PEB DRAFT REPORT ON UCC RULES APPLICABLE TO THE ASSIGNMENT OF MORTGAGE NOTES AND TO THE OWNERSHIP & ENFORCEMENT OF THOSE NOTES AND...3/29/2011

8/4/2019 PEB DRAFT REPORT ON UCC RULES APPLICABLE TO THE ASSIGNMENT OF MORTGAGE NOTES AND TO THE OWNERS

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MEMORANDUM

March 29, 2011

From: John A. Sebert, Chair, Permanent Editorial Board for the Uniform Commercial Code (PEB)

Re: Draft Report of the PEB on the UCC Rules Applicable to the Assignment of Mortgage

Notes and to the Ownership and Enforcement of Those Notes and the Mortgages

Securing Them

Recent economic developments have brought to the forefront complex legal issues about the

enforcement and collection of mortgage debt. Many of these issues are governed by local real

property law and local rules of foreclosure procedure, as well as by rules of evidence and civil

procedure, but others are addressed in a uniform way throughout the United States by provisions

of the Uniform Commercial Code (UCC). Although the UCC provisions have been settled law

for a number of years, it has become apparent that not all courts and attorneys are familiar with

them. In addition, the complexity of some of the rules has proved daunting.

The Permanent Editorial Board for the Uniform Commercial Code has prepared this Draft

Report in order to further the understanding of this statutory background by identifying and

explaining several key rules in the UCC that govern the transfer and enforcement of notes

secured by a mortgage on real property. Of course, 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 states real property law (although determinations made pursuant to the UCC are

typically relevant under that law).

This is a draft report that does not represent the final views of the PEB, the American Law

Institute, or the Uniform Law Commission on the matters discussed in this report. The PEB is

distributing this Draft Report broadly seeking comment on the draft, and we strongly encouragethose interested in these matters to provide comments to ALI Associate Deputy Director Deanne

Dissinger at [email protected]. When submitting comments please identify your representation

of or affiliation with stakeholders, as well as your expertise and experience in the mortgage and

foreclosure area.

Comments should be received by May 28, 2011. After the end of the comment period, the PEB

will review all of the comments that have been received and will make appropriate revisions to

the draft before issuing the report as a final report of the PEB.
mailto:[email protected]:[email protected]


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PERMANENT EDITORIAL BOARD FOR THE UNIFORM COMMERCIAL CODE

DRAFT REPORT

UCCRULES APPLICABLE TO THE ASSIGNMENT OF MORTGAGE NOTES AND TO

THE OWNERSHIP AND ENFORCEMENT OF THOSE NOTES AND THE MORTGAGES

SECURING THEM

Introduction

Recent economic developments have brought to the forefront complex legal issues about the

enforcement and collection of mortgage debt. Many of these issues are governed by local real

property law and local rules of foreclosure procedure, but others are addressed in a uniform way

throughout the United States by provisions of the Uniform Commercial Code (UCC).1

Although

the UCC provisions have been settled law for a number of years, it has become apparent that not

all courts and attorneys are familiar with them. In addition, the complexity of some of the ruleshas proved daunting.

The Permanent Editorial Board for the Uniform Commercial Code2 has prepared this Report in

order to further the understanding of this statutory background by identifying and explaining

several key rules in the UCC that govern the transfer and enforcement of notes secured by a

mortgage on real property. Of course, 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 states real property law (although determinations made pursuant to the UCC are typically

relevant under that law).

Background

Two Articles of the UCC apply to the transfer, ownership, and enforcement of mortgage notes:

1The UCC is a uniform law sponsored by the American Law Institute and the Uniform Law Commission. It has

been enacted in every state (as well as the District of Columbia, Puerto Rico, and the United States Virgin Islands)

in whole or significant part. This Report is based on the current Official Text of the UCC. Some states have

enacted some non-uniform provisions that are generally not relevant to the issues discussed in this Report. Of

course, the enacted text of the UCC in the state whose law is applicable governs. See note 4, infra, for important

information about variations among different versions of Article 3 of the UCC.2In 1961, the American Law Institute and the Uniform Law Commission, the organizations that jointly sponsor the

UCC, established the Permanent Editorial Board for the Uniform Commercial Code (PEB). One of the charges of

the PEB is to issue commentaries and other articulations as appropriate to reflect the correct interpretation of the

[Uniform Commercial] Code and issuing the same in a manner and at times best calculated to advance the

uniformity and orderly development of commercial law.


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In cases in which the notes fulfill the technical requirements of negotiability,3 Article 3 ofthe UCC

4provides rules governing the obligations of parties on the notes and the

enforcement of those obligations.

In cases involving either negotiable or non-negotiable notes, Article 9 of the UCC5contains important rules governing how ownership of those notes may be transferred, the

effect of the transfer of ownership of the notes on the ownership of the mortgages

securing those notes, and the right of the transferee, under certain circumstances, to

record its interest in the mortgage in the applicable real estate recording office.

This Report explains the application of the rules in both of those Articles to provide guidance in:

Identifying the person who is entitled to enforce the payment obligation of the maker 6 ofa mortgage note, and to whom the maker owes that obligation; and

Determining who owns the rights represented by the note and mortgage.Together, the provisions in Articles 3 and 9 of the UCC (along with general principles thatappear in Article 1 and that apply to all transactions governed by the UCC) provide legal rules

that apply to these questions.7

Moreover, these rules displace any inconsistent common law rules

that might have otherwise governed those questions.8

3Those requirements are set out in UCC 3-104.

4Except for New York, every state (as well as the District of Columbia, Puerto Rico, and the United States Virgin

Islands) has enacted either the 1990 Official Text of Article 3 or the newer 2002 Official Text (the latter having been

adopted in ten states as of the date of this Report). Unless indicated to the contrary all discussions of provisions in

Article 3 apply equally to both versions. Much of the analysis of UCC Article 3 in this Report also applies under the

older version of Article 3 in effect in New York, although many section numbers differ. The Report does notaddress those aspects of New Yorks Article 3 that are different than the 1990 or 2002 texts. 5

Unlike Article 3 (which has not been enacted in its modern form in New York), the current version of Article 9 has

been enacted in all 50 states, the District of Columbia, and the United States Virgin Islands. Some states have

enacted non-uniform provisions that are generally not relevant to the issues discussed in this Report (but see note 24

with respect to one relevant non-uniformity). A limited set of amendments to Article 9 was approved by the

American Law Institute and the Uniform Law Commission in 2010. Except as noted in this Report, those

amendments (which have not yet been enacted by any state) are not germane to the matters addressed in this Report.6

A note can have more than one obligor. In some cases, this is because there is more than one maker (in which case

they are jointly and severally liable; see UCC 3-116(a)). In other cases, there may be an indorser. The obligation

of an indorser is different than that ofa maker in that the indorsers obligation is triggered by dishonor of the note

(see UCC 3-415) and, unless waived, indorsers have additional procedural protections (such as notice of dishonor;

see UCC 3-503)). These differences do not affect the issues addressed in this Report. For simplicity, this Report

uses the term maker to refer to both makers and indorsers. 7 Subject to limitations on the ability to affect the rights of third parties, the effect of these provisions may be varied

by agreement. UCC 1-302. Variation by agreement is not permitted when the UCC so indicates (see, e.g., UCC

9-602) or when the variation would disclaim obligations of good faith, diligence, reasonableness, or care prescribed

by the UCC. But the meaning of the statute itself cannot be varied by agreement. Thus, for example, private parties

cannot make a note negotiable unless it complies with UCC 3-104. See Official Comment 1 to UCC 1-302.

Similarly, parties may not avoid the application of UCC Article 9 to a transaction that falls within its scope. See id.

and Official Comment 2 to UCC 9-109.8UCC 1-103(b). As noted in Official Comment 2 to UCC 1-103:


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This Report does not, however, address all of the rules in the UCC relating to enforcement,

transfer, and ownership of mortgage notes. Rather, it reviews the rules relating to four specific

questions:

Who is the person entitled to enforce a mortgage note and, correspondingly, to whom isthe obligation to pay the note owed?

How can the owner of a mortgage note effectively transfer ownership of that note toanother person or effectively use that note as collateral for an obligation?

What is the effect of transfer of an interest in the note on the mortgage securing it? May a person to whom an interest in the note has been transferred, but who has not taken

a recordable assignment of the mortgage, take steps to become the assignee of record of

the mortgage securing the note?9

Question OneWho is The Person Entitled to Enforce a Mortgage Note and to Whom the

Obligation to Pay the Note is Owed?

