In the age of digital transactions and DocuSign, the importance of lenders storing and maintaining original loan documents has waned. But exceptions persist. In a recent decision, the Washington Court of Appeals (Division I) outlined one of the remaining areas where document management remains important: the humble promissory note.
Robertson v. 21st Mortgage Corporation
In 1999, Linda Nicholls obtained a loan from Old Kent Mortgage Company. As is common, the Nicholls loan was subsequently transferred in a series of transactions: (i) Old Kent transferred the loan to Residential Funding Company (RFC), endorsing the note to RFC, (ii) RFC placed the loan in a securitized trust, endorsing to the trustee, (iii) the trustee then executed an allonge, endorsing the note in blank, (iv) a subsequent trustee then endorsed the note back to RFC, (v) RFC then sold the note to Berkshire Hathaway, again endorsing the note in blank, and (vi) finally, Berkshire contributed the loan to a securitized trust and delivered the original note and its allonges to 21st Mortgage Corporation, as servicer for the trust.
Following the line of transfers, 21st Mortgage then commenced a foreclosure on the property securing the loan. Challenging the foreclosure, the owner of the property claimed that 21st Mortgage did not have standing to enforce the loan because the allonges endorsing the note to various holders were not properly “affixed” under the UCC when 21st Mortgage sought to foreclose. Relying on section 3-204 of the UCC, the property owner argued that all allonges had to be permanently affixed to a note (i.e., stapled) for the endorsements to be valid.
In a victory for paperclips, the Court of Appeals disagreed. Relying on section 3-203 of the UCC, the Washington Court of Appeals found that the “affixing” language in section 3-204 was irrelevant. Rather, all that is required for a subsequent holder to enforce an assigned promissory is that the holder has in its possession all endorsements evidencing the chain of title, without regard to whether they are affixed to the note (by staple, paperclip, or otherwise).
Of course, document management officers will have the final say. But for anyone who has been tasked with scanning loan documents to a file and struggling to line up staple holes, the Washington Court of Appeals has provided some welcome relief.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.