By: masaccio Wednesday October 20, 2010
The foreclosure fraud debacle raises a number of legal issues, ranging from perjury to consumer fraud. All of the issues revolve around one central legal issue. Who has the right to foreclose? I address the basic law, and then offer an example to explain why it matters.
Introduction
Let’s assume a couple buys a house with a down payment a loan from Argent Mortgage Co. The borrowing is evidenced by a promissory note, and the promissory note is secured by a mortgage on the home. State law governs promissory notes. Article 3 of the Uniform Commercial Code is the basic law. Every state has adopted Article 3, some with minor variations. The citations vary from state to state, but generally track the UCC sections. References are to model UCC provisions. This link gives you Article 3.
Basic Negotiable Instrument Law
§ 3-301 says that the person entitled to enforce a note is (a)(1) the holder, (a)(2) a nonholder in possession of the note who has the rights of a holder, or (a)(3) a person not in possession but who has the right to enforce because the note is missing (§3-309) or another section which isn’t likely to apply.
§ 3-201 defines negotiation as transfer of possession to a person other than the issuer of the note. The transferee is a holder. If a note is payable to a specific person, negotiation requires both transfer of possession and indorsement by the named person. If the instrument is payable to bearer, transfer of possession is enough.
A note is payable to bearer if it is made out to bearer, or if it is indorsed in blank. In our example, the couple signed the note, making it payable to Argent Mortgage Co. When Argent Mortgage Co. transfers the note, it might endorse it as follows:
Pay to Bank of America, N.A.
Argent Mortgage Co.
By:___________________
Its: [title of authorized person]
In this example, Bank of America is an identified payee, so to transfer the note, Bank of America has to indorse the note as well as transfer possession.
The note could have been endorsed:
Pay to:____________________
Argent Mortgage Co.
By:_____________________
Its: [title of authorized person]
That is an indorsement in blank, and the note can be negotiated by transfer of possession.
With this background, we can see who is entitled to enforce the note. In the first case, only Bank of America can enforce the note. In the second case, any person in possession of the note can enforce it.
That covers the provisions of § 3-301(a)(1).
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