16-4012-bk
Michael H. Arnold v. First Citizens National Bank et al.

                            UNITED STATES COURT OF APPEALS
                                FOR THE SECOND CIRCUIT

                                           SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED
BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A
COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

        At a stated term of the United States Court of Appeals for the Second Circuit, held at the
Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the
31st day of May, two thousand seventeen.

Present:
            JOHN M. WALKER, JR.,
            DEBRA ANN LIVINGSTON,
            GERARD E. LYNCH,
                  Circuit Judges.
_____________________________________

MICHAEL H. ARNOLD, as Chapter 11 Trustee,

                          Plaintiff-Appellant,

                 v.                                                    16-4012-bk

FIRST CITIZENS NATIONAL BANK, THE COMMUNITY
PRESERVATION CORPORATION, ELMIRA SAVINGS
BANK,

                  Defendants-Appellees.
_____________________________________



For Plaintiff-Appellant:                          GREGORY MASCITTI (Christina L. Shifton, on the
                                                  brief), LeClairRyan, P.C., Rochester, NY

For Defendant-Appellee First Citizens:            ALLAN HILL (Nickolas Karavolas, on the brief),
                                                  Phillips Lytle LLP, Rochester, NY


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For Defendant-Appellee Community RONALD M. TERENZI (Cara M. Goldstein, on the
Preservation Corporation:        brief), Stagg, Terenzi, Confusione & Wabnik, LLP,
                                 Garden City, NY

For Defendant-Appellee Elmira Savings: DAVID D. MACKNIGHT, Lacy Katzen LLP, Rochester,
                                       NY

       Appeal from a judgment of the United States District Court for the Western District of

New York (Geraci, C.J.).

       UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND

DECREED that the judgment of the district court is AFFIRMED.

       Plaintiff-appellant Michael H. Arnold, the bankruptcy trustee (the “Trustee”) for debtor

Cornerstone Homes, Inc. (“Cornerstone”), appeals from the November 11, 2016 judgment of the

United States District Court for the Western District of New York (Geraci, C.J.) which, in turn,

affirmed a grant of summary judgment to defendants-appellees First Citizens National Bank

(“First Citizens”), The Community Preservation Corporation (“CPC”), and Elmira Savings Bank

(“Elmira”, collectively, the “Banks”) by the bankruptcy court.            We assume the parties’

familiarity with the underlying facts, the procedural history of the case, and the issues on appeal.

       Over the course of its life as an ongoing concern, Cornerstone developed a large portfolio

of residential real estate properties in southern New York, mostly in economically depressed

communities in the region.       At the time the bankruptcy petition in this case was filed,

Cornerstone owned more than seven hundred parcels of residential real estate, which, together,

were valued at more than $18,000,000.        In order to build its holdings, Cornerstone initially

solicited investment from hundreds of individual investors.        These individual investors (the

“Individual Lenders”) lent Cornerstone funds to purchase and renovate properties in the region in

exchange for a promissory note (the “Individual Notes”), secured by a mortgage (an “Individual

Mortgage”) on one of Cornerstone’s residential properties. These loans were relatively small –


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often on the order of $40,000 – and the rates relatively high, with interest on the Individual Notes

generally accruing at ten percent per year.

        In 2006 and 2007, Cornerstone sought to refinance these loans at substantially lower

interest rates and, to this end, turned to several banks, First Citizens, CPC, and First Niagara

Bank (“First Niagara”), for funding.1     Each of the Banks entered into separate loan agreements

with Cornerstone (the “Bank Loans”).          In connection with these agreements, the Banks lent

Cornerstone the specified sum, and, in return, Cornerstone separately granted each Bank a

mortgage on certain properties in Cornerstone’s portfolio (the “Bank Mortgages”).                In an

apparent effort to avoid New York’s mortgage recordation tax, the parties also asked the

Individual Lenders to execute a written agreement assigning his or her Individual Mortgage and

the associated note to the Bank lending money against the underlying property.          The individual

security interests putatively transferred by these assignments were consolidated by agreements

between each of the Banks and Cornerstone, each of which separately secured a Bank Loan.

Under the assignments, each Individual Lender agreed to convey “unto [the assignee Bank] . . . a

certain mortgage made by Cornerstone . . . together with the bond or obligation described in said

mortgage.”    App’x 946.      It remains uncontested on appeal that, as the Bankruptcy Court

observed, the Individual Lenders “neither indorsed the underlying promissory notes nor

delivered physical possession of their Individual . . . Notes to the” Banks. In re Cornerstone

Homes, Inc., 

, 497-98 (Bankr. W.D.N.Y. 2015).

