NscoTIATNG

THtr, AMERTcAN

Dnseu

A Crittcall-ook atthe Role of Negotiability

in the Foreclosure Cnsts
by Thomas Erskine lce

ontemporary negotiable instruments law developed hundreds of years ago, before every important institution of the modern financiai world: incorporated banks, business corporations, developed capital markets, global monetary systems, electronic transfers, and even paper currency.l It is counterintuitive that this ancient law of negotiable instruments would have any relevance to one of the world's most sophisticated, cutting-edge tools of high finance - the pooling and securitization of mortgage loans. Yet, the courts routinely look to such law to resolve a foreclosure crisis spawned by the collapse of mortgage-backed securitization, a process which is as strained as trying to decide First Amendment issues using cases pre-dating the Constitution. It is all the more exttaordinary that, just as the nation begins to
awaken to "robo-signing" and other such pervasive and methodical abuses of the court systems, judges should find themselves slavishly compelled to apply a body of law shaped (and then abandoned) by the very authors of such scandals: the financial institutions.

complete chain of title from the original creditor invoke the equitable remedy of foreclosure.

to

The Private Currency of Merchants The concept of negotiability is rooted in European mercantile customs, which, as of the 17th century, had developed a means of paying for goods, principally in international transactions, using documents called "bills of exchange."2 Similar to a cashier's check today, the bill of exchange was an instrument representing an amount of money that the buyer had deposited with a third party. The bill instructed a fourth party, typically located near the foreign seller of the goods, to pay the seller upon presentment of the bill. Bills of exchange
offered the advantage ofbeing easier and safer to transport than precious metals or other valuables.3 As the use of these instruments became more common, merchants developed the practice of transferring the bills among themselves by endorsement.a Rather

This article explores the historical underpinnings

of negotiability and whether the evidentiary shortcut that negotiability appears to offer as a means of proving a plaintiff's standing to sue can or should be applied in the context ofthe foreclosure cases facing the courts today, Examination of the original purposes of negotiability, as weli as recent changes to the Uniform Commercial Code, leads to the conclusion that mere possession of a negotiable instrument (the promissory
note) is insufficient to enforce a mortgage. The possessor a or "holder" must prove ownership of the instrument

than presenting the bill to the local "fourth party" for payment, the payee would endorse the bill to another merchant as payment for goods or services.s Such instruments were often transferred dozens of times and served the function that currency serves today.6 This practice of transferring the bill to additional parties by way of "negotiation" and "endorsement" was later extended to promissory notes two-party debt instruments.T As the courts came to recognize and enforce this endorsement-and-delivery method of transfer, documents that could be circulated in this manner came to be known as "negotiable" instruments. The "negotiability" of the instrument typically referred to its degree of "transferability'"8
THE FLORIDA BAR JOURNAUDECEMBER 201

Holder in Due Course Doctrine

The "holder in due course" doctrine

instantaneous transfers of money and information about transactions.

is said to be, not only the primary feature of negotiable instrument law, but "the most important principle in the whole law of bills and
notes."s This doctrine grew out of an

information vacuum typical in the

age before computers and worldwide communications. In those

Negotiability had become anachronistic and unnecessary.r5 Nevertheless, in 1952, the already antiquated holder in due course rules were codified into Article 3 of the Uniform Commercial Code (UCC).rG

was "a pro-bank statute."le Yet, as the technology of payment systems continued to advance, the banking

days, the more times a particular instrument was transfened,

industry itself became dissatisfied with Article 3 as a means of transfer, particularly with respect to mortgage loans. The necessity of physical delivery of the documentation became a nuisance that hindered, rather than expedited transferabiiity.2o

the more attenuated the later recipients'

knowledge about the

original transaction
became. Merchants,

In response, the industry orchestrated a change to Article 9 of the UCC in 1998 that brought mortgage loans within its
purview.2l Specifical-

therefore, developed rules of negotiability to enhance the liquidity of the instruments by reducing the need for information about
transactions earlier in the chain.lo The most

ly designed to facilitate securitization,22

not only did the new Article 9 provide for automatic perfection of the buyer's interest upon sale, even without the transfer ofpossession,2s but it

important of these
was the "holder in due

course" status, which

officially sanctioned
the practice of using third-party agents as
document custodians to "possess" the in-

simply disallowed most claims or defenses that might un-

dermine the value of holder

chas the instrument.ll The in due course

struments.2a When

the transferor and

transferee used the
same document cus-

was a "good faith pur-

er"-someone who paid value for

the document without knowledge of any

todian, the transfers of possession could

in either the seller's right to sell it

defect or in the transaction that created it.12 BeAs a result, the "iaw for clipper cause the holder in due course was a transferee that could receive greater ships and their exotic cargoes from rights than those of the transferor, the the Indies"17 became frozen in time doctrine was a remarkable departure and, rightly or wrongly, continues to from basic common iaw principles influence court decisions today.18 that governed ordinary contracts,13 but one necessary for the documents Evolving from Article 3 to function as a currency substitute. Negotiability to Article 9 Sales as a Means to Transfer Over time, governments began to issue paper currency,la supplanting Mortgage Loans Article 3 has been criticized as the need for the unfettered transferability of bills and notes. New having been drafted by a process technology revolutionized payment that rvas "captured by bank atsystems by creating the means for torneys" such that the end result
1O THE FLORIDABAR JOURNAUDECEMBER
2012

