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

posted by Adam Levitin

Why the PEB Report? 

What motivated the Permanent Editorial Board for the Uniform Commercial Code to issue its ridiculous report on the enforceability of negotiable mortgage notes (discussed in the previous post in some detail) when virtually no mortgage notes are negotiable? Why go to all the effort and fuss to issue an irrelevant report?  

The report is an attempt to paper over all of the legal and paperwork snafus that have gummed up the foreclosure system. The report is an attempt to put a finger on the scale of justice in favor of the banks in foreclosure litigation. (I hope ALI members who read this understand just what a rogue body the PEB has become; I don’t think this is a policy that the ALI membership as a whole would support.)   

To understand what’s going on here, think of the scene in Star Wars when the rebels are attacking the Death Star and the imperial officer says to Grand Moff Tarkin:

We’ve analyzed their attack, sir, and there is a danger. Should I have your ship standing by?  

The authors of the PEB report are like the nameless, cautious imperial officer.  They are lawyers who have realized that there’s a real danger to the banks in the foreclosure process because the banks failed to comply with the law (the bankers themselves don’t get this--for them this is all technicalities that don’t or shouldn’t matter.  Or as Grand Moff Tarkin responded:  Evacuate? In our moment of triumph? I think you overestimate their chances!).

It seems that the PEB report has been underway since around the fall of 2010--when the robosigning scandal broke. Some bank lawyers realized that there was something to the arguments being made by consumer attorneys and law professors that the banks had screwed up the chain of title and paper work in so many different ways that they really couldn't foreclose if courts were to take the law seriously.  (Some other law professors and I have been trying to squash this tarakan for a while--we delayed it but weren't ultimately successful.  You can see some of my comments on earlier versions of the report here and here.)    

So the PEB Report is Plan B for the banks' lawyers. Plan A was for the banks to comply with the law. But if that didn’t work, then plan B is to make the law comply with the banks. The idea here is to twist the law to make it appear as if the banks are in compliance. If the banks don’t fit the law, make the law fit the banks. Hence the attempt to sound very official about the enforceability of (negotiable) mortgage notes in the hope that no one would notice that mortgage notes are non-negotiable. Instead of rule of law, it seems, we have rule of banks. 


Thank You finally someone has brought up the issue that these notes are NOT negotiable instruments. There might be rare cases that are but most are not.

What kills me is that there is a lot of bad lawyering out here . The bank will claim the note is negotiable or the judge will and they let the charactarization stand uncontested.

I don't think people understand the enormity f the distinction. There are virtually no defenses to non-payment of a negotiable instrument. However if the note is non-negotiable every defense is available that would be available under a simple contract. My favorite being "failure of consideration".

Here's a little write up I did about the issue awhile back.

There is also a little part in Corpus Juris Bills and Notes about the note being unenforceable if the transfer was done solely for the purpose of defeating the defenses of the note's maker.

This defense alone would destroy the little "pay to the order of bearer" trick they like to pull to get around issues of standing. We all know its a fraud especially when it is done so MERS can foreclose.

An end needs to come to this criminality.

Anyone that is a foreclosure defense lawyer should be ashamed for not knowing about this issue because I know about it and I've never been to law school.

I'm not in foreclosure either and have never owned a house. I have no ax to grind except that the rule of law is being eviscerated before our eyes.

Prof. or Dana

Is there any case law that supports this theory? If so, what are the cases? because I think the public needs to know how this could apply to their situations.

Dana, where is the "little part" located in Juris? Because they love to use the "bearer paper" is part of a securitized trust.

Dana just went through your link, interesting stuff!!

NY UCC 3-104 states:
Form of Negotiable Instruments; "Draft"; "Check";
"Certificate of Deposit"; "Note".
(1) Any writing to be a negotiable instrument within this Article must
(a) be signed by the maker or drawer; and
(b) contain an unconditional promise or order to pay a sum
certain in money and no other promise, order, obligation or
power given by the maker or drawer except as authorized by
this Article; and
(c) be payable on demand or at a definite time; and
(d) be payable to order or to bearer.
(2) A writing which complies with the requirements of this section is
(a) a "draft" ("bill of exchange") if it is an order;
(b) a "check" if it is a draft drawn on a bank and payable on
(c) a "certificate of deposit" if it is an acknowledgment by a
bank of receipt of money with an engagement to repay it;
(d) a "note" if it is a promise other than a certificate of
(3) As used in other Articles of this Act, and as the context may
require, the terms "draft", "check", "certificate of deposit" and "note"
may refer to instruments which are not negotiable within this Article as
well as to instruments which are so negotiable.

Where would the wording be in the note? under the section Borrowers promise to pay?
On my adjustable note, it says:

"I undertsand that the lender may transfer this note. The lender or anyone who takes this note by transfer and who is entitled to receive payments under this note is called the "Note Holder" and then it goes on to say note holder all over the place, but no words that say "payable to order" or "to bearer"

You have the plans out of order. Plan A has always been to write the laws to fit. Plan B has always been, if the laws are not as wished, capture the regulators. Plan C: If all else fails, obey the law.

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