Arizona State Law Journal is previewing its upcoming articles in the winter publication. This article is written by third-year student, Natalya Ter-Grigoryan.
Since 2007, Arizona has been among four states experiencing the highest foreclosure rates in the nation. This proliferation in residential foreclosures is reflected in the increased volume of litigation involving homeowners who contest foreclosure actions in an effort to retain their homes.
Relying on section 3309 of Arizona’s Uniform Commercial Code, homeowners assert that the party attempting to enforce a secured mortgage loan agreement must produce the original promissory note in order to initiate a foreclosure. Such cases highlight a problematic provision in section 3309, which governs enforcement of lost, destroyed or stolen negotiable instruments. The statute can be interpreted to require a holder pursuant to section 3301 to have had physical control of the instrument before the loss occurred and explain why the note could not be produced.
In fact, at least one court construed the statutory language currently in effect in Arizona to require a holder to have had physical possession of the promissory note before its disappearance. In the 1997 case Dennis Joslin Co. v. Robinson Broadcasting Corp., Dennis Joslin tried to collect on a debt after purchasing rights in a loan. The loan, however, had been sold and transferred multiple times before Dennis Joslin acquired it from a seller who never had the note. The court held that the possession requirement precluded Dennis Joslin from recovering on the underlying debt, spurring a revision to the Uniform Commercial Code.
In 2002, the National Conference of Commissioners on Uniform State Laws, in collaboration with the American Law Institute, issued an amended version of Article 3. The proposed changes to section 3-309 suspend the possession requirement by extending enforcement rights to a person who does not have the physical instrument but “has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred.” The official comment to this section explicitly states that the amendment is “intended to reject the result” reached in Joslin.
Arizona has not enacted the 2002 revisions and the state supreme court has never addressed the “show me the note” argument. Consequently, district courts applying Arizona law grapple with the uncertainty surrounding this discrete issue. This comment explores these courts’ treatment of the presentment defense, which is consistently deemed meritless and dismissed. The article also compares how courts interpreting other states’ laws have answered this question and discusses two states’ reasons for adopting the 2002 amendments.
This article urges adoption of the proposed changes to Article 3 in Arizona in order to clarify state law and provide notice to struggling homeowners that the presentment argument is not a viable defense to foreclosure if the terms of the loan agreement and the assignee’s ownership of the note are not in dispute. In addition, enacting the amendments will promote the objective of the Uniform Commercial Code by standardizing the commercial law governing negotiable instruments. Lastly, the revised text is advantageous because it is compatible with technological advances that suggest paper-intensive mortgage processes are becoming increasingly obsolete.