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									Does	“the	Mortgage	Follow	the	Note”?
Lessons	Learned,	Best	Practices	for	Assignment	of	a	Note	and	Mortgage
Contributing Editor:                                                                                                                                        security. 5 Section
Deborah L. Thorne                                                  About the Authors                                                                        9-203(g) of the
Barnes & Thornburg LLP; Chicago                    Deborah Thorne is a partner in the                                                                       UCC provides that                           Chicago office of Barnes & Thornburg                                                                     “[t]he attachment of
Also Written by:                                   LLP in the Finance, Insolvency and                                                                       a security interest in
Ethel Hong Badawi                                  Restructuring Department, and serves on                                                                  a right to payment
Barnes & Thornburg LLP; Indianapolis               ABI’s Board of Directors. Ethel Badawi                                                                   or performance                             is an associate in the firm’s Indianapolis                                                               secured by a secu-
                                                                                                                                                            rity interest or other

                                                   office in the Finance, Insolvency and
          sk any first-year law student            Restructuring Department.                                                            Ethel Hong Badawi   lien on personal or
          who has completed a prop-                                                                                                                         real property is also
          erty course and he or she will      what would constitute the proper method                                                  attachment of a security interest in the
tell you that good title to real property     for the assignment of a mortgage note?                                                   security interest, mortgage, or other
requires a recording of the deed in the       First, mortgage notes are negotiable                                                     lien.” In some states, absent an express
local county records. Have a lien on          instruments pursuant to § 3-104(a) of the                                                transfer of the mortgage or security
real property? Record it with the local       Uniform Commercial Code (UCC). Also,                                                     interest, the noteholder is vested with
county. An easement? Record. In law           under § 3-301 of the UCC, the right to                                                   only an equitable interest in the mort-
school, if it is not recorded, it might as    enforcement of a note lies with the holder                                               gage, while legal title to the mortgage
well not exist. Ask any law student who       of a note and nonholders in possession of                                                remains with the mortgage-holder that
has taken secured transactions or a com-      a note. “Nonholders in possession” must                                                  holds the mortgage in constructive trust
mercial paper course, and he or she will      demonstrate possession of the note and                                                   for the noteholder.6 Even so, as a matter
also tell you that in order to enforce and    that the transferor was the holder at the                                                of state-specific real estate law, without
collect a note, one must be holder. The       time of the transfer to the transferee in                                                a recorded mortgage assignment, a party
requirements seem so simple, so black         order to enforce the note.1                                                              may not be able to enforce the mort-
and white. So then why are courts reject-
ing foreclosure actions for chain-of-title
issues and improper note transfers, and
what can lenders or servicers do to avoid
these issues?
                                                    Lien on Me
                     With the increase
                     in foreclosures and          Transfer of the note by a holder is                                                  gage. Section 9-607(b) of the UCC pro-
                     single-asset real        usually accomplished by negotiation,                                                     vides that a secured party may record a
                     estate cases, courts     which requires the transfer of posses-                                                   copy of the security agreement transfer-
                     have increased           sion and endorsement of the note. 2                                                      ring an interest in the note to the secured
                     scrutiny of note         Endorsement may be made to a specific                                                    party and the secured party’s sworn
                     transfers, mortgage      person to whom the instrument is made                                                    affidavit in recordable form stating that
                     assignments and          payable or “in blank,” in which case the                                                 the default has occurred in the office
                     the transfer of col-     endorsement does not identify the person                                                 in which the mortgage is recorded, in
Deborah L. Thorne    lateral documents.       to whom the note is payable.3 In the case                                                order for the secured party to exercise
                     Further complicat-       of blank endorsements, the note may be                                                   the right to enforce the mortgage non-
