NscoTIATNG THtr, AMERTcAN DnseuA Crittcall-ook atthe Role of Negotiability

in the Foreclosure Cnsts

by Thomas Erskine lce

ontemporary negotiable instruments law de-veloped hundreds of years ago, before everyimportant institution of the modern financiaiworld: incorporated banks, business corpora-

tions, developed capital markets, global monetary sys-tems, electronic transfers, and even paper currency.l Itis counterintuitive that this ancient law of negotiableinstruments would have any relevance to one of theworld's most sophisticated, cutting-edge tools of highfinance - the pooling and securitization of mortgageloans. Yet, the courts routinely look to such law toresolve a foreclosure crisis spawned by the collapse ofmortgage-backed securitization, a process which is asstrained as trying to decide First Amendment issuesusing cases pre-dating the Constitution. It is all themore exttaordinary that, just as the nation begins toawaken to "robo-signing" and other such pervasive andmethodical abuses of the court systems, judges shouldfind themselves slavishly compelled to apply a body oflaw shaped (and then abandoned) by the very authorsof such scandals: the financial institutions.

This article explores the historical underpinningsof negotiability and whether the evidentiary shortcutthat negotiability appears to offer as a means of prov-ing a plaintiff's standing to sue can or should be ap-plied in the context ofthe foreclosure cases facing thecourts today, Examination of the original purposes ofnegotiability, as weli as recent changes to the UniformCommercial Code, leads to the conclusion that merepossession of a negotiable instrument (the promissorynote) is insufficient to enforce a mortgage. The possessor

or "holder" must prove ownership of the instrument - a

complete chain of title from the original creditor - toinvoke the equitable remedy of foreclosure.

The Private Currency of MerchantsThe concept of negotiability is rooted in European

mercantile customs, which, as of the 17th century, had

developed a means of paying for goods, principally ininternational transactions, using documents called"bills of exchange."2 Similar to a cashier's check today,the bill of exchange was an instrument representing anamount of money that the buyer had deposited with a

third party. The bill instructed a fourth party, typicallylocated near the foreign seller of the goods, to pay theseller upon presentment of the bill. Bills of exchangeoffered the advantage ofbeing easier and safer to trans-port than precious metals or other valuables.3

As the use of these instruments became more com-mon, merchants developed the practice of transferringthe bills among themselves by endorsement.a Ratherthan presenting the bill to the local "fourth party" forpayment, the payee would endorse the bill to anothermerchant as payment for goods or services.s Such in-struments were often transferred dozens of times andserved the function that currency serves today.6

This practice of transferring the bill to additional par-ties by way of "negotiation" and "endorsement" was laterextended to promissory notes - two-party debt instru-ments.T As the courts came to recognize and enforce thisendorsement-and-delivery method of transfer, documents

that could be circulated in this manner came to be known as

"negotiable" instruments. The "negotiability" of the instru-ment typically referred to its degree of "transferability'"8

THE FLORIDA BAR JOURNAUDECEMBER 201 2 9

Holder in Due Course DoctrineThe "holder in due course" doctrine

is said to be, not only the primaryfeature of negotiable instrumentlaw, but "the most important prin-ciple in the whole law of bills andnotes."s This doctrine grew out of aninformation vacuum typical in the

instantaneous transfers of moneyand information about transactions.Negotiability had become anach-ronistic and unnecessary.r5 Never-theless, in 1952, the already anti-quated holder in due course ruleswere codified into Article 3 of theUniform Commercial Code (UCC).rG

age before computersand worldwide com-munications. In thosedays, the more timesa particular instru-ment was transfened,the more attenuatedthe later recipients'knowledge about theoriginal transactionbecame. Merchants,therefore, developedrules of negotiabilityto enhance the liquid-ity of the instrumentsby reducing the needfor information abouttransactions earlier inthe chain.lo The mostimportant of thesewas the "holder in duecourse" status, whichsimply disallowedmost claims or de-fenses that might un-dermine the value ofthe instrument.ll Theholder in due coursewas a "good faith pur-chas er"-someonewho paid value forthe document with-out knowledge of anydefect in either theseller's right to sell itor in the transactionthat created it.12 Be-cause the holder in due course was a As a result, the "iaw for clippertransferee that could receive greater ships and their exotic cargoes fromrights than those of the transferor, the the Indies"17 became frozen in timedoctrine was a remarkable departure and, rightly or wrongly, continues tofrom basic common iaw principles influence court decisions today.18that governed ordinary contracts,13but one necessary for the documents Evolving from Article 3to function as a currency substitute. Negotiability to Article 9

Over time, governments began to Sales as a Means to Transferissue paper currency,la supplanting Mortgage Loansthe need for the unfettered trans- Article 3 has been criticized as

ferability of bills and notes. New having been drafted by a processtechnology revolutionized payment that rvas "captured by bank at-systems by creating the means for torneys" such that the end result

1O THE FLORIDABAR JOURNAUDECEMBER 2012

was "a pro-bank statute."le Yet, asthe technology of payment systemscontinued to advance, the bankingindustry itself became dissatis-fied with Article 3 as a means oftransfer, particularly with respectto mortgage loans. The necessityof physical delivery of the docu-

mentation became anuisance that hin-dered, rather thanexpedited transfer-abiiity.2o

