Produce the Note, An Alternate View, Part 3

Parts 1 and 2 in this series explained that the produce the note defense is based on UCC 3-301 which provides a “holder” with the right to enforce the note. UCC 1-201(21)(A) defines “holder” as “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.” The reason that producing the note makes it easy for the foreclosing party to prove standing to foreclose stems from the principle that the possessor of a note payable to bearer has a right to enforce the note. UCC 3-205 tells us that a note becomes payable to bearer through an endorsement in blank, which occurs when the person to whom the note is payable writes on it “pay to the order of”, leaves a blank space and then signs below the blank space. The endorsement can be on the note itself or on a page attached to the note called an “allonge.” Endorsing the note in blank makes the note “bearer paper” which means that whoever “bears,” or possesses, it has the right to enforce it.

Calling for production of the note plays right into the foreclosing party’s hand. If the note is endorsed in blank, and virtually all notes that were part of mortgage securitizations were endorsed in blank, all the foreclosing party needs to do is produce the note to show possession (together with evidence that it possessed the note at the time it started the foreclosure lawsuit). But it does not even have to do that. UCC 3-309 provides that a person who does not have possession of the note can nonetheless enforce the note as long as it can prove that it once had possession and had a right to enforce the note when it had possession. Foreclosing parties do this with a “lost note affidavit.”

For these reasons, borrowers would be better served by taking the position that the foreclosing party has to own the debt to have the right to foreclose and merely producing the note does not establish ownership (see Parts 1 and 2 of this series). It is far more difficult for a foreclosing party to produce compelling evidence of ownership than it is for that party to produce a bearer note or a lost note affidavit. In fact, I have raised this argument many times and have yet to see a single foreclosing party produce any credible evidence of ownership. That’s not to say that all the cases where I have raised the argument have been dismissed. The trial courts have been grappling with the owner-holder distinction. The Connecticut Supreme Court has agreed to resolve the issue in one of my cases and I expect the case to be heard in the Fall of 2011. In the same case, the Supreme Court will consider the validity of MERS mortgages, which I will make the subject of future posts.

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.