Produce the Note, An Alternate View, Parts 1, 2 and 3 explained why borrowers might be better off asking the foreclosing party to prove ownership of the debt rather than asking it to produce the note. But how and when does the borrower go about asking the lender to do either of these things? In my view, the best way to do it is by a formal motion to dismiss for lack of standing. Part 1 of the Produce the Note series explained that standing is an aspect of subject matter jurisdiction and that if the foreclosing party lacks standing, the court lacks subject matter jurisdiction. If the court lacks subject matter jurisdiction, the case must be dismissed. When a borrower asks the foreclosing party to prove ownership of the debt (or to produce the note if the borrower goes that route), the borrower is really asking the court to dismiss the case because the foreclosing party can’t prove ownership of the debt (or produce the note). Whether the borrower does this informally, by making the request at a court appearance for example, or formally, by filing a written request with the court, the borrower’s request is a motion to dismiss for lack of subject matter jurisdiction. If the borrower chooses to ask the foreclosing party to prove it owns the debt, the borrower should make a formal written motion. The mortgage industry wants to prove standing merely by producing the note and that is all the courts have been requiring. The borrower needs to why producing the note is not sufficient and that requires a written explanation.
One of the best features of the lack of subject matter jurisdiction is that in some jurisdictions, like Connecticut, it cannot be waived or conferred by consent. This means that the borrower can raise it at any time. Other jurisdictions may require the borrower to do something, like raise it as a defense in the pleadings, to preserve the right to move to dismiss later. Assuming the borrower has properly preserved it, or doesn’t have to, the question of when to move to dismiss for lack of subject matter jurisdiction is really a question of strategy in a particular case. It may not be beneficial to do it early in the case when, for example, the borrower is participating in the Foreclosure Mediation Program (CT) or the Foreclosure Settlement Conference Program (NY). The goal of these programs is to modify the mortgage to keep the borrower in the property. They are essentially “court-annexed” programs, which means that if there is no case pending against the borrower, the borrower cannot participate in the program. A successful motion to dismiss will take the borrower out of the program because it results in there being no case. On the other hand, it may be beneficial to do it early in the case when no court-annexed program is available to the borrower as in the case of an investment property. In those circumstances, the borrower might get some leverage in negotiating a workout or modification if the foreclosing party is facing dismissal.
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.
Picking up where I left off in Produce the Note, An Alternate View, Part 1, UCC 3-301 is entitled “Person Entitled to Enforce Instrument.” It provides in relevant part that the “Person entitled to enforce” an “instrument” is the holder of the “instrument.” UCC 3-104 defines “instrument” as “an unconditional promise or order to pay a fixed amount of money.” In other words, as far as the UCC is concerned, an instrument is a promissory note. Instruments under the UCC do not include mortgage deeds or deeds of trust. This is the main problem with the produce the note defense. By the express terms of UCC 3-301, the party that can produce the note has nothing more than the right to enforce the note. But, the foreclosing party is not trying to enforce the note. The foreclosing party is trying to enforce the mortgage deed or deed of trust because it’s the mortgage deed or deed of trust, not the note, that describes the lender’s rights to the property and how to exercise those rights.
Not only is UCC 3-301 expressly limited to the enforcement of notes, no court can expand its reach to mortgage deeds or deeds of trust. The statute provides that “[a] person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.” We saw in Part 1 that at common law the owner of the debt is directly injured by its non-payment (“common law” is judge made law as opposed to legislature made law). UCC 3-301 does not require any injury. It gives the right to enforce the note to a nonowner or even a thief, i.e., a person “in wrongful possession of the instrument.” Because the statute provides a right to sue without requiring an injury, it is “in derogation of the common law” or, more simply, changes common law. It is a fairly universal principal that statutes in derogation of the common law must be “strictly construed.” That’s just a complicated way of saying that a judge can’t expand a statute that changes the common law; the statute means only what it says and nothing more. Under this principle, a judge can’t expand UCC 3-301 to apply to the enforcement of mortgage deeds or deeds of trust.
In Part 3, I will discuss how producing the note actually makes it easier for a “lender” to overcome challenges to its standing.
“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.