The U.S. Court of Appeals for the 10th Circuit ruled that JP Morgan Chase was entitled to collect on a $2 million loan to a Colorado couple, despite the fact that the bank had lost the original note that documented the obligation.

In February 2008, Alexander N. Kim took out a $2 million loan from Washington Mutual Bank so he and his wife, Laura Foster, could build a commercial kitchen site for their catering business in Carbondale. Kim signed a promissory note to repay the loan plus interest to Washington Mutual, but during the 2008 recession, the bank failed and the federal government placed it in receivership.

In September of that year, JP Morgan Chase arranged to purchase all of Washington Mutual’s mortgage loans, although Kim and Foster allege that there is no proof that Chase bought Kim’s repayment pledge. Nonetheless, the couple began making payments to Chase until they filed for bankruptcy in 2010. Kim and Foster sent a letter to Chase in March 2014 asking to see the original note. Chase, in turn, moved to foreclose on the couple and sell the property.

Kim and Foster continued to request the proof of Kim’s repayment obligation, and Chase finally acknowledged that it was “not currently in possession of the original [Washington Mutual] Note.” That fact was corroborated during a 2016 bankruptcy hearing in which a mortgage banking research officer admitted that Chase did not have it. There were two key exhibits at trial: a scan of the note’s first page and a summary report about the loan. Kim and Foster called an expert to testify that he could not verify that the image of the note was genuine.

Nevertheless, the bankruptcy judge ruled that Chase had to meet three requirements to be entitled to payment on the note: Chase had to have had the note in its possession and be entitled to enforce it when they lost it. The note could not have been transferred or seized. Finally, Chase had to show that it could not reasonably produce the note.

The court found that Chase scanned the note into its system in 2009, and therefore it had possession. Furthermore, there had been no transfer or seizure, nor could the bank find the note in a reasonable manner. All three elements being satisfied, the bankruptcy judge determined that this scenario was covered under Colorado’s lost-instrument statute, and JP Morgan Chase could collect payment. On appeal to federal district court, the ruling was again in Chase’s favor.

Writing for the three-member 10th Circuit panel, Judge Gregory A. Phillips addressed the fact that the original note did not list Washington Mutual as the recipient of payment and was blank in the “payee” section. 

“Generally, the only people entitled to enforce a blank-indorsed note are those in physical possession of it,” Phillips explained. However, the lost-instrument statute provides an exception if Chase could prove the three elements in the statute. Per the mortgage banking research officer’s testimony at trial, she personally knew “that the vault personnel [at Chase’s vault in Monroe, Louisiana,] physically took possession of the note.”

Phillips dismissed the allegation that the witness was not credible for lacking firsthand knowledge because the witness was able to describe in detail the company’s record-keeping process. She stated that the note probably got lost when Chase transferred it to one of its lawyers. She also described the scanning process for documents, to which Phillips observed that the scan of the note as a business record was an exception to the prohibition on hearsay evidence.

Despite Kim and Foster’s argument that the transfer of possession to Chase’s lawyer violated one of the three lost-instrument conditions, Phillips disagreed, saying that the lawyer did not take possession so he could collect on his own behalf.

“Chase gave custody of the Note to its foreclosure counsel, an action meant to facilitate foreclosure proceedings against Kim and Foster. That means that Chase gave its foreclosure counsel custody of the Note through an agency relationship – i.e., an attorney-client relationship,” Phillips wrote. He also wondered why, if an entity other than Chase possessed the note, had that person not begun to demand payment on the $2 million loan.

The court’s opinion concluded with the finding that the federal government did not need to create a bill of sale with Chase when it transferred Washington Mutual’s assets.

The case is Alexander N. Kim et al. v. JP Morgan Chase et al.