take place without physically moving the documents; the

custodian could sim-

ply acknorvledge the importantly, revised Article 9 applied regardless of whether the promissory notes were actually negotiable.26 Article 9, therefore, now provides all the benefits of negotiability, such as transferability and liquidity, without the outdated custom of transporting the note and mortgage.2T
change.2t' Most

lnfusion of the Concept of "Holder" into Foreclosure In the early days of the foreclosure crisis, the allegations ofstand-

ing in complaints fiied in Florida merely tracked the language of the foreclosure form approved by the Florida Supreme Court - that the plaintiff bank "owns and holds the note and mortgage."28 Over time, the complaints have evolved such that the word "holder" has
been substituted for the "owns and

the basis for arguing an evidentiary shortcut which not only discards

concern the borrower (or the court),

but rather, concerns only the true

owner.33

ownership of the loan as an element

of proof, but which circumvents basic foundational evidence for the authenticity of the note itself. By claiming that promissory notes
are "self-authenticating" under the

The notion that a borrower is precluded from challenging a holder's expressed apothegmatically as : "Even a thiefis entitled to enforce a bearer instrument."3a Needless to say, the assertion that a thiefcan obtain or

right of enforcement is often

holds" language approved by the Florida Supreme Court.2e Replacing the traditional language with the unrelated Article 3 term "holder"30 permits the bank to argue that mere possession of a document that its attorney asserts to be an original note endorsed in blank (or specially endorsed to the plaintiffbank) conclusively establishes its standing to
foreclose.

is now routinely, albeit incorrectly,32 established on a single unsworn representation by plaintiff's counsel that the document presented is the original note.
UCC,31 standing

Can a Thief Really Enforce a

Note?
The key to this evidentiary shortcut, this indifference to who actualiy owns the loan, is the idea that, under Article 3, mere possession,

Thus, despite the shift toward Article 9 as the real-world mechanism for transferring loans, Article 3 negotiability has become the dominant legal theory argued by plaintiffs in support oftheir standing to bring foreclosure actions. In the courtroom, Article 3 serves as

even wrongful possession, of a

bearer instrument confers an unassailable right of enforcement. This argument holds that the court need not inquire into the true ownership

of the nofe because' even if the bank's possession is shown to be illegitimate, the matter does not

pass title to stolen property flies in the face of common law.35 It also offends the commonsense of the average citizen to say that a court of law has no choice but to employ its constitutionally granted powers on behalf of those with no legitimate right to the note so that they may profit from what must surely be a crime. Indeed, under negotiable instrument law prior to Article 3, only a holder in due course was immune to the defense of theft, not a mere holder.36 Even the claimed status of holder in due course could be impeached with evidence that the note was not acquired in good faith, at which time the burden "shifted

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THE FLORIDA BAB JOURNAUDECEMBER 201

11

orrowers in foreclosure are, for the most part, consumers who had no bar-

thief to produce evidence of his or

her authority to enforce the note. This labyrinth of seeming selfcontradictions in the UCC can be

aligned by an interpretation of Article 3 that is consistent with prior negotiable instrument 1aw.
Specifically, the statutory declara-

gaining power
with which to influence a single term in t}te note

tion that a holder may enforce

stolen or found instrument should

be construed as a description of what constitutes a prima facie

case. Rather than a bar to evidence

that the instrument is stolen, it

merely creates a presumption that

and mortgage they signed. Most lacked

even an understanding of the terms of those documents,
to the holder to prove that he took it free from defect or infirmity."3? Yet, $3.301 ofthe current version of the UCC states: 'A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument
possession"as

temporarily shifts the burden of

introducing evidence of ownership to the defendant.

Protecting Consumers from Negotiability Borrowers in foreclosure are, for

the most part, consumers who had
no bargaining power with which to influence a single term in the note

or is in wrongful possession of the instrument."ss The drafters' comments to Article 3 state without Still, after the adoption of the UCC, there was considerable debate as to whether its drafters meant to grant
such rights to thieves.ao At least one commentator has labeled this result an "authorization anomaly" and questioned whether any court will "accept such a daring theory"

"for the purpose of giving the person receiving delivery the right to enforce the instrument."4a Because no one intends to give a thief, or even a finder, the right to enforce an instrument, the two provisions
that payment made to a person
entitled to enforce the instrument
appear irreconcilable. Moreover, UCC $3.602a5 provides

of that instrument

and mortgage they signed. Most lacked even an understanding of the terms of those documents, much less, the destructive effect of negotiability on their defenses. In the context of credit transaetions involving goods and services, the federal government took steps in 7977 to limit the negative effects

reservation that a "thief" or a "finder" may become a holder.se

of negotiability on consumers.a8 Specifically, the Federal Trade Commission promulgated a regulation entitled "Preservation of consurners'claims and defenses, unfair or deceptive acts or practices," also known as the "Holder Rule," which requires a notice on all consumer credit contracts that the holder would be subject to all claims and defenses that the consumer could assert against the seller of goods
or services.ae

