Archive for October 24th, 2012

U.S. Sues BOA for $1Billion for Mortgage Fraud

A federal prosecutor has filed suit against Bank of America for more than one billion (that’s B B B Billion, with a B) for mortgage fraud against Fannie Mae and Freddie Mac.

Move along, folks.  There’s nothing to see here.

Mark Stopa

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What is a “Negotiable Instrument”? And Why Does it Matter?

If I’ve heard it once from a plaintiff’s lawyer, I’ve heard it 1,000 times.  “We have the original note, and it’s endorsed in blank.”  Plaintiffs’ attorneys love to argue this to support foreclosure.  Sometimes, it’s ALL they argue.  Contrary to what the typical homeowner might think, there are typically no lengthy arguments with case law, no public policy arguments, no attempts to show documents aren’t forged or robo-signed … just “we have the original note, and it’s endorsed in blank.”

Why does this matter?  Why is the argument so simple?  More importantly, should it be so simple?

Many Florida cases have clarified that the “holder” of a promissory note is the person/entity that gets to foreclose.  See Fla. Stat. 673.3011(1).  “Holder,” of course, is defined by Fla. Stat. 671.201(21) as the person/entity in possession of the original Note, with an endorsement.  Hence, that’s why I so often hear “we have the original note, and it’s endorsed in blank,” as that’s the Plaintiff’s way of saying it is the holder of the Note and is entitled to foreclose.

There are a few ways this argument can completely fall apart.  The most fundamental problem, though, is to attack the very premise upon which it is based.  You see, the entire concept of being a “holder” or of having possession of an original Note, with an endorsement, is predicated on the Note being a “negotiable instrument.”  If it’s not a “negotiable instrument,” then the entire concept of being the “holder” is irrelevant.

So what is a “negotiable instrument”?

Florida Statute 673.1041 defines a “negotiable instrument” as an “unconditional promise” to pay a “fixed amount of money” if it: (a)  Is payable to bearer or to order at the time it is issued or first comes into possession of a holder; (b)  Is payable on demand or at a definite time; and (c)  Does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain: 1. An undertaking or power to give, maintain, or protect collateral to secure payment; 2. An authorization or power to the holder to confess judgment or realize on or dispose of collateral; or  3. A waiver of the benefit of any law intended for the advantage or protection of an obligor.

If that sounds confusing then, well, it is.  That’s why I like to think of a negotiable instrument as a check.  Imagine you have a check, and it’s payable to you.  If you wanted to give that check to John Smith to cash, you’d have to endorse that check on the back, i.e. sign it and write “pay to the order of John Smith.”  Also, you’d have to hand John Smith the check.  If John Smith had the check in his possession, with an endorsement on the back to him, then he could take it to the bank and cash it.

Suppose John Smith had the check, but you hadn’t endorsed it.  Could John Smith cash the check?  Of course not – the bank would tell him it wasn’t endorsed.  Likewise, if you endorsed the check, but didn’t give it to John Smith, the bank wouldn’t cash the check.  John needs two things to cash that check – an endorsement and possession of the original check.

But what if what you gave John Smith wasn’t a check at all.  What if it was an IOU.  Or a bag of rocks.  Obviously, John Smith couldn’t take those things to a bank and get cash – they aren’t negotiable instruments.  Silly examples, perhaps, but they illustrate the point.  A negotiable instrument has to be an unconditional promise to pay a fixed amount of money, payable to bearer, payable on demand, without any other undertakings.

Sounds confusing, and it is.  In fact, there are very few cases that talk about this.  Hence, let’s use a simple example from foreclosure-world.  Suppose a bank is suing to collect on a home equity line of credit agreement.  The agreement provides the homeowner can borrow up to $25,000, and the agreement is recorded, just as a mortgage is recorded.  As is typical, the bank that is suing isn’t the same as the bank that loaned the money.

When that bank comes into court and tries the same, old party line – “we have the original note, and it’s endorsed in blank” – make sure you stop them, dead in their tracks.  You see, that entire argument is irrelevant.  It doesn’t matter that the plaintiff has the original note, or even that it has an endorsement.  Those buzzwords are only relevant if the agreement is a negotiable instrument.  In the case of a home equity line of credit, that plainly isn’t the case.  After all, looking at the home equity line of credit agreement, nobody can tell whether the homeowner borrowed $25,000, zero dollars, or some amount in between.  In other words, the agreement is not an “unconditional promise” to pay a “fixed amount of money,” it’s a conditional promise to pay an unspecified amount of money – predicated on how much the homeowner decides to borrow, if anything, in the future.

To understand this distinction, check out this hearing transcript as well as this Order, entered by St. Petersburg judge David Demers.  Clearly, Judge Demers understands and agrees with this distinction, ruling the Plaintiff’s complaint (and amended complaint) had to be dismissed because the Plaintiff was incorrectly arguing that a home equity line of credit agreement was a negotiable instrument.

Why does this matter, you ask?  Simple.  If the Note (or HELOC, or whatever you want to call it), is not a negotiable instrument, then all of the statutes I’ve cited above don’t apply.  The entire argument Plaintiffs like to make – ”we have the original Note, and it’s endorsed in blank” doesn’t apply.  That, in and of itself, doesn’t mean the bank can’t foreclose.  However, to prove its standing to foreclose, the bank has to prove the Note/HELOC was transferred to it in some way other than the standard endorsement.  As I see it, this likely means the bank has to provide proof of an assignment.  What’s the difference between an assignment and an endorsement?  It’s a big difference, actually.  The way banks have operated in recent years, they’ve used endorsements to prove standing – that’s what the machine in their huge factory kicks out, over and over again – endorsements.  If you make them spit out an assignment, you may well see that the machine that is the banking industry is ill-equipped to do so, particularly one that predates the filing of the complaint, as requierd.  Hence, if you successfully argue the Note is not a negotiable instrument, and force the bank to prove standing with something besides an assignment, you may render them unable to prove standing at all.

There are almost no Florida cases that make this distinction.  Many cases make the conclusory statement that the Note is a negotiable instrument, without explaining how/why.  It’s imperative that everyone realize that not all notes are negotiable instruments.  Judge Demers realized it, and if/when more judges follow suit, I’m convinced many banks will be unable to establish the requisite standing to foreclose.


Mark Stopa

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