Mortgages - Foreclosure - Standing - Physical Delivery of Note - Endorsed Allonge Not Firmly Affixed to Note at Time of Delivery

Kriss & Feuerstein LLP, New York City (Jerold C. Feuerstein, Michael J. Bonneville and Michael A. Giannini of counsel), for plaintiff.

Goldberg Weprin Finkel Goldstein, LLP, New York City (Matthew Hearle of counsel), for Lichter Real Estate Number One, L.L.C. and others, defendants.

[*2]This is a mortgage-foreclosure action brought by plaintiff, 175 West 76th Street LLC, seeking to foreclose on a residential apartment building located on the Upper West Side in Manhattan and owned by defendant Lichter Real Estate Number One, L.L.C.

Lichter's ownership of the building is financed by a $37.5 million loan pursuant to a promissory note and secured by a consolidated mortgage and other related security instruments. Plaintiff has alleged that it is the current holder of the note, mortgage, and other forms of security for the obligations of the note, and that Lichter is in default on its obligations under the note. Plaintiff is asserting three causes of action: (i) foreclosure on the mortgage, as against Lichter; (ii) conditional right to seek a deficiency judgment following foreclosure, as against defendants Suzette Schwartz (individually and as executor of the estate of Claire Lichter) and Joseph Schwartz (as executor of the estate of Claire Lichter), who have guaranteed Lichter's obligations under the note and mortgage; and (iii) foreclosure of personal property owned by Lichter that is located at or related to the building. Defendants answered and counterclaimed.

Plaintiff now moves (i) for a temporary receiver for the building to collect rents, pay applicable taxes, and so on (mot seq 001); (ii) for summary judgment in plaintiff's favor on its mortgage-foreclosure claim; and (iii) for summary judgment dismissing defendants' affirmative defenses and counterclaims (mot seq 002). The motions are denied.

In opposing plaintiff's request for summary judgment on its mortgage-foreclosure claim, defendant challenges plaintiff's standing to foreclose. Because the question whether plaintiff validly holds the note and mortgage (as required for standing) is also relevant to plaintiff's request for appointment of a temporary receiver, this court considers the summary-judgment motion first.{**87 Misc 3d at 603}

I. Plaintiff's Motion for Summary Judgment on its Mortgage-Foreclosure Claim

A plaintiff moving for summary judgment on a mortgage-foreclosure claim must establish, prima facie, the existence of an unpaid note, a mortgage securing that note, and the mortgagor's default. (See PNC Bank, N.A. v Salcedo, 161 AD3d 571, 571 [1st Dept 2018].) Additionally, when, as here, a defendant's answer puts at issue the plaintiff's standing to foreclose, plaintiff must also make out a prima facie showing that it has standing. (See LNV Corp. v Allison, 206 AD3d 710, 712 [2d Dept 2022].)

A plaintiff may establish standing to foreclose in three ways: evidence in admissible form that (i) it is the original lender; (ii) it was the holder of the note by assignment at the time the action was commenced; or (iii) it was the holder of the note by physical delivery at the time the action was commenced. (See U.S. Bank N.A. v Askew, 138 AD3d 402, 402 [1st Dept 2016].) It is undisputed that plaintiff is not the original lender. Rather, plaintiff alleges that the original lender (Capital One) assigned and delivered the note and mortgage to nonparty PT ATL SPV Grantor Trust; and that PT ATL then assigned and delivered the note and mortgage to plaintiff. Plaintiff thus rests its standing on both assignment and physical delivery. Lichter argues that plaintiff has [*3]not established that these grounds support plaintiff's standing. This court agrees.^[FN1]

A. Plaintiff's Argument That it Has Standing as a Holder of the Note by Assignment

When, as in this case, a party claims standing to foreclose on a mortgage note as the last party in a chain of assignments of the note from A to B to C, it must show (i) valid assignment or delivery from A to B and from B to C; and (ii) that the note was{**87 Misc 3d at 604} assigned or delivered by A to B before B assigned or delivered it to C. (See Midland Mtge. Co. v Imtiaz, 110 AD3d 773, 775 [2d Dept 2013].)