        After Cornerstone filed for bankruptcy protection, the Trustee sued the Banks, seeking a

declaratory judgment that the Bank Mortgages were unenforceable as a matter of law.           It argued


1
 Elmira, the third defendant-appellant here, would later purchase the loan it currently holds from First
Niagara.


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that, because the Individual Notes were negotiable notes covered by Article 3 of New York’s

Uniform Commercial Code (the “UCC”), the Banks had standing under New York law to

enforce the Bank Mortgages only if the written assignments executed by the Individual Lenders

validly conveyed title to the Individual Notes under Article 3.     It further argued that, because

Article 3 does not provide for the transfer of title to a negotiable note by written assignment, the

assignments at issue only effected the transfer of the Individual Mortgages, not the Individual

Notes.    Since it is “the note, and not the mortgage, [which] is the dispositive instrument that

conveys standing to foreclose under New York law,” Aurora Loan Servs., LLC v. Taylor, 

, 361 (2015), the Trustee argues that, because the Banks never gained title to the

Individual Notes, the Banks have no standing to foreclose and thus cannot enforce the security

interest reflected in the Bank Mortgages against property of the debtor.

         In general, Article 3 of the UCC provides for two ways to gain title to a negotiable

instrument: transfer and negotiation. See N.Y. U.C.C. §§ 3-201 (transfer); 3-202 (negotiation).

Negotiation, which confers holder status on the transferee, is accomplished by physical delivery

and indorsement (if the instrument is payable to order) or by delivery alone (if it is payable to

bearer or is “indorsed in blank”). 

1-201(b)(21)(B). The UCC also permits the

transfer of a negotiable instrument, which “vests in the transferee such rights as the transferor has

therein.” N.Y. U.C.C. § 3-201(1).      However, New York’s version of the UCC does not clearly

define the mechanism for a valid “transfer,” and the parties join issue on whether a written

assignment without physical delivery of the instrument can effect a valid transfer of the

instrument under Article 3.    Though there are numerous New York decisions that suggest, in

passing, that the recipient of a written assignment who has not taken physical delivery has, at the

very least, standing to foreclose, see, e.g., Aurora Loan Servs., LLC v. Weisblum, 

,


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108 (2d Dep’t 2011) (“A plaintiff has standing where it is both (1) the holder or assignee of the

subject mortgage and (2) the holder or assignee of the underlying note, either by physical

delivery or execution of a written assignment prior to the commencement of the action with the

filing of the complaint.”) (emphasis added), the parties have not pointed us to New York case

law articulating a clear basis for this view or otherwise generally considering the interaction

between negotiable instruments law and the law governing the prerequisites for standing to

foreclose.2   We need not address the issue ourselves here, however, as doing so is ultimately

unnecessary to our resolution of this case.

        As described above, rather than proceeding through purchases of the Individual Notes

from the Individual Lenders by the Banks, the Bank Loans were structured as loans from each

Bank, respectively, to Cornerstone.         This is directly memorialized in the loan agreements

between Cornerstone and the Banks, several of which include a clear promise to pay running

from Cornerstone to the applicable Bank, and make no mention of the Individual Notes.                 But it

is also the way the Trustee itself characterized the loan transactions before the bankruptcy court

on summary judgment.         For instance, with respect to First Citizens, the Trustee explained that

“[u]pon the closing of the [First Citizens] Loan, First Citizens loaned $1,000,000.00 to

[Cornerstone] pursuant to the terms of that certain promissory note issued by [Cornerstone] to

First Citizens . . . and that certain mortgage issued by [Cornerstone] to First Citizens . . . .”

App’x 632.


2
  We note, however, that the Banks have pointed us to two Appellate Division decisions which appear to
have clearly held that written assignment, even absent physical delivery, is sufficient to confer standing to
foreclose. See Wells Fargo Bank, N.A. v. Walker, 

, 988 (3d Dep’t 2016) (holding that,
though, “plaintiff’s proof falls short of establishing standing by physical delivery” the assignment of the
mortgage “together with the bond or note” was sufficient for standing); U.S. Bank Nat’l Ass’n v. Akande,

, 890 (2d Dep’t 2016) (explaining that the written assignment in the case was sufficient to
establish standing even absent physical delivery of the note).


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          The fact that the parties also obtained written assignments of the Individual Mortgages,

which they subsequently consolidated by agreement, is therefore incidental, in this case, to the

parties’ transaction.    While these consolidation agreements might have been effective in

minimizing the total mortgage recordation tax burden borne by the parties, they do not change

the fundamental structure of the Bank Loans, or the fact that Cornerstone granted the Banks a

mortgage securing these loans.       Because the loans made by the Banks are independently

sufficient to support the security interest at issue in this case, the Banks have standing under New

York law to foreclose. Citimortgage, Inc. v. Chow Ming Tung, 

, 842 (2d Dep’t

2015) (“In an action to foreclose a mortgage, the plaintiff has standing where, at the time the

action is commenced, it is the holder or assignee of both the subject mortgage and the underlying

note.”); see also Bank of N.Y. v. Silverberg, 

, 280 (2d Dep’t 2011) (explaining that

“foreclosure of a mortgage can[] be pursued by one who has . . . [a] demonstrated right to the

debt”).

                                          *      *       *

          We have considered the Trustee’s remaining arguments and find them to be without

merit.    Accordingly, we AFFIRM the judgment of the district court.

                                                      FOR THE COURT:
                                                      Catherine O’Hagan Wolfe, Clerk




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