How to Use Article 9 §203 UCC Requiring Value Be Paid for Debt to Fight Wrongful Foreclosure

by Neil Garfield

What many lawyers continue to miss is that there is a difference between the laws entitling someone to enforce a note and the laws entitling someone to enforce a mortgage. There are different public policies behind each one. For Notes, the public policy is to encourage the free flow of negotiable instruments in the marketplace. For mortgages, the public policy is to make sure that the civil equivalent of the death penalty (loss of home) is not imposed by someone who has no interest in the debt.  

It is an added protection. As a condition precedent it means that standing to enforce the note is different from standing to enforce the mortgage. It is both factual and jurisdictional.   The grey area occurs because many states adopt the doctrine that if someone has the right to enforce the note, they automatically have the right to enforce the mortgage. Although that seems to contradict the Article 9 §203 provision it doesn’t.

That is because possession of the note by a person who is entitled to enforce it raises the legal presumption that the value was paid by the person on whose behalf the note and mortgage are enforced.   This is a fuzzy area of the law. But boiled down to its simplest components, it means that possession of the note is deemed (presumed) to be possession of legal title to the debt which, as we know from Article 9 §203 can only be true if the person has value invested in the deal.  

The point of that policy is that if the forced sale of the house is not going to produce proceeds that will be used to pay down the debt, then the foreclosure should not occur. If the person on whose behalf the foreclosure is brought is not the owner of the actual debt, then without evidence from the lawyers representing the party named as Plaintiff or Beneficiary, there is no evidence that the proceeds will go towards paying down the debt and the court is required, with no discretion, to enter judgment for the homeowner.   So, the question comes down to whether the party claiming both possession and entitlement to enforce the note is the owner of the debt.

The answer is yes if the homeowner does nothing. This presumption can be rebutted. A simple question as to whether the value was paid and if so, how many times, and demanding the dates and parties involved, would clear up the question if the banks had a factual answer. They don’t. They present a legal argument instead. As virtually all lawyers know, their job is to win however they can do it. So, if they can’t dazzle the court with facts, they can baffle the courts with bullshit.  

Carefully educating the judge who most probably slept through the UCC classes in law school is key to winning on this basis, but it has been done many times. All jurisdictions have case decisions that reflect what I have described above. You must find those decisions and present them as part of your pleadings, memorandum and argument in court.