Real Estate Transactions

1
Real Estate Transactions

• Assignment Ten
• Transfers by Mortgagee

2
Assignment of Mortgages

• Secondary mortgage market
• Four situations in which a mortgage is
  transferred by Mee
  
• Sale to investor
• Pledge to lender
• Sale of participations
• Securitization of the loan

3
Securitization of the loan

• Securitization
• Process by which mortgage loans are assigned to
  and held by a custodian or trustee. Debt
  securities are then issued in the capital markets
  and sold to investors. Payments to investors are
  derived from mortgage payments.
• Types
• Pass through mortgage payments pass through
  directly to investors mortgage loans are
  collateral for the securities
  
• Non-Pass through- certificates (typically called
  participation certificates) are actual shares of
  ownership in the mortgage loans. Typically
  Commercial Mortgage Backed Securities. Issued
  in tranches (like classes of stock).

4
Securitization of the loan

• No matter which form of securitization is used
  all securitizations involve assignment to a
  trustee or custodian of the mortgages to be held
  for the benefit and protection of the securities
  investors!!

5
Rights of Assignee vis a vis Mortgagor

• Holder in Due Course Status
• Promissory note must be negotiable and
• The process by which the note is transferred must
  be a proper negotiation.
  
• What makes a note negotiable?
• What is proper negotiation of a note?

6
What makes a note negotiable?

• UCC 3-104(a)
• Makers unconditional promise and signed
• Fixed sum
• On demand or at a definite time
• Payable to order or to bearer
• No other undertaking may be listed (with the
  following exceptions)
  
• May include undertaking to give, maintain or
  protect the collateral (i.e. prevent waste,
  insure)
  
• May include waiver of protections by maker
• May incorporate by ref provisions of the mortgage
  dealing with acceleration and other terms of
  payment

7
What makes a note negotiable? Example

• The Greatest American Hero holds a line of credit
  with Bank up to 200k. The note provides that
  Hero will repay bank so much as Hero has borrowed
  from time to time or upon demand. Negotiable?

8
What makes a note negotiable? Example

• The Fonz signs a note which requires the Fonz to
  use the mortgaged premises only as a motorcycle
  repair shop. Negotiable?

9
What is proper negotiation of a note?

• UCC 3-201
• Indorsement and
• If there is not enough space for indorsement on
  note, it can be affixed in a separate document
  called an Allonge.
  
• Delivery or Possession

10
Bankers Trust v. 236 Beltway Investment

• Generally This was a case about a secondary
  market mortgage purchaser who asserted holder in
  due course status to resist defenses raised by
  mortgagors.
• Was the purchaser a holder in due course in this
  case? Why or why not?

11
Holder in Due Course

• No, not a HDC b/c note was not negotiable.
• To be HDC under UCC 3-302, the note must be
  negotiable, not obviously forged, altered,
  irregular, or incomplete. The assignee must take
  it for value, in good faith, and w/o notice
  that
• Overdue
• Default
• Unauthorized signature/alteration
• Claim of another
• Defense or claim of another in recoupment
• Notice actual knowledge or reason to know but,
  interestingly, does not include constructive
  notice from public filings
  
• Cannot be too closely connected to mortgagee

12
Holder in Due Course Example

• John is a landscaping contractor who obtained a
  note and mortgage from Housewife for installation
  of elaborate trees and bushes. John subsequently
  indorsed and sold the note to Bank. Housewife
  later refused to pay the note, claiming that John
  had defrauded her by lying about the quality of
  the landscaping (the trees were diseased and the
  bushes wilting).

13
Rights of Assignee who is HDC

• Free of Personal Defenses
• Subject to Real Defenses 3-305(a)

14
Rights of Assignee who is HDC - Example

• Bea Arthur engaged in a contract for window
  tinting of her Florida home with Slick Tint, Inc.
  Bea was showing signs of senility at the time
  the contract was being negotiated (she kept
  consulting Rose and Blanche, even though they
  werent present at the negotiationsand in fact
  are fictional characters). In fact, Bea didnt
  even realize she had signed a mortgage, but
  believe she had signed a regular unsecured
  promissory note.
• Slick Tint, Inc. then sold the note to Bank (with
  a valid endorsement and delivery of possession)
  and skipped town.
  
• Will bank enjoy HDC status? Can Bea withhold
  payment from Bank? On what grounds?

15
HDC Status- A Summary

• The reason assignees hope for HDC status is to be
  insulated from personal defenses.
  
• An assignee can be denied HDC status, generally,
  for any of 3 reasons
  
• Note may be nonnegotiable
• Process by which the assignee obtained the note
  may not have been valid negotiation
  
• The note may have been obviously irregular, or
  the assignee may not have taken it for value, in
  good faith, and w/o notice
  
• However, even a non-HDC may still be free of
  defenses based on latent equities.