If the mortgage note is a negotiable instrument,10

Article 3 of the UCC provides a largely

complete set of rules governing the obligations of parties on the note, including how to determine

who may enforce those obligations and to whom those obligations are owed. The following

discussion analyzes the application of these rules to that determination in the case of mortgage

notes that are negotiable instruments.11

In the context of notes that have been sold or used as collateral to secure an obligation, the

central concept for making that determination is identification of the person entitled to enforce

the note.12 Several issues are resolved by that determination. Most particularly:

The Uniform Commercial Code was drafted against the backdrop of existing bodies of law, including the

common law and equity, and relies on those bodies of law to supplement its provisions in many important

ways. At the same time, the Uniform Commercial Code is the primary source of commercial law rules in

areas that it governs, and its rules represent choices made by its drafters and the enacting legislatures about

the appropriate policies to be furthered in the transactions it covers. Therefore, while principles of common

law and equity may supplementprovisions of the Uniform Commercial Code, they may not be used to

supplantits provisions, or the purposes and policies those provisions reflect, unless a specific provision of

the Uniform Commercial Code provides otherwise. In the absence of such a provision, the Uniform

Commercial Code preempts principles of common law and equity that are inconsistent with either its

provisions or its purposes and policies.9

The Report does not discuss the application of common law principles, such as the law of agency, that supplement

the provisions of the UCC other than to note some situations in which the text or comments of the UCC identifysuch principles as being relevant. See UCC 1-103(b).10

See UCC 3-104 for the requirements that must be fulfilled in order for a payment obligation to qualify as a

negotiable instrument.11

Law other than Article 3, including contract law, governs this determination for non-negotiable mortgage notes.

That law is beyond the scope of this Report.12

The concept of person entitled to enforce a note is not synonymous with owner of the note. A person need

not be the owner of a note to be the person entitled to enforce it, and not all owners will qualify as persons entitled to

enforce. Rules that address transfer of ownership of a note are addressed in the discussion of Question 2 below.


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(i) the makers obligation on the note is to pay the amount of the note to the personentitled to enforce the note,

13

(ii) the makers payment to the person entitled to enforce the note results in dischargeof the makers obligation,

14 and

(iii) the makers failure to pay, when due, the amount of the note to the person entitledto enforce the note constitutes dishonor of the note.

15

Thus, a person seeking to enforce rights based on the failure of the maker to pay the note must

identify the person entitled to enforce the note and establish that that person has not been paid.

This portion of the Report sets out the criteria for qualifying as a person entitled to enforce a

note. The discussion of Question Two addresses how ownership of a note may be effectively

transferred from an owner to another person.

UCC Section 3-301 provides only three ways in which a person may qualify as the person

entitled to enforce a note, two of which require the person to be in possession of the note (which,

for this purpose, may include possession by a third party such as an agent)16

:

The first way that a person may qualify as the person entitled to enforce a note is to be itsholder. This familiar concept, set out in detail in UCC Section 1-201(b)(21)(A),

requires that the person be in possession of the note and either (i) the note is payable to

that person or (ii) the note is payable to bearer. Determining to whom a note is payable

requires examination not only of the face of the note but also of any indorsements. This

is because the party to whom a note is payable may be changed by indorsement17

so that,

for example, a note payable to the order of a named payee that is indorsed in blank by

that payee becomes payable to bearer.18

The second way that a person may be the person entitled to enforce a note is to be anonholder in possession of the [note] who has the rights of a holder.

o How can a person who is not the holder of a note have the rights of a holder?This can occur by operation of law outside the UCC, such as the law of

13UCC 3-412. (If the note has been dishonored, and an indorser has paid the note to the person entitled to enforce

it, the makers obligation runs to the indorser.) 14

UCC 3-602. In states that have enacted the 2002 Official Text of UCC Article 3, a maker is also discharged by

paying a person formerly entitled to enforce the note if the maker has not received adequate notification that the note

has been transferred and that payment is to be made to the transferee.15See UCC 3-502. See also UCC 3-602.

16See UCC 1-103(b). See also UCC 3-420, Comment 1 (Delivery to an agent [of a payee] is delivery to the

payee.). Note that delivery of a negotiable instrument is defined in UCC 1-201(b)(15) as voluntary transfer of

possession17

An indorsement may appear either on the instrument or on a separate piece of paper (usually referred to as an

allonge) affixed to the instrument. See UCC 3-204(a) and Comment 1, par. 4.18

UCC Section 3-205 contains the rules concerning the effect of various types of indorsement on the party to whom

a note is payable.


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subrogation or estate administration, by which one person is the successor to or

acquires another persons rights.19

It can also occur if the delivery of the note to

that person constitutes a transfer (as that term is defined in UCC Article 3, see

below) because transfer of a note vests in the transferee any right of the

transferor to enforce the instrument.20

Thus, if a holder (who, as seen above, is a

person entitled to enforce a note) transfers the note to another person, that other

person (the transferee) obtains from the holder the right to enforce the note even if

the transferee does not become the holder (as in the example below). Similarly, a

subsequent transfer will result in the subsequent transferee being a person entitled

to enforce the note.

o Under what circumstances does delivery of a note qualify as a transfer? As statedin UCC Section 3-203(a), a note is transferred when it is delivered by a person

other than its issuer for the purpose of giving to the person receiving delivery the

right to enforce the instrument. For example, assume that the payee of a note

sells it to an assignee, intending to transfer all of the payees rights to the note, butdelivers the note to the assignee without indorsing it. The assignee will not

qualify as a holder (because the note is still payable to the payee) but, because the

transaction between the payee and the assignee qualifies as a transfer, the assignee

now has all of the payees rights to enforce the note and thereby qualifies as the

person entitled to enforce it. Thus, the failure to obtain the indorsement of the

payee does not prevent a person in possession of the note from being the person

entitled to enforce it, but demonstrating that status is more difficult. This is

because the person in possession of the note must also demonstrate the purpose of

the delivery of the note to it in order to qualify as the person entitled to enforce. 21

There is a third method of qualifying as a person entitled to enforce a note that, unlike theprevious two methods, does not require possession of the note. This method is quite

limitedit applies only in cases in which the person cannot reasonably obtain

possession of the instrument because the instrument was destroyed, its whereabouts

cannot be determined, or it is in the wrongful possession of an unknown person or a

person that cannot be found or is not amenable to service of process.22

In such a case, a

person qualifies as a person entitled to enforce the note if the person demonstrates not

only that one of those circumstances is present but also demonstrates that the person was

19

See Official Comment to UCC 3-301.20

UCC 3-203(b).21

If the note was transferred for value and the transferee does not qualify as a holder because of the lack of

indorsement by the transferor, the transferee has a specifically enforceable right to the unqualified indorsement of

the transferor. See UCC 3-203(c).22

UCC 3-309(a)(iii) (1990 text), 3-309(a)(3) (2002 text). The 2002 text goes on to provide that a transferee from

the person who lost possession of a note may also qualify as a person entitled to enforce it. See UCC 3-

309(a)(1)(B) (2002). This point was thought to be implicit in the 1990 text, but was rejected in a federal district

court opinion in which the issue was raised.


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formerly in possession of the note and entitled to enforce it when the loss of possession

occurred and that the loss of possession was not as a result of transfer (as defined above)

or lawful seizure. If the person proves those facts, as well as the terms of the note, the

person may enforce the note, but the court may not enter judgment in favor of the person

unless the court finds that the maker is adequately protected against loss that might occur

because if the note subsequently reappears.23

Question TwoWhat Steps Must be Taken for the Owner of a Mortgage Note to Transfer

Ownership of the Note to Another Person or Use the Note as Collateral for an Obligation?

In the discussion of Question One, this Report addresses identification of the person who is

entitled to enforce a note. It does not address who owns the note. While in many cases the

owner of a note and the person entitled to enforce it are the same person, as explained earlier this

is not always the case. This is because the rules that determine who is entitled to enforce a note

and the rules that determine whether the note, or an interest in it, have been effectively

transferred serve different functions:

The rules that determine who is entitled to enforce a note are concerned primarily withthe maker of the note, providing the maker with a relatively simple way of determining to

whom his or her obligation is owed and, thus, whom to pay in order to be discharged.

