Tag Archives: Uniform Commercial Code

Possession of Note Confers Standing to Foreclose

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Jupiter.Aurora.HST.UV

Dale Whitman posted this discussion of Aurora Loan Services, LLC v. Taylor, 2015 WL 3616293 (N.Y. Ct. App., June 11, 2015) on the DIRT listserv:

There is nothing even slightly surprising about this decision, except that it sweeps away a lot of confused and irrelevant language found in decisions of the Appellate Division over the years. The court held simply holds (like nearly all courts that have considered the issue in recent years) that standing to foreclose a mortgage is conferred by having possession of the promissory note. Neither possession of the mortgage itself nor any assignment of the mortgage is necessary. “[T]he note was transferred to [the servicer] before the commencement of the foreclosure action — that is what matters.” And once a note is transferred, … “the mortgage passes as an incident to the note.” Here, there was a mortgage assignment, the validity of which the borrower attacked, but the attack made no difference; “The validity of the August 2009 assignment of the mortgage is irrelevant to [the servicer’s] standing.”

The opinion in Aurora makes it clear that prior Appellate Division statements are simply incorrect and confused when they suggest that standing would be conferred by an assignment of the mortgage without delivery of the note. See, e.g., GRP Loan LLC v. Taylor 95 A.D.3d at 1174, 945 N.Y.S.2d 336; Deutsche Bank Trust Co. v. Codio, 94 A.D.3d 1040, 1041, 943 N.Y.S.2d 545 [2d Dept 2012].) For an excellent analysis of why these decisions are wrong, see Bank of New York Mellon v. Deane, 970 N.Y.S.2d 427  (N.Y. Sup. Ct. 2013).

The Aurora decision implicitly rejects such cases as Erobobo, which suppose that the failure to comply with a Pooling and Servicing Agreement would somehow prevent the servicer from foreclosing. In the present case, the loan was securitized in 2006, but the note was delivered to the servicer on May 20, 2010, only four days before filing the foreclosure action. This presented no problem at all the court. If the servicer had possession at the time of the filing of the case (as it did), it had standing. (I must concede, however, that the rejection is only implicit, since the Erobobo theory was not argued in Aurora.)

If there is a weakness in the Aurora decision, it is its failure to determine whether the note was negotiable, and (assuming it was) to analyze the application UCC Article 3’s “person entitled to enforce” language. But this is not much of a criticism, since it is very likely that under New York law, the right to enforce would be transferred by delivery of the note to the servicer even if the note were nonnegotiable.

It has taken the Court of Appeals a long time to get around to cleaning up this area of the law, but its work is exactly on target.

Should The Mortgage Follow The Note?

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The financial crisis and the foreclosure crisis have pushed many scholars to take a fresh look at all sorts of aspects of the housing finance system. John Patrick Hunt has added to this growing body of literature with a posting to SSRN, Should The Mortgage Follow The Note?. It is an interesting and important article, taking a a fresh look at the legal platitude, “the mortgage follows the note” and asking — should it?!? The abstract reads,

The law of mortgage assignment has taken center stage amidst foreclosure crisis, robosigning scandal, and controversy over the Mortgage Electronic Registration System. Yet a concept crucially important to mortgage assignment law, the idea that “the mortgage follows the note,” apparently has never been subjected to a critical analysis in a law review.

This Article makes two claims about that proposition, one positive and one normative. The positive claim is that it has been much less clear than typically assumed that the mortgage follows the note, in the sense that note transfer formalities trump mortgage transfer formalities. “The mortgage follows the note” is often described as a well-established principle of law, when in fact considerable doubt has attended the proposition at least since the middle of the last century.

The normative claim is that it is not clear that the mortgage should follow the note. The Article draws on the theoretical literature of filing and recording to show that there is a case that mortgage assignments should be subject to a filing rule and that “the mortgage follows the note,” to the extent it implies that transferee interests should be protected without filing, should be abandoned.

Whether mortgage recording should in fact be abandoned in favor of the principle “the mortgage follows the note” turns on the resolution of a number of empirical questions. This Article identifies key empirical questions that emerge from its application of principles from the theoretical literature on filing and recording to the specific case of mortgages.

The article does not answer the core question that it asks, but it certainly demonstrates that it is worth answering.

