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1 IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

2 PNC MORTGAGE, a division of PNC

3 BANK, NATIONAL ASSOCIATION,

4 Plaintiff-Appellee,

5 v. NO. 35,255

6 HARBHAJAN KHALSA, a/k/a,

7 HARBHAJAN S. KHALSA,

8 Defendant-Appellant.

9 APPEAL FROM THE DISTRICT COURT OF SANTA FE COUNTY

10 Francis J. Mathew, District Judge

11 Brownstein Hyatt Farber Schreck, LLP

12 Eric R. Burris

13 Thomas J. Bunting

14 Albuquerque, NM

15 for Appellee

16 Gleason Law Firm, LLC

17 Deirdre Gleason

18 Heath, MA

19 for Appellant

20 MEMORANDUM OPINION
2

1 WECHSLER, Judge.

2 {1} Defendant-Appellant Harbhajan Khalsa appeals from a foreclosure judgment

3 in favor of Plaintiff-Appellee PNC Mortgage, a division of PNC Bank, National

4 Association. Khalsa argues that PNC Mortgage failed to establish standing to enforce

5 the underlying promissory note and to foreclose the mortgage that secured the note.

6 For the reasons that follow, we agree. We therefore reverse.

7 BACKGROUND

8 {2} In March 2006, Khalsa executed a promissory note (the Note) evidencing a debt

9 in the principal sum of $304,500 to National City Mortgage (NCM), a division of

10 National City Bank of Indiana (NCBI). The Note was secured by a mortgage on

11 Khalsa’s home (the Mortgage). Khalsa made the Mortgage payments until August

12 2010, but thereafter he went into default.

13 {3} In December 2010, PNC Mortgage, “a division of PNC Bank, National

14 Association successor by merger with National City Real Estate Services LLC,

15 successor by merger to National City Mortgage, Inc. f/k/a National City Mortgage

16 Co., a subsidiary of National City Bank,” filed a mortgage foreclosure complaint

17 against Khalsa. PNC Mortgage attached both an unindorsed copy of the Note and a

18 copy of the Mortgage. The complaint alleged that the Mortgage had been assigned to

19 PNC Mortgage and that PNC Mortgage was “the owner of the Mortgage and the
3

1 holder in due course of the Note.” The complaint further alleged that PNC Mortgage

2 was “the holder of the Mortgage . . . pursuant to a name change/merger with current

3 holder of record.” In February 2011, Khalsa filed an answer to the complaint,

4 asserting the affirmative defense of lack of standing to sue.

5 {4} In March 2013, PNC Mortgage filed a motion for summary judgment,

6 contending that it was “the current holder of the [N]ote” and also “successor by

7 merger to the original entity to whom Mr. Khalsa gave the [N]ote,” and as such, it was

8 entitled to enforce the Note and the Mortgage. PNC Mortgage attached a copy of the

9 Note that, unlike the version attached to the complaint, contained two undated

10 indorsements: one by NCM, a division of NCBI, to National City Mortgage Co., a

11 subsidiary of NCBI; and the other by National City Mortgage Co., a subsidiary of

12 NCBI, in blank. In support of its motion, PNC Mortgage attached numerous

13 documents, including the affidavit of Brian J. Arthur. As “an Assistant Vice President

14 of Mortgage Services—Default for PNC Mortgage,” Arthur stated that the Mortgage

15 had been assigned to National City Mortgage Co. in 2006. A copy of that assignment

16 was attached. Arthur further stated that National City Mortgage Co. had merged with

17 and into National City Bank effective October 1, 2008, and that National City Bank

18 had merged with and into PNC Mortgage effective November 6, 2009. A number of

19 documents reflecting the National City Mortgage Co. merger into National City Bank
4

1 were attached. Arthur also stated that “National City Mortgage Co. [had] indorsed the

2 Note in blank[,]” without specifying when that occurred. Finally, he stated that PNC

3 Mortgage’s counsel was in possession of the original Note.

4 {5} In response to the motion for summary judgment, Khalsa asserted that material

5 issues of fact existed, including whether PNC Mortgage was the holder of the Note.

6 In an attached affidavit, Khalsa described his attempts to obtain a loan modification

7 in 2010; in the course of those conversations, PNC Mortgage had advised Khalsa that

8 the Bank of New York was the holder of the Note. In its reply, PNC Mortgage took

9 the position that Khalsa’s sworn statement concerning the conflicting information that

10 he had received from PNC Mortgage should be regarded as “post-hoc efforts” to

11 nullify prior discovery responses that failed to mention the exchange described in

12 Khalsa’s affidavit.

13 {6} Khalsa subsequently filed his own motion for summary judgment and a motion

14 to dismiss, contending that PNC Mortgage lacked support for its claim of standing and

15 entitlement to collect amounts due on the Note and foreclose the Mortgage. Khalsa

16 reiterated that PNC Mortgage told him that the Bank of New York was the holder of

17 the Note and admitted in discovery that it did not own his loan, as it was part of a

18 bundle given as security to another bank prior to the mergers. PNC Mortgage, Khalsa
5

1 argued, was unable to establish its status either as a holder in due course or as a holder

2 by virtue of possession, corporate merger, or otherwise.

