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Bankruptcy Court Enforces Requirement that Allonge be Affixed to Note

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| Legal Advisory

In an apparent case of first impression in Massachusetts, the U.S. Bankruptcy Court for the District of Massachusetts recently held that an allonge must be physically affixed to the original promissory note to be effective.

In In re: Lilia Shapoval, Case No. 10-30175-HJB (Bankr. D. Mass. 2010), a debtor filed a Chapter 13 bankruptcy case in the Bankruptcy Court. Among her debts was a mortgage held by Wells Fargo. During the proceedings, the debtor objected to Wells Fargo's proof of claim for the outstanding amount owed on the mortgage note, noting that the note attached to the proof of claim did not contain an indorsement to Wells Fargo. 

After Wells Fargo filed a motion to lift the automatic stay under 11 U.S.C. § 362 (d)(1) and (2), the debtor filed an objection to the motion claiming that Wells Fargo lacked standing to pursue the claim because the original mortgage note was not properly indorsed to Wells Fargo. In response, Wells Fargo presented a copy of an allonge to the note that had been indorsed in blank. The debtor then argued that the allonge was ineffective because it had not been properly affixed to the original mortgage note.

The Bankruptcy Court reviewed the pertinent provisions of the Uniform Commercial Code as adopted by the Massachusetts legislature, looking specifically at Mass. Gen. Laws c. 106, § 3-204, which defines what constitutes an indorsement to a negotiable instrument. The statute states that a signature on a paper affixed to the negotiable instrument may be considered a part of the instrument. Citing prior decisions in other jurisdictions, the Court held that an allonge must be physically attached to the original note to be effective. The Court, accordingly, concluded that a separate evidentiary hearing would be needed to determine whether the Wells Fargo allonge had properly been affixed to the note, and, therefore, whether Wells Fargo had standing to proceed with the Motion for Relief.

This case highlights the implications of failing to properly affix an allonge to a note, particularly in the bankruptcy context, and therefore stresses the importance of immediately affixing an allonge to a note upon execution.

This advisory was prepared by Beth Mitchell of the Commercial Finance practice at Nutter McClennen & Fish LLP. For more information, please contact Beth or your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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