The District Court of Appeal of the State of Florida, Fourth District, recently reversed a final judgment of foreclosure, holding that the mortgagee failed to prove that it had standing to foreclose because the note was specially indorsed to an affiliate of the lender, which later merged into the lender, but only the lender and not its former affiliate subsequently indorsed the note to the mortgagee, and the mortgagee did not present evidence of the extent of any assets transferred as part of the merger.

A copy of the opinion is available at:  Link to Opinion.

The borrowers signed a promissory note and mortgage in favor of a national bank, which later transferred the note to a subsidiary (the “LLC”). The note contained an allonge with a specific indorsement from the bank to the LLC.

The LLC subsequently was merged or consolidated into the bank. The bank then indorsed the note to the mortgagee, which sued to foreclose the mortgage.

As a defense, the borrower argued that the trustee lacked standing to enforce the note as a holder in due course, because the chain of ownership showed that the LLC — not the original lender bank — was still the holder.

At trial, the trustee’s witness testified that although the note was specially indorsed from the bank to its LLC subsidiary, the LLC was merged into the bank “to become one entity.” The trial court overruled the borrower’s objection to admission of the assignment into evidence and entered final judgment in the mortgagee’s favor. The borrower appealed.

On appeal, the Fourth District Court of Appeal limited its attention to whether the mortgagee proved it had standing to foreclose.

The Appellate Court explained that “[w]hen a note is specially endorsed, … ‘it becomes payable to the identified person and may be negotiated only by the indorsement of that person.’” It went on to clarify, however, that “[w]here a bank is seeking to enforce a note which is specially indorsed to another it may provide standing ‘through evidence of a valid assignment, proof of purchase of the debt, or evidence of an effective transfer.’ … One type of such an ‘effective transfer’ is a corporate merger, whereby a surviving entity may enforce the note and mortgage of the predecessor.”

The Appellate Court then cited two Florida statutes, sections 607.1106 and 655.417(1), which govern what happens to a merged corporation’s property interests and the effect of mergers on corporate liabilities.  The Court found that “[t]hese statutes make it clear that a foreclosing party can establish standing to foreclose based upon a merger. However, achieving standing via merger also requires that the surviving entity prove that it ‘acquired all of [the absorbed entity’s] assets, including [the] note and mortgage, by virtue of the merger.’”

The Appellate Court pointed out that “[o]ther than the bare assertion by [the mortgagee’s] witness at trial, there are no documents in the record indicating that the merger of [the bank and its LLC subsidiary] took place. It then concluded that the mortgagee “did not provide sufficient evidence to enable the trial court to discern the extent of any assets transferred between [the bank and its LLC subsidiary], or that a merger … had taken place. Testimony that the merger had occurred, without more, is insufficient to prove the extent of the consolidation, or that the transfer of the asset in question was included as part of the purported transaction.”

Because the mortgagee did not sufficiently prove that the merger had occurred and that the surviving entity had thereby acquired the note by operation of law, “there was no evidence that [the bank] had the authority to further transfer the note by assigning the mortgage to the [mortgagee].”

Accordingly, the Court concluded that the mortgagee “failed to prove that it had standing to foreclose,” and reversed and remanded the case directing the trial court to enter an involuntary dismissal.