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PLAINTIFF DID NOT DEMONSTRATE STANDING TO BRING THE FORECLOSURE ACTION (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, determined plaintiff in this foreclosure action did not demonstrate she had standing to bring it:

“A plaintiff has standing to maintain a mortgage foreclosure action where it is the holder or assignee of the underlying note at the time the action is commenced” … . The plaintiff can establish standing by attaching a properly endorsed note to the complaint when commencing the action . However, where an endorsement is on an allonge and not on the note itself, the plaintiff must establish that the allonge was “so firmly affixed to the note so as to become a part thereof” as required by UCC 3-202(2) at the time the action was commenced … . “Where there is no allonge or note that is either endorsed in blank or specially endorsed to the plaintiff, mere physical possession of a note at the commencement of a foreclosure action is insufficient to confer standing or to make a plaintiff the lawful holder of a negotiable instrument for the purposes of enforcing the note” … .

Here, the plaintiff failed to establish her status as holder of the note at the time the action was commenced. Although the note was executed in favor of the decedent, the copy of the note attached to the complaint contains two purported endorsements in favor of nonparties, and the plaintiff failed to show that an allonge containing an additional endorsement back to the decedent was firmly affixed to the note … . Thompson v Seay, 2023 NY Slip Op 06072, Second Dept 11-22-23

Practice Point: Where the note and the endorsements do not comply with the requirements of UCC 3-202, plaintiff has not demonstrated standing to bring the foreclosure action.

 

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THE BANK DID NOT DEMONSTRATE STANDING TO BRING THE FORECLOSURE ACTION AND DID NOT DEMONSTRATE COMPLIANCE WITH THE NOTICE-OF-DEFAULT PROVISION IN THE MORTGAGE (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the bank in this foreclosure action did not demonstrate standing to bring the action and did not demonstrate it complied with the notice-of-default requirement in the mortgage:

… [T]he plaintiff failed to establish … that it had standing to commence this action. Although the plaintiff attached to the complaint copies of the note and three undated purported allonges, one of which was endorsed in blank, the plaintiff did not demonstrate that the purported allonges, which were each on a piece of paper completely separate from the note and the other allonges, were “so firmly affixed” to the note “as to become a part thereof,” as required by UCC 3-202(2) … .

Additionally, the plaintiff failed to establish its status as the holder of the note at the time of the commencement of the action. In her affidavit, a representative employed by the plaintiff’s loan servicer did not attest that she was personally familiar with the plaintiff’s record-keeping practices and procedures, and therefore, the plaintiff failed to demonstrate that the records relied upon by the affiant were admissible under the business records exception to the hearsay rule … .

The plaintiff also failed to establish, prima facie, that it complied with the condition precedent contained in the mortgage agreement, which required that it provide the defendant with a notice of default prior to demanding payment of the loan in full. The evidence submitted by the plaintiff did not establish that a notice of default was mailed by first-class mail or actually delivered to the defendant’s “notice address” if sent by other means, as required by the terms of the mortgage agreement … . U.S. Bank N.A. v Yoel, 2023 NY Slip Op 04682, Second Dept 9-20-23

Practice Point: If the defendant in a foreclosure action alleges the bank lacks standing to bring the action, the bank must demonstrate it was the holder of the note at the time the action was brought. In addition, the UCC requires that allonges endorsed in blank be “firmly affixed” to the note.

 

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THE BANK DID NOT DEMONSTRATE IT HAD STANDING TO FORECLOSE; THERE WAS INSUFFICIENT PROOF THE ALLONGE WAS FIRMLY AFFIXED TO THE NOTE AS REQUIRED BY UCC 3-202 (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the bank in this foreclosure action did not prove it had standing to bring the action:

A plaintiff has standing to commence a mortgage foreclosure action when it is the holder or assignee of the underlying note at the time the action is commenced … . The plaintiff can establish standing by attaching a properly endorsed note to the complaint when commencing the action … . However, where an endorsement is on an allonge to the note, the plaintiff must establish that the allonge was “so firmly affixed to the note so as to become a part thereof” pursuant to UCC 3-202(2) at the time the action was commenced … . “Where there is no allonge or note that is either endorsed in blank or specially endorsed to the plaintiff, mere physical possession of a note at the commencement of a foreclosure action is insufficient to confer standing or to make a plaintiff the lawful holder of a negotiable instrument for the purposes of enforcing the note” … .

Here, the plaintiff’s submissions failed to eliminate triable issues of fact as to whether the allonges were so firmly affixed to the note as to become a part thereof … . [The bank vice president’s] affidavit did not clarify whether the allonges were firmly affixed to the note … . U.S. Bank N.A. v Duvivier, 2023 NY Slip Op 03496, Second Dept 6-28-23

Practice Point: If the endorsement is on an allonge to the note, the allonge must be firmly affixed to the note (UCC 3-202). If the bank does not prove the endorsed allonge is firmly affixed to the note, it has not proved standing to foreclose.