The rules concerning transfer of ownership and other interests in a note, on the otherhand, relate to who, among competing claimants, is entitled to the economic value of the

note, a matter as to which the maker is indifferent so long as it does not affect whom the

maker must pay.

Initially, a note is owned by the payee to whom it was issued. If that payee seeks either to usethe note as collateral or sell the note outright, Article 9 of the UCC governs that transaction and

determines whether the creditor or buyer has obtained a property right in the note. As is

generally known, Article 9 governs transactions in which property is used as collateral for an

obligation.24

In addition, however, Article 9 governs the sale of most payment rights, including

the sale of both negotiable and non-negotiable notes.25 With very few exceptions, the same rules

that apply to transactions in which a payment right is collateral for an obligation also apply to

transactions in which a payment right is sold. Rather than contain two parallel sets of rulesone

for transactions in which payment rights are collateral and the other for sales of payment rights

23 See UCC 3-309(b). This subsection goes on to state that Adequate protection may be provided by anyreasonable means.24

UCC 9-109(a)(1).25

With certain limited exceptions not germane to this Report, Article 9 governs the sale of accounts, chattel paper,

payment intangibles, and promissory notes. UCC 9-109(a)(3). The term promissory note includes not only

notes that fulfill the requirements of a negotiable instrument under UCC 3-104 but also notes that do not fulfill

those requirements but nonetheless are of a type that in ordinary business is transferred by delivery with any

necessary indorsement or assignment. See UCC 9-102(a)(65) (definition of promissory note) and 9-102(a)(47)

(definition of instrument as the term is used in Article 9).


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Article 9 uses nomenclature conventions to apply one set of rules to both types of transactions.

This is accomplished primarily by defining the term security interest to include not only an

interest in property that secures an obligation but also the right of a buyer of a payment right in a

transaction governed by Article 9.26

As a result, for purposes of Article 9, the buyer of a

promissory note has a security interest in the note, and the rules that apply to security interests

that secure an obligation also apply to transactions in which a promissory note is sold. 27

Section 9-203(b) of the Uniform Commercial Code provides that three criteria must be fulfilled

in order for the owner of a mortgage note effectively to create a security interest (either an

interest in the note securing an obligation or the outright sale of the note to a buyer) in it.

The first two criteria are straightforwardvalue must be given28 and the debtor/sellermust have rights in the note.

29

The third criterion may be fulfilled in either one of two ways. Either the debtor mustauthenticate

30a security agreement

31that describes the note

32or the secured party

must take possession33of it pursuant to the debtors security agreement.34

26See UCC 1-201(b)(35) [UCC 1-201(37) in states that have not yet enacted the 2001 revised text of UCC

Article 1]. (For reasons that are not apparent, when South Carolina enacted the 1998 revised text of UCC Article 9,

which included an amendment to UCC 1-201 to expand the definition of security interest to include the right of

a buyer of a promissory note, it did not enact the amendment to 1-201. This Report does not address the effect of

that omission.) The limitation to transactions governed by Article 9 refers to the exclusion, in cases not germane to

this Report, of certain assignments of payment rights from the reach of Article 9.27

Similar nomenclature conventions define debtor to include the seller of a payment right, secured party to

include the buyer of a payment right, and collateral to include a sold payment right. See UCC 9-102(a)(28),

(72), (12).28 UCC 9-203(b)(1). UCC 1-204 provides that giving value for rights includes not only acquiring them for

consideration but also acquiring them in return for a binding commitment to extend credit, as security for or in

complete or partial satisfaction of a preexisting claim, or by accepting delivery of them under a preexisting contract

for their purchase.29

UCC 9-203(b)(2). Limited rights that are short of full ownership are sufficient for this purpose. See Official

Comment 6 to UCC 9-203.30

This term is defined to include signing and its electronic equivalent. See UCC 9-102(a)(7).31

A security agreement is an agreement that creates or provides for a security interest (including the rights of a

buyer arising upon the outright sale of a payment right). See UCC 9-102(a)(73).32

Article 9s criteria for descriptions of property in a security agreement are quite flexible. Generally speaking, any

description suffices, whether or not specific, if it reasonably identifies the property. See UCC 9-108(a)-(b). A

supergeneric description consisting solely of words such as all of the debtors assets or all of the debtors

personal property is not sufficient, however. UCC 9-108(c). A narrower description, limiting the property to aparticular category or type, such as all notes, is sufficient. For example, a description that refers to all of the

debtors notes is sufficient.33

See UCC 9-313. As noted in Official Comment 3 to UCC 9-313, in determining whether a particular person

has possession, the principles of agency apply. UCC 9-313(c) also contains a rule under which possession by a

non-agent (such as a bailee) may constitute possession by the secured party if the person authenticates a record

acknowledging that it holds the collateral for the secured partys benefit. Possession as contemplated by UCC 9-

313 is also possession for purposes of UCC 9-203. See UCC 9-203, Comment 4.34

UCC 9-203(b)(3)(A)-(B).


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o Thus, if the secured party (including a buyer) takes possession of the mortgagenote pursuant to the security agreement of the debtor (including a seller), this

criterion is satisfied even if that agreement is oral.

o Alternatively, if the debtor authenticates a security agreement describing the note,this criterion is satisfied even if the secured party does nottake possession of the

note. (Note that in this situation, in which the seller of a note may retain

possession of it, the owner of a note can be a different person than the person

entitled to enforce the note.)35

Satisfaction of these three criteria of Section 9-203(b) results in the secured party (including a

buyer of the note) obtaining a property right (whether outright ownership or a security interest to

secure an obligation) in the note from the debtor (including a seller of the note). 36

Question ThreeWhat is the Effect of Transfer of an Interest in the Note on the Mortgage

Securing It?

What if a note secured by a mortgage is sold (or the note is used as collateral to secure an

obligation), but the parties do not formally assign the mortgage that secures payment of the note?

UCC Section 9-203(g) explicitly provides that the mortgage automatically follows the note:

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. (As noted previously, a security interest in a note

includes the right of a buyer of the note.)

Thus, while this matter has engendered some confusion,37

the law is clear,38

and the sale of a

mortgage note not accompanied by a separate conveyance of the mortgage securing the note doesnot result in a separation of the mortgage from the note.

35As noted in the discussion of Question One, payment by the maker of a negotiable note to the person entitled to

enforce it discharges the maker's obligations on the note. UCC 3-602. This is the case even if the person entitled

to enforce the note is not its owner. As between the person entitled to enforce the note and the owner of the note,

the right to the money paid by the maker is determined by the UCC and other applicable law, such as contract and

agency law. See, e.g., UCC 3-306 and 9-315(a)(2).36

For cases in which another person claims an interest in the note (whether as a result of another voluntary transfer

by the debtor or otherwise), reference to Article 9s rules governing perfection and priority of security interests may

be required in order to rank order those claims (and, in some cases, determine whether a party has taken the note free

of competing claims to the note). In the case of notes that are negotiable instruments, the Article 3 concept ofholder in due course (see UCC 3-302) should be considered as well, because a holder in due course takes its

rights in an instrument free of competing property claims to it (as well as free of most defenses to obligations on it).

See UCC 3-305 and 3-306. With respect to determining whether the owner of a note has effectively transferred a

property interest to a transferee, however, the perfection and priority rules are largely irrelevant. (Of course,

application of the perfection and priority rules can result in the transferee either being subordinate to the rights of a

competing claimant or being extinguished by the rights of the competing claimant.)37

See, e.g., the discussion of this issue in U.S. Bank v. Ibanez, 458 Mass. 637, 2011 WL 38071 (Mass. 2011), at slip

op. p. 10. In that discussion, the court cited Massachusetts common law precedents pre-dating the enactment of the

current text of Article 9 to the effect that a mortgage does not follow a note in the absence of a separate assignment


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Question FourMay a Person to Whom an Interest in the Note Has Been Transferred, but

Who Has not Taken a Recordable Assignment of the Mortgage, Take Steps to Become the

Assignee of Record of the Mortgage Securing the Note?

In some states, a party without a recorded interest in a mortgage may not enforce the mortgage

non-judicially. In such states, even though the buyer of a mortgage note (or a creditor to whom asecurity interest in the note has been granted to secure an obligation) automatically obtains

corresponding rights in the mortgage,39 this may be insufficient as a matter of applicable real

estate law to enable that buyer or secured creditor to enforce the mortgage upon default of the

maker if the buyer or secured creditor does not have a recordable assignment. The buyer or other

secured creditor may, of course, attempt to obtain such a recordable assignment from the seller

or debtor at the time it seeks to enforce the mortgage, but such an attempt may be unsuccessful. 40

Article 9 of the UCC provides such a buyer or secured creditor a mechanism by which it can

record its interest in the realty records in order to conduct a non-judicial foreclosure. UCC

Section 9-607(b) provides that if necessary to enable a secured party [including the buyer of amortgage note] to exercise the right of [its transferor]to enforce a mortgage nonjudicially,

the secured party may record in the office in which the mortgage is recorded (i) a copy of the

security agreement transferring an interest in the note to the secured party and (ii) the secured

partys sworn affidavit in recordable form stating that default has occurred41

and that the secured

party is entitled to enforce the mortgage non-judicially.42

of the mortgage, but did not address the effect of Massachusettss subsequent enactment of UCC 9-203(g) on those

precedents. Of course, application of UCC 9-203(g) would result in the conclusion that the holder of the note in

question had an interest in the mortgage securing the note only if the holder demonstrated that it had an attached

security interest (including the interest of a buyer) in the note. Such a conclusion would not, of itself, mean that the

holder can enforce the mortgage without a recordable assignment to it. That matter is the province of real property

law and is addressed, in part, in the discussion of Question 4 below.38

Official Comment 9 to UCC 9-203 confirms this point: Subsection (g) 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

security interest or lien.39

See discussion of Question Three, supra.

40 In some cases, the seller or debtor may no longer be in business. In other cases, it may simply be unresponsive torequests for execution of documents with respect to a transaction in which it no longer has an economic interest.

Moreover, in cases in which mortgage note was collateral for an obligation owed to the secured party, the defaulting

debtor may simply be unwilling to assist its secured party. See Official Comment 8 to UCC 9-607,41

The 2010 amendments to Article 9 (promulgated by the American Law Institute and the Uniform Law

Commission but not yet enacted) add language to this provision to clarify that default, in this context, means

default with respect to the note or other obligation secured by the mortgage.42

Of course, UCC 9-607(b) does not address other conditions that must be satisfied for judicial or non-judicial

enforcement of a mortgage.


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Summary

The Uniform Commercial Code provides four sets of rules that determine matters that are

important in the context of enforcement of mortgage notes and the mortgages that secure them:

First, in the case of a mortgage note that is a negotiable instrument, Article 3 of the UCCdetermines the identity of the person who is entitled to enforce the note and to whom the

maker owes its payment obligation; payment to the person entitled to enforce the note

discharges the makers obligation, but failure to pay that party when the note is due

constitutes dishonor.

Second, for both negotiable and non-negotiable mortgage notes, Article 9 of the UCCdetermines whether a transferee of the note from its owner has obtained an attached

property right in the note.

Third, Article 9 of the UCC provides that a transferee of a mortgage note whose propertyright in the note has attached also automatically has an attached property right in the

mortgage that secures the note.

Finally, Article 9 of the UCC provides a mechanism by which the owner of a note and themortgage securing it may, upon default of the maker of the note, record its interest in the

mortgage in the realty records in order to conduct a non-judicial foreclosure.

Of course, as noted previously, these UCC rules do not resolve all issues in this field. The

enforcement of real estate mortgages by foreclosure is primarily the province of a states real

property law, but legal determinations made pursuant to the four sets of UCC rules described in

this Report will, in many cases, be central to administration of that law. In such cases, proper

application of real property law requires proper application of the underlying UCC rules.


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Adam J. LevitinAssociate Professor of Law

May 27, 2011

To the Permanent Editorial Board:

We are law professors at Albany Law School, Georgetown University Law Center,

University of Illinois College of Law, University of Iowa School of Law, the University of Utah S.J.

Quinney College of Law, and Valparaiso University Law School, where we teach courses in secured

credit (Uniform Commercial Code [UCC] Article 9 and real property security), payment systems(including UCC Article 3), structured finance, bankruptcy, consumer finance, and contracts. We have

testified repeatedly before Congress regarding mortgage foreclosures, including chain of title issues,

and closely follow legal developments in mortgage foreclosures.

We are writing to express serious misgivings about the draft report on the UCC Rules

Applicable to the Assignment of Mortgage Notes and to the Ownership and Enforcement of Those

Notes and the Mortgages Securing Them (the Draft Report) authored by Permanent Editorial Board(PEB) for the Uniform Commercial Code. The Draft Report is couched in the technicalities of the

UCC, but is actually attempting to resolve pressing public policy questions arising out of the financialcrisis. Attempting a sub rosa resolution of such controversial issues of law through a PEB report

undermines the perceived independence and credibility of the PEB and damages the reputation of the

American Law Institute and the National Conference of Commissioners on Uniform State Law.

The Draft Reports apparent purpose is to urge an authoritative interpretation of critical and

controversial questions of public policy on the states and on courts. To the extent the PEB has the

authority to issue interpretations, that power is limited to the correct interpretation of the U.C.C.1The PEB acknowledges that limitation on its authority by asserting that the Draft Report is limited to

interpretation of the U.C.C. provisions on point and does not address issues that are the particularprovince of real property law.

A prior, non-public version of the Draft Report repeatedly strayed over that line.2 At key

points, the prior version of the Report attempted to override state property law, including with respect

1 Permanent Editorial Board for the Uniform Commercial Code, Agreement Describing the Relationship of theAmerican Law Institute, the National Conference of Commissioners on Uniform State Laws, and the Permanent Editorial

Board with Respect to the Uniform Commercial Code at [5] (unnumbered), at http://www.ali.org/doc/03-PEB%20for%20UCC%2003.pdf.

2 Regarding the prior, non-public version of the Draft Report, please see my letter to the PEB dated December 28,2010.


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to important questions on which state courts are divided. Elsewhere, the Report affirmatively

misstated the law by ignoring state and federal statutes that modify or curtail the holder-in-due course

rule for certain residential mortgages.

The current public version of the Draft Report has been revised to be more circumspect in

this regard. Unfortunately, the revised, public Draft Report now has the effect of being misleading

because it addresses UCC issues in a vacuum when in fact they cannot be meaningfully separated

from state procedural law, real property law, agency law, and trust law. In many instances, the result

that would obtain if only the UCC were considered is opposite of the result that would obtain if all

pertinent law were considered. The Draft Report is misleading because it ignores the non-UCC laws

that also govern the enforceability of mortgage notes.

Even if the Report were not misleading in this respect, the PEB is simply the wrong body to

resolve these issues. The Reports recommendations, if adopted, would directly affect the economicwelfare of millions of Americans and the financial health of the nation. Its rigid prescriptions of law

would further constrain the ability of state and federal governments to protect their citizens in times

of economic crisis. Issues of this magnitude need to be resolved in an open and public forum where

all affected constituencies can be heard and the complex public policy implications involved can be

aired, rather than by a non-representative body like the PEB.Strangely, the Report is virtually devoid of any reference to the financial crisis or the role that

the UCC played in facilitating the financial structures the precipitated the global economic collapse.

Instead, the Report seeks to impose a resolution on the courts to issues affecting the foreclosure crisis

and the future structure of securitization purely as a matter of legal doctrine. This failure to grapple

with the real-world implications of the problems the Report addresses or to acknowledge calls for

reform on these issues seriously undermines the credibility of the Report.

A PEB report is not an appropriate vehicle for resolving the serious legal issues posed by

MERS or chain of title problems in residential mortgage securitizations. Unfortunately, the DraftReport gives the impression of being an attempt, if not to resolve these issues, than at least to put a

finger on the scale to tilt the law to help shield large financial institutions from the consequences of

sloppy legal compliance in the name of efficiency.In the remainder of this letter, we address several particular concerns with the Draft Report:

(1) that the Draft Report is misleading because enforcement of mortgage notes other than through

mortgage foreclosure is virtually meaningless; (2) the Draft Report is misleading because it focuses

solely on the UCC issues when consideration of supplementary, contradictory, or superseding federal

bankruptcy law, state procedural law, evidentiary law, real property law, trust law, and agency law

might produce different outcomes; and (3) the Draft Report fails to recognize that UCC 9-203(g) may

not be effective to transfer real property in title theory states.