Plaintiff claims that it has standing by assignment from the intermediary party in the assignment chain (PT ATL), based on two assignments from PT ATL to plaintiff: one pertaining only to the note and dated May 15, 2024 (see NYSCEF Doc No. 74 at 4-5), and one an "omnibus" assignment of all loan documents, dated June 19, 2024, and effective May 17, 2024 (see NYSCEF Doc No. 83). Plaintiff advances two arguments for why these assignments were valid. Neither is persuasive.

First, plaintiff contends that PT ATL was entitled to assign the note and mortgage to plaintiff in May and June 2024 because PT ATL had been assigned the note and mortgage by the original lender in September 2021. (See NYSCEF Doc No. 100 at 2; NYSCEF Doc No. 73 [2021 assignment].) This contention is without merit: The September 2021 assignment pertained only to the mortgage—not also to the note secured by that mortgage. The assignment provides that the original lender is assigning to PT ATL the lender's "right, title and interest, of any kind whatsoever, including without limitation that of mortgagee, beneficiary, payee, assignee or secured party (as the case may be) in and to those certain documents described" on an attached schedule of "Security Instruments." (NYSCEF Doc No. 73 at 5.) The referenced schedule lists the mortgages encumbering the property between 1985 and 2018, as recorded, modified, consolidated, and assigned. (See id. at 8-10.) The schedule does not, however, list or mention the underlying note. And an assignment only of the mortgage does not carry with it the underlying note, because the mortgage is merely "security for a debt or other obligation," rather than "exist[ing] independently of the debt or obligation." (Citibank, N.A. v Herman, 125 AD3d 587, 588 [2d Dept 2015].)

Plaintiff asserts, however, that the language in the September 2021 assignment shows that the assignment did pertain also to the note as well as the mortgage. (See NYSCEF Doc No. 100 at 2.) This court disagrees. It is true, as plaintiff points out, that a document describing itself as an assignment of a mortgage can also validly assign the underlying note through incorporating [*4]by reference the obligations of the note, thereby manifesting an intent to transfer both note and mortgage. (See Deutsche Bank Natl. Trust Co. v Romano, 147 AD3d 1021, 1023 [2d Dept 2017].) But this court is not persuaded that the September 2021 assignment effected this kind of incorporation{**87 Misc 3d at 605} by reference. In the Romano decision relied on by plaintiff, for example, the original lender, "in addition to assigning the mortgage, . . . explicitly transferred 'all moneys now owing or that may hereafter become due or owing.' " (Id.) Similarly, in Chase Home Fin., LLC v Miciotta (101 AD3d 1307 [3d Dept 2012]), cited by Romano, the two assignments at issue transferred (i) the mortgage, together with "all obligations therein described [and] the money due and to become due thereon with interest"; and (ii) the mortgage and "all indebtedness secured thereby," describing the note for which the mortgage served as security. (Id. at 1308.) The September 2021 assignment does not have any comparable language.

Plaintiff relies solely on the fact that the assignment provides that one form of the assignor's right or interest in the mortgage being transferred is the status of "payee." (See NYSCEF Doc. No. 100 at 2, quoting NYSCEF Doc No. 73 at 5.) But the assignment does not contain language that might connect the right of "payee" under the mortgage to being the "payee" under the note, and thereby indicate that the transfer of a security interest in the note also encompassed a transfer of the note itself. Plaintiff asks this court instead to draw the multiple layers of inferences required. This court sees no basis on which to do so.^[FN2]

Second, plaintiff contends that PT ATL was entitled to assign the note and mortgage to plaintiff in May and June 2024 because the original lender had specially endorsed the note to PT ATL by allonge, thereby bringing with it the mortgage as well.^[FN3] (See NYSCEF Doc No. 18 ¶ 16; NYSCEF Doc No. 67 at 8; NYSCEF Doc No. 100 at 1-2; see also Bank of N.Y. v Silverberg, 86 AD3d 274, 280 [2d Dept 2011] [explaining that upon transfer of the note, the mortgage passes as well "as an incident to the note"].) This contention suffers from a simple, fatal flaw: The endorsement is not dated. (See NYSCEF Doc No. 69 at 18.) To{**87 Misc 3d at 606} the contrary, it states that it is "Dated as of the ___ day of May, 2024"—with the day blank not filled in. (Id.) As a result, plaintiff has not shown that this endorsement was executed and effective in the first two weeks of May 2024, or even in May 2024 at all. Plaintiff thus has not established that the endorsement of the note to the order of PT ATL occurred before PT ATL endorsed or assigned the note to plaintiff.^[FN4]

