In 1997 the Supreme Court of Arkansas held that, with exceptions, 
the lender must possess the original promissory note in order to foreclose.

John P. McKay, Jr. and Rosemary L. McKay v.
CAPITAL RESOURCES COMPANY, LTD.

96-200                                             ___ S.W.2d ___

                    Supreme Court of Arkansas
                Opinion delivered March 24, 1997


1.   Mortgages -- original note's terms could not be enforced by
     use of copy without proving it lost, destroyed, or stolen as
     required in code -- adequate protection to appellants from
     future claim not given. --  Where appellee apparently never
     possessed appellants' original note as provided in Ark. Code
     Ann.  4-3-309(a)(i) (Repl. 1991), but was required, even if
     it had, to have proven all three factors specified in  4-3-
     309(a) and did not do so, appellee could not enforce the
     original note's terms by the use of a copy; even if all three
     requirements in  4-3-309(a) had been proven, the trial court
     was still obligated to ensure that appellee provided adequate
     protection to the appellants from any future claim, and this,
     too, was not done. 

2.   Evidence -- argument that rules of evidence supersede
     requirements of UCC without merit -- appellee failed to either
     produce original of note or satisfy requirements for lost
     negotiable instrument. -- Appellee's argument that the trial
     court was correct in admitting the copy of the note as an
     exception under the best evidence rule and that the Arkansas
     Rules of Evidence superseded the requirements of the Uniform
     Commercial Code (UCC) was without merit; if a duplicate was
     allowed in place of the original note, the appellants could
     later be subjected to double liability if the actual holder of
     the note appeared; the rules of evidence are rules of the
     court involving legal proceedings, while the UCC is composed
     of statutes of law that established the rights and liabilities
     of persons; appellee, as an assignee of the appellants' note,
     could not sue on the underlying debt the appellants owed to
     the original lender; in order for appellee to have prevailed
     in enforcing the note, it was required either to produce the
     original or satisfy the requirements for a lost negotiable
     instrument under  4-3-309(a) and (b); because appellee failed
     to do either, the case was reversed and remanded.


     Appeal from Garland Chancery Court; David B. Switzer,
Chancellor; reversed and remanded.
     Hilburn, Calhoon, Harper, Pruniski & Calhoon, Ltd., by:  John
E. Pruniski and Dorcy Kyle Corbin, and The Harmon Law Firm, P.A.,
by:  John T. Harmon, for appellants.

