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940 F.Supp. 512)
United States District Court, E.D. New York.

[11] This Court must apply New Mexico substantive law because the Modification Agreement provides that New Mexico law will govern any dispute arising thereunder. See Compl.Ex. E P 27, at 23.  In this regard, “[f]ederal courts sitting  in diversity cases will, of course, apply the [choice-of-law rules] of the forum
State on outcome determinative issues.”  Travelers Ins. Co. v. 633 Third Assocs., 14 F.3d 114, 119 (2d Cir.1994) (citing *520  Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938)).  Further, “[i]t is well established that the court will honor the parties’ choice of law where there is a reasonable basis
for the choice or the chosen State has some relation to the agreement.” Depositors Trust Co. v. Hudson Gen. Corp., 485 F. Supp. 1355, 1359 (E.D.N.Y.1980).

Thus, because New York courts would apply New Mexico law in determining the rights of the parties to the present dispute, this Court must predict how the Supreme Court of New Mexico would rule on the substantive issues presented in the defendants’ motion to dismiss.  See  Travelers, 14 F.3d at 119.

The task of predicting New Mexico law is rendered somewhat more difficult here because, as the parties agree, the Supreme Court of New Mexico has not addressed the precise issue of whether a mortgage may be foreclosed upon when the holder of such mortgage is not in possession of the underlying note.  In addition, it does not appear that the lower courts of New Mexico have addressed this issue either.

[12] In ascertaining a particular state’s substantive law [common law – Rick] when the highest court of that state has not spoken, a federal court should “consider relevant cases from jurisdictions other than [the subject state] in an effort to predict ‘what would be the decision of reasonable intelligent lawyers,’ sitting as judges of the highest … court [of that state], and fully conversant with [such state’s]
jurisprudence.”  Id.

Although the New Mexico Supreme Court has not ruled on this issue, the decisive weight of authority within other jurisdictions holds that an assignment of a mortgage without the underlying debt is a nullity, and therefore unenforceable, unless the promissory note in question has been lost or destroyed, or the original contracting parties intended the mortgage to be independently enforceable.  See55 Am.Jur.2d:  Mortgages s 1283, at 1038-39 (1971);  59 C.J.S. Mortgages s 356, at 504-07 (1949);  Federal Deposit Ins. Corp. v. Bracero & Ri vera, Inc., 895 F.2d 824, 827 (1st Cir.1990) (applying Puerto Rico law);  Brunn v. Wichser, 75 F.2d 25, 27 (3d Cir.1934) (applying Pennsylvania law);  In re Leisure Time Sports, Inc., 194 B.R. 859, 861 (9th Cir. BAP 1996) (applying California law);  United States v. Freidus, 769 F.Supp. 1266, 1277-78 (S.D.N.Y.1991) (applying New York law);  In re BNT Terminals, Inc., 125 B.R. 963, 970-71 (Bankr.N.D.Ill.1990) (applying Illinois and Nebraska law);  In re Hurricane Resort Co., 30 B.R. 258, 260-61 (Bankr.S.D.Fla.1983) (applying Florida law);  South Carolina Nat’l Bank v. Halter, 293 S.C. 121, 359 S.E.2d 74, 77 (1987) (applying South Carolina law); Barton v. Perryman, 265 Ark. 228, 577 S.W.2d 596, 600 (1979) (applying Arkansas law);  Rockford Trust Co. v. Purtell, 183 Ark. 918, 39 S.W.2d 733, 736 (1931) (applying Arkansas law);  Kluge v. Fugazy, 145 A.D.2d 537, 536 N.Y.S.2d 92, 93 (2d Dep’t 1988) (applying New Y ork law);  Beak v. Walts, 266 A.D. 900, 42 N.Y.S.2d 652, 653 (4th Dep’t 1943) (per curiam) (applying New York law);  Merritt v. Bartholick, 36 N.Y. 44, 51 (1867) (applying New York law);  see also  Kawai Am.
Corp. v. Hilton, 205 A.D.2d 1021, 613 N.Y.S.2d 989, 991 (3d Dep’t 1994) (applying New York law) (exception where intent of the original contracting parties overrode the default rule), leave to appeal dismissed, 87 N.Y.2d 968, 642 N.Y.S.2d 196, 664 N.E.2d 1259 (1996);  Felin Assocs. v. Rogers, 38 A.D.2d 6, 326 N.Y.S.2d 413, 415 (1st Dep’t 1971) (applying New York law) (exception where note was lost).

