Foreclosure Defense: Holder in Due Course Argument Refined. It’s no magic bullet but it can be used effectively

You should be careful about any argument based on the holder in due course. It is true that in order to enforce any rights under a security instrument, lien or mortgage the claimant must have paid value for the underlying obligation assuming the obligation still exists.

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But there are other elements required to achieve the status of a holder in due course. A holder in due course is someone who paid value for the note. They paid value to a person who was either a holder in due course or a holder. They might even have paid value to a thief.
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But in order to be a holder in due course, they must have acted in good faith and without knowledge of the defenses of the maker of the note (the homeowner).
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Both a holder and a holder in due course are entitled to enforce a note. A holder may enforce the note as long as they have either possession or constructive possession of the note and they have received authorization to enforce it from someone who is authorized to grant such authorization.
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Under current law, mere possession of the original note is sufficient to raise the legal presumption that authorization from a proper source has been given. This can be rebutted in discovery. There is of course a question about whether and when anyone ever receives possession of the original note in the context of a securitization infrastructure.
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The absence of an assertion and that the claimant is a holder and do course raises an important factual and legal point. A holder in due course may avoid most defenses of the maker of the note. A holder does not have that elevated status. A holder may enforce the note, but it may not enforce the mortgage unless it is paid value for the underlying obligation. See Article 9 § 203 UCC and Article 3 UCC, mortgage and note respectively. Note also that Article 3 presumptions do not apply unless the note is a negotiable instrument.
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So the failure to assert or allege that the claimant is a holder in due course is an admission that at least one of these three elements are missing: payment value, acting in good faith, and no knowledge of the maker’s defenses.
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It is therefore completely within the rights of the homeowner to ask which one of these elements are missing. The lawyers for the claimant will refuse or failed to answer any such questions. The reason they refuse is that the claimant cannot fulfill any of the elements of a holder in due course.
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None of this stops a judge from treating the claimant as a holder in due course unless the homeowner raises objections. It is an error to be sure. But on appeal, the appellate panel will see it as not material to the outcome of the case, unless a proper record has been preserved in which other procedural errors are involved.
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So the bottom line is that the holder in due course argument is part of a larger argument. It is not a magic bullet. But properly framed and aggressively used in discovery and motion practice will often yield a successful result for the homeowner.
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At such time that the claimant refuses to answer questions about payment value, acting in good faith, or knowledge about the defenses of the maker, a pretty strong argument emerges for the court to grant an order granting a motion in limine, barring the claimant from introducing evidence to prove the truth of the matter that the condition precedent contained in article 9 section 203 of the uniform commercial code has been satisfied.
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The net result of such a strategy is that if the motion has been granted, the claimant may not continue to pursue Foreclosure. The claimaint can’t pursue Foreclosure unless they have satisfied all conditions precedent. While the satisfaction of conditions precedent might be presumed at the beginning of the case, those presumptions no longer apply (assuming the homeowner raises the issue) if the claimant has refused to answer questions corroborating the presumed facts.
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And this is another example of why a lawyer is needed to argue this in court citing to appropriate state statute and state court decisions.
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Neil F Garfield, MBA, JD, 74, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.
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8 Responses

  1. Legisman, possession of the Note without being owed a debt is not Holder in due course is note as Wells is the custodian of records for WAMU. If your holding the Note but there is nothing due, one cannot foreclose as no outstanding amount is due. Wells in this case would need to under UCC9 present proof of ownership as we know for a fact that these loans were placed into WAMU’s Ginnie Mae MBS before Wells even entered into the mortgage servicing agreement. We know from the Notes that WAMU endorsed the Notes in Blank as the endorsement is right there on page 3 of the Note. The Note must be endorsed to Wells, but that impossible because Ginnie cannot endorse a Note ever!

  2. Legisman it not true that anybody that owns the Note can foreclose, as even Ginnie Mae admits they cannot foreclose and only the lender can foreclose or another lender that purchase the loan. Yes Ginnie owns every single Note that pooled into the Ginnie Mea MBS but you will never see it listed that Ginnie foreclosed. You must provide a loan or purchase the loan to be able to foreclose.