B. Plaintiff's Argument That it Has Standing as a Holder of the Note by Physical Delivery of the Note-and-Allonges

Plaintiff also argues in the alternative that it has standing regardless of the validity of the assignments, because it received delivery and had possession of the note before bringing this action. (See NYSCEF Doc No. 100 at 2.) If plaintiff were correct that it had "possession of the endorsed note prior to the commencement of the foreclosure action," then plaintiff would have standing "even if the written assignment was deficient as to the note." (Salcedo, 161 AD3d at 572 [emphasis added].) But plaintiff is not correct.

Plaintiff is not the original lender. As a result, proof that plaintiff had " 'physical possession of [the] note at the commencement of [this] foreclosure action is insufficient' " for standing purposes, absent an " 'allonge or note that is either endorsed in blank or specially endorsed to the plaintiff.' "^[FN5] (5AIF Sycamore 2, LLC v 201 EB Dev. III, 223 AD3d 550, 550-551 [1st Dept 2024], quoting U.S. Bank N.A. v Moulton, 179 AD3d 734, 737 [2d Dept 2020].) It is undisputed that the note itself has not been endorsed, whether specially or in blank. Plaintiff argues instead that it has standing based on two valid allonges to the note—one containing a special endorsement from the {**87 Misc 3d at 607}original lender to PT ATL, one containing a special endorsement from PT ATL to plaintiff. (See NYSCEF Doc No. 67 at 8; NYSCEF Doc No. 100 at 2.) It is undisputed that the electronic copy of the note submitted on this motion includes documents that are described as allonges and contain the two endorsements relied on by plaintiff. (See NYSCEF Doc No. 69 at 18-21.) This court disagrees, however, with plaintiff's position that the allonges are effective.

1. Whether the Allonges were Firmly Affixed to the Note at the Time of Delivery

An endorsement on an allonge is effective only when the allonge is "so firmly affixed" to the original negotiable instrument "as to become a part thereof." (UCC 3-202 [2].) On motion sequence 001, plaintiff's manager, Josh Blisko, represents in an affidavit that each "[a]llonge was firmly affixed to the [n]ote by staple so as to become part thereof at the time of physical delivery to [p]laintiff," and that the allonges "remain[ ] firmly affixed to [the] [n]ote." (NYSCEF Doc No. 18 ¶¶ 16, 27.) On motion sequence 002, the affidavit submitted by Blisko represents only that each allonge was "firmly affixed to the [n]ote by staple so as to become a part thereof prior to the [*5]commencement of this [a]ction." (NYSCEF Doc No. 66 ¶¶ 17, 20.) Plaintiff's supplemental letter brief contends that these two sets of representations are "alone . . . sufficient to demonstrate standing." (NYSCEF Doc No. 100 at 2.)

As Lichter points out in its supplemental letter brief, however, the electronic versions of the note-with-allonges submitted in this action lack any staple marks (or, for that matter, holes or other damage to the paper reflecting staple-removal for scanning/copying purposes). (See NYSCEF Doc No. 98 at 2-3.) In light of the discrepancy between the Blisko affidavits' representations about the note-with-allonges and the appearance of the filed version of that document, this court requested by email that plaintiff provide a further supplemental submission addressing that discrepancy (supported by any additional proof that plaintiff wished to provide). In response to the court's request, plaintiff's counsel has provided a further affirmation (see NYSCEF Doc No. 108), with accompanying documentation (see NYSCEF Doc Nos. 109-114). These supplemental materials helpfully clarify the factual record. That record leads this court to conclude the allonges on which plaintiff relies are not valid and effective for standing purposes.

Counsel's affirmation reflects that the endorsed allonges were not stapled to the note at the time plaintiff's counsel received{**87 Misc 3d at 608} the loan file with the original loan documents. (See NYSCEF Doc No. 101 ¶ 7.) Indeed, the allonges were not in the loan file at all. Instead, they were being held by the title company that was used in connection with the assignment of the note and related instruments from the lender to PT ATL and PT ATL to plaintiff.^[FN6] (See id. ¶¶ 8-10.) And counsel represents that after the title company provided the allonges to plaintiff's law firm, firm staff stapled the two allonges to the note.^[FN7] (See id. ¶ 13.)