1. The PEB Draft Report Is Misleading Because It DiscussesNote Enforcement when the Issue

IsMortgage Enforcement, a Topic Beyond the PEBs Purview

The Draft Report purports to cover only the enforcement of mortgage notes under the UCC,

not the enforcement of mortgages. Framing the report in this fashion, however, is fundamentally

misleading, because mortgage notes are seldom enforced except by foreclosure of the mortgages.

Most mortgages in the United States are either legally or practically non-recourse. Therefore it makes


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little sense to discuss solely enforcement of the note. What is being enforced is almost always the

mortgage,3

which is an issue that is beyond the authority of the PEB.

The Official Commentary to the UCC makes clear that the UCC takes no position on whether

a mortgage is enforceable.4

UCC section 9-308 Official Comment 6 states that:

Under this Article, attachment and perfection of a security interest in a secured rightto payment do not themselves affect the obligation to pay. For example, if theobligation is evidenced by a negotiable note, then Article 3 dictates the person whom

the maker must pay to discharge the note and any lien s ecuring it.Similarly, thisArticle does not determine who has the power to release a mortgage of record. That

issue is determined by real-property law. (Emphasis added.)

Unfortunately, the very title of the Draft Report claims an authority that the PEB lacks. The Draft

Report is title states that it is on the UCC Rules Applicable to the Assignment of Mortgage Notes and

to the Ownership and Enforcement of Those Notes and the Mortgages Securing Them (key wordsunderlined). The enforcement of mortgages is outside the scope of the UCC and therefore not a topic

that the PEB may properly address.

While the substance of the Draft Report does not veer into the enforcement of mortgages, thetitling of the Draft Report furthers the problem that the Report is only addressing note enforcement,

while giving the impression that enforceability of the note decides the enforceability of the mortgage.

Given that the real issue of import is the enforcement of the mortgage, not the note, it is

fundamentally misleading for the PEB to issue a report about the enforcement of the note. While the

ability to enforce the note is usually required to enforce the mortgage,5 a report that only addresses

note enforcement is inherently misleading because it fails to address the ultimate questionwhether a

party has a right to deprive a family of its home.

2. The PEB Draft Report Is Misleading Because It Discusses UCC Issues in the Enforcement of

Mortgage Notes Out of Their Broader Legal Context

The Draft Report is also misleading because the enforcement of mortgage notes viaforeclosure or through a plain monetary judgment cannot be reduced to UCC issues. Instead, it

inevitably involves state civil procedure and evidentiary law, and typically involves state real

property law. Given the widespread use of both third-party mortgage servicers and the Mortgage

Electronic Registration System (MERS), agency issues also come into play. Also, as the vast

majority of mortgages are held by securitization trusts, trust law issues may also be relevant. The

trusts may create transfer and enforcement requirements beyond those in the UCC and/or that conflict

3Technically, a recourse mortgage note could be enforced separate from a foreclosure action through a suit on the

note itself and then attempts to collect on the judgment other than from the mortgaged realty. Such a situation isexceedingly rare and likely to occur only when the collateral has lost nearly all value and the debtor has substantial othernon-exempt assets. Note that collection on a deficiency judgment is not an action on a mortgage note, as there is no

mortgage following the foreclosure.4 UCC 9-607(b) does not alter this conclusion. First, the provision only addresses nonjudicial enforcement ofmortgages, making it facially inapplicable to judicial foreclosure proceedings. Second, it merely permits a filing in thefurtherance of enforcement; it does not in and of itself create any rights to enforcement. See UCC 9-607 Official

Comment 8 (noting Subsection (b) would not entitle the secured party to proceed with a foreclosure unless the mortgagoralso were in default or the debtor (mortgagee) otherwise enjoyed the right to foreclose.).

5 A major exception to this being if the debt has been discharged in a bankruptcy, but the lien remains valid. Insuch a case, the mortgage may be enforced, but not the note.


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with the UCC. It is impossible to disentangle these issues, which are beyond the ken of the PEB,

from UCC issues, but addressing only UCC issues without addressing the other issues creates a

necessarily misleading Draft Report.

For example, the Draft Report places great emphasis on UCC 9-203(g) as effecting the

transfer of a mortgage if the associated note is transferred under UCC 9-203(a)-(b). But state real

property law may impose additional requirements for a transfer of real property, such as the statesStatute of Frauds or recordation requirements that go beyond attachment of a security interest. See,

e.g., Texas Local Govt. Code 192.007 (providing that To release, transfer, assign, or take anotheraction relating to an instrument that is filed, registered, or recorded in the office of the county clerk, a

person must file, register, or record another instrument relating to the action in the same manner as

the original instrument was required to be filed, registered, or recorded.).

This problem can be seen in regard to Question 1 (Who is The Person Entitled to Enforce a

Mortgage Note and to Whom the Obligation to Pay the Note is Owed?) . In modern commercialrelationships, agency relationships abound, and common, shared agents such as document custodians

and the Mortgage Electronic Registration System (MERS) are frequently used. 6 This complicates

attempts to determine whether a party is a nonholder in possession of the [note] who has the rights of

a holder and therefore entitled to enforce the note. If a party itself is not in possession of the note,but an agent is in possession of the note, does that make the party a nonholder in possession of the[note] who has the rights of a holder and therefore entitled to enforce the note?

UCC 3-420, Comment 1 notes that Delivery to an agent [of a payee] is delivery to the

payee. But this statement is made in the Official Commentary in context of a discussion ofconversion of a note, rather than transfer for the purpose of enforcing the note; it does not directly

address the question of whether a party may enforce a note if the note is held by its agent.7

This raises a series of questions unaddressed by the Draft Report. Does the UCC require

possession by the principal itself? Does this answer change if there is a common agent?8

Does itdepend on the scope of the agency agreement? These issues are, of course, well beyond the purview

of the UCC. The Draft Report observes that the common law of agency might supplement the UCC,

but this observation is buried in footnote 9 and not connected with any discussion.An answer to Question 1 that fails to account for agency questions might well be incorrect. It

is no defense to this charge that the Draft Report only addresses UCC issues. While that is the extent

of the PEBs authority, the UCC does not exist in a vacuum. The danger is that litigants and courtsthat reference the Draft Report could easily fail to understand the artificial, constrained nature of the

Draft Reports analysis and thus reach wrong conclusions about whether a family should be deprivedof its home.

The misleading impact of the narrow UCC focus is also evident in regard to Question 4

(May a Person to Whom an Interest in the Note Has Been Transferred, but Who Has Not Taken a

6See, e.g, Kemp v. Countrywide, 440 B.R. 624 (Bankr. D.N.J. 2010) (possession of note by document custodian,

not by securitization trustee).7 Relatedly, the Draft Report does not address the question of whether the original note must be produced andentered by the party seeking to enforce the note. Arguably this is an evidentiary question, not a UCC question, but it againshows that the UCC can not be disentangled from other areas of law.

8See, e.g., In re Gilbert, No. COA10-361 (N.C. Ct. of Appeals, May 3, 2011). In Gilbert, a note was endorsed to

Deutsche Bank as trustee. Deutsche Bank is trustee (and thus functionally an agent) for around two thousand RMBStrusts. The failure to endorse the note to Deutsche Bank as trustee for a specific RMBS trust was held insufficient to givethe particular trust rights in the note. This situation has some analogies to common agent problems.


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Recordable Assignment of the Mortgage, Take Steps to Become the Assignee of Record of the

Mortgage Securing the Note?). The Draft Reports answer is yes, with reference to UCC 9-

607(b). While this is the correct answer under the UCC itself, it may be the incorrect answer as a

matter of law more generally. Taking steps to become the assignee of record could conflict with trustlaw, tax law, bankruptcy law, and agency law.

First, the vast majority of US mortgages are securitized and held by trusts. Most of these

trusts are formed under New York law. The trust instrument is known as the Pooling and Servicing

Agreement (PSA). PSAs are often particular in terms of specifying when and how transfers must be

made. They do so in order to ensure the bankruptcy remoteness of the securitized assets and favored

federal tax status as Real Estate Mortgage Investment Conduits (REMICs) or grantor trusts.

Transfers that are made outside of the time frame and method specified by the PSA are in violation of

the trust instrument and as such voidunder New York Trust Law. N.Y.E.P.T.L 7-2.4 (If the trust

is expressed in the instrument creating the estate of the trustee, every sale, conveyance or other act of

the trustee in contravention of the trust, except as authorized by this article and by any other provision

of law, is void.). Similarly, steps to become the assignee of record could imperil the trusts favoredtax status if taken outside the limited timeframe for transfers to a REMIC or grantor trust provided bythe Internal Revenue Code.