    So Ginnie approaches the court and calls the loan due? So what the amount the homeowner owe Ginnie?

  3. Charles, I noticed in one of your posts that you’re a vet. Thank you for your service to our country.

    The problem everyone seems to be missing is that whoever possesses the note can foreclose—PERIOD!

    For the millionth time, any argument other than there’s a problem with the original contract is a waste of time & money that went into some scammers pocket. Conversely, and the evidence overwhelming, those attacking the contract are successful almost 100% of the time!

  4. Legisman you are correct that UCC3 is transferring a blank endorsed Note, and UCC9 requires that proof of sale be present to the court if not the originator of the loan.

    Now most of the large lenders get around the issue of ownership when calling a debt due because they originated these loans and in the case of Ginnie pooled loan the agency acts as if the Notes were not transferred, and the rest of the world is clueless as to the processing of Ginnie Mae MBS.

    However, where a servicer is caught is in a failed bank as in WAMU, who originated or purchased a FHA or VA loan and placed it into their Ginnie Mae MBS. Understand that all Ginnie Mae MBS pooled loan are done the same way, so whether foreclosing or refinancing the 1.3 million WAMU loans that Wells Fargo was servicing at the time WAMU stopped existing on Sept 25, 2008, that all were process at the beginning of the pool with UCC3 require “blank endorsements”!

  5. Garfield’s post is pretty scholarly until he goes off the rails with his UCC Article 9 argument. Its a fact, notes ARE negotiable instruments; therefore its Article 3 that applies not Article 9. As a matter of fact, a court case Garfield was involved with, the court laughed at Garfield’s argument regarding Article 9:
    CONNELLY V. U.S. BANK NAT’L ASS’N (In re Connelly), 487 B.R. 230 (Bankr.Ariz., 2013) (“Plaintiff solely relies on his expert’s assertion… Article 9 applies to the sale of promissory notes.” Garfield Aff. 9:9–12. Even if this opinion testimony by a witness who has not been qualified as an expert could be considered by the Court, it would be rejected because it directly contradicts VEAL…Plaintiff’s argument that only Article 9 applies to the transfer of the Note fails.”).

    Hence, the post is mostly factually and legally incorrect as a matter of law according to case precedent.

  6. My bank that I was a mortgage loan officer for and we had a correspondent relationship were we originated the loans and funded them, and later we sold these loan to WAMU. It was not by fraud. We sold hundreds of these FHA & VA loans to the lender, including my VA loan.

  7. Charles — WAMU got the “notes” by fraud. They are not real notes.

  8. All Fed Gov backed loans that are pooled have the same flaw in the Note are relinquished to Ginnie Mae without a sale of the loan as UCC3 is used and the request to call the loan due must provide proof of ownership per UCC9.

    What do we know for a fact is that no Fed Gov loan can be placed in a Ginnie Mae pool without relinquishing the Note. It serves to stop the banks from running off with the loans and selling, refinancing these loans.

    Best example of fraud is knowing that on Jul 31, 2006, all of WAMU Fed Gov Backed loans transferred to Wells Fargo Bank as the mortgage servicer and custodian of records. So on Sept 25, 2008, when the OTS seized WAMU and the FDIC on the same day declared it a “failed bank”. WAMU had no rights at all because it stop existing.

    FDIC knew that Wells had physical possession of 1.3 million WAMU FHA & VA loans however FDIC did not clear up the fact that JP Morgan could not have purchased the $140 billion in loans in a $8 billion sale as the Notes where in the possession of Ginnie as Wells the custodian. Wells held all the files in the building they purchased in the servicing agreement 2006.

    Wells acted as the Holder of the Notes to foreclose after Sept 25, 2008, however had not authority from WAMU who stop exiting and because Ginnie did not and cannot purchase the debt, there was no Holder in Due Course. Wells must present proof of purchase per UCC9! There could be no foreclosures or refinancing of these loan. The debt stopped existing when WAMU stop existing!

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