Negotiable No Longer! Bank of N.Y. Mellon Trust Co. v. Hendrickson and the Future of Reverse Mortgage Enforceability

Jonathan Carelli

With its decision in Bank of N.Y. Mellon Trust Co., N.A. v. Hendrickson[1], the New York State Supreme Court for Rockland County m­ay pu­­t in jeopardy the enforceability of many reverse mortgage agreements. On March 31, 2023, the Court reaffirmed the holding of OneWest Bank¹ v. FMCHD Realty, that a reverse mortgage is not a negotiable instrument under Uniform Commercial Code (UCC) § 3-104. The Court further held that the proper section of the UCC to evaluate the enforceability of reverse mortgages is UCC § 9-203(b) because a reverse mortgage establishes a security interest governed by that section.² In setting this new rule, the Court focused on the definitions provided in the UCC for what constitutes a negotiable instrument and a non-negotiable instrument and explored the impact of the seminal case of OneWest Bank v. FMCHD Realty.³ This article explains the relevant background and holding of OneWest, the applicable UCC sections, distinguishes different types of mortgage loan vehicles, and analyzes the Hendrickson Court’s holding as it applies to the future of reverse mortgage foreclosure procedure.

Background and OneWest Bank

A reverse mortgage is a type of home loan that diverges from the traditional mortgage, in that borrowers do not make monthly payments; instead, interest and fees add to the loan balance over time and the loan is repaid after the borrower vacates the home.⁴ A borrower may receive the funds from the reverse mortgage through a line of credit on a monthly basis over a term, a combination of both a line of credit and monthly basis method, or any other approved basis.⁵ The history of reverse mortgages in the United States is relatively short, with the first reverse mortgage thought to have been issued in 1961.⁶ Reverse mortgages came to the national stage through the passing of the Housing and Community Development Act of 1987.⁷ The act specifically included provisions for a pilot program for “Insurance of Home Equity Conversion Mortgages for Elderly Homeowners,” which created the federal guidelines for reverse mortgage transactions.⁸ A Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage and is only available for homeowners who are 62 and older.⁹

In OneWest Bank, N.A. v. FMCDH Realty, Inc., a reverse mortgage was the instrument at issue.¹⁰ Specifically, the reverse mortgage in question had been memorialized in “a Cash Account Adjustable Rate Reverse Mortgage Loan Account Disclosure Statement and [Cash Account] Agreement.”¹¹ The Appellate Division, Second Department requested post-argument submission to address the “threshold question of whether the Cash Account Agreement falls within the definition of a negotiable instrument [under] [§] 3-104 of the [UCC].”¹² After reviewing the record, the relevant background on the nature of negotiable instruments, and the applicable UCC sections, the court held that a cash account agreement fails to constitute a negotiable instrument within the meaning of UCC § 3-104.¹³ Most notably, while the court acknowledged that the cash account agreement contained an unconditional promise to pay, “[the cash account agreement] create[d] a banking relationship between the lender and the borrower, provide[d] terms and conditions under which the borrower may . . . obtain additional cash advances from the lender, and even contains an arbitration clause,” which extended the agreement beyond what is permitted in negotiable instruments under the UCC.¹⁴ Despite the plaintiffs' contentions otherwise, the court found no New York case law on point, relying on decisions from other jurisdictions to serve as persuasive precedent for its decision.¹⁵

Law

Section 3-104 of the UCC defines the requirements for a writing to be considered a negotiable instrument.¹⁶ For a writing to be a negotiable in¹⁷strument, it must: “(a) be signed by the maker . . .; (b) contain an unconditional promise or order to pay a sum certain in money . . .; (c) be payable . . . at a definite time; and (d) be payable to order or to bearer.” A writing which complies with the requirements of §3-104 can be considered a note if, “it is a promise other than a certificate of deposit.”¹⁸ UCC § 3-112 provides the only other promises or obligations that may be included within a negotiable instrument, in addition to the unconditional promise to pay.¹⁹ “[A] cash account agreement does not constitute a negotiable instrument within the meaning of UCC § 3-104.”²⁰

