Michael H. Arnold v. First Citizens National Bank, 693 F. App'x 62

Background

Debtor Cornerstone Homes owned ~700 residential parcels valued >$18M and borrowed from hundreds of individual investors (Individual Lenders) via promissory notes secured by mortgages on specific properties (Individual Notes and Individual Mortgages).
In 2006–2007 Cornerstone refinanced by borrowing from banks (First Citizens, CPC, First Niagara/Elmira) under separate loan agreements; each Bank took a mortgage from Cornerstone (Bank Loans and Bank Mortgages).
To minimize mortgage recording tax, the parties obtained written assignments from Individual Lenders purporting to assign their Individual Mortgages and associated notes to the Banks; the Individual Notes were not physically delivered or indorsed to the Banks.
After Cornerstone filed bankruptcy, the Chapter 11 Trustee sued, arguing the Banks lacked standing to foreclose because Article 3 negotiable notes were not validly transferred (no negotiation/delivery), so the Banks never held the underlying notes.
The bankruptcy court granted summary judgment for the Banks; the district court affirmed. The Second Circuit affirmed, holding resolution of Article 3 transfer mechanics unnecessary because the Bank Loans themselves independently established the Banks’ right to enforce the mortgages.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether written assignments (without physical delivery/indorsement) transferred negotiable Individual Notes under Article 3 so Banks could enforce mortgages	Trustee: Article 3 requires negotiation (delivery ± indorsement) to transfer negotiable notes; written assignment alone did not convey title, so Banks lack standing	Banks: Appellate decisions and practice allow written assignment to confer standing even absent physical delivery; here Banks received assignments	Court: Did not decide Article 3 point; unnecessary to resolve because Banks’ independent loans from Cornerstone gave them standing to foreclose
Whether consolidation/assignment scheme (assigning Individual Mortgages to Banks) defeats Banks’ mortgage enforcement right	Trustee: Consolidation/assignments show Banks rely on Individual Notes for standing, which were not validly transferred	Banks: Regardless of assignments, the Banks made independent loans to Cornerstone secured by mortgages, which establish foreclosure standing	Held: The underlying Bank Loans and mortgages are sufficient to establish standing; assignments/tax-avoidance scheme irrelevant to standing here
Whether lack of physical possession/indorsement of notes defeats foreclosure standing under NY law	Trustee: Absence of delivery/indorsement means Banks are not holders of negotiable notes and lack standing	Banks: Written assignments plus consolidation and loan documents demonstrate right to the debt and standing	Held: On these facts, Banks had demonstrated right to the debt through their loan agreements; standing affirmed
Whether the Court must resolve unsettled interplay between Article 3 negotiable-instrument transfer rules and foreclosure-standing doctrine	Trustee: Court should rule that Article 3 bars transfer by written assignment alone	Banks: Prior App Div cases support written-assignment standing; Court can avoid deciding unsettled issue	Held: Court declined to resolve the broader Article 3 question as unnecessary to outcome

Key Cases Cited

Aurora Loan Servs., LLC v. Taylor, 25 N.Y.3d 355 (2015) (the note, not the mortgage, determines standing to foreclose)
Citimortgage, Inc. v. Chow Ming Tung, 126 A.D.3d 841 (2015) (plaintiff must demonstrate right to the debt to pursue foreclosure)
Bank of N.Y. v. Silverberg, 86 A.D.3d 274 (2011) (foreclosure can be pursued by one who has demonstrated right to the debt)
Wells Fargo Bank, N.A. v. Walker, 141 A.D.3d 986 (2016) (written assignment of mortgage together with the bond or note may suffice for standing absent physical delivery)
U.S. Bank Nat’l Ass’n v. Akande, 136 A.D.3d 887 (2016) (written assignment found sufficient to establish standing without physical delivery)