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                                    Complex UCC Issues

Deborah L. Thorne, Moderator | Barnes & Thornburg LLP; Chicago

                                                                             Ed uc a tio n al
                                                                             Mat e rial s
           Hon. Dennis R. Dow | U.S. Bankruptcy Court (W.D. Mo.)
                                     Kansas City

                Terri L. Gardner | Nelson Mullins Riley & Scarborough, LLP
                                     Raleigh, N.C.

               Steven O. Weise | Proskauer; Los Angeles

                                     American Bankruptcy Institute

                                     COMPLEX UCC ISSUES

                                    Honorable Dennis R. Dow
                                  United States Bankruptcy Court
                                     Charles Evans Whittaker
                                     United States Courthouse
                                 400 East Ninth Street, Room 6562
                                     Kansas City, MO 64106

                                     Terri L. Gardner
                                 GlenLake One, Suite 200
                                   4140 Parklake Avenue
                                    Raleigh, NC 27612

                                         Steven O. Weise
                                    PROSKAUER ROSE LLP
                                 2049 Century Park East, Suite3200
                                   Los Angeles, CA 90067-3206

                                        Deborah L. Thorne
                                 BARNES & THORNBURG LLP
                                 1 North Wacker Drive, Suite 4400
                                        Chicago, IL 606060

I. Negative Equity, Is it part of the Creditor’s Purchase Money
   Security Interest? Split Among the Circuits.
                Ninth Circuit Counters Trend; Holds Negative Equity Is Not
                         Part of Creditor's Purchase Money Claim

               Americredit Financial Services, Inc. v. Penrod (In re Penrod),
                               611 F.3d 1158 (9th Cir. 2010)

       In Penrod, the Ninth Circuit Court of Appeals held that a secured vehicle lender does not

have a purchase money security interest in that portion of the claim representing finance of the

negative equity on a debtor's trade-in vehicle. In so doing, Penrod creates a circuit split, since each

circuit court previously deciding the question had held to the contrary. Eight circuits have held that a

creditor has a purchase money security interest in the financed negative equity of a debtor's trade-in

                                        29TH ANNUAL SPRING MEETING

      vehicle. Nuvell Credit Corp. v. Westfall (In re Westfall), 599 F.3d 498 (6`" Cir. 2010); In re Howard,

      597 F.3d 852 (7th Cir. 2010); Reiber v. GMAC, LLC (In re Peaslee), 585 F.3d 53 (2d Cir. 2009);

      Ford Motor Credit Co. v. Dale (In re Dale), 582 F.3d 568 (5th Cir. 2009); Ford Motor Credit Co. v.

      Mierkowski (In re Mierkowski), 580 F.3d 740 (8`h Cir. 2009); Ford v. Ford Motor Credit Co. (In re

      Ford), 574 F.3d 1279 (10`" Cir. 2009); In re Price, 562 F.3d 618 (4`h Cir. 2009); and Graupner v.

      Nuvell Credit Corp. (In re Graupner), 537 F.3d 1295 (11`h Cir. 2008).

             The facts in Penrod are relatively straight forward and typical. The debtor purchased a

      2005 Ford Taurus from a California Ford dealership. The price of the car was approximately

      $25,600.00 and included approximately $7,000.00 in negative equity on a trade-in. The paper

      was subsequently assigned to the appellant, Americredit Financial Services. Less than 910 days

      after purchasing the vehicle, debtor filed a Chapter 13 petition in which she proposed to

      bifurcate Americredit's claim into secured and unsecured portions. Americredit objected

      claiming that it had a purchase money security interest in the entire amount, including the

      negative equity. The bankruptcy court overruled the objection and confirmed the plan.

      Americredit appealed and the bankruptcy court was affirmed by the Bankruptcy Appellate Panel.

              The court begins by noting that the phrase "purchase money security interest" is not defined

      in the Bankruptcy Code and resorts to state law for a determination of the meaning of the phrase.

