Lesson. In some cases, proof of the date upon which a foreclosing lender acquired possession of a promissory note (endorsed in blank) could be important.
Case cite. Howard v. US Bank Trust N.A., 247 N.E.3d 761 (Ind. Ct. App. 2024)
Legal issue. Whether Indiana’s mandatory pre-suit notice of default was invalid, such that the subsequently filed residential foreclosure action was premature.
Vital facts. Borrower defaulted on her promissory note and residential mortgage. Lender, an assignee of the loan, asserted it acquired physical possession of the note, endorsed in blank, on 2/18/21. On 5/26/21, Lender sent Borrower the pre-suit notice of default. The rub was that the prior lender (assignor) did not execute the assignment of the mortgage for another eight days. Although not really expressed in the Howard opinion, the timing of the assignment of mortgage appeared to create a question as to when Lender actually obtained possession of the note.
Procedural history. The trial court granted Lender’s summary judgment motion, and Borrower appealed.
Key rules. The Court’s opinion stated several general rules applicable to standing to enforce a note:
“Promissory notes are negotiable instruments, which generally may only be enforced by their ‘holder.’” See also, Ind. Code §§ 26-1-3.1-104, –301.
Whether a person in possession of a negotiable instrument is a “holder” and, thus, is entitled to enforce the instrument depends on how the instrument is endorsed. A “holder” is “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person if the identified person is in possession of the instrument.” Ind. Code § 26-1-1-201(20)(A).
When “specially endorsed” (i.e., signed and made payable to an identified person), only the identified person has enforcement power. Ind. Code § 26-1-3.1-205(a).
But when “endorsed in blank” or “made payable to bearer” (i.e., signed and made payable but not to an identified person), the instrument is enforceable by anyone who possesses it. Ind. Code § 26-1-3.1-205(b).
Holding. The Indiana Court of Appeals reversed the summary judgment and remanded the case for trial.
Policy/rationale. The parties agreed that Lender had to physically possess the note when it sent the mandatory pre-suit notice of default. The parties also agreed that, without the right to enforce the note, the notice would have been invalid and the foreclosure action premature. The case turned on the proof, or lack thereof, surrounding when Lender came into possession of the note.
The Howard opinion largely was dedicated to technical evidentiary matters. Certain evidence pertaining to the purported date on which Lender acquired possession was stricken. In the end, the Court reasoned that there remained a genuine issue of material fact as to whether Lender was the holder of the note when it sent Borrower the mandatory pre-suit default notice. Review the opinion to learn more about the authentication problems identified by the Court.
The takeaway for commercial foreclosures, which do not require a pre-suit notice of default, is that assignee lenders ideally should have in hand the original promissory note (endorsed in blank, as applicable), together with the executed assignment of mortgage, before filing suit. If the date of note acquisition becomes an issue in a case – a rarity – lenders are advised to have solid, admissible evidence supporting such date.
- Indiana’s Pre-Suit Notice And Settlement Conference Statute Not Intended For Commercial Foreclosures
My practice involves loan enforcement actions. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on X @JohnDWaller or on LinkedIn, or you can subscribe to posts via email as noted on the bottom of this page.