Tag Archives: PEB

Assignments Not Standing up

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The District Court of Appeal of the State of Florida (4th Dist.) ruled in Murray v. HSBC Bank USA et al., (No. 4D13-4316, Jan. 21, 2015) that HSBC did not have standing to foreclose. This case highlights the difficulties that so many judges have in applying the UCC appropriately in foreclosures. The Court quotes the trial court as stating,

     To me, that’s the only issue in the case; can this Court enter a judgment on what you say is that possession is enough without the [i]ndorsement.

      In every other respect they have it. They got the mortgage. They got the records. They got the servicing. They got the whole thing. They just don’t have the [i]ndorsement, and is that fatal?

       In other words do you have to go and get, and then start over again? That’s the question. I don’t know the answer. (2, n.1)

It is well documented that many, many courts have trouble applying the relevant provisions of the UCC in harmony with the relevant provisions of the state foreclosure procedure statute.

The District Court of Appeal goes to great efforts to get it right here, given that the trial court apparently punted on the analysis. I found the the Appendix to the opinion to be of particular of interest. It carefully walks through the chain of transfers to identify the “missing piece” that results in the HSBC’s lack of standing. It also distinguishes these transfers from those between servicers, which some courts conflate with transfers between those with the right to enforce a mortgage.

From a law reform perspective, I wonder what should be done to get courts to apply the law as it is written, instead of just trying to get the gist of it right. Given that the Permanent Editorial  Board of the UCC has issued guidance in this area, I don’t think the issue is lack of clarity. Rather, I think it is just straightforward complexity — judges have a hard time going through all of the steps of the analysis. Can this area of law be simplified so that courts can achieve more just and equitable results? I wonder if Dale Whitman has any ideas . . ..

Should The Mortgage Follow The Note?

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The financial crisis and the foreclosure crisis have pushed many scholars to take a fresh look at all sorts of aspects of the housing finance system. John Patrick Hunt has added to this growing body of literature with a posting to SSRN, Should The Mortgage Follow The Note?. It is an interesting and important article, taking a a fresh look at the legal platitude, “the mortgage follows the note” and asking — should it?!? The abstract reads,

The law of mortgage assignment has taken center stage amidst foreclosure crisis, robosigning scandal, and controversy over the Mortgage Electronic Registration System. Yet a concept crucially important to mortgage assignment law, the idea that “the mortgage follows the note,” apparently has never been subjected to a critical analysis in a law review.

This Article makes two claims about that proposition, one positive and one normative. The positive claim is that it has been much less clear than typically assumed that the mortgage follows the note, in the sense that note transfer formalities trump mortgage transfer formalities. “The mortgage follows the note” is often described as a well-established principle of law, when in fact considerable doubt has attended the proposition at least since the middle of the last century.

The normative claim is that it is not clear that the mortgage should follow the note. The Article draws on the theoretical literature of filing and recording to show that there is a case that mortgage assignments should be subject to a filing rule and that “the mortgage follows the note,” to the extent it implies that transferee interests should be protected without filing, should be abandoned.

Whether mortgage recording should in fact be abandoned in favor of the principle “the mortgage follows the note” turns on the resolution of a number of empirical questions. This Article identifies key empirical questions that emerge from its application of principles from the theoretical literature on filing and recording to the specific case of mortgages.

The article does not answer the core question that it asks, but it certainly demonstrates that it is worth answering.

Maine Really Doesn’t Like Lenders

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I recently blogged in No MERS-y for Maine Lenders about a Maine Supreme Judicial Court opinion that seemed to go against the weight of authority as to a fundamental issue:  that the mortgage follows the note.

The lender in that Maine case, Bank of America, filed a Motion to Reconsider which the Court summarily denied. I think that the lender has it right on the law here and I quote from its motion:

The Court’s standing analysis conflicts with Maine’s Uniform Commercial Code (“UCC”) and sets Maine apart from other states (even those construing the same language that the Court finds of particular importance here). These persuasive authorities recognize MERS’s designation in a mortgage as a “nominee” and “mortgagee of record” does not prevent MERS from validly assigning all legal rights in the mortgage to a subsequent foreclosure plaintiff. The UCC “explicitly provides that . . . the assignment of the interest of the seller or other grantor of a security interest in the note automatically transfers a corresponding [beneficial] interest in the mortgage to the assignee.” Report of the Permanent Editorial Board for the Uniform Commercial Code 12 (Nov. 2011), available at https://www.uniformlaws.org/Shared/Committees_Materials/PEBUCC/PEB_Report_111411.pdf. The UCC further provides: “The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage or other lien.” 11 M.R.S. § 9-1203(7). The Editor’s Notes to this statutory provision confirm that it “codifies the common-law rule that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the [beneficial interests in the] security interest or lien.” Id. cmt. 9. The UCC thus “adopts the traditional view that the mortgage follows the note; i.e., the transferee of the note acquires, as a matter of law, the beneficial interests in the mortgage, as well.” 11 M.R.S. § 9-1308 cmt. 6.

