A recent New York court decision in a residential foreclosure case shines a bright light on what’s wrong with our foreclosure system. We suffer from antiquated negotiable instruments laws so complex that even an appellate court seems to have gotten them wrong. The case also suggests how loan purchasers can stay out of trouble and how the legislature could improve things.
The familiar saga began sometime before mid-2013, when a residential borrower stopped paying their mortgage. The loan was passed around, eventually landing at HSBC, which tried to foreclose. After two years of litigation, the appellate court threw out the foreclosure because HSBC didn’t have “standing.” Why not?
Well, HSBC did have the promissory note, the document evidencing the borrower’s promise to pay. The global banking firm had obtained it from someone else. But the document transferring the note to HSBC—the so-called “allonge”—was paper-clipped to the note, not firmly attached, such as with glue, tape or a heavy staple. So the allonge was not a valid endorsement. So HSBC was not a “holder.” So HSBC had no right to enforce the note. Back to square one!
Legally, the result seems questionable. Receiving a promissory note through a proper endorsement is not the only way to get the right to enforce it. If someone acquires a loan and has the physical note—even without a proper endorsement—they will usually have the right to enforce the note. They may not legally be a “holder,” so they may face some defenses they could have otherwise avoided. But they should still be able to foreclose.