Maine Really Doesn’t Like Lenders

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I recently blogged in No MERS-y for Maine Lenders about a Maine Supreme Judicial Court opinion that seemed to go against the weight of authority as to a fundamental issue:  that the mortgage follows the note.

The lender in that Maine case, Bank of America, filed a Motion to Reconsider which the Court summarily denied. I think that the lender has it right on the law here and I quote from its motion:

The Court’s standing analysis conflicts with Maine’s Uniform Commercial Code (“UCC”) and sets Maine apart from other states (even those construing the same language that the Court finds of particular importance here). These persuasive authorities recognize MERS’s designation in a mortgage as a “nominee” and “mortgagee of record” does not prevent MERS from validly assigning all legal rights in the mortgage to a subsequent foreclosure plaintiff. The UCC “explicitly provides that . . . the assignment of the interest of the seller or other grantor of a security interest in the note automatically transfers a corresponding [beneficial] interest in the mortgage to the assignee.” Report of the Permanent Editorial Board for the Uniform Commercial Code 12 (Nov. 2011), available at https://www.uniformlaws.org/Shared/Committees_Materials/PEBUCC/PEB_Report_111411.pdf. The UCC further provides: “The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage or other lien.” 11 M.R.S. § 9-1203(7). The Editor’s Notes to this statutory provision confirm that it “codifies the common-law rule that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the [beneficial interests in the] security interest or lien.” Id. cmt. 9. The UCC thus “adopts the traditional view that the mortgage follows the note; i.e., the transferee of the note acquires, as a matter of law, the beneficial interests in the mortgage, as well.” 11 M.R.S. § 9-1308 cmt. 6.

In these circumstances, “the UCC is unambiguous: the sale of a mortgage note (or other grant of a security interest in the note) not accompanied by a separate conveyance of the mortgage securing the note does not result in the mortgage being severed from the note.” Report of the Permanent Editorial Board for the Uniform Commercial Code 12 (emphasis added). Instead, by the explicit terms of the statute, the attachment of the note “is also attachment of a security interest in the . . . mortgage.” 11 M.R.S. § 9-1203(7). Thus, under the UCC, the beneficial interest in the mortgage travels with the note so holding the note in addition to the assignment from MERS of bare legal title means that party has everything necessary for standing under Section 6321. Thus, the Court was inconsistent with the UCC in stating that BANA’s right to enforce the Note (along with assignment of the legal title of the Mortgage by MERS) was not sufficient to show its requisite interest in the Mortgage. The Court should reconsider its analysis on this basis.

Moreover, this Court’s analysis stands in conflict with many other state and federal courts that have examined the issue. Many courts across the nation (in judicial and non-judicial foreclosures states alike) have determined that MERS can assign all rights under a mortgage in which it is named mortgagee as nominee for the lender and lender’s successors and assigns. (18-20, footnote omitted)

As I have acknowledged before, the Supreme Judicial Court is the final arbiter of Maine law. I think, nonetheless, that the Court got it wrong in this case. I also think that this summary denial of the well-argued motion for reconsideration does not do the issue justice.

 

HT Max Gardner

No MERS-Y for Maine Lenders

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The Maine Supreme Judicial Court seems to be on a roll against the mortgage industry, having recently issued an opinion that effectively wiped out a mortgage because of the lenders bad faith negotiations during a foreclosure proceeding.

And now, the Maine Supreme Judicial Court issued an opinion in Bank of America, N.A. v. Greenleaf et al., 2014 ME 89 (July 3, 2014), that casts into doubt whether MERS has any life left in it in Maine.  The case’s reasoning is, however, somewhat suspect. The Greenleaf court held that the bank did not have standing to seek foreclosure even though it was the holder of the mortgage note. The court stated that

The interest in the note is only part of the standing analysis, however;  to be able to foreclose, a plaintiff must also show the requisite interest in the mortgage. Unlike a note, a mortgage is not a negotiable instrument. See 5 Emily S. Bernheim, Tiffany Real Property § 1455 n.14 (3d ed. Supp. 2000). Thus, whereas a plaintiff who merely holds or possesses—but does not necessarily own—the note satisfies the note portion of the standing analysis, the mortgage portion of the standing analysis requires the plaintiff to establish ownership of the mortgage. (8)