Second, the Draft Report ignores that steps taken to become the Assignee of Record might

violate the federal bankruptcy automatic stay, 11 U.S.C. 362. If the putative transferor is in

bankruptcy, the note is property of the bankruptcy estate, and attempting to become assignee of

record of the note could be a violation of the stay. Similarly, if the obligor on the note is in

bankruptcy, recording of the note could violate the stay by being an attempt to perfect a security

interest postpetition.

Finally, to the extent that MERS is involved in with the mortgage, there may be agency issues

that affect the question of whether there is authority to assign the mortgage. At the very least, the

Draft Report should recognize that steps to become the assignee of record could create these possible

complications.

The multitude of non-UCC problems that could arise from attempts to become transferee ofrecord of a mortgage note illustrates a fundamental problem with the Draft Report. What might be

the right answer in a world where the only law is the UCC might in fact be the wrong answer in the

real world where other laws conflict with or supersede the UCC. Putting the PEBs officialimprimatur on the answers to these questions could mislead a court that fails to recognize the artificial

nature of the Reports analysis.

3. UCC 9-203(g) Is Not Always Sufficient to Effectuate the Transfer of a Mortgage

The Draft Report places great emphasis on UCC 9-203(g) as effecting the transfer of a

mortgage if the associated note is transferred under UCC 9-203(a)-(b).9

The PEB Draft Report

notes that while this matter has engendered some confusion, the law is clear, and the sale of a

mortgage note not accompanied by a separate conveyance of the mortgage securing the note does notresult in a separation of the mortgage from the note. There is no basis whatsoever for this statement.

9In a previous letter to the PEB, one of us (Professor Levitin) has argued that UCC 9-203(g) is a particularly

problematic provisionit has not been cited by any court for the mortgage-follows-the-note principle, which is a testamentto its uniquely abstruse drafting.


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The law is not clear; were it so, the PEB Draft Report would be unnecessary. Indeed, the Draft

Report is unable to cite any precedent for its point.

There are two problems with the Draft Reports interpretation. First, as noted above, theremay simply be supplementary legal requirements for the transfer of a mortgage. See, e.g., Texas

Local Govt. Code 192.007. The UCC does not supersede state statutory law or non-conflicting

common law. Failure to acknowledge that compliance with UCC 9-203(g) may not be sufficient to

effectuate a transfer of a mortgage under state law leaves the Draft Report fundamentally flawed.

And second, the language of 9-203(g) limits it to mortgages and liens, not deeds of trust or

situations (regardless of the name of the security document) that the law deems to be a sale and

repurchase (as in title theory states). The abstruse language of 9-203(g) does not effectuate the

mortgage follows the note policy that might have been intended; it is not drafted broadly enough todo so. The PEB, however, is limited by the language of the statute.

The PEB Draft Report understands UCC 9-203(g) to mean that the transfer of any mortgage

note transfers the associated mortgage. The Draft Report states that UCC Section 9-203(g) explicitly

provides that the mortgage automatically follows the note.10 But UCC 9-203(g) does no suchthing. It states that:

The attachment of a security interest in a right to payment or performance secured by

a security interest or other lien on persona or real property is also attachment of a

security interest in the security interest, mortgage, or other lien. (Emphasis added.)

Similarly, Official Comment 9 to UCC 9-203 states that:

Subsection (g) 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

security interest or lien. (Emphasis added.)

UCC 9-203(g) means that the transfer of a note is accompanied by the transfer of the lien. It is hard

to understand how this could apply to a deed of trust. The technical operation of a deed of trust is not

a security interest, but a transfer of the deed to the property in trust for the benefit of the obligee on

the associated note. The deed of trust operates as a sale and repurchase, rather than a lien.Interpreted strictly, then, a deed of trust should not qualify as a security interest or other lien on

personal or real property, so it would not fall within the ambit of 9-203(g). Accordingly, reading 9-203(g) to mean that a mortgage always follows a note would result in non-uniform state law

because of the prevalence or even exclusive use of deeds of trust in some states.

Even if 9-203(g) does apply to deeds of trusts, it still does not mean that the mortgage

follows the note principle is not absolute. If the trust deed is seen as a security interest, not a sale and

repurchase, then the trust deed is necessarily separated from the note. The deed of trust trustee holds

the security interest and the obligee has the note. The question of who may claim the status of trustbeneficiary is determined by reference to trust, agency, and real property law, not to the UCC, and

under such law it might be possible for the beneficial interest in the trust deed to be sold without the

note being sold, for example.

Moreover, irrespective of the form of the security document, roughly thirty of the fifty states

do not understand a mortgage to be a lien. Instead, these states understand a mortgage or deed of trust

to be a sale and repurchase and not a lien. This is because these states are title theory states, as

10 Draft Report at 8.


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opposed to lien theory states. In title theory states UCC 9-203(g) is ineffective to transfer a lienbecause there is no lien to transfer. While a sale and repurchase may be economically

indistinguishable from a lien, their legal (and accounting) treatment may vary, and the UCC pointedly

avoids taking any position on whether a transaction is a sale or a lien. Furthermore, because titletheory states consider the mortgage or deed of trust as actual ownership of real property, specific

requirements for the transfer of real property interests apply.

The Massachusetts Supreme Judicial Courts unanimous opinion inIbanez v. U.S. Bank, 458

Mass. 637 (Mass. 2011), which is itself cited by the PEB Draft Report, makes exceedingly clear that

the distinction between title theory and lien theory affects the requirements for transferring a

mortgage; in a title theory state, such as Massachusetts, a mortgage is actually a sale of real property,

which is subject to requirements beyond those of the UCC. Indeed, because of this distinction,Ibanez

did not reference 9-203(g), as the provision had no bearing on the case since it only addresses liens,

not sales and repurchases.

Official Comment 3.b. to UCC 9-202 clearly recognizes that title and lien theory may

matter for purposes of applying Article 9:

This Article does not determine which line of interpretation (e.g., title theory or lien

theory, retained title or conveyed title) should be followed in cases in which theapplicability of another rule of law depends upon whom has title.

State mortgage foreclosure law is another rule of law that may in fact depend on who has title. The

Draft Report ignores this issue, which renders it misleading. By claiming that the transfer of a note

effectuates the transfer of a mortgage in a title theory state, the UCC reaches beyond its proper ambit

of commercial law and attempts to supersede state real property law. There is a difference between

what 9-203(g) might have been intendedto accomplish and what the actual drafting is, and a PEB

Draft Report is not the appropriate vehicle forpurported corrections of the statute.11

11Indeed, it is necessary to read the 9-203(g) to preserve title theory. If 9-203(g) accomplished what the DraftReport believes it did, it undermined title theory in 30 states in one fell swoop. It is implausible that any state legislatorthought that was what he or she was doing in adopting the 2001 revisions to UCC Article 9. This is so for three reasons.

First, the UCC has neverbeen understood to cover realty law. States pride themselves on realty law idiosyncrasies,and uniformity across states is of much less importance in realty than other areas of commercial law.

Second, the manner in which UCC 9-203(a)-(b) accomplishes sales of promissory notes is itself one of the mostopaquely drafted provisions in the UCC. Only a handful of UCC mavens know of its existence. A non-specialist attorney

searching through a state code for promissory note sale provisions would never discover the statute, as it does not use salelanguage; the sale provisions are only effectuated through the UCC Article 1 definition of security interest, which ishardly where an attorney would think to search for law governing the sale of promissory notes. Not surprisingly, there is noreported case law addressing it. Put differently, to the extent that UCC 9-203(a)-(b) were meant to provide clear law on

the sale of promissory notes, they are utter failures as provisions. Instead, their only accomplishment has been thefacilitation of asset securitization, a narrow, special-interest use of the UCC.

And third, even to the extent that a state legislator understood the effect of 9-203(a)-(b), the drafting of 9-

203(g) is sufficiently inarticulate that few would understand it as the PEB Draft Report does. If 9-203(g) means what thePEB Draft Report says it does, it is an admission that the ALI and NCCUSL have carried out a program of stealth legislationfor the benefit of the mortgage securitization industry.