In response, theindustry orchestrat-ed a change to Article9 of the UCC in 1998that brought mort-gage loans within itspurview.2l Specifical-ly designed to facili-tate securitization,22not only did the newArticle 9 provide forautomatic perfectionof the buyer's inter-est upon sale, evenwithout the transferofpossession,2s but itofficially sanctionedthe practice of usingthird-party agents asdocument custodiansto "possess" the in-struments.2a Whenthe transferor andtransferee used thesame document cus-todian, the transfersof possession couldtake place withoutphysically movingthe documents; thecustodian could sim-ply acknorvledge the

change.2t' Most importantly, re-vised Article 9 applied regardlessof whether the promissory noteswere actually negotiable.26 Article9, therefore, now provides all thebenefits of negotiability, such as

transferability and liquidity, with-out the outdated custom of trans-porting the note and mortgage.2T

lnfusion of the Concept of"Holder" into Foreclosure

In the early days of the foreclo-sure crisis, the allegations ofstand-

ing in complaints fiied in Floridamerely tracked the language ofthe foreclosure form approved bythe Florida Supreme Court - thatthe plaintiff bank "owns and holdsthe note and mortgage."28 Overtime, the complaints have evolvedsuch that the word "holder" hasbeen substituted for the "owns andholds" language approved by theFlorida Supreme Court.2e Replacingthe traditional language with theunrelated Article 3 term "holder"30permits the bank to argue that merepossession of a document that itsattorney asserts to be an originalnote endorsed in blank (or speciallyendorsed to the plaintiffbank) con-clusively establishes its standing toforeclose.

Thus, despite the shift towardArticle 9 as the real-world mecha-nism for transferring loans, Article3 negotiability has become thedominant legal theory argued byplaintiffs in support oftheir stand-ing to bring foreclosure actions. Inthe courtroom, Article 3 serves as

the basis for arguing an evidentiaryshortcut which not only discardsownership of the loan as an elementof proof, but which circumventsbasic foundational evidence forthe authenticity of the note itself.By claiming that promissory notesare "self-authenticating" under theUCC,31 standing is now routinely,albeit incorrectly,32 established ona single unsworn representationby plaintiff's counsel that the docu-ment presented is the original note.

Can a Thief Really Enforce aNote?

The key to this evidentiary short-cut, this indifference to who actu-aliy owns the loan, is the idea that,under Article 3, mere possession,even wrongful possession, of abearer instrument confers an unas-sailable right of enforcement. Thisargument holds that the court neednot inquire into the true ownershipof the nofe because' even if thebank's possession is shown to beillegitimate, the matter does not

concern the borrower (or the court),but rather, concerns only the trueowner.33

The notion that a borrower is pre-cluded from challenging a holder'sright of enforcement is often ex-pressed apothegmatically as : "Evena thiefis entitled to enforce a bearerinstrument."3a Needless to say, theassertion that a thiefcan obtain orpass title to stolen property fliesin the face of common law.35 It alsooffends the commonsense of theaverage citizen to say that a courtof law has no choice but to employits constitutionally granted powerson behalf of those with no legitimateright to the note so that they mayprofit from what must surely be acrime. Indeed, under negotiable in-strument law prior to Article 3, onlya holder in due course was immuneto the defense of theft, not a mereholder.36 Even the claimed statusof holder in due course could beimpeached with evidence that thenote was not acquired in good faith,at which time the burden "shifted

It's a jungle out there! Getting your professlonal liability policy shouldn't

be complicated- At GilsbarPRO, we take you fom initial premiunr quote

through poliry delivery in most cases within one business day. We

provide seamless service fom quote to coverage with a dedicated staff

of professionals who focus on lawyers malpractice insurance.

CNA is the largest underwriter of iegal malpractie cowrage in tie U.S.

GilsbarPRO is the exclusive administrator {or the CNA Lawyers

Professional Uability Program in the State of Florida.

Take it easy.Make the switdr today.

800.906, I 654 . gilsbarpro.com

#G'LSBARPRO CHAEIJJtrEIr+ffill:*rbfHtS'fE\lrlll':-'lHl

OG or ffie o{ tu ftA ;n*6re cffips rcvii€ e rd6 rod/6 *M.s &r6ed.Ihe ;nfo iiff Elntsd€dta rd a g€n€€l ('@#fv iJl@rk lW sly CNA ; a

e*d rgd€oart d CM Fna&l Crydb Csyishr {c} 412 CNA Al dsh 'r:M

BI

THE FLORIDA BAB JOURNAUDECEMBER 201 2 11

orrowers inforeclosure

are, for the mostpart, consumerswho had no bar-gaining powerwith which to in-fluence a singleterm in t}te noteand mortgagethey signed.Most lackedeven an under-standing of the terms of those documents,

thief to produce evidence of his orher authority to enforce the note.

This labyrinth of seeming self-contradictions in the UCC can bealigned by an interpretation ofArticle 3 that is consistent withprior negotiable instrument 1aw.Specifically, the statutory declara-tion that a holder may enforce astolen or found instrument shouldbe construed as a description ofwhat constitutes a prima faciecase. Rather than a bar to evidencethat the instrument is stolen, itmerely creates a presumption thattemporarily shifts the burden ofintroducing evidence of ownershipto the defendant.

Protecting Consumers fromNegotiability

Borrowers in foreclosure are, forthe most part, consumers who hadno bargaining power with which toinfluence a single term in the noteand mortgage they signed. Mostlacked even an understanding ofthe terms of those documents,much less, the destructive effect ofnegotiability on their defenses. Inthe context of credit transaetionsinvolving goods and services, thefederal government took steps in7977 to limit the negative effectsof negotiability on consumers.a8Specifically, the Federal Trade Com-mission promulgated a regulationentitled "Preservation of consurn-ers'claims and defenses, unfair ordeceptive acts or practices," alsoknown as the "Holder Rule," whichrequires a notice on all consumercredit contracts that the holderwould be subject to all claims anddefenses that the consumer couldassert against the seller of goodsor services.ae

In Tinker u. De Maria PorscheAudi, lnc.,459 So. 2d 487 (Fla. 3dDCA 1984), the court held that "theeffect of the federal lHolder Rule] isto defeat the holder in due coursestatus of the assignee institutionallender, thus, removing the lender'sinsulation from claims and defenseswhich could be asserted against theseller by the consumer."so The FTCrecently reaffirmed the rule, issuingan opinion letter that condemned

to the holder to prove that he tookit free from defect or infirmity."3?

