A Blow to the “You Can’t Prove You’re the Holder” Defense

In North Carolina, powers of sale foreclosures are relatively limited in their scope.  To authorize a foreclosure sale, the Clerk of Superior Court must find the existence of only six elements: (i) a valid debt of which the party seeking to foreclose is the holder; (ii) default; (iii) a right to foreclose under the deed of trust; (iv) notice of the foreclosure hearing to those who are entitled to it; (v) that the underlying mortgage debt is not a home loan as defined in G.S. 45-101(1b); and (vi) that the sale is not barred by G.S. 45-21.12A (which concerns the homeowner’s military service status). 

Parties seeking to prevent a foreclosure sale from going forward are limited to challenging the existence of one or more of these six enumerated findings.  In the vast majority of NC foreclosures, none of those six elements is ever really in dispute.  Indeed, the party instituting the foreclosure can usually establish, with relative ease, each of those six elements.  In recent years, however, many property owners, desperate to save their properties from foreclosure but without a real defense to any of the other elements, have resorted to challenging the petitioner’s status as “holder” of the note.

What exactly is a “holder” of a note?  The Uniform Commercial Code, as adopted in North Carolina, defines “holder” as “[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.”  N.C. Gen. Stat. §25-1-201(b)(21)(a)(2013).  When a negotiable instrument is indorsed in blank, it “becomes payable to bearer and may be negotiated by transfer of possession alone until specifically indorsed.”  N.C. Gen. Stat. 25-3-205(b)(2013). In short then, to be a “holder” of a note, you must have possession of it and it must either be payable to you or indorsed in blank.  

In 2011, the North Carolina Court of Appeals in In re Foreclosure of Gilbert, 211 N.C. App. 483, 492, 711 S.E.2d 165, 172 (2011) held generally that production by a party of an original note at trial does not, in itself, establish that the note was transferred to that party with the purpose of giving it the right to enforce the instrument.  In Gilbert, however, the note in question was not indorsed in blank.  Rather, it was specially indorsed, and the party in possession of the note was not the entity to whom the note was payable.  In other words, in Gilbert, there was a real question as to whether the party trying to foreclose met the UCC’s definition of “holder.”

But what if, at the foreclosure hearing, a party has possession of an original note indorsed in blank?  Is this, in itself, sufficient to establish that the party is the holder?  In its recent opinion in Greene v. Trustee Services of Carolina, LLC, 781 S.E.2d 664 (N.C.App. 2016), the North Carolina Court of Appeals answered that question in the affirmative.  The relevant facts of Greene are as follows:  

The Kenleys executed a Promissory Note for $296,700.00 in favor of Homebanc Mortgage Corporation and secured it with a deed of trust encumbering their real property.  The Kenleys defaulted on the Note by failing to make monthly payments.  Meanwhile, the Kenleys also defaulted on their obligation to pay HOA dues on the property.  The HOA filed a claim of lien and foreclosed on the property.  Mr. Greene purchased the property at the HOA’s foreclosure sale for less than $5,000, after which he became the owner of the property subject to the deed of trust.  Later, U.S. Bank, which was in possession of the original Note executed by the Kenleys and indorsed in blank, initiated its own foreclosure on the property.  

Mr. Greene then sought to prevent U.S. Bank from foreclosing on the property.  In the foreclosure proceeding, Mr. Greene argued that despite the fact that U.S. Bank had possession of the original note endorsed-in-blank, it could not prove it was the holder of the note.  Mr. Greene then filed a separate quiet title action asking the court to enjoin U.S. Bank from foreclosing and to declare that he owned the property free and clear of U.S. Bank’s deed of trust.

The trial court allowed U.S. Bank to foreclose and dismissed Mr. Greene’s quiet title action.  Mr. Greene appealed to the North Carolina Court of Appeals.

On appeal, Mr. Greene, citing Gilbert, argued that U.S. Bank’s production of the original note endorsed in blank was not sufficient evidence to establish that U.S. Bank was the holder.  Mr. Greene contended that U.S. Bank had to also produce evidence regarding the transfer of the note to U.S. Bank or how it otherwise came into possession of the note.  The Court of Appeals flatly rejected this argument and, in citing In re Foreclosure of Connolly, 63 N.C. App. 547, 550, 306 S.E.2d 123, 125 (1983) held:

[T]here is no provision of the UCC requiring a party in possession of a note endorsed in blank to show the transfer of the note in order to enforce it.  Instead, “[i]t is the fact of possession which is significant in determining whether a person is a holder” of a note indorsed in blank.  …. 

Here, because the Note was endorsed in blank and U.S. Bank had possession of the Note, the superior court properly determined that U.S. Bank was the holder of the Note, satisfying N.C. Gen. Stat. § 45-21.16(d)(i). Greene, at 9-10.

Citing the prior pending action doctrine, the Court of Appeals also affirmed the trial court’s dismissal of Mr. Greene’s quiet title action because it involved the same parties, subject matter, issues, and requested relief as the foreclosure proceeding which was filed first.  The Court of Appeals also rejected Mr. Greene’s theory that U.S. Bank’s deed of trust was invalid because it was separated from the note through MERS, Inc.’s securitization process.  Relying on the Fourth Circuit’s holding in Horvath v. Bank of New York, N.A., 641 F.3d 617, 623 (4th Cir. 2011) and N.C. Gen. Stat. §47-17.2, the Court held “the Note and Deed of Trust are not separated through the securitization process: transfer of the Note constitutes an effective assignment of the deed of trust, and the holder of a note can enforce both the note and the Deed of Trust.”  Greene, at 16.

The Court’s opinion in Greene should limit future spurious challenges to a foreclosing party’s “holder” status, particularly when the original note is produced and is indorsed in blank.