In these circumstances, “the UCC is unambiguous: the sale of a mortgage note (or other grant of a security interest in the note) not accompanied by a separate conveyance of the mortgage securing the note does not result in the mortgage being severed from the note.” Report of the Permanent Editorial Board for the Uniform Commercial Code 12 (emphasis added). Instead, by the explicit terms of the statute, the attachment of the note “is also attachment of a security interest in the . . . mortgage.” 11 M.R.S. § 9-1203(7). Thus, under the UCC, the beneficial interest in the mortgage travels with the note so holding the note in addition to the assignment from MERS of bare legal title means that party has everything necessary for standing under Section 6321. Thus, the Court was inconsistent with the UCC in stating that BANA’s right to enforce the Note (along with assignment of the legal title of the Mortgage by MERS) was not sufficient to show its requisite interest in the Mortgage. The Court should reconsider its analysis on this basis.

Moreover, this Court’s analysis stands in conflict with many other state and federal courts that have examined the issue. Many courts across the nation (in judicial and non-judicial foreclosures states alike) have determined that MERS can assign all rights under a mortgage in which it is named mortgagee as nominee for the lender and lender’s successors and assigns. (18-20, footnote omitted)

As I have acknowledged before, the Supreme Judicial Court is the final arbiter of Maine law. I think, nonetheless, that the Court got it wrong in this case. I also think that this summary denial of the well-argued motion for reconsideration does not do the issue justice.

 

HT Max Gardner

No MERS-Y for Maine Lenders

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The Maine Supreme Judicial Court seems to be on a roll against the mortgage industry, having recently issued an opinion that effectively wiped out a mortgage because of the lenders bad faith negotiations during a foreclosure proceeding.

And now, the Maine Supreme Judicial Court issued an opinion in Bank of America, N.A. v. Greenleaf et al., 2014 ME 89 (July 3, 2014), that casts into doubt whether MERS has any life left in it in Maine.  The case’s reasoning is, however, somewhat suspect. The Greenleaf court held that the bank did not have standing to seek foreclosure even though it was the holder of the mortgage note. The court stated that

The interest in the note is only part of the standing analysis, however;  to be able to foreclose, a plaintiff must also show the requisite interest in the mortgage. Unlike a note, a mortgage is not a negotiable instrument. See 5 Emily S. Bernheim, Tiffany Real Property § 1455 n.14 (3d ed. Supp. 2000). Thus, whereas a plaintiff who merely holds or possesses—but does not necessarily own—the note satisfies the note portion of the standing analysis, the mortgage portion of the standing analysis requires the plaintiff to establish ownership of the mortgage. (8)

This seems to go against the weight of authority. The influential Report of The Permanent Editorial Board for The Uniform Commercial Code, Application of The Uniform Commercial Code to Selected Issues Relating to Mortgage Notes (November 14, 2011), states that

the UCC is unambiguous: the sale of a mortgage note (or other grant of a security interest in the note) not accompanied by a separate conveyance of the mortgage securing the note does not result in the mortgage being severed from the note. . . . UCC Section 9-308(e) goes on to state that, if the secured party’s security interest in the note is perfected, the secured party’s security interest in the mortgage securing the note is also perfected . . .. (12-13, footnotes omitted)

The Maine Supreme Judicial Court is the ultimate authority on the meaning of Maine’s foreclosure statute, of course, but their reasoning is still open to criticism.

