder if the payee has possession.

    Whether other persons qualify as a holder depends upon whether the instrument initially is payable to order or payable to bearer, and whether the instrument has been indorsed.” (footnotes omitted)).

    Accordingly, a third party must prove both physical possession and the right to enforcement through either a proper indorsement or a transfer by negotiation.   See NMSA 1978, § 55-3-201(a) (1992)

    (“‘Negotiation’ means a transfer of possession . . . of an instrument by a person other than the issuer to a person who thereby becomes its holder.”).

    Because in this case the Romeros’ note was clearly made payable to the order of Equity One, we must determine whether the Bank provided sufficient evidence of how it became a “holder” by either an indorsement or transfer.

{22}     Without explanation, the note introduced at trial differed significantly from the original note attached to the foreclosure complaint, despite testimony at trial that the Bank of New York had physical possession of the Romeros’ note from the time the foreclosure complaint was filed on April 1, 2008.

{23}     Possession of an unindorsed note made payable to a third party does not establish the right of enforcement,

    just as finding a lost check made payable to a particular party does not allow the finder to cash it. See NMSA 1978, § 55-3-109 cmt. 1 (1992)

    (“An instrument that is payable to an identified person cannot be negotiated without the indorsement of the identified person.”).

    The Bank’s possession of the Romeros’ unindorsed note made payable to Equity One does not establish the Bank’s entitlement to enforcement.

{24}     The Bank’s possession of a note with two indorsements, one of which restricts payment to JPMorgan Chase, also does not establish the Bank’s entitlement to enforcement.

    The UCC recognizes two types of indorsements for the purposes of negotiating an instrument.

    A blank indorsement, as its name suggests, does not identify a person to whom the instrument is payable but instead makes it payable to anyone who holds it as bearer paper.  See NMSA 1978, § 55-3-205(b) (1992) (“If an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a ‘blank indorsement.’”). “When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.” Id.

{25}     By contrast, a special indorsement “identifies a person to whom it makes the instrument payable.” Section 55-3-205(a).

    “When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person.” Id.; accord Baxter Dunaway, Law of Distressed Real Estate, § 24:105 (2011)

    (“When an instrument is payable to an identified person, only that person may be the holder.

    A person in possession of an instrument not made payable to his order can only become a holder by obtaining the prior holder’s indorsement.”).

{26}     The trial copy of the Romeros’ note contained two undated indorsements:

    a blank indorsement by Equity One and

    a special indorsement by Equity One to JPMorgan Chase.

    Although we agree with the Bank that if the Romeros’ note contained only a blank indorsement from Equity One, that blank indorsement would have established the Bank as a holder because the Bank would have been in possession of bearer paper,

    that is not the situation before us.

    The Bank’s copy of the Romeros’ note contained two indorsements, and the restrictive, special indorsement to JPMorgan Chase establishes JPMorgan Chase as the proper holder of the Romeros’ note absent some evidence by JPMorgan Chase to the contrary. See Cadle Co. v. Wallach Concrete, Inc., 1995-NMSC-039, ¶ 14, 120 N.M. 56, 897 P.2d 1104

    (“[A] special indorser . . . has the right to direct the payment and to require the indorsement of his indorsee as evidence of the satisfaction of own obligation.

    Without such an indorsement, a transferee cannot qualify as a holder in due course.” (omission in original) (internal quotation marks and citation omitted)).

    Because JPMorgan Chase did not subsequently indorse the note, either in blank or to the Bank of New York,

    the Bank of New York cannot establish itself as the holder of the Romeros’ note simply by possession.

{28}     Accordingly, we conclude that the Bank of New York’s possession of the twice indorsed note restricting payment to JPMorgan Chase does not establish the Bank of New York as a holder with the right of enforcement.

b.     None of the Bank of New York’s Evidence Demonstrates a Transfer of the Romeros’ Note

{29}     The second type of “person entitled to enforce” a note under the UCC is a third party in possession who demonstrates that it was given the rights of a holder. See § 55-3-301

    (“‘Person entitled to enforce’ an instrument means . . . a nonholder in possession of the instrument who has the rights of a holder.”).