(which presumably includes

thiefl, discharges the borrower, unless the borrower knows "that the instrument is a stolen instrument and pays a person it knows is in wrongful possession of the instrument." Coupled with the thief's right of enforcement, this implies that the borrower can be compelled to pay an admitted thief, yet will still be liable to the rightful owner ofthe note. Similarly, UCC g3-501(b)(2)46 provides that, upon demand for payment, the borrower may ask that the person seeking payment give "reasonable identification" and if the demand is made on behalf of of authority to do so."a? If even a thiefis entitled to enforce the note, it seems inconsistent to require the
someone else, "reasonable evidence

that a thiefis entitled. to enforce an

instrument because it is an "obvious abuse of the term 'entitlement."'41 Even the text of the UCC itself

on the issue. It declares that one becomes a "holder" through "nego-

appears strangely ambivalent

In Tinker u. De Maria Porsche Audi, lnc.,459 So. 2d 487 (Fla. 3d DCA 1984), the court held that "the
effect of the federal lHolder Rule] is

tiation," which in turn is defined as a "transfer of possession [of an instrumentl whether voluntary or involuntary."a2 Yet, a "transfer" of an instrument is described as a delivery a "voluntary transfer of

to defeat the holder in due course status of the assignee institutional lender, thus, removing the lender's insulation from claims and defenses
which could be asserted against the seller by the consumer."so The FTC recently reaffirmed the rule, issuing

an opinion letter that condemned

12

THE FLORIDABAR JOURNAUDECEMBEB 2012

court decisions, such as one in Florida,51 which have barred consumers

from affirmative recoveries under the Holder Rule unless rescission is warranted.s2 It is against this backdrop that the courts are being asked to make decisions in foreclosure actions based on a presumed negotiability of mortgage notes, often with no analysis as to whether Article 3 is even applicable. Given the general obsolescence of negotiability and the banking industry's own rejection ofArticle 3 in favor ofArticle 9, the courts should not only analyze whether the notes are negotiable, but should employ a healthy skepticism when doing so.

sion that negotiability is not at the forefront of the drafters' objectives. Fifteen years ago, one commentator argued that that the UI Note does not meet the requirements of negotiability because it contains an undertaking in addition to the payment of money, which is forbidden by UCC Article 3-104(a)(3).56 Specifically, he argued that the

lncorporation of Mortgage Terms; Opting for Security Over Transferability One of the well-settled rules of negotiability is that the instrument
cannot include obligations or condi-

tions that cannot be determined from the four corners of the note itself.ss Thus, incorporating the
terms of another document, such as
the mortgage, instantly destroys ne-

requirement that the borrower notify the note holder in writing of any prepayment is just such an additional undertaking.sT Courts, however, have recently begun to reject this argument, finding that the nonmonetary obligation is not
a condition placed on the borrower's

promise to pay. Rather, the notification requirement conditions the

exercise of the right of prepayment,

Negotiability of Modern Mortgage Notes It is perplexing that modern jurists often assume that all mortgage-backed promissory notes are

gotiability.d0 Mere reference to the mortgage without incorporating its terms, however, has no effect upon negotiability.6l This rule has led to bizarre tightrope walking by the banking industry attempting to integrate terms from the mortgage into the note while still maintaining negotiability. In Sims u. New Falls Corp.,37 So. 3d
358 (Fla. 3d DCA 2010), for example,

a benefit of which the borrower is not obliged to avail himself or herself.s8 Still, there are other more cornpelling reasons to conclude that modern mortgage notes are not negotiable.

Fannie Mae and Freddie Mac were

permitted to explain their intent

with respect to the drafting of a note
(a

negotiable, when the assumption runs counter to the historically

essential requirement that a negotiable instrument be simple, unconditional, and without contingencies

sued

UI Note for a second mortgage isin Georgia) and security deed

- 6((s6g1ls1 without luggage."53 In reality, a mortgage note is laden with the mortgage itself a veritable steamer trunk full of additional
rights and obligations that must accompany the note on all its travels. The Permanent Editorial Board for the Uniform Commercial Code has itself warned that "[ijt should not be assumed that all mortgage notes
are negotiable instruments."sa The more intuitive stance is that

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today's complex mortgage loan transactions produce lengthy interrelated documents that do not qualify as negotiable instruments. Indeed, the banking industry's abandonment of Article 3 in favor ofArticle 9 transfers suggests there would be little reason for the industry to ensure that the notes it drafts
for loans intended for securitization would comply with all the rules of

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negotiability.

Examination of the most commonly used form for the mortgage

Ioan note, the "Fannie Mae/Freddie Mac Uniform Instrument Note" or "{JI Note,";; supports the concluTHE FLORIDA BAR JOURNAUDECEMBER

2012

.13

(equivalent to a mortgage). In that case, the term at issue was a choice of law provision that appeared in

the mortgage, but not the note.

