United States: Assignee Bank May Seek Recovery Based On Lost Promissory Note

It generally is accepted that a party that loses a promissory note nonetheless may enforce the note by way of a lost note affidavit. The Alabama Supreme Court recently addressed the related question of whether a party that had been assigned the interest in such lost note may do the same.

The case, Atlantic National Trust v. McNamee, 2007 WL 2898263 (Ala. 2007), turned on Article 3 of the Alabama Uniform Commercial Code. Under section 3-309 of the U.C.C., a person may enforce the terms of a lost note as long as that person was in possession of the note at some point, and as long as certain other criteria are met. Section 3-309 does not directly address the issue of whether an assignee of such lost note holder also may enforce the note, and neither do any of the other sections of the U.C.C.

Under the facts of the case, James McNamee executed a promissory note in favor of SouthTrust Bank, which SouthTrust eventually lost or misplaced. When the note matured, SouthTrust assigned its rights in the note to Wachovia Bank after McNamee failed to pay. Wachovia sued McNamee and attached a lost note affidavit to its motion for summary judgment. The lost note affidavit included a copy of the note and explained that the original had been lost prior to being assigned to Wachovia.

McNamee argued that section 3-309 only permitted SouthTrust Bank to enforce the note. As Wachovia was never in possession of the original note and as no other U.C.C. provision directly allowed Wachovia to make out a claim against McNamee, McNamee claimed that Wachovia's complaint should be dismissed.

Wachovia, on the other hand, argued that other provisions of the U.C.C. supported its complaint, specifically referring to section 3-203 and 1-103. Section 3-203 codifies the rule that an assignee inherits an assignor's rights in a note. Wachovia argued that as SouthTrust had the right to enforce a lost note against McNamee, so should Wachovia.

Section 1-103 permits a court to look beyond the U.C.C. if an issue is not directly addressed by the U.C.C., and permits courts to look at common law only if principals of law or equity are not "displaced by the particular provisions" of the U.C.C. Wachovia argued that no U.C.C. provision directly addressed whether an assignee could enforce the note. As such, Wachovia argued the court could rely on cases interpreting the common law, which Wachovia found supported its position.

The Alabama Supreme Court weighed whether the U.C.C. sufficiently addressed this issue as to prevent the court from needing to look elsewhere or, instead, whether there was a gap in the U.C.C.'s coverage.

Ultimately, the Alabama Supreme Court found that the U.C.C. contained a gap. As Alabama common law clearly allowed an assignee to "step into the shoes" of an assignor, the Supreme Court found that Wachovia was entitled to enforce the terms of the promissory note.

This article is presented for informational purposes only and is not intended to constitute legal advice.