2. Whether Allonges are Effective When They are Affixed to a Note after Delivery of the Note But before Commencement of an Action to Foreclose the Note

The question for this court becomes whether the timing of the affixion of the allonges matters. Plaintiff has not provided, and this court's own research has not identified, authority squarely addressing this unusual scenario. In particular, there appears to be no case law considering whether an endorsed allonge to a mortgage note is effective, for standing purposes, as long as it is firmly affixed to the note before commencement, or whether the allonge must already be affixed at the time the note-and-allonges comes into plaintiff's possession, instead. This court concludes that the relevant point in time is when a foreclosure plaintiff receives possession of the loan documents, not when plaintiff files its complaint.

This conclusion derives, first and foremost, from the text of UCC 3-202 itself. Subsection (1) of this statute provides that negotiation of an instrument that is "payable to order"—i.e., endorsed to a particular person or for particular purposes (see UCC 3-204 [1])—occurs "by [*6]delivery with any necessary indorsement." (UCC 3-202 [1].) Subsection (2) of the statute provides that "[a]n indorsement must be written by or on behalf of the holder and on the instrument or on a paper so firmly affixed thereto as to become a part thereof." These two subsections, taken together, indicate that if the additional affixed paper (the allonge) is not already affixed to the note at the time A endorses the note to B on the allonge, it must at least be affixed before A delivers the note to B.{**87 Misc 3d at 609}

Plaintiff does not explain how treating post-delivery affixion as sufficient would be consistent with the language, or for that matter the logic, of the statute. To the contrary, the affixion requirement itself evinces a statutory aim of ensuring that any legally operative modifications to the negotiation or negotiability of an instrument be made on the instrument itself before it is delivered. This approach serves to limit fraud and encourage clarity about the identity and rights of the post-delivery holder. Furthering these goals is particularly important in the mortgage-note context, given the foreclosure-crisis-era harms that resulted when banks and loan servicers separated ownership of mortgage notes from the (putative) right to foreclose on the notes, in the name of efficiency and securitization. (See Bank of N.Y. v Silverberg, 86 AD3d 274, 278-279, 281-283 [2d Dept 2011] [discussing this problem].)

Although, as noted above, little precedent deals directly with this question, several foreclosure decisions support the conclusion that an endorsed allonge must be affixed prior to delivery of a mortgage note, not merely prior to commencement of an action to foreclose on the note. For example, in Bayview Loan Servicing, LLC v Kelly (166 AD3d 843 [2d Dept 2018]), the Appellate Division, Second Department, reversed the motion court's grant of a judgment of foreclosure and sale. There, the original lender had (purportedly) assigned the note to Wells Fargo, which later endorsed the note to plaintiff. (See id. at 845.) The Court held that a motion for summary judgment on the complaint should have been denied because "there is a triable issue of fact as to whether the note was properly endorsed in blank by an allonge 'so firmly affixed thereto as to become a part thereof' when it came into the possession of Wells Fargo, which later endorsed the note to the plaintiff." (Id. at 846, quoting UCC 3-202 [2]; accord Bank of N.Y. Mellon Trust Co., N.A. v Andersen, 209 AD3d 817, 820-821 [2d Dept 2022] [reversing grant of summary judgment to plaintiff due to "a triable issue of fact as to whether the note was properly specially endorsed by an allonge so firmly affixed thereto as to become a part thereof when it came into the possession of the plaintiff" (internal quotation marks omitted)]; HSBC Bank USA, N.A. v Herod, 203 AD3d 805, 807 [2d Dept 2022] [same].)

Conversely, in U.S. Bank N.A. v Mave Hotel Invs. LLC, the Appellate Division, First Department, affirmed the grant of summary judgment to the foreclosing plaintiff based on an affidavit of counsel that "upon receipt of the original trust file . . . {**87 Misc 3d at 610}the original allonges were stapled to the original note," and that counsel still maintained custody of the trust file. (231 AD3d 607, 608 [1st Dept 2024]; accord LNV Corp. v Allison, 206 AD3d 710, 712 [2d Dept 2022] [holding that plaintiff established standing through the affidavit of its document custodian representing that when "plaintiff obtained physical possession of the original note," the note had "the allonge firmly affixed thereto"]; 75 St. Servicing LLC v CLST Enters. LLC, 2022 NY Slip Op 31425[U], *2 [Sup Ct, NY County 2022] [same], affd 220 AD3d 590 [1st Dept 2023].)