If an instrument is not a negotiable instrument, section 9-203 of the UCC governs the formal requisites for the attachment and enforceability of security interests in secured transactions.²¹ UCC section 9-203(b) enunciates the requirements for the enforceability of security interests against debtors and third parties.²² Specifically, a security interest is enforceable if:

(1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and (3) one of the following conditions is met: (A) the debtor has authenticated a security agreement that provides a description of the collateral . . .; (B) the collateral is not a certified security and is in the possession of the secured party under section 9-313 pursuant to the debtor’s security agreement; (C) the collateral is certificated security in registered form and the security certificate has been delivered to the secured party under section 8-301pursuant to the debtor’s security agreement; or (D) the collateral is deposit accounts, electronic chattel paper, investment property, letter-of-credit rights, or electronic documents, and the secured party has control under section 7-106, 9-104, 9-105, or 9-107 pursuant to the debtor’s security agreement.²³

UCC § 9-203(b) requires the debtor’s security agreement for authentication to comply with the evidentiary requirements of the statute of frauds.²⁴

“A plaintiff in a mortgage foreclosure action establishes its standing by demonstrating that ‘it was the holder or assignee of the underlying note at the time the action was commenced.’”²⁵ Where an instrument has been determined to be a cash account, simple possession of the instrument and the associated note at the time of commencement of the action is not enough to establish standing to foreclose.²⁶

Bank of N.Y. Mellon Trust Co., N.A. v. Hendrickson

Recently, the issue of standing in a reverse mortgage action was addressed by the New York State Supreme Court for Rockland County in Bank of N.Y. Mellon Trust Co., N.A. v. Hendrickson.²⁷ Bank of New York Mellon Trust Company, National Association (“Plaintiff”), is a full service bank, which accepts deposits, makes loans and provides other services to the public.²⁸ John and Margaret Fitton obtained a HECM on their West Nyack, New York property in 2005.²⁹ Upon both of their consecutive deaths, the title to the property vested in the estate of Margaret Fitton in December of 2017.³⁰ Regina Hendrickson and Christopher Fitton (“Defendants”) are the co-executors of the estate of Margaret Fitton.³¹ On June 21, 2019, Plaintiff filed a notice of pendency, summons, and complaint to initiate the mortgage foreclosure action.³² Regina Hendrickson filed a pro se answer, raising fourteen affirmative defenses, with lack of standing and attorney’s fees among them.³³ After a failure to reach settlement in the mandatory foreclosure conferences, the case was released from the foreclosure settlement part of the court and Plaintiff was permitted to proceed with the mortgage foreclosure action.³⁴ The case was stayed from March 2020 through July 2021 due to the passage of the Coronavirus Aid, Relief, and Economic Security Act and the residential foreclosure moratorium.³⁵ On March 9, 2021, Defendants attained counsel for future proceedings.³⁶ Plaintiff filed its motion for summary judgment against Defendants and Defendants filed a cross motion to dismiss and for attorney’s fees.³⁷ Plaintiff asserted that it had “established its prima facie entitlement to summary judgment by submitting the note, mortgage, and evidence of the borrowers’ default by the [a]ffidavit of Marilyn Solivan . . . which states that there was a default under the terms of the Note and Mortgage upon Margaret M. Fitton's death . . . .”³⁸ Defendants contend that they established their prima facie case for summary judgment due to Plaintiff’s failure to prove standing to prosecute the mortgage foreclosure action.³⁹

The Rockland County Supreme Court granted Defendants’ motion for summary judgment and dismissal, denied Plaintiff’s motion for summary judgment as moot, and granted Defendants’ motion for attorney’s fees. In its analysis, the Court first reviewed the requirements for Plaintiff’s motion for summary judgment, pursuant to CPLR § 3212(b).⁴⁰ Since the issue of standing is a threshold issue and it was properly raised by the Defendants in reply, the Court addressed the Defendants’ cross-motion first.⁴¹

