Editor: David Reiss
Brooklyn Law School

February 17, 2013

North Carolina Appellate Court Finds for Home Owners, Concluding Bank Did Not Produce Sufficient Evidence of Assignment

By Joseph Kelly

In In re Adams, 204 N.C. App. 318, 693 S.E.2d 705 (2010) the Court of Appeals of North Carolina overturned the Superior Court and held that the alleged holder (Nationwide), while not required to present the original note and deed, was required to prove that the original note holder had transferred or assigned its interest in the note. Accordingly, it reversed the order authorizing the substituted trustees to foreclose.

Hannia Adams had executed a note with Novastar Mortgage, Inc. (“Novastar”) as the lender. To secure this loan, she and Clayton Adams executed a deed of trust which identified Novastar as the lender and Burke & Associates as the trustee. Roughly four years later Monica Walker, Matressa Morris and Nationwide sought to be appointed as substituted trustees for Burke & Associates. Their appointment identified Deutsche Bank for Soundview (“Deutsche Bank”) as the current owner and holder of the note. One week after the appointment, at the “instruction of the owner and holder of the note,” Monica Walker filed a petition with the county clerk requesting a hearing to permit respondents to show cause as to why the court should not allow a foreclosure sale to proceed.

The Clerk of Wake County Superior Court found Deutsche Bank was the holder of the note, the note was in default, and the instrument securing the debt gave the note holder the right to foreclose through power of sale. On appeal, the Superior Court affirmed based on testimony from Nationwide’s team lead in the foreclosure department and an affidavit from an assistant secretary at Deutsche Bank, and respondents appealed again.

The Court of Appeals held that under North Carolina law, the lender must prove four elements to establish their right to foreclose:

  • 1. [A] valid debt of which the party seeking to foreclose is the holder
  • 2. Default
  • 3. Right to foreclose under the instrument
  • 4. Notice to those entitled to such

NC Gen Stat. Sec. 45-21.16(d)

The court further broke down part one to its constituent parts:

  • 1. Is there sufficient competent evidence of a valid debt?
  • 2. Is there sufficient competent evidence that the party seeking to foreclose is the holder of the notes that evidence the debt? (internal citations omitted)

Here the only issue was whether Deutsche Bank presented competent evidence that it was the current holder of the note.

Respondents argued Deutsche Bank’s evidence was insufficient as it was only photocopies of the note and deed of trust. However, the court cited another appellate decision for the principle that “the best evidence rule was inapplicable…when the opposing party admits that the documents shown [to them] are correct copies.” Since respondents did not dispute that the copies were correct, the court concluded the bank was not required to produce the originals.

However, the court went on to state “mere possession of a note by a party to whom the note has neither been indorsed nor made payable does not suffice to prove ownership of holder status.” (internal citations omitted, emphasis in original) Here, since the photocopies indicated the original holder was Novastar, not Deustche Bank, and the photocopies did not indicate Novastar negotiated, indorsed or transferred the note to Deustche Bank, respondents claimed they were insufficient to establish Deutsche Bank was the current holder of the note.

The court rebutted that it is settled procedure that affidavits can be used as competent evidence to establish statutory elements in de novo foreclosure appeals. Here, the testimony through affidavit from the assistant secretary of Deutsche Bank and the in-person testimony from Ms. Cole indicated Deutsche Bank was the current holder of the note and deed of trust. One gap remained however. As the court stated “however, neither the in-person testimony…nor the testimony by affidavit…expressly showed that Novastar transferred or assigned its interest in the note or deed of trust to Deutsche Bank.” Since neither the photocopies nor the testimony explained how the note and deed of trust were assigned, the court found the evidence presented was not sufficient to establish that the note was payable to Deutsche Bank and reversed accordingly.

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