This seems to go against the weight of authority. The influential Report of The Permanent Editorial Board for The Uniform Commercial Code, Application of The Uniform Commercial Code to Selected Issues Relating to Mortgage Notes (November 14, 2011), states that

the UCC is unambiguous: the sale of a mortgage note (or other grant of a security interest in the note) not accompanied by a separate conveyance of the mortgage securing the note does not result in the mortgage being severed from the note. . . . UCC Section 9-308(e) goes on to state that, if the secured party’s security interest in the note is perfected, the secured party’s security interest in the mortgage securing the note is also perfected . . .. (12-13, footnotes omitted)

The Maine Supreme Judicial Court is the ultimate authority on the meaning of Maine’s foreclosure statute, of course, but their reasoning is still open to criticism.

(Non-)Enforcement of Securitized Mortgage Loans

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Professors Neil Cohen and Dale Whitman, two important scholars who know their way around the UCC and mortgage law, will take on a highly contested topic in an upcoming ABA Professors’ Corner webinar: “Ownership, Transfer, and Enforcement of Securitized Mortgage Loans.” I blogged a bit about this topic a couple of days ago, in relation to Adam Levitin’s new article. There is a lot of misinformation floating around the blogosphere relating to this topic, so I encourage readers to register.

The full information on this program is as follows:

Professors’ Corner is a FREE monthly webinar, sponsored by the ABA Real Property, Trust and Estate Law Section’s Legal Education and Uniform Law Group.  On the second Wednesday of each month, a panel of law professors discusses recent cases or issues of interest to real estate practitioners and scholars.

December 2013 Professors’ Corner
“Ownership, Transfer, and Enforcement of Securitized Mortgage Loans”
Profs. Neil Cohen and Dale Whitman
Wednesday, December 11, 2013
12:30pm Eastern/11:30am Cental/9:30am Pacific
Register for this FREE program at https://ambar.org/ProfessorsCorner

Our nation’s courts have been swamped with litigation involving the foreclosure of securitized mortgage loans.  Much of this litigation involves the appropriate interaction of the Uniform Commercial Code and state foreclosure law. Because few foreclosure lawyers and judges are UCC experts, the outcomes of the reported cases have reflected a significant degree of uncertainty or confusion.

In addition, much litigation has been triggered by poor practices in the securitization of mortgage loans, such as robo-signing and the failure to transfer loans into a securitized trust within the time period required by the IRS REMIC rules.  This litigation has likewise produced conflicting case outcomes.  In particular, recent decisions have reflected some disagreement regarding whether a mortgagor — who is not a party to the Pooling and Servicing Agreement that governs the securitized trust that holds the mortgage — can successfully defend a foreclosure by challenging the validity of the assignment of the mortgage to a securitized trust.

Our speakers for the December program will bring some much-needed clarity to these issues.  Our speakers are Prof. Neil B. Cohen, the Jeffrey D. Forchelli Professor of Law at Brooklyn Law School, and Prof. Dale A. Whitman, the James E Campbell Missouri Endowed Professor Emeritus of Law at the University of Missouri School of Law.  Prof. Cohen is the Research Director of the Permanent Editorial Board for the Uniform Commercial Code, and a principal contributor to the November 2011 PEB Report, “Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes.” Prof. Whitman is the co-Reporter for the Restatement (Third) of Property — Mortgages, and the co-author of the pre-eminent treatise on Real Estate Finance Law.

Please join us for this program.  You may register at https://ambar.org/ProfessorsCorner.

Show Me The Note, NY Style

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Steiner, Goldstein & Sohn published a short article in the New York Law Journal, Clearing The Confusion:  Misplaced Notes and Allonges (Sept. 18, 2012) (behind a paywall). While intended to address commercial real estate finance, it relies on an interesting residential real estate finance case, Bank of N.Y. Mellon v. Deane, 2013 Slip Op. 23244 (Sup. Ct. Kings Country July 11, 2013). The authors write that

Mortgage assignments, when properly drafted, assign both the mortgage and the note. Assuming the chain of mortgage assignments is intact, lenders can gain comfort knowing that under New York case law they have standing to enforce the full amount of the debt evidenced by these assignments. Nevertheless, defendants in foreclosure proceedings often challenge the lenders’ standing to enforce the note, demanding that lenders demonstrate physical possession of the note to initiate a foreclosure despite the fact that physical possession is not required by the law.