ing this problem are the varying stan-        negotiated by possession alone.4 In either                                               judicially. Further, because the assign-
dards and practices for assignment of         case, possession of the note entitles the                                                ment of a note is not made publicly and
interests from lender to lender and the       holder to collect and enforce the note.                                                  a borrower may not have any notice of
customs and practices of securitiza-              Section 3-301 also permits a party to                                                the assignment, for practical purposes,
tion. Unfortunately, the customs and          enforce a mortgage note if the note has                                                  even if the note was transferred, an
practices for the assignment or transfer      been lost, stolen or destroyed. However,                                                 unrecorded assignment of the mortgage
of a note and the accompanying col-           in these instances, the party that seeks to                                              may weigh heavily in a court’s determi-
lateral documents may not hold up in          enforce the note must prove that it has                                                  nation of the proper party and standing
an enforcement action before a court.         the right to enforce the note, commonly                                                  to foreclosure the mortgage. Finally, as
The recent criticism of the Mortgage          established by a lost document affidavit.                                                5	 See	 Draft	 Report	 of	 the	 Permanent	 Editorial	 Board	 on	 the	 UCC	 Rules	
Electronic Registration Systems                                                                                                           Applicable	to	the	Assignment	of	Mortgages	Notes	and	to	the	Ownership	
(MERS) and securitization practices           “Mortgage Follows the Note”                                                                 and	 Enforcement	 of	 Those	 Notes	 and	 the	 Mortgages	 Securing	 Them,	
                                                                                                                                          Permanent	 Editorial	 Board	 for	 the	 Uniform	 Commercial	 Code,	 http://
highlight the problem.                            The common-law rule is that the                                               
                                                                                                                                          Circulation_Draft.pdf;	Carpenter v. Longan,	83	U.S.	271,	274	(1872)	(“The	
                                              transfer of the note carries with it the
Back to the Basics:                           1	   U.C.C.	§§	3-301	and	3-203	(2002),	cmt.	2.	
                                                                                                                                          note	 and	 mortgage	 are	 inseparable...the	 assignment	 of	 the	 note	 carries	
                                                                                                                                          the	mortgage	with	it,	while	an	assignment	of	the	latter	alone	is	a	nullity.”).	

UCC Article 3 Primer                          2	                                                                                       6	 In	 a	 few	 states,	 such	 as	 Massachusetts,	 state	 courts	 have	 held	 that	
                                                   U.C.C.	§	3-203	(2002).
                                              3	   U.C.C.	§	3-205	(2002).                                                                 legal	 title	 to	 the	 mortgage	 is	 held	 by	 another	 party	 in	 trust	 for	 the	
     Forgetting for the moment the reali-     4	   U.C.C.	 §	 3-201(b)	 (2002)	 (“[N]egotiation	 requires	 transfer	 of	 possession	      noteholder,	and	the	mortgage-holder	must	be	named	in	any	foreclosure	
                                                                                                                                          proceeding.	 See First Nat’l Bank of Cape Cod v. North Adams Hoosac
                                                   of	the	instrument	and	its	[e]ndorsement	by	the	holder.	If	an	instrument	is	
ties or practicalities of note assignments,        payable	to	bearer,	it	may	be	negotiated	by	transfer	of	possession	alone.”).            Savs. Bank,	7	Mass.	App.	Ct.	790,	796	(1979).	

54 May 2011	                                                                                                                                                                                         ABI Journal
the following cases demonstrate, reli-        as trustee, were recorded on May 23,           in the subject mortgage other than mere-
ance on the common law principles             2008. On Sept. 2, 2008, American Home          ly servicing the mortgage payments. In
of note assignment alone may lead to          Mortgage Servicing Inc., “as successor-        Bayview, the assignment of the mortgage
unpredictable results.                        in-interest” to Option One, executed an        was dated June 22, 2004, and assigned
                                              assignment of mortgage to U.S. Bank,           the interest of Old National Bank’s (the
U.S. Bank v. Ibanez                           which was recorded nine days later. It         original lender) interest in the mortgage
    The recent Massachusetts Supreme          is unclear from the facts described in         to Bayview Financial Trading Group
Court decision in U.S. Bank National          the case whether this was a new assign-        LP (the “partnership”). However, the
Association v. Ibanez 7 highlights the        ment or if the prior blank assignment by       partnership’s servicer, Bayview Loan
issues raised by inaccurate recording         Option One was stamped with U.S. Bank          Servicing LLC, brought the foreclosure
of mortgage assignments. U.S. Bank            as assignee.                                   action and asserted that it was the owner
National Association and Wells Fargo              Similarly, in Wells Fargo v. LaRace,       of the mortgage and note at issue, and
Bank NA each filed separate actions           Mark and Tammy LaRace gave a mort-             therefore was entitled to foreclose.
