February 1, 2012

In what appears to be a direct attack on the alleged authority of “robo-indorsements”, the Court of Appeals of North Carolina has issued an opinion dated December 6, 2011 In The Matter of the Foreclosure of Deed of Trust executed by Tonya R. Bass, Case No. COA11-565, which upheld the trial court’s dismissal of a foreclosure attempted by U.S. Bank National Association as Trustee, which claimed to be the “holder” of the Note based on a blank, unsigned indorsement. The opinion is approximately 23 pages, and sets forth a detailed analysis of the issues surrounding the burden of a foreclosing party to demonstrate “holder” status, which is required as to a foreclosure proceeding brought under NCGS 45-21.16(d).

North Carolina’s nonjudicial foreclosure procedure under the Statute is initiated by the filing of a Petition by the foreclosing party and a preliminary hearing before the Clerk of the Court who determines whether there is sufficient evidence from the Petitioner to satisfy the four separate 45-21.16(d) factors to justify the entry of an Order authorizing a foreclosure sale. The Statute provides for an automatic right of appeal before the presiding Judge as to the Clerk’s determination, and an automatic stay of the sale pending the outcome of the appeal.

The trial court, on such appeal, takes evidence and determines whether all four of the statutory factors have been met to warrant a sale. The trial court’s determination may then be appealed to the Court of Appeals of North Carolina, which is what occurred in the Bass case.

The promissory note in the Bass case contained three stamps purportedly indorsing and transferring the note among prior lenders and ultimately to U.S. Bank. The attack was on the first endorsement, which was a stamp without a handwritten signature. The Court first went through the method by which someone can acquire “holder” status under North Carolina law, and also what constitutes proof thereof. The holding specifically states “Moreover, an indorsement does not prove itself, but must be established…by proper testimony. Our Supreme Court has specifically held that a stamp may constitute an indorsement, but only if the stamp is executed by a person having the intent and authority to do so.”

The Court found that U.S. Bank’s witness had no personal knowledge of the prior transfers of the note beyond what was reflected in records which she reviewed. The trial court concluded that U.S. Bank was not the “holder” of the note as there was no evidence or testimony that the blank, unsigned indorsement was placed on the note by someone with authority to do so, and thus U.S. Bank failed to satisfy subpart (a) of NCGS 45-21.16(d). The trial court dismissed the foreclosure, which dismissal was upheld by the Court of Appeals.

Bravo to the Court of Appeals to North Carolina for holding a foreclosing bank to its burden of proving the validity of indorsements on promissory notes. We all too often see courts blindly accepting the “well, it is a blank indorsement which makes the note fully negotiable” argument being made by “banks” and servicers, with no evidentiary burden whatsoever being placed on the foreclosing party to prove that the blank indorsement was placed on the note by someone with authority to do so.

We hope that other states will see the importance of this decision and adopt the evidentiary burden placed on foreclosing party by the Court of Appeals of North Carolina. We thank one of our dedicated followers for bringing this case to our attention.

Jeff Barnes, Esq.,