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North Carolina Appellate Decision Raises New Chain of Title Issue
Today, May 09, 2011, 8 hours ago | Yves Smith
A potentially important North Carolina appeals court case, In re
Gilbert, has not gotten the attention it warrants.

In very short form, the borrowers, who were unable to obtain a loan
modification, tried to halt a foreclosure by arguing that the lenders
had failed to make required disclosures under the Truth in Lending Act
(which they hoped would allow for recission of the loan, and that the
party seeking to foreclose had not proved that it was the holder of
the Note with the right to foreclose under the instrument. The judges
nixed the TILA argument, affirming lower court decisions, but reversed
the superior court on the question of the standing of the petitioner.

In Re Gilbert May 3, 2011 North Carolina Appeals Court Decision

What is interesting is the logic of the decision, which blows a hole
in one of the pet arguments of the American Securitization Forum, that
possession of a note will suffice. We have argued that the contracts
that govern the securitization, the pooling and servicing agreement,
sets the requirements for conveyance as is contemplated in the Uniform
Commercial Code (its Article 1 allows for parties to make their own
arrangements as long as certain conditions are met). But if the
parties to a case do not argue that the PSA trumps the UCC (and many
do not), most judges will reason from the UCC, and securitization
attorneys have blithely assumed this will get them out of trouble.
This is the position asserted in the ASF’s white paper last fall:

Under the UCC, the transfer of a mortgage note that is a negotiable
instrument is most commonly effected by (a) indorsing the note, which
may be a blank indorsement that does not identify a person to whom the
mortgage note is payable or a special indorsement that specifically
identifies a person to whom the mortgage note is payable, and (b)
delivering the note to the transferee (or an agent acting on behalf of
the transferee). As residential mortgage notes in common usage
typically are “negotiable instruments,” this is the most common method
to transfer the mortgage note. In addition, even without indorsement,
the transfer can be effected by transferring possession under the UCC.
Moreover, the sale of any mortgage note also effects the transfer of
the mortgage under Article 9. Securitization agreements often provide
both for (a) the indorsement and transfer of possession to the trustee
or the custodian for the trustee, which would constitute a negotiation
of the mortgage note under Article 3 of the UCC and (b) an outright
sale and assignment of the mortgage note. Thus, regardless of whether
the mortgage notes in a securitization trust are deemed “negotiable”
or “non-negotiable,” the securitization process generally includes a
valid transfer of the mortgage notes to the trustee in accordance with
the explicit requirements of the UCC.

The North Carolina judges blew a hole in that theory. This particular
foreclosure had some of the irregularities that are all too common,
but the borrowers were deemed to have abandoned the related arguments.
However, the judge focused on a specific failure in this deal which is
pervasive in securitizations: the final endorsement was to the
trustee, not the particular trust. The judges in the case goes through
multiple deficiencies in the transfer process: some transfers were
made by parties that did not have clear authority to do so, the
affidavits were unreliable (as in they were in some cases non-factual
and separately made inappropriate conclusions of law), and there was
no evidence provided that the securitization trust was the owner and
holder of the note (as in the not exactly compelling endorsements
ending with a trustee and not a particular trust were inadequate). The
most important part was this statement:

…the Allonge in the record contains no indorsement to Deutsche Bank
Trust Company Americas as Trustee for Residential Accredit Loans, Inc.
Series 2006-QA6

Few courts have questioned whether the final endorsement needs to be
to the trust rather than the trustee; we’ve argued that that is
necessary because the trusts elect to be governed by New York law and
case law has long stipulated that endorsement to a particular trust is
necessary. Interestingly, the North Carolina judges came to a similar
conclusion independently. We expect this argument to be made in other
courts. Given that endorsement to a specific trust seems to be very
rare, this could prove to be a potent argument.
Comments (7)

Jake Naumer
Resolution Advisors
3187 Morgan Ford
St Louis Missouri 63116
314 961 7600
Fax Voice Mail 314 754 9086

6 Responses

  1. Man Oh Man what happened to America, nothing but GREED is what got us in this mess. Cant wait until things get better again.

  2. Need conveyance to have possession.

  3. To “concerned:”
    I would suggest that you have either a “Wild Instrument” as assignment, or a document manufactured in anticipation of litigation with the express purpose to perpetrate a deceit (or both). Since foreclosures are inherently equitable matters, and the act is a willful act prior to coming to Court (or concurrent to it), then you have the set of events addressed by the US Supreme Court in the matter of “Keystone Driller v. General Excavator,” 290 US 240. Note that the Court in that case ruled that “the Court House Doors shall be barred in limine, and he shall take nothing by his complaint.” See at 245. This allows you to get a dismissal with prejudice, and probably a voiding of the Note and the Mortgage. Then sue the bums.

  4. What about an allonge that is not made payable to ANYONE? I have copies of some notes that say “PAY TO THE ORDER OF” , and are signed by the bank transfering it, but the ‘to the order of’ part is left blank.

  5. Well, I still see big problems for the single-step assignment from, using the MERS nominee status, to assign DIRECTLY from a lender that never existed (therefore no nominee possible) TO the Trustee for the specific trust almost 5 YEARS too late.

    This assignment would also be viewed as a self-serving assignment, signed by the servicer to put the loan into the trust.

    Oh, and the assignment is one of those really smart ones that TRIES to claim it is also assigning the NOTE.

    The only thing that is right is that a specific trust is cited, all else is a bogus as the mortgage originally was on the day it closed. The LENDER CORPORATION WAS NEVER FORMED. Lenders must register with my state. It never did so but tried to use a ‘D/B/A’ status that is not reflected anywhere in my mortgage Deed or Note.

    I do have one question: now that I have a document that falsely CLAIMS to transfer the NOTE, can that be used to infer anything about any further attempt to claim the note was properly transferred from the Corporation that never existed?

    United States Government Accountability Office GAO

    Report to Congressional Requesters

    MORTGAGE FORECLOSURES Documentation Problems Reveal Need for Ongoing Regulatory Oversight

    As of December 2010, an estimated 4.63 percent of the about 50 million first-lien mortgages outstanding nationwide were in some stage of foreclosure—an increase of over 370 percent since the first quarter of 2006, when just 1 percent of mortgages were in foreclosure.1 Requirements for proceeding with foreclosure are largely contained in state laws, and some states require the party seeking foreclosure to prepare documents that are notarized or signed by someone with knowledge of the case and submit them to a court. Beginning in September 2010, several servicers announced that they were halting or reviewing their foreclosure proceedings throughout the country after allegations that the documents accompanying judicial foreclosures may have been inappropriately signed or notarized. The servicers subsequently began resuming some foreclosure actions after reviewing their processes and procedures, but following these allegations, some homeowners have challenged the validity of foreclosure proceedings brought against them. In other states, foreclosures may be processed without the involvement of courts, but challenges to the documentation associated with foreclosures can occur and are occurring in these states as well. In addition, questions over whether documents for loans that were sold and packaged into mortgage-backed securities were properly handled have prompted additional challenges regarding whether the parties filing for foreclosure have the necessary authority to do so.2 In response, numerous federal agencies have initiated reviews of foreclosure practices at major servicers. Additionally, state attorneys general are engaged in a review of servicers’ foreclosure practices.


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