Produce the Note, An Alternate View, Part 1

“Produce the note” has been a popular mortgage foreclosure defense since the revelation that lenders often do not have the “paperwork” necessary to foreclose.  This is the first post in a series that will explain why the defense may be a misstatement of the law and actually may make it easier for a lender to overcome what might otherwise be an insurmountable problem.

The produce the note defense is rooted in the requirement of standing, which is an aspect of subject matter jurisdiction.  If the foreclosing party lacks standing, the court lacks subject matter jurisdiction and the foreclosure action must be dismissed.  This does not mean that the debt or mortgage is unenforceable.  It means that the wrong party commenced the foreclosure action.  The right party can try again but make no mistake — a dismissal is a fantastic result for a borrower.

To have standing, the foreclosing party must have a direct injury or be authorized by statute to foreclose.  The purpose of a foreclosure action is to remedy the injury resulting from the non-payment of the debt.  The party who is owed the debt is the one that is injured by non-payment.  The owner of the debt is the party who is owed the debt.  In short, the owner of the debt has a direct injury from the borrower’s failure to pay and thus has standing to foreclose.

In my experience, foreclosing parties do not try to establish standing by direct injury.  Instead, they claim statutory authority to foreclose.  More specifically, they rely on section 3-301 of the Uniform Commercial Code (commonly called the “UCC”).  Section 3-301 provides the “holder” of the note with the right to enforce the note.  For our purposes, “holder” under the UCC means the person in possession of a note.

The produce the note defense is based on theory that a party who cannot produce the note does not possess the note and so does not have the right to enforce it.  The flaw in the defense, as we’ll see in future posts in the series,  is that the right to enforce the note, without more, is irrelevant to the right to foreclose the associated mortgage.