Best Practices for Kentucky Lost Note Affidavits

A recent opinion from the Kentucky Court of Appeals highlights the importance of a well-crafted lost note affidavit. Also, it touches on certain best practices for preparing loan modifications.  

‍Background

‍The House case involved a challenge to the plaintiff’s right to enforce the note. The original lender was Washington Mutual Bank, which had assigned the mortgage to Deutsche Bank while continuing as loan servicer. Also, Washington Mutual had maintained possession of the original note on behalf of Deutsche Bank. Later, the borrowers and Deutsche Bank entered into a loan modification which identified Deutsche Bank as “note holder and mortgagee.”  

When Washington Mutual failed during the 2008 financial crisis, JPMorgan Chase Bank acquired its assets from the FDIC as receiver and assumed servicing of this loan for Deutsche Bank. The next year the borrowers entered into another loan modification, but this one identified the lender as “JPMorgan Chase Bank, N.A., successor to Washington Mutual Bank.” A third modification a few years later identified “JPMorgan Chase Bank, N.A.” as “Lender or Servicer.” Neither of these modifications mentioned Deutsche Bank.

When the loan later went into foreclosure, the copy of the note appended to the complaint was endorsed in blank by Chase “by purchase from the FDIC as receiver for Washington Mutual Bank.” But the assignment was directly from Washington Mutual to Deutsche Bank. For this reason, the borrowers challenged Deutsche Bank’s standing to foreclose, pointing both to its failure to produce the original note to prove it was the holder, and to the two loan modifications that identified Chase, rather than Deutsche Bank, as the lender.  

‍Key Provisions

‍As a result, Deutsche Bank was forced to rely on two different lost note affidavits to obtain judgment, and the Court of Appeals considered elements of both in affirming the trial court’s decision. Several key provisions in these affidavits enabled Deutsche Bank to prevail, and offer some insights about how to draft an effective lost note affidavit that can withstand a vigorous court challenge.  

For example, besides reciting that it was entitled to enforce the note, Deutsche Bank was able to provide key details about how and when it acquired the note. It attested both that it had obtained the note from Washington Mutual on a specific date by endorsement into its name and that Washington Mutual had maintained possession on its behalf as servicing agent.  

Additionally, Deutsche Bank was specific in stating that its records did not show that the note was ever released, paid off, satisfied, assigned, transferred, pledged, hypothecated, or that the Note was otherwise disposed of by the company. Instead, because the loss had occurred during a service transfer, the affidavit included that key detail, along with specifics about the company’s efforts to search for the missing note.

Another important fact was that Deutsche Bank’s affidavit attached a photocopy of the missing note. The statute requires a party seeking to enforce a lost note to prove its terms. A copy of the note will satisfy that requirement even if it lacks certain required endorsements.

A final significant feature of Deutsche Bank’s affidavit was its offer to indemnify the borrower against any loss that might arise if another financial institution would attempt to enforce the lost note.  Kentucky’s statute prohibits a court from entering judgment on a lost note unless the borrower is provided adequate protection against that risk. The court found that Deutsche Bank’s indemnity provision satisfied this requirement. While a court may order a bond for that purpose, bond agents are often hesitant to provide them in this situation, and the premium can be quite expensive.  

Another important lesson that can be drawn from this case is the need for care in drafting loan modifications. Two of the three loan modifications in this case referred to Chase as the lender without any mention of Deutsche Bank. This can create an opening for an opportunistic defense attorney, and probably contributed to this foreclosure being much more difficult than it otherwise might have been. Loan modifications should clearly identify the investor, and avoid referring to a servicer in a way that might suggest that it is the real party in interest on the loan.

Finally, while lost note affidavits must contain certain minimum required information as set forth in the statute, this case illustrates how including certain key features and factual details can make them much more effective. Such affidavits are not needed frequently, but when they are needed, we suggest collaborating with foreclosure counsel to craft each one carefully, with as much detail as the company’s records will support.  The more specific evidence the lender can provide, the harder it will be for an opposing party to prevent enforcement of the lost note.  The attorneys at Manley Deas Kochalski LLC are available to answer your questions and to suggest options to enhance the effectiveness of these important documents so that your foreclosure process can go as smoothly as possible.