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In a victory for creditors, the Alabama Court of Civil Appeals recently reversed a trial judge’s decision to exclude a copy of a promissory note from evidence simply because it was not an original. Without the promissory note in evidence, the creditor lost its case at trial, so the higher court reversed the judgment for the debtor and sent the case back to the lower court for a new trial. The court explained that the relevant rule of evidence permits a copy to be introduced into evidence “to the same extent as an original” unless there is a “genuine question” as to the authenticity of the original (e.g., it might be a forgery) or in the circumstances it would somehow be unfair to admit the copy instead of the original. Notably , the availability of the original is not part of the test. While the creditor may eventually win and even get repaid, it’s worth noting that it could have avoided the cost of an appeal, at least on this issue, had it retained and produced the original note. Pepin Manufacturing, Inc. v. ESwallow USA, LLC (Ala. Ct. Civ. App. Oct. 2, 2015).

It’s a common occurrence – a mortgagor or grantor signs the security instrument a day or two in advance of the loan, or perhaps a note is re-signed a couple of days after closing to correct an error in the original note. Either way, it’s easy to end up with a security instrument that references a “note dated as of” an incorrect date. It shouldn’t matter, some would argue, since the borrower and the lender would certainly understand that the security instrument is meant to relate to the note. But one bank found out the hard way that dates do matter.

In In re Duckworth, a case recently decided by the U.S. Court of Appeals for the 7th Circuit, the court held that a bankruptcy trustee could defeat a prior perfected security interest held by a bank because the security agreement referenced a note dated “December 13, 2008,” while the actual promissory note was dated “December 15, 2008.” The court held that the bankruptcy trustee is “entitled to rely on the text of a security agreement.” Since there was no promissory note dated December 13, 2008, the security agreement didn’t secure anything at all as far as the bankruptcy trustee was concerned. Thus, the bank lost its priority position on the collateral for a $1,100,000 loan. The court, which reversed lower court rulings in the bank’s favor, reached this result even though the borrower admitted that the date discrepancy was a mistake.

While the court recognized that a borrower, as opposed to a bankruptcy trustee, cannot necessarily avoid a security agreement because of this type of mistake, it’s in bankruptcy that perfection really gets put to the test. Cautious lenders may want to review their closing practices to assure conformity of date and other references to notes in their security instruments.

 

Today the Southeast Financial Litigation Monitor sat down with Balch Partner John Pickering, member of the Financial Industries Section and leader of the Real Estate, Credit and Commercial Practice Group, to discuss the potential implications for financial institutions after last week’s SCOTUS decision guaranteeing a right for same-sex couples to marry in all fifty states. 

The US Supreme Court recently ruled 5-4 in Obergefell v. Hodges that the US Constitution guarantees a right for same-sex couples to marry in all fifty states. Several states already recognized same-sex marriage, but the high court’s decision dictates policy for every state and the federal government. 

What are some immediate implications we will see as a result of this ruling for financial institutions?

Here’s a good example — consider the spousal guaranty rule under Regulation B, which implements the federal Equal Credit Opportunity Act (ECOA).  ECOA prohibits creditors from discriminating against credit applicants on the basis of several criteria, notably including marital status.  Regulators have long taken the position that requiring the spouse of an applicant for credit – simply because the applicant is married to the spouse — to guaranty the credit extension violates this prohibition.

So does the “marital status” rule prohibit a creditor from requiring the guaranty of a same-sex spouse? Probably.  The definition of “marital status” in the regulation references marital status under “applicable state law”. When the regulations were written, few if any states permitted same-sex marriage.  To the extent they do now, either under laws enacted by their legislatures, prior court decisions, or under the Supreme Court’s recent decision, it would seem that an applicant with a same-sex spouse would now fall under the protections of the spousal guaranty rule.

What should lenders do now to avoid problems in this area going forward?

Prudent creditors will take note of this issue now and consider how their Regulation B compliance practices may need to be revised and updated to take into account the Supreme Court’s decision.

John Pickering is a partner in Balch & Bingham’s Birmingham, Ala., office and the leader of the firm’s Real Estate, Credit and Commercial Practice Group. He concentrates his practice on real estate and commercial lending, factoring, secured transactions, loan restructurings and real estate development. His clients include large and small banks, commercial finance companies, and other businesses, and he assists them with various types of transactions, procedures, regulatory compliance, and new product development.