Editor: David Reiss
Brooklyn Law School

January 10, 2013

Texas Case Distinguishes Between a Holder and an Owner of Promissory Notes

By Karl Dowden

In Martin v. New Century Mortgage Company, et al., 2012 Tex. App. Lexis 4705 (Houston 1st Court of Appeals, June 14, 2012), the plaintiffs executed a deed of trust and promissory note with New Century Mortgage Corporation. The deed of trust contained a provision allowing, “the note (together with [the deed of trust]) can be sold one or more times without prior notice to the borrower.” The deed of trust was assigned to Wells Fargo after the plaintiffs defaulted and acceleration of the loan occurred. The plaintiffs filed suit on the day before the foreclosure sale by Wells Fargo alleging a lack of standing.

The plaintiffs argued that Wells Fargo failed to prove they were the holder or owner of the note, which is required to have standing to foreclose on the property. Specifically, they argued that there was no written endorsement from New Century showing an assignment to Wells Fargo. The Court agreed with the plaintiffs that Wells Fargo is not considered a “holder” of the promissory note under Texas commercial law. Without the written endorsement from New Century that showed negotiation (which is defined as the “transfer of possession … of an instrument by a person other than the issuer to a person who thereby becomes its holder”) (Tex. Bus. & Com. Code Ann. § 3.201(a) (West 2002)), Wells Fargo cannot be the holder of the note.

However, under Texas common law, it is still possible to assign ownership of the note without a written endorsement as required under Texas commercial law. With a proper assignment, Wells Fargo could acquire the rights associated with the note, even without the status as a “holder” of the note. Wells Fargo has the burden of proving the transfer of ownership and any gap in the chain of title may result in a question of ownership.

In this case, Wells Fargo proved the transfer of ownership through an executed document assigning the deed of trust and promissory note along with their respective rights. As a result, the Court found Wells Fargo had standing to continue the foreclosure process.

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