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Home Foreclosures: 2.2.5.7 A Key Litigation Issue for Holder Status—Timing of Indorsements

The UCC does not require that an indorsement be dated, and the industry practice is to leave indorsements undated.109 As a result, it is usually impossible to verify from the face of a note whether an indorsement was in place when a party took certain actions in the past to enforce the note.110 For example, state law may require that a party be a holder in order to record a document that initiates foreclosure, file a complaint, or obtain judgment at trial or through a dispositive motion.

Home Foreclosures: 2.2.5.8.2 A non-holder in possession who has the rights of a holder

A “nonholder in possession of an instrument who has the rights of the holder” typically refers to an entity that has physical possession of a note that is indorsed to some other entity. While this entity is in possession of the note, it cannot be a holder. However, the nonholder in possession can claim the rights of a holder based on a contractual or statutory right that is not apparent on the face of the note. As a transferee, the nonholder may assert the rights of a holder based on the terms of a contract with its transferor.

Home Foreclosures: 2.2.1 Overview

The securitization of mortgage debt has created significant new issues for advocates to consider in defending a foreclosure. Before the rise of securitization, homeowners’ counsel seldom raised questions about the foreclosing party’s authority to proceed. The familiar name of the loan originator routinely appeared on the face of foreclosure documents.

Home Foreclosures: 2.2.4.1 Generally

The Uniform Commercial Code defines a negotiable instrument, determines how it is transferred, and limits who may enforce it. Some familiarity with basic UCC concepts is essential in fashioning an appropriate response to a servicer’s or assignee’s claim that it has the right to foreclose based on a note and mortgage originated by someone else.20

Home Foreclosures: 2.2.5.8.3 A party seeking to enforce a lost note

The second significant category of non-holders who can enforce negotiable instruments consists of claimants who concede that they are not in possession of the instrument. These claimants unambiguously assert that they are not in possession because the note has been “lost, destroyed, or stolen.”144 In cases involving securitized mortgage obligations servicers sometimes make little or no effort to ascertain the whereabouts of notes.

Home Foreclosures: 2.2.5.9 Possession of the Note at the Right Time—What Does the Evidence Show?

For a party to be entitled to enforce a negotiable note either as a holder or as a transferee with the rights of a holder, the party must have possession of the note.168 Possession of the original note at the time of a hearing or when an affidavit was executed does not establish that the same party possessed the note when all actions essential to a valid foreclosure took place.169 These critical events can include recording of a required notice and the appointment of a trustee in a non-judicial

Home Foreclosures: 2.2.5.10 Assignments of Security Instruments Do Not Automatically Transfer the Right to Enforce the Related Negotiable Notes

A document that assigns a mortgage or deed of trust may contain language to the effect that the assignment of the security instrument acts as a transfer of the related note. Lenders have argued that this language can be effective to transfer the right to enforce a negotiable note. A few courts have accepted the argument.183 These rulings ignore essential elements of negotiation required by the UCC.

Home Foreclosures: 2.3.1 Overview

As discussed in §§ 3.3, 3.4, infra, the state appellate courts in almost a majority of judicial and non-foreclosure states harmonize the relevant UCC rules with state foreclosure law.

Home Foreclosures: 2.3.3 Application of Statutory Construction Principles

On the question of which statute (foreclosure/real property statutes or UCC) is “general” and which is “specific,” the answer may not be clear. Arguably, both are specific, at least in relation to the topics covered. UCC Article 3 represents a comprehensive set of provisions addressing the enforcement of negotiable instruments.

Home Foreclosures: 2.4.2.2 Home Equity Lines of Credit

Homeowners may borrow against their homes to draw out cash for one or more personal reasons such as to pay for home repairs, a child’s education, or medical bills.228 A lender may offer the homeowner a home equity line of credit (HELOC), rather than refinance an existing mortgage.229 A HELOC differs from a traditional mortgage loan in several ways.

Home Foreclosures: 2.4.3 The Role of Article 9 of the UCC in the Sale (Transfer) of Nonnegotiable Notes

The original version of Article 9 governed conventional security interests in personal property.283 The 1972 revisions added the sale of accounts and chattel paper into Article 9 in order to recognize “historical forms of financing that had long been practiced in many industries called ‘factoring.’”284 Later, the residential mortgage-backed securitization market flourished.285 In order to facilitate this form of financing and investment, the Nation

Home Foreclosures: 2.5.2.3 The Party Seeking to Foreclose Must Have “Control” of the Transferable Record

If the record constitutes a transferable record, the next issue is whether the lender or a transferee maintains “control” of the electronic note. “Control” in this electronic world substitutes for “possession” in the paper world.379 Even if a party establishes “possession” of a paper copy of an electronic note, the relevant consideration is control of the note in its electronic form.380

Home Foreclosures: 2.5.2.4 The Transferable Record Must Be Created, Stored, and Assigned in Compliance with Certain Control-Related Requirements

First, the system must produce a single authoritative copy of the electronic record that is unique, identifiable, and unalterable.384 In Good v. Wells Fargo Bank, the only reported appellate case applying section 7021 of E-Sign, the court ruled that the plaintiff did not show that it controlled the single authoritative copy at the summary judgment stage.385

Home Foreclosures: 2.5.3 Proof Issues

If a person attempts to enforce the note either through foreclosure, suit on the note, or otherwise, the obligor has the right to request “reasonable proof” that it is in control of the transferable record.394 Typically, the proof should include information about security and integrity systems which must be available before trial for scrutiny by the borrower’s attorney and expert.

Home Foreclosures: 2.5.4 Enforcement of Electronic Notes That Would be Nonnegotiable If in Paper Form

There are several examples of paper notes secured by real property that are not negotiable: home equity lines of credit (HELOCs), payment option ARMs, reverse mortgages, FHA-insured notes in certain circumstances, and land installment contracts.405 In the paper world, Article 9 of the UCC governs the sale of promissory notes.406 As a result, Article 9 and the sale contract provide the exclusive method for determining ownership of nonnegotiable promissory notes, in the absence of other statutes t