THE POWER OF PAPER, DOES THE UCC GIVE HOMEOWNERS A FIGHTING CHANCE?
PRESENT THE ORIGINAL NOTE - IF YOU DON'T - I CANNOT BE IN DEFAULT UNDER THE UCC. IF I AM NOT IN DEFAULT HOW CAN YOU FORECLOSURE UNDER STATE LAW?
THE FOLLOWING IS NOT LEGAL ADVICE AND NOT INTENDED TO SERVE AS LEGAL ADVICE. IF YOU HAVE SPECIFIC QUESTIONS ABOUT YOUR FORECLOSURE SITUATION, OR HAVE QUESTIONS ABOUT BANKRUPTCY, CONTACT US TO DISCUSS YOUR SPECIFIC CASE AT (877) 276-5084. INSTEAD, THE FOLLOWING IS A LEGAL THEORY PRESENTED TO ME BY A PROFESSOR OF LAW AT A MAJOR LAW SCHOOL. HE SENT ME AN EMAIL ASKING ME WHY I WASN'T PURSUING THIS LEGAL THEORY. AS SUCH, I PRESENT THIS AS A LEGAL THEORY FOR PEER REVIEW AND COMMENT. IF ANYONE HAS ANY INPUT, I WOULD LOVE TO HEAR IT. YOU SHOULD ALL REALIZE THERE ARE SOME HOMEOWNERS WHO SIMPLY CANNOT LOSE THEIR HOMES TO FORECLOSURE. WE HAVE HEARD ALL OF THE HORROR STORIES IN OUR PRACTICE AS A FORECLOSURE DEFENSE LAW FIRM. FOR EXAMPLE, THERE ARE PEOPLE DYING OF CANCER AND THE BANK COULD CARE LESS; PEOPLE WITH ADA ENABLED HOMES WITH BADLY NEEDED RAMPS AND RAILS - AND THE STUBBORN LOAN SERVICERS COULD CARE LESS. THIS IS ARTICLE THEREFORE IS A GENERAL IDEA OR CONCEPT PRESENTED TO ME BY A LAW PROFESSOR WHO KNOWS A WHOLE HECK OF A LOT MORE ABOUT THE UCC (UNIFORM COMMERCIAL CODE) THAN I DO, AND SO I PRESENT IT AS FOOD FOR THOUGHT. THE THEORY HAS NOT BEEN TRIED OR TESTED BY MY FIRM, AND ONLY LIMITED RESEARCH INTO THE CASE LAW HAS BEEN PERFORMED. Email your comments to firstname.lastname@example.org
Lately the news has been full of headlines covering the national disaster that is our housing crisis. Banks are investigating their foreclosure procedures, robo-signers are hiding from the press and frustrated homeowners are still losing their homes. For some homeowners, predatory lending, greed or fraud put them in a no win situation and default was inevitable. For others, the temptation to bite off more than they could chew was irresistible and now they find themselves unable to make payments. Regardless of the situation, the law forbids foreclosures unless homeowners are in "default". Sounds fair enough, but what does it mean to be in "default." Is there more than one way to look at the issue?
The UCC DEFENSE Argument: (Plaintiff = Bank/Lender, Defendant = Homeowner/Borrower)
The UCC Defense "theory" goes something like this: The Plaintiff Bank has no right to foreclose because there has been no default. According to the Arizona laws governing foreclosures and realty paper the Defendant must be in default prior to foreclosure. Pursuant to Arizona law and the UCC as adopted by Arizona, the Defendants are not in default because they have not dishonored the note. The banks should not be able to foreclose until they canprove their is a legal "defaut" of the loan obligation
Under Arizona Law, foreclosures are forbidden unless the underlying debt is in default. See Ariz. Rev. Statute Art. 33. Further, realty paper like a Deed of Trust or a Promissory Note falls within the plain meaning of Article Nine of the UCC. The Arizona Court of Appeals held that “realty paper” like a note secured by a Deed of Trust in real property applies to Article 9 of the UCC (see A.R.S. §§47-9101 through 47-9507 for Arizona’s version of the UCC as applied to “realty paper”). Rodney v. Arizona Bank, 172 Ariz. 221, 836 P.2d 434 (1992).
