CitiMortgage, Inc. v. Garcia

538 P.3d 89

CITIMORTGAGE, INC., Plaintiff-Appellant/Counterdefendant/Cross-Appellee,

v.Lorraine GARCIA, as Personal Representative of the Estate of Rose Gomez, Defendant-Appellee/Counterplaintiff/Cross-Appellant.

No. A-1-CA-38418

Court of Appeals of New Mexico.

Filing Date: July 20, 2022

Rose L. Brand & Associates, P.C., Eraina M. Edwards, Albuquerque, NM, for Appellant

Kalm Law Firm, P.C., C. James Kalm, Thomas L. Kalm, Albuquerque, NM, for Appellee

IVES, Judge.

{1} In this foreclosure case, Plaintiff CitiMortgage, Inc., appeals from an order in which the district court concluded that Plaintiff lacked standing because the promissory note secured by the mortgage was lost while it was not in Plaintiff's possession. On appeal, we consider an issue of first impression: whether the assignee of a lost negotiable instrument to which Article 3 of New Mexico's Uniform Commercial Code (NMUCC) applies, see generally NMSA 1978, § 55-3-102 (1992), may obtain the right to enforce that instrument under NMSA 1978, Section 55-3-309 (1992) by virtue of the assignment. Concluding that the NMUCC's provisions do not displace the general rule that an assignee stands in the assignor's shoes, we hold that the assignment of a lost instrument carries with it the right to enforce because that interpretation of Section 55-3-309 furthers the policies and purposes underlying the NMUCC. To ensure that the vital limitations on the right to enforce a lost instrument contained in Section 55-3-309(b) serve their intended purpose of protecting persons required to pay, we also hold that, when a district court enters judgment in favor of a party seeking to enforce a lost note, the court must make the finding required by Section 55-3-309(b) —that the "person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument"—explicitly and must explain why its chosen means afford adequate protection in a reasonable manner under the circumstances.

BACKGROUND

{2} In 2016, CitiFinancial Servicing, LLC (CitiFinancial) filed an in rem complaint for foreclosure of a mortgage securing a promissory note executed by Rose Gomez, who had passed away before the initiation of suit, and whose estate is represented by Defendant Lorraine Garcia. Because the note had allegedly been lost, CitiFinancial based its claim for foreclosure on Section 55-3-309, which allows parties to enforce lost instruments under certain circumstances. CitiFinancial eventually filed an unopposed motion to substitute CitiMortgage, LLC as plaintiff pursuant to Rule 1-025(C) NMRA, asserting that CitiFinancial had transferred the right to enforce the note at issue to Plaintiff during the course of the litigation.

{3} After the district court granted the motion to substitute, Defendant moved for summary judgment, contending that she had established an affirmative defense to enforcement of the note—and thus to foreclosure of the mortgage—because it was undisputed that the note was lost and that Plaintiff did not have the rights of a holder in due course. To support this position, Defendant relied on the last sentence of NMSA 1978, Section 55-3-305(c) (2009), which provides that "[a]n obligor is not obliged to pay [a negotiable] instrument if the person seeking enforcement of the instrument does not have rights of a holder in due course and the obligor proves that the instrument is a lost or stolen instrument." Defendant's argument was that a person can never be required to pay a lost instrument if the person who lost the instrument does not have the rights of a holder in due course.

{4} The district court rejected that argument, but nevertheless entered summary judgment in Defendant's favor. Applying what it considered to be the plain meaning of Section 55-3-309, the district court concluded that Plaintiff lacked standing to enforce the note because Plaintiff had not been "in possession of the instrument and entitled to enforce it when loss of possession occurred." Section 55-3-309(a). Plaintiff filed a notice of appeal from the order granting summary judgment, and Defendant cross-appealed on the Section 55-3-305(c) issue.

DISCUSSION

I. The Assignment of a Lost Instrument Carries With It the Right to Enforce

{5} New Mexico's standing doctrine requires a plaintiff seeking to foreclose a mortgage that secures a promissory note to demonstrate that it had the right to enforce the note at the time suit was filed. HSBC Bank USA v. Wiles , 2020-NMCA-035, ¶ 9, 468 P.3d 922. Where that note is a negotiable instrument subject to Article 3 of the NMUCC, as the note at issue here undisputedly is, our courts look to NMSA 1978, Section 55-3-301 (1992) to determine whether the plaintiff has the right to enforce the note. Deutsche Bank Nat'l Tr. Co. v. Johnston , 2016-NMSC-013, ¶ 14, 369 P.3d 1046. In pertinent part, that statute defines a " ‘[p]erson entitled to enforce’ " an instrument as "a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 55-3-309." Section 55-3-309, in turn, sets out the circumstances under which a person is entitled to enforce a lost, stolen, or destroyed instrument and the conditions for exercising that entitlement:

(a) A person not in possession of an instrument is entitled to enforce the instrument if (i) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred, (ii) the loss of possession was not the result of a transfer by the person or a lawful seizure, and (iii) 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.