Open Season on Homeowners

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A case coming out of California, Peng v. Chase Home Finance LLC et al., No. B245436 (California Courts of Appeal Second App. Dist., Div. 8, April 8th, 2014, has attracted a lot of attention in the blogosphere. This is particularly notable because this case is not to be published in the official reports and thus has no precedential value. Judge Rubin’s dissent has attracted much of the attention. It opens,

The promissory note signed by appellants Jeffry and Grace Peng obligated them to repay their home loan. In August 2007, Freddie Mac acquired the promissory note from Chase. Based on Freddie Mac owning the note, appellants seek to amend their complaint to allege Chase did not have authority to enforce the promissory note or to foreclose on their home, but the majority rejects appellants’ proposed amendment. Relying on case law rebuffing a homeowner’s challenge to a creditor-beneficiary’s authority to foreclose, the majority notes that courts have traditionally reasoned that the homeowner’s challenge is futile because, even if successful, the homeowner “merely substitute[s] one creditor for another, without changing [the homeowner’s] obligations under the note.” (Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 271.) The only party prejudiced by an illegitimate creditor-beneficiary’s enforcement of the homeowner’s debt, courts have reasoned, is the bona fide creditor-beneficiary, not the homeowner.

Such reasoning troubles me. I wonder whether the law would apply the same reasoning if we were dealing with debtors other than homeowners. I wonder how most of us would react if, for example, a third-party purporting to act for one’s credit card company knocked on one’s door, demanding we pay our credit card’s monthly statement to the third party. Could we insist that the third party prove it owned our credit card debt? By the reasoning of Fontenot and similar cases, we could not because, after all, we owe the debt to someone, and the only truly aggrieved party if we paid the wrong party would, according to those cases, be our credit card company. I doubt anyone would stand for such a thing. (Dissent, 1)

The dissent’s concern is justified. As Professor Whitman has recently noted on the Dirt Listserv and elsewhere, it is a “bizarre notion that anyone can foreclose a mortgage without showing that they have the right to enforce the note.” He also notes that the majority (and even the dissent) in Peng confuse ownership of the note with the right to enforce it. Until courts fully understand how the UCC governs the enforcement of notes, one should worry that some state court judges might declare an open season on homeowners as the majority does here in Peng.

NJF and UCC and Contract Law, Oh My!

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Parsing how a court should approach a particular deed of trust foreclosure case can put you to sleep faster than crossing the poppy fields next to the yellow brick road.  Does the Non-Judicial Foreclosure (NJF) statute govern? Does the state’s Uniform Commercial Code (UCC) govern? Does the contract terms of the deed of trust itself govern? Or, more likely, do all three govern? And, if so, how do they interact with each other?

Brad Borden and I have recently noted that while

“show me the note” does come up in federal cases, federal courts defer to the applicable state law in reaching their results.  [T]he courts’ holdings tend to flow from a careful reading of the relevant state foreclosure statute, so a particular state’s law can have a big effect on the outcome.  We would note that many scholars and leaders of the bar are befuddled by courts’ failure to do a comprehensive analysis under the UCC as part of their reasoning in mortgage enforcement cases, but judges make the law, not scholars and members of the bar.  See Report of The Permanent Editorial Board for The Uniform Commercial Code Application of The Uniform Commercial Code to Selected Issues Relating to Mortgage Notes at 1 (Nov. 14, 2011).

Zadrozny v. Bank of New York Mellon, No. 11-16597 (June 28, 2013), a recent 9th Circuit case demonstrates the problem of an incomplete analysis in an Arizona non-judicial foreclosure case.  The Court notes that

The PEB [Permanent Editorial Board] Report [] clarifies:

the UCC does not resolve all issues in this field. Most particularly, the enforcement of real estate mortgages by foreclosure is primarily the province of a state’s real property law (although determinations made pursuant to the UCC are typically relevant under that law).

Given the PEB Report’s recognition that state law is typically controlling on foreclosure issues, the Zadroznys are unable to allege a cause of action premised on the PEB Report . . ..(14-15, citation omitted)

This is confusing in a few ways.  First, the UCC is state law, adopted with variants by all of the states’ legislatures.  What the PEB is calling for is for courts to apply state UCC law as appropriate.

Second, state foreclosure law does not “control” foreclosure issues in some inchoate and expansive way. It governs it to the extent that it governs it and not one bit more. So if state UCC law governs one facet of a foreclosure case, it is not trumped by the states’ foreclosure law. Or if the terms of the deed of trust were to govern, it would not be trumped by the foreclosure law either (so long as it did not violate it).

Finally, it is just plain weird to say that the Zadroznys would have a “cause of action premised on the PEB report.” How would that work?!?  The PEB report is merely an interpretation of general UCC principles. The Court should be asking how the Arizona UCC applies to this case.

I am not saying that the Court reached the wrong result under Arizona law in this regard, but the Court’s incomplete analysis offers no clarity to litigants, no more than the Wizard of Oz offered real solutions to his supplicants’ pleas. But judges decide the cases, not me and not you . . ..