In fact, this decision has been followed and cited in several other decisions including the 9th Circuit District Court as recently as Aug. 17 2010. The Court in Rodney was clear, “We hold that Article Nine of Arizona’s Commercial Code applies to creation and perfection of a security interest in a promissory note, when the note itself is secured by a deed of trust in real property.” Id. at 5. The Federal Bankruptcy Court in Arizona also applied the UCC to realty paper and foreclosures holding that GMAC lacked standing for failure to demonstrate they were the holder of the note. See In Re Weisband, 427 B.R. 13 (Dist. Ariz. 2010) (citing A.R.S. 47-1201(B)(21)(a) defining a 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” Title 47 is Arizona’s version of the UCC).
Therefore, the argument goes, the parties seeking to foreclose on Deeds of Trust must follow both the Arizona Statutes governing the foreclosure process and the rules of the UCC as adopted by Arizona. In fact, one could argue the rules seem clear:
The Plaintiff May Not Foreclose If The Borrower Is Not In Default:
Under the UCC, for a mortgage to be in default, the borrower, or maker of the promissory note, must have dishonored the note. Under UCC §3-502 (A.R.S. 47-3502) a promissory note is not dishonored until the maker refuses to pay it when presentment thereof is made. “Presentment” is defined by the UCC as “a demand to pay the instrument made by a person entitled to enforce an instrument.” The UCC also requires that “Upon demand of the person to whom presentment is made, the person making presentment must 1) exhibit the instrument” [emphasis added] (UCC 3-501(B)(2)(a) & A.R.S 47-3501(B)(2)(a))
The argument proceeds: Until the proper presentment (of the original note) is made the UCC requires that the “obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken, and the following rules apply (2) In the case of a note, suspension of the obligation continues until dishonor of the note or until it is paid.” (UCC 3-310(b) & A.R.S. 47-3310(b)) Therefore, the borrower is not in default until the plaintiff can exhibit the instrument, proving dishonor. Default is not simply missing payments. It also includes refusal to pay after presentment has been made. Default must also include an exhibit of the instrument.
Second, if the borrower pays a person who is not entitled to enforce he/she is not discharged from liability on the note, and faces the danger of having to pay the true owner when that person produces proof of ownership of the note (see UCC 3-601 and 3-602). This potential double liability is especially applicable to the current mortgage debacle and the careless attitude surrounding mortgage documents including promissory notes and deeds of trust.
The Plaintiff must prove that they are a “person entitled to enforce an instrument” (UCC 3-501 A.R.S. 47-3501). A ‘person entitled to enforce an instrument” is defined in 3-501 as the “holder” of the instrument (one who takes through a series of valid indorsements – a negotiation) or someone having rights of a “holder” under 3-203(b)’s shelter rule. Therefore, the UCC and Arizona Law require that the Plaintiff must have taken through a series of valid indorsements. Only when a valid chain of indorsements have taken place has a negotiation taken place. Without negotiation there is no holder. The Plaintiff must show a series of valid indoresements and the complete chain to be allowed to enforce the note.
What if the note has been lost destroyed or otherwise is missing? The UCC in Arizona allows the Plaintiff to enforce the instrument in these situations but, A.R.S. 47-3309/UCC 3-309 still requires that they prove the right of payment. Nothing is presumed. The Plaintiff must show the validity of each transfer of the instrument from the original payee to the current Plaintiff, and explain how and why the note cannot be produced. Again, unless and until the Plaintiff can prove that they are entitled to enforce the note through a series of valid indorsements, section 3-310 suspends the obligation to pay.
Mortgages have been bought and sold by the thousands over the past few years. Banks and Lenders like the Plaintiff should not have purchased mortgage assets unless they had proof of good title to them. The law requires a series of checks on commercial transactions, including realty paper. If the Plaintiff wishes to take the Defendants home by way of foreclosure, the courts should make them prove they have the legal right under all applicable laws, not just some of them. These rules of law cited above from the UCC have been adopted in nearly all jurisdictions in the USA and should not be ignored by the courts. No doubt the borrowers owe the debt and the house is still the collateral, the law simply requires that the correct entity takes the collateral where it is legally appropriate. This is but one legal theory to think about.
The following is provided for reference purposes.
FAQ/Background to the UCC, Foreclosures and Mortgages.
