I have been hammering away especially over the last several weeks about the fact that possession and delivery of the original “blue ink” promissory note is absolutely essential in every foreclosure case. (There is an exception to the general rule that you need the original note, but for general discussion purposes, consider the general rule that requires the original note)
In order for a Plaintiff to state a claim for foreclosure, they must:
1) Be in possession of the promissory note, (with a limited exception) and;
2) they must be legally authorized to enforce the promissory note.
This means that even if a Plaintiff shows up in court with a blank endorsed promissory note, this is only the first step in a two step analysis. The second and the critical step is the Plaintiff seeking to enforce that note they possess must present properly authenticated evidence that they are legally authorized to be in possession of the note and that they have the right to enforce it.
But far too often, all of this is ignored. Any old Plaintiff filing a foreclosure will in most cases get a judgment because the basic laws of standing and the Uniform Commercial Code are being flat out ignored. This is entirely inexcusable anymore. You must read this long opinion in its entirety, it is a masterful treatment of the very basic elements of foreclosure that have been blown millions of times all across this country and continue to be blown in courtrooms every single day.
Read the opinion and pay particular attention to the discussion of what it means to be a “Holder” under the UCC. This more or less destroys the whole servicer fiction. I hesitate to break out any highlights from this opinion, because every word of it is important, but following are some of the key take aways:
- The concept of a ” holder” is set out in detail in UCC § 1-201(b)(21)(A), providing that a person is a holder if the person possesses the note and either (i) the note has been made payable to the person who has it in his possession or (ii) the note is payable to the bearer of the note. This determination requires physical examination not only of the face of the note but also of any indorsements.
- under the common law generally, the transfer of a mortgage without the transfer of the obligation it secures renders the mortgage ineffective and unenforceable in the hands of the transferee. Restatement (Third) of Property (Mortgages) § 5.4 cmt. e (1997) (” in general a mortgage is unenforceable if it is held by one who has no right to enforce the secured obligation”). As stated in a leading real property treatise: When a note is split from a deed of trust ” the note becomes, as a practical matter, unsecured.” Restatement (Third) of Property (Mortgage) § 5.4 cmt. a (1997). Additionally, if the deed of trust was assigned without the note, then the assignee, ” having no interest in the underlying debt or obligation, has a worthless piece of paper.”
- (” The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.”); Orman v. North Alabama Assets Co., 204 F. 289, 293 (N.D. Ala. 1913); Rockford Trust Co. v. Purtell, 183 Ark. 918 (1931).
- As a result, to show a colorable claim against the Property, Wells Fargo had to show that it had some interest in the Note, either as a holder, as some other ” person entitled to enforce,” or that it was someone who held some ownership or other interest in the Note. See In re Hwang, 438 B.R. 661, 665 (C.D. Cal. 2010) (finding that holder of note has real party in interest status). None of the exhibits attached to Wells Fargo’s papers, however, establish its status as the holder, as a ” person entitled to enforce,” or as an entity with any ownership or other interest in the Note.
- AHMSI apparently conceded that Wells Fargo held the economic interest in the Note, as it filed the proof of claim asserting that it was Wells Fargo’s authorized agent. Rule 3001(b) permits such assertions, and such assertions often go unchallenged. But here the Veals did not let it pass; they affirmatively questioned AHMSI’s standing. In spite of this challenge, AHMSI presented no evidence showing any agency or other relationship with Wells Fargo and no evidence showing that either AHMSI or Wells Fargo was a ” person entitled to enforce” the Note. That failure should have been fatal to its position.
- If, however, the maker pays someone other than a ” person entitled to enforce” ““ even if that person physically possesses the note the maker signed ““ the payment generally has no effect on the obligations under the note. The maker still owes the money to the ” person entitled to enforce,“ Miller & Harrell, supra, ¶ 6.03[b][ii], and, at best, has only an action in restitution to recover the mistaken payment. See UCC § 3-418(b).
Read the full opinion below: