NC APPELLATE COURT: POSSESSION OF NOTE IS NOT ENOUGH

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FORECLOSING PARTY MUST BE HOLDER OF VALID DEBT

5.09.2011-North-Carolina-Appeals-Court-Decision[1]

North Carolina Appellate Decision Raises New Chain of Title Issue
Today, May 09, 2011, 8 hours ago | Yves Smith
A potentially important North Carolina appeals court case, In re
Gilbert, has not gotten the attention it warrants.

In very short form, the borrowers, who were unable to obtain a loan
modification, tried to halt a foreclosure by arguing that the lenders
had failed to make required disclosures under the Truth in Lending Act
(which they hoped would allow for recission of the loan, and that the
party seeking to foreclose had not proved that it was the holder of
the Note with the right to foreclose under the instrument. The judges
nixed the TILA argument, affirming lower court decisions, but reversed
the superior court on the question of the standing of the petitioner.

In Re Gilbert May 3, 2011 North Carolina Appeals Court Decision

What is interesting is the logic of the decision, which blows a hole
in one of the pet arguments of the American Securitization Forum, that
possession of a note will suffice. We have argued that the contracts
that govern the securitization, the pooling and servicing agreement,
sets the requirements for conveyance as is contemplated in the Uniform
Commercial Code (its Article 1 allows for parties to make their own
arrangements as long as certain conditions are met). But if the
parties to a case do not argue that the PSA trumps the UCC (and many
do not), most judges will reason from the UCC, and securitization
attorneys have blithely assumed this will get them out of trouble.
This is the position asserted in the ASF’s white paper last fall:

Under the UCC, the transfer of a mortgage note that is a negotiable
instrument is most commonly effected by (a) indorsing the note, which
may be a blank indorsement that does not identify a person to whom the
mortgage note is payable or a special indorsement that specifically
identifies a person to whom the mortgage note is payable, and (b)
delivering the note to the transferee (or an agent acting on behalf of
the transferee). As residential mortgage notes in common usage
typically are “negotiable instruments,” this is the most common method
to transfer the mortgage note. In addition, even without indorsement,
the transfer can be effected by transferring possession under the UCC.
Moreover, the sale of any mortgage note also effects the transfer of
the mortgage under Article 9. Securitization agreements often provide
both for (a) the indorsement and transfer of possession to the trustee
or the custodian for the trustee, which would constitute a negotiation
of the mortgage note under Article 3 of the UCC and (b) an outright
sale and assignment of the mortgage note. Thus, regardless of whether
the mortgage notes in a securitization trust are deemed “negotiable”
or “non-negotiable,” the securitization process generally includes a
valid transfer of the mortgage notes to the trustee in accordance with
the explicit requirements of the UCC.

The North Carolina judges blew a hole in that theory. This particular
foreclosure had some of the irregularities that are all too common,
but the borrowers were deemed to have abandoned the related arguments.
However, the judge focused on a specific failure in this deal which is
pervasive in securitizations: the final endorsement was to the
trustee, not the particular trust. The judges in the case goes through
multiple deficiencies in the transfer process: some transfers were
made by parties that did not have clear authority to do so, the
affidavits were unreliable (as in they were in some cases non-factual
and separately made inappropriate conclusions of law), and there was
no evidence provided that the securitization trust was the owner and
holder of the note (as in the not exactly compelling endorsements
ending with a trustee and not a particular trust were inadequate). The
most important part was this statement:

…the Allonge in the record contains no indorsement to Deutsche Bank
Trust Company Americas as Trustee for Residential Accredit Loans, Inc.
Series 2006-QA6

Few courts have questioned whether the final endorsement needs to be
to the trust rather than the trustee; we’ve argued that that is
necessary because the trusts elect to be governed by New York law and
case law has long stipulated that endorsement to a particular trust is
necessary. Interestingly, the North Carolina judges came to a similar
conclusion independently. We expect this argument to be made in other
courts. Given that endorsement to a specific trust seems to be very
rare, this could prove to be a potent argument.
Comments (7)

—
Jake Naumer
Resolution Advisors
3187 Morgan Ford
St Louis Missouri 63116
314 961 7600
Fax Voice Mail 314 754 9086

Tags: foreclosure, foreclosure defense, foreclosure offense, fraud, IN RE GILBERT, note, possession, securitization, TILA audit, trustee
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