N.C. Ct. of Appeals: In re Frucella- Lost Mortgage Note

Summary: The Frucellas purchased a home with a mortgage note from The Lotham & Nettleton Co. In 1985. In 1997, a Notice of Substitution of Trustee was filed providing, among other things, that Crestart Bank was the holder of the note. Then again in 2003, another Notice of Substitution of Trustee was recorded naming Sun Trust Bank as the holder of the note. After the inevitable defaults in payments, Citimortgage, acting on behalf of Lotham & Nettle on, commenced foreclosure proceedings against the Frucellas and, at the foreclosure hearing, presented two lost note affidavits, that averred that: 1. At the time CitiMortgage, Inc. lost possession of the original Note, it had the right to enforce the Note and Deed of Trust; 2. The loss of possession of the Note was not the result of the original Note being assigned, endorsed, or delivered to another party, cancelled, pledged, hypothecated or otherwise transferred, nor was the loss of possession the result of a lawful seizure of the Note; and 3. After a good faith, thorough and diligent manual search, the hard copy collateral file pertaining to the Loan (which pursuant to CitiMortgage, Inc.’s regular business practice would be expected to contain the original note) was not located. The Court of Appeals found that this met the requirements of the UCC at N.C.G.S. § 25-3-309, which allows for, subject to a three-part test, the enforcement a lost instrument if: 1. The person was in possession of the instrument and entitled to enforce it when loss of possession occurred, 2. The loss of possession was not the result of a transfer by the person or a lawful seizure, and 3. The person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process. Commentary: Only the party that can show it last had possession of the note can comply with these requirements. Lost Note cases will likely then turn on when the Note was lost and who had possession of it at that time. Here, where two prior Notices of Substitution of Trustee indicated that first Crestar and then Sun Trust were holders of the note, it would seem that the Frucellas should have sought discovery from both Crestar and Sun Trust to determine if either had actually had possession of the note, as such would have eliminated the ability of Citimortgage to proceed. Such might be a only pyrrhic victory, as then either Crestar or Sun Trust could foreclose, but that might provide sufficient leverage for a positive outcome for the Frucellas. Unmentioned also here, is that the lost note affidavits, affirmed by the multiple levels of the North Carolina court system, establish that Crestar and Sun Trust both filed fraudulent Notices of Substitution of Trustee, as neither could have been the holders of the note if it had been lost previously. For a copy of the opinion, please see: In re Frucella