These two lines of precedent, taken together, strongly suggest that when standing to foreclose based on allonge(s) is in issue, the foreclosing plaintiff must provide evidence (through the loan documents themselves or through an affidavit on personal knowledge) that the allonge(s) were firmly affixed to the note before delivery to the plaintiff.[*7]

To be sure, some Second Department decisions do describe the allonge-related standing inquiry as whether plaintiff has "establish[ed] that the allonge was 'so firmly affixed to the note so as to become a part thereof' pursuant to UCC 3-202 (2) at the time the action was commenced." (U.S. Bank N.A. v USA Brooklyn Enters., Inc., 232 AD3d 647, 648 [2d Dept 2024]; see also Thompson v Seay, 221 AD3d 932, 933 [2d Dept 2023] [same]; U.S. Bank N.A. v Chrismas-Beck, 219 AD3d 534, 536-537 [2d Dept 2023] [same]; U.S. Bank N.A. v Duvivier, 217 AD3d 994, 995 [2d Dept 2023] [same].) None of these cases, though, addressed a scenario in which the allonge was affixed after delivery to plaintiff but before commencement. In three of the cases, plaintiff failed to provide evidence that the allonge in question had been affixed at all;^[FN8] and in the fourth, the action was (i) commenced by the successor in interest of the original lender, based on (ii) a note with an endorsement in blank stamped on the back page of the note itself, rather than on an affixed allonge.^[FN9]

Further, all four decisions base their description of the allonge requirement on a passage in the Second Department's decision in{**87 Misc 3d at 611} U.S. Bank N.A. v Moulton (179 AD3d 734, 737 [2d{**87 Misc 3d at 611} Dept 2020]).^[FN10] And that passage, read in context, stands for a subtly, but materially, different proposition: That when a foreclosure plaintiff is relying for standing on an endorsement set forth on an allonge, the plaintiff must establish that physical delivery to plaintiff of the note-with-affixed-allonge occurred before commencement of the action. (See id., citing U.S. Bank N.A. v Guy, 125 AD3d 845, 846-847 [2d Dept 2015].) That is, this aspect of Moulton is about the physical-delivery requirement, not the allonge-affixion requirement.

In short, these four Second Department decisions do not address—and should not be extended to—the particular fact pattern presented here. At a minimum, these decisions do not undermine the force of the other First and Second Department precedents, discussed above, that support the view that affixion must be assessed at delivery, rather than at action-commencement.

Given this court's conclusion that an endorsed allonge is effective for standing purposes only if it was firmly affixed to the note when the note was physically delivered or assigned to the foreclosing party, the record here establishes that the allonges relied on by plaintiff were not effective. Plaintiff thus may not rely on those allonges to establish its standing to foreclose.^[FN11]

C. Plaintiff's Argument That Defendants Have Waived Challenges to Plaintiff's Standing to Foreclose

Plaintiff also argues that defendants and their counsel have waived any opposition to [*8]plaintiff's arguments that the mortgage note was validly assigned from the original lender to PT ATL, and then from PT ATL to plaintiff, before plaintiff brought this action. (See NYSCEF Doc No. 100 at 3.) This argument is unpersuasive.

1. With respect to the assignment from the original lender to PT ATL, plaintiff points to a statement in the affirmation of defendants' counsel on motion sequence 001 that "Plaintiff's predecessor and Borrower agreed to a deferral of certain amortization payments during the pandemic." (NYSCEF Doc No. 43 at 3-4.) Plaintiff says that (i) the reference in counsel's affirmation to "Plaintiff's predecessor" refers to PT ATL (rather than the original lender); and (ii) because Lichter (assertedly){**87 Misc 3d at 612} "negotiated and performed under a deferral agreement with PT ATL 'during the pandemic,' Defendants cannot now claim PT ATL did not own the Note and Mortgage prior to May 15, 2024." (NYSCEF Doc No. 100 at 3.) Accordingly, plaintiff says, the June 2024 assignment from PT ATL to plaintiff must be treated as valid for standing purposes.