3 {7} The district court denied Khalsa’s motion for summary judgment as untimely

4 and did not rule on the remaining motions, instead proceeding to trial. The evidence

5 presented at trial largely correlated with the materials submitted in connection with

6 the pretrial motions. PNC Mortgage presented the original Note, bearing the two

7 undated indorsements referenced in its motion for summary judgment. Arthur, PNC

8 Mortgage’s only witness, testified about the series of mergers by which PNC became

9 the successor to NCM. In the course of that testimony, the district court admitted

10 certifications reflecting the mergers of NCBI and NCM into PNC Bank, National

11 Association, effective November 2009. Arthur also testified that it was the usual

12 business practice of NCM to indorse original notes directly after closing and digital

13 imaging. However, Arthur did not have any personal knowledge of the actual timing

14 of the indorsements on the Note. Nor did he testify as to whether NCM, NCBI, and/or

15 PNC Mortgage had possession of the Note at the time of the filing of the complaint

16 or continuously retained possession of the Note between the time of origination and

17 the time of trial.

18 STANDARD OF REVIEW
6

1 {8} We review the district court’s determination that PNC Mortgage had standing

2 to pursue the foreclosure complaint against Khalsa under the substantial evidence

3 standard of review. Deutsche Bank Nat’l Tr. Co. v. Johnston, 2016-NMSC-013, ¶ 28,

4 369 P.3d 1046. Accordingly, we must determine whether PNC Mortgage presented

5 evidence that a reasonable mind could accept as adequate to establish the requisites

6 of standing, resolving all disputed facts and indulging all reasonable inferences in

7 favor of the district court’s findings. Id. “However, when the resolution of the issue

8 depends upon the interpretation of documentary evidence, [the appellate court] is in

9 as good a position as the trial court to interpret the evidence.” Id. (alteration, internal

10 quotation marks, and citation omitted).

11 STANDING

12 {9} The New Mexico Supreme Court has held that a party seeking to foreclose is

13 “required to demonstrate under [the UCC] that it had standing to bring a foreclosure

14 action at the time it filed suit.” Bank of N.Y. v. Romero, 2014-NMSC-007, ¶ 17, 320

15 P.3d 1; see Johnston, 2016-NMSC-013, ¶¶ 20-23. To demonstrate standing, the

16 foreclosing party “must demonstrate that it had the right to enforce the note and the

17 right to foreclose the mortgage at the time the foreclosure suit was filed.” PNC Mortg.

18 v. Romero, 2016-NMCA-064, ¶ 19, 377 P.3d 461 (emphasis added) (alteration,

19 internal quotation marks, and citation omitted).
7

1 {10} A promissory note is a negotiable instrument that may be enforced by the

2 holder. See NMSA 1978, § 55-3-301 (1992) (defining “ ‘[p]erson entitled to enforce’

3 [a negotiable] instrument” to include “the holder of the instrument,” inter alia); PNC

4 Mortg., 2016-NMCA-064, ¶ 20. The holder is “the person in possession of a

5 negotiable instrument that is payable either to bearer or to an identified person that is

6 the person in possession[.]” NMSA 1978, § 55-1-201(b)(21)(A) (2005).

7 {11} PNC Mortgage contends that there was sufficient evidence to establish its

8 standing as the holder of the Note for two reasons. First, it argues that its possession

9 of the Note, indorsed in blank, rendered it the holder. Alternatively, it relies on its

10 status as successor by merger to the original lender. We address each argument in

11 turn.

12 The Indorsed Note

13 {12} PNC Mortgage argues that the indorsed Note establishes its standing because

14 PNC Mortgage was in possession of a bearer instrument, and thus it had the right to

15 enforce the Note.

16 {13} The difficulty with PNC’s argument is that the indorsed Note only came to light

17 after PNC Mortgage filed its complaint. PNC Mortgage failed to establish either the

18 date of the indorsements on the Note or PNC Mortgage’s possession of the original

19 Note at the time it filed its complaint. Under the circumstances, the Note, as produced
8

1 at trial, is insufficient to show that PNC Mortgage was the holder of the Note at the

2 time it filed its foreclosure complaint. See Johnston, 2016-NMSC-013, ¶ 23 (holding

3 that “a mortgage holder must produce proof that it was entitled to enforce the

4 underlying promissory note prior to the commencement of the foreclosure action by,

5 for example, attaching a note containing an undated indorsement to the initial

6 complaint or producing a note dated before the filing of the complaint at some

7 appropriate time in the litigation”); PNC Mortg., 2016-NMCA-064, ¶ 25 (same).

8 {14} PNC Mortgage argues that Arthur’s testimony concerning the usual business

9 practice of indorsing original notes promptly after closing supports a reasonable

10 inference that the Note received similar treatment. Nevertheless, even assuming that

11 this inference is permissible, the evidence remains insufficient. As previously

12 described, Arthur did not testify to the crucial question of PNC Mortgage’s possession

13 of the Note at the time of the filing of the complaint. This is a fatal deficiency. See

14 Johnston, 2016-NMSC-013, ¶ 28 (“Substantial evidence means relevant evidence that

15 a reasonable mind could accept as adequate to support a conclusion.” (internal

16 quotation marks and citation omitted)).

