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IN THE COURT OF APPEALS OF THE STATE OF NEW MEAICO

31 Ooimion Number: Court of Appeals of New Mexico
rr , Filed 7/20/2022 11:19 AM
3) Filing Date: July 20, 2022 ep

No. A-L-CA-38418 Mark Reynolds

CITIMORTGAGE, INC.,

“ES

Plaintiff-A ppellant/Counterdefendant/
Cross-Appellee,

Vv.

LORRAINE GARCTA, as Personal
Representative of the ESTATE OF
ROSE GOMEZ,

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Defendant-Appellee/Counterplaintit!/
Cross-Appellant.

APPEAL FROM THE DISTRICT COURT OF BERNALILLO COUNTY
Carl J. Butkus, District Judge

Rose L.. Brand & Associates, P.C.
Eraina M. Edwards

Albooneroane NIRA
17.3

Le ES Be WB DOR

for Appellant

20
21

Kaim Law Furm, P.C.
C. James Kalm

221 Thomas Lkalm
23) Albuquerque, NM

for Apnellee
os

OPINION

LIVES, Judge.

3 ~—s In this foreclosure case, Plaintiff CitiMortgage, Inc., appeals from an order in

which the district court concluded that Plaintiff lacked standing because the

promissory note secured by the mortgage was lost while it was not in Plaintiffs

possession. On appeal, we consider an issue of first impression: whether the assignee

of a lost negotiable instrument to which Article 3 of New Mexico’s Uniform

Commercial Code (NMUCC) applies, see generally NMSA 1978, § 55-3-102

(1992), may obtain the right to enforce that instrument under NMSA 1978, Section

55-3-309 (1992) by virtue of the assignment. Concluding that the NMUCC’s

provisions do not displace the general rule that an assignee stands in the assignor’s

shoes, we hold that the assignment of a lost instrument carries with it the right to

enforce because that interpretation of Section 55-3-309 furthers the policies and

purposes underlying the NMUCC. To ensure that the vital limitations on the right to

enforce a lost instrument contained in Section 55-3-309(b) serve their intended

purpose of protecting persons required to pay, we also hold that, when a district court

enters judgment in favor of a party seeking to enforce a lost note, the court must

make the finding required by Section 55-3-309(b)—that the “person required to pay

the instrument 1s adequately protected against loss that might occur by reason of a

claim by another person to enforce the instrument’—explicitly and must explain

why its chosen means afford adequate protection in a reasonable manner under the

circumstances.

BACKGROUND

3 In 2016, CitiFinancial Servicing, LLC (CitiFinancial) filed an in rem

complaint for foreclosure of a mortgage securing a promissory note executed by

Rose Gomez, who had passed away before the initiation of suit, and whose estate is

represented by Defendant Lorraine Garcia. Because the note had allegedly been lost,

CitiFinancial based its claim for foreclosure on Section 55-3-309, which allows

parties to enforce lost instruments under certain circumstances. CitiFinancial

eventually filed an unopposed motion to substitute CitiMortgage, LLC as plaintiff

pursuant to Rule 1-025(C) NMRA, asserting that CitiFinancial had transferred the

right to enforce the note at issue to Plaintiff during the course of the litigation.

33 After the district court granted the motion to substitute, Defendant moved for

summary judgment, contending that she had established an affirmative defense to

enforcement of the note—and thus to foreclosure of the mortgage—because it was

undisputed that the note was lost and that Plaintiff did not have the rights of a holder

in due course. To support this position, Defendant relied on the last sentence of

NMSA 1978, Section 55-3-305(c) (2009), which provides that “[a]n obligor is not

obliged to pay [a negotiable] instrument if the person seeking enforcement of the

instrument does not have rights of a holder in due course and the obligor proves that

the instrument is a lost or stolen instrument.” Defendant’s argument was that a

person_can never be required to pay_a lost instrument if the person w

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instrument does not have the rights of a holder in due course.

4 The district court rejected that argument, but nevertheless entered summary

judgment in Defendant’s favor. Applying what it considered to be the plain meaning

of Section 55-3-309, the district court concluded that Plaintiff lacked standing to

enforce the note because Plaintiff had not been “in possession of the instrument and

entitled to enforce it when loss of possession occurred.” Section 55-3-309(a).

Plaintiff filed a notice of appeal from the order granting summary judgment, and

Defendant cross-appealed on the Section 55-3-305(c) issue.

DISCUSSION

12
13

I. The Assignment of a Lost Instrument Carries With It the Right to
Enforce

{5} |New Mexico’s standing doctrine requires a plaintiff seeking to foreclose a

mortgage that secures a promissory note to demonstrate that it had the nght to

enforce the note at the time suit was filed. HSBC Bank USA v. Wiles, 2020-NMCA-

035, 4 9, 468 P.3d 922. Where that note is a negotiable instrument subject to Article

3 of the NMUCC, as the note at issue here undisputedly 1s, our courts look to NMSA

1978, Section 55-3-301 (1992) to determine whether the plaintiff has the right to

enforce the note. Deutsche Bank Nat’l Tr. Co. v. Johnston, 2016-NMSC-013, ¥ 14,

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369 P.3d 1046. In pertinent part, that statute defines a ““[p]erson entitled to enforce”’

an instrument as “a person not in possession of the instrument who is entitled to

enforce the instrument pursuant to Section 55-3-309.” Section 55-3-309, in turn

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sets out the circumstances under which a person ts entitled to enforce a lost, stolen,

A} or destroyed instrument and the conditions for exercising that entitlement:

5 (a) A person not in possession of an instrument is entitled to

6 enforce the instrument if (1) the person was in possession of the

7 instrument and entitled to enforce it when loss of possession occurred,

8 (11) the loss of possession was not the result of a transfer by the person

9 or a lawful seizure, and (111) the person cannot reasonably obtain
10 possession of the instrument because the instrument was destroyed, its
11 whereabouts cannot be determined, or it is in the wrongful possession
12 of an unknown person or a person that cannot be found or is not
13 amenable to service of process.
14 (b) A person seeking enforcement of an instrument under
15 Subsection (a) must prove the terms of the instrument and the person’s
16 right to enforce the instrument... . The court may not enter judgment
17 in favor of the person seeking enforcement unless it finds that the
18 person required to pay the instrument is adequately protected against
19 loss that might occur by reason of a claim by another person to enforce
20 the instrument. Adequate protection may be provided by any reasonable
21 means.
2? The question presented here is whether the assignment of atost- instrument! carries
23] with it the right to enforce the instrument under Section 55-3-309 if the assignor had
24] that right.

