If a "Holder" Can Enforce a Promissory Note, Why Can't He Enforce a Mortgage?

Oct 1, 2021

If the claimant is only a holder it is highly probable that he is neither a holder in due course nor a true lender or creditor. If it was otherwise, he would say so. And only a party who has paid value for the underlying obligation may enforce a mortgage. (Article 9 §203 UCC, adopted verbatim in all U.S. jurisdictions).

A true creditor would ordinarily say in judicial states that it is suffering financial loss or injury from the breach by the homeowner. You NEVER see that when a lawyer files a claim naming a REMIC trustee as the claimant. Yet is a basic rule and custom of pleading because the court may not hear a case unless someone has been injured or is being injured by the conduct of the other party.

A holder in due course by definition is ONLY one who has paid value for the claimed underlying obligation. If he has not paid value then he is not a holder in due course (the other elements being that the purchase was made in good faith and without knowledge of the borrower’s defenses — which is also a problem for any transfer of the original note to or from REMIC trusts).

It is of course possible for one who has paid value for the underlying obligation either at origination or acquisition and still enforce the mortgage — subject to defenses like the breach of TILA or state law obligations of disclosure (usually raised in affirmative defenses as recoupment which limit set off to the amount of the claim but are not limited by the statute of limitations).

A “Holder” is defined by statute. It is one who is in possession of the note AND who has received authority to enforce it. The authority to enforce can come from a previous holder. But the mistake made by nearly everyone is to drop it there. The question is where did the previous holder get authority?

Ultimately the authority MUST come from the party to whom the proceeds are required to be paid by whoever enforces the note. That is the person who owns the underlying obligation. That person is the one who loaned money or purchased the debt for value.

Because if there was no payment of value at origination then there is no consideration and the original claimed “debt” is unenforceable for lack of consideration — even if it is in writing, like a promissory note. That is even a defense against a holder in due course, against whom the maker of the note has few defenses.

The authority to enforce the note is not the same as satisfying the condition precedent to the enforcement of the mortgage, which requires the claimant in foreclosure has first paid value before seeking enforcement. In that way, it is completely different from the enforcement of a note which may be enforced by any holder or even a non-holder who has received authority to enforce it.

In most cases, without objection, transfer or even apparent transfer of the note is sufficient to raise the legal presumptions that the possessor is a holder who has the legal authority to (a) enforce the note and (b) enforce the mortgage — because the transfer of the note is presumed to mean that the underlying obligation had been purchased for value. But all of that can be challenged successfully and is challenged successfully if the homeowner takes a step by step approach.

If the underlying obligation has not been purchased for value, and the homeowner timely asks for proof that value was paid, and if the claimant refuses to comply with that discovery demand, the homeowner can (a) bar evidence of the debt from being introduced at summary judgment or trial and (b) is automatically entitled to an order from the judge stating that the presumptions arising from apparent possession of the note do not apply.

That order requires the claimant to put on OTHER proof that the debt exists and is owned by the claimant who is also entitled to enforce. In no case I have ever seen has any such evidence been forthcoming when the claimant is or was a REMIC trust.

Raising the issue is not enough. For example, “Objection, lack of foundation” is easier to overrule than “a lawyer standing up and saying “Your honor, I object on the basis of lack of foundation and most likely calling for hearsay testimony. The witness was just asked to read off of the document that counsel was handing him. The witness has not testified to any knowledge about any documents, nor about his knowledge or role in connection with the subject transaction.”

I am telling you that the first guy will be overruled but the second guy will most likely and almost certainly be sustained in his objection — and if the witness tried to answer while the question and objection were stated, the judge will also likely grant a motion to strike the answer from the record. Assuming the objection is correct in its premises, any other ruling from the bench would be “clear error” and be reversed on appeal. But the first guy who lazily said “Objection, foundation” will probably not have his objection sustained and probably lose on appeal.

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Neil F Garfield, MBA, JD, 74, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.

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