Yet, $3.301 ofthe current versionof the UCC states: 'A person maybe a person entitled to enforce theinstrument even though the personis not the owner of the instrumentor is in wrongful possession of theinstrument."ss The drafters' com-ments to Article 3 state withoutreservation that a "thief" or a"finder" may become a holder.seStill, after the adoption of the UCC,there was considerable debate as towhether its drafters meant to grantsuch rights to thieves.ao At leastone commentator has labeled thisresult an "authorization anomaly"and questioned whether any courtwill "accept such a daring theory"that a thiefis entitled. to enforce aninstrument because it is an "obviousabuse of the term 'entitlement."'41

Even the text of the UCC itselfappears strangely ambivalenton the issue. It declares that onebecomes a "holder" through "nego-tiation," which in turn is definedas a "transfer of possession [of aninstrumentl whether voluntary orinvoluntary."a2 Yet, a "transfer" ofan instrument is described as adelivery - a "voluntary transfer of

possession"as - of that instrument"for the purpose of giving the per-son receiving delivery the right toenforce the instrument."4a Becauseno one intends to give a thief, oreven a finder, the right to enforcean instrument, the two provisionsappear irreconcilable.

Moreover, UCC $3.602a5 providesthat payment made to a personentitled to enforce the instrument(which presumably includes athiefl, discharges the borrower, un-less the borrower knows "that theinstrument is a stolen instrumentand pays a person it knows is inwrongful possession of the instru-ment." Coupled with the thief'sright of enforcement, this impliesthat the borrower can be compelledto pay an admitted thief, yet willstill be liable to the rightful ownerofthe note.

Similarly, UCC g3-501(b)(2)46provides that, upon demand forpayment, the borrower may askthat the person seeking paymentgive "reasonable identification" andif the demand is made on behalf ofsomeone else, "reasonable evidenceof authority to do so."a? If even athiefis entitled to enforce the note,it seems inconsistent to require the

12 THE FLORIDABAR JOURNAUDECEMBEB 2012

court decisions, such as one in Flor-ida,51 which have barred consumersfrom affirmative recoveries underthe Holder Rule unless rescissionis warranted.s2

It is against this backdrop thatthe courts are being asked to makedecisions in foreclosure actionsbased on a presumed negotiabilityof mortgage notes, often with noanalysis as to whether Article 3 iseven applicable. Given the generalobsolescence of negotiability andthe banking industry's own rejec-tion ofArticle 3 in favor ofArticle 9,the courts should not only analyzewhether the notes are negotiable,but should employ a healthy skepti-cism when doing so.

Negotiability of ModernMortgage Notes

It is perplexing that modernjurists often assume that all mort-gage-backed promissory notes arenegotiable, when the assumptionruns counter to the historicallyessential requirement that a nego-tiable instrument be simple, uncon-ditional, and without contingencies

- 6((s6g1ls1 without luggage."53 Inreality, a mortgage note is ladenwith the mortgage itself - a verita-ble steamer trunk full of additionalrights and obligations that must ac-company the note on all its travels.The Permanent Editorial Board forthe Uniform Commercial Code hasitself warned that "[ijt should notbe assumed that all mortgage notesare negotiable instruments."sa

The more intuitive stance is thattoday's complex mortgage loantransactions produce lengthy in-terrelated documents that do notqualify as negotiable instruments.Indeed, the banking industry'sabandonment of Article 3 in favorofArticle 9 transfers suggests therewould be little reason for the indus-try to ensure that the notes it draftsfor loans intended for securitizationwould comply with all the rules ofnegotiability.

Examination of the most com-monly used form for the mortgageIoan note, the "Fannie Mae/FreddieMac Uniform Instrument Note" or"{JI Note,";; supports the conclu-

sion that negotiability is not at theforefront of the drafters' objectives.Fifteen years ago, one commenta-tor argued that that the UI Notedoes not meet the requirements ofnegotiability because it containsan undertaking in addition to thepayment of money, which is forbid-den by UCC Article 3-104(a)(3).56Specifically, he argued that therequirement that the borrowernotify the note holder in writingof any prepayment is just such anadditional undertaking.sT Courts,however, have recently begun toreject this argument, finding thatthe nonmonetary obligation is nota condition placed on the borrower'spromise to pay. Rather, the notifi-cation requirement conditions theexercise of the right of prepayment,a benefit of which the borrower isnot obliged to avail himself or her-self.s8 Still, there are other morecornpelling reasons to conclude thatmodern mortgage notes are not ne-gotiable.

lncorporation of MortgageTerms; Opting for SecurityOver Transferability

One of the well-settled rules ofnegotiability is that the instrumentcannot include obligations or condi-tions that cannot be determinedfrom the four corners of the noteitself.ss Thus, incorporating theterms of another document, such as

the mortgage, instantly destroys ne-gotiability.d0 Mere reference to themortgage without incorporating itsterms, however, has no effect uponnegotiability.6l

This rule has led to bizarre tight-rope walking by the banking indus-try attempting to integrate termsfrom the mortgage into the notewhile still maintaining negotiability.In Sims u. New Falls Corp.,37 So. 3d358 (Fla. 3d DCA 2010), for example,Fannie Mae and Freddie Mac werepermitted to explain their intentwith respect to the drafting of a note(a UI Note for a second mortgage is-sued in Georgia) and security deed

..1!:,'. Lrsii: LEWIS

%i+',,?il?Hr^li^ ' :;;,;;;'r:;",;:

*

:ttxtJ'E ui Uur i'*:! Ft

And they refer work to us. They know that when the work is done(and done well) we'll return their clients to them.