The reasoning behind the default rule was stated in  In re Hurricane Resort Co., 30 B.R. 258 (Bankr.S.D.Fla.1983):  “To allow the assignee of a security interest to enforce the security agreement would expose the obligor to a double liability, since a holder in due course of the promissory note clearly is entitled to recover from the obligor.”  Id. at 261.  Thus, the default rule gives effect to the likely intent of the contracting parties which would protect the maker of a note, who also issues a mortgage, from being exposed to liability twice in respect of the same underlying debt. The consequences of a separation of a mortgage from the note is amply illustrated in the case at bar wherein the pendency of two separate actions in respect of the same underlying obligation threatens Rogers and Allsuite with double liability;  a result that probably was not intended at the *521 time that the original bargains culminating in the issuance of these respective instruments were struck.  At the very least, such intent of the contracting parties to the Modification Agreement has not been pleaded in the complaint at bar.FN5

FN5. The Court observes that a determination that the mortgage at issue, having been separated from the underlying promissory note, may be unenforceable would not leave the plaintiff in possession of a worthless instrument.  This conclusion obtains because the plaintiff presumably can sell the mortgage to the holder of the underlying obligation.  The plaintiff also can purchase the underlying obligation from the holder of the note.  In that case, plaintiff, as holder of both the mortgage and the note, could foreclose on the mortgage on the New York Property.

Contrary to the view expressed by the defendants in an apparent attempt to anticipate plaintiff’s argument, this Court regards New York law to be consistent with the majority default rule that an assignment of a mortgage unaccompanied by the note that it secures is a nullity, absent a contrary intent of the original contracting parties. In this regard, the New York Court of Appeals has held that a transfer of the mortgage, without the debt, is a nullity, and no interest is acquired by it…. [T]he legal maxim is, the incident shall pass by the grant of the principal, but not the principal, by the grant of the incident.  So that, unless we are authorized to say, that such was the intent of the parties, we cannot hold that it did.
Merritt v. Bartholick, 36 N.Y. 44, 51 (1867) (emphasis in original);  see Freidus, 769 F.Supp. at 1277-78;  Kluge, 536 N.Y.S.2d at 93;  Felin Assocs., 326 N.Y.S.2d at 415;  Beak, 42 N.Y.S.2d at 653.

Further, the Court regards those New York cases which defendants assert to depart from this principle to fall within the rubric of construing the intent of the original contracting parties in light of the unique factual circumstances presented therein.  For example, in  Felin Assocs. v. Rogers, 38 A.D.2d 6,  326 N.Y.S.2d 413 (1st Dep’t 1971), an assignment of the note along with the mortgage was an impossibility because the original note had been lost.  The assignor instead issued a replacement note to the assignee.  See  id., 326 N.Y.S.2d at 414.  The court based its holding-that physical delivery of the original note was not necessary for the subject mortgage to be enforceable, in compliance with the New York Real Property Law-on the ground that “there [was] no doubt that there [was] an intent to so transfer the interest in the note and mortgage.”  Id., 326 N.Y.S.2d at 415.  In explicating the limited scope of its analysis, the Felin court stated, “we do agree wit h the plaintiff … [that] in ordinary circumstances the mortgagee should also be required to transfer and deliver the mortgage and the original bond or note.”  Id.

The defendant also cites  Kawai America Corp. v. Hilton, 205 A.D.2d 1021, 613 N.Y.S.2d 989 (3d Dep’t 1994), leave to appeal dismissed, 87 N.Y.2d 968, 642 N.Y.S.2d 196, 664 N.E.2d 1259 (1996), as authority that New York does not adhere to the majority rule.  That case likewise is distinguishable from the facts alleged in the complaint at bar.  In Kawai, the defendant executed a series of one-year agreements from 1984 through 1990 in connection with the shipment of merchandise.  See  id., 613 N.Y.S.2d at 990-91.  In 1989, certain of the defendants issued a mortgage as additional security for a shipment of merchandise valued in excess of $50,000.  See  id. 613 N.Y.S.2d at 991.  The  defendants claimed that a prom issory note was never issued to the plaintiff as a result of disputes that had arisen between the parties.  See id.  The court found the mortgage to be enforceable, holding that “[w]hen an obligation secured by a mortgage exists aside from the note or bond, the mortgage is not invalidated by the invalidity of the note or bond manifesting the debt.”  Id.  The circumstances at issue in Kawai present a substantially different situation from the successive-assignment scenario in the case at bar.  See id.  This conclusion obtains because, in Kawai, the mortgage was held by the same party that was a promise of a commercial transaction for the shipment of goods, the enforceability of which was independently determinable without reference to a promissory note. See id.