Fannie and Freddie conceded that

conditions that -affect payment itself, "That Security Instrument

conditions under which the borrower may be required to make immediate payment in other words,

provisions of $15 of the mortgage, without ever describing the specifics of those provisions (emphasis
added):

which are not contained in the note

describes how and under what conditions I may be required to make immediate payment in full of all amounts I owe under this Note." Section 10 goes on to describe "some of those conditions" (emphasis added). The drafters'use ofthe

a conscious effort had been made not to incorporate the term by reference to the mortgage for fear it would "destroy the negotiability of promissory notes and open all foreclosure actions to otherwise barred

If Lender exercises this option [to accelerate upon sale or transfer of the property to a third partyl, Lender shall
give Borrower notice of acceleration. The notice shall provide a period ofnot less

collateral

defenses."62

Still, wanting

to have their cake and eat it, too, Fannie and Freddie maintained that in a foreclosure action (as opposed
to an action to enforce the note), the

note and the mortgage should "be

considered together as an integrated

word "someo unmistakably communicates that the mortgage contains additional promises of the borrower with respect to the loan that do not

sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument

is given in accordance utith Section 15 within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these

than 30 days from the date the notice

without further notice or demand on

Borrower.

contract and that the choice of law provision in the [mortgage] would govern the enforcement of the [n] ote."63 So, Slrzs reveals an important banking industry concession that, in a foreclosure context, its standard characteristic - it can effectively adopt terms outside its own four
corners. note has a decidedly non-negotiable

appear within the four corners of the note. Those additional promises include 1) payment of taxes;2) payment of casualty insurance; 3) payment of mortgage insurance; 4)

One example of an additional promise made by the borrower in $15 of the UI Mortgage is to "promptly notify Lender of Borrower's change of address." Under the UI Note, the borrower is not obligated to provide a change of
address.6s

payment of community association

fees and assessments; 5)

furnishing

the lender with notices of amounts due for taxes, assessments, and community association charges; and 6) furnishing the lender with receipts evidencing payments of taxes, assessments, and community asso-

This desire to incorporate terms from the mortgage, without appearing to, is most evident in $10 of the UI Note. Here, Freddie and Fannie begin by merely referencing the mortgage, which, by itself,
would have no effect on the note's negotiability: In addition to the protections given

ciation charges.Ga In addition, the borrower promises to occupy and

use the residence as the borrower's primary residence for a period of at least one year.6s The borrower also

Another complication is that the UI Mortgage defines the term "borrowero as the "mortgagor." To ensure that the lien applies equally to anyone on the deed, such as nonborrowing spouses or business partners, the practice is to include the names of property
owners who borrowed no money as a borrower (and, thus, mortgagor) on the mortgage. The borrower on

agrees to refrain from destroying,

to the Note Holder under this Note, a Mortgage, Deed of Trust, or Security Deed (the'Security Instrument"), dated the same date as this Note, protects the Note Holder from possible losses which might result if I do not keep the prornises which I make in this Note.

damaging, or impairing the property and repairing the property if

so damaged.66

the UI Note, however, is merely the person obligated to repay the

debt. As a result, the borrower on the note will often be one person, while the borrower on the mortgage will often be more than one. Not only does this raise the question of which borrower is being referred to in $10 of the UI Note (that quotes
$18 of the UI Mortgage), but suggests that the note is incorporating

Moreover, $10 of the UI Note re-

The drafters go on, however, to state that the mortgage contains

cites verbatim language from $18 of the UI Mortgage6T that permits acceleration upon alienation of the collateral real estate. In doing so, it
incorporates by reference the notice

}ile Find thissins Hcirc

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Reasonable, Non-Percentage Based Fees. A 97olo Success Rate. Results Guaranteed or No Charge.

promises by strangers to the note be - parties whose identity cannotthe ascertained without looking at mortgage. In the end, despite the drafters'

studious avoidance of the word "incorporate," it cannot be disputed that the intended effect was to
incorporate the terms of the mortrather than merely reference them. While it might be said that the careful wording is a passing
gage,

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THE FLORIDA BAR JOURNAUDECEMBEB 2012

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nod to negotiability, Freddie and Fannie have ultimately decided

that negotiability must take a

back seat to the preservation and
enforcement of the mortgage terms

intended to protect the collateral.

possession" of the note, may not take a home as payment for the debt.Ta Requiring a greater showing of entitlement to foreclose than that to obtain a money judgment, i.e., greater than mere possession of a note, is also entirely consistent
protecting homeownership as reflected in Florida's Constitution.Ts

ignored, since an Article 3 holder of the note need not be its owner, the abstract claim by a holder that the

