Acquired Capital I, L.P. v. Griffin, No. S0916-11 CnC (Crawford, J., Dec. 1, 2011)

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                                                       STATE OF VERMONT

SUPERIOR COURT                                                                             CIVIL DIVISION
CHITTENDEN UNIT                                                                            DOCKET NO.: 916-11 CnC

ACQUIRED CAPITAL I, L.P.

v.

KAREN GRIFFIN et al

                                           DECISION ON MOTION TO DISMISS

This dispute concerns the consequences of losing a promissory note secured by a mortgage.

The facts as laid out in the complaint are:

On January 12, 2000, Libby’s Diner Inc. executed a promissory note in the amount of $20,000
in favor of KeyBank National Association. Karen and Elizabeth Griffin signed as personal
guarantors. Karen and Elizabeth Griffin and Peter Gallagher also executed a mortgage on their
residence to secure the note, the personal guaranty, and other loan agreements.

On September 15, 2011, a vice president of KeyBank signed an affidavit stating that the note was
lost. The next day KeyBank sold the obligation to Acquired Capital. A copy of the note was
endorsed to the order of Acquired Capital.

The note is in default. Plaintiff Acquired Capital has filed a foreclosure case against the Griffins’
residence.

                                                                 ANALYSIS

Defendant argues that the loss of the note is fatal to the claim against her. Plaintiff contends that
§ 3-309 of the Uniform Commercial Code, 9A V.S.A. § 3-309, authorizes Acquired Capital to
enforce the promissory note as if it were in possession. Section 3-309 provides in relevant part:

           (a) A person not in possession of an instrument is entitled to enforce the instrument if
           (i)the person was in possession of the instrument and entitled to enforce it when loss of
           possession occurred, (ii) the loss of possession was not the result of a transfer by the
           person or a lawful seizure, and (iii) the person cannot reasonably obtain possession of the
           instrument because the instrument was destroyed, its whereabouts cannot be determined,
           or it is in the wrongful possession of an unknown person or a person that cannot be found
           or is not amenable to service of process.

The court agrees with neither position.
First, with respect to the defendant’s argument that the loss of the note excuses any further
payment, the loss of the note may cause difficulties with proof and it will result in the loss of
protections afforded to a holder in due course, but it does not relieve the borrower and its
guarantors from the underlying obligation to repay the debt.

       Note that 3-309 allows the entitled person only to “enforce the instrument.” This is not a
       suit on the underlying liability. Section 3-310(b)(4) makes it clear that the suit is on the
       instrument and cannot be on the underlying obligation.

White and Summers, Uniform Commercial Code 553 (2000). The claim that Libby’s Diner has
not repaid its loan is not defeated because the note evidencing the obligation cannot be found.
Plaintiff is entitled to sue Libby’s Diner, Inc. for the unpaid debt if it chooses to do so.

Second, with respect to the plaintiff’s argument that section 3-309 creates an alternative basis
upon which it can sue on the note, the facts are clear from the complaint that plaintiff does not
meet the requirements of § 3-309 because it was never in possession of the note. The note was
declared lost the day before it was assigned to plaintiff. This case is the polar opposite of In Re
Montagne, 421 B.R. 65 (Br.Ct.of Vt 2009), in which the lost note never left the possession of the
entity which originated the loan, sold a participation to a bank, and then accepted the loan back
as assignee. In the present case, Acquired Capital came on the scene only after the note was
lost. It cannot be said to be a person “in possession of the instrument and entitled to enforce it
when loss of possession occurred.”

The next step of the analysis is to consider what effect the loss of the note has on this case which
is a mortgage foreclosure, not a suit against the debtor or the guarantors. The foreclosure case
exists separate from any lawsuit on the note. It is subject to a different statute of limitations
(fifteen years instead of six), Huntington v. McCarty, 174 Vt. 69 (2002), and -- as in this case –
can be filed independently. As an action in rem, it results only in foreclosure on property
interests and imposes no personal liability on any party. The plaintiff in this case does not even
seek a deficiency judgment.

The effect of these ancient principles in this case is that the elements of the foreclosure case do
not include possession of the note by the plaintiff-assignee. See New England Savings Bank v.
Bedford Realty Corp, 680 A.2d 301, 309 (Ct. 1996)(“[T]he fact that [the assignee] never
possessed the lost promissory note is not fatal to its foreclosure of the mortgage.”) It would be
sufficient for the plaintiff to prove that its predecessor KeyBank was owed a debt by Libby’s
Diner, Inc., that the debt was secured by the mortgage, that the debt is in default, and that the
original lender assigned its interest in the debt and mortgage to the plaintiff. The original note
would be helpful to prove these elements, but its production is not an essential element of the
case.




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                                   CONCLUSION



The motion to dismiss is DENIED.

Dated:                                          ________________
                                                Geoffrey Crawford,
                                                Superior Court Judge




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