17 The Corporate Mergers

18 {15} Alternatively, PNC Mortgage argues that it established its standing to enforce

19 the Note by demonstrating its status as successor to NCM. PNC Mortgage bases its
9

1 argument on the testimony and documentation describing the series of mergers, as

2 well as a section in the National Bank Act, 12 U.S.C. § 215a(e) (2012), which

3 provides:

4 All rights, franchises, and interests of the individual merging banks or

5 banking associations in and to every type of property (real, personal, and

6 mixed) and choses in action shall be transferred to and vested in the

7 receiving association by virtue of such merger without any deed or other

8 transfer. The receiving association, upon the merger and without any

9 order or other action on the part of any court or otherwise, shall hold and

10 enjoy all rights of property, franchises, and interests[.]

11 PNC Mortgage therefore argues that it established its entitlement to enforce the Note

12 because it had all of the rights of its predecessor in interest.

13 {16} In PNC Mortgage, we addressed a nearly identical argument. We concluded

14 “that a successor in interest seeking to establish its right to foreclose [must] provide

15 some evidence of a proper indorsement or transfer via negotiation as part of its prima

16 facie case.” 2016-NMCA-064, ¶ 28. Moreover, a successor in interest must establish

17 that right as of the time of the filing of the complaint. Id. ¶ 34. In light of the decision

18 rendered in PNC Mortgage, it is clear that proof of the mergers, without more, cannot

19 establish PNC Mortgage’s status as holder at the time of the filing of the complaint.

20 {17} Whether the Note was unindorsed, specially indorsed, or indorsed in blank at

21 the time of the filing of the complaint, possession remained critical. See § 55-1-

22 201(b)(21)(A) (defining the holder as “the person in possession of a negotiable
10

1 instrument that is payable either to bearer or to an identified person that is the person

2 in possession[.]” (emphasis added)). Accordingly, “PNC Mortgage may have been

3 able to establish a right to enforce the unindorsed note had it shown documentation

4 confirming what entity had possession of it through negotiation or transfer at the time

5 of filing the complaint.” PNC Mortg., 2016-NMCA-064, ¶ 35 (emphasis added). It did

6 not do so.

7 {18} We understand PNC Mortgage to argue that Arthur’s testimony and the

8 documentary evidence concerning the mergers should be sufficient to establish its

9 possession of the Note “[f]rom November 2009 forward[.]” However, neither Arthur’s

10 testimony nor the documents concerning the mergers actually addressed this subject.

11 No specific information was supplied about the manner in which PNC Mortgage

12 obtained possession. If PNC Mortgage and/or the various entities that merged into

13 PNC Mortgage had continuous possession of the Note, as it suggests, PNC Mortgage

14 should have presented evidence, such as business records, to that effect. In the absence

15 of such evidence, the invited inference of continuous possession is unduly speculative.

16 See, e.g., PNC Mortg., 2016-NMCA-064, ¶ 34 (observing that the “noticeable lack”

17 of documentary evidence to confirm the inclusion of a promissory note in a series of

18 mergers, combined with uncertainties surrounding possession in view of

19 securitization, created genuine issues of material fact regarding possession). 
11

1 {19} Finally, PNC Mortgage argues that the decision in PNC Mortgage should not

2 be regarded as controlling because that case involved an award of summary judgment

3 as opposed to a decision on the merits following a bench trial. We acknowledge the

4 distinction. In either situation, however, the burden on the complainant remains

5 fundamentally the same. See generally Johnston, 2016-NMSC-013, ¶ 27 (observing,

6 on appeal from a decision rendered after a bench trial, that proof of the elements of

7 standing is “an indispensable part of the plaintiff’s case” (internal quotation marks and

8 citation omitted)). As described above, the evidence upon which PNC Mortgage relied

9 in this case exhibited the same deficiencies as the evidence relied upon in PNC

10 Mortgage; the critical informational gaps cannot be filled with unsupported inference.

11 See, e.g., Johnston, 2016-NMSC-013, ¶¶ 28-32 (concluding that indirect evidence was

12 insufficient to establish standing to foreclose under the applicable substantial evidence

13 standard of review); cf. Romero, 2014-NMSC-007, ¶¶ 30-33 (holding that in the

14 absence of admissible testimony or business records, alleged transfer of a promissory

15 note to the complainant was not supported by the requisite substantial evidence).

16 CONCLUSION

17 {20} For the foregoing reasons, we conclude that PNC failed to prove its standing.

18 We therefore reverse and remand with instructions to vacate the judgment of

19 foreclosure. See PNC Mortg., 2016-NMCA-064, ¶ 35.
12

1 {21} IT IS SO ORDERED.

2 ________________________________

3 JAMES J. WECHSLER, Judge

4 WE CONCUR:

5 ________________________________

6 JULIE J. VARGAS, Judge

7 ________________________________

8 STEPHEN G. FRENCH, Judge