Authors
Douglas B. Rosner
Director, Boston
drosner@goulstonstorrs.com+1 617 574 6517
Charles R. Jacob III
Of Counsel, New York
cjacob@goulstonstorrs.com+1 212 878 5143Summary judgment is an important tool in commercial foreclosure proceedings because it can cut both costs and the time needed to implement the foreclosure. The foreclosing party requests judgment of foreclosure on a set of court papers, cutting off further discovery and eliminating the need for further motions or even a trial. Or at least that’s the desired result – a recent decision in Supreme Court, New York County, illustrates the need for including all necessary documents on the summary judgment motion or else the motion may be denied.
In a recent NY Supreme Court case (Sup. N.Y. July 12, 2023), an American multinational financial services company, as trustee for a commercial mortgage-backed securitization, moved for summary judgment granting foreclosure of a commercial mortgage loan in the original principal amount of $18,500,000. The loan was originated in May 2019 and assigned to the financial services company in August 2019. In support of foreclosure, the financial services company relied on a default by the mortgagor in April 2020. The court (Hon Francis A. Kahn, III) denied the motion, finding two crucial gaps in the documentation submitted by the financial services company on the motion.
First, the court found that admissible evidence of the mortgagor’s default was not submitted. The financial services company supported its motion with the affidavit of an Asset Manager of the Special Servicer of the loan. The court found that affidavit insufficient to establish default, stating that default must be “established by (1) an admission made in response to a notice to admit, (2) an affidavit from a person having personal knowledge of the facts, or (3) other evidence in admissible form.” Finding that the Asset Manager’s testimony as to the default was based solely upon a review of documents, “the records evidencing the default (i.e. an account ledger or similar records) were required to be proffered.” The default notices annexed to the Asset Manager’s affidavit “were insufficient to establish the default.” Accordingly, “as admissible evidence of Defendants’ default was not proffered, Plaintiff failed to establish prima facie entitlement to summary judgment on the cause of action for foreclosure.”
In addition, the court found that the financial services company failed to establish standing to foreclose because of insufficient evidence of assignment of the promissory note. Noting that “mere physical possession of a note at the commencement of a foreclosure action is insufficient to confer standing …,” the court ruled that “[h]older status is established where the plaintiff possesses a note that, on its face or by allonge, contains an indorsement in blank or bears a special indorsement payable to the order of the plaintiff…. The indorsement must be made either on the face of the note or on an allonge ‘so firmly affixed thereto as to become a part thereof” (UCC § 3-202[2]).” Here, the court found, “the note was attached to the complaint, but the endorsement in blank was contained in an undated allonge on a separate page, and annexed as a separate exhibit, which reveals no discernable evidence of firm attachment from a visual inspection …. [the financial services company] was required to establish the allonge was ‘firmly affixed’ to the original note.”
The 63 Spring Lafayette case is a reminder that close court scrutiny of foreclosure court papers is not limited to residential foreclosures but can be expected in commercial foreclosures as well. Close attention must be paid to the evidentiary requirements of proving a default, including submitting and authenticating underlying business records showing the default if the movant’s affiant is basing her testimony on such records. Also, where a promissory note has been assigned prior to enforcement, it is crucial to provide evidence of the assignment complying with the UCC, including showing that the indorsement of assignment was on the face of the note or by means of an allonge affixed to the original note. If there is an allonge, it and the promissory note should be submitted as a single exhibit rather than separately, to demonstrate that the allonge was “firmly affixed” to the note.
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