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COA: Parties Facing Dismissal of Note Enforcement Action Should Clearly Plead the Chain of Title, and Request that Any Dismissal of The Complaint be Without Prejudice.

By Sean E. Andrussier

Tuesday the Court of Appeals made clear that, in order to avoid dismissal, parties seeking to enforce a note need to make a clear showing that they're the holder.  The Court also reminded litigants that they should take measures in advance to avoid a dismissal with prejudice.  The case is First Federal Bank v. Aldridge.

Plaintiff First Federal Bank ("FFB") sought enforcement of two promissory notes executed by defendant Aldridge. Both of the notes identified Aldridge as the borrower and ?Cape Fear Bank? as the lender. FFB was not referenced in either note.  FFB attached an affidavit to its complaint that included a statement from an employee familiar with the books and records related to the notes, and that the notes were in default.  The trial court dismissed the Complaint with prejudice on the grounds that FFB had failed to sufficiently plead that it was the holder.

The Court found that "evidence that a plaintiff is the holder of a promissory note, or has otherwise acquired the rights of the holder, is an essential element of a cause of action upon such note."  Because neither the text of the complaint nor the affidavit indicated that FFB had acquired the debt from Cape Fear Bank or was otherwise entitled to enforce them as a holder in due course, the COA found that FFB had not demonstrated its right to enforce promissory notes which were executed by Aldridge with a third party bank, and affirmed the trial court's dismissal of the Complaint.   The COA also noted that if FFB had been a payee or endorsee of the notes that were attached to the Complaint, it would have been the prima facie owner and holder. Here, FFB did not plead that the notes had been assigned or transferred to it from the third party bank.

FFB also argued that dismissing its Complaint with prejudice was inequitable, and that it should have had an opportunity to amend the Complaint.  Noting that the decision to dismiss an action with or without prejudice is subject to an abuse of discretion standard, and that the party whose claim is being dismissed has the burden to show it deserves a "second chance," the COA found that the dismissal was proper because the record contained no evidence that Plaintiff sought to amend the complaint during the hearing or afterward, nor did it move for a dismissal without prejudice.

Full post as published by North Carolina Appellate Blog on November 06, 2013 (boomark / email).