 

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THE BANK DID NOT PRESENT SUFFICIENT EVIDENCE OF STANDING TO FORECLOSE; THE EVIDENCE DID NOT DEMONSTRATE THE ALLONGE WAS FIRMLY ATTACHED TO THE NOTE; EVIDENCE FIRST OFFERED IN REPLY SHOULD NOT HAVE BEEN CONSIDERED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the bank did not demonstrate it had standing to foreclose because the evidence the allonge was firmly attached to the note was insufficient. The court noted Supreme Court should not have considered evidence first submitted in reply:

Although the vice president of loan documentation attested in her affidavit, based on her review of the plaintiff’s business records, that an allonge containing an endorsement in blank by “Federal Deposit Insurance Corporation As Receiver of AmTrust Bank fka Ohio Savings Bank” was attached to the consolidated note, she did not aver that the allonge was “firmly affixed” to the consolidated note within the meaning of UCC 3-202(2). “Although the foundation for the admission of a business record may be provided by the testimony of the custodian, it is the business record itself, not the foundational affidavit, that serves as proof of the matter asserted” … . Moreover, the affidavit was sworn to on January 9, 2020, subsequent to the commencement of this action, and the affiant did not state when she reviewed the copy of the note and the allonge. Thus, her affidavit was insufficient to establish, prima facie, that the allonge was “so firmly affixed [to the consolidated note] as to become a part thereof” (UCC 3-202[2]) at the time of commencement of either the 2014 action or the 2015 action … . Nor did the affidavit of the employee of the plaintiff’s attorneys establish compliance with the requirements of UCC 3-202(2), as it made no reference to an allonge to the consolidated note.

Affidavits submitted by the plaintiff with its reply papers, asserting that the allonge was attached to the consolidated note at the time of commencement of the 2015 action, should not have been considered by the Supreme Court, since a party moving for summary judgment “cannot meet its prima facie burden by submitting evidence for the first time in reply” … . Wells Fargo Bank, N.A. v Mitselmakher, 2023 NY Slip Op 02709, Second Dept 5-17-23

Practice Point: To demonstrate standing to foreclose the bank must show the allonge was “firmly attached” to the note within the meaning of UCC 3-303(2). The bank’s evidence here was insufficient.

Practice Point: Evidence first submitted in reply should not be considered in support of the prima facie burden for summary judgment.

 

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THE BANK IN THIS FORECLOSURE ACTION DID NOT SUBMIT SUFFICIENT PROOF OF STANDING OR COMPLIANCE WITH THE NOTICE REQUIREMENTS OF RPAPL 1304 (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the bank in this foreclosure action did not demonstrate standing or compliance with the notice requirements of RPAPL 1304:

“[A] plaintiff may demonstrate its standing in a foreclosure action through proof that it was in possession of the subject note endorsed in blank, or the subject note and a firmly affixed allonge endorsed in blank, at the time of commencement of the action” … . Although the plaintiff attached to the complaint copies of the note and a chain of purported allonges ending with an undated purported allonge endorsed in blank, the plaintiff did not demonstrate that the purported allonges, which were on pieces of paper completely separate from the note, were “so firmly affixed thereto as to become a part thereof,” as required by UCC 3-202(2) … . …

Johnson’s [the foreclosure specialist’s] affidavit did not establish proof of a standard office mailing procedure designed to ensure that items are properly addressed and mailed …  Further, Johnson’s affidavit failed to address the nature of Fay’s [plaintiff’s loan servicer’s] relationship with LenderLive [third-party vendor which sent the RPAPL 1304 notice] and whether LenderLive’s records were incorporated into Fay’s own records or routinely relied upon in its business … . Thus, Johnson’s affidavit failed to lay a foundation for admission of the transaction report generated by LenderLive (see CPLR 4518[a] …). Finally, the tracking numbers on the copies of the 90-day notices submitted by the plaintiff, standing alone, did not suffice to establish, prima facie, proper mailing under RPAPL 1304 …) . US Bank N.A. v Okoye-Oyibo, 2023 NY Slip Op 00457, Second Dept 2-1-23

Practice Point: Here there was no evidence the allonge was firmly attached to the note; therefore the bank’s standing to bring the foreclosure action was not demonstrated.

Practice Point: The bank in this foreclosure action did not demonstrate compliance with the notice requirements of RPAPL 1304.