    This provision requires a nonholder to prove both possession and the transfer of such rights.

    See NMSA 1978, § 55-3-203(a)-(b) (1992) (defining what constitutes a transfer and vesting in a transferee only those rights held by the transferor).

    A claimed transferee must establish its right to enforce the note. See § 55-3-203 cmt. 2

    (“[An] instrument [unindorsed upon transfer], by its terms, is not payable to the transferee and the transferee must account for possession of the unindorsed instrument by proving the transaction through which the transferee acquired it.”).

{30}     Under this second category, the Bank of New York relies on the testimony of Kevin Flannigan, an employee of Litton Loan Servicing who maintained that his review of loan servicing records indicated that the Bank of New York was the transferee of the note.

    The Romeros objected to Flannigan’s testimony at trial, an objection that the district court overruled under the business records exception.

    We agree with the Romeros that Flannigan’s testimony was inadmissible and does not establish a proper transfer.

{31}     As the Bank of New York admits, Flannigan’s employer, Litton Loan Servicing, did not begin working for the Bank of New York as its servicing agent until November 1, 2008—seven months after the April 1, 2008, foreclosure complaint was filed.

    Prior to this date, Popular Mortgage Servicing, Inc. serviced the Bank of New York’s loans.

    Flannigan had no personal knowledge to support his testimony that transfer of the Romeros’ note to the Bank of New York prior to the filing of the foreclosure complaint was proper because Flannigan did not yet work for the Bank of New York.

    See Rule 11-602 NMRA

    (“A witness may testify to a matter only if evidence is introduced sufficient to support a finding that the witness has personal knowledge of the matter.  Evidence to prove personal knowledge may consist of the witness’s own testimony.”).

    We make a similar conclusion about the affidavit of Ann Kelley, who also testified about the status of the Romeros’ loan based on her work for Litton Loan Servicing. As with Flannigan’s testimony, such statements by Kelley were inadmissible because they lacked personal knowledge.

{32}     When pressed about Flannigan’s basis of knowledge on cross-examination, Flannigan merely stated that “our records do indicate” the Bank of New York as the holder of the note based on “a pooling and servicing agreement.”

    No such business record itself was offered or admitted as a business records hearsay exception. See Rule 11-803(F) NMRA (2007) (naming this category of hearsay exceptions as “records of regularly conducted activity”).

{33}     The district court erred in admitting the testimony of Flannigan as a custodian of records under the exception to the inadmissibility of hearsay for “business records” that are made in the regular course of business and are generally admissible at trial under certain conditions. See Rule 11-803(F) (2007) (citing the version of the rule in effect at the time of trial).

    The business records exception allows the records themselves to be admissible but not simply statements about the purported contents of the records. See State v. Cofer, 2011-NMCA-085, ¶ 17, 150 N.M. 483, 261 P.3d 1115 (holding that, based on the plain language of Rule 11-803(F) (2007), “it is clear that the business records exception requires some form of document that satisfies the rule’s foundational elements to be offered and admitted into evidence and that testimony alone does not qualify under this exception to the hearsay rule”

    and concluding that “‘testimony regarding the contents of business records, unsupported by the records themselves, by one without personal knowledge of the facts constitutes inadmissible hearsay.’” (citation omitted)).

    Neither Flannigan’s testimony nor Kelley’s affidavit can substantiate the existence of documents evidencing a transfer if those documents are not entered into evidence.  Accordingly,

    Flannigan’s trial testimony cannot establish that the Romeros’ note was transferred to the Bank of New York.

{34}     We also reject the Bank’s argument that it can enforce the Romeros’ note because it was assigned the mortgage by MERS.

    An assignment of a mortgage vests only those rights to the mortgage that were vested in the assigning entity and nothing more. See § 55-3-203(b)

    (“Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course.”); accord Hart & Willier, supra, § 12.03(2) at 12-27

    (“Th[is] shelter rule puts the transferee in the shoes of the transferor.”).  1359, 1361-63 (2010) (explaining that MERS was created by the banking industry to electronically track and record mortgages in order to avoid local and state recording fees).