(b) A person seeking enforcement of an instrument under Subsection (a) must prove the terms of the instrument and the person's right to enforce the instrument.... The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.

The question presented here is whether the assignment of a lost instrument¹ carries with it the right to enforce the instrument under Section 55-3-309 if the assignor had that right.

{6} Section 55-3-309 is modeled on the version of Section 3-309 of the Uniform Commercial Code (UCC) that was adopted as part of the 1990 amendments to the UCC. See generally U.C.C. § 3-309 (Am. Law Inst. & Unif. Law Comm'n 1990, amended 2002).² We are far from the first court called upon to decide whether this uniform provision permits the post-loss assignee of a negotiable instrument to enforce it, but those that have gone before are divided. Beginning, apparently, with Dennis Joslin Co. v. Robinson Broadcasting Corp. , 977 F. Supp. 491 (D.D.C. 1997), courts in one line of cases hold that the plain language of UCC Section 3-309 gives enforcement rights only to the person who had possession of the instrument at the time of loss. See Dennis Joslin Co. , 977 F. Supp. at 495 (explaining that "the plain language of the provision mandates that the plaintiff suing on the note must ... have been both in possession of the note when it was lost and entitled to enforce the note when it was lost" (emphasis omitted)); accord, e.g. , Emerald Portfolio, LLC v. Outer Banks/Kinnakeet Assocs., LLC , 249 N.C.App. 246, 790 S.E.2d 721, 725 (2016) ; Seven Oaks Enters., L.P. v. Devito , 185 Conn.App. 534, 198 A.3d 88, 99 (2018) ; SMS Fin. XXV, LLC v. Corsetti , 186 A.3d 1060, 1066 (R.I. 2018). Under this line of cases, an assignee cannot enforce the lost note because they did not have possession of the note at the time it was lost.

{7} In contrast, the courts that have concluded that the assignee of a lost note may enforce it generally reason that the language of UCC Section 3-309 says nothing one way or the other about an assignee's right to enforce a promissory note lost by the assignor before assignment. See, e.g. , Invs. Bank v. Torres , 243 N.J. 25, 233 A.3d 424, 436-37 (2020) ("The New Jersey version of UCC [S]ection 3-309 ... is silent regarding the rights of an assignee of a mortgage and the transferee of a note when the original note executed by the mortgagor has been lost."); Atl. Nat'l Tr., LLC v. McNamee , 984 So. 2d 375, 378 (Ala. 2007) ; Jones v. Ward , 254 Md.App. 126, 270 A.3d 1024, 1035-36 (2022). Looking for an answer elsewhere in the UCC, these courts resort to relying on the pertinent state's enactment of UCC Section 1-103—a provision that applies to the entire Code—which provides that "the principles of law and equity" "supplement [the code's] provisions" "[u]nless displaced by [its] particular provisions." See, e.g. , Torres , 233 A.3d at 433-34, 436-37 ; McNamee , 984 So. 2d at 378. But cf. Jones , 270 A.3d at 1036 (holding that the right of enforcement could be assigned without discussing Maryland's version of Section 1-103). The courts that have allowed enforcement then reason that the rule that an assignee "stands in the shoes" of the assignor qualifies as one of these "principles" and is not "displaced" by the silence of Section 3-309 before holding that a post-loss assignee is entitled to enforce a lost instrument. See, e.g. , Torres , 233 A.3d at 431-37 ; McNamee , 984 So. 2d at 378.

{8} Interpreting Section 55-3-309 de novo, Baker v. Hedstrom , 2013-NMSC-043, ¶ 10, 309 P.3d 1047, we find ourselves in substantial agreement with the latter line of cases. As we explain below, the text of Section 55-3-309 does not answer the question presented, and we therefore ascertain the Legislature's intent by looking to the NMUCC as a whole and to the overarching directives for construing the NMUCC that the Legislature provided in ...