      Referring to the California Uniform Commercial Code, the court notes that the phrase is defined in §

      9-103. According to the various subsections of that statute, a security interest is a PMSI to the extent

      the goods are "purchase money collateral." "Purchase money collateral" means goods that secure a

      "purchase money obligation." A "purchase money obligation" means an obligation incurred as all or

      part of the price of the collateral or for value given to enable the debtor to acquire rights in the

      collateral. As other courts have noted, the Official Comment to this section provides that the term

      "price" and the phrase "value given to enable" include obligations incurred in connection with

      acquiring rights in the collateral including certain examples such as sales taxes, finance charges,

      costs of collection and other similar obligations. The court rejects Americredit's argument that the

                                      American Bankruptcy Institute

negative equity is an expense holding that it was inappropriate to characterize the payment of an

antecedent debt as an expense.

        Americredit next argued is that the balance due on the prior vehicle was closely connected

with the acquisition of the new vehicle The court rejects this argument holding that while it may

have become customary for the difference between value of the trade-in and the debt on the trade-

in to be rolled into the financing of the new vehicle, that does not mean that negative equity is part

of the price of the vehicle or value given for it. In the court's view, the value given to pay off

negative equity does not acquire rights in the new collateral, nor does it constitute any part of the

price of the vehicle.

        The court also rejects Americredit's argument that negative equity is encompassed by the

language of Official Comment because it is an "other similar obligation." The court held that

negative equity is unlike the other kinds of obligations included in that list.

        Americredit next argued that the California Automobile Sales Finance Act clearly includes

negative equity as part of the "cash price" of the vehicle and that the court should construe that Act in

pari materia with Article 9 and the Bankruptcy Code. The court disagreed holding that the Sales

Finance Act has an entirely different purpose, being a disclosure statute and not intended to regulate

purchase money security interests.

       Finally, the court holds that it would be inappropriate to extend purchase money security

interest status to the negative equity based on the phrase "value given to enable the debtor to acquire

rights in/or use of the collateral." In its view, that language was added not to expand the scope of

purchase money security interest but rather to expand the pool of eligible creditors. Specifically, the

court held that the "price" prong of that provision is intended to apply to transactions financed by the

seller, whereas the phrase "value given to enable the debtor to acquire rights in the collateral" is

intended to apply to transactions financed by third party lenders. As such, the latter phrase was not

designed to expand the scope of purchase money security interests and was not appropriately

considered in determining whether the lender had a purchase money security interest in financed

negative equity.

                                    29TH ANNUAL SPRING MEETING

      II. Accidental or Unauthorized Termination Statements
          • What is the effect of mistaken or unauthorized filing of a termination statement?
          • Would a junior lienholder or bankruptcy trustee have priority over a secured creditor
              whose financing statement was terminated?
          • Can a correction statement negate the effect of a termination statement?
          • Is the filing of a correction statement a preference?

      Applicable Provisions of the Uniform Commercial Code

         •   9-102(79): A termination statement is an amendment to a financing statement
         •   9-509(d): A person may file an amendment only if the secured party authorizes the filing.
         •   9-510(a): A filed record is effective only to the extent that it was filed by a person that
             may file it under 9-509.
         •   9-513(d): Upon the filing of a termination statement, the financing statement ceases to be
         •   9-518(c): A correction statement does not affect the effectiveness of an initial financing
             statement or other filed record.
         •   9-625(b): A person is liable for damages for any loss caused by a failure to comply with
             Article 9.

      Would the Secured Creditor Lose Its Priority to a Junior Lienholder or Trustee Asserting
      Its Powers Under 544(a)?

        •    In re A.F. Evans Co., No. 09-41727, 2009 WL 2821510 (Bankr. N.D. Cal. July 14, 2009).
                 o A secured creditor will not be bound by an unauthorized modification of a UCC-3
                     Termination Statement pursuant to sections 9-509 and 9-510(d) of the UCC.
                 o Termination Statement was patently ambiguous.
                 o Combination of Financing Statement and Termination Statement was not
                     considered “seriously misleading” and thus remained effective.