 

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THE ACTION BY PLAINTIFF SELLER TO RECOVER ON A SECURITY INTEREST IN COLLATERAL FOR A LOAN TAKEN OUT BY THE BUYER AS CONSIDERATION FOR THE PURCHASE BARRED BY THE STANDSTILL AGREEMENT WHICH ASSIGNED PRIORITY TO TWO OTHER SECURITY INTERESTS (FIRST DEPT).

The First Department, reversing Supreme Court, in a full-fledged opinion by Justice Manzanet-Daniels, determined the language of a so-called standstill provision barred the action by plaintiff Intrepid seeking to recover a security interest in collateral for the $28.7 million loan taken out by the buyer, Selling Source, as consideration for the purchase. Plaintiff was a third priority lender and the standstill agreement provided plaintiff could not seek a remedy until payment was made to the first and second priority lenders:

… Selling Source agreed to acquire a number of Internet businesses from plaintiff Intrepid. In partial consideration, Selling Source executed a $28.7 million junior secured promissory note … . …

In connection with the transaction, the parties executed an intercreditor and subordination agreement (ICA) delineating the priority of each party’s security interest in the collateral pledged by the guarantors. Plaintiff, as the “third priority representative” of the “third priority lenders,” received third priority liens as security for the repayment of the $28.7 million note … .

The ICA contains standstill provisions that circumscribe Intrepid’s ability to exercise its remedies in the event of a default by Selling Source, providing, inter alia, that “[n]o Third Priority Lender shall commence or exercise any Remedies in respect of any default or event of default. . . until such time as the Payment-in-Full of the First Priority Obligations and Second Priority Obligations” … . * * *

This action is barred by the plain language of the standstill provision, which states that “[n]o Third Priority Lender shall commence or exercise any Remedies in respect of any default or event of default . . . until such time as the Payment-in-Full of the First Priority Obligations and Second Priority Obligations” … . Intrepid Invs., LLC v Selling Source, LLC, 2023 NY Slip Op 00396, First Dept 1-31-23

Practice Point: Here priority was assigned to those holding security interests in collateral for a loan taken out by the buyer as consideration for the purchase. The plaintiff seller was a third priority lender. The seller’s action to recover on its security interest was barred by standstill agreement which did not allow the seller to seek a remedy until the payment of the first and second priority lenders.

 

 

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THE COMPLAINT DID NOT STATE CAUSES OF ACTION FOR BREACH OF IMPLIED WARRANTY FOR A PARTICULAR PURPOSE OR BREACH OF IMPLIED WARRANTY OF MERCHANTABILITY (FIRST DEPT).

The First Department, reversing Supreme Court, determined the complaint in this products liability case did not state causes of action for breach of warranty. Plaintiff tried the product, an elastic exercise band, which was on display at the store. He secured one end of the band with his foot. That end slipped out and hit him in the eye:

… To begin, plaintiff did not assert a claim in the SAC [second amended complaint] for breach of implied warranty of fitness for a particular purpose (see UCC 2-315). In any event, such a claim requires allegations that defendants had “reason to know any particular purpose for which the goods” are used and that plaintiff relied on defendants’ “skill or judgment to select or furnish [those] suitable goods” … . The SAC, however, did not allege any particular purpose of the exercise band other than its ordinary purpose for exercise, and there were no allegations that defendants knew or should have known about any particular purpose for which the goods were purchased, nor were there any allegations that plaintiff relied upon defendants’ skill or judgment in selecting those goods … .

Similarly, plaintiff failed to state a claim for breach of the implied warranty of merchantability, which provides under that warranty that goods “are fit for the ordinary purposes for which such goods are used” (UCC 2-314[2][c]). To plead a breach of the implied warranty of merchantability, a plaintiff must allege that goods are defective such that they were not reasonably fit for the ordinary purpose for which they were used, that the defect in the goods was a substantial factor in causing the injury, and that the alleged defect existed at the time the goods left the manufacturer or entity in the line of distribution … . Fiuzzi v Paragon Sporting Goods Co. LLC, 2023 NY Slip Op 00054, First Dept 1-10-23

Practice Point: The complaint in this case did not state causes of action for breach of implied warrant of fitness for purpose of breach of warranty of merchantability, criteria explained.

