U.S. National Bank Association v. Pinkney (Lawyers Weekly No. 012-117-16, 12 pp.) (J. Douglas McCullough, J.) Appealed from Forsyth County Superior Court (Patrice A. Hinnant, J.) N.C. App. Unpub.
Holding: Plaintiff creditor brought this action against defendant debtors seeking sale of the subject real property in satisfaction of the debt and recovery of principal, interest applicable fees and costs. The trial court dismissed the action, finding that the subject promissory note lacked an indorsement in its chain of title prior to its final indorsement to plaintiff, who was therefore not a “holder” of the note. As such, plaintiff had no right to enforce it against creditors.
We affirm the trial court’s dismissal of the action.
Plaintiff’s complaint alleges that (1) the note that is the subject of this action was originally executed by debtors, (2) that it was indorsed by the original holder to a subsequent holder, (3) that the note was then assigned from that holder via written assignment to another entity, and (4) that entity then indorsed the note to plaintiff.
In a foreclosure proceeding under a power of sale, the lender bears that burden of proof of a valid debt of which the party seeking to foreclose is the holder. This court has determined that the definition of “holder” in North Carolina’s adoption of the Uniform Commercial Code is applicable to the term as used within the statute providing for foreclosure actions.
Under G.S. § 25-3-104(a), a promissory note is a negotiable instrument. The UCC defines the “holder” of a negotiable instrument to be “[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession[.]” G.S § 25-1-201(b)(21)(a).
When the party in possession is not the original holder, if the instrument is payable to an identified person, transfer requires indorsement by each previous holder. An indorsement is a “a signature . . . that alone or accompanied by other words is made on an instrument for the purpose of . . . negotiating the instrument. . . . For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.” G.S. § 25-3-204.
In the present case, because plaintiff was not the original holder of the note, each transfer required endorsement of the note from one holder to the next.
The complaint discloses a fact, that the note and the allonges attached to the note lack an indorsement from a prior holder of the note, which necessarily defeats plaintiff’s claim. The prior holder, rather than indorsing the note to the subsequent holder, assigned the note via a recorded assignment. Therefore, the face of the complaint as well as the documents incorporated into plaintiff’s complaint demonstrate that plaintiff cannot establish that it is the holder of the Note.
The UCC is clear that if a party in possession of a note is not the original holder, if the instrument is payable to an identified person, there needs to be an indorsement by each and every previous holder.
Plaintiff, in the alternative, argues that, even if it is not a holder of the note through proper indorsement, it is non-holder in possession of the note and has the rights of a holder, under G.S. § 25-3-301. However, the complaint did not allege the alternative theory that plaintiff was a non-holder in possession of the note, and plaintiff did not amend its complaint at any time to allege this additional theory. Because the trial court’s consideration of a motion to dismiss under Rule 12(b)(6) is limited to examining the legal sufficiency of the allegations within the four corners of the complaint, we need not address plaintiff’s argument concerning its status as a non-holder in possession.