         •   In re Masters, 273 B.R. 773 (Bankr. E.D. Ark. 2002)
                 o Erroneous Termination Statement filed by filing officer will not deprive secured
                    creditor of priority.
                 o Chapter 7 Trustee sought to assert power under 544(a)
                 o Under 9-516(a) (former 9-403(1)) mistake by a clerk does not affect the
                    perfection of the creditor’s security interest.

        • Roswell Capital Partners, LLC v. Alternative Construction Technologies, No. 08 Civ.
           10647, 2010 WL 3452378 (S.D.N.Y. Sept. 1, 2010).
              o Notwithstanding sections 9-509(d) and 9-510, the termination of a financing
                  statement, even if mistaken, releases the secured creditor’s lien against the
                  debtor’s property.
              o Creditors must be able to rely on termination statements even if filed in error or
                                   American Bankruptcy Institute

          o UCC places a burden of monitoring for erroneous termination statements or other
            amendment on existing creditors, who are in a position to know whether a
            termination statement was authorized or not.
          o Court noted the formerly secured creditor’s ability to seek damages under 9-625.
          o Court did not address effectiveness of a correction statement

   •   Peoples Bank of Kentucky, Inc. v. U.S. Bank, N.A. (In re S.J. Cox. Enters., Inc.), Adv.
       No. 08-5066, 2009 WL 939573 (Bankr. E.D. Ky. Mar. 4, 2009)
          o Secured creditor’s lien released by unauthorized termination statement.
          o Filing of a termination statement is not a minor error that can be fixed in equity.
          o Unauthorized filer is liable for any loss caused.

Can a Correction Statement Negate a Termination Statement?

   •   A correction statement affords “incomplete relief,” as it does not remove an erroneous or
       unauthorized Financing or Termination Statement. It “simply serves as notice to
       potential lenders that the debtor [or creditor] disputes [the] claim of interest.” R.I Spiece
       Sales Co. v. Bank One, N.A., 2005 WL 3005484, at *3 (N.D. Ind. Nov. 9, 2005).

Could a Correction Statement Constitute a Preference?

   •   Heller Ehrman LLP v. Bank of America, N.A. (In re Heller Ehrman LLP) (N.D. Cal.).
          o Law Firm filed Chapter 11 to assert a $50M preference claim based upon a
              correction statement filed by a secured creditor to correct a termination statement
              it filed “in error and as a result of a clerical error.”
          o Answer never filed, but case remains open.

   •   9-518(c): Correction statement does not affect the effectiveness of a “filed record.”
   •   11 U.S.C. § 547(b): Trustee may avoid any transfer of an interest of the debtor in
   •   11 U.S. C. § 101(54): Transfer means the creation of a lien.

Other Issues to Watch Out For:

   •   Revised Article 9 does not require a signature in order to file a financing statement,
       amendment, or termination statement, thus making it more difficult for third parties to
       determine whether a filing was authorized.
   •   Do these decisions comport with a system of “notice filing?” See 9-502 cmt. 2.

                                     29TH ANNUAL SPRING MEETING

      III. Payments to the Debtor’s Professionals from Pre-Petition Rents
           Assigned to a Lender - Is Disgorgement Required?
      Issue: Are rents subject to the lien of the Lender and thus recoverable from Debtor’s
      professionals by the Lender?

         •   Does the secured creditor’s interest extend to rents?
         •   Has the secured creditor enforced its security interest as to rental proceeds?
         •   If the secured creditor has not enforced its security interest pre-petition, does its lien
             extend to rental proceeds?
         •   Disgorgement required if lien extends to pre-petition rents, absent consent from secured
             creditor or showing of adequate protection.

      Applicable Provisions of the Bankruptcy Code

         •   101(37): A lien is an interest in property to secure payment of a debt.
         •   101(51): A security agreement is an agreement that creates a security interest.
         •   101(51): A security interest is a lien created by an agreement.
         •   363(a): Cash collateral includes the post-petition rents of property subject to a security
             interest as provided in section 552(b).
         •   552(b)(1): If a pre-petition security interest extends to property of the debtor acquired
             before the commencement of the case and to rents of such property, then such security
             interest extends to post-petition rents acquired by the estate.