in the Massachusetts Land Court for a         gage to Option One as security for a               At a hearing on Bayview’s motion for
declaration of clear title after each fore-   $103,200 loan, and the mortgage was            summary judgment, Bayview’s counsel
closed on residential mortgages and pur-      recorded on the same day, on May 19,           acknowledged that Bayview was a legal
chased the property at the foreclosure        2005. On May 26, 2005, Option One              entity separate and distinct from the part-
sale. In both instances, the trial court      executed an assignment in blank. Well          nership, that the partnership is the correct
ruled that the foreclosure sales were         Fargo asserted that Option One assigned        legal entity to which Old National Bank
invalid because the foreclosure sales         the mortgage to Bank of America on a           assigned the mortgage and note, and that
named U.S. Bank and Wells Fargo as            July 28, 2005, and pursuant to a sale and      Bayview is not the correct plaintiff. 9
the mortgage-holders, but neither had         serving agreement, Bank of America             Based on this acknowledgment and cou-
yet been assigned the mortgages at the        assigned the mortgage to Asset Backed          pled with the fact that no evidence was
time of the respective foreclosure sales,     Funding Corporation (ABFC) in an Oct.          presented that Bayview obtained legal
therefore, at the time of the publication     1, 2005, mortgage loan-purchase agree-         interest in the subject property, the court
of notice and foreclosure sale, neither       ment. AFBC then assigned the LaRace            concluded that “there was no basis for
had an interest in the mortgages. Both        mortgage to Wells Fargo, as trustee for a      entry of a summary judgment in favor of
moved to vacate the judgment on the           pool of securitized mortgages. However,        Bayview, a stranger to the mortgage.”10
grounds that they could demonstrate that      Option One remained the record-holder
they were the holders of the note and         of the mortgage. The foreclosure sale          Bank of America v. Alvarado
mortgage at foreclosure. Because the          occurred on July 5, 2007, and the statu-           In Bank of America NA v. Alvarado,11
two actions addressed the same issues,        tory foreclosure affidavit and foreclosure     the defendant did not dispute that
the cases were heard together on appeal.      deed were executed on May 7, 2008, by          she executed a note and mortgage to
    In 2005, Antonio Ibanez took out a        Wells Fargo.                                   Washington Mutual Bank and that she
loan for $103,500, which was secured              In both Ibanez and LaRace, the             was in default of the loan; instead, she
by a mortgage to the original lender,         alleged assignments to both mortgages          contested the chain of ownership of the
Rose Mortgage Inc. The original mort-         were not recorded at the time of the fore-     note. The defendant further contended
gage was properly recorded, and several       closure sale, and neither U.S. Bank nor        that because the plaintiff was not in pos-
days later, Rose Mortgage executed an         Wells Fargo produced executed docu-            session of the note, it could not enforce
assignment of the Ibanez mortgage in          mentation of the alleged assignments.          the note. The plaintiff, Bank of America,
blank. The assignment was eventually          Because Massachusetts permits nonjudi-         conceded that it was not in possession
stamped with the name of Option One           cial foreclosure, strict compliance with       of the note because the note was lost
Mortgage Corp. as assignee, which was         the statutory requirements is imposed on       by Washington Mutual before the loan
recorded on June 7, 2006. Prior to the        mortgage-holders. One of these require-        was securitized and transferred.12 Bank
recording of the Option One mortgage          ments is that the power of sale can only       of America presented an affidavit of
assignment, Option One executed a sub-        be exercised by the mortgagee. The             lost note as evidence that the original
sequent assignment in blank. U.S. Bank        Massachusetts Supreme Court held that          note was certified as lost by Washington
asserted that Option One assigned the         U.S. Bank and Wells Fargo lacked the           Mutual, as original lender, and that the
Ibanez mortgage to Lehman Brothers            authority to exercise the power of sale        obligation represented in the affidavit
Bank FSB, which was assigned to               because they were not the assignees of         was intended to be included in the pooled
Lehman Brothers Holdings Inc., which          the mortgages at the time of the notice of     loans that were transferred.
