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The Restatement of Property and the Road to Mortgagocracy

posted by Adam Levitin

I recently did a string of blog posts of the Permanent Editorial Board for the UCC's Report on the enforcement of negotiable mortgage notes. I'm still planning a final installment there, but I came across another document that just floored me in showing how across another American Law Institute product that just floored me in how deeply captured and compromised part of the legal elite is.  

The document in quest is section 5.4(c) from the Restatement (2d) of Property.  The Restatements are an ALI-only product (unlike the UCC, which is jointly done with NCCUSL), and they are the ALI's signature product.  They are meant to "restate" the law, meaning summarize and improve it, sort of the way Yiddish versions of Shakespeare plays were unironically advertised as farbesert un fartaytsht (improved and translated).  That is to say the restatements are meant to be positive summaries of the law, but they often have normative spins.  

Section 5.4(c) appears to stand for a very simple and uncontroversial principle (pace FNMA v. Eaton), that only the obligee of a mortgage note has the right to foreclose on the note:  

A mortgage may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures.

In other words, a naked mortgage's got nothin' (are you listening AZ Supreme Court?).  But then the comments and illustration go off the deep-end. Here's Comment (e):  

Mortgage may not be enforced except by a person having the right to enforce the obligation or one acting on behalf of such a person...[including an agent or a trustee for the noteholder.]  The trust or agency relationship may arise from the terms of the assignment, from a separate agreement, or from other circumstances. Courts should be vigorous in seeking to find such a relationship, since the result is otherwise likely to be a windfall for the mortgagor and the frustration of [the noteholder]'s expectation of security. See Illustration 10.

Illustration 10 is an example in which a past agency relations is grounds for finding a current agency relationship:

Mortgagee has often served as [noteholder's] agent in the past with authority to foreclose mortgages held by [Noteholder]. A court is warranted in finding on the basis of this pattern of prior conduct that Mortgagee is noteholder's agent for purposes of foreclosing the instant mortgage.

I've never seen anything like this before. The Restatement here is saying that "courts should bend over backwards to make sure that the lender wins no matter how badly the lender has screwed things up." Is it really an accurate restatement of the law to say "lenders win even if they screw up and don't follow the law"? That sure sounds like a Mortgagocracy.  I suspect that many ALI members would be pretty shocked to find that's what the Restatement is saying.  But it's got the ALI imprimatur on it.  

I get that the borrower has no right to a windfall, but I can't see why that means that basic principal of agency law should be disregarded and agency relationships implied where they do not exist; the ALI's Restatement (2d) on Agency (sec. 15) is quite clear in stating that an agency relationship requirement mutual consent. It isn't an implied set of fiduciary duties, etc.  Current agency is going to be implied from a past course of dealing?  What if the scope of that agency varied in the past? Curiously, the Restatement cites NO cases in support of its point.  

Let me be clear. I don't think anyone deserves a free house. But a mortgage is a contract, and a background term to that contract is that the foreclosure has to follow the law.  That's part of the deal, no different from any other (non-severable), material term.  Otherwise, why not allow self-help foreclosures and evictions?  

I don't think it's too much to say that if you're going to engage in a major financial transaction like making a mortgage loan, you'll be expected to follow the law correctly or not enjoy its benefits. Both lenders and borrowers have to play by the rules.  If you don't pay the mortgage and the lender follows the law, you lose your house. But following the proper legal procedure is no less important than the default in a foreclosure; both are equally important requirements.  It's not a windfall.  It's part of the mortgage contract. 

What about the noteholder's "reasonable expectation of security"?  There is none, and I don't see how the drafters possibly thought there was one.  Just having a note without the security instrument doesn't make you meaningfully secured.  The noteholder only has a reasonable expectation of security as long as it retains the security instrument or can prove its terms.  If it doesn't, what expectation of security could it reasonably have?  

