The Burden of Proof in Case of a Lost Note

It is well-established that creditors bear the burden of proof in foreclosure actions, to establish that they are entitled to enforce the promissory note. Borrowers’ attorneys are routinely challenging the creditors on this issue, and even in uncontested cases, the courts are applying strict scrutiny to the evidence before granting judgment in favor of the creditor.

The original note is an important document that should be safeguarded by the holder. A lost note is not necessarily fatal to the creditor’s claim, but prevailing in that situation is more difficult in cases where the note was lost by a prior holder.

Under UCC §3-301, and §3-309, a creditor is entitled to enforce the note even if it has been lost, if all of the following apply: (1) they were in possession of the note and entitled to enforce it when loss of possession occurred; (2) the loss of possession was not the result of a transfer by them, or a lawful seizure; and (3) they cannot reasonably obtain possession of the note because it 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.

With the heightened level of scrutiny being applied by the courts, a simple statement that the note is lost may no longer be sufficient in order for the creditor to prevail.  The creditor must establish the three above-mentioned elements, and must also prove the terms of the note. In addition, the court must find that the borrower is adequately protected against loss that might occur by reason of a claim by another person to enforce the note.

This difficulty was illustrated most recently in Beaumont v. Bank of New York Mellon, a Florida Court of Appeals case decided on February 17, 2012, involving a note that was apparently lost prior to the transfer of the loan to the plaintiff.   The Court of Appeals reversed the judgment for foreclosure, because the creditor had failed to prove who lost the note, when it was lost, and offered no proof of anyone's right to enforce the note when it was lost, or evidence of ownership due to the transfer. The court also noted the requirement that the trial judge is also required to address the issue of providing adequate protection to the borrower against loss that might occur by reason of a claim by another person to enforce the note.

In the current environment, loan servicers should seek to enhance their security protocol, in order to avoid losing the note.  Entities acquiring a loan where the note was lost by a prior holder must be prepared to establish all of the necessary details regarding the loss of the note, and the terms of the note, in order to ensure that the courts will recognize their entitlement to enforce the note.

It is also important to note that in the event an unscrupulous note holder sells the loan to two different buyers, the buyer in possession of the original note will generally prevail.

If you have any questions regarding a Florida property, please contact Ms. Cheryl Burm. Cheryl is the managing attorney of the Ft. Lauderdale, Florida office, practicing in the Real Estate Default Group.