NC Law Update: Enforcement of a Lost Note in North Carolina

written by Associate Attorneys, Archie Sumpter & Devin Chidester


Enforcing a lost note is a common problem that creditors face. In a recent North Carolina opinion, Emerald Portfolio, LLC v. Outer Banks/Kinnakeet Associates, LLC, 790 S.E.2d 721 (2016), the North Carolina Court of Appeals analyzed the lost note issue as it applies in North Carolina foreclosures. In Emerald Portfolio, the Court was tasked with deciding whether the transferee of a lost note is entitled to enforce said note.

The facts of Emerald Portfolio are as follows. In 2006, Outer Banks/Kinnakeet Associates, LLC (OBKA) executed a promissory note and accompanying deed of trust in favor of First South Bank (FSB). On the same day, Ray and Donna Hollowell, owners of OBKA, signed guaranty agreements making them personally liable for OBKA’s payment of the note. In February 2013, FSB sold and assigned the note and deed of trust to Emerald Portfolio, LLC (Emerald). FSB never physically transferred the note to Emerald.

In 2014, Emerald filed suit against OBKA and the Hollowells for defaulting on the debt. Attached to the complaint was an affidavit from FSB’s senior vice president, which alleged FSB was the lawful owner of the note, the note was endorsed to Emerald as of February 21, 2013, and the note could not be located. The trial court held Emerald was entitled to enforce the lost note and the Hollowells were liable as guarantors. OBKA and the Hollowells appealed, arguing Emerald did not have the right to enforce the note because it was lost when it was assigned to Emerald.

In deciding the case, the Court of Appeals analyzed N.C.G.S. § 25-3-309 (North Carolina’s lost note statute and the old UCC lost note statute) and UCC § 3-309 (the current UCC lost note statute revised in 2002.) Per N.C.G.S. § 25-3-309, a person can enforce a lost note if: 1) the person possessed and was entitled to enforce the note when it was lost; 2) the loss of possession was not the result of a transfer by the person or a lawful seizure; and 3) possession of the note can not be reasonably obtained because the note was destroyed or its whereabouts are unknown. Conversely, under UCC § 3-309, a transferee need only prove that the transferor was entitled to enforce the note at the time of transfer: proving possession is not required.

The Court of Appeals held Emerald could not enforce the lost note under the North Carolina statute because FSB, not Emerald, possessed the note when it was lost. The Court reasoned Emerald would have been able to enforce the lost note under the UCC statute because Emerald acquired ownership of the note from FSB, the party who was entitled to enforce the note when it was lost. The Court’s rationale was based on the fact that the North Carolina legislature could have adopted the most recent version of the U.C.C., but decided not to do so. Thus, the amended U.C.C. statute was not an intended avenue of relief for lost notes under North Carolina law.

Emerald Portfolio is important because it enforces and highlights the limitations of North Carolina’s lost note law. In North Carolina, to enforce a lost note, you had to lose the note.