Negotiable Instruments Explained

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This is an amended version of earlier piece I wrote. It is amended because the commentary and cases supplied to me by multiple readers.


Given the confusion over applying the principles used in the making, transferring, and enforcement of promissory notes, I offer the following as a primer.

I would point out, thanks to a new client, a decision in Nevada that explains the Uniform Commercial Code, negotiability and transfer of mortgage notes and why Wells Fargo was full of crap and should be sanctioned even though it had according to its own employee legally obtained the allegedly original note see 62310193-Levya-v-National-Default-Servicing-Wells-Fargo-etal-Nevada-Supreme-Court.v2

The Nevada Appellate court turned the decision of the trial judge on its head and corroborated what I have been writing, testifying and teaching since 2007 — that a note is either payable to “bearer” (which never happens with mortgage notes) or it is payable to a definite party that is correctly identified.

The identification of an entity that did not legally exist in a Florida case was sufficient for the Trial Court to conclude that the mortgage was void and therefore could not be enforced in any manner, shape or form. See

There are three main points to remember. Assignability is preferred and assumed. The maker (the person who signs an instrument promising to pay or do something) must be protected from fraud or breach such that his promise can only be demanded once. And the person who receives such a promise whether directly or indirectly must be protected such that his reasonable expectation of performance will be satisfied.

Start with the premise that we want to enable the transferability of written instruments. That is our system because our history shows that without the ability to transfer, sell or assign agreements, the marketplace for goods and services becomes bottle necked. So the first assumption is that any written instrument can be negotiated. That means that a promissory note, which is a promise to pay a certain amount on certain terms, is presumptively subject to transfer, sale or assignment except where it is prohibited by law or the instrument itself.

Then we go to the maker — the person who signs the instrument promising to do something — like pay back a loan. Nobody would sign such an instrument unless they were protected from multiple claims on the same promise. So protection of the maker is of paramount importance. The marketplace would stall out if the maker was at serious risk of multiple claims that would bankrupt him based upon one promise. In this age of technology and finance, where ample evidence (forgery and robo signing, as well as outright fabrication) has emerged about multiple “original” documents created with advanced technology, we need to give close scrutiny to assure current future makers that they are only going to be called upon to satisfy the promise once. Without that negotiability becomes irrelevant because nobody would sign anything. Liquidity in the marketplace would evaporate and commerce, already slow, would come to a halt.

Lastly, there must be equal protection for the person who ends up with the instrument containing the maker’s promise. If people have no confidence that the instrument is true, valid and enforceability then they will have no confidence in its authenticity, validity, and enforceability. So nobody would never accept the paper without rules that protect them from financial injury. Thus a written promise signed by a maker, is expected to be enforced, as long as the effect of enforcement only requires the maker to perform once, as described in the written instrument — and only so far as the legal person in possession of such an instrument came by it legally through a definite transaction in which it was clearly entitled to enforce the promissory note.

There exists a conflict between the protection for the maker and the protection for the holder of the document containing the maker’s promise. And there is always the problem of Moral hazard, fraud, breach and other issues. The answer to this conflict comes from the first observation — that we want free transferability of such documents in the marketplace.

So the maker knows that as long as he is dealing with the original party in the agreement, he can bring up whatever defenses apply. For example if he delivers a tractor to his neighbor under the agreement that his neighbor would pay him a certain sum of money, then upon delivery he expects the certain sum of money to be paid. If not, he can either take back his tractor or demand payment or sue for the money that was promised.

When the agreement is transferred people often forget that whoever gets the contract simply steps into the shoes of his predecessor. The transfer of the agreement cannot convey any additional obligation or conditions that would effect the maker of the promise — unless of course the maker agrees to additional terms or restrictions. Thus the person receiving the transfer of the maker’s promise must fulfill the terms of the agreement — either delivery of the tractor or payment of the money.

So if the party with the tractor transfers the agreement to someone else, that new person must deliver that tractor to the buyer identified in the agreement. If the other party to the original agreement transfers the agreement to someone else, that new person must accept delivery of that particular tractor described in the agreement, and the new person must pay for it exactly as specified in the agreement.

Hence we see that transferability of contracts, if done properly, does no harm to anyone and helps provide liquidity in the marketplace.

The person selling the tractor might need the money faster than what was anticipated in the agreement. So he could either ask the buyer to finish the deal early or he could find someone who is willing to buy the agreement and the tractor for an amount less than the expected payment from the buyer.

The person buying the tractor might transfer the agreement because someone else is willing to advance a premium amount to him for the tractor (he wants it more than the original party to the agreement).

Instead of the agreement getting stalled or breached by one party or the other, everyone gets what they want without any muss or fuss. That is what we mean by transferability or liquidity in the marketplace.

If the agreement is a promise to pay, it must arise out of an actual transaction in which the maker of the promise actually gets what was described in the agreement. In loans the promise is to pay a definite legal person (e.g., a bank — not some fictitious name entity that is unregistered in the state where the transaction took place, like for Example, American Brokers Conduit in Florida).

For the note to be negotiable it must satisfy the statutory requirements. And to satisfy the statutory requirements, the promissory note must state a promise by maker to pay definite sum of money at definite time to a definite legal person, the payee. There can be no conditional or parole elements to the promise. The instrument is either facially valid or it is not enforceable as a negotiable instrument.