      Note: State law governs the assignment of rents. Butner v. United States, 440 U.S. 48 (1979).


         •   In re 1560 Wilson Boulevard L.P., 206 B.R. 819 (E.D. Va. 1996)
                 o Pre-petition, secured creditor sent default notice to debtor after retainer paid to
                     debtor’s counsel.
                 o Under Virginia law, a lender’s security interest under an assignment of rents is
                     perfected when the assignment is recorded.
                 o Assignment of leases did not give debtor an absolute right to use the rents after
                     default but prior to lender’s formal declaration of default.
                 o Unapplied portion of retainer must be disgorged.
                 o Rents constituted cash collateral and cannot be used to pay a post-petition retainer
                     without consent or showing of adequate protection.

         •   In re Pacific Avenue, LLC, Case No. 10-320-93 (WDNC Bankr. Sept. 2, 2010)
                 o The Debtor assigned to Regions Bank all of the right title and interest in rents.
                     Regions granted the Debtor a license to collect the rents and use them for ordinary
                     and necessary expenses, but upon default, the license was automatically
                 o Regions sent a written notice of default but did not exercise the right to collect the
                     rents from the tenants.
                 o Regions began foreclosure and a proceeding to have a receiver appointed.

                               American Bankruptcy Institute

       o The Debtor filed chapter 11, and shortly thereafter filed an application to employ
         special counsel to bring an action against Regions. The application disclosed that
         the proposed special counsel was paid a retainer pre-petition of approximately
       o Regions Bank objected to payment of special counsel from the funds and claimed
         that the rents were the collateral of Regions
       o The Bankruptcy Court held that the rents were subject to the lien of Regions
         under North General Statutes § 47-20 and not by the provisions of the UCC as
         adopted in North Carolina. Therefore, special counsel was not allowed to retain
         the payment. .
       o N.C.G.S § 47-20 states as follows:
                 (c) The recording of a written document in accordance with G.S. §47!20.1
                 containing an assignment of leases, rents, issues, or profits arising from
                 real property shall be valid and enforceable from the time of recording to
                 pass the interest granted, pledged, assigned, or transferred as against the
                 assignor, and shall be perfected from the time of recording against
                 subsequent assignees, lien creditors, and purchasers for a valuable
                 consideration from the assignor.

                  (d) Where an assignment of leases, rents, issues, or profits is a collateral
                  assignment, after a default under the mortgage, deed of trust, conditional
                  sales contract, or evidence of indebtedness which such assignment
                  secures, the assignee shall thereafter be entitled, but not required, to
                  collect and receive any accrued and unpaid or subsequently accruing lease
                  revenues, rents, issues, or profits subject to the assignment, without need
                  for the appointment of a receiver, any act to take possession of the
                  property, or any further demand on the assignor.

•   In re D’Anna, 177 B.R. 819 (E.D. Pa. 1995)
        o Under Pennsylvania law, a secured creditor can obtain a present right to rents by:
                ! (1) obtaining actual possession of real estate through foreclosure or acting
                    as mortgagee in possession; or
                ! (2) taking constructive possession by serving demand notices on the
                    mortgagor’s tenants.
        o Debtor’s counsel entitled to rents until secured creditor issued demand notices on

•   In re Buttermilk Towne Center, LLC, -- B.R. --, 2010 WL 5185870 (B.A.P. 6th Cir. Dec.
    23, 2010)
        o Under Kentucky law, a security agreement granting an assignment of rents was
           intended to be a security interest rather than an absolute assignment and therefore
           rents were property of the bankruptcy estate.
        o A replacement lien in rental proceeds does not provide adequate protection to a
           secured creditor whose lien extends to rents for debtor’s use of rents to pay
           professional fees.

