CA Judge: HELOC Notes Are Not Negotiable Instruments — Possession Is Not Enough — Pretender Lenders Must Prove the Debt and Ownership

Financial institutions securitized billions in Home Equity Lines of Credit (HELOC). These same institutions argue in courts across the country that HELOCs are negotiable instruments under the Uniform Commercial Code, and therefore, the banks do not have to prove ownership of the debt, rather merely possession; “Even if we stole the HELOC, we have the right to enforce it under the Uniform Commercial Code, because we have possession of the original instrument.” A California Court disagreed, and in considering a borrower’s motion for summary adjudication, held that HELOCs are not payable for a fixed sum and are therefore not negotiable instruments; a ruling that helps pave the way to force banks to prove ownership of billions of dollars in HELOCs under contract law.

“The HELOC Is Not a Negotiable Instrument”

Section 104.3104 of Nevada’s Uniform Commercial Code provides that, among other things, “‘negotiable instrument’ means an unconditional promise or order to pay a fixed amount of money.” Nev. Rev. Stat. Ann. § 104.3104(1). Neither of the parties has cited to any Nevada authorities dealing with the issue of whether a note evidencing a line of credit qualifies as a Courts applying other states’ versions of UCC § 3-104 have held that lines of credit or revolving loans are not negotiable instruments as they fail the “fixed amount” requirement. Am First Fed. v. Gordon, 2015 WL 3798210 (Conn. Super. Ct. May 26, 2015); Heritage Bank v.Bruha, 812 N.W.2d 260 (2012); Yin v. Society Nat’l Bank Ind., 665 N.E.2d 58 (1996); Resolution Trust Corp. v. Oaks Apts. Joint Venture, 966 F.2d 995 (5th Cir. 1992); Cadle Co. v. Richardson, 597 So. 2d 1052 (1992). Under the terms of the HELOC, the obligee promises to lend Baroni money “from time to time” upon her request, up to a credit limit of $134,998.00, and Baroni promises to pay “when and as due, all loans made under this Agreement” pursuant to periodic monthly statements. The HELOC, however, does not state “a fixed amount of money” that Baroni is required to pay and the revolving nature of the agreement demonstrates Baroni would owe different amounts at different points in time depending upon her requests for loans and payments on account of those loans. Therefore, the HELOC does not qualify as a negotiable instrument within the meaning of section 104.3104.2 Because the HELOC is not a negotiable instrument, section 104.3205 does not apply to the HELOC. Nev. Rev. Stat. § 104.3205.”