What is foreclosure? Foreclosure is the legal process by which an owner’s right to a property is terminated. Because it is a “legal” process your rights to a property may only be terminated if the proper rules and laws apply, including the UCC (Title 47 of the Arizona Revised Statutes).
What is the UCC? The UCC is short for the Uniform Commercial Code. Arizona’s version of the UCC is found under Title 47 of the Arizona Revised Statutes. The UCC governs commercial transactions including mortgages. A.R.S 47-1103 states that the UCC is to be “applied liberally” and that the purpose of the UCC is to “simplify, clarify and modernize the law governing commercial transactions”.
Does the UCC apply to my mortgage? PERHAPS, Yes. The UCC applies to commercial transactions. The Arizona Court of Appeals further answered this question in holding that “realty paper” falls under the UCC rules. See Rodney v. Arizona Bank, 172 Ariz. 221, 836 P.2d 434 (1992).
What is ‘realty paper”? Realty Paper refers to the documents involved in securing & collateralizing real property (real estate). Arizona Courts have held that “realty paper” such as a Deed of Trust falls under the UCC rules.
Who is MERS, and why are they on my loan? MERS is short for the Mortgage Electronic Registration System. It is a nationwide company that many mortgagees (people who own your mortgage) assign the mortgage for the purpose of making transfers to other banks/lenders easy. MERS own website states that the law of promissory notes must be complied with and that they are only telling the world who is entitled to foreclose on your home. Mortgages are bought and sold all the time and MERS is paid to keep the track of who is entitled to what. MERS itself has no right to foreclose or enforce the mortgage. Only a “person entitled to enforce” (PETE) the mortgage note may do that.
What is a Note? A note is a written promise by one party (the maker) to pay money to another party (the payee) or the bearer. A Promissory Note is slightly different because it is a written promise, signed by the maker, to pay absolutely and in any event a certain sum of money either to, or to the order of, the bearer or a designated person.
What is a Deed of Trust? A Deed of Trust is a deed (or written instrument) conveying title to real property to a trustee as security until the grantor repays a loan.
What is the difference between a Note and a Mortgage? As discussed above, a note is a written promise to pay. A mortgage itself is not a debt; it is the security interest in the collateral. In law, the phrase is often used, “security follows the debt”. This means that the mortgage (security) travels along with the promissory note (the debt). This also means that whoever has possession of the promissory note is the ONLY entity that can enforce the mortgage. IMPORTANT: The actual note must be produced, not just a copy.
What’s a “PETE”? PETE is short for “person entitled to enforce”. Under Arizona Law, a PETE is the holder of the instrument. Holder is a person who has legal possession of the note and is entitled to enforce it. A Holder only becomes a PETE if they hold they received the note through a series of valid indorsements. See A.R.S. 47-3301, 47-3201 & 47-3204.
What’s the Shelter Rule? The Shelter Rule is a rule under the UCC which allows the buyer to take shelter in the rights of the seller. In fact, the shelter rule acts to pass on the original holder’s rights completely down the chain as long as the current possessor of the note can prove the validity of all previous transfers from the beginning. See A.R.S. 47-3203(b) & (c) & Official Comment 2 of the UCC.
Remember, to become a holder there must be negotiation. A.R.S. 47-3201(B) requires both possession of the instrument (not just a copy) and its indorsement.
What does Default mean? Default is the omission or failure to perform a legal or contractual duty; esp., the failure to pay a debt when due.
What is an Instrument? An instrument is a written legal document that defines rights, duties, entitlement, or liabilities, such as a contract, will, promissory note, or share certificate. In Commercial Law it is an unconditional promise or order to pay a fixed amount of money, with or without interest or other fixed charges described in the promise or order. See A.R.S. 47-3104.
What is an Indorsement? An indorsement is the placing of a signature, sometimes with an additional notation, on the back of a negotiable instrument to transfer or guarantee the instrument or to acknowledge payment.
What if I suspect fraud? Unfortunately, there is fraud in many foreclosure cases. Phony documents, forged signatures, false affidavits of lost instruments are all forms of fraud. Those guilty of fraud cannot enforce their rights to a contract and can lose their rights to foreclose.
*Definitions were obtained from A.R.S. Title 4, A.R.S. Title 33, & Black’s Law Dictionary.