•   In re Village Green I, GP, 435 B.R. 525 (W.D. Tenn. 2010)

                                       29TH ANNUAL SPRING MEETING

                  o Under Tennessee law, assignment of rents was not an absolute assignment despite
                    language in deed of trust that assignment was intended as absolute transfer of
                    debtor’s interest in rents.
                  o Rents are property of the estate and constituted cash collateral.

         •   In the Matter of Wheaton Oaks Office Partners Ltd. P’Ship, 27 F.3d 1234 (7th Cir. 1994)
                 o Under Illinois law, executing an assignment of rents, without having to take
                     further action, is sufficient create a security interest in rental proceeds.
                 o Post-petition rents held to be cash collateral.

      IV. What does “property” have to do with it (Uniform Commercial
          Code Article 9 security interests)?
      Code sections
      UCC § 9-109(a):

             “Except as otherwise provided in subsections (c) and (d), this article applies to:
                    “(1) a transaction, regardless of its form, that creates a security interest in
             personal property or fixtures by contract”
      UCC § 9-401(a):

             “Except as otherwise provided in subsection (b) and Sections 9-406, 9-407, 9-408,
             and 9-409, whether a debtor’s rights in collateral may be voluntarily or
             involuntarily transferred is governed by law other than this article.”
      Intellectual property licenses

             •        Catapult, 165 F.3d 747 (9th Cir. 1999)
             •        In re CFLC, Inc., 89 F.3d 673 (9th Cir. 1996)
             •        Harris v. Emus Records Corp, 734 F.2d 1329(9th Cir. 1984)
             •        Gardner v. Nike, 279 F.3d 774 (9th Cir. 2002)
             •        Cincom Systems, __ F.3d __ (6th Cir 2009)

      Domain names

             •        Kremen v. Cohen, 337 F.3d 1024 (9th Cir. 2003)
             •        Office Depot, Inc. v. Zuccarini, 2007 WL 2688460 (N.D. Cal. 2007)
             •        Network Solutions, Inc. v. Umbro Int'l, Inc., 259 Va. 759, 529 S.E.2d 80, 86 (Va.
             •        Network Solutions, Inc. v. Clue Computing, Inc., 946 F. Supp. 858, 860 (D. Colo.

      FCC licenses

             •        FCC v. NextWave Personal Communications, Inc., 537 U.S. 293 (2003)
             •        MLQ Investors, L.P. v. Pacific Quadracasting, Inc., 146 F.3d 746, 749 (9th Cir.
                      1998) (FCC license)
                                     American Bankruptcy Institute

       •         Airadigm Communications, Inc. v. Federal Communications Commission, 519
                 F.3d 640 (7th Cir. 2008), rehearing and rehearing en banc denied (2008)
       •         In re Tak Communications, Inc., 138 B.R. 568 (W.D. Wis. 1992), aff’d, 985 F.2d
                 916 (7th Cir. 1993)
       •         In re Tracy Broadcasting Corp., 438 B.R. 323 (Bankr. D. Colo. 2010) (FCC
       •         In re Ridgely Communications, Inc., 139 B.R. 374 (Bankr. D. Md. 1992)
       •         In re Cheskey, 9 F.C.C.R. 986 (1994)
       •         Urban Communicators PCS Ltd Partnership v. Gabriel Capital, LP, 394 B.R. 325
                 (S.D.N.Y. 2008)
       •         State St. Bank & Trust Co. v. Arrow Communications, 833 F. Supp. 41(D. Mass.
       •         In re Media Props., Inc., 311 B.R. 244 (Bankr. W.D. Wis. 2004)
       •         In re Atlantic Business and Community Development Corp., 994 F.2d 1069 (3d
                 Cir. 1993)
       •         In re Thomas Communications, 161 B.R. 621 (Bankr. S.D. W. Va. 1993)

