Banking and Business Monthly – May 2017

WHAT DOES IT MEAN TO “AFFIX” AN ALLONGE TO A PROMISSORY NOTE FOR PURPOSES OF NEGOTIATING INSTRUMENTS UNDER THE ILLINOIS UCC?

For the first time since 1991, when Article 3 of the Illinois Uniform Commercial Code (“Code”) was adopted governing negotiable instruments, an Illinois court has clarified and determined what the term “affixed” means in the definition of an “Indorsement” under 810 ILCS 5/3-204(a). Olive Portfolio Alpha, LLC v. 116 W. Hubbard St., 2017 IL App (1st) 160357. Section 3-204(a) of the Code states, in pertinent part, “[f]or the purposes of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.” 810 ILCS 5/3-204(a) (emphasis added).

At first glance, the clause would appear to be rather innocuous and not a possible source of litigation or confusion. However, in Olive, the outcome of how the court interpreted the clause would determine whether the plaintiff was a proper holder of the note with the ability to enforce its related mortgage lien.

In that case, Olive Portfolio Alpha, LLC, assignee of Olive Portfolio, LLC, successor to BMO Harris Bank N.A. f/k/a Harris N.A., filed a mortgage foreclosure complaint against 116 West Hubbard Street, LLC (hereinafter “Borrower”). Initially, BMO Harris entered into two promissory notes with the Borrower that were then consolidated into one promissory note for $7.5 million in June of 2008. As a result of subsequent amendments, modifications, and renegotiations, the exact terms of the note changed and in 2012, an amended note was executed and delivered by Borrower. In February of 2013, BMO Harris assigned its interest in the 2012 note to Olive Portfolio, LLC. The agreement was recorded with the Cook County recorder of deeds and the “Endorsement and Allonge” document was signed by a vice president of BMO Harris and paper clipped to the 2012 note. Thereafter, Olive Portfolio, LLC conveyed its interest in the 2012 note to Olive Portfolio Alpha, LLC, the plaintiff in this case. As a result of Borrower’s non-payment, the plaintiff initiated a mortgage foreclosure complaint. One of Borrower’s many defenses asserted was that plaintiff failed to properly allege in its complaint that it actually owned the 2012 note and therefore it could not bring this action. The trial court granted plaintiff’s motion for summary judgment and judgment of foreclosure and sale. The judicial sale was conducted with the Plaintiff being the highest bidder.

Borrower appealed and argued that because the first allonge was paper clipped to the 2012 note, it was not properly affixed to the original 2012 Note as is required, it argued, by 810 ILCS 5/3-204(a). The Appellate Court started its analysis by recognizing that under Illinois law, merely attaching a copy of the note to a complaint is prima facie evidence that the plaintiff owns such note. Olive, 2017 IL App (1st) 160357 at ¶ 31. The Appellate Court went on to hold that because Illinois’ legislature did not add an adjective to its version of the UCC, like other states have, paper clipping documents together is sufficient affixation. Id. at ¶ 38. The court found that had the Illinois’ legislature wanted to increase the requirements of affixation, it would have included terms in the statute that would imply a permanent affixation or words to that effect, like other states around the county have. Id. at ¶ 36.

Notably, the term “affixed” went over 20 years without being interpreted, and this case offers a good example of how courts interpret statutes. The opinion highlights the importance of not only what is in a statute but also what is not in it -- the absence of words has meaning when interpreting statutes. In Olive, the court found instructive what the Illinois legislature did not include in a statute, whether by an active decision or mere inadvertence, as compared to other states. Especially in answering novel questions about the UCC, Illinois courts may look to other states for guidance.

If you would like to speak with the author, he can be contacted at (847) 705-7555 and smigala@lavellelaw.com. Steven A. Migala is a partner at Lavelle Law and possesses over 20 years of providing excellent representation to banks, businesses and individuals in a variety of matters.