"mortgage follows the note" leads

the court inexorably to the question of whether it follows the owner of

Does the Mortgage Follow the Holder of the Note or the Owner? Even if the court decides that a note is negotiable (and that the plaintiff bank is its holder), the bank's work in a foreclosure case is only half done. Successfully claiming to be an Article 3 holder only entitles the bank to a money judgment on the note. It must now prove that it is entitled to enforce the mortgage.6s For this, the foreclosing bank turns to the common law rule that the "mortgage follows the note."?o Thus, so the syllogism goes, no document is needed to show that the plaintiff is entitled to enforce the mortgage because that right was transferred to it along with the note itself.?r Notably, the most often cited case for this proposition, Johns u. Gillian, 184 So. 140 (Fla. 1938), actually held that, when there is no written assignment of the mortgage, the plaintiff "would be entitled to foreclose in equity upon proof of his purchase of the debt."72 But because even a thief can be a holder entitled to enforee a negotiable instrument, mere presentment of the original note is not evidence ofan actual purchase of that note. The "mortgage follows
the evidentiary shortcut it is professed to be, but just the opposite. It requires proofofpurchase ofthe note, something that the Article 3 holder was able to skip on the way to enforcing just the note.
bank is not the original lender, it must prove a purchase and an intent to transfer the mortgage with the note. Such proof of ownership
Accordingly, when the foreclosing

with the public's interest in

Even if the additional proof requirement of Johns were to be

the note or the holder of the note. Ifthe transfer is one that occurs by operation of"equity," then it strains logic to suggest that equity would strip the true owner of the right to collect upon the collateral securing

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the note and give that right to a potential thief or finder. Happily, the court need not ponder too long on the puzzle because the very architecture of the UCC
answers the question. The common

link in the chain of ownership. The belief that an entity in wrongful

possession of a note may foreclose on a home is firmly refuted by Article 9, and cases that hold that mere

605, 607 (1981); Jalres Srrvnw RocnRs, Tne Eanr,y Hrsrony or rnr Lew on Btr-r-s euo Noros, A Sruov oF rHE ORrctlis or ANcr,o-AlrERrcAN CouneRcrar- Lew (Cambridge University Press 1995); Ali

Khan, A Theoretical Analysis of Pay-

Iaw concept that the lien faithfully tags along after the note is
found in Article
9,?6

presentment of a note endorsed to the plaintiff is alone sufficient to prove standing to foreclose are
misguided.

not Article 3.
1aw77

The UCC supplants common

and the court must presume that the legislature, in adopting these

provisions, intended that mortgages follow Article 9 owners, not Article 3 holders. Moreover, if there is any conflict between Article 9 and Article 3, the rules in Article 9
govern.78 And finally, while possession is a means of perfection under

Care should be taken in the rush to extricate ourselves from the current mortgage foreclosure crisis not to elevate negotiability
beyond the narrow mercantile milieu from which it developed, where merchants transacted business on an equal footing. In the foreclosure

a Id. at 390-91; Giimore, The Good Faith Purchase ldea at 613.

ntent Systems 60 S.C.L. Rsv. 426, 434, n. 45 (2008). 3 Kurt Eggert, Held. Up in Due Course: Codification and the Victory of Form Ouer Intent in Negotiable Instrument Lau,35 Cnntcu'roN L. Rrv. 363,377-'18 Q002).
5

setting, both Article 9 and the

chain of title to the note, making Article 3 negotiability irrelevant to the determination of standing.E
corrABLE

Article 9, enforcement of the security interest requires proof that the buyer gave value to purchase the mortgage loan from a seller entitled to sell it.7e As a result, enforcement of a mortgage transferred under Article 9 (i.e. by following the note) requires proofofa sale,just as was required by common law under Johns. And because the foreclosing bank must show that it obtained the mortgage loan from a seller authorized to sell it, the bank must ultimately prove the sale at each

common lalv require proof of the

tems,44 UCLA L. Rnv. 951, 957 (1997). 6 RocrRs, Tsr Ervo oF Npcorrnel,n INsrRUMENrs at 71. ("What gave rise to the iaw of bilis and notes in general, and negotiability in particular, was the circumstance that privately issued instruments circulated as a form ofcurrency substitute."); see also id. at 93. 7 Eggert, Held Up in Due Course at
388-389. 8 Rocens, Tun ENo

gotiability in Payment and Credit

Ronald J. Mann, Searching for NeS.ys-

or Nroorreat-o

IN-

I Jluns SrpvrN Rocons, THn ENo orNBIusrnultrxrs, BRrNcrNc Payl,tor.Jr

or NscorreeI,p lNsrnunnNrsl; Neil B. Cohen, The Calamitous

Rocnns, Tne ENo
z Edward Jenks, The Early History of Negotiable Instruments, 9 L.Q.R. 70 (7893); Grant GiImore, The Good Faith Purchase ldea and the Uniform

University Press 2012) [hereinafter L. J.

Svsrelrs Larv Our or rne Pesr 20 (Oxford

Payment and Credit Systems at 95?-958.

s Rocrns, Tsn ENo ol Nrcorrenle INsrnunpNrs at 22 (quoting Wrr,lrau EvrRnrr Bnrtrorv, Haroeoox oF THE LAw or Law op Brlr-s eNo Norns 25 (1943)J. r0 Mann, Seorching for Negotiability in

srnulrrNrs at

8.

LaLo of Notes, 68 Onio Sr. 161-62 Q007).

161,

\t Id. at 958. 12 Gilmore, The Good Faith Purchase

Idea at 605,607 (1981). 13 Curtis Nyquist, A Spectrum Theory

of Negotiability, 78 Mena. L. Rev. 897, 899-100 (1995). la Rocrns, THr ENo oF NEcoTiABLE INsrnurrENrs at32-35.

pentant Draftsntan,l5 Groncra L. Rnv.

