• Dude, Where’s My Note?

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    UPDATE: On February, 7, 2017, in an unpublished decision, In re Foreclosure of Iannucci, the NC Court of Appeals upheld the trial court’s reliance on a lost note affidavit as competent evidence to support the court’s findings of fact and, in turn, the conclusion of law that the lender is the holder of a valid debt.   In the opinion, the court did not directly address the jurisdictional issues raised in question two below.  However, the superior court makes the same inquiry on appeal de novo from the clerk as the clerk does in the first instance in a power of sale foreclosure.  See In re Foreclosure of Lucks, ___ NC ___ (Dec. 21, 2016).   By finding that the superior court appropriately relied on a lost note affidavit, a similar finding would likely apply to the jurisdictional authority of the clerk to rely on a lost note affidavit.  Because the court’s decision is unpublished, it does not constitute controlling legal authority, but is some indication of how a court may decide a similar issue on appeal in the future.

    UPDATE #2:  On October 2, 2018 in a published opinion, the NC Court of Appeals upheld an order authorizing sale entered in a non-judicial foreclosure where the person seeking to enforce the note lost the original note.  The court of appeals based the decision on the conclusion that the mortgagee presented evidence to satisfy the requirements of G.S. 25-3-309 of the NC Uniform Commercial Code.  You can reach the decision, In re Foreclosure of Frucella, here.

    Imagine this scenario:  A borrower defaults on a loan and the lender notices the default and gives the borrower an opportunity to cure it.  The borrower is unable to remedy the default and the lender engages a trustee and begins to gather the loan documents to proceed with a foreclosure action.  In the process of going through the loan file, the lender realizes that the original note is missing and the lender is not able to locate a copy of the note.

    May the lender still proceed with the foreclosure?  

    Yes, the lender may proceed with the foreclosure.  G.S. 25-3-309 states that a person (as defined in G.S. 25-1-201(b)(27) and including individuals, business, and other legal entities) not in possession of a note is entitled to enforce it if:

    1. The person was in possession of the instrument and entitled to enforce it when the loss of possession occurred, and
    2. The loss of possession was not due to transfer by the person or a lawful seizure, and
    3. The person is not reasonably able to obtain possession of the instrument because the instrument was destroyed, it is lost, or it is in the wrongful possession of an unknown person or a person that cannot be found or served with process.

    Typically, the lender seeking to foreclose submits an affidavit or testimony to the court that attests to the occurrence of the events described above along with the terms of the note.   G.S. 25-3-309 (b). If there is sufficient proof of these events as well as the terms of the note, then the person seeking enforcement is entitled to the rights set forth in G.S. 25-3-308 (regarding (i) proof of signatures, and (ii) payment) as if the person had produced the note.  Id.

    What type of foreclosure may the lender file – a judicial foreclosure before a superior court judge or a power of sale foreclosure before the clerk of superior court?

    The answer to this question isn’t quite as easy as the first.  Based on a plain language reading of Chapter 45, the clerk does not have jurisdiction to hear a foreclosure case involving a lost, stolen, or destroyed note.

    The clerk’s jurisdiction in the context of a power of sale foreclosure is limited. In re Vogler Realty, Inc., 365 N.C. 389, 395 (2012).   The clerk cannot perform functions involving the exercise of judicial discretion in the absence of statutory authority.  Id.  Under Chapter 45, the clerk may not enter an order authorizing sale unless the clerk finds competent evidence of six factors.  G.S. 45-21.16(d).  One of these factors includes finding that the party seeking to foreclose is the holder of a valid debt.  G.S. 45-21.16(d)(i).

    The North Carolina Supreme Court has stated that the term “holder” as used in GS 45-21.16 is defined by the UCC.  In re Bass, 366 N.C. 464, 468 (2013).   To be a holder under the UCC, a person must meet two criteria:  (1) they must be in possession of a note, and (2) the note must be payable to that person or to bearer, either originally or through subsequent indorsementsG.S. 25-1-201(b)(21)(a).