The maker knows he must pay the amount stated on the document identified as a note. The payee knows he must deliver the funding for the loan. If the payee on the note (the originator) does not deliver the funds the promissory note and any mortgage signed by the maker should be returned to the maker. The maker does not have a debt at law unless the maker received the certain sum of money from the party presenting itself as the lender. It is on this point, among others, that Wall Street underwriters are attempting to cloud the issue of “definite legal person” and an actual transaction where money exchanges hands. But as we see in all cases that have carefully analyzed this issue, the Wall Street version creates parole elements or conditions that are not on the face of the note and therefore eliminate any possibility of the instrument being enforced as a negotiable instrument. And THAT means they must allege and prove a cause of action for collection of money due from the homeowner to the party bringing suit (including “non-judicial states”).

If the payor on the note breaches the agreement, the Payee can bring suit but the payee will lose in court because they cannot satisfy the conditions of a prima facie case, to,wit: that the payee on the note delivered certain funds to the closing agent that were then given to the borrower or used on the borrower’s (maker’s) behalf with the full consent of the borrower as shown on the HUD settlement statement.

THAT is what we mean by having an actual transaction instead of a snowstorm of paper that talk about the transaction but never actuality show it. In the world of “securitization fail” (Adam Levitin) virtually all assignments and most loan originations have no underlying transaction — between the definite legal persons that are described on the face of the instrument. In other words there never was a deal between any of the parties involved and no money exchanged hands between THOSE legal persons.

A payee on the note who does not deliver funds at closing is not entitled to collect on the debt or the note. And obviously if there were no funds and there was no debt, then the mortgage should never have been released to anyone, much less recorded or enforced through foreclosure.

But the UCC makes an exception to the above logic. In order to promote free transferability of promises in the marketplace a Holder in Due Course will be able to enforce the note and possibly the mortgage. That means the legislature has decided that where there was fraud or chicanery in the loan closing the new party can still enforce without worrying about the maker’s defenses IF they purchased the debt for value, received delivery of the real original loan documents, in good faith and without knowledge of the borrower’s defenses.

Despite the usual rule that the maker can only be liable once on a promise, the maker absorbs the risk of loss (I.e. being liable twice on one promise). But if the holder in due course cannot prove they have the real original note, the presumption is that someone else has it. In that case the party claiming to be a holder in due course cannot make their prima facie case of payment of value, delivery, in good faith and without knowledge of borrower’s defenses.

Note that claiming a lost note is not a substitute for having the original. If the note has truly been lost then the prima facie case of the party making the claim also consists of proof they had the original, and a credible story from a competent witness about what happened to it, as well as corroboration that nobody else has the real original note.

And a self serving claim of being just a possessor or holder of the note does not eliminate anything from the requirements of proof nor does it satisfy any part of the forecloser’s burden of proof. Quite the contrary. A party who alleges they are a holder is admitting that one or more of the elements of a holder in due course are not present. AND they must allege and prove the identity of the owner of the debt, from whom they allege the right to enforce. A power of attorney from another holder is nothing unless the right to enforce does in fact emanate from an actual holder in due course or the owner of the debt.

Judges who allow partial prima facie cases are not following the law. And if the recent decisions in 5 states is any example, these judges are going to see many of their decisions reversed with a command that they enter judgment for the borrower.

A comment on this post by a reader who wishes to remain anonymous takes issue with my approach. This is yet another example of how we should form a collaborative venture in which we are all exposed to the same information and arguments and perhaps all using the same playbook and legal arguments. His analysis is completely sound. And maybe he is right that we should stick with pressing the legal arguments about the elements of negotiable paper and the elements of enforcement. He says

Under UCC 3 transfer is how rights of enforcement are exchanged.   Under the UCC transfer is not change of possession, that is negotiation.  Transfer requires delivery (voluntary [Editor’s note: or involuntary but legal]) and intent for new person to have enforcement rights.  Negotiation is change in possession whether voluntary or not.  Negotiation, ie possession, does not confer rights – only a transfer.

Deny transfer.  In some cases, like mine, it is evident no transfer happened because no negotiation happened.  A note made payable to an identifiable person must be indorsed to be negotiated (i.e., change in possession to happen).  I personally would like to test the theory that buying a note that lacks required endorsements is notice of defect.

Now the parties to the lawsuit need to be the issuer and the PETE.  This means that as much as we wish to have a legal analysis of whether the borrower is a party to the sale of his note, it is not why the PSA, etc must be produced and attacked.    So when we present bifurcation, the Court is going to ask ‘who the hell is going to buy a note it cannot enforce?’   That is exactly the point….moreover is it the borrower’s liability?

6 Responses

  1. I desperately need your assistance. Can someone take a look at this DOT and tell me if its valid. I am currently in a foreclosure with Wells Fargo and trying to fight them myself because I cant afford an attorney. I currently have a complaint in with the CFPB and would like to get an answer as quick as possible so I can present it to them as part of my case. If you look at the DOT it has Mortgage Lenders Network listed on there. Since they went out of business in 2007, does it void this DOT and break the chain of title? Please help. My email is I can email you the DOT. Please help

  2. @ Louise ,

    I always thought that both the current and new servicer needed to give you notice so that you knew it wasn’t just some kid with a computer sending you a letter redirecting your payments to himself..

    I under stand that you probably mean a servicing rights transfer and not the note itself (although that COULD be the case) ,, most (if not all) states have no recording requirement for assignments (think MERS).

  3. To Rock
    Write me at I attacked in fed court on contract and breach of statutes, lost, appealed and won a judgment. Persona non grata on this site which doesn’t like serious winners and caters to whiners.

  4. Can anyone answer this? Defts claim that the RESPA letter is the only document required to prove transfer of the Note and Mortgage to a new servicer. What about the assignments at the state level? If that is all that is required, then this is worse tha MERS transferring as a nominee?

  5. Yeah Neil,
    What about those UCC citations?

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