Stealth legislation is diametrically opposed to the fundamental principles of law reform. State legislators shouldunderstand the laws they are adopting, particularly when they are model laws that bear the imprimatur of the ALI and

NCCUSL. Stealth legislation in the service of large financial institutions in the furtherance of mortgage securitizationwould be a deep stain on the reputation of the ALI and NCCUSL. This is the inexorable conclusion from the interpretationof 9-203 in the Draft Report.


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Conclusion

We strongly urge the PEB to withdraw the Draft Report and refrain from further efforts to

clarify the law in regard to mortgage foreclosures. A UCC PEB report is simply an inappropriate

form for addressing major policy issues. Doing so under the guise of a technical report does serious

harm to the credibility and reputation of the ALI and NCCUSL.

While we appreciate the PEBs duty to clarify the UCC,12 the PEB has a broader duty toensure that the rule of law functions to produce correct outcomes. Even if the Draft Report correctly

interpreted the UCC, a proposition with which we disagree, as noted above, the result would still be

an inevitably misleading report because the ability to enforce a mortgage note is almost exclusively

through mortgage foreclosure, and mortgage foreclosure involves numerous areas of law beyond the

purview of the UCC. The results that obtain solely under the UCC may be diametrically opposed tothose that would obtain if all applicable law is considered. We urge you to withdraw the Draft

Report.

Yours,

/s/Robert M. Lawless

Professor of Law

University of Illinois College of Law

504 E. Pennsylvania Ave.

Champaign, IL 61820

/s/Adam J. Levitin

Associate Professor

Georgetown University Law Center

600 New Jersey Ave., NW

Washington DC 20001(202) 662-9234

12While we are optimistic that the PEB will withdraw the Draft Report, in the event that it proceeds with the

Report, we urge the PEB to include clear and unambiguous language explaining that the results that obtain under the UCCmay be different than if all applicable law is considered. We also urge the PEB to amend the report to explicitly state thatthe burden of proof is on the party attempting to enforce a mortgage note under UCC 3- 309s lost note provision and thatthe proof required includes proof that the note has not been previously been sold or transferred by it or any of its allegedpredecessors in title. The current language in the Report, noting that the person seeking to enforce the note under 3-309

must show that the person was formerly in possession of the note and entitled to enforce it when the loss of possessionoccurred and that the loss of possession was not as a result of transfer (as defined above) or lawful seizure is insufficientlyclear on this point.


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Christopher L. Peterson

Associate Dean for Academic Affairs

Professor of Law

University of Utah,S.J. Quinney College of Law

332 South 1400 East, Room 101Salt Lake City, UT 84112-0730

(801)581-6655

/s/Katherine Porter

Professor of Law

University of Iowa

Iowa City, IA 52242

(319) 335-7490

/s/Elizabeth Renuart

Assistant Professor of Law

Albany Law School80 New Scotland Avenue

Albany, NY 12208(518) 445-3358

/s/Alan M. White

Professor of Law

Valparaiso University School of Law656 S. Greenwich St.

Valparaiso IN 46383

(219) 465-7842

Cc: Lance Leibman, ALI Director

Deanne Dissenger, ALI Associate Deputy Director

John Sebert, NCCUSL President

Prof. Neil Cohen, Brooklyn Law School


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From: Jack Wolfe

Sent: Monday, April 18, 2011 5:30 AM

To: Deanne Dissinger

Cc: john hooge

Subject: UCC vs. Residential Real Estate

6/2/2011

Mr. Dissinger:Please see attached letter for your review and comment. I look forward to the latter. I believe the greatest issue facinhe UCC right now is not so much the ruling in Ibanez as the impact of MERS as to Article 3 requirements to endorshe note in bearer when possession alone allows enforcement.

Sincerely,

ack B. Wolfe, Esq.Wolfe Law Group, PLLC24901 Northwestern Hwy, Suite 212Southfield, MI 48075Phone:(248) 809-2005Cell: (248) 229-1187Fax: (248) 809-9969

RS Circular 230 Notice: We are required to advise you that no person or entity may use any tax advice in thisommunication or any attachment to (i) avoid any penalty under federal tax law or (ii) promote, market or recommeny purchase or investment.

CONFIDENTIALITY NOTICE: This transmission is intended only for the addressee shown above. It may contain

nformation that is privileged, confidential, or otherwise protected from disclosure. If you are not the intended recipiplease do not read, copy, or use it, and do not disclose it to others. Please notify the sender of the delivery error byeplying to this message and then delete it from your system.

*All communications are confidential and are not to be filed with a Court, made part of a public record, or otherwishared with anyone other than the recipient.**


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Mr. Dissinger:

I am a licensed attorney in Michigan who represents many distressed homeowners trying toprevent being evicted from their homes where they closed on a Mortgage Electronic RegistrationSystems, Inc. ("MERS") originated Mortgage (affectionately referred to by MERS as the

"MOM") and a note in the name of the lender. My position is that because the note and mortgageare split or separated at closing, and given that the mortgage is ancillary to the note, the mortgageis rendered void by this disconnection. It is important to note that MERS own internal policiesrequire an endorsed note in blank to lift a stay in bankruptcy and to foreclose a mortgage.

My analysis that an endorsed note in blank is required with the MOM is based upon UCC 3-301,which requires that a "person entitled to enforce an instrument" (i.e., note), means the holder ofthe instrument. Holder would typically mean the person to whom the note is specificallyendorsed; however, where the note is endorsed in blank, it can be transferred by possessionalone. See UCC 3-205(2).

Accordingly, viewing this in the reverse, at the closing, if the split or separation of the mortgageobligations is not to render the mortgage void, then MERS must be able to enforce the MOMthrough the note. To do so, MERS must be a "holder" of the note, which requires, at a minimum,possession of the note. MERS allegedly possesses the note because it has created a "network"wherein a member/ lender elect a qualifying officer in its company to act on behalf of MERS,which would apparently satisfy the dominion aspect of "holder-ship" but not the endorsementrequirement.

As a matter of MERS operating policy, the note is never specifically endorsed to MERS (MERSdoes not collect payments) so that pursuant to the interplay between UCC sections 3-205 and 3-301, the only way the MERS Network can connect the MOM to the note is if the note isendorsed in blank AND THIS NEVER OCCURS. The result should be an unsecured notewhich can be enforced potentially through judicial foreclosure by arguing an equitable lien butthe lender or servicer should not be able to access non-judicial foreclosure statutes given the splitof the mortgage obligations at the closing.

MERS tries to overcome this simple black letter UCC legal reality, the impact of which wouldaffect 62 million mortgages, by asserting that it acts as the "master agent" for its Network and isconnected to the note through principles of principal and agency law. However, principal andagency law has always existed with mortgage loans or you could not have servicing by thirdparties on behalf of the owners of the instruments or investors therein. See UCC 1-103.

MERS further argues that mortgage obligations can be split between beneficial and legalinterests--which is true or you could not have a secondary market--and since the lender is thelegal and beneficial owner of the note and the beneficial owner of the mortgage (MERS is thealleged legal owner of the mortgage as the "nominee of the lender"), this creates a sufficientnexus which does not require endorsement to negotiate and enforce a note. An interesting theory[completely refuted by Professor Peterson in his article, Foreclosure, Subprime MortgageLending, and the Mortgage Electronic Registration System, 78 U. Cinn. L. Rev. 1359 (Summer2010)] and certainly new law. Moreover, to agree with these MERS connection theories will


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completely emasculate the requirement of endorsement under the UCC and directly contradictsUCC provisions on point and would, therefore, be contrary to UCC 1-103.

MERS created for the first time in secured real estate closings a lender who wasnot the mortgagee and that this dramatic change of relationship between the mortgage

obligations only exacerbated the cavaliar attitude toward the entire origination side of theindustry. MERS had two primary business objectives which were to speed up securitizations byeliminating the recorded assignment and saving money to its members by eliminating the need topay the assignment recording fee of approximately $22.00; however, what likely drove mostmembership in the Network by most mortgage bankers was the saving of the $22.00 fee. If thatfee savings was compromised by having to deal with an endorsed note and the extra security andprecautions which would naturally exist when you posses a negotiable instrument, then thisadditional cost would likely dwarf the fee savings and many would not have joined the Network.Where a note is possessed or transferred and it is not endorsed in blank there is no fear ofnegotiation and no need to become more cautious with possessing the instrument. In myempirical opinion, the underlying policy of the UCC to require the endorsement of the note was

to create both a relationship to the note and accountability. Without the endorsement, thereis neither accountability nor relationship with the result being an unenforceable mortgage noit tomention a completely cavalier attitiude toward the note.