    In contrast, a person seeking to enforce a lost, stolen, or destroyed note must attest that they do not have possession of the note.  G.S. 25-3-309(a).   Furthermore, the UCC as set forth in Chapter 25 sets forth a list of persons “entitled to enforce” the note, by foreclosure or otherwise.  G.S. 25-3-301.  They include:

    1. The holder of the note
    2. A nonholder in possession of the note who has the rights of a holder
    3. A person not in possession of the note who is entitled to enforce a lost, stolen or destroyed note pursuant to G.S. 25-3-309
    4. A person not in possession of note who is entitled to enforce the note pursuant to GS 25-3-418(d)

    G.S. 25-3-301.   As is evident from the foregoing list, a holder of the note under the UCC is not the same as a person who seeks to enforce a lost, stolen or destroyed note.  G.S. 35-3-301.  Given that Chapter 45 limits the clerk’s authority to enter an order to those cases where the clerk finds that the party seeking to foreclose is the holder, the clerk does not have clear authority under Chapter 45 to enter an order for sale when a person other than a holder seeks an order from the clerk, including a person entitled to enforce a lost, stolen, or destroyed note under G.S. 25-3-301.

    The disconnect between Chapter 25 and Chapter 45 may be a result of amendments to Chapter 25 that were not reflected in Chapter 45.  In 1995, the legislature replaced the former and more limited G.S. 25-3-301 entitled “rights of a holder” with the more expansive “persons entitled to enforce the instrument” to reflect that the enforcement of notes is not limited to holders and includes other persons and cases such as when the note is lost.  G.S. 25-3-301, cmt. 1.   However, a similar change has not been made to Chapter 45 to expand the clerk’s jurisdiction to include other persons entitled to enforce the note in addition to the holder.

    It is more expensive and time-consuming for a lender to have to pursue a judicial foreclosure where the note is lost, stolen, or destroyed.  This is a cost that is most frequently passed on to a borrower as part of the terms of the loan.  Some may point out that it goes against the spirit of Chapter 45 to require a lender to pursue a judicial foreclosure where a person may not be a holder, but they are entitled to enforce the note.  In one unpublished decision, the NC Court of Appeals applied the statute regarding lost, stolen, or destroyed notes in the context of a power of sale foreclosure.  In re Carter, 198 N.C. App. 702 (2009) (unpublished). The court did not expressly address the limitation in Chapter 45 on the clerk’s authority to enter an order only when the holder seeks to foreclose.  Id.  Ultimately, the court found that the affidavit submitted by the lender was insufficient to prove the terms of the instrument and affirmed the trial court’s dismissal of the action.  Id.  The case does leave open some question as to whether the court could see things differently and expand the definition of holder to include other persons entitled to enforce the note under the UCC.   To do that, the court would first have to contend with the current language of Chapter 45 and other case law from the NC Supreme Court limiting the definition of holder to a person in possession of the note.

    What are your thoughts?  Please share them below.




    Meredith Smith joined the School of Government in 2013. Her work focuses on the areas of law where clerks of superior court exercise judicial authority.

    8 thoughts on “Dude, Where’s My Note?”

    • Matt Kraus says:

      It appears to me that our General Assembly needs to amend chapter 45 to address this issue, and to also *finally* clarify the applicability of the rules of civil procedure in power of sale foreclosure proceedings, and to specifically address the fact that foreclosures are not a special proceeding, as the Clerk’s manual indicates and is clearly intended in a number of parts of the foreclosure statute.

      • Jason Purser says:

        I don’t think the Bass case or Chapter 45 can fairly be read as narrowly as suggested. Because the lender in Bass was seeking to enforce a negotiable instrument, then it was appropriate to discuss whether it was the holder of that INSTRUMENT, which requires an analysis of the pertinent provisions of UCC Article 3.

        However, look at what Chapter 45 actually says: it is not limited to negotiable instruments. It says the clerk shall find “holder of a valid DEBT” (emphasis added). Not all debts are evidenced by negotiable instruments. Accordingly, I think it’s appropriate when we’re talking about negotiable instruments, to look to the UCC to determine whether a person is a holder of that instrument. However, when we’re talking about a situation where the debt is evidenced by something other than a negotiable instrument, then you have to look to the ordinary definition of “holder.”

        Going to M-W.com, I find this definition of “holder”:
        1: a person that holds: as
        a (1) : owner (2) : tenant
        b : a person in possession of and legally entitled to receive payment of a bill, note, or check.