 

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PURSUANT TO UCC 9-406 A LENDER’S SECURITY INTEREST IN A DEBTOR’S ACCOUNTS-RECEIVABLES IS AN ASSIGNMENT SUCH THAT A THIRD-PARTY WHICH HAS NOTICE OF THE ASSIGNMENT MUST MAKE ANY PAYMENTS OWED TO THE DEBTOR DIRECTLY TO THE LENDER (CT APP). ​

​The Court of Appeals, reversing the appellate division, in a full-fledged opinion by Judge Wilson, determined that UCC 9-406 allowed the lender to collect the accounts-receivables owed to the debtor by third-parties. The lender (Worthy) had a security interest in payments made by a third-party (New Style) to the debtor (Checkmate) after the New Style received notice of the assignment:

We are called upon to determine whether, for purposes of New York’s Uniform Commercial Code § 9-406, an “assignee” includes the holder of a presently exercisable security interest in an assignor’s receivables. We hold that it does. Under UCC 9-406, a security interest is an assignment and the UCC is purposefully structured to permit a debtor to grant creditors security interests in a debtor’s receivables so that the secured creditor can direct account debtors to pay it directly. * * *

Worthy filed a UCC-1 Financing Statement against Checkmate with the Secretary of State of New Jersey, perfecting its secured position regarding Checkmate’s assets. … Worthy sent New Style a notice of its security interest and collateral assignment in the New Style accounts and directed New Style that “[a]ll remittances for Accounts shall be made payable only to Worthy.” … . * * *

An account debtor who receives a secured creditor’s notice asserting its right to receive payment directly can pay the secured creditor and receive a complete discharge (UCC 9-406 [a]) or, if in doubt, can seek proof from the secured creditor that it possesses a valid assignment and withhold payment in the interim (UCC 9-406 [c]). Worthy Lending LLC v New Style Contrs., Inc., 2022 NY Slip Op 06631, CtApp 11-22-22

Practice Point: Pursuant to UCC 9-406 a lender’s security interest in a debtor’s accounts-receivable is an assignment of the accounts-receivables to the lender such that, after notice of the assignment, a party owing payments to the debtor is obligated to make those payments directly to the lender.

 

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THE BANK DID NOT DEMONSTRATE THE ALLONGE, A SEPARATE PAPER, WAS FIRMLY ATTACHED TO THE NOTE, AS REQUIRED BY THE UCC; THEREFORE THE BANK DID NOT DEMONSTRATE IT HAD STANDING TO BRING THE FORECLOSURE ACTION (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the bank did not demonstrate standing to bring the foreclosure action:

… [T]he plaintiff failed to establish, prima facie, that it had standing to commence the action based on its annexation of the note to the summons and complaint, since the plaintiff did not demonstrate that the purported allonge, which was on a piece of paper completely separate from the note, was “so firmly affixed thereto as to become a part thereof,” as required by UCC 3-202(2) … . Hudson City Sav. Bank v Ellia, 2022 NY Slip Op 06235, Second Dept 11-9-22

Practice Point: When a defendant contests the bank’s standing to bring a foreclosure action, the bank must prove the allonge (a separate paper) was “firmly attached” to the note as required by UCC 3-202(2).

 

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THE BANK IN THIS FORECLOSURE ACTION DID NOT DEMONSTRATE IT WAS THE HOLDER OF THE NOTE AND DID NOT DEMONSTRATE POSSESSION OF THE NOTE AT THE TIME THE ACTION WAS BROUGHT BECAUSE THE NOTE ITSELF WAS NOT ATTACHED TO THE LOAN SERVICER’S AFFIDAVIT; THE BANK’S MOTION FOR SUMMARY JUDGMENT SHOULD NOT HAVE BEEN GRANTED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the plaintiff bank should not have been awarded summary judgment in this foreclosure action because it did not demonstrate standing to foreclose:

… [T]here was no evidence that the plaintiff is the assignee of the note, and a triable issue of fact exists as to whether the plaintiff was the holder of the note at the time this action was commenced. A promissory note is a negotiable instrument within the meaning of the Uniform Commercial Code (see UCC 3-104[2][d] …) “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” (UCC 1-201[b] [21][A] …). In the present case, there is a triable issue of fact as to whether the note was properly specially endorsed by an allonge “so firmly affixed thereto as to become a part thereof” when it came into the possession of the plaintiff (UCC 3-202[2] …).

Further, the affidavit of Verdooren [loan servicer employee] and the accompanying business records were insufficient to establish the plaintiff’s standing … . Although the foundation for the admission of a business record may be provided by the testimony of the custodian, “it is the business record itself, not the foundational affidavit, that serves as proof of the matter asserted” ( … see CPLR 4518[a]). Here, although Verdooren stated that Wells Fargo had possession of the note on the plaintiff’s behalf at the time the action was commenced, the documents attached to Verdooren’s affidavit failed to establish this fact. Bank of N.Y. Mellon Trust Co., N.A. v Andersen, 2022 NY Slip Op 05827, Second Dept 10-19-22

Practice Point: If the defendant raises the lack-of-standing defense in a foreclosure action, the bank must demonstrate the plaintiff was the assignee of the note and the note was in its possession when the action was brought. Here the plaintiff did not show the note was properly endorsed by an attached allonge when it came into plaintiff’s possession and the note was not attached to the loan servicer’s affidavit, rendering the affidavit hearsay.

 

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