Commercial Code: Confessions of a Re-

16

THE FLORIDA BAR JOURNAUDECEMBER 2012

15 16

Id. at 71,93.
Gregory Maggs, Determining the

Rights and Liabilities of the Remitter of a Negotiable Instrttment: A Theory Applied to Some Unsettled Questions,
36 B.C.L. Rnv. 619, 626 (1995).
1?

Lau of Negotiable Instruments,

Grant Gilmore, Formalism and the

13

the bother of taking physical possession ofthe notes in question, a process that they often consider irksome"); H. Bruce Bernstein, Commercial Finance Association: Summary of the Uniform Contmercial Code Reuised Article 9, auailable al https://rvww.cfa.
eom/erv eb/DynamicPage a spx? Site= cfa&WebKey=9d83ef78-8 268 - 4 aae 95el-7f4085764e46 (revised Article 9 facilitated mortgage-backed securitization); David Peterson, Cracking the Mortgage Assignment Shell Game,85
-

2e The typical standing allegation is now that the plaintiff bank is the

CnnrcstoN L. Rnv. 44L,448 (1979). t8 Id. aL 461 (Article 3 is "a museum of antiquities - a treasure house crammed fuli of ancient artifacts whose use and function have long since been

negotiable instruments. Unlike the

3 "holder," the person who "owns and holds" an instrument is its owner. For example, when Fla. R. Crv. P. Form 1.934 (Promissory Note Complaint) was amended in 1980, the Florida Supreme Court added the same words found in the foreclosure form "the Plaintiff owns and holds the note" specificaily "to show ownership of the note." Committee Note to Fre. R. Crv. P, Form 1.934 adopted by The Florida Bar, In re Rules of Ciuil

"hoider of the [n]ote and the fmlortgage and/or is entitled to enforce them." 30 The rvord "holds" in the phrase "owns and hoids" appears to be unrelated to the Article 3 term "holder." A search of Florida law reveals that the phrase "orvns and holds" is a ubiquitous legalism used in many contexts outside of

Article

forgotten.").
ls

History of the Uniform Commercial

Code: 1940-49, 51 SMU

Allen R. Kamp, Uptown Act:

L. Rnv.

Fre. B. J. 11, 12 (Nov. 2011) (revisions to

346 (1998); Frederick K. Beutel, The

275,

Articie 9 addressed the needs of banks in the securitization chain by treating mortgages as personal property that could be transferred without regard to
the real estate records).
23 Peterson, Cracking the Mortgage Assignment Shell Game at 12. 2a See Fre. Srer. $679.3131(3) Q0l2). 25 26

out" of the American Law Institute and the Commission of Uniform Laws to the banking lobby). 20 Dale A. Whitman, Ilow Negotiability has Fouled Up the Secondary Mortgage Market, and What to Do About It, 37 Pnpp. L. REr'. 737, 740 (20LA) ("[N]egotiability requires that, for every loan sold on the secondary market, the original promissory note must be delivered to the purchaser. In a national or global

334,362-63 (1952) (calling the UCC a "Lawyers and Bankers ReliefAct" and railing against what he called a "se11-

Proposed Uniform [?] Commercial Code Should Not Be Adopted,6l Yelr L. J.

Id.

RrpoRr oF THE

PERITANENT EDrroRrAL

Boeno loR rHe Uxrronlt Coltntnnct.cr Coor, Appr,rcArroN oF rnn UNrponlr

Rnr-ertxc ro MoRTGAGE Nores 8 (Ameri-

Cotrlrrncral Colo ro Srlncrro Issuns

can Law Institute and the National Conference of Commissioners on Uniform State Larvs 2011)lhereinafter PEB Reponrl.

Loan Seruices, LLC,36 So.3d 932 (Fla. 4th DCA 2010). 32 The Florida evidence rule on selfauthentieation of commercial papers

Procedure,391 So. 2d 165 (Fla. 1980). 31 FLe.. Evro. Cooe $90.902 (8) (SelfAuthentication). ,See Riggs u. Aurora

market, this requirement is extremely recent years, has been widely ignored, much to the detriment of mortgage
purchasers."); see also Mann, Searching for Negotiability in Payment and Credit Systems at 961. 2r Dale Whitman,Transfers of Mortgage Notes under New Article 9, auailable ctt http: / / d.irt. umkc.edu/files/newart9i. htm. These changes were enacted in

inefficient and inconvenient, and in

'?? See Mann, Searching for Negotiability in Payntent and Credit Systents at 969. 25 Fle. R. Cn'. P. Form 1.944.

to the authenticity of signatures

provided in the Uniform Commercial Code." Drafted in the days before highresolution color copiers, scanners, and printers, horvever, the UCC speaks only
on

is expressly limited to the "extent

Florida in 2001, effective 2002, Fu.

to paperless eNotes. .See Electronic Signatures in Global and National

Uniform Electronic Transaction Act adopted by the National Conference of Commissionels on Uniform State Laws in 1999 (adopted in Florida in 2000, Fra. Srer. $668.50 (2011)); Case Closed, eNotes Are Legal, An Analysis of eNote Enforceability Nationtoide, a rvhite paper jointly prepared by Mortgage Industry Standards lVlaintenance
(2O12);

industry has also advocated a shift

Srar. $$679.1011-.709 (2072). The

NewJersey Referrals
.
Over 75 years experience of our attorneys are certified byThe Supreme Court of New Jersey as civil trial attorneys
14

Commerce Act, 15 U.S.C. $7001 ef seq.

