Standing to Enforce a Note: Holder Status and Indorsement Requirements in New York Foreclosure

McCormack v Maloney, 2018 NY Slip Op 02385 (3d Dept. 2018)

This is a commercial paper case, but I blog about standing because it is an issue we deal with at various times — in no-fault disputes, foreclosure matters, and other civil litigation where the right to bring suit is contested. The McCormack decision offers a clear illustration of how standing works in the context of note enforcement, with some interesting implications for practitioners across different practice areas.

Here are the relevant snippets from this upstate case involving a note that was not indorsed in blank.

Background: A Note That Changed Hands Twice

The plaintiff in McCormack purchased the note and mortgage from Trustees Capital in September 2006, with a written assignment documenting the transfer. So far, so good — plaintiff was the holder.

But then the situation became complicated. The trial evidence established that plaintiff subsequently assigned both the note and mortgage to his then-bankruptcy attorney in March 2008 as partial payment for legal services. When plaintiff commenced this foreclosure action in June 2010 — two years after the assignment to the attorney — he could not produce:

• Any proof that the note was reassigned to him before he commenced suit
• Any evidence that he was the holder of the original note at commencement

He did possess the original note at trial in 2015. But possession at trial is not the same as possession at commencement.

The Legal Standards: Holder Status in New York

The Third Department’s analysis starts with the fundamental rule for note enforcement. As the court explained:

“Holder status is established where the plaintiff possesses a note that, on its face or by allonge, contains an indorsement in blank or bears a special indorsement payable to the order of the plaintiff.” (Wells Fargo Bank, NA v Ostiguy, 127 AD3d 1375, 1376; see UCC 1-201; 3-202, 3-204; Hartford Acc. & Indem. Co. v American Express Co., 74 NY2d 153, 159; U.S. Bank N.A. v Brody, 156 AD3d 839, 840.)

This two-element test is conjunctive — both elements must be satisfied:

1. Physical possession of the original note at the time of commencement
2. Proper indorsement: either blank (making the note payable to bearer) or a special indorsement naming the plaintiff specifically

The plaintiff in McCormack failed on both prongs. First, there was no proof he possessed the note when he commenced the action in June 2010 — by that time, it had been assigned to his bankruptcy attorney 26 months earlier with no documented reassignment. Second, even if possession were established, the note was payable to Trustees Capital, not to the plaintiff — and it was neither indorsed in blank nor specially indorsed to him.

The Court’s Holding: No Standing, Dismissed

The Third Department was unequivocal:

“Defendant argues, and we agree, that the complaint should have been dismissed for lack of standing. Because defendant raised the issue of standing as an affirmative defense in his answer, plaintiff had to prove his standing to maintain this foreclosure action in order to be entitled to relief.”

“Even if he was [in possession of the note], the note — which was payable to Trustees Capital — was neither indorsed in blank nor specially indorsed to him. Consequently, plaintiff’s physical possession of the note could not render him the lawful holder thereof for purposes of enforcing it.”

This is a clean, unambiguous application of the UCC holder status rules. Physical possession without proper indorsement does not create holder status. Period.

The Recommencement Question

Now, another interesting question raised by this dismissal: would the 6-month period to recommence the action run upon dismissal, since the dismissal is not on the merits?

Under CPLR 205(a), when a timely-commenced action is dismissed on grounds other than the merits, the plaintiff may commence a new action on the same transaction within six months of the dismissal, even if the statute of limitations has otherwise expired. A dismissal for lack of standing is generally not a dismissal on the merits.

This opens a potentially important window for plaintiffs who are dismissed on standing grounds — but it requires careful attention. The six-month clock begins running from the dismissal, not from the original filing, and plaintiffs must ensure that their standing deficiencies are cured (i.e., the note is properly reassigned and indorsed) before refiling.

Why This Matters Beyond Foreclosure

Standing challenges are not limited to mortgage foreclosure cases. In no-fault insurance litigation, the concept of standing — and specifically, the question of whether an assignment of benefits was valid and what rights it transferred — arises regularly. The principle at the heart of McCormack — that an assignee cannot have greater rights than the assignor, and the assignor cannot assign rights that no longer belong to them — echoes through New York & Presbyterian Hospital’s observation that “you cannot assign your right to benefits if your right to those benefits has not been triggered.”

For practitioners who handle commercial disputes, consumer debt matters, or insurance litigation, understanding the mechanics of holder status and assignment validity is essential to evaluating standing before filing suit.

Related Articles

• Motion seeking leave to amend the answer to seek affirmative defense of lack of standing is proper
• Understanding Legal Standing in New York: A Comprehensive Guide for Long Island and NYC Residents
• Standing – the Defense Applied Outside the No-Fault Arena
• Assignments and business records – a deadly combination