then assigned it to the Structured Asset      sale and subsequent foreclosure sale.              The Superior Court of New Jersey
Securities Corp., as part of a securitiza-                                                   Chancery relied on equity and unjust
tion, and then assigned it to U.S. Bank,      Bayview v. Nelson                              enrichment to conclude that to preclude
as trustee, for the Structured Asset              In Bayview Loan Servicing LLC v.           Bank of America’s right to enforce the
Securities Corp. Mortgage Pass-Through        Nelson,8 the Illinois appellate court held     note would unjustly enrich the defendant.
Certificates, Series 2006-Z.                  that a loan-servicing company was not          The court held that New Jersey recog-
    On July 5, 2007, U.S. Bank, as            the proper party to bring a foreclosure        9	 Id.	at	943.
trustee, purchased the Ibanez prop-           action because the assignment of the note      10	 Id.	at	944.
                                                                                             11	 Superior	 Court	 of	 New	 Jersey,	 Chancery,	 Bergen	 County,	 Docket	 No.	
erty at the nonjudicial foreclosure sale.     and the mortgage were made to a sepa-              BER-F-47941-08	(Jan.	7,	2011).
The foreclosure deed and the statutory        rate partnership and the loan-servicing        12	 Bank of America NA v. Alvarado,	 Case	 No.	 BER-F-47941-08,	 (N.J.	
                                                                                                 Super.	Ct.	Ch.	Div.	Jan.	7,	2011).
foreclosure affidavit from U.S. Bank,         company did not obtain any legal interest
7	 941	N.E.2d	40	(Mass.	2011).                8	 890	N.E.2d	940,	944	(Ill.	App.	Ct.	2008).                                                   continued on page 84

ABI Journal                                                                                                                                        May 2011 55
Lien on Me: Best Practices for Assignment of a Note and Mortgage
from page 55

nizes “an equitable assignment when the                               not sufficient to establish the mortgage-                                             to the instrument. 18 While the practice
equities of a circumstance so compel.”13                              holder’s right to foreclose at the time of                                            of blank endorsements has been widely
    Interestingly, the court also addressed                           the foreclosure sale.16                                                               used in securitization, the practice has
the possibility that another person may                                   Lastly, in many states, the traditional                                           recently been called into question by
seek to enforce the note in the future.                               rule is that an assignment of the mortgage                                            state attorneys general and the Senate
Accordingly, the court also ordered that                              without the corresponding note is inef-                                               Banking Committee, so the better prac-
Bank of America be required to inter-                                 fective (i.e., the note does not follow the                                           tice is to use a specific endorsemsent.
vene and participate in the defendant’s                               mortgage).17 Prior to initiating any foreclo-                                              3. Confirm possession of the note.
defense in the event another party sought                             sure proceeding, lenders and their counsel                                            If the note has been lost, an affidavit
to enforce the note against the defendant                             should, at minimum, ensure the following:                                             of lost note by the assignor of the note
such that the defendant would not be                                                                                                                        may suffice.