That's just who we are.

And, we've been doing it for more than 15 years.

Water. Real Estate. Health Care. Intellectual Property. Natural Resources.Legislative and Covernment Aifairs. And, more.

THE FLORIDA BAR JOURNAUDECEMBER 2012 .13

(equivalent to a mortgage). In thatcase, the term at issue was a choiceof law provision that appeared inthe mortgage, but not the note.Fannie and Freddie conceded thata conscious effort had been madenot to incorporate the term by ref-erence to the mortgage for fear itwould "destroy the negotiability ofpromissory notes and open all fore-closure actions to otherwise barredcollateral defenses."62 Still, wantingto have their cake and eat it, too,Fannie and Freddie maintained thatin a foreclosure action (as opposedto an action to enforce the note), thenote and the mortgage should "beconsidered together as an integratedcontract and that the choice of lawprovision in the [mortgage] wouldgovern the enforcement of the [n]ote."63 So, Slrzs reveals an importantbanking industry concession that, ina foreclosure context, its standardnote has a decidedly non-negotiablecharacteristic - it can effectivelyadopt terms outside its own fourcorners.

This desire to incorporate termsfrom the mortgage, without ap-pearing to, is most evident in $10of the UI Note. Here, Freddie andFannie begin by merely referenc-ing the mortgage, which, by itself,would have no effect on the note'snegotiability:In addition to the protections givento the Note Holder under this Note, aMortgage, Deed of Trust, or SecurityDeed (the'Security Instrument"), datedthe same date as this Note, protects theNote Holder from possible losses whichmight result if I do not keep the prorn-ises which I make in this Note.

The drafters go on, however, tostate that the mortgage contains

conditions under which the bor-rower may be required to make im-mediate payment - in other words,conditions that affect paymentwhich are not contained in the noteitself, "That Security Instrumentdescribes how and under what con-ditions I may be required to makeimmediate payment in full of allamounts I owe under this Note."

Section 10 goes on to describe"some of those conditions" (empha-sis added). The drafters'use oftheword "someo unmistakably commu-nicates that the mortgage containsadditional promises of the borrowerwith respect to the loan that do notappear within the four corners ofthe note. Those additional prom-ises include 1) payment of taxes;2)payment of casualty insurance; 3)payment of mortgage insurance; 4)payment of community associationfees and assessments; 5) furnishingthe lender with notices of amountsdue for taxes, assessments, andcommunity association charges; and6) furnishing the lender with re-ceipts evidencing payments of taxes,assessments, and community asso-ciation charges.Ga In addition, theborrower promises to occupy anduse the residence as the borrower'sprimary residence for a period of atleast one year.6s The borrower alsoagrees to refrain from destroying,damaging, or impairing the prop-erty and repairing the property ifso damaged.66

Moreover, $10 of the UI Note re-cites verbatim language from $18of the UI Mortgage6T that permitsacceleration upon alienation of thecollateral real estate. In doing so, itincorporates by reference the notice

provisions of $15 of the mortgage,without ever describing the specif-ics of those provisions (emphasisadded):

If Lender exercises this option [to ac-celerate upon sale or transfer of theproperty to a third partyl, Lender shallgive Borrower notice of acceleration. Thenotice shall provide a period ofnot lessthan 30 days from the date the noticeis given in accordance utith Section 15within which Borrower must pay allsums secured by this Security Instru-ment. If Borrower fails to pay thesesums prior to the expiration of this pe-riod, Lender may invoke any remediespermitted by this Security Instrumentwithout further notice or demand onBorrower.

One example of an additionalpromise made by the borrowerin $15 of the UI Mortgage is to"promptly notify Lender of Bor-rower's change of address." Underthe UI Note, the borrower is notobligated to provide a change ofaddress.6s

Another complication is thatthe UI Mortgage defines the term"borrowero as the "mortgagor."To ensure that the lien appliesequally to anyone on the deed,such as nonborrowing spouses orbusiness partners, the practice isto include the names of propertyowners who borrowed no money asa borrower (and, thus, mortgagor)on the mortgage. The borrower onthe UI Note, however, is merelythe person obligated to repay thedebt. As a result, the borrower onthe note will often be one person,while the borrower on the mortgagewill often be more than one. Notonly does this raise the question ofwhich borrower is being referred toin $10 of the UI Note (that quotes$18 of the UI Mortgage), but sug-gests that the note is incorporatingpromises by strangers to the note

- parties whose identity cannot beascertained without looking at themortgage.

In the end, despite the drafters'studious avoidance of the word"incorporate," it cannot be disputedthat the intended effect was toincorporate the terms of the mort-gage, rather than merely referencethem. While it might be said thatthe careful wording is a passing

}ile Findthissins HcircA Bette-l Way

Reasonable, Non-Percentage Based Fees. A 97olo Success Rate.Results Guaranteed or No Charge.

iGSir:irtnirr1.800.663.2255

info@heirsearch-com

www.heirsearch.com rc[i]rL* e

14 THE FLORIDA BAR JOURNAUDECEMBEB 2012

nod to negotiability, Freddie andFannie have ultimately decidedthat negotiability must take a

back seat to the preservation andenforcement of the mortgage termsintended to protect the collateral.

Does the Mortgage Followthe Holder of the Note or theOwner?

Even if the court decides thata note is negotiable (and that theplaintiff bank is its holder), thebank's work in a foreclosure caseis only half done. Successfullyclaiming to be an Article 3 holderonly entitles the bank to a moneyjudgment on the note. It must nowprove that it is entitled to enforcethe mortgage.6s For this, the fore-closing bank turns to the commonlaw rule that the "mortgage followsthe note."?o Thus, so the syllogismgoes, no document is needed toshow that the plaintiff is entitled toenforce the mortgage because thatright was transferred to it alongwith the note itself.?r

Notably, the most often citedcase for this proposition, Johns u.

