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Concurrent
Session
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
2011
29TH ANNUAL SPRING MEETING
356
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
NELSON MULLINS RILEY & SCARBOROUGH LLP
GlenLake One, Suite 200
4140 Parklake Avenue
Raleigh, NC 27612
terri.gardner@nelsonmullins.com
Steven O. Weise
PROSKAUER ROSE LLP
2049 Century Park East, Suite3200
Los Angeles, CA 90067-3206
sweise@proskauer.com
Deborah L. Thorne
BARNES & THORNBURG LLP
1 North Wacker Drive, Suite 4400
Chicago, IL 606060
dthorne@btlaw.com
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
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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
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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.
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II. Accidental or Unauthorized Termination Statements
Issues:
• 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
effective.
• 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)?
NO:
• 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.
YES:
• 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
unauthorized.
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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
property.
• 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.
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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).
Examples
• 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
terminated
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.
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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
$120,000.
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
tenants.
• 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)
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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.”
Decisions
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.
2000)
• Network Solutions, Inc. v. Clue Computing, Inc., 946 F. Supp. 858, 860 (D. Colo.
1996)
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)
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• 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
license)
• 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.
1993)
• 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
1974)
• 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)
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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:
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“(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.
Decision
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
instrument.”
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.
Ibanez.
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.
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