        The oridinary definition considers that when we’re not discussing a negotiable instrument, a person can be a holder by virtue as its status of an “owner.” Accordingly, when we’re talking about lost notes, reverse mortgage debts, future advance loans, or any other debt where a negotiable instrument is NOT involved, a person can demonstrate they are a holder by their ownership status after looking to other relevant law, instead of the law governing holdership of negotiable instruments.

    • Meredith Smith says:

      Thanks for the comment. I think it is a great point that Chapter 45 does extend beyond negotiable instruments. It does allow for the enforcement of debts outside of just negotiable instruments by the use of the “valid debt” language (therefore not requiring a clerk to engage in an analysis of whether a note is negotiable or not). However, the analysis of what constitutes a holder still must be applied to negotiable and non-negotiable instruments alike given Chapter 45’s use of “holder” (and not other language such as “owner” or “person entitled to enforce”). Bass is one case out of a number of cases that state that the term “holder” as used in Chapter 45 is defined as set forth in GS 25-3-301 of the UCC. See In re Simpson, 211 NC App 483, 490 (2011) (stating “[w]e have previously determined that the definition of “holder” under the Uniform Commercial Code (“UCC”), as adopted by North Carolina, controls the meaning of the term as it used in section 45–21.16 of our General Statutes for foreclosure actions under a power of sale). See also In re Adams, 204 NC App. 318 (2010); Connolly v. Potts, 63 NC App 547 (1983). NC courts have applied this definition to the term as used in Chapter 45 without qualifying that it applies to only those foreclosures that involve negotiable instruments. They have instead stated that it applies as the term is used in GS 45-21.16.

      The right to enforce a debt as a holder and ownership of the debt are two different concepts. A person may assign enforcement rights as the holder to another party while retaining ownership rights in the debt. Further, Black’s Law Dictionary has a similar definition to the UCC for holder that focuses on possession and makes no mention of ownership (unlike the definition you cite above from M-W.com).

      Many lenders rely on GS 25-3-309 when seeking to foreclose based on a lost, stolen or destroyed note before the clerk. This is a remedy available under GS 25-3-301 to enforce a negotiable instrument when a person is not a holder. For a person to avail themselves of this remedy as a means of proving they are a holder seems to ask the court to ignore the definition of the very thing it is being asked to find.

      A person can still foreclose when the note is lost, stolen, or destroyed. However, the operable question is whether that foreclosure is an appropriate power of sale foreclosure before the clerk given Chapter 45’s use of “holder” and the case law interpreting holder to mean a person in possession. A clerk’s authority is limited to what is expressly provided for by statute. The legislature’s use of valid debt + holder indicates that while the underlying debt does not have to be evidenced by a negotiable instrument, a person may not pursue a power of sale foreclosure before the clerk without being in possession of the underlying document evidencing the debt that is payable to that person.


      • Jason Purser says:

        Respectfully, the opinions discussing the definition of a “holder” under the UCC refer to cases involving negotiable instruments. There simply is no authority to suggest other debts are unenforceable under Chapter 45. It makes perfect sense for an “owner” to be synonymous with “holder” when the debt obligation is an intangible, as is the case with non-negotiable paper.

        The analysis that the clerk does not have jurisdiction to entertain power of sale foreclosures does a gross injustice to the history and reasoning behind the notice and hearing provisions of Chapter 45. A power of sale remedy is a self-help contractual remedy that a debtor authorized by signing a DEED OF TRUST, without regard to whether the secured debt is evidenced by a negotiable instrument. The only reason we have hearings before the clerk to authorize a power of sale foreclosure was because of the Turner v. Blackburn case where a federal district court ruled that a mortgagor is entitled to notice and opportunity to be heard before the foreclosure by power of sale could proceed. You have taken a safeguard and proclaimed it to be an absolute bar of the power of sale remedy for certain debts, when that was not the intention behind the statute.

    • Jolee says:

      I’ve found that clerks will look to the evidence in support of the six elements… and most will accept the Affidavit of Lost Note as evidence that they are holder of the Note, as long as the affidavit is clear, as you explained above.

    • Jason Purser says:

      The Court of Appeals has answered the question in an opinion released today. Lost notes are enforceable by power of sale in North Carolina. See In re Iannucci. https://appellate.nccourts.org/opinions/?c=2&pdf=34938.

      • Matt Kraus says:

        Although not a published opinion, which is odd considering it is the first time this has come up on appeal and that specific issue was before the court. It is good that we have this for guidance now though.

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