Airline-related rights

       •         In re Braniff Airways, Inc., 700 F.2d 935 (5th Cir. 1983) (airport slots)
       •         In re Gull Air, Inc., 890 F.2d 1255 (1st Cir. 1989) (airport slots)
       •         In re Continental Airlines, Inc., 61 B.R. 758 (S.D. Tex, 1986) (airport slots)
       •         Pan American World Airways, Inc. v. Boyd, 207 F. Supp. 152 (D.D.C. 1962)
                 (certificate of public convenience)
Liquor license

       •         In re O’Neill’s Shannon Village, 750 F.2d 679 (8th Cir. 1984)
       •         Bogus v. American National Bank, 401 F.2d 458 (10th Cir. 1968)
       •         Paramount Financial Co. v. United States, 379 F.2d 543 (6th Cir. 1967)
       •         In re Coed Shop, Inc., 435 F. Supp. 472 (N.D. Fla. 1977), aff’d, 567 F.2d 1367
                 (5th Cir. 1978)
       •         Gibson v. Alaska Alcoholic Beverage Control Bd, 377 F. Supp. 151 (D. Alaska
       •         In re Matto’s, Inc., 9 B.R. 89 (Bankr. E.D. Mich. 1981)
       •         Rushmore State Bank v. Kurylas, Inc., 424 N.W.2d 649 (S.D. 1988)
       •         In re Chris-Don, Inc., 367 F. Supp. 2d 696 (D.N.J. 2005)
       •         Nelson v. Naranjo, 395 P.2d 228 (N.M. 1964)
       •         In re Hodges, 33 B.R. 51 (Bankr. E.D. Pa. 1983)
       •         Club Misty, Inc. v. Laski, 208 F.3d 615 (7th Cir. 2000)

ICC Certificate

       •         First Pa. Bank, N.A. v. Wildwood Clam Co., 535 F. Supp. 266 (E.D. Pa. 1982)
       •         In re Cleveland Freight Lines, Inc., 14 B.R. 777 (Bankr. N.D. Ohio 1981)
       •         In re The Ground Round, Inc., 326 B.R. 23 (Bankr. D. Mass. 2005)
       •         In re Rainbo Express, Inc., 179 F.2d 1 (7th Cir. 1950)
       •         Jones Truck Lines, Inc. v. United States, 303 F. Supp. 234 (W.D. Ark. 1969)
       •         Costello v. Acco Transport Co., 232 S.W.2d 297 (Tenn. App. 1950)

                                      29TH ANNUAL SPRING MEETING

      Other licenses and rights

             •        Freightliner Mkt. Dev. Corp. v. Silver Wheel Freightlines, Inc., 823 F.2d 362 (9th
                      Cir. 1987)
             •        D’Ambra v. City of Providence, 21 F. Supp. 2d 106 (D.R.I. 1998)
             •        Shimer v. Fugazy (In re Fugazy Express), 114 B.R. 865, 873 (Bankr. S.D.N.Y.
                      1990), aff’d, 124 B.R. 426 (S.D.N.Y. 1991), appeal dismissed, 982 F.2d 769 (2d
                      Cir. 1992
             •        Moore v. Regents, 51 Cal. 3d 120      (Cal. 1990)
             •        In re Propex, Inc., 415 B.R. 321 (Bankr. E.D. Tenn. 2009)
             •        Hecht v Superior Court, 16 Cal. App. 4th 836 (1993)

      V. Peaceful coexistence – security interests and set off under the
         Uniform Commercial Code
      Code sections
      UCC § 9-102(a)(3):

             “’Account debtor’ means a person obligated on an account, chattel paper, or
             general intangible.”
      UCC § 9-109(d):

             “This article does not apply to:
             “. . .
             “(10) a right of recoupment or set-off, but:
                   “(A) Section 9-340 applies with respect to the effectiveness of rights of
             recoupment or set-off against deposit accounts; and
                    “(B) Section 9-404 applies with respect to defenses or claims of an
             account debtor;”
      UCC § 9-340:

             “(a) [Exercise of recoupment or set-off.] Except as otherwise provided in
             subsection (c), a bank with which a deposit account is maintained may exercise
             any right of recoupment or set-off against a secured party that holds a security
             interest in the deposit account.
      “(b) [Recoupment or set-off not affected by security interest.] Except as otherwise provided
      in subsection (c), the application of this article to a security interest in a deposit account does not
      affect a right of recoupment or set-off of the secured party as to a deposit account maintained
      with the secured party.”