Analysis

The Defendants’ core argument for lack of standing asserted that the note is a non-negotiable instrument and that a reverse mortgage creates a security interest instead.⁴² Thus Article 9 of the UCC governs Plaintiff’s ability to foreclose the mortgage, which the Plaintiff cannot satisfy.⁴³ The Court agreed.⁴⁴ First, the Court identified that the parties agreed that the mortgage agreement can be categorized as a cash account.⁴⁵ Like in OneWest Bank, Plaintiff’s demonstration of its possession of the cash account at the time of commencement is not enough to establish standing since a cash account agreement is not a negotiable instrument under UCC § 3-104.⁴⁶

The court then pronounced that, “UCC § 9-203(b) provides the applicable standard to establishing standing to enforce a non-negotiable instrument.”⁴⁷ Applying that standard, The Court turned to an analysis of UCC § 9-203(b), specifically addressing if Plaintiff had satisfied one of the four requirements under §9-203(b)(3).⁴⁸ Plaintiff had not submitted a security agreement for the sale of the note (including a description of the note) and confirmed, in its answers to Defendants interrogatories, that no such agreement existed, thus failing to satisfy UCC § 9-203(b)(3)(A).⁴⁹ With the lack of a security agreement, Plaintiff’s failed to adhere to UCC § 9-203(b)(3)(B); moreover, even if a security agreement existed, the note itself does not fall under one of the security interests listed in UCC § 9-313.⁵⁰ Plaintiff was unable to produce evidence of its compliance with the remaining two subsections of UCC § 9-203(b)(3), as the promissory note, by definition, is not a certificated security and the note was not a deposit account, electronic chattel paper, investment property, letter-of-credit rights, or electronic documents.⁵¹ While Plaintiff contended that OneWest Bank did not provide a clear standard for what is required to establish standing to enforce a non-negotiable instrument, the Court dismissed this argument, holding UCC § 9-203(b) as the governing law.⁵² When evaluating under that standard, Defendants’ evidence along with Plaintiff’s disclosures proved Plaintiff’s non-compliance.⁵³ In conjunction with granting Defendants’ motion for dismissal, the court granted Defendants’ motion for attorneys’ fees, over argument from Plaintiff that the Defendants’ were not party to the mortgage.⁵⁴

Reverse Mortgages, HELOCs, and How Their Differences Matter

Home Equity Lines of Credit (HELOC) are a type of financing that can be secured by a home, much like a mortgage.⁵⁵ A HELOC creates a revolving line of credit between the lender and the borrower, where as long as the borrower remains under the credit limit, they can borrow as much as they need, whenever they so need it, much like a credit card.⁵⁶ HELOCs and reverse mortgages are not synonymous terms; HELOCs are revolving lines of credit based on the equity the borrower has in their home, while a reverse mortgage is an amount a borrower gets based on the borrower owning the home or having a small mortgage.⁵⁷ Further, the amount a borrower owes the lender increases over time with a reverse mortgage, slowly divesting the borrower of their home equity; whereas the HELOC amount is only that which is actually borrowed plus interest.⁵⁸

The differences between HELOCs and reverse mortgages are nuanced and can produce much confusion, as evidenced by the Richmond County Supreme Court’s decision in Winward Bora, LLC. v. Cristofer Musumeci.⁵⁹ In granting the plaintiff’s motion for summary judgment on the foreclosure of a HELOC, the court dismissed the position of the defendant, who had cited OneWest in their affirmative defense of lack of standing, arguing that the HELOC was not a negotiable instrument under UCC § 3-104.⁶⁰ In dismissing the defendant’s assertions, the court opined that OneWest was abrogated by JPMorgan Chase Bank N.A. v. Garcete, and that a HELOC is, in fact, a negotiable instrument.⁶¹

While the Winward Bora court is correct that a HELOC has been held to be a negotiable instrument, one could conclude Garcete does not serve to abrogate the OneWest decision because of the differences in the loan documents at issue. Garcete holds that a HELOC agreement is a negotiable instrument, whereas OneWest deals specifically with a reverse mortgage.⁶² Furthermore, unlike Garcete, OneWest and Hendrickson deal specifically with reverse mortgages that can be categorized as cash account agreements.⁶³ Until the Appellate Division clarifies the scope of the Garcete decision, practitioners must be wary of the differences between HELOCs and reverse mortgages and how it may affect a court’s decision in foreclosure actions.

