Contract – Promissory Note – Lender’s Loss of Note – Assignee – Guarantor – Unconscionability

Emerald Portfolio, LLC v. Outerbanks/Kinnakeet Associates, LLC (Lawyers Weekly No. 011-301-16, 14 pp.) (Valerie Zachary, J.) Appealed from Dare County Superior Court (Cy Grant, J.) N.C. App.

Holding: Where the lending bank lost a promissory note before assigning it to plaintiff, plaintiff may not enforce the note.

We affirm summary judgment against the defendant-guarantor but reverse summary judgment against the defendant-borrower.

In 2002, Uniform Commercial Code § 3-309 was amended to allow an assignee to recover on a promissory note that a bank had lost prior to assignment; however, our General Assembly has chosen not to update North Carolina’s version of the statute, G.S. § 25-3-309. Accordingly, where a party who would otherwise have a right to enforce a lost note under § 25-3-309 subsequently assigns that note, the assignee does not acquire the right to enforce the note unless the assignee is in actual possession of the note.

As the note in this case remains missing, the plaintiff-assignee lacked standing to enforce it against the borrower. The trial court erred as a matter of law in granting summary judgment in favor of the assignee against the borrower.

However, defendant-guarantor Ray Hollowell’s guaranty waived all defenses other than full payment of the note. Consequently, the unenforceability of the obligation by the assignee against the borrower is no defense for Mr. Hollowell, and the guaranty may be enforced against him.

Finally, the only possible evidence of procedural unconscionability was the lender’s requirement that both Donna and Ray Hollowell execute guaranties. We are reluctant to hold that it is per se procedurally unconscionable for a lender to require that both members of a limited liability company execute a guaranty of the LLC’s loan obligation. In the absence of other evidence of procedural unconscionability, we hold that appellants have failed to demonstrate procedural unconscionability.

There is no bright-line rule as to just how much procedural or substantive unconscionability must be shown. However, some of each is necessary to demonstrate unconscionability.

In the absence of any procedural unconscionability, it cannot be said that the guaranty agreement was unconscionable. As such, the trial court did not err in rejecting the unconscionability defense asserted by guarantor Ray Hollowell.

Affirmed in part and reversed in part.