Gillian, 184 So. 140 (Fla. 1938),actually held that, when thereis no written assignment of themortgage, the plaintiff "wouldbe entitled to foreclose in equityupon proof of his purchase of thedebt."72 But because even a thiefcan be a holder entitled to enforeea negotiable instrument, merepresentment of the original note isnot evidence ofan actual purchaseof that note. The "mortgage followsthe note" concept, therefore, is notthe evidentiary shortcut it is pro-fessed to be, but just the opposite.It requires proofofpurchase ofthenote, something that the Article 3

holder was able to skip on the wayto enforcing just the note.

Accordingly, when the foreclosingbank is not the original lender, itmust prove a purchase and an in-tent to transfer the mortgage withthe note. Such proof of ownershipof the loan brings the analysisinto harmony with the fact thatforeclosure is an equitable action.?3As such, plaintiffs with "uncleanhands," such as those in "wrongful

possession" of the note, may nottake a home as payment for thedebt.Ta Requiring a greater show-ing of entitlement to foreclose thanthat to obtain a money judgment,i.e., greater than mere possessionof a note, is also entirely consistentwith the public's interest in pro-tecting homeownership as reflectedin Florida's Constitution.Ts

Even if the additional proofrequirement of Johns were to be

ignored, since an Article 3 holder ofthe note need not be its owner, theabstract claim by a holder that the"mortgage follows the note" leadsthe court inexorably to the questionof whether it follows the owner ofthe note or the holder of the note.Ifthe transfer is one that occurs byoperation of"equity," then it strainslogic to suggest that equity wouldstrip the true owner of the right tocollect upon the collateral securing

5,OOO YEARS OF

DIVINELY

'An extraordinary -\experience!...Exquisitely beautlful."

- Cate BlanchettAcade ny Awa rd - w inn i ng actress

"So inspiring...I may have found some ideas for the next /vdtar movie."

- Robert Stromberg

FT. TAUDERDALEJANUARY 11-13

BROWARDCE}ITER

Phone: 888-974-3698954-462-0222

0nline: Ticketingbox.comBrowardCenter.org

BUY NOW FOR PREMIUM SEAT SETECTION

ORTANDO

JANUARY 15_17

BOB CARR CEI.ITRE

Phone: 800-745-3000888-884-6707

0nline: Ticketmaster.com

FLShows.com

ShenYun20l3.org

INSPIRIDCULTURE

HEN YUN. For Chinese,

the words evoke a

sense of wonder, magic,

and the divine. To audiences

who have seen it, they recall

the experience of a lifetime-a moment so powerfully

beautiful it touches the soul.

Discover the glory of a fan-

tastically rich culture, that

of classical China, brought

to life through brilliantly

choreographed dance and

mesmerizing, all-original

orchestral compositions.

Magnificently costumed

dancers-the world's elite-move in poetic arrangements

that evoke pastoral beauty,

imperial drama, and the glory

of an ancient civilization. This

season, discover what art was

meant to be. Discover Shen

Yun.

JACKSONVILLEJANUARY 29-30

TII'IES.UNION CENTER

Phone: 800-745-3000888-884-6747

0nline: Ticketmaster.com

THE FLORIDABAR JOURNAUDECEMBER 2012 15

the note and give that right to apotential thief or finder.

Happily, the court need not pon-der too long on the puzzle becausethe very architecture of the UCCanswers the question. The commonIaw concept that the lien faith-fully tags along after the note isfound in Article 9,?6 not Article 3.The UCC supplants common 1aw77

and the court must presume thatthe legislature, in adopting theseprovisions, intended that mort-gages follow Article 9 owners, notArticle 3 holders. Moreover, if thereis any conflict between Article 9and Article 3, the rules in Article 9govern.78 And finally, while posses-sion is a means of perfection underArticle 9, enforcement of the secu-rity interest requires proof thatthe buyer gave value to purchasethe mortgage loan from a sellerentitled to sell it.7e

As a result, enforcement of amortgage transferred under Ar-ticle 9 (i.e. by following the note)requires proofofa sale,just as wasrequired by common law underJohns. And because the foreclosingbank must show that it obtainedthe mortgage loan from a sellerauthorized to sell it, the bank mustultimately prove the sale at each

link in the chain of ownership. Thebelief that an entity in wrongfulpossession of a note may forecloseon a home is firmly refuted by Arti-cle 9, and cases that hold that merepresentment of a note endorsedto the plaintiff is alone sufficientto prove standing to foreclose aremisguided.

Care should be taken in therush to extricate ourselves fromthe current mortgage foreclosurecrisis not to elevate negotiabilitybeyond the narrow mercantile mi-lieu from which it developed, wheremerchants transacted business onan equal footing. In the foreclosuresetting, both Article 9 and thecommon lalv require proof of thechain of title to the note, makingArticle 3 negotiability irrelevant tothe determination of standing.E

I Jluns SrpvrN Rocons, THn ENo orNB-corrABLE Iusrnultrxrs, BRrNcrNc Payl,tor.JrSvsrelrs Larv Our or rne Pesr 20 (OxfordUniversity Press 2012) [hereinafterRocnns, Tne ENo or NscorreeI,p lNsrnu-nnNrsl; Neil B. Cohen, The CalamitousLaLo of Notes, 68 Onio Sr. L. J. 161,161-62 Q007).

z Edward Jenks, The Early Historyof Negotiable Instruments, 9 L.Q.R.70 (7893); Grant GiImore, The GoodFaith Purchase ldea and the UniformCommercial Code: Confessions of a Re-pentant Draftsntan,l5 Groncra L. Rnv.