The statement of defendants' counsel is not clear on its face, however, that it constitutes an acknowledgment that Lichter negotiated (or entered into an agreement) with PT ATL before PT ATL assigned the note to plaintiff in June 2024. Nor does plaintiff provide a copy of any deferral agreement, so as to identify the parties to that agreement or that agreement's terms. This paltry record is insufficient to show for standing purposes that defendants have waived any argument that PT ATL did not validly hold the note, as plaintiff would have it.

2. Plaintiff also relies on a June 14, 2024 letter agreement between plaintiff and Lichter. (See NYSCEF Doc No. 100 at 3, citing id. at 4-9.) This agreement provided a framework for plaintiff and Lichter to negotiate and resolve Lichter's asserted defaults under the note and other loan documents, short of foreclosure. (See id. at 5.) The agreement states in its fourth paragraph that PT ATL assigned the note and other documents to plaintiff on May 15, 2024, and that plaintiff "is the current holder and owner of the loan documents." (Id.) Plaintiff says that this constitutes a recognition by defendants that plaintiff validly holds the underlying note (thereby also waiving an objection to plaintiff's standing to foreclose).

This argument suffers from multiple flaws. The quoted language appears in the background section of the letter agreement, not in its operative provisions. Plaintiff has not shown that defendants were in full possession of the facts relevant to whether plaintiff was the holder of the note—in particular, that the May 15, 2024 assignment of the note was effected by endorsement on a piece of paper that was not attached to the note.^[FN12] Further, the letter agreement also provides in its sixth operative paragraph that the plaintiff and defendants "agree that the entering into this Letter Agreement[,] and continuing negotiations as set forth herein, are not constituting waivers of{**87 Misc 3d at 613} any of their respective rights and remedies." (NYSCEF Doc No. 100 at 6.) Plaintiff does not address the tension between this paragraph and plaintiff's position that background language in the agreement constituted a waiver of defendants' objection to plaintiff's status as the holder of the underlying note.

Plaintiff's summary-judgment motion on its mortgage-foreclosure claim is denied for failure to establish that plaintiff has standing to foreclose. Given that ruling—and that no [*9]discovery has taken place—this court also denies without prejudice plaintiff's request for summary judgment dismissing defendants' affirmative defenses and counterclaims.

II. Plaintiff's Motion for Appointment of a Temporary Receiver (Mot Seq 001)

On motion sequence 001, plaintiff moves for appointment of a temporary receiver. Plaintiff relies on section 2.04 of the mortgage, which provides that upon the commencement of an action "by mortgagee to obtain judgment for the principal of, or interest on the Note . . . or of any other nature in aid of the enforcement of the Note or of this Agreement," the mortgagor must, on the request of mortgagee, consent to the appointment of a receiver of the property. (See NYSCEF Doc No. 21 at 37 [PDF pagination].) Plaintiff argues that this term of the mortgage triggers application of Real Property Law § 254 (10). Section 254 (10) provides that a provision of this kind "must be construed as meaning that the mortgagee . . . in any action to foreclose the mortgage" shall be entitled, "without regard to adequacy of any security of the debt, to the appointment of a receiver of the rents and profits" of the mortgaged property.

As plaintiff points out, Real Property Law § 254 (10) sets out a much less demanding threshold for appointment of a receiver in the mortgage-foreclosure context than the general standard for receiverships imposed by CPLR 6401. At the same time, a court hearing a foreclosure action may still, "in its discretion and under appropriate circumstances," deny a mortgage-foreclosure-based receivership application. (ADHY Advisors LLC v 530 W. 152nd St. LLC, 82 AD3d 619, 619 [1st Dept 2011].)

Plaintiff in this action has failed to establish its standing to foreclose on the underlying mortgage note. Indeed, although the court does not definitively resolve the question at this time, significant doubt exists on this record about whether plaintiff can establish standing to foreclose. The court declines to appoint a receiver in aid of a foreclosure action that might never{**87 Misc 3d at 614} be able to proceed further. Nor do plaintiff's submissions on this motion establish that appointment of a temporary receiver is otherwise urgently needed to prevent waste.

Accordingly, it is ordered that plaintiff's motion for appointment of a temporary receiver (mot seq 001) is denied; and it is further ordered that plaintiff's motion for summary judgment (mot seq 002) is denied; and it is further ordered that the parties appear before this court for a telephonic preliminary conference on April 14, 2025.