'Throughout this opinion, we use the term “lost instrument” as a shorthand for

an instrument that has been “destroyed,” an instrument with “whereabouts [that]
cannot be determined,” or an instrument that “is in the wrongful possession of an
unknown person or a person that cannot be found or is not amenable to service of

process.” Section 55-3-309(a).

{6} Section 55-3-309 is modeled on the version of Section 3-309 of the Uniform
Commercial Code (UCC) that was adopted as part of the 1990 amendments to the
UCC. See generally U.C.C. § 3-309 (Am. Law Inst. & Unif. Law Comm’n 1990,
amended 2002).? We are far from the first court called upon to decide whether this
uniform provision permits the post-loss assignee of a negotiable instrument to
enforce it, but those that have gone before are divided. Beginning, apparently, with
Dennis Joslin Co. v. Robinson Broadcasting Corp., 977 F. Supp. 491 (D.D.C. 1997),
courts in one line of cases hold that the plain language of UCC Section 3-309 gives
enforcement rights only to the person who had possession of the instrument at the
time of loss. See Dennis Joslin Co., 977 F. Supp. at 495 (explaining that “the plain
language of the provision mandates that the plaintiff suing on the note must .. . have
been both in possession of the note when it was lost and entitled to enforce the note
when it was lost” (emphasis omitted)); accord, e.g., Emerald Portfolio, LLC v. Outer 7
Banks/Kinnakeet Assocs., LLC, 790 $.E.2d 721, 725 (N.C. Ct. App. 2016); Seven
Oaks Enters., L.P. v. Devito, 198 A3d 88, 99 (Conn. App. Ct. 2018); SMS Fin. XXV,
LLC v. Corsetti, 186 A.3d 1060, 1066 (R.I. 2018). Under this line of cases, an
assignee cannot enforce the lost note because they did not have possession of the

note at the time it was lost.

2All mentions of and citations to UCC 3-309 are to the 1990 version of the
UCC, unless the context indicates otherwise.

t% _Incontrast, the courts that have concluded that the assignee of a lost note may

enforce it generall

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way or the other about an assignee’s right to enforce a promissory note lost by the

assignor before assignment. See, e.g., Invs. Bank v. Torres, 233 A.3d 424, 436-37

(N.J.2020) (“The New Jersey version of UCC [S]ection 3-309 ... is silent regarding

the rights of an assignee of a mortgage and the transferee of a note when the original

note executed by the mortgagor has been lost.”); At/. Nat’l Tr., LLC v. McNamee,

984 So. 2d 375, 378 (Ala. 2007); Jones v. Ward, 270 A.3d 1024, 1035-36 (Md. Ct.

Spec. App. 2022). Looking for an answer elsewhere in the UCC, these courts resort

to relying on the pertinent state’s enactment of UCC Section 1-103—a provision that

applies to the entire Code—which provides that “the principles of law and equity”

99 <4

“supplement [the code’s] provisions” “[u]nless displaced by [its] particular

provisions.” See, e.g., Torres, 233 A.3d at 433-34, 436-37; McNamee, 984 So. 2d at

378. But cf. Jones, 270 A.3d at 1036 (holding that the right of enforcement could be

assigned without discussing Maryland’s version of Section 1-103). The courts that

have allowed enforcement then reason that the rule that an assignee “stands in the

shoes” of the assignor qualifies as one of these “principles” and is not “displaced”

by the silence of Section 3-309 before holding that a post-loss assignee is entitled to

enforce a lost instrument. See, e.g., Torres, 233 A.3d at 431-37; McNamee, 984 So.

2d at 378.

83 Interpreting Section 55-3-309 de novo, Baker v. Hedstrom, 2013-NMSC-043,

410, 309 P.3d 1047, we find ourselves in si

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of cases. As we explain below, the text of Section 55-3-309 does not answer the

question presented, and we therefore ascertain the Legislature’s intent by looking to

the NMUCC as_a whole and to the overarching directives for construing the

NMUCC that the Legislature provided in NMSA 1978, Section 55-1-103 (2005).

Those directives lead us to hold that the assignment of a lost instrument by a person

entitled to enforce it transfers the right of enforcement under Section 55-3-309 to the

assignee, and that a district court may enter judgment in favor of an assignee if the

court ensures that the borrower is adequately protected as required by Section 55-3-

309(b).>

(9 “Our ultimate goal in construing a statute is to ascertain and give effect to the

intent of the Legislature.” D.W. v. B.C., 2022-NMCA-006, § 14, 504 P.3d 559

(internal quotation marks and citation omitted). We begin with “[t]he primary

indicator of the Legislature’s intent’—‘the plain language of the statute.”

Weatherford Artificial Lift Sys., LLC v. Clarke, 2021-NMCA-065, § 14, 499 P.3d

679 (alteration, internal quotation marks, and citation omitted). The plain language

Our holding that the right to enforce a lost instrument may be conveyed by
assignment makes it unnecessary to address Plaintiff's argument that it obtained
standing by virtue of Rule 1-025(C) even if the NMUCC does not permit assignment

of the entitlement to enforce a lost instrument.

of Section 55-3-309 provides that a person who is not in possession of an instrument
must have had possession of and the right to enforce the instrument at the time the
instrument was lost in order to enforce it. But the statutory text says nothing about
whether the assignment of a lost instrument by a person who meets those conditions
carries with it the right of enforcement. Put simply, Section 55-3-309 does not
expressly prohibit or permit assignment of the right to enforce a lost instrument.
Compare § 55-3-309, with NMSA 1978, § 41-5-12 (1976) (providing that “[a]
patient’s claim for compensation under the Medical Malpractice Act is not
assignable”). Nor does it provide that the assignee of a lost instrument can or cannot
bring suit to enforce it.

