By Michael L. Moskowitz and Melissa A. Guseynov
In an unpublished opinion dated July 19, 2017, the Court of Appeals for the Second Circuit (“Second Circuit”) denied a petition for rehearing of a decision by the District Court for the Western District of New York granting standing of an assignee’s rights to enforce individual notes and mortgages. The Court affirmed, among other things, that commercial lenders that advanced money and obtained assignments to pay off the loans of a chapter 11 debtor from individual lenders were entitled to file proofs of secured claims in the debtor’s bankruptcy case, regardless of whether the assignments were properly transferred. Arnold v. First Citizens National Bank, 2017 WL 3049414 (2d. Cir. July 19, 2017).
In this case, a corporate debtor obtained loans from individual lenders who were given notes to evidence the debt and mortgages to secure the obligations. When the debtor needed additional financing, the original lenders assigned their notes and mortgages to new lenders by using written assignments. Significantly, however, the original lenders did not endorse the old notes to the new lenders, nor did they deliver the old notes to the new lenders.
After a chapter 11 trustee was appointed in the Cornerstone Homes, Inc. case, the trustee brought suit to set aside certain pre-petition loans made to Cornerstone contending the new lenders were unsecured creditors because the original lenders neither endorsed nor delivered the old notes. The bankruptcy judge granted summary judgment in favor of the new lenders, upholding their rights as secured creditors. Chief District Judge Frank P. Geraci, Jr., of Rochester, N.Y., upheld the bankruptcy court’s determination. The trustee appealed. Notably, however, in a July 19th opinion, the Second Circuit held that the lenders had standing to enforce the assigned mortgages under New York Law and were secured creditors.
Article 3 of the UCC states there are two ways to gain title to a negotiable instrument: transfer and negotiation. In this case the parties joined issue on whether the written assignment without physical delivery of the instrument affected a valid transfer of the instrument under Article 3. The Second Circuit determined that it need not address the disputed issue, as the transactions were structured as loans from each bank, and each was memorialized in a loan agreement. Because the loans made by the lenders were sufficient to support the security interest at issue in the case at bar, the Second Circuit held that the lenders had standing under New York law to foreclose, even without the endorsement and delivery of the individual lenders’ mortgage notes.
Weltman & Moskowitz will continue to follow and report on this issue and we will keep clients and colleagues informed of the developing impact to lenders and borrowers. Please feel free to call Weltman & Moskowitz with any questions or challenges you, your colleagues, or clients may have.
About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:
Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Michael L. Moskowitz, a partner with the firm, focuses his practice on business and bankruptcy litigation, as well as creditor’s rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Michael can be reached at (212) 684-7800, (201) 794-7500 or mlm@weltmosk.com. Melissa Guseynov is an associate of the firm. Melissa can be reached at mag@weltmosk.com.
