There is no conflict of laws. There is conflict in understanding them.

It is correct to say that Article 3 of the Uniform Commercial Code adopted in all US jurisdictions applies to negotiable instruments and that article 9 applies to secured transactions. Article 3 and negotiable instruments are, in the context of foreclosures, promissory notes — if the notes are officially valid and otherwise comply with the elements of a negotiable instrument. And foreclosures most of them don’t qualify as a negotiable instrument.

And again I would point out that nobody is ever alleging that they are a holder in due course because if they did that, they would have to present evidence in order to satisfy the elements of a prima facie case. That presentation of evidence would have to include details on the specific transaction in which they claim that value was paid in exchange for ownership of the note. In cases where securitization is involved, no such transaction occurred.

For reasons beyond the scope of this blog, the underlying obligation was intentionally extinguished outside the field of vision of the homeowner, the lawyer for the homeowner, the judge, and even regulators. Suffice it to say that there were plenty of good solid business reasons for extinguishing the obligation of the homeowner without informing the homeowner of the event. The primary benefit is that the homeowner continues to think that they owe money when they don’t.

(Ownership of the note gives rise to the legal presumption that the owner of the note is also the owner of the underlying obligation that was created upon the receipt of money in the context of a loan agreement.)

Article 3 provides a path for easy enforcement of a facial invalid note by any possessor of the note or anyone entitled to possession of the note who has also received authority to enforce. The authority to enforce is presumed from possession. But interestingly enough the reality is that most of the promissory notes that are used in foreclosure proceedings are no longer negotiable instruments because they are already in default.
Despite the arguments we constantly see from the other side, the only article that governs the enforceability of security instruments, like a mortgage or deed of trust, is Article 9; and section 203 specifically provides that the condition precedent to making the claim for foreclosure can only be after value is paid by the claimant in exchange for ownership of the underlying obligation.
This doesn’t happen simply because someone says it happened. It only happens if there actually was a transaction in which someone paid money and received in exchange ownership of the underlying obligation. The banks don’t argue with this interpretation. In fact, it’s not an interpretation. It’s simply a statement of the law in all US jurisdictions.
The argument from the bank is that they don’t have to show the actual transaction in which value was paid. They are correct in arguing that there is a presumption that value was paid especially when it is recited in the instrument that transfers paper title to the mortgage from an assignor to an assignee. But they are wrong and can be reversed on appeal if they prevent the putative debtor from exercising their legal right to discovery during a judicial proceeding.
So if the homeowner asks for a specific response describing the transaction in which value was paid, the foreclosure mill and named claimant are legally required to answer and most judges will compel them to do so in a court order.

But unless the homeowner follows up, they will still lose the case even though the Foreclosure mill and the name to parties have failed to comply with the discovery demand, the rules of civil procedure, and the court orders. The homeowner gained the upper hand not when the court orders compliance, but rather when the court gets angry with the Foreclosure Mill for failure to obey the court orders. If sanctions are ordered, the homeowner is on their way to victory.

3 Responses

  1. It’s illegal for the Pretender Servicer to continue to charge Kate fees each month after they accelerate to full payment on statement. And yet that is exactly what Rushmore continues to do.

  2. I submit the very moment an “agency” demands full payment off the acceleration, there is no longer a “negotiable instrument”. A lump sum payment is due, upon demand. They cannot have it both ways…the “alleged” default, much of the time, is directly connected to the demand for payment in full. At least in my case…

  3. Neil, can you please explain why “ the note is no longer negotiable because it is already in default”. What prevents the note from being a negotiable instrument under the circumstance of default?

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