{10} Because the plain language of the statute does not resolve the issue before us,
we turn to canons of statutory construction to ascertain the Legislature’s intent. See
State v. Porter, 2020-NMSC-020, § 16, 476 P.3d 1201. One canon looms especially
large here: expressio unius est exclusio alterius, “the inclusion of one thing implies
the exclusion of another.” Baker v. Hedstrom, 2012-NMCA-073, § 30, 284 P.3d 400,
aff'd on other grounds, 2013-NMSC-043. Cases holding that the assignee of a lost
instrument may not enforce it in essence rest on the expressio unius canon. Said
differently, we think the courts in those cases implicitly reasoned that, because the
relevant enactment of UCC Section 3-309 specifies who is entitled to enforce a lost

instrument (a person who “was in possession of the instrument and entitled to

enforce it when loss of possession occurred”), nobody else is entitled to enforce.

example, although the statute affirmatively provides that a person is entitled to

enforce a lost instrument if the person’s lack of present possession is not the result

of a “lawful seizure,” Section 55-3-309(a), the obvious implication of the statutory

language is that a person not in possession is not entitled to enforce an instrument

that has been lawfully seized. Limiting the entitlement to enforce a lost instrument

to persons identified in the statutory language is, by and large, a straightforward

application of the “common-sense premise that when [legislatures] say one thing,

they do not mean something else.” 2A Norman J. Singer & Shambie Singer,

Sutherland Statutes & Statutory Construction § 47:23 (7th ed. 2021).

(1143 But expressio unius is neither an “inflexible determinant of legislative intent,”

Swink v. Fingado, 1993-NMSC-013, J 28, 115 N.M. 275, 850 P.2d 978, nor an “end

[in] itself.” State v. Santillanes, 2001-NMSC-018, § 17, 130 N.M. 464, 27 P.3d 456

(internal quotation marks and citation omitted). And that canon is of limited value

in determining whether the Legislature intended for a right codified by statute to be

assignable. “An ‘assignment’ is a transfer of property or some other right from one

person (the ‘assignor’) to another (the ‘assignee’).” Quality Chiropractic, PC v.

oR AOA Po ea 4 4 4+1W 44

Farmers Ins. Co. of Ariz., 2002-NMCA-080, § 6, 132 N.M. 518, 51 P.3d 1172

(internal quotation marks and citation omitted). Following an assignment, an

assignee usually has “the same rights” as the assignor did because the law for

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[assignor’s] shoes.” /nv. Co. of the Southwest v. Reese, 1994-NMSC-051, 9 29-31,

117 N.M. 655, 875 P.2d 1086; see Leger v. Gerety, 2022-NMSC-007, 9 41, 503 P.3d

349; Wilson v. Berger Briggs Real Est. & Ins., Inc., 2021-NMCA-054, 925-26, 497

P.3d 654. See generally 6A C.J.S. Assignments § 111 (2022) (stating that “[an]

assignee’s rights are derivative’). So, when a statute specifies that a certain person

has a right, it does not necessarily mean that that right cannot be conveyed to and

exercised by a different person—i.e., the assignee standing in the shoes of the

assignor. See, e.g., Chevron Res. v. N.M. Superintendent of Ins., 1992-NMCA-081,

q9 4-5, 114 N.M. 371, 838 P.2d 988 (noting that an employee who had been assigned

his employer’s right to reimbursement from the New Mexico Subsequent Injury

Fund stood in the position of the employer); cf Reese, 1994-NMSC-051, § 35

(reasoning that, although a statutory heading addressed the “[s]tatute of limitations

99 66.

for actions brought by [a] conservator or receiver[,]” “nothing in the statute either

prohibit[ed] or permit[ted] assigning the limitations period” to a person who was

neither a conservator or receiver (emphasis, internal quotation marks, and citation

omitted)). Our Supreme Court has previously rejected the proposition that the mere

absence of express “statutory authorization” renders a right conferred by statute

unassignable. Reese, 1994-NMSC-051, 9 35, 45.

123} In our view, the strongest evidence of legislative intent with respect to the
proper interpretation of Section 55-3-309 is not the statute’s language read in
isolation; it is that language considered in the context of “the broader act in which
[Section 55-3-309 is] situated”’—1.e., the NMUCC. Chatterjee v. King, 2012-
NMSC-019, 9 12, 280 P.3d 283. Critically, the NMUCC provides directives for
courts tasked with interpreting its provisions. Subsection (a) of Section 55-1-103
requires courts to “liberally construe[] and appl[y]” the NMUCC to promote the
goals of “simplify[ing], clarify[ing}] and moderniz[ing] the law governing
commercial transactions”; “permit[ting] the continued expansion of commercial
practices through custom, usage and agreement of the parties”; and “mak[ing]
uniform the law among the various jurisdictions.” And in Subsection (b) of the same
statute, the Legislature—evidently recognizing the “futil[ity]” of attempting to draft
an “all-encompassing” statutory code that “anticipate[s] every eventuality[,]” Reese,
1994-NMSC-051, § 28—expressly provided that “the principles of law and equity”
supplement the NMUCC “{uJnless displaced by [its] particular provisions.” Section
55-1-103(b). Relying on both subsections, we conclude that the rule that an assignee
stands in the assignor’s shoes supplements Section 55-3-309 so that assignment of a
lost instrument carries with it any entitlement to enforce belonging to the assignor.

{13} The legislative goals underlying the NMUCC weigh in favor of permitting the

assignee of a lost instrument to enforce it. We base that conclusion on two of the

goals articulated in Section 55-1-103(a): (1) “permit[ting] the continued expansion

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(2) “mak[ing] uniform the law among the various jurisdictions.” As to the first, were

we to hold that the NMUCC does not allow the assignee of a lost instrument to

enforce it, lost instruments would be rendered practically unmarketable. Parties are

exceedingly unlikely to purchase lost instruments that they cannot enforce. Cf

Reese, 1994-NMSC-051, 4 38 (pointing out the unreasonableness of assuming that

the parties intended to “enter an agreement in which a note that was enforceable

before it was assigned[] became unenforceable simply because it was assigned’’).

Our choice is thus between a rule that would foster development of the market for

lost instruments and a rule that would restrict it, and we think it apparent that only

the former will “permit the continued expansion of commercial practices.” Section

55-1-103(a)(2).

