In Bank of America v. Alvarado, BER-F-47941-08 (January 7, 2011), Alvarado obtained a mortgage loan from Washington Mutual in 2006. After the loan was closed, Washington Mutual lost the note. It made an Affidavit of Lost Note dated July 14, 2006. Ownership of the mortgage loan, which included the Affidavit of Lost Note, was subsequently assigned to LaSalle Bank, as a trustee of a pool of mortgage loans. LaSalle Bank was then acquired in a merger by Bank of America. When the loan defaulted in 2008, Bank of America commenced a foreclosure action.
Alvarado defended the foreclosure action on the basis that Bank of America could not rely on the Affidavit of Lost Note because it was not the party who lost the note. Under §3-309 of the 1995 Uniform Commercial Code, a party in “possession of an instrument is entitled to enforce the instrument if the person was in possession of the instrument and entitled to enforce it when the loss of possession occurred . . .” Under a 2002 revision to 3-309, possession of the note at the time of its loss is not required; however, New Jersey had not adopted the 2002 revision.
The court examined cases interpreting the 1995 version of §3-309, the majority of which held that possession of the note and the right to enforce it must both be present at the time the note was lost before one is permitted to enforce it. The court refused to apply this rule, noting that it would mean no one can enforce the mortgage obligation, leading to an “inequitable” windfall to the defendant mortgagor.
Instead, the court noted that because the 1995 version of §3-309 is silent as to the assignment of rights under a promissory note that has been lost, it may rely on the common law doctrines of assignment and unjust enrichment under the “gap-filler” provision of §1-103. Under New Jersey common law, a person is unjustly enriched when she “receives a benefit and it would be inequitable to permit that person to retain the benefit without paying fair compensation or consideration for it.” In that instance, a court may fashion an equitable remedy.
New Jersey’s common law doctrine of equitable assignment, the court reasoned, “is sufficiently broad to permit assignment of the right to enforce a lost note.” The court would not construe §3-309 as preempting the common law doctrine, noting that “[e]ven if a higher court determined that common law assignment were preempted by the Code, the equitable remedy of unjust enrichment would still compel the result reached here.”
A copy of the decision is available here: BOA v. Alvarado_110111