Staff includes a physician and three RNs

22 Steven Schwarcz, The Impact of Securitization of Reuised UCC Articl.e 9, 74 Cnrcaco-Ke:vr L. Rer'. 947 (1999); Whitman, Transfers of Mortgage Notes under New Article I (appatent purpose of change was to insulate issuers of mortgage-backed securities from attacks by bankruptcy trustees "without

(ESRA), and the American Land Title Association (ALTA), auailable at http:// wwrv. mo rtgageb anke rs. org/files/ResourceCenter / emortgage/ eNote WhitePaper.pdf).

Signature and Records Association

Organization (MISMO), the Electronic

Bruun GoropnDEN BEnxowrrz, DONNELLY FRIED 6T Fonrn, PC

,\
Chatham
Pr0r,rssi t;r\-1 r" C0rit)()rt,\TI(r\

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work participation may be paid to NewJersey Coure Rule l:39-6(d) 2012

Fees without

in accordance

THE FLORIDA BAR JOURNAUDECEMBER

17

documents, not the authenticity of the documents themselves. J3 See Haruey u. Deutsche Bank Nat. Trust Co.,69 So. 3d 300, 304 (Fla. 4th DCA 2011) (even ifthe borrower could prove that an assignment vi'as fraudulent, the dispute wouid be between the plaintiff and the actual ow'ner of the

right to enforce the note is necessary to

prevent a mere handler with temporary consensual possession, such as a mailman, from becoming a "holder."
n5

(2012). The requirement that there be an intent to give the recipient the

on real propertyl. Most particularly, as

{6

1992) (a thiefcannot convey good title to stolen property, even to a good faith

25 (B.A.P. 9th Cir. 2011) (noting that the ability of a thief to obtain payment on bearer instruments has factored in Iiterature and film storylines). 36 Battles u. State,602 So. 2d1287 (Fla.

note ). 2a See

{'-

Fre. Srer. $673.5011 (2)(b)2. (2012).

Fre. Srer. $673.6021 (2012).

In re Veal,450 B.R. 897, 912,

Most modern promissory notes for

(Fla. 1938). 71 Haruey,69 So. 3d at 304. 72 Johns, 184 So. at 143-414 (emphasis
added).

to both substance and procedure, the enforcement ofreal estate mortgages by foreclosure is primarily the providence of a state's real property law...."). 70 Johns u. Gillian,184 So. 140, 743

n.

the purchase of homes state that the borrower waives the right to require the holder to make a formal demand
horvever, expressly waive the borrower's

for payment. The ianguage does not, right to require identification and evidence of authority to enforce the note once that demand for payment has been
made. 48 16 C.F.R. $433.2. re .Id. The Holder RuIe notice destroys the negotiability ofany note upon rvhich

i3 See Smith u. Kleiser,107 So. 262,263 (Fla. 1926) (foreclosure, as an action in equity, "shouid be in the name of the

real owner ofthe debt secured").

Knight Energy Seruices, Inc. u. Amoco So. 2d 786,789 (Fla. 4th DCA 1995). Equity will intervene even when the wrongfui conduct complained of harms someone other than the defendant. Quality Roof Seruices, Inc. u. Interuest Nat. Banh,21 So. 3d 883, 885 (FIa. 4th DCA 2009) ("Unclean hands may be asserted by a defendant who claims that the plaintiff acted toward a third party with unclean hands vrith respect to the matter in litigation."); see
7a

OiI Co.,660

purchaser); Alamo Rent-a-Car, Inc. u. Williamson Cadillac Co., 613 So. 2d 517, 518 (Fla. 3d DCA 1993) (a thief
cannot pass good title).
36 Antonacci v. Denner,149 So. 2d 52, 53 (Fla. 3d DCA 1963). 31 Id. at 53-54. The Fifth District later noted that there was a split of authority

appears because its very presence makes the promise to pay conditional. A revision to Article 3 restored limited

it

under prior common law whether the

burden would be on the holder to prove

his BFP status once the claimant has

introduced evidence of ownership. Fld.