liable twice on the same note.                                                                                                                                   4. Confirm that all required assign-
                                                                      Being mindful of the basic principles                                                 ments of the mortgage, and assignment
Lessons Learned, Best Practices
to Ensure Proper Chain of Title                                       of property law, secured transactions                                                 of rents and leases, if applicable, have
                                                                                                                                                            been properly recorded in the local land
     These cases highlight the scrutiny
courts give to the chain of title and loan
                                                                       and commercial paper will prevent                                                    records. There should be a correspond-
                                                                                                                                                            ing assignment of the mortgage with
documentation in support of foreclosure
actions nationwide. Each case under-
                                                                       the inconsistencies experienced by                                                   each transfer. The date of execution for
                                                                                                                                                            each assignment should ideally corre-
scores the importance of ensuring prop-
er documentation prior to initiating any
                                                                       many plaintiff lenders and servicers                                                 spond to the date of the transfer. If the
                                                                                                                                                            assignment is executed after the foreclo-
foreclosure action.
     First, in addition to proper negotia-
                                                                                  who were not.                                                             sure proceeding is commenced but the
                                                                                                                                                            effective date relates back to a date prior
tion of the note, there is no substitute for                               1. Any purchase agreement for the                                                to the commencement of foreclosure pro-
a formal assignment of the mortgage. All                              note and mortgage at issue should include                                             ceedings, this may still create potential
assignments should be dated, identify the                             a specific intent to sell and granting lan-                                           chain-of-title issue.
assignor and assignee, and be recorded.                               guage for the mortgage loan with a specif-
Blank assignments may not be sufficient                                                                                                                     Conclusion
                                                                      ic identification of the loan at issue. This                                              Being mindful of the basic principles
and may be void.14 Even a statement of a                              should include language that establishes
future intent to sell or transfer a note or                                                                                                                 of property law, secured transactions and
                                                                      an intent to sell the mortgage loan(s) to                                             commercial paper will prevent the incon-
mortgage may not be sufficient evidence                               the purchaser, including a specific listing
of an actual assignment. Documents                                                                                                                          sistencies experienced by many plaintiff
                                                                      of each mortgage loan being sold, grant-                                              lenders and servicers who were not.
(e.g., purchase agreements, pooling and                               ing language specifically conveying the
servicing agreements, etc.) evidencing an                                                                                                                   Although ensuring the proper transfer
                                                                      mortgage loans and language identifying                                               documents and recording the documents
intent to assign the mortgage are not suf-                            the effective date of the sale transaction.
ficient proof of actual assignment.15                                                                                                                       may create a delay in initiating a fore-
                                                                           2. Confirm proper transfer and                                                   closure proceeding, resolving any issues
     Second, the chain of title should cor-                           endorsement of the note. The endorse-
respond and make chronological sense.                                                                                                                       prior to litigation will almost certainly
                                                                      ment should be made on the instrument                                                 alleviate lenders and their counsel of the
Altering the “effective date” to a date                               itself or on separate paper firmly affixed
prior to the foreclosure sale if the execu-                                                                                                                 headaches of heightened scrutiny and
tion of the assignment is after the sale is
                                                                      16	 Id. See also Davenport v. HSBC Bank USA,	739	N.W.	2d	383	(Mich.	Ct.	              additional costs in foreclosure actions
                                                                          App.	 2007)	 (interest	 in	 mortgage	 and	 note	 must	 be	 acquired	 prior	 to	
13	 Id.	                                                                  first	notice	of	publication	for	foreclosure).	                                    by courts. n
                                                                      17 Vega v. CTX Mortg. Co. LLC,	 ----F.Supp.2d----,	 2011	 WL	 192514	 (D.	
14 See U.S. Bank Nat'l Ass'n v. Ibanez,	941	N.E.2d	40	(Mass.	2011).                                                                                         18	 U.C.C.	§	3-204(a)	(2002).
15	 Id.                                                                   Nev.	2011).

                                                   Copyright 2011
                                                   American Bankruptcy Institute.
                                                   Please contact ABI at (703) 739-0800 for reprint permission.

84 May 2011	                                                                                                                                                                                ABI Journal

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