414; Of-at least equal importance 1s the contribution that a rule permitting post-loss

assignees to enforce would make toward reaching “uniform[ity in] the law among

the various jurisdictions.” Section 55-1-103(a)(3). Neither our Legislature nor this

Court is capable of achieving that goal when it comes to Section 55-3-309 because

the various jurisdictions have not uniformly enacted or interpreted the model statute:

no matter which interpretation of Section 55-3-309 we choose, our decision here will

have the effect of putting our state on one side of a jurisdictional split.t Yet we have

the benefit of some thirty years of legal developments in other

our assessment of which interpretation will better further uniformity. And the

momentum is on the side of permitting enforcement by a post-loss assignee. In 2002,

Section 3-309 of the model UCC was amended (without further explanation) “‘to

reject the result” the United States District Court for the District of Columbia reached

in Dennis Joslin Co. in 1997. U.C.C. § 3-309 cmt. 2.° Since 2002, nineteen states

(and the District of Columbia) have enacted the amended version of UCC Section 3-

309.° Although twenty-nine states retain statutes virtually identical to Section 55-3-

‘Conspicuously absent from the fray is the State of New York, which retains
a statute loosely modeled on UCC Section 3-804, a provision of the original, 1951

uniform act and the predecessor to UCC Section 3-309. See N.Y. U.C.C. Law § 3-
804 (McKinney 1963); U.C.C. § 3-309 cmt. 1.

>We disagree with Defendant’s suggestion that our Legislature’s failure to

enact the 2002 version of UCC Section 3-309 is indicative of a legislative intent to
reject the results that would obtain under that statute. See Cable One, Inc. v. N.M.
Tax’n & Revenue Dep’t, 2018-NMCA-017, 4 25, 412 P.3d 1121 (cautioning “parties

and district courts against jumping to and relying on legislative inaction as somehow
providing evidence of legislative intent’”’). The last time the Legislature expressed its
intent regarding enforcement of lost instruments was when it enacted Section 55-3-

309, a statute containing language that has divided courts throughout the country and
that a number of courts have concluded does not prevent enforcement by an assignee.
The Legislature might justifiably have believed that courts in our state would reach

a similar conclusion.
SAla. Code § 7-3-309 (2009); Ark. Code Ann. § 4-3-309 (West 2005); D.C.
Code Ann. § 28:3-309 (West 2013); Fla. Stat. Ann. § 673.3091 (West 2004); Ind.

Code Ann. § 26-1-3.1-309 (West 2010); Iowa Code Ann. § 554.3309 (West 2006);
Kan. Stat. Ann. § 84-3-309 (West 2005); Ky. Rev. Stat. Ann. § 355.3-309 (West
2006); Mich. Comp. Laws Ann. § 440.3309 (West 2014); Minn. Stat. Ann. § 336.3-

309 (West 2003); Miss. Code. Ann. § 75-3-309 (West 2010); Mo. Ann. Stat. § 400.3-

309,’ appellate courts in some of those states have interpreted their state’s statute to

g.. Torres, 233 A.3d at 437.

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permit the assignee of a lost instrument to enforce it_E.

Jones, 270 A.3d at 1036; Bobby D. Assocs. v. DiMarcantonio, 751 A.2d 673, 676

(Pa. Super. Ct. 2000). It would be hazardous to assume that courts in at least some

of the jurisdictions where the issue is still open will not join them, and we are

unaware of a single instance in which a state legislature has rejected that

interpretation by enacting a decidedly non-uniform statute to prohibit enforcement

by post-loss assignees. In view of the current legal landscape, we have no difficulty

309 (West 2021); Neb. Rev. Stat. Ann. U.C.C. § 3-309 (West 2003); Nev. Rev. Stat.
Ann. § 104.3309 (West 2005); N.H. Rev. Stat. Ann. § 382-A:3-309 (2004); Ohio
Rev. Code Ann. § 1303.38 (West 2016); Okla. Stat. Ann. tit. 12A, § 3-309 (West

2009); S.C. Code Ann. § 36-3-309 (2008); Tenn. Code Ann. § 47-3-309 (West
2003); Tex. Bus. & Com. Code Ann. § 3.309 (West 2005).
7Alaska Stat. Ann. § 45.03.309 (West 1993); Ariz. Rev. Stat. Ann. § 47-3309

(1993); Cal. Com. Code § 3309 (West 1992); Colo. Rev. Stat. Ann. § 4-3-309 (West
1994); Conn. Gen. Stat. Ann. § 42a-3-309 (West 1991); Del. Code Ann. tit. 6, § 3-
309 (West 1995); Ga. Code Ann. § 11-3-309 (West 1996); Haw. Rev. Stat. Ann.

§ 490:3-309 (West 1991); Idaho Code Ann. § 28-3-308 (West 1993); 810 II. Comp.
Stat. Ann. 5/3-309 (West 1992); La. Stat. Ann. § 10:3-309 (1992); Me. Rev. Stat.
Ann. tit. 11, § 3-1309 (1993); Md. Code Ann., Com. Law § 3-309 (West 1996);

Mass. Gen. Laws Ann. ch. 106, § 3-309 (West 1998); Mont. Code Ann. § 30-3-309
(West 1991); N.J. Stat. Ann. § 12A:3-309 (West 1995); N.C. Gen. Stat. Ann. § 25-
3-309 (West 1995); N.D. Cent. Code Ann. § 41-03-35 (West 1991); Or. Rev. Stat.

Ann. § 73.0309 (West 1993); 13 Pa. Stat. and Cons. Stat. Ann. § 3309 (West 1992);
R.I. Gen. Laws Ann. § 6A-3-309 (West 2000); S.D. Codified Laws § 57A-3-309
(1994); Utah Code Ann. § 70A-3-309 (West 1993); Vt. Stat. Ann. tit. 9A, § 3-309

(West 1993); Va. Code Ann. § 8.3A-309 (West 1992); Wash. Rev. Code Ann.
§ 62A.3-309 (West 1993); W. Va. Code Ann. § 46-3-309 (West 1993); Wis. Stat.
Ann. § 403.309 (West 1995); Wyo. Stat. Ann. § 34.1-3-309 (West 1991).

concluding that the goal of uniformity will be best served by allowing the assignment

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of the right to enforce_a lost n

153 Because Section 55-1-103(a) directs us to interpret the NMUCC in a manner

that furthers its purposes, we should construe Section 55-3-309 to “codif[y] an

assignable right,” Reese, 1994-NMSC-051, 434, if the statute will bear_that

construction. We think that it will. As noted, Section 55-1-103(b) explicitly

authorizes courts to “supplement” the NMUCC with “the principles of law and

equity’ unless those principles are “displaced by [the NMUCC’s] particular

provisions.” See generally Associated Home & RV Sales, Inc. v. Bank of Belen,

2013-NMCA-018, 4 7, 294 P.3d 1276 (“Common law principles are not preserved

in an area which is thoroughly covered by the [NMUCC] simply because they are

not expressly excluded.” (internal quotation marks and citation omitted)); § 55-1-

103 cmt. 2 (““[NMUCC] preemption . . . extends to displacement of other law that is

inconsistent with the purposes and policies of the [NMUCC], as well as with its

text.””). When it comes to lost instruments, the NMUCC does not displace® a rule

permitting the assignee of an instrument to enforce it.