Conclusion

The Hendrickson Court’s ruling sets the standard for determining if a plaintiff has standing to commence a reverse mortgage foreclosure action by holding that UCC § 9-203(b) is the governing law.⁶⁴ Practitioners must evaluate how this decision will affect outstanding reverse mortgage agreements. It is imperative for plaintiff’s counsel to review outstanding reverse mortgage documentation and determine if that documentation comports to UCC § 9-203(b).⁶⁵ Prior to any foreclosure action, plaintiff’s counsel should also review if, in addition to the reverse mortgage agreement, there exists an “errors and omissions agreement” between the parties, which would allow the plaintiff to revise the existing mortgage agreement.⁶⁶ Defense counsel must also review outstanding reverse mortgage agreements and, should they not comply with UCC § 9-203(b), prepare for their applicable affirmative defenses to the foreclosure action.⁶⁷ With a clear standard set through the Hendrickson court, practitioners for both plaintiffs and defendants will have a clearer notion of how future reverse mortgage foreclosure actions may proceed.

1. Bank of N.Y. Mellon Trust Co., N.A. v. Hendrickson, 79 Misc. 3d 540, 545, 191 N.Y.S.3d 571 (Sup. Ct., Rockland Co. 2023); OneWest Bank, N.A. v. FMCDH Realty, Inc., 165 A.D.3d 128, 128, 83 N.Y.S.3d 612 (2d Dep’t 2018).

2. Id.

3. Id.

4. N.Y. Real Property Law § 280; https://Consumerfinance.gov.

5. See 12 USC § 1715z-20(d)(9)(A-F).

6. Testimony of Peter H. Bell, President & CEO National Reverse Mortgage Lenders Association before the Subcommittee on Insurance, Housing & Community Opportunity House Financial Services, 112th Cong. 2-4 (2012), https://financialservices.house.gov/uploadedfiles/hhrg-112-ba04-wstate-pbell-20120509.pdf.

7. Housing and Community Development Act, 12 USC §§ 101-706 (1987).

8. 12 USC § 1715z-20.

9. RPL § 280-b; https://Consumerfinance.gov.

10. OneWest Bank, N.A. v. FMCDH Realty, Inc., 165 A.D.3d 128, 128, 83 N.Y.S.3d 612 (2d Dep’t 2018).

11. Id at 130.

12. Id at 131.

13. Id at 132.

14. Id at 134-5.

15. Id (citing Resolution Trust Corp. v. Oaks Apts. Joint Venture, 966 F. 2d 995, 1001-1002 (5th Cir. 1992); Heritage Bank v. Bruha, 283 Neb. 263, 269-270, 812 N.W.2d 260, 268 (2012); Yin v. Society Natl. Bank Indiana, 665 N.E.2d 58, 62-63 (Ind. Ct. App. 1996); Cadle Co. v Richardson, 597 So 2d 1052, 1055-1056 (La. Ct. App. 1992); Farmers Prod. Credit Assn. v Arena, 145 Vt. 20, 22-23, 481 A.2d 1064, 1065 (1984)).

16. Uniform Commercial Code § 3-104.

17. UCC §§ 3-104(1)(a)-(d).

18. UCC § 3-104(2)(d).

19. UCC § 3-112.

20. OneWest Bank, N.A. v. FMCDH Realty, Inc., 165 A.D.3d 128, 135, 83 N.Y.S.3d 612 (2d Dep’t 2018) (noting that a cash account agreement does “much more” than memorialize the borrower’s unconditional promise to pay; namely creating a banking relationship between lender and borrower).