     Tom Glaze, Justice.
     In 1987, appellants John and Rosemary McKay, Jr., purchased a
condominium unit in Hot Springs.  They financed the purchase
through Landmark Savings Bank, F.S.B., by a promissory note secured
by a mortgage on the unit.  In 1990, Landmark Savings was placed
into receivership with the Resolution Trust Corporation (RTC), and
in 1993, the RTC assigned the McKay note and mortgage to Magnolia
Federal Bank for Savings of Hattiesburg, Mississippi.       
     Subsequently, the McKays defaulted on the note, and on
April 12, 1994, Magnolia Federal filed a complaint to foreclose on
the McKay mortgage, but during the pendency of that foreclosure
suit, on June 29, 1995, Magnolia Federal assigned the McKay note
and mortgage to appellee Capital Resources Company, Ltd.  Capital
Resources in turn filed a petition requesting it be substituted for
Magnolia Federal as party-plaintiff in the foreclosure action.  An
order granting Capital Resources' motion was entered on
September 25, 1995.
     At the conclusion of the trial held on September 27, 1995, the
McKays moved to dismiss the foreclosure action because Capital
Resources failed to produce the original promissory note or account
for the note's absence.  The chancellor denied McKay's motion, and
on October 19, he entered a foreclosure decree in Capital
Resources' favor, awarding a judgment against the McKays in the
amount of $117,387.06.  The McKays appeal from the forclosure
decree and denial of their motion to dismiss. 
     The McKays challenge the trial court's ruling that Capital
Resources was not required to produce the original promissory note
at trial, but instead could prove its case by introducing only a
copy of the note.  As argued below, they contend that under the
Uniform Commercial Code, Capital Resources was required either to
produce the original note or to explain its absence.  The McKays
maintain that without production of the original note, Capital
Resources cannot prove its status as a holder entitled to sue on
the note.  They further submit that Capital Resources' failure to
produce the original note subjects them to double liability should
a subsequent holder of the original note appear.  
     The McKays point out that Arkansas case law dating as far back
as 1842 has required a creditor to prove the debt by admitting the
original promissory note into evidence.  See Beebe v. Real Estate
Bank, 4 Ark. (1842) (profert of a promissory note is required by
statutes placing promissory notes on the same footing and of equal
dignity with instruments under seal).  Furthermore, they cite
Vandergriff v. Vandergriff, 211 Ark. 848, 202 S.W.2d 967 (1947),
where this court held there can be no judgment on a note when it is
not introduced into evidence and where the note's absence is not
explained.  This court has also held that secondary evidence of the
contents of a note is inadmissible when the original is within the
control or custody of the one seeking to enforce it.  Chaviers v.
Simmons, 256 Ark. 731, 510 S.W.2d 301 (1974).  
     Article 3 of the UCC, first enacted in 1961 and replaced in
1991, governs the treatment of negotiable instruments.  Ark. Code
Ann.  4-3-101--605 (Repl. 1991).  Here, because their promissory
note is a negotiable instrument as defined by  4-3-104(a), the
McKays contend, and we agree, that Capital Resources was obligated
to satisfy the UCC requirements for negotiable instruments.  We
turn to those UCC requirements applicable here.  Under  4-3-
310(b)(3), an obligee may enforce either the note or the debt. 
However, when the note is transferred to a third party (as in the
present case) the only right that survives is the right to enforce
the note.   4-3-310(b)(4).  Also important here is Code provision
 4-3-301, which provides that a person may be able to enforce the
note even though that person is not the owner of the instrument or
is in wrongful possession of the note.
     In applying the foregoing Code requirements to the facts
before us, the McKay note and mortgage were purportedly 
transferred ultimately to Capital Resources, a third party.  And
while Capital Resources introduced into evidence the Garland County
Circuit Court Clerk's certification that the mortgage and the
assignments were true copies of the originals, Capital Resources
submitted only a photocopy of the promissory note.  The McKays
maintain that the record is void of any evidence that either
Magnolia Federal or Capital Resources were ever holders of the
original note, and that being so, the McKays are left with the
possibility of the actual holder enforcing the note against them
later.
     At this point, we underscore that Capital Resources, even
without possessing the original note, could have under certain
circumstances prevailed in this action against the McKays.  For
example, under  4-3-301, a person not in possession of a note may
be entitled to enforce the instrument pursuant to  4-3-309.  Under
 4-3-309, a lost, destroyed, or stolen instrument may be enforced,
if the following is shown: 
          (a)  A person not in possession of an instrument is
     entitled to enforce the instrument if (i) the person was
     in possession of the instrument and entitled to enforce
     it when loss of possession occurred, (ii) the loss of
     possession was not the result of a transfer by the person
     or a lawful seizure, and (iii) the person cannot
     reasonably obtain possession of the instrument because
     the instrument was destroyed, its whereabouts cannot be
     determined, or it is in the wrongful possession of an
     unknown person or a person that cannot be found or is not
     amenable to service of process.
          (b)  A person seeking enforcement of an instrument
     under subsection (a) must prove the terms of the
     instrument and the person's right to enforce the
     instrument.  If that proof is made,  4-3-308 applies to
     the case as if the person seeking enforcement had
     produced the instrument.  The court may not enter
     judgment in favor of the person seeking enforcement
     unless it finds that the person required to pay the
     instrument is adequately protected against loss that
     might occur by reason of a claim by another person to
     enforce the instrument.  Adequate protection may be
     provided by any reasonable means.  
     In the instant case, Capital Resources apparently never
possessed McKays' original note as provided in  4-3-309(a)(i). 
But even if it had, Capital Resources was required to have proven
all three factors specified in  4-3-309(a).  Consequently, Capital
Resources could not enforce the original note's terms by the use of
a copy.  Even if all three requirements in  4-3-309(a) had been
proven, the trial court was still obligated to ensure that Capital
Resources provided adequate protection to the McKays from any
future claim, and this too was not done.  See Resolution Trust
Corp. v. Love, 36 F.3d 972 (10th Cir. 1994) (RTC agreed to
indemnify the debtor against further liability on the lost note).
     Capital Resources also urges that the trial court was correct
in admitting the copy of the note as an exception under the best
evidence rule.  Ark. R. Evid. 1002 provides that the original is
required to prove the contents of a document.  However, under Rule
1003, a duplicate is admissible to the same extent as an original,
unless a question of its authenticity is raised or it would be
unfair to admit the duplicate in lieu of the original.  Capital
Resources contends the Rules of Evidence supersede the requirements
of the UCC.  But we find this argument without merit.
     First, as previously discussed, we mention the unfairness in
these circumstances that, if a duplicate was allowed in place of
the original note, the McKays could later be subjected to double
liability if the actual holder of the note appeared.  Next, we add
that the Rules of Evidence are rules of the court involving legal
proceedings, while the UCC is composed of statutes of law that
established the rights and liabilities of persons.  Again, as
previously discussed, Capital Resources, as an assignee of the
McKays' note, could not sue on the underlying debt the McKays owed
to Landmark Savings.  For Capital Resources to have prevailed in
enforcing the McKays' note, it was required either to produce the
original or satisfy the requirements for a lost negotiable
instrument under  4-3-309(a) and (b).  Because Capital failed to
do either, we must reverse and remand.
     Corbin and Brown, JJ., not participating.  Special Justices
Michael D. Huckabay and Paul B. Gean join this opinion.