’Because it is difficult to understand how the NMUCC could “displace”
principles that did not already exist, the text of Section 55-1-103(b) suggests that the

“principles of law and equity” to which the statute refers are those found in “existing
bodies of law” at the time of the enactment of a particular NMUCC provision.
Section 55-1-103 cmt. 2. Although Defendant asserts that “the common law did not

favor transferability of a lost note[,]” the parties have not cited, and we are unaware

{16} As explained below, Article 3 sets out with great specificity the methods and

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has not been lost. This detailed statutory scheme—pursuant to which a transferee

may obtain unassailable title to an instrument—implicitly but necessarily precludes

the application of ordinary assignment law principles to enable enforcement of a

non-lost instrument by an assignee. But the same is not true in the context of lost

instruments. Article 3 says nothing about how the right to enforce a lost instrument

can be transferred. And while Appellant urges us to infer from this silence that the

of, any authority addressing whether New Mexico law permitted the assignee of a
lost instrument to bring suit upon it before our state adopted the NMUCC.
Although that 1s an interesting question, we think the answer, which it appears

would need to be reached through guesswork, does not control the outcome here.
Courts have always had the authority to modify common law rules to adapt to
changing legal and societal conditions, and equity 1s, if anything, more flexible than

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ha[s]| the power to change them” and that “the revision of an outmoded common law

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QWOUTTTTIN Ts within tne competence oft tne judiciary Do 1dZa ING 1 Dank V~Y aide 3

1987-NMSC-105, § 16, 106 N.M. 464, 745 P.2d 372 (“Sitting in its equitable
capacity, a court may avail itself of those broad and flexible powers which are

canable_ of heino_exnanded to deal with novel _ceacec_and canditions—_BPoaount. has the

VapaUuly UI UNM TITS, VAPCTOUIYS WW UNA VVEItir TrO VT VO) CGH VULTIIUPOTtD. YU fia UI

inherent power to supply a method in any suit to protect the rights of all interested
parties.” (citation omitted)). While the common law and equity practice, in a general

sense, were the “backdrop” acainst which the NMUCC was enacted, § §5-1-103 emt

Www avin VR GegsS¢ YEIIWIT Iw TNT

2, we see nothing in Section 55-1-103 evidencing a legislative intent to abrogate

courts’ historical authority to fashion evolving rules, to flash-freeze the common law
or_tules of eauity_practice_as they existed_at anv given point_in time. Section 55-1-

SEW OE SOY EAGER OD EE Vet GU CE VERO EEE EE CREE WI CREE

103(a)’s mandate that the NMUCC be “liberally construed” to “modernize the law
governing commercial transactions” applies to Section 55-1-103(b) no less than to
any_other provision of the NMUCC

Legislature intended the right to enforce a lost instrument to be non-transferrable,

we think that it instead “expresses_n

Renger, 1992-NMSC-061, 9 9, 114 N.M. 686, 845 P.2d 780, and therefore does not

prevent the enforcement of a lost instrument by an assignee.

a7; The entitlement to enforce a negotiable instrument that has_not been lost is

not a “right[]” or “privilege[]” that can be assigned like any other. Reese, 1994-

NMSC-051, § 31. Under Article 3, “[t]he right to enforce an instrument and

ownership of the instrument are two different concepts.” NMSA 1978, § 55-3-203

cmt. | (1992); see also § 55-3-301 (“A person may be a person entitled to enforce

the instrument even though the person is not the owner of the instrument.”’). The

assignment of a negotiable instrument may convey ownership of the instrument to

the assignee without the right to enforce the instrument. See Benton v. Albuquerque

Nat’l Bank, 1985-NMCA-039, ¢ 13, 103 N.M. 5, 701 P.2d 1025 (“An assignment is

an act or expression of intention by which one person causes a transfer of a right or

interest in property.”); § 55-3-203 cmt. 1 (“Ownership rights in instruments may be

determined by the principles of the law of property, independent of Article 3.”’); cf.

Elizabeth Renuart, Uneasy Intersections: The Right to Foreclose & the U.C.C., 48

Wake Forest L. Rev. 1205, 1225 (2013) (“Article 9 [of the UCC] now governs the

sale of promissory notes.”). However, even if an assignee acquires ownership of an

instrument by virtue of the assignment, the assignee obtains no right to enforce the

instrument until the instrument is physically “transferred” to the assignee.’ Section

55-3-203(a)-(b);_see_also_id.-cmt.1(Although [a document conveying all of X’s
AT XM T9 X oO L J oO

a be SF Se ea eo = A os So ab

right, title, and interest in an instrument to Y] may be effective to give Y a claim to

ownership of the instrument, Y is not a person entitled to enforce the instrument until

Y obtains possession of the instrument.”); Grant Gilmore, 7he Commercial Doctrine

of Good Faith Purchase, 63 Yale L.J. 1057, 1064 (1954) (explaining that, under the

law of negotiable instruments, a “debt claim is ‘merged’ into the paper evidencing

the claim,” and “[t]ransfer of the claim can only be made by physical delivery”

(emphasis omitted)).!° Before that point, the owner’s recourse is not against the

*Persuaded by the reasoning of the Alabama Supreme Court in addressing a
practically identical issue in McNamee, we conclude that enforcement by a post-loss

assignee is not addressed by Section 55-3-203, under which “[t]ransfer of an
instrument . . . vests in the transferee any right of the transferor to enforce the
instrument.” As the McNamee court explained, “ ‘transfer’ of an instrument” under

that statute “can be accomplished only by its ‘delivery’ to the transferee[,]” 984 So.
2d at 378, and the NMUCC elsewhere defines “delivery” as the “voluntary transfer

of possession” of an instrument. NMSA 1978, § 55-1-201(b)(15) (2005). But cf. §
55-1-201(a) (providing that the terms defined in Section 55-1-201 “have the
meanings stated” “[u]nless the context otherwise requires’’). “If an instrument is lost,
destroyed, or stolen, it is no longer ‘possessed’ by its owner and, as a result, cannot

be ‘delivered’ as required to effect a transfer of the instrument under” Section 55-3-
203. McNamee, 984 So. 2d at 378; see also Locks v. N. Towne Nat’l Bank of
Rockford, 451 N.E.2d 19, 22 (Ill. App. Ct. 1983). But see DiMarcantonio, 751 A.2d

at 676.
Section 55-3-309 replaced a statue that permitted enforcement of lost
instruments without mentioning possession at the time of loss: former NMSA 1978,

