Livinglies's Weblog

Hat tip to Wendy Allison Nora

Even before I went to law school, when I was getting then called an “Advanced MBA”  I learned that notes are only pieces of paper. With the proper foundation, they could be evidence of something that is an agreement.

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In law school, I didn’t understand why the professor for the contracts class for two semesters and why the professor for the negotiable instruments class for two semesters kept pounding on the same concept in urgent terms like we might forget it: “THE NOTE IS NOT THE DEBT. IT IS ONLY EVIDENCE OF THE DEBT. IF IT IS NOT EVIDENCE OF A DEBT, IT IS VOID — REGARDLESS OF WHAT IS WRITTEN UPON IT.”

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Then I went out into the real world and found out why they were urgently reminding us of that and pounding it into our heads. The reason was simple: most people did forget it and never understood that distinction to begin with. And that included nearly all lawyers, which in turn obviously meant that nearly all judges did not grasp the distinction between the note and the debt.

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As a result of this deficiency, many lawyers for people who are described as “borrowers” will file documents that essentially admit that the note is the debt and, therefore, that the mortgage secures the note.  This produces a conflict that nevertheless becomes the law and facts of the case, once the homeowner or the lawyer for the homeowner makes that admission.

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So I was relieved to see an email thread in which Wendy Allison Nora described how this works:

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The correct legal position with respect to the “Note” is that the Note is evidence of debt but does not establish that there is a debt outstanding.  The Wisconsin Supreme Court got this part right in Mitchell Bank v. Schanke, 2004 WI 13, 268 Wis. 2d 571, 587, 676 N.W.2d 849 (Wis. 2004) “[W]e hold that the Bank did prove the debt underlying the Mortgage, despite the Bank’s failure to produce the Note, because the parties intended the Mortgage to secure antecedent debt and the Bank proved the existence of extensive antecedent debt” and “In order to foreclose on the Mortgage, the Bank was required to prove the existence of the underlying debt that the Mortgage secured. “Where there is no debt — no relation of debtor and creditor — there can be no mortgage” 268 Wis. 2d at 595, citing Doyon & Rayne Lumber Co. v. Nichols, 196 Wis. 387, 390, 220 N.W. 181 (1928).  The Wisconsin Supreme Court in Mitchell Bank, clearly stated at 268 Wis. 2d 595:

While certainly, this court would not allow a creditor to recover sums from a debtor if the creditor never advanced the money, Schanke’s argument is more germane to the requirement that the mortgagee prove the existence of debt in order to foreclose on the mortgage, as a mortgage cannot exist without a debt. See Doyon & Rayne Lumber Co. v. Nichols, 196 Wis. 387, 390, 220 N.W. 181 (1928).

Doyon & Rayne holds at 220 N.W. 182-183:

It seems plain that none of the mortgages became a lien upon the premises until someone paid value therefor. “A mortgage is only an incident to a debt, which is the principal thing. It is merely security for the debt. Where there is no debt–no relation of debtor and creditor–there can be no mortgage. Here there was no debt, and hence no mortgage that can be enforced in equity. If the mortgage could be sustained upon any theory, it could only be as a security for future advances, and then only to the extent of such advances.” Cawley v. Kelley, 60 Wis. 315, 319, 19 N. W. 65, 66.

“A mortgage is not property at all, independent of the debt it secures. The extinguishment of the debt ipso facto et eo instante extinguishes the mortgage. The mere entry on the record of a release of the mortgage is not for the purpose of extinguishing it, but as evidence of a previous discharge of the debt.” Fred Miller Brewing Co. v. Manasse, 99 Wis. 99, 74 N. W. 535. (Emphasis added.)

Filed under: foreclosure |