I read with considerable intrigue the March 29, 2011, Memorandum to John A. Sebert, Chair,Permanent Editorial Board for the Uniform Commercial Code (PEB), given that in the afternoonof April 14, 2011, before Federal Judge Marianne Battani of the Eastern District of Michigan,Southern Division, Case No.2:10-cv-13175-MOB, counsel for MERS stated that the UCC doesnot apply to mortgage transactions and that MERS under UCC 3-3301 could be a non-holder inpossession, which is preposterous. In addition, and as important, he said that the efficacy of theUCC as to notes and their negotiation is no longer relevant given commerce today which protectsagainst the unlawful negotiation and/or enforcement of notes and gave as an example The FairDebt Collections Act. The Judge ruled in MERS favor. I intend to attach your Memo to mymotion for reconsideration and will appeal the decision.

Here is my interest and queries: While Ibanez may have been the motivating force behind theaforementioned Memo to Mr. Sebert, the MERS split issue has much greater impact and truechange to the mortgage banking industry and homeowners. To this end, first, are you aware ofthe MERS split issue? Second, do you believe that the UCC has impact on the enforcement ofmortgage obligations? Third, does the UCC or principles of agency control the enforcement ofthe note and, by its ancillary relationship to the note, a mortgage? Fourth, do you analyze theUCC as requiring that in order for the MOMto have ancillary power to enforce the note, shouldthere be an endorsement in blank to MERS on the note? Fifth, does not the UCC require that thenote in a servicing or third party enforcement relationship be possessed by the servicer orenforcer and that the note be endorsed in blank? The latter is the classic secondary markettransaction between either FNMA or FHLMC and their seller/servicer.

The UCC must stand up against the big lie being promoted by MERS. The MERS business planwas an untested private response for the need for speed in private securitizations and eithermistakenly or intentionally eliminated the need for an endorsed note. In my opinion, the latter


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occurred based upon an incorrect reliance on agency law and/or that, since mortgage obligationscan be split between legal and beneficial ownership, it follows that the actual instruments can besplit or separated at closing. The result of the MOM without endorsement should be a voidmortgage; however, lenders will not be without a remedy in that they can still sue on the note,seek coverage of the unsecured note by suing the title insurers who issued first lien letters or sue

the homeowner under judicial foreclosure asserting an equitable lien [however, see Phyllis K.Slesinger & Daniel McLaughlin,Mortgage Electronic Registration System, 31 Idaho L. Rev 805(1995), which promoted no need to endorse the note if no enforcement action].Under the latter application of the UCC to residential loan mortgage closings to require anendorsed note when closing with the MOM, courts could now restate mortgages to current fairmarket values without the need for statutory authority. The economy would positively explode asthis would put an end to the bank dominated foreclosure process of failed loan modifications andshort sales to third parties but not homeowners.

The courtesy of your reply and thoughts are greatly appreciated as this issue demands a positiontaken by the PEB no different thenIbanez. I have carbon copied the author of an excellent article

on this topic, Mr. Hooge, Mortgage Electronic Registration Systems, Inc.: A Survey of CasesDiscussing MERS Authority to Act, Hodge, John R. and Williams, Laurie, Norton BankruptcyLaw Advisor, Issue No. 8 (August, 2010), as this issue of the UCC vs. MERS must bethoughtfully explored and he with his co-author are scouring the local and national court systemsto find and analyze cases on this issue.

The courtesy of your reply is requested.

Thank you.

Jack B. Wolfe, Esq.


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From: Jack Wolfe

Sent: Monday, July 25, 2011 11:29 AM


Subject: Re: Comments on Draft PEB Report

7/26/2011

Ms. Dissinger:

Yes, by all means, make my April 18, 2011, letter publicly available on the condition that the belowmay or will be used to supplement my comments as these cases and rulings occurred after my April18, 2011 letter to you, and are very pertinent to the discussion:

The Michigan Court of Appeals in the landmark decision ofResidential Funding Co, LLC vSaurman, Docket No. 290248, and the companion case of Bank of New York Trust Co v Messner,Docket No. 291443, on April 21, 2011 (RFC Opinion ) held that MERS did not have standing topursue non-judicial foreclosure in Michigan as MERS had no interest whatsoever in the note, whichwas required under the applicable Michigan non-judicial foreclosure statute. In footnote 6 of the RFOpinion, it appeared, though, that the Court would allow a non-judicial foreclosure if, prior to theheriff sale, MERS assigned to the foreclosing lender, who had standing. However, on June 7, 2011he New York Court of Appeals for the Second Division issued an opinion inBank of New York v

Silverberg, 2011 NY Slip OP 05002 (June 7, 2011), that an assignment of MERS to an assignee forhe purpose of foreclosing is a nullity where MERS had no interest in the note distinguishing

Mortgage Elec. Registration Sys., Inc. v Coakley, 41 AD3d 674 (NY 2007), as the latter case alsonvolved a MERS assignment but, at the time of the assignment, the relevant note was indorsed in

blank to MERS, wherein the Silverberg case, there was no endorsement of the note whatsoever.Simply put, if the note in RFCor Silverberg had been endorsed in blank when MERS was mortgagehen both decisions would have been in favor of the foreclosing lender. The need to endorse notes t

enforce mortgages requires a UCC analysis. The UCC requires that at the time of inception, theMERS mortgage is a nullity unless the originating note was indorsed in blank or bearer. Thispresumes for the sake of argument that the MERS Network created the necessary "possession" of thnote. Possession is not a word defined in the UCC but, in the event the endorsement argument isdeemed not to aply to the MERS mortgage contrary to the recent case law cited herein, the issue ofwhether the MERS Network accomplished possession, as intended in commercially reasonableransactions, we would assert is extremely suspect."

Thank you.

ack B. Wolfe, Esq.Wolfe Law Group, PLLC24901 Northwestern Hwy, Suite 212Southfield, MI 48075Phone: (248) 809-2005Cell: (248) 229-1187Fax: (248) 809-9969

RS Circular 230 Notice: We are required to advise you that no person or entity may use any taxadvice in this communication or any attachment to (i) avoid any penalty under federal tax law or (ii

promote, market or recommend any purchase or investment.


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From: Alan White [[email protected]]

Sent: Friday, May 27, 2011 4:28 PM


Subject: Permanent Editorial Board Draft Report Mortgage Notes

Attachments: AW Comments PEB Draft Report Mortgage Notes.PDF

6/2/2011

Dear Ms. Dissinger,

Attached is a letter with my comments regarding the draft PEB report. I presently teach UCC (Payments) and Consumer Protectioaw. I have written extensively about the mortgage foreclosure crisis, and practiced in Philadelphia for many years representingomeowners in foreclosure actions. I am also a member of ALI.

Cordially,

Alan White

Alan M. Whiterofessor

Valparaiso University School of Law56 S. Greenwich St.

Valparaiso IN 4638319 465 7842ax 219 465 7872

[email protected] available on SSRN at: http://ssrn.com/author=854609

Blog: http://pubcit.typepad.com/clpblog/


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From: Dean T. Kirby, Jr. [[email protected]]

Sent: Friday, May 27, 2011 5:54 PM


Cc: [email protected]; Robertson, James V; Stern, Brian; Ellen Friedman; Arnold Rosenberg

Subject: Draft PEB Report on UCC Rules Applicable to Assignment of Mortgage Notes / California UCC CommitteeComment

Attachments: Calif UCC Cttee Comment to PEB Report Final.pdf

6/2/2011

Dear Ms. Dissinger:

Attached to this email are comments of the Uniform Commercial Code Committee of Business Law Section of the State Bar o

California to the Draft Report of the PEB on the UCC Rules Applicable to the Assignment of Mortgage Notes and to the

Ownership and Enforcement of Those Notes and Mortgages Securing Them

he Committee thanks the PEB for this opportunity to comment. We look forward to issuance of the Report.

Dean

==================================

Dean T. Kirby, Jr.

KIRBY & McGUINN, A P.C.

Documents

PEB DRAFT REPORT ON UCC RULES APPLICABLE TO THE ASSIGNMENT OF MORTGAGE NOTES AND TO THE OWNERSHIP & ENFORCEMENT OF THOSE NOTES AND...3/29/2011