    The Romeros’ mortgage contract reiterates the MERS role, describing “MERS [a]s a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns.”

    A “nominee” is defined as “[a] person designated to act in place of another, usu. in a very limited way.”  Black’s Law Dictionary 1149 (9th ed. 2009). 

    As a nominee for Equity One on the mortgage contract, MERS could assign the mortgage but lacked any authority to assign the Romeros’ note.

    Although this Court has never explicitly ruled on the issue of whether the assignment of a mortgage could carry with it the transfer of a note, we have long recognized the separate functions that note and mortgage contracts perform in foreclosure actions. See First Nat’l Bank of Belen v. Luce, 1974-NMSC-098, ¶ 8, 87 N.M. 94, 529 P.2d 760

    (holding that because the assignment of a mortgage to a bank did not convey an interest in the loan contract, the bank was not entitled to foreclose on the mortgage);

    Simson v. Bilderbeck, Inc., 1966-NMSC-170, ¶¶ 13-14, 76 N.M. 667, 417 P.2d 803

    (explaining that “[t]he right of the assignee to enforce the mortgage is dependent upon his right to enforce the note”

    and noting that “[b]oth the note and mortgage were assigned to plaintiff.

    Having a right under the statute to enforce the note, he could foreclose the mortgage.”); accord 55 Am. Jur. 2d Mortgages § 584

    (“A mortgage securing the repayment of a promissory note follows the note, and thus, only the rightful owner of the note has the right to enforce the mortgage.”); Dunaway, supra, § 24:18

    (“The mortgage only secures the payment of the debt, has no life independent of the debt, and cannot be separately transferred.

    If the intent of the lender is to transfer only the security interest (the mortgage), this cannot legally be done and

    the transfer of the mortgage without the debt would be a nullity.”).

{36}     The MERS assignment fails for several additional reasons. 

    First, it does not explain the conflicting special indorsement of the note to JPMorgan Chase.

    Second, its assignment of the mortgage to the Bank of New York on June 25, 2008, three months after the foreclosure complaint was filed, does not establish a proper transfer prior to the filing date of the foreclosure suit.

    Third, except for the inadmissible affidavit of Ann Kelley and trial testimony of Kevin Flannigan, nothing in the record substantiates the Bank’s claim that

    the MERS assignment was meant to memorialize an earlier transfer to the Bank of New York.

    Accordingly, neither the MERS assignment nor Flannigan’s testimony establish the Bank of New York as a nonholder in possession with the rights of a holder by transfer.

c.     Failure of Another Entity to Claim Ownership of the Romeros’ Note Does Not Make the Bank of New York a Holder

{37}     Finally, the Bank of New York urges this Court to adopt the district court’s inference that if the Bank was not the proper holder of the Romeros’ note, then third-party-defendant Equity One would have claimed to be the rightful holder, and

    Equity One made no such claim.

{38}     The simple fact that Equity One does not claim ownership of the Romeros’ note does not establish that the note was properly transferred to the Bank of New York.

    In fact, the evidence in the record indicates that JPMorgan Chase may be the lawful holder of the Romeros’ note, as reflected in the note’s special indorsement. As this Court has recognized,

    In addition, the UCC clarifies that the Bank of New York is not afforded any assumption of enforcement without proper documentation:

    Because the transferee is not a holder, there is no presumption under Section [55-]3-308 [(1992) (entitling a holder in due course to payment by production and upon signature)] that the transferee, by producing the instrument, is entitled to payment.

Because the Bank of New York did not introduce any evidence demonstrating that it was a party with the right to enforce the Romeros’ note either by an indorsement or proper transfer, we hold that the Bank’s standing to foreclose on the Romeros’ mortgage was not supported by substantial evidence, and we reverse the contrary determinations of the courts below.

[Note:  Emphasis added re formatting for ease of reading.]

___

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Read the remainder of the Opinion. . .