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Financial Services Law Insights and Observations

North Carolina Court of Appeals Denies Foreclosure Action Due to Improper Endorsement on Borrower’s Note

State Issues

The North Carolina Court of Appeals recently denied a lender’s right to foreclose on a borrower’s property, holding that the lender had not established by competent evidence that it was the owner and holder of the borrower’s note and deed of trust. In re Foreclosure by David A. Simpson, No. COA10-361 (N.C. App. May 3, 2011). In this case, the borrower had executed a note to refinance an existing mortgage on his home in 2006 with payment and principal due to the First National Bank of Arizona. Two years later, the borrower ceased making payments on his note. In 2009, a substitution of trustee was recorded with the register of deeds and it identified Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6 (Deutsche Bank RAL) as the new holder of the note and the lien. Soon thereafter, Deutsche Bank RAL commenced non-judicial foreclosure proceedings which were upheld, after appeal, in county superior court. The borrower appealed the superior court’s order based on two claims. First, the borrower claimed that the debt was not valid due to recission; he contended that he had rescinded the transaction because the original lender failed to provide all material disclosures as required by the federal Truth in Lending Act, 15 U.S.C. § 1635 (TILA). The court rejected this argument, holding that because recission under TILA is an equitable remedy, it cannot be properly raised in a non-judicial foreclosure proceeding under North Carolina law, but must instead be brought in a separate civil action in superior court. Second, the borrower claimed that Deutsche Bank RAL was not the owner and holder of the note. The court agreed, finding that while both the original note and an allonge to that note evidenced the note’s transfer, the party to whom the note was transferred to was not the same party bringing the foreclosure action. Specifically, while the foreclosure action was brought by Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6, the endorsement to the note was in the name of Deutsche Bank Trust Company Americas only. Because the note was not properly endorsed to the named plaintiff in the foreclosure action, the court found that under the Uniform Commercial Code there was "not sufficient evidence that [the] Petitioner [was] the ‘holder’ of the Note."

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