Banh, 50I F.zd 1322, 1325 n. 3 (5th Cir. 1974). While the court deciined to decide rvhich party bears the evidentiary burden, the fact that evidence of ownership of the instrument could be introduced against an alleged holder in
due course was taken for granted. 3s Fr-.r. Sr,rr. $673.3011(2012) (emphasis added). 3e Comments of the drafters of Article 3, Fr,r. Srer. $673.2031 (2012) ('A ihief lvho steals a check payable to bearer becomes the holder of the check and

&

notice, but withheid a key attribute. It declared that no one may be a holder in due course of a note imprinted with the notice. U.C.C. $3-106(d); Fla. Star.
$673. 106 1(4) (2012); see also, Cohen, The

negotiability to notes containing the

Cas. Co. of Neto Yorh u. Key Biscayne

Calamitous Law of Notes aL 163-L64. 'ro Tinker, 459 So. 2d at 492; see also Florida Auto. Fin. Corp. u. Reyes,7I0 So. 2d 216, 218 (Fla. 3d DCA 1998). 5t Schatter u. Gen. Motors Acceptance Corp.,819 So. 2d 809, 813 (F1a. 4th DCA
t2 Opinion Letter of the Federai Trade Commission, NIay 3, 2012, auailable at http ://rvww ft c. gov / osl20 L2 / 0 5 / 120 5 l0 a

2002).

to the fraudulent transaction nor that the fraud was perpetrated upon a third
party.").
75

also Yost u. Rieue Dnters., Inc., 461 So. 2d L78 (F).a.1st DCA 1984) ("There is no bar to applying the doctrine ofunclean hands to a case in which both the plaintiff and the defendant are parties to a fraudulent transaction perpetrated on a third party."); Hauer u. Thum, 67 So. 2d 643,645 (Fla. 1953) ("It would matter not that the [defendants] were parties

76

instrument is payable to bearer and it is stolen by Thiefor is found by Findeq Thief or Finder becomes the holder of the instrument when possession is obtained. In this case there is an involun-

a person entitled to enforce it...."); Fu. Sret. $673.2011 (2012) ("[I]f an

dvisoryopinionholderrule.pdf, 53 See, e.g., Gen. Motors Acceptance Corp. u. Honest Air Conditioning & Heating, lnc.,933 So. 2d 34, 37 (Fla. 2d
DCA 2006). i4 PEB Rrponr at 4, n. 13. ;5 The version ofthe form discussed in this article is Form 3210, the Florida

Srar. $$679.2031(7) and 679.3081(5)

QOLZ).
78
7e

Fr,a. Coxsr. art. X, $4. U.C.C. $$9-203(g) and 9-308(e); Fra.

77 U.C.C. $1-103(b); Fre. Srer. $671.103 (2012).

U.C.C. $3-102(b); Fr,a. Sr.ar. U.C.C. $9_Z0g(b); Fre. Sr,.rr.

$673.1021(2) Q012). $679.2031(2) (2ot2).

Fixed Rate Note - Single FamilyFannie Mae/Freddie Mac Uniform

Instrument.

tary transfer
{o

of possession

that results

James J. White, Some Petty Complaints About Article Three, 65 Mtcu. L.

Rev. 1315 (L967); Robert F. T. Dugan, A New Approach to "Holder" Conundruns Under Arti.cles 3 of the Uniform Com-

in negotiation to Thief or Finder.").

'j6 Mann, Searching for Negotiability in Payntent anc! Credit Systems at 969-73.

t7

t'8

(Bankr. E.D. Pa. 2012).

''e tr\

In re Walker,

Id.

466 B.R. 27I, 283

Faith Purchase Idea and the Uniform

mercial Code - A Reply to Professor white, !3 B.c.L. Rnr'. 1 (1971). One of the drafters of the UCC publicly lamented its exaltation of transferabilitv over property rights, as being out of step with modern economic realities. Grant Gilmore, The Good

$673.106 1(1Xb).

U.C.C. $3-106(a); Fra. Sret.

u.

Holly Hill Acres, Ltd. Id.

Sims,3?
So. 3d

Charter Banh

of Gainesuille, 314 So. 2d209,211 (F1a. 2d DCA 1975).

6t
62
63

at 364 (J. Cope's dissent). $3. $6.

$7.

Commercial Code: Confessions of a Repentant Draftsman,lS Groncrn L. Rev. 605 (1981). n' Khan, A Theoretical Analysis of Payment Systenzs at 2 n. 9 and 22. '2 U.C.C. $3.201; Fl,r. Srer. $6?3.2011
(2012).
43

Mae/Freddie
Form 3010.
68 6s

6i

Id. at 362. 6{ UI Mortgage 6" UI Mortgage 66 UI Mortgage

Florida

Single Family - Fannie Mac Uniforn Instrument,

9671.20r(15) (2OrD. '* U.C.C. $3.203; Fra. Srer. $673.2031

U.C.C. $1.201(b)(15); Fr,r. Sr.rt.

UI Note $7. PEB Rpponr at 1 ("The UCC, of course, does not resolve all issues in this field lthe transfer and enforcement of notes secured by a mortgage

Thornas Erskine lce is the founder and principal legal strategist of lce Legal, PA,, in. West Palm Beach and Miami, and has practiced law in South Florida for more tltan 25 years. He is licensed to appear in the courts of Florida and the U.S. federal courts. He handles complex mdtters including banhruptcy, commercial litiga' tion, personal injury, and wrongful death cases, and is a graduate af the uniuersity
of

Miami School of Laul

18

THE FLORIDA BAR JOURNAUDECEMBEN 2U2