      UCC § 9-404:

             “(a) [Assignee’s rights subject to terms, claims, and defenses; exceptions.]
             Unless an account debtor has made an enforceable agreement not to assert
             defenses or claims, and subject to subsections (b) through (e), the rights of an
             assignee are subject to:
                                   American Bankruptcy Institute

               “(1) all terms of the agreement between the account debtor and assignor
       and any defense or claim in recoupment arising from the transaction that gave rise
       to the contract; and
              “(2) any other defense or claim of the account debtor against the assignor
       which accrues before the account debtor receives a notification of the assignment
       authenticated by the assignor or the assignee.
       “(b) [Account debtor’s claim reduces amount owed to assignee.] Subject to
       subsection (c) and except as otherwise provided in subsection (d), the claim of an
       account debtor against an assignor may be asserted against an assignee under
       subsection (a) only to reduce the amount the account debtor owes.
       “(c) [Rule for individual under other law.] This section is subject to law other
       than this article which establishes a different rule for an account debtor who is an
       individual and who incurred the obligation primarily for personal, family, or
       household purposes.
Bank of America v. Lehman Bros., Case No. 08-01753 (JMP) (Bankr. SDNY 2010) – Secured
party’s (depositary bank) security interest in deposit account had effect of preventing bank from
exercising set off rights with respect to debt not secured by the security interest.

VI. “The Mortgage Follows the Note” – Lessons Learned and Best
    Practices for the Assignment of a Note and Mortgage
   A. Generally, mortgage notes are negotiable instruments under UCC 3-104 and can be
         transferred pursuant to the following:
                  i. By negotiation under UCC 3-201(b) - “negotiation requires transfer of
                     possession of the instrument and its indorsement by the holder. If an
                     instrument is payable to bearer, it may be negotiated by transfer of
                     possession alone. “
                         1. Indorsement – UCC 3-204(a)
                                 a. Special Indorsement – specific person to whom the
                                     instrument is made payable is identified
                                 b. Blank Indorsement – an endorsement that does not identify
                                     the person to whom the instrument is payable (most
                                     common in connection with loan securitization). When
                                     endorsed in blank, the note is payable to the bearer and may
                                     be negotiated by possession alone. 3-201(b).
                 ii. By transfer of the instrument under UCC 3-203(a) “An instrument 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
         b. Right to Enforce the Note
                  i. The right to enforce a note include (i) holders of the note and (ii) non-
                     holders in possession of the note. UCC 3-301

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                   ii. “non-holders in possession” must show possession of the note and transfer
                        of the note by the holder to the transferee in order to enforce. 3-203 cmt 2.
             c. Regardless of whether they are negotiable or non-negotiable, the sale of mortgage
                notes also governed by even though the creation of the mortgage itself is not
                governed by Article 9. UCC 9-109(a)(3)
                    i. Attachment – value given, seller has right to transfer the note, and buyer
                        has possession of the note pursuant to a security agreement. 9-203(b)
                   ii. Perfection – provides the superior right in the mortgage and note. 9-308
             d. “The mortgage follows the note”
                    i. Common law rule is that the transfer of the Note carries with it the
                        security. UCC 9-203(g) (“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.”).
                            1. Exception – in some states the absent an express transfer of the
                                mortgage or security interest, the note holder is vested with only an
                                equitable interest in the mortgage, while legal title to the mortgage
                                remains with the mortgage holder, they hold it in constructive trust
                                for the note holder.
                   ii. The same is not true for the Note. The note does not follow the mortgage.

