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The Heirs of Karl Lleywellyn: the PEB Report, Green Cheese, and the Hijacking of American Law (Part I)

posted by Adam Levitin

This last week the Permanent Editorial Board of the Uniform Commercial Code came out with a report bering the none-too-thrilling title of "Report on Application of the Uniform Commercial Code to Selected Issues Related to Mortgage Notes". There's an awful lot to say about this awful document, and I'm not going to attempt to cover it all in a single blog post. This post is going to cover what the report is, what authority it has, and why it is completely irrelevant (namely that it deals with negotiable notes, when virtually all mortgage notes are non-negotiable). Subsequent posts will deal with the substantive flaws in the report and with the motivation behind the report and with the way the uniform law making process has become completely hijacked by monied interests.

There are two critical takeaways from this post. First, it is important to understand that the PEB report is not law. It is not authoritative or binding. The PEB does not determine what the law is or what the Uniform Commercial Code means or does not mean. The report is merely dicta on dicta from a completely nonrepresentative, politically unresponsive body that includes some patently conflicted members.

Second, it is important to understand that the PEB report is utterly irrelevant because by its own terms it only addresses the enforceability of "negotiable" mortgage notes, and virtually all mortgage notes are non-negotiable. Therefore, even if everything in the PEB report were correct (which it ain't), it would have as much real world application as a report on the enforceability of mortgage notes made of green cheese. (This raises the question, of course, why there would be so much energy spent on an irrelevant document. I'll address that in a later blog post, but basically this report is a desperate attempt to put a finger on the scales of justice in favor of the banks).

The PEB Report Lacks Authority and Is Not Law.

To understand what the PEB report is, it is necessary to understand what the Uniform Commercial Code is and what the PEB is. The Uniform Commercial Code (UCC) is a set of model commercial laws. They are designed to be adopted uniformly by all 50 states. As it happens most of the UCC's 10 articles (1-5, 7-9, 2A, 4A) have been adopted by all 50 states. They haven't been adopted completely uniformly, however, and some states have adopted revised versions of various Articles, while others haven't (for example, there are three versions of Article 3 in effect in different states).

The UCC is a joint project of the American Law Institute (ALI) and the National Conference of Commissioners on Uniform State Law (NCCUSL: na-KEW-sell). ALI is a private law reform organization whose membership is made up of fancy law professors (like our own Bob Lawless), judges, and lawyers. It is essentially the intellectual leadership of the American bar. ALI is perhaps best known for its "Restatements," quasi-normative summaries of American law in various areas.

NCCUSL, on the other hand, is a body made up of commissioners appointed by each state. I don't have a great sense of who NCCUSL commissioners are, but my impression is that some are law professors (including, briefly, our own Bob Lawless), but that many are would-be jv politicians. In any case, NCCUSL doesn't carry nearly the prestige of the ALI.

The Permanent Editorial Board for the UCC is a body comprised of 6 ALI representatives and 6 NCCUSL representatives. It includes the head of the ALI (a law professor) and the head of NCCUSL, but neither is a commercial law expert. Looking at the other 10 members, there are 4 law professors, five lawyers in private practice, and a VP of the Federal Reserve Bank of New York. The PEB, according to ALI's website "assists in attaining and maintaining uniformity in state statutes governing commercial transactions by discouraging non-uniform amendments to the Uniform Commercial Code by the states, and by approving and promulgating amendments to the UCC when necessary."

A PEB report is not even a proposed amendment to the UCC (and remember that a proposed amendment is just that until and unless a state legislature actually adopts it as law. Otherwise, it's legal status is the same as any proposal for a law that you or I come up with.) Instead, a PEB report is just a report on how the PEB believes the law should be interpreted.

This brings us to a critical point: the PEB is NOT the ALI and PEB reports are not approved by the ALI. The PEB report doesn't even carry with it the prestige of the ALI imprimatur. Instead, it is the product of a 12 person body that contains many non-neutral parties and only one commercial law scholar with a national reputation; most of the top commercial law scholars who are ALI members are not on the PEB. (These are the heirs of Karl Llewellyn?!) I find credentialism really distasteful, but the PEB report is trading on the ALI's reputation, which is quite different than that of many PEB members. So what we have here are dicta from a nonrepresentative, politically unresponsive body. Add to that that it is apparent that at least some of of the members have pretty clear conflicts of interest, such as representation of or employment by major mortgage investors, even if not necessarily on mortgage investment issues. Yup, that's authoritative. 

2. The PEB Report Is Irrelevant Because It Only Deals with Negotiable Notes

Perhaps the bigger point to make about the PEB report is that it is utterly irrelevant. It is a report about the enforceability of "negotiable notes". The problem is that no mortgage note in the country qualifies as "negotiable" under the definition of Article 3 of the Uniform Commercial Code. This might as well be a report about the enforceability of mortgage notes made of green cheese. Even if it were technically correct on every point (which it ain't), it just wouldn't matter.

Courts haven't really taken up the negotiability point, but it seems beyond peradventure as Ronald Mann noted nearly 15 years ago that the uniform Fannie/Freddie note doesn't meet the requirements of negotiability because it contains additional undertakings and conditions. This report makes no mention of this issue. But the fact that the notes aren't negotiable makes the report irrelevant to the legal issues involving foreclosures.

Now I should note that the fact that the notes aren't negotiable doesn't solve the trust law problem of the notes lacking the endorsements required by pooling and servicing agreements. If the PSA says that the note has to be made of green cheese, that's what it has to be. PSAs, as it happens, apply to all notes, whether or not negotiable. PSAs don't require negotiability of the note. Instead, they require endorsement of both notes and mortgages (mortgages are themselves never negotiable instruments), as a way of indicating ownership, as a way of documenting chain of title, and as legal protection for the securitization trust if the note does happen to be negotiable.


There is a probably apocryphal tale of a modern pope issuing a statement that made significant changes in existing teaching. The religious press immediately asked the curia spokesman who was fielding their questions whether the pope was speaking infallibly. The spokesman told them the pope was not speaking infallibly but was "almost infallible." This is an illustration of creeping infallibility, and whoever is pulling the PEB's strings is praying for it here, namely that the average judge will not care if the note at issue is actually negotiable.

As for moneyed interest control of the UCC, that isn't new. Article 4 is one, big takeaway of Article 3 protections in favor of the banks.

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