21. UCC § 9-203.

22. UCC § 9-203(b).

23. Id.

24. Id at cmt. 3.

25. HSBC Bank USA v. Olivier, 179 A.D.3d 648, 650, 113 N.Y.S.3d 590 (2d Dep’t 2020) (quoting US Bank N.A. v. Nelson, 169 A.D.3d 110, 114, 93 N.Y.S.3d 138 (2d Dep’t 2019)).

26. OneWest Bank, N.A. v. FMCDH Realty, Inc., 165 A.D.3d 128, 132, 83 N.Y.S.3d 612 (2d Dep’t 2018)( “a plaintiff cannot establish its standing merely by showing that it possessed the original Cash Account Agreement, indorsed in blank, at the time the instant action was commenced”).

27. Bank of N.Y. Mellon Trust Co., N.A. v. Hendrickson, 79 Misc. 3d 540, 540, 191 N.Y.S.3d 571 (Sup. Ct., Rockland Co. 2023).

28. https://www.bloomberg.com.

29. Hendrickson, 79 Misc. 3d at 541.

30. Id at 542.

31. Id.

32. Id.

33. Id.

34. Id.

35. Id.

36. Hendrickson, 79 Misc. 3d at 541.

37. See CPLR § 3212; RPL § 282; Bank of N.Y. Mellon Trust Co., N.A. v. Hendrickson, 79 Misc. 3d 540, 542, 191 N.Y.S.3d 571 (Sup. Ct., Rockland Co. 2023).

38. Hendrickson, 79 Misc. at 542.

39. Id at 544.

40. CPLR § 3212(b); Hendrickson, 79 Misc. 3d at 543.

41. Hendrickson, 79 Misc. 3d at 544.

42. Id.

43. Id.

44. Id at 547.

45. Id at 545.

46. Hendrickson, 79 Misc. 3d at 545 (citing OneWest Bank, N.A. v. FMCDH Realty, Inc., 165 A.D.3d 128, 132, 83 N.Y.S.3d 612 (2d Dep’t 2018)).

47. Hendrickson, 79 Misc. 3d at 547.

48. Hendrickson, 79 Misc. 3d at 545 (citing CPLR §3212(b)).

49. Hendrickson, 79 Misc. 3d at 547.

50. Id at 547.

51. Id.

52. Id.

53. See id.

54. See id at 549 (RPL § 282 allows for executors to recover attorney’s fees, even if those attorneys are publicly funded legal services organizations, because to allow otherwise would “significantly thwart” the legislature’s intent to only award attorney’s fees to those who have the ability to afford their own attorney).

55. https://consumer.ftc.gov.

56. Id.

57. Id.

58. Id.

59. Winward Bora LLC. v. Cristofer Musumeci, Index No. 135069/2019, 2022 N.Y. Misc. LEXIS 12763, at 1 (Sup. Ct., Richmond Co. 2022).

60. Id at 7.

61. Id at 8 (citing JPMorgan Chase Bank, N.A. v. Garcete, 203 A.D.3d 1149, 1150, 163 N.Y.S.3d 816 (2d Dep’t 2022); (holding that the attachment of a home equity line of credit agreement was enough to establish standing to commence a mortgage foreclosure action).

62. See OneWest Bank, N.A. v. FMCDH Realty, Inc., 165 A.D.3d 128, 132, 83 N.Y.S.3d 612 (2d Dep’t 2018); Winward Bora, 2022 N.Y. Misc. LEXIS 12763, at *7 (“[T]he note, which was a reverse mortgage line of credit . . .”).

63. See Garcete, 203 A.D.3d at 1150; OneWest Bank, 165 A.D.3d at 132; Bank of N.Y. Mellon Trust Co., N.A. v. Hendrickson, 79 Misc. 3d 540, 542, 191 N.Y.S.3d 571 (Sup. Ct., Rockland Co. 2023).

64. Hendrickson, 79 Misc. 3d at 547.

65. UCC § 9-203(b).

66. Irving I. Steinman, Steinman's Bergerman and Roth New York Real Property Forms Annotated, Form 116 (Matthew Bender & Company, Inc., 3d ed. 2023).

67. UCC § 9-203(b).