*522 The plaintiff does not disagree with the above analysis of the law but contends that its status as holder of the note in question may be construe d from its allegation in the complaint that the RTC assigned its interest in and to the mortgage in question to 5-Star by Assignment of Mortgage dated January 11, 1995. See Compl. P 31.  Specifically, in its complaint, 5-Star cited Exhibit F thereof for reference to such assignment.  See id.  That exhibit, entitled “Assignment of Mortgage or Beneficial Interest in Deed of Trust” [the “Assignment”], includes the following language:

For value received, the undersigned assignor … does hereby grant, bargain,
sell, assign, transfer and convey to the following assignee:  Five Star
Management … all of Assignor’s right, title and interest in and to that
certain Mortgage … which encumbers the real property …together with all the
indebtedness currently due and to become due under the terms of any promissory
note or evidence of indebtedness secured thereby.

Compl.Ex. F, at 1 (e mphasis added).  According to the plaintiff, because the Assignment explicitly states that all the indebtedness secured thereby was assigned along with the mortgage, “5-Star clearly has alleged its possession of the Note.”  Pl.’s Mem. of Law, at 5.

The chief difficulty with the plaintiff’s argument is that the factual inference which it requests the Court to draw-that it has possession of the Note-is contradicted by its principal’s admission in a judicial proceeding of which this Court has taken judicial notice.  The Court therefore regards it to be inappropriate to draw this inference in favor of the plaintiff on the present
motion to dismiss absent an express allegation in the complaint, made in accordance with Fed.R.Civ.P. 11, that supports it.  Moreover, the complaint does not allege that the promissory note in question has been lost or destroyed so as to prevent Rogers from being exposed to dou ble liability in respect of the same underlying obligation. See  Felin, 326 N.Y.S.2d at 415 (where original note was lost and therefore rendered impossible to negotiate, mortgage securing such note was enforceable).  Furthermore, the complaint does not allege that the original
contracting parties, in entering into the Modification Agreement in 1991, specifically intended to expose Rogers and Allsuite to double liability, contrary to the default rule, in the event that different parties came into possession of the note and the mortgage in question. In view of these circumstances, the Court regards the better route to be to dismiss plaintiff’s complaint against defendants Rogers and Allsuite with leave to file an amended complaint.  Such amended
complaint must be served and filed within 45 days of the date that this Memorandum and Order is docketed, and should give proper regard to both the analysis stated herein and the parol evidence rule.FN6

FN6. In view of the Court’s rulings herein, it is unnecessary for it to
reach the defendants’ alternative application to transfer this case to the
United States District Court for the District of New Mexico pursuant to 28
U.S.C. s 1404(a).  For completeness of record, however, the Court notes
that said application appears to be unwarranted because the real property
that is the subject of this mortgage-foreclosure action is located in New
York, and moreover because the declaratory-judgment action commenced by
Rogers and Allsuite against 5-Star in the United States District Court for
the District of New Mexico has been transferred to the Eastern District of
New York pursuant to 28 U.S.C. s 1631.

CONCLUSION

For the foregoing reasons, the Court enters the following orders in this action:

1. Defendant Allsuite’s motion to dismiss this action against it for lack of
personal jurisdiction is DENIED.

2. Defendants Rogers’ and Allsuite’s motion to dismiss the complaint for failure
to state a claim is GRANTED.  Said dismissal shall be with leave to file  an
amended complaint, which must be served and filed within 45 days of the date that
this Memorandum and Order is docketed.

3. In the event that plaintiff does not file an amended complaint within the time
parameters established by the Court, plaintiff shall promptly notify the Court in
writing of its decision to that effect and state whether it wishes to continue
this ac tion against the other named defendants who have not joined *523 in the
subject motions to dismiss.  Failure to notify the Court in accordance herewith
will result in the dismissal of this action in its entirety without prejudice, as
against all defendants, for want of prosecution.

SO ORDERED.
E.D.N.Y.,1996.
5-Star Management, Inc. v. Rogers
940 F.Supp. 512

Filed under: CDO, currency, Eviction, foreclosure, GTC | Honor, Mortgage | Tagged: foreclosure defense, foreclosure offense, lost note |