Section 55-3-804 (1961, repealed 1992). But cf, W. Nat’l Bank v. Rives, 927 S.W.2d
681, 685 (Tex. App. 1996) (interpreting the Texas version of former UCC Section
3-804 “to require possession by the claimant prior to loss or destruction”). That

statute provided in pertinent part that the “owner” of a lost instrument could

person obligated to pay the instrument, but the person with possession. See NMSA

1978, § 55-3-306 (1992) (“A person taking an instrument, other than aperson

rights of a holder in due course, is subject to a claim of a property or possessory right

in the instrument or its proceeds, including a claim to rescind a negotiation and to

“maintain an action in his own name and recover from any party liable thereon upon

due proof of his ownership, the facts which prevent his production of the instrument
and its terms.” Although we have considered the change in language in light of the
presumption that “[w]hen the [L]egislature enacts a new statute . . . 1t intend[s] to

establish new law or to change law as it previously existed” Leyba, 1992-NMSC-
061, 4 10, we are not persuaded that the former statute’s allusion to ownership should
figure into our analysis because the change may just as well have been intended to

make clear that proof of ownership is not a prerequisite to enforcement as to impose
an absolute requirement of prior possession on owners of lost instruments. Compare
Fales v. Norine, 644 N.W.2d 513, 519 (Neb. 2002) (stating | that, in replacing

TTS

Nebraska’ S version of former UCC Section 3-804 with the 1990 version of UCU
Section 3-309, that state’s legislature “intended to clarify that the plaintiff need not
satisfy the definition of ‘owner’ to enforce an instrument”), and Jones, 270 A.3d at

1NQE Latatan 4h 4 NAnaeslandc 14 4. 444 LTTIMO Oantinn 2. 200 + nandtadtl thane

LUSS (oldu Uldt Vid Vida Ss ClHdCuOeit OF UCU SCCUOM S-DUZ CAPAHOPOady WOse
who are entitled to enforce a lost instrument from the former section’’), with James
N. Duca, Now Where Did That Mortgage Note Go? 16 Haw. B.J. 71, 80 (2013)

rontine the fact nf LICC Cactinn 2-200’c an 1c qteal fa *4 tpatar at.

(arguing t that UI TAU OLD UN DOUUUIOITD oT IU7 5 enactmenti Ts Ttsit ad KCy indicator Ul
legislative intent” because the statue replaced former UCC Section 3-804, which was

“much more permissive with respect to the enforcement rights of the assignees of
loct— natec’’”) Coe generally —§ 55 2_304(ce)\— (nravidino— that under__certain

LV pULUAA Cre) } Ieee Serie? Ulty Ss ~~ TVW) (PIV v ~ tia, Unie Verran

circumstances, an obligor may raise another person’s property rights to an
instrument as a defense). The most likely source of a persuasive explanation, the

official comment to Section 55-3 309, indicates no_intention to_work a sweeping
paeun AJIT IV IIe SITU EIU VRS

change on the assignability of the right to enforce a lost instrument, but its content

is as unilluminating as it is accurate: “[t]he rights stated” in the new statute are indeed
‘“those_of ‘a person entitled to_enforce the instrument’ at the time of loss rather than

TEENS Oe PME REE OPEC WEEE ES EE EE WEE EEE GE EDD EEE

those of an ‘owner’ as in former Section 3-804.” Aware of no demonstrably correct
explanation for the shift in emphasis from ownership to entitlement to enforce, we
decline to draw_an inference either way from Section 55-3-309’s legislative history

recover the instrument or its proceeds.”); 2 Frederick M. Hart, Erik F. Gerding &

William F. Willer, Negotiable Instruments Under the Uniform Commercial Code

Ss Coie . ts

§ 12.04 (2022) (“The owner without possession can . . . obtain possession from the

person who has the instrument through the use of a writ of replevin.”). The

distinction between ownership and enforcement applicable to non-lost instruments

necessarily follows from the overall scheme of Article 3, which specifically sets out

when the transferee of a negotiable instrument may enforce it and, critically, may

give a transferee better title than the true owner of the instrument. Regardless of

ownership, a person who qualifies as the holder of an instrument—“‘the person in

possession of a negotiable instrument that is payable either to bearer or to an

identified person that is the person in possession[,|” § 55-1-201(b)(21)(A)—may

“negotiate” that instrument by transferring possession “to a person who thereby

becomes [the instrument’s] holder.” Section 55-3-201(a); see also § 55-3-201(b)

(providing that an instrument payable to bearer “may be negotiated by transfer of

possession alone,” while an instrument payable to an identified person can only be

negotiated by a transfer of possession and indorsement). Under certain conditions,

the new holder may qualify as a “holder in due course,” NMSA 1978, § 55-3-302(a)

(1992), and Article 3 makes plain that a holder in due course has the right to enforce

the instrument free and clear of any and all ownership-based defenses to payment.

Section 55-3-306 (“A person having rights of a holder in due course takes free of [a

claim of a property or possessory right in an instrument or its proceeds].”); § 55-3-

305(b) (providing that certain defenses may not be asserted against ah

course); see also 2 Hart, Gerding & Willier, supra, § 12.07 (“If [a] person in

possession is a holder in due course that person gets ‘new title’ by virtue of being a

holder in due course which title is good as against all who claim an interest in the

instrument.”’); James Steven Rogers, The Myth of Negotiability, 31 B.C. L. Rev. 265,

266 (1990) (‘[U]nlike [other forms] of property, if a negotiable instrument is stolen

and passed to a purchaser who qualifies as a holder in due course, the purchaser takes

free of the claim of the true owner.”).

