Livinglies's Weblog

I can remember back when Nova Law Center was an old building on what had been a World War II airstrip. My fellow students and I would satisfy our need for speed on those runways. That was in 1974.

I also remember my contracts professor, Samuel Bader (RIP). He pounded into our heads a simple but elusive fact of law. The note is not the debt. it is evidence of a debt. And he said that those who can remember and use this fact of law would do very well and those who couldn’t remember it or know how to use it would be condemned to the dustbins of historical law practice.

Securities brokerage companies marching under the flag of an “Investment Bank” understood this fact of law. The entire securitization scheme was based upon their knowledge of this fact and their knowledge that practically nobody makes that distinction when arguing a case.

Here is why it is important.

Anyone who can prove they gave money, property or services to another person can clearly claim that they must be paid, even if the amount to be paid was not clear at the time of the origination of the transaction. That is the debt. It exists even if there is no written instrument. It is enforceable without a written instrument. If you have a witness to the transaction all the better but you can show up as the sole witness to describe what happened and why the other person owes you money — without a single document.

The execution of a promissory note is evidence of a debt and the terms of repayment. But it is virtually worthless if the execution of the note is not merged with an underlying obligation as described above. Otherwise, there would be two liabilities arising from one transaction. A note without an underlying obligation is worthless.

Under modern law possession of the note PLUS a grant of authority to enforce it FROM the owner of the underlying obligation (i.e., the person to whom the money is legally owed) raises the status of a possessor (e.g. package delivery service) to a holder entitled to sue for recovery using the note as evidence of how the damages should be calculated and used in the final judgment in your favor.

THAT final judgment entitled you to a right of execution upon any property that is not protected by things like homestead laws. It does not entitle you to enforce a separate contract (mortgage) that says if you don’t pay the debt, your house can be sold at auction.

Nobody in any U.S. jurisdiction has the legal right to seek a foreclosure judgment or to use the power of sale in nonjudicial foreclosure UNLESS they have purchased the underlying obligation for value. This is how thousands of homeowners have escaped the gallows — by hammering on their right to seek evidence corroborating the fact recited in an assignment of mortgage that someone paid $10 and other valuable consideration.

This issue has become confused for many judges and lawyers. The mortgage or deed of trust will often state that the pledge of collateral contained within the mortgage instrument is meant to guarantee payments scheduled under the terms of the promissory note. Such provisions are in conflict with the laws of every U.S. jurisdiction. each of whom has adopted verbatim UCC 9-203.

It is true that you can introduce the promissory note as evidence of the debt and the schedule of required payments. But violation of the note provisions does not entitle anyone to pursue foreclosure without buying the underlying debt.

Many trial courts and appellate courts have latched onto the view that the possessor of the note is entitled to foreclose. That is clearly wrong and has been wrong for centuries. We allow for some liberality for people who want to get a judgment based upon the note alone, although ultimately at trial if there is no underlying obligation and no original transaction then there was no consideration. Such notes are subject to various defenses. While the actor seeking to enforce the note might get past a motion to dismiss they will most often lose at trial.

It is equally important that the reader take note of how the misapplication of the laws contorts reality and liability. Each maker of a promissory note is taking the risk that someone might actually pay for ownership of it and any underlying obligation. But no underlying obligation is conveyed if the grantor did not own it.

Such a purchaser under modern law is virtually immune from any normal defenses except fraud and such. The purchaser under that scenario is called a “holder in due course,” meaning they paid for it, without knowledge of the maker’s defenses and that they made the purchase in good faith.

The contortion of the rules surrounding enforcement of debts that use notes as evidence is further complicated by the misapplication of the laws governing holders in due course.

For good reason, no entity seeking foreclosure will claim to be a holder in due course. The reason is that they didn’t pay for it (violating 9-203), and/or they did not purchase it in good faith without knowledge of the maker’s defenses. If they alleged that they were holders in due course then they would add to the list of prima facie elements of this case — namely that they really and truly did pay for the assignment of the mortgage along with the underlying obligation.

So the current actors playing at foreclosure merely allege holder status (which is not true) and they expect to be treated as holders in due course. Unfortunately, the courts often oblige. But the failure of the judge to stop such antics is mostly based upon the weaponization of the judicial system, requiring the judge to accept the allegations as true and not to litigate or judge any issue that is not contested.

Even if the judge thinks there is doubt as to the status of the holder in due course or even just a holder, the judge is not allowed to turn the case around by raising objections that should have been raised by the affected party.

By conceding facts that are not in evidence, the maker is doomed to pay off at least one liability to a party that has no right to receive it.

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Neil F Garfield, MBA, JD, 75, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business, accounting and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.
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FORECLOSURE DEFENSE IS NOT SIMPLE. THERE IS NO GUARANTEE OF A FAVORABLE RESULT. THE COMMENTS ON THIS BLOG AND ELSEWHERE ARE BASED ON THE ABILITY OF A HOMEOWNER TO WIN THE CASE NOT MERELY SETTLE IT. OTHER LAWYERS HAVE STRATEGIES DIRECTED AT SETTLEMENT OR MODIFICATION. THE FORECLOSURE MILLS WILL DO EVERYTHING POSSIBLE TO WEAR YOU DOWN AND UNDERMINE YOUR CONFIDENCE. ALL EVIDENCE SHOWS THAT NO MEANINGFUL SETTLEMENT OCCURS UNTIL THE 11TH HOUR OF LITIGATION.

But challenging the “servicers” and other claimants before they seek enforcement can delay action by them for as much as 12 years or more. In addition, although currently rare, it can also result in your homestead being free and clear of any mortgage lien that you contested. (No Guarantee).

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