605, 607 (1981); Jalres Srrvnw RocnRs,Tne Eanr,y Hrsrony or rnr Lew on Btr-r-seuo Noros, A Sruov oF rHE ORrctlisor ANcr,o-AlrERrcAN CouneRcrar- Lew(Cambridge University Press 1995); AliKhan, A Theoretical Analysis of Pay-ntent Systems 60 S.C.L. Rsv. 426, 434,n. 45 (2008).

3 Kurt Eggert, Held. Up in Due Course:Codification and the Victory of FormOuer Intent in Negotiable InstrumentLau,35 Cnntcu'roN L. Rrv. 363,377-'18Q002).

a Id. at 390-91; Giimore, The GoodFaith Purchase ldea at 613.

5 Ronald J. Mann, Searching for Ne-gotiability in Payment and Credit S.ys-tems,44 UCLA L. Rnv. 951, 957 (1997).

6 RocrRs, Tsr Ervo oF Npcorrnel,n IN-srRUMENrs at 71. ("What gave rise tothe iaw of bilis and notes in general,and negotiability in particular, wasthe circumstance that privately issuedinstruments circulated as a form ofcur-rency substitute."); see also id. at 93.

7 Eggert, Held Up in Due Course at388-389.

8 Rocens, Tun ENo or Nroorreat-o IN-srnulrrNrs at 8.

s Rocrns, Tsn ENo ol NrcorrenleINsrnunpNrs at 22 (quoting Wrr,lrauEvrRnrr Bnrtrorv, Haroeoox oF THE LAwor Law op Brlr-s eNo Norns 25 (1943)J.r0 Mann, Seorching for Negotiability in

Payment and Credit Systems at 95?-958.\t Id. at 958.12 Gilmore, The Good Faith Purchase

Idea at 605,607 (1981).13 Curtis Nyquist, A Spectrum Theory

of Negotiability, 78 Mena. L. Rev. 897,899-100 (1995).la Rocrns, THr ENo oF NEcoTiABLE IN-

srnurrENrs at32-35.

16 THE FLORIDA BAR JOURNAUDECEMBER 2012

15 Id. at 71,93.16 Gregory Maggs, Determining the

Rights and Liabilities of the Remitterof a Negotiable Instrttment: A TheoryApplied to Some Unsettled Questions,36 B.C.L. Rnv. 619, 626 (1995).

1? Grant Gilmore, Formalism and theLau of Negotiable Instruments, 13CnnrcstoN L. Rnv. 44L,448 (1979).t8 Id. aL 461 (Article 3 is "a museum

of antiquities - a treasure housecrammed fuli of ancient artifacts whoseuse and function have long since beenforgotten.").ls Allen R. Kamp, Uptown Act: A

History of the Uniform CommercialCode: 1940-49, 51 SMU L. Rnv. 275,346 (1998); Frederick K. Beutel, TheProposed Uniform [?] Commercial CodeShould Not Be Adopted,6l Yelr L. J.334,362-63 (1952) (calling the UCC a"Lawyers and Bankers ReliefAct" andrailing against what he called a "se11-out" of the American Law Institute andthe Commission of Uniform Laws to thebanking lobby).

20 Dale A. Whitman, Ilow Negotiabilityhas Fouled Up the Secondary MortgageMarket, and What to Do About It, 37Pnpp. L. REr'. 737, 740 (20LA) ("[N]ego-tiability requires that, for every loansold on the secondary market, the origi-nal promissory note must be deliveredto the purchaser. In a national or globalmarket, this requirement is extremelyinefficient and inconvenient, and inrecent years, has been widely ignored,much to the detriment of mortgagepurchasers."); see also Mann, Searchingfor Negotiability in Payment and CreditSystems at 961.2r Dale Whitman,Transfers of Mortgage

Notes under New Article 9, auailablectt http: / / d.irt. umkc.edu/files/newart9i.htm. These changes were enacted inFlorida in 2001, effective 2002, Fu.Srar. $$679.1011-.709 (2072). Theindustry has also advocated a shiftto paperless eNotes. .See ElectronicSignatures in Global and NationalCommerce Act, 15 U.S.C. $7001 ef seq.(2O12); Uniform Electronic TransactionAct adopted by the National Conferenceof Commissionels on Uniform StateLaws in 1999 (adopted in Florida in2000, Fra. Srer. $668.50 (2011)); CaseClosed, eNotes Are Legal, An Analysisof eNote Enforceability Nationtoide, arvhite paper jointly prepared by Mort-gage Industry Standards lVlaintenanceOrganization (MISMO), the ElectronicSignature and Records Association(ESRA), and the American Land TitleAssociation (ALTA), auailable at http://wwrv. mo rtgageb anke rs. org/files/Re-sourceCenter / emortgage/ eNote White-Paper.pdf).

22 Steven Schwarcz, The Impact ofSecuritization of Reuised UCC Articl.e9, 74 Cnrcaco-Ke:vr L. Rer'. 947 (1999);Whitman, Transfers of Mortgage Notesunder New Article I (appatent purposeof change was to insulate issuers ofmortgage-backed securities from at-tacks by bankruptcy trustees "without

the bother of taking physical posses-sion ofthe notes in question, a processthat they often consider irksome");H. Bruce Bernstein, Commercial Fi-nance Association: Summary of theUniform Contmercial Code ReuisedArticle 9, auailable al https://rvww.cfa.eom/erv eb/DynamicPage - a spx? Site=cfa&WebKey=9d83ef78-8 268 - 4 aae -95el-7f4085764e46 (revised Article 9facilitated mortgage-backed securiti-zation); David Peterson, Cracking theMortgage Assignment Shell Game,85Fre. B. J. 11, 12 (Nov. 2011) (revisions toArticie 9 addressed the needs of banksin the securitization chain by treatingmortgages as personal property thatcould be transferred without regard tothe real estate records).