Consider if the security instrument were destroyed prior to recordation, but not the note.  Perhaps there could be an equitable mortgage or the like, but the noteholder would have a lot of trouble proving that the note was in fact secured.  That creates a strong incentive to record, asap.  If you don't control the security instrument physically, and it isn't recorded (and recording isn't required usually for enforceability against the borrower), how can you reasonably expect to remain secured? You can't take care of that security instrument if you don't have it and don't have an agent or trustee holding it for you.  But apparently the good folks who did the Restatement of Property think that's quite reasonable.  Or more precisely, they don't care if it's reasonable, as long as the lender wins.

It's really disturbing to see an ALI product moving so blatantly away from rule of law and towards mortgagocracy.  Now the good news is that the Restatement isn't law. But this is a scary sign of how part of the legal elite, which used to fight for rule of law above the rule of monied interests, has been co-opted.  More about that whenever I get to my final post on UCC Article 9.


ALI, like the rest of Amerika has been corrupted and compromised. We are a White Collar Criminal Oligarchy.

This anti-banking frenzy that is totally occupying the time and effort of blogs like this in such a tortured (and almost certainly an unconscious) way, is starting to really annoy me. Speaking of bubbles...

When was comment (e) published?

This is especially disturbing that it occurs on Roberta Ramos' watch as ALI President. I'm from New Mexico where both Roberta (also the first woman president of the ABA)and her husband Barry have contributed so much (eg, supporting important speakers for the UNM Peace and Justice Center).

Welcome to Potemkin Village. My name is Peggy. What is problem?

Focus on the corruption of the "unjust enrichment" argument. There is a growing body of evidence that the big banks never transferred the mortgages to the mortgage backed securities trust as required by the PSA. Instead, these banks held on to the mortgages so that these assets could be shown on their balance sheets. In other words, they used the property sold to others to make it appear falsely as belonging to the bank. As a bank's financial condition became more and more fragile, the retention of the sold mortgages became ever more important to enable banks to continue to maintain investor confidence to enable the bank to continue to conduct its investment and banking activities.

The mortgages should be declared unenforceable because to enforce them would permit the banks to escape liability for wrongful actions and lead to the banks unjust enrichment.

The truth is that banks do not want to accept the risks that gave them trillions of dollars in profits, selling the houses tens or hundreds of times to other countries; the time come for them to lose a bit, but based on the Reganomics and lobbies, they want to reel off the losses that they would correspond to millions of homeowners.
This is very similar to student loans. Remember that the loans were to the pools of investors scrambled with home loans that students sometime does not pay, then the debt was sold to a collector company and one to one selling the debt insured by the government or by taxpayers. That's why you see that collecting agencies are constantly changing, because while some others charge the government left with the debt, some others come and go and always getting the payment from the government in a process that seems to infinity.
In other words, for most business collection agencies is better that the student does not pay.

I am totally in favor of any person whose bank broke the law getting a free house.

The first house meme is what absolutely irks me. There is no such thing. Someone might get a house cheaper than what they would have paid in a 30 year mortgage, but the house WAS NOT FREE.

If any party got something for free it was the bank. Knowing what we know now, where originators capital ever truly at risk? Or was the loan funded via re-re-rehypothecation scheme to the FED?

I don't think people realize that they can buy a house and the FED can simply print new money to pay the seller. What is the collateral to back those fresh printed Federal Reserve Notes? Why the mortgage of course. This is simply a conversion to the note of a different maker. The penultimate house of mirrors aka circle jerk.

Now consider the FED itself never redeems their notes

damn typo , I meant free house meme.....

If I lose a $20 Federal Reserve Note from my wallet, can I claim the value of it anyway, saying that whoever found my $20 bill was "unjustly enriched"?

Whoever originally gave value for the note and mortgage agreed with the mortgagor, by contract, that foreclosure could take place only by the note holder.

Whoever gave value for the mortgage without the note knew, or should have known, that the right to foreclose lay with the note holder.

The mortgage holder can always track down the note. It may take time, it may take money, but without the note who can prove that the debt is still owed?

Adam - Looking forward to your final post on UCC Article 9. I raised the "non-negotiable instrument" argument during a bk hearing on a motion for stay relief last week. The motion was withdrawn after the hearing (perhaps the note was MIA). Does anyone know if the "non-negotiable" issue has been ruled upon by any court? Stated otherwise, has any court ruled that the promissory note attached to the mortgage was not negotiable (presumably the case with virtually every mortgage note I have reviewed)?