16
Latent/ Patent Equity Distinction

• If the note is negotiable, but the holder is not
  a HDC, UCC 3-305(a)(2) makes the assignee subject
  to any defense of the obligor that would be
  available if the person entitled to enforce the
  instrument were enforcing a right to payment
  under a simple K. Even if the note is
  nonnegotiable, common law reaches the same
  result.
• If the right is to be asserted by the original
  mor, then it is a patent right if the defense
  is capable of being raised by a TP, then it is a
  latent equity.

17
Bankers Trust Variation

• Assume the notes had been full recourse mortgage
  notes
  
• Suppose that the general partners of 236 argue
  This note\mortgage was forged by a limited
  partner of 236 who didnt have authority to bind
  the partnership.
• What does it mean to lack authority?
• Could Bankers Trust still enforce the note
  despite this defense?
  

18
Bankers Trust Variation Holder in Due Course
Status(Quick Review)

• Holder in due course takes free of personal
  defenses, but not real defenses
  
• Real defenses are those that would have
  rendered the underlying transaction void, such
  as
  
• Infancy, incapacity, duress, illegality that
  nullifies obligation of the obligor ( such as
  forgery)
  
• Fraud in the factum
• Discharge in insolvency
• Personal defenses include lack of
  consideration, breach of warranty, fraud in the
  inducement, etc.
  
• Even as HDC, Bankers Trust would be subject to
  236 Beltways forgery defense b/c it is real
  defense!
  

19
Estoppel Certificate?

• How would Bakers Trust protect itself vs. this
  risk?
  
• By obtaining an estoppel letter from 236
• estoppel letter, if properly drafted, will
  waive both real and personal defenses
  
• Note\mortgage are valid
• True copies are attached
• If 236 refuses to sign, Bankers Trust can refuse
  to buy the note\mortgage
  
• What if estoppel letter is forged?

20
Consumer Credit Rules

• October 2001 Lindsay Lohan signed a contract
  with Wilmer Valderrama for installation of
  siding
  
• Price 5,700
• Lindsay signs note mortgage
• Wilmer assigns note\mortgage to Willis Federal
  Savings Bank for 5,500
  
• January 2002 After making first two payments,
  Lindsay stops making payments when siding begins
  falling off of the house
  
• Can Willis FSB enforce note\mortgage?

21
Article 3 Result

• If note is not negotiable, then Willis Bank will
  take the note subject to the Lindsays defense
  against Wilmer (likely failure of consideration
  or breach of warranty)
• If note is negotiable, Willis Bank will be a
  holder in due course unless
  
• It acted in bad faith, or
• It knew or had reason to know that the note was
  subject to such a defense
  
• Is there a close enough relationship between
  Wilmer and Willis to impute such notice?
  

22
Imputing notice to Willis

• What facts would raise concern about Williss
  good faith in terms of its relationship with
  Wilmer Aluminum Siding?
  
• Wilmers note\mortgage forms prepared by Willis
• Wilmer is subsidiary of Willis or is controlled
  by Willis
  
• Willis approves terms of credit\does credit
  checks on customers (pre-transaction)
  
• Wilmer assigns note\mortgage with recourse
  (Wilmer guarantees payment by Lindsay)
  

23
Uniform Consumer Credit Code

• UCCC 3.404(1) With respect to a consumer
  credit sale or consumer lease, an assignee of the
  rights of the seller or lessor is subject to all
  claims and defenses of the consumer against the
  seller or lessor arising from the sale or lease
  of property or services, notwithstanding that the
  assignee is a holder in due course of a
  negotiable instrument
• Under the UCCC, Willis would take the
  note/mortgage subject to the Lindsays defense,
  even if the note was negotiable
  

24
The FTC Rule

• Consumer credit contract (25,000 or less) must
  include the following language
  
• NOTICE. ANY HOLDER OF THIS CONSUMER CREIT
  CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES
  WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER
  OF GOODS OR SERVICES OBTAINED WITH THE PROCEEDS
  HEREOF.
• If note contains this notice, assignee of the
  note cant qualify for holder-in-due-course
  status
  
• Unfair trade practice to enter into consumer
  credit contract without this notice
  

25
Lindsay and the FTC Rule

• Would Linsday be protected by the FTC rule?
• If the note actually contained the notice, yes,
  Lindsay could assert defense against Willis
  
• What if the note did not contain the notice?
  Could Willis still qualify as a holder in due
  course?
  
• Would the note be an obvious consumer credit
  contract such that Willis knew/should have known
  it was subject to FTC rule?
  

26
Payment/Discharge of an Assigned Note/Mortgage

• Xander borrows 100K from Zena, secured by a
  mortgage
  
• Later Zena assigns note and mortgage to
  Purchaser
  
• Xander, unaware of assignment, tenders 100K
  payment to Zena
  
• Zena doesnt pay Purchaser, but disappears with
  the money
  
• If Purchaser tries to enforce note, must Xander
  pay P, or is Ps obligation discharged?
  