23 Peterson, Cracking the Mortgage As-signment Shell Game at 12.

2a See Fre. Srer. $679.3131(3) Q0l2).25 Id.26 RrpoRr oF THE PERITANENT EDrroRrAL

Boeno loR rHe Uxrronlt Coltntnnct.crCoor, Appr,rcArroN oF rnn UNrponlrCotrlrrncral Colo ro Srlncrro IssunsRnr-ertxc ro MoRTGAGE Nores 8 (Ameri-can Law Institute and the NationalConference of Commissioners on Uni-form State Larvs 2011)lhereinafter PEBReponrl.

'?? See Mann, Searching for Negotiabilityin Payntent and Credit Systents at 969.

25 Fle. R. Cn'. P. Form 1.944.

2e The typical standing allegationis now that the plaintiff bank is the"hoider of the [n]ote and the fmlortgageand/or is entitled to enforce them."30 The rvord "holds" in the phrase "owns

and hoids" appears to be unrelated tothe Article 3 term "holder." A searchof Florida law reveals that the phrase"orvns and holds" is a ubiquitous legal-ism used in many contexts outside ofnegotiable instruments. Unlike theArticle 3 "holder," the person who "ownsand holds" an instrument is its owner.For example, when Fla. R. Crv. P. Form1.934 (Promissory Note Complaint) wasamended in 1980, the Florida SupremeCourt added the same words found inthe foreclosure form "the Plaintiff ownsand holds the note" specificaily "to showownership of the note." Committee Noteto Fre. R. Crv. P, Form 1.934 adopted byThe Florida Bar, In re Rules of CiuilProcedure,391 So. 2d 165 (Fla. 1980).

31 FLe.. Evro. Cooe $90.902 (8) (Self-Authentication). ,See Riggs u. AuroraLoan Seruices, LLC,36 So.3d 932 (Fla.4th DCA 2010).

32 The Florida evidence rule on self-authentieation of commercial papersis expressly limited to the "extentprovided in the Uniform CommercialCode." Drafted in the days before high-resolution color copiers, scanners, andprinters, horvever, the UCC speaks onlyto the authenticity of signatures on

NewJerseyReferrals

. Over 75 years experience

14 of our attorneys are certified byThe SupremeCourt of New Jersey as civil trial attorneys

Staff includes a physician and three RNs

,\ Pr0r,rssi t;r\-1 r" C0rit)()rt,\TI(r\

(e73) 635-s400Chatham 'Jersey City ' North Bergen ' Red Bank

www.niatty.com

Fees without work participation may be paid

in accordance to NewJersey Coure Rule l:39-6(d)

Bruun GoropnDENDONNELLY FRIED 6T

BEnxowrrz,Fonrn, PC

THE FLORIDA BAR JOURNAUDECEMBER 2012 17

documents, not the authenticity of thedocuments themselves.

J3 See Haruey u. Deutsche Bank Nat.Trust Co.,69 So. 3d 300, 304 (Fla. 4thDCA 2011) (even ifthe borrower couldprove that an assignment vi'as fraudu-lent, the dispute wouid be between theplaintiff and the actual ow'ner of thenote ).

2a See In re Veal,450 B.R. 897, 912, n.25 (B.A.P. 9th Cir. 2011) (noting thatthe ability of a thief to obtain paymenton bearer instruments has factored inIiterature and film storylines).

36 Battles u. State,602 So. 2d1287 (Fla.1992) (a thiefcannot convey good titleto stolen property, even to a good faithpurchaser); Alamo Rent-a-Car, Inc. u.

Williamson Cadillac Co., 613 So. 2d517, 518 (Fla. 3d DCA 1993) (a thiefcannot pass good title).

36 Antonacci v. Denner,149 So. 2d 52,53 (Fla. 3d DCA 1963).

31 Id. at 53-54. The Fifth District laternoted that there was a split of authorityunder prior common law whether theburden would be on the holder to provehis BFP status once the claimant hasintroduced evidence of ownership. Fld.& Cas. Co. of Neto Yorh u. Key BiscayneBanh, 50I F.zd 1322, 1325 n. 3 (5thCir. 1974). While the court deciined todecide rvhich party bears the eviden-tiary burden, the fact that evidence ofownership of the instrument could beintroduced against an alleged holder indue course was taken for granted.3s Fr-.r. Sr,rr. $673.3011(2012) (empha-

sis added).3e Comments of the drafters of Article

3, Fr,r. Srer. $673.2031 (2012) ('A ihieflvho steals a check payable to bearerbecomes the holder of the check anda person entitled to enforce it....");Fu. Sret. $673.2011 (2012) ("[I]f aninstrument is payable to bearer and itis stolen by Thiefor is found by FindeqThief or Finder becomes the holder ofthe instrument when possession is ob-tained. In this case there is an involun-tary transfer of possession that resultsin negotiation to Thief or Finder.").{o James J. White, Some Petty Com-

plaints About Article Three, 65 Mtcu. L.Rev. 1315 (L967); Robert F. T. Dugan, ANew Approach to "Holder" ConundrunsUnder Arti.cles 3 of the Uniform Com-mercial Code - A Reply to Professorwhite, !3 B.c.L. Rnr'. 1 (1971). Oneof the drafters of the UCC publiclylamented its exaltation of transfer-abilitv over property rights, as beingout of step with modern economicrealities. Grant Gilmore, The GoodFaith Purchase Idea and the UniformCommercial Code: Confessions of a Re-pentant Draftsman,lS Groncrn L. Rev.605 (1981).n' Khan, A Theoretical Analysis of Pay-

ment Systenzs at 2 n. 9 and 22.

'2 U.C.C. $3.201; Fl,r. Srer. $6?3.2011(2012).

43 U.C.C. $1.201(b)(15); Fr,r. Sr.rt.9671.20r(15) (2OrD.

'* U.C.C. $3.203; Fra. Srer. $673.2031

(2012). The requirement that therebe an intent to give the recipient theright to enforce the note is necessary toprevent a mere handler with temporaryconsensual possession, such as a mail-man, from becoming a "holder."

n5 Fre. Srer. $673.6021 (2012).{6 Fre. Srer. $673.5011 (2)(b)2. (2012).{'- Most modern promissory notes for

the purchase of homes state that theborrower waives the right to requirethe holder to make a formal demandfor payment. The ianguage does not,horvever, expressly waive the borrower'sright to require identification and evi-dence of authority to enforce the noteonce that demand for payment has beenmade.48 16 C.F.R. $433.2.re .Id. The Holder RuIe notice destroys

the negotiability ofany note upon rvhichit appears because its very presencemakes the promise to pay conditional.A revision to Article 3 restored limitednegotiability to notes containing thenotice, but withheid a key attribute. Itdeclared that no one may be a holderin due course of a note imprinted withthe notice. U.C.C. $3-106(d); Fla. Star.$673. 106 1(4) (2012); see also, Cohen, TheCalamitous Law of Notes aL 163-L64.'ro Tinker, 459 So. 2d at 492; see also

Florida Auto. Fin. Corp. u. Reyes,7I0So. 2d 216, 218 (Fla. 3d DCA 1998).5t Schatter u. Gen. Motors Acceptance

Corp.,819 So. 2d 809, 813 (F1a. 4th DCA2002).t2 Opinion Letter of the Federai Trade

Commission, NIay 3, 2012, auailable athttp ://rvww ft c. gov / osl20 L2 / 0 5 / 120 5 l0 advisoryopinionholderrule.pdf,

53 See, e.g., Gen. Motors AcceptanceCorp. u. Honest Air Conditioning &Heating, lnc.,933 So. 2d 34, 37 (Fla. 2dDCA 2006).i4 PEB Rrponr at 4, n. 13.;5 The version ofthe form discussed in

this article is Form 3210, the FloridaFixed Rate Note - Single Family-Fannie Mae/Freddie Mac UniformInstrument.'j6 Mann, Searching for Negotiability in

Payntent anc! Credit Systems at 969-73.t7 Id.t'8 In re Walker, 466 B.R. 27I, 283

(Bankr. E.D. Pa. 2012).''e U.C.C. $3-106(a); Fra. Sret.

$673.106 1(1Xb).tr\ Holly Hill Acres, Ltd. u. Charter Banh

of Gainesuille, 314 So. 2d209,211 (F1a.2d DCA 1975).6t Id.62 Sims,3? So. 3d at 364 (J. Cope's dissent).63 Id. at 362.6{ UI Mortgage $3.6" UI Mortgage $6.66 UI Mortgage $7.6i Florida - Single Family - Fannie

Mae/Freddie Mac Uniforn Instrument,Form 3010.68 UI Note $7.6s PEB Rpponr at 1 ("The UCC, of

course, does not resolve all issues inthis field lthe transfer and enforce-ment of notes secured by a mortgage

on real propertyl. Most particularly, asto both substance and procedure, theenforcement ofreal estate mortgages byforeclosure is primarily the providenceof a state's real property law....").

70 Johns u. Gillian,184 So. 140, 743(Fla. 1938).

71 Haruey,69 So. 3d at 304.72 Johns, 184 So. at 143-414 (emphasis

added).i3 See Smith u. Kleiser,107 So. 262,263

(Fla. 1926) (foreclosure, as an action inequity, "shouid be in the name of thereal owner ofthe debt secured").

7a Knight Energy Seruices, Inc. u. AmocoOiI Co.,660 So. 2d 786,789 (Fla. 4thDCA 1995). Equity will intervene evenwhen the wrongfui conduct complainedof harms someone other than the de-fendant. Quality Roof Seruices, Inc. u.

Interuest Nat. Banh,21 So. 3d 883, 885(FIa. 4th DCA 2009) ("Unclean handsmay be asserted by a defendant whoclaims that the plaintiff acted towarda third party with unclean hands vrithrespect to the matter in litigation."); seealso Yost u. Rieue Dnters., Inc., 461 So.2d L78 (F).a.1st DCA 1984) ("There is nobar to applying the doctrine ofuncleanhands to a case in which both the plain-tiff and the defendant are parties to afraudulent transaction perpetrated on athird party."); Hauer u. Thum, 67 So. 2d643,645 (Fla. 1953) ("It would matternot that the [defendants] were partiesto the fraudulent transaction nor thatthe fraud was perpetrated upon a thirdparty.").

75 Fr,a. Coxsr. art. X, $4.76 U.C.C. $$9-203(g) and 9-308(e); Fra.

Srar. $$679.2031(7) and 679.3081(5)QOLZ).

77 U.C.C. $1-103(b); Fre. Srer. $671.103(2012).

78 U.C.C. $3-102(b); Fr,a. Sr.ar.$673.1021(2) Q012).

7e U.C.C. $9_Z0g(b); Fre. Sr,.rr.$679.2031(2) (2ot2).

Thornas Erskine lce is the founderand principal legal strategist of lce Legal,PA,, in. West Palm Beach and Miami, andhas practiced law in South Florida formore tltan 25 years. He is licensed to ap-pear in the courts of Florida and the U.S.

federal courts. He handles complex mdttersincluding banhruptcy, commercial litiga'tion, personal injury, and wrongful deathcases, and is a graduate af the uniuersityof Miami School of Laul

18 THE FLORIDA BAR JOURNAUDECEMBEN 2U2