I'm sad to hear about the comments to Section 5.4(c). If I remember correctly, the ALI's Principles of Corporate Governance (1992-ish) is the first ALI product where I ever heard accusations of interest-group corruption. Generally, the ALI has had a reputation for High Tory probity: generally favoring the legal status quo, but blind to the entreaties of interest groups, and sometimes cautiously innovating.

The ALI, to its credit, did back off from UCITA once it became clear that the Article 2B project was a wholly-owned subsidiary of the copyright industry. (NCCUSL didn't have the sense to do so, but it was always viewed as the more politically responsive of the two.)

It is lucky for us that the Restatement is not, in fact, the law. It can be cited in legal memoranda, but it is only persuasive authority - not binding authority.

For anyone curious what actual case law says, I would encourage you to read the recent decision from the Supreme Court of Nevada (binding authority in the state), Leyva v. National Default Servicing Corp., 255 P.3d 1275 (2011). There is a very thorough discussion of proper transfer of notes and deeds of trust. At least this court is requiring banks to show that they are the proper party to enforce the note before allowing them to foreclose.

you pay you stay.
if not get out.

@ Brad I'm curious about what happened. Did the bank withdraw? Did you file a motion or did you just throw it out there to see what would happen?

@ Brad
I think your looking for something like this.
SIRIUS LC v. Erickson, 156 P. 3d 539 - Idaho: Supreme Court 2007


Here's the juiciness ..
The promissory note under consideration here lacks the requisite words of negotiability to be a negotiable instrument. It provides in relevant part "[f]or value received, the undersigned Bryce H. Erickson promises to pay to SIRIUS LC. . . ." The note is not payable to bearer because it specifically identifies the person to whom payment is to be made, "SIRIUS LC," and even though the note is payable to an identified person, it is not payable to order because it lacks the words of negotiability "to order" required under Idaho Code § 28-3-109(2). Notes payable simply to a specific payee, and not "to the order of the payee" or "to the payee or order," are non-negotiable. See, e.g., Universal Premium Acceptance Corp. v. 543*543 York Bank & Trust Co., 69 F.3d 695, 700 (3d Cir.1995) (draft with language "PAY AND DEPOSIT ONLY TO THE CREDIT OF: Great American Insurance Company" was non-negotiable because it lacked the words "to the order of"); Krajcir v. Egidi, 305 Ill.App.3d 613, 238 Ill.Dec. 813, 712 N.E.2d 917, 922 (1999) (note with language "payable to sellers," although payable to specific individuals, was non-negotiable because it did not contain the words "to order" or "to bearer"). The promissory note here is not "payable to bearer or to order" and thus is non-negotiable; consequently, the promissory note is governed by contract law.

@self - Let me guess, you used to work for Fairbanks Capital. You've got one of those nifty blue t-shirts they used to have printed for the collections department showing the monopoly man being dragged out of a house by an owl (The Fairbanks mascot) with the caption "No Pay No Stay" - don't you...

The problem with that argument, "self" is who has the *LEGAL RIGHT* to say "Get out." Certainly not you - unless you can prove that you own the note in question.

It is NOT a FREE house. I have $200,000 cash in mine regarding about $100,000 in downpayment, $80,000 in repairs and renovations, and another $20,000 in other out of pocket expenses, including, but not limited to, legal fees. Oh, and my credit is ruined costing even more financial damages to my family.

JPMorgan Chase has NOT A SINGLE PENNY in ANY WAMU LOANS. We can now prove this. JPMorgan Chase has also been accused of running WAMU off the cliff. This explains WAMU's fraud spree between 2005 - 2008. (see the TEXAS COMPLAINT - WAMU Bondholders vs JPMC/FDIC)

Unclean hands and unjust enrichment? RICO anybody??

(See you in court, cockroaches. Just try to sue me for expressing my opinions based on facts. DISCOVERY in countersuit will be long and "bloody," including deposing your attