Scott E. Mollen

Reverse Mortgages—Bank Lacked Standing To Foreclose On Reverse Mortgage—Lender Possessed Original Line of Credit Agreement, Indorsed in Blank, at Time Action was Commenced—Line of Credit Agreement Did Not Constitute a Negotiable Instrument Under Uniform Commercial Code §3-104

This decision involves the issue of “whether a bank can establish its standing to foreclose on a reverse mortgage securing the repayment of a home equity line of credit by demonstrating that it was in possession of the original line of credit agreement, indorsed in blank, at the time this action was commenced” and “whether such a line of credit agreement constitutes a negotiable instrument as defined in section 3-104 of the Uniform Commercial Code.”

A defendant appealed, in an action to foreclose a mortgage, from a trial court order which, inter alia, granted the plaintiff summary judgment on its complaint against the defendant.

In September 2005, “A” entered into a reverse mortgage transaction with “B.” The transaction involved a Cash Account Adjustable Rate Reverse Mortgage Loan Account Disclosure Statement and Agreement (CAA), which permitted “A” from time to time, to receive cash advances up to $806,152, and an Adjustable Rate Home Equity Conversion Deed of Trust (mortgage), which created a security interest on the borrower’s home to guaranty payment of up to twice the stated advance limit under the CAA.

The borrower died in May 2010. “B” assigned the mortgage to “C.” The record contained a second assignment of the mortgage, dated March 13, 2014, from an entity (“D”), to the plaintiff. The records also showed that on June 9, 2011, the property was transferred by the executors of the borrower’s estate to “E,” which in turn transferred the property to defendant “F,” by deed dated March 25, 2014.

In August 2014, the plaintiff commenced the subject action against several parties, including “F,” to foreclose the mortgage. “F” asserted several affirmative defenses, including that the plaintiff lacked standing to bring this foreclosure action. The plaintiff had moved for summary judgment and an order of reference. The defendant opposed the motion and cross-moved for summary judgment dismissing the complaint insofar as asserted against it for lack of standing. The trial court granted the plaintiff’s motion and denied the cross motion.

The Appellate Division (court) explained

A plaintiff has standing in a mortgage foreclosure action when it is the holder or assignee of the underlying note at the time the action is commenced…. “‘A holder’ is 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”…. Where the note has been indorsed in blank, the holder must establish its standing by demonstrating that the original note was physically in its possession at the time of the commencement of the action….

The document that the plaintiff referred to as the note is the 14-page CAA. The plaintiff submitted, inter alia, an affidavit by its “assistant secretary, who averred, based upon his review of the plaintiff’s business records, that the plaintiff received the original (CAA), indorsed in blank, on May 5, 2011, and had it in its possession at the time of the commencement of this action.”

The defendant countered that in a prior foreclosure action, a lender sought to establish its standing based on the physical delivery of the CAA, “to which an undated allonge, indorsed in blank by an unidentified representative of (“B”) and referring specifically to the borrower and the address of the subject premises, was affixed.” In support of the instant motion, the CAA submitted by plaintiff lacked the prior allonge. Rather, it “bore a different, undated indorsement in blank signed by … the vice president of (“B”), which referred neither to the subject premises nor the name of the borrower.”

The trial court accepted the plaintiff’s prima facie showing and disregarded “the absence of the prior allonge relied upon by the plaintiff’s predecessor in interest in the prior action,” and accepted “the new indorsement in blank (by “B’s” officer).”

Since the plaintiff sought to establish standing on the grounds that it is a valid holder in due course of the CAA, the court requested a post-argument submission on the issue of whether the CAA constituted a negotiable instrument as contemplated under UCC §3-104. The court found that the CAA “does not constitute a negotiable instrument within the meaning of UCC 3-104.” Accordingly, the plaintiff could not establish its standing merely by establishing that it was in possession of the original CAA, indorsed in blank, at the time that the instant action was commenced.

The court noted that a negotiable instrument had once been described as a “courier without luggage.” The court explained that “to qualify as a negotiable instrument under the UCC, a document must ‘(a) be signed by the make or drawer; and (b) contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the make or drawer except as authorized by the article, and (c) be payable on demand or at a definite time; and (d) be payable to order or to bearer’ (UCC-3-1041.” The court also reviewed the terms of UCC 3-112.

Although the CAA was signed by the borrower and contained an unconditional promise to pay, it also contained provisions “that go well beyond what is permitted under the UCC.” The CAA “creates an open-end (i.e., revolving) line of credit upon which the borrower could draw a maximum of $806,152.” Since the borrower’s initial advance had been $366,152, the borrower could have drawn down as much as $440,000 more from the lender. The court found “no New York case directly on point.” However, other jurisdictions found similar lines of credit agreements to be “distinct from an agreement to pay a sum certain.”

Moreover, the CAA also provided for “the periodic adjustment of the advance limit, and allows the lender, inter alia, to suspend, terminate, or reduce the borrower’s right to obtain future advances under certain circumstances.” Additionally, the CAA permitted the lender to “sell, transfer, or assign its rights thereunder to third parties, with the understanding that the purchaser, transferee, or assignee will have no obligation to cure any of the lender’s failures to perform, and that the lender will continue to be obligated to the borrower under the (CAA) unless the sale, transfer, or assignment is made to a financially responsible person who unconditionally assumes all of the lender’s obligations thereunder.” Further, the CAA required that all disputes arising out of or relating to the CAA, other than an action to foreclose, had to be submitted to binding arbitration.

Thus, the CAA did “much more than memorialize the borrower’s unconditional promise to pay a sum of money.” The CAA established a “banking relationship between the lender and the borrower, provides terms and conditions under which the borrower may, from time to time, obtain additional cash advances from the lender, and even contains an arbitration clause.” Although the CAA was apparently only signed by the borrower, the CAA imposed obligations on both the borrower and the lender. The language of several provisions of the CAA, “read in the context of the agreement as a whole,” provided “compelling evidence that the (CAA) is not, and was never intended to be, a negotiable instrument.”

Thus, the court held that the plaintiff cannot establish its standing “merely by showing that is possessed the original (CAA), indorsed in blank, on the date this action was commenced, and the plaintiff’s motion for summary judgment on the complaint should have been denied.” The court agreed with the trial court’s denial of the defendant’s cross motion for summary judgment dismissing the complaint, since the defendant failed to eliminate triable issues of fact as to whether the plaintiff had standing.

OneWest Bank N.A. v. FMCDH Realty Inc., App. Div., 2d Dept., Index No. 2016-00039, decided Sept. 19, 2018. Opinion by Chambers, J. Mastro, J.P., LaSalle, Brathwaite Nelson, JJ. concur.



Scott E. Mollen is a partner at Herrick, Feinstein.