4183 Permitting assignment of the right to enforce an instrument that is not lost

would thus subject the person obliged to pay the instrument to a risk of double

liability: a holder in due course could enforce the instrument against the person

obliged to pay it, and that person would be unable to rely on an assignee’s purported

ownership of the instrument as a defense. See 2 Hart, Gerding & Willier, supra,

§ 12.04 (“Since rights of ownership are cut off when a holder in due course takes an

instrument, the rule [requiring possession] protects the obligor from the possibility

of having to pay twice; once to the owner and then to the holder in due course.”);

see also Johnston, 2016-NMSC-013, § 22 (“[S]tanding [requirements] in foreclosure

actions . . . protect[] homeowners against double liability[.]”); 7nv. Serv. Co. v.

Martin Bros. Container & Timber Prods. Corp., 465 P.2d 868, 872 (Or. 1970) (“The

most important [probable basis for the requirement of possession] is the danger of

not have physical possession of the note.”). Strict adherence to Article 3’s

requirement of possession as a prerequisite for enforcement is necessary to prevent

that risk when_an instrument has not been lost

419} But these legal principles can easily coexist with a rule permitting assignment

of the right to enforce a lost instrument. Section 55-3-309 is an outlier within the

statutory scheme governing the enforcement of negotiable instruments under Article

3 of the UCC. With one or two exceptions not relevant here,'' the statute is the sole

mechanism by which a person who does not have present possession of an

instrument may enforce it. See § 55-3-301(1) (providing that “the holder of the

instrument” is a person entitled to enforce it); § 55-3-301(41) (providing that a

“nonholder in possession” with the rights of a holder is a person entitled to enforce

an instrument). The very existence of that mechanism is at odds with the historically-

rooted’ principle underlying Article 3: that a negotiable instrument is “a reified right

"See NMSA 1978, § 55-3-312 (2009) (providing for a claim to the amount of
a lost certified check, cashier’s check, or teller’s check); NMSA 1978, § 55-3-418(d)

(1992) (providing that, “if an instrument is paid .. . by mistake and the payor .. .
recovers payment... the instrument is deemed not to have been paid . . . and the
person from whom payment is recovered has rights as a person entitled to enforce

the dishonored instrument”).
"It appears reasonably clear that the law of negotiable instruments developed,
at least in part, as a commercially useful workaround to the common law’s historical

refusal, long since abandoned, to sanction the transfer of an intangible right to

to payment[,]” § 55-3-203 cmt. 1,'° which by hypothesis can be enforced only by

the person with present possession. See 2 Hart, Gerding & Willer, supra, § 4.01

ti —¥ = Sa de ae ey Net APT rs

(“The obligation [represented by a negotiable instrument] is reified, meaning that

[it] is embodied in the piece of paper; possession of the instrument is essential to

enforcing the transferee’s rights.”’)

20; Although allowing the enforcement of lost notes creates the same risk of

double liability that would flow from other rules permitting the enforcement of

instruments by persons not in possession, see § 55-3-309 cmt., Section 55-3-309(b)

contains a built-in safeguard against the risk of double liability. Under that

subsection, “[a] court may not enter judgment in favor of the person seeking

payment by another person. See generally John A. Russell, Chitty on Bills of
Exchange and Promissory Notes 3 (11th ed. 1878) (“[T]he common law . . . refused

to sanction the assignment of a chose in action, that is, of any mere right of suit with
regard to property, real or personal.” (italicization omitted)); 2 Hart, Gerding &
Willier, supra, § 1.03[4] (The rule against the transfer of intangible rights was the

first hurdle which had to be overcome before the bill of exchange could acquire a
negotiable character.”); Edward Jenks, On the Early History of Negotiable
Instruments, 9 L.Q. Rev. 70, 76 (1893) (“[A] chose in action does not permit of that

corporeal and formal transfer which is essential to the legality of early conveyances.”
(italicization omitted)); Restatement (Second) of Contracts ch. 15, intro. note (Am.
Law Inst. 1981) (explaining that “[t]he historic rule . . . that a chose in action could

not be assigned” “was progressively narrowed by the reception into the common law
of doctrines developed in the law merchant”—under which “mercantile instruments
... were held transferable by delivery, or by indorsement and delivery’— “and in

the courts of equity and by statute” (internal quotation marks omitted)).
'3 Where we rely on the non-binding official comments to the NMUCC, we
find them persuasive. See generally First State Bank at Gallup v. Clark, 1977-

NMSC-088, 9 5, 91 N.M. 117, 570 P.2d 1144.

enforcement [of a lost instrument] unless it finds that the person required to pay the

instrument is adequately protected against loss that mi

by another person to enforce the instrument.” /d. Thus, a person suing on a lost

instrument may be required to pay the temporary price'* of assuring the person

obliged to pay that the payment sought will be the only one to come out of the

obliged person’s pockets.

13 Ultimately, we conclude that the UCC does not displace assignment law in

the context of lost instruments because the theoretical and practical reasons for

formalistically clinging to the requirement of possession imposed by Article 3’s

t.'>

other enforcement provisions do not apply in that context.’° The concept that an

instrument is a “reified right to payment” goes out the window the moment the

4S Historically, that price was a potentially expensive one. See generally
NMSA 1929, § 105-837 (1897) (“To entitle a party to [recover on a lost note or bill],

he, or some responsible party for him, shall execute a bond to the adverse party in a
penalty at least double the amount of such note or bill, and with two sufficient
securities, to be approved by the court in which the trial shall be had, conditioned to
indemnify the adverse party against all claims by any other person on account of

such note or bill and against all costs and expense by reason of such claims.”’).
'S Another rationale for the requirement of possession is that it provides a
simple and clear method for ascertaining who is entitled to enforce. See Johnston,

2016-NMSC-013, 9 21; Inv. Serv. Co., 465 P.2d at 873. We see no reason to think
that permitting enforcement of lost instruments by assignees will seriously
undermine this policy. Although assignments are commonplace nowadays, no

intolerable confusion has resulted. And the law ordinarily provides obligors with
some measure of clarity and certainty by requiring an assignee to inform the obligor
of the assignment. See, e.g., Giannini v. Wilson, 1939-NMSC-052, 7 16, 43 N.M.