They conclude:

New York courts in the cases described herein consistently follow well-established precedent permitting standing in a foreclosure action without the plaintiff having physical possession of the original notes. New York case law makes clear that physical possession of all notes in a chain of loan assignments and refinancings is unnecessary for standing in a foreclosure action and that proper execution of a [Consolidated Extension and Modification Agreement] is sufficient to confer standing when missing notes have been consolidated. Likewise, inclusion of an allonge or other endorsement for every note transfer is not required under New York law for standing in a foreclosure action when the note has been assigned by other means, such as through a properly drafted assignment of mortgage.

The article’s discussion of Deane is most interesting:

the court found physical possession of the note to be determinative regardless of whether a written assignment was executed. The court criticized the approach followed by case law in New York, stating that allowing an assignee to have standing without possession of the note “would be inconsistent with Revised Article 3, and put New York out-of-step with the 49 states that have adopted the revision[.]” Notably, however, New York has opted not to adopt those proposed revisions to Article 3. The court continued, “that misstep, however, if such it is, has apparently already been taken. The case law quoted and cited above clearly speaks, in the disjunctive, of standing obtained by ‘assignment’ or ‘physical delivery’ of the note[.]”

I will return to Deane in a later post.

NJF and UCC and Contract Law, Oh My!

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Parsing how a court should approach a particular deed of trust foreclosure case can put you to sleep faster than crossing the poppy fields next to the yellow brick road.  Does the Non-Judicial Foreclosure (NJF) statute govern? Does the state’s Uniform Commercial Code (UCC) govern? Does the contract terms of the deed of trust itself govern? Or, more likely, do all three govern? And, if so, how do they interact with each other?

Brad Borden and I have recently noted that while

“show me the note” does come up in federal cases, federal courts defer to the applicable state law in reaching their results.  [T]he courts’ holdings tend to flow from a careful reading of the relevant state foreclosure statute, so a particular state’s law can have a big effect on the outcome.  We would note that many scholars and leaders of the bar are befuddled by courts’ failure to do a comprehensive analysis under the UCC as part of their reasoning in mortgage enforcement cases, but judges make the law, not scholars and members of the bar.  See Report of The Permanent Editorial Board for The Uniform Commercial Code Application of The Uniform Commercial Code to Selected Issues Relating to Mortgage Notes at 1 (Nov. 14, 2011).

Zadrozny v. Bank of New York Mellon, No. 11-16597 (June 28, 2013), a recent 9th Circuit case demonstrates the problem of an incomplete analysis in an Arizona non-judicial foreclosure case.  The Court notes that

The PEB [Permanent Editorial Board] Report [] clarifies:

the UCC does not resolve all issues in this field. Most particularly, the enforcement of real estate mortgages by foreclosure is primarily the province of a state’s real property law (although determinations made pursuant to the UCC are typically relevant under that law).

Given the PEB Report’s recognition that state law is typically controlling on foreclosure issues, the Zadroznys are unable to allege a cause of action premised on the PEB Report . . ..(14-15, citation omitted)

This is confusing in a few ways.  First, the UCC is state law, adopted with variants by all of the states’ legislatures.  What the PEB is calling for is for courts to apply state UCC law as appropriate.

Second, state foreclosure law does not “control” foreclosure issues in some inchoate and expansive way. It governs it to the extent that it governs it and not one bit more. So if state UCC law governs one facet of a foreclosure case, it is not trumped by the states’ foreclosure law. Or if the terms of the deed of trust were to govern, it would not be trumped by the foreclosure law either (so long as it did not violate it).

Finally, it is just plain weird to say that the Zadroznys would have a “cause of action premised on the PEB report.” How would that work?!?  The PEB report is merely an interpretation of general UCC principles. The Court should be asking how the Arizona UCC applies to this case.

I am not saying that the Court reached the wrong result under Arizona law in this regard, but the Court’s incomplete analysis offers no clarity to litigants, no more than the Wizard of Oz offered real solutions to his supplicants’ pleas. But judges decide the cases, not me and not you . . ..