27
The Payment Rule

• If the note is a negotiable instrument, note is
  discharged when it is paid or by payment
  
• Payment occurs when it is made to a person
  entitled to enforce the instrument 3-602(a)
  
• Person entitled to enforce means the holder
  of the instrument or someone entitled to assert
  the rights of the holder 3-301
  
• In hypo, P is holder of the note if it was
  indorsed/delivered to P at time of assignment
  3-201
  
• If so, payment to Zena does not discharge note P
  can enforce note against Xander
  

28
The Payment Rule

• Suppose that Xanders note was nonnegotiable in
  form
  
• Under contract law, obligator can still discharge
  obligation by paying assignor, until it gets
  notice of assignment, direction to pay assignee
  
• Assume, further, that P did not send notice of
  assignment to Xander
  
• Can P enforce note against Xander, or did
  Xanders payment to Zena discharge the note?
  
• Rogers vs. Seattle-First?

29
The Payment Rule and Nonnegotiable Instruments

• Under reasoning of Rodgers v. Seattle First
  National Bank, P could still enforce note vs.
  Xander
  
• When Xander pays Zena, Zenas nonproduction of
  the note notification that the note has been
  assigned!
  
• Symbolic writing If Xander pays note without
  requiring that note be produced, Xander runs risk
  of having to pay note again if note has been
  assigned
• Exception if assignor (Z) is servicing the note
  or was authorized to collect payments for P
  
• Exception if a course of dealing has arisen
  upon which Xander reasonably relied in paying
  assignor (Zena)
  

30
Rodgers v. Seattle-First Natl Bank

• Seattle-First took assignment of note\mortgage as
  collateral
  
• Prior to default, Seattle-First allowed CPM to
  collect note payments
  
• Seattle-First had not set up any mechanism to
  collect note payments had not notified Nobles of
  assignment (payment of CPM satisfied note)
  

31
The Payment Rule

• Restatement 5.5 rejects payment rule obligator
  may satisfy note by paying assignor until obligor
  receives notice of assignment, except to the
  extent UCC provides otherwise
• Thus, even under Restatement view, the payment
  rule would continue to apply with respect to
  payment of negotiable notes
  
• There are pending proposals that would reject the
  payment rule in favor of the Restatement
  approach
  

32
Assignment of Note and Mortgage as Collateral

• Susan Sarandon holds purchase money mortgage on
  Blueacre (owned by Ted Danson)
  
• Balance 50,000
• Susan wants to use note/mortgage as collateral
  for 40,000 loan from Bank
  
• What must Bank do to perfect its security
  interest in the note\mortgage?
  

33
Perfection of Security Interest in Instruments

• To perfect SI in note instrument under
  9-102(a)(47), Bank must either
  
• File UCC-1 covering instruments 9-312(a)
  or
  
• Take possession of the note 9-313(a)
• If the Bank doesnt do either, Banks SI would be
  unperfected
  
• Banks SI could be cut off if Susan makes
  subsequent assignment of the note 9-330
  
• If Susan later filed for bankruptcy, Banks SI in
  the note could be avoided (invalidated) by
  Susans bankruptcy trustee BC 544(a)
  

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35
Questions

• If the mortgage follows the note, why might
  assignee still insist on recording a separate
  assignment of the mortgage?
  
• 1. If assignee later has to foreclose on the
  mortgage, assignee will need to record evidence
  of assignment to be able to establish proper
  chain of title to the land
• 2. If assignee doesnt obtain and record evidence
  of assignment, assignee could be subject to risk
  of being defrauded
  

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38
Enforcing SI in a Mortgage Note

• Bank can collect the note 9-607(a)
• Bank simply notifies Ted that the note has been
  assigned to Bank (if it hasnt already notified
  him) that the assignor (Susan) is in default and
  that he is directed to make all future payments
  to Bank
• Bank applies payments received to reduce debt
• Bank can conduct foreclosure sale9-610
• Bank issues notice of sale to all parties
  required to receive notice under Article 9
  
• Bank can conduct public or private sale buyer
  becomes holder of note entitled to collect it
  
• Bank applies sale proceeds to reduce debt

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Sale of Note under Article 9

• Banks interest as buyer of note is treated as a
  security interest subject to Article 9
  1-201(37), 9-109(3)
  
• Rationale sometimes it can be hard to
  distinguish between an outright sale of a note
  and a collateral assignment of that note
  applying Article 9 to both obviates the need to
  make true sale vs. security interest
  distinction
• However Banks deemed security interest is
  treated a automatically perfected 9-309(4)
  
• Thus, Susans trustee cannot avoid/ set aside the
  Banks interest in the note BC 544, 9-317

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42
End of Assignment Ten!

• Please prepare Assignment Eleven Payment and
  Prepayment pgs. 506-536