      B. Lesson Learned
            a. A statement of a future intent to sell or transfer a note or mortgage is not enough.
                Documents (i.e., purchase agreements, pooling and servicing agreements, etc.)
                evidencing an intent to assign the mortgage are not sufficient proof of actual
                assignment. U.S. Bank National Association v. Ibanez, --- N.E.2d ----, 458 Mass.
                637, 2011 WL 38071, Mass., January 07, 2011 (NO. SJC-10694).
            b. All assignments should be dated, identify the assignor and assignee and be
                recorded. Blank assignments are not sufficient and may be void. US Bank v.
            c. Altering the “effective date” to a date prior to the foreclosure sale, if the execution
                of the assignment is after the sale is not sufficient to establish the mortgage
                holders right to foreclose at the time of the foreclosure sale. US Bank v. Ibanez.
                See also, Davenport v. HSBC Bank, USA, 275 Mich.App. 344 (Mich. Ct. App.
                2007) (the interest in the mortgage and note must be acquired prior to the first
                notice of publication for foreclosure).
            d. An assignment to “Bayview Financial Trading Group, L.P.” was not sufficient to
                allow “Bayview Loan Servicing, L.L.C.” to foreclose on the mortgage. Letters
                submitted by the servicer as evidence of its authority was not sufficient to
                demonstrate that it was in possession of the note and mortgage sufficient to file a
                foreclose action. Bayview Loan Servicing, L.L.C. v. Nelson, 890 N.E.2d 940
                (App. Ct. Ill. 2008). In this case, Bayview Loan Servicing, L.L.C. contended that
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          it had standing, on its own, to foreclose, it did not assert that it was an agent of the
          actual holder of the note and mortgage.
       e. Assignment of the mortgage without the corresponding note is ineffective. (i.e.
          the note does not follow the mortgage). Vega v. CTX Mortgage Co., LLC, ___
          F.Supp.2d___, 2011 WL 192514 (D. Nev. 2011). Traditional rule is that the
          mortgage and the debt are “split” and neither the owner of the mortgage nor the
          owner of the note made foreclose. Contra Restatement Third of Property
          (Mortgages) § 5.4(a)-(b) (1997) which attempts to fix this problem by providing
          that whether the debt or mortgage is separately transferred one flows from the
          other. Not all states follow the Third Restatement.
       f. Although the general rule is that the “note follows the mortgage”, where the
          mortgage is not properly assigned, some states hold that the mortgage holder is in
          legal title of the mortgage, and the mortgage holder must be named in any
          mortgage foreclosure proceeding. In these instances, the holder of the mortgage
          holds the mortgage in trust for the purchaser of the note.

C. Best Practices
      a. Contract - A contract clear that clearly establishes an intent to sell the mortgage
          loan(s) to the purchaser; including a specific listing of each of the mortgage loans
          being sold; granting language specifically conveying the mortgage loans;
          identifies the time of sale; and specifies the governing law for the sale transaction
      b. Transferring the Note
               i. Endorsement of the note should be made on the instrument itself or on
                  separate paper (allonge). 3-204(a). While the practice of blank
                  endorsements has been widely used in securitization, the practice has
                  recently been called into question by state attorneys general and the Senate
                  Banking Committee, avoid this, use a specific endorsement.
              ii. Possession of the Note or lost note affidavit
      c. Transferring the Mortgage – even though common law supports the “mortgage
          follows the note” rule, which may allow for the transfer of the mortgage without a
          recorded assignment, best practices are to record an assignment of the mortgage
          with each transfer. Date of execution should be the date of the transfer without a
          backdating to the effective date, especially if the assignment is executed after the
          foreclosure proceeding is commenced but the effective date relates back to a date
          prior to the commencement of foreclosure proceedings.
               i. Prevent a delay transferee’s right to foreclose
              ii. Minimize risks to transferee causes by the mortgage holder’s actions

D. Conclusion – Proper transfer documents and recordation may create a lag in timing for
     the commencement of foreclosure proceedings, but will allow for clean title to pass in
     foreclosure and avoid the headaches of heightened scrutiny by courts.

                                29TH ANNUAL SPRING MEETING

      CHDS01 DTHORNE 663235v1
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