460, 95 P.2d 209.

instrument does, and permitting the assignee of a lost instrument to enforce is no

nore inconsistent with that theory than 1s permittin

es We Se = Ee =

instrument in the first place. And the protection against double liability provided by

Section 55-3-309(b) provides a buffer against the displacement that the possession-

based provisions of Article 3 work on the law of assignments where an instrument

is not lost. Critically, there is no reason to think that Subsection (b) will be any less

effective in preventing double liability in cases brought by assignees of lost

instruments than it is in protecting against double liability in cases brought by

persons who claim to have lost the instrument themselves. !°

922}, Weclose by emphasizing the essential role that district courts play in applying

Subsection (b) in a manner that meaningfully protects persons obliged to pay

negotiable instruments, both from the risk of double liability and from the burdens

of repetitious litigation. Subsection (b) affords district courts discretion with respect

to how to provide such protection: they may do so “by any reasonable means.” Other

jurisdictions have recognized a variety of means that could be reasonable, including

written indemnification agreements, surety bonds, letters of credit issued by

financial institutions, and deposits of cash collateral with the court. See, e.g., Fla.

'eAlthough the provisions of Subsection (b) come into play only after a party

has established its entitlement to recover pursuant to Subsection (a), nothing in our
opinion excuses plaintiffs, whether assignees or not, from otherwise complying with
the settled requirement that “standing .. . be established as of the time of filing suit.”

Johnston, 2016-NMSC-013, § 20.

Stat. Ann. § 702.11(1)(a)-(e) (West 2013); DiMarcantonio, 751 A.2d at 676.

Ensuring that the interests ofa person

= EGE Fo

manner, by the means we have listed or others, is a task that Subsection (b) assigns

in the first instance to the district court, which must make that determination based

on the facts of each case

923} While we do not go so far as to set out inflexible rules, district courts must

closely scrutinize attempts to enforce lost instruments. A person who undertakes

liability on a negotiable instrument has no reason to expect that the instrument will

end up as, in effect, an ordinary intangible chose in action, freely assignable to and

enforceable by persons who have never even seen it. The misfortune or negligence

of the person entitled to enforce an instrument should not be visited upon the person

obliged to pay. To ensure that Subsection (b) serves its intended purpose and to

facilitate meaningful appellate review, we hold that, when a district court enters

judgment on behalf of a party seeking to enforce a lost note, the court must make the

requisite finding—that the person obligated to pay is adequately protected—

explicitly and explain why its chosen means afford adequate protection in a

reasonable manner under the circumstances. A failure to make and support that

finding will constitute an abuse of discretion.

Ii. Defendant’s Cross-Appeal Lacks Merit

4; In her cross-appeal, Defendant challenges the district court’s denial of her

notion for summary judgment insofar_as it was _based_on the second sentence_of

Section 55-3-305(c), which provides that “[a]n obligor is not obliged to pay [an]

instrument if the person seeking enforcement of the instrument does not have rights

of a holder in due course and the obligor proves that the instrument is a lost or stolen

instrument.” Defendant contends that she established a defense to payment under the

plain language of the statute because it was undisputed that Plaintiff was not a holder

in due course of the note and that the note was lost. We disagree. As the district court

recognized, although it may be “tempt[ing] to go along with” Defendant’s argument

“Tijf one looks only at the last sentence of [Section] 55-3-305(c),” that sentence

“must be viewed in the larger context of [Section] 55-3-305(c). . . , [Section 55-]3-

305 and, indeed... , Article 3.” See Miller v. Bank of Am., N.A., 2015-NMSC-022,

4] 12, 352 P.3d 1162 (“A statutory subsection may not be examined in a vacuum but

must be considered in reference to the statute as a whole and to statutes dealing with

the same general subject matter.”); Key v. Chrysler Motors Corp., 1996-NMSC-038,

q 14, 121 N.M. 764, 918 P.2d 350 (“[AIII parts of a statute must be read together to

ascertain legislative intent.”). This context makes clear that Defendant’s argument

lacks merit.

5; Reading each sentence of Subsection (c) as part of a “harmonious whole,”

Key, 1996-NMSC-038, 4 14, we think it apparent that the statute in its entirety

addresses the jus tertii.e., third-party rights—defenses available to the obligor on

an obligor may “assert against the person entitled to enforce the instrument a

defense, claim in recoupment or claim to the instrument ... of another person.”

Section 55-3-305(c). Following this pattern, the crucial second sentence permits an

obligor to raise as a defense the rights of a person who has lost an instrument or from

whom an instrument has been stolen. An obligor is not liable on a lost or stolen

instrument produced by a person who does not have the rights of a holder in due

course. But, contrary to Defendant’s argument, Subsection (c) does not create a

defense against enforcement of an instrument that cannot be produced by the person

seeking enforcement because it has been lost by or stolen from that person.'’ The

posited defense has no relation to the concern for third-party rights underlying

Subsection (c).

6} Moreover, Defendant’s reading of the statute would create broader tension

within Article 3 because it conflicts with the enforcement mechanism for lost or

stolen instruments set out in Section 55-3-309. See generally Leger, 2022-NMSC-

007, §[ 33 (stating that courts should “avoid finding conflict where a statute can be

"Theoretically, a person who finds or steals an instrument could go on to lose

the instrument or have it stolen by somebody else. Nothing in this opinion prevents
an obligor from raising the initial loss or theft—rather than the loss by or theft from
the person seeking enforcement—in a suit brought under Section 55-3-309 in those

circumstances.

interpreted harmoniously”). Subsection (b) of Section 55-3-309 provides that the

WOE Oe

terms of the instrument and the person’s right to enforce the instrument.” In pertinent

part, a person has a “right to enforce” under Subsection (a) only if “the person cannot

reasonably obtain possession of the instrument because its whereabouts cannot

be determined, or it is in the wrongful possession of [another] person.” Thus, under

the plain language of Section 55-3-309, the person seeking enforcement of a lost or

stolen instrument has the burden of proving that the instrument is lost or stolen. But

under Defendant’s construction of Section 55-3-305(c), the obligor would have the

burden of “prov[ing] that the instrument is a lost or stolen instrument” in a suit

brought under Section 55-3-309. Because Defendant’s reading of the statute would

create disharmony when our task is to achieve the opposite, we hold that the last

sentence of Section 55-3-305(c) does not exempt obligors from paying lost or stolen

instruments in cases where enforcement is sought by a person without the rights of

a holder in due course.

CONCLUSION

27; We reverse and remand to the district court for further proceedings consistent

with this opinion.

1 (28) IT IS SO ORDERED.
2 3
ZACHARY A. IVES, Judge
WE CONCUR:
4 5 6
Jacqueline MR. Medina JACQUELINE R. MEDINA, Judge
7
P Duffy
8| MEGAN P. DUFFY, Gudge
30

July 20, 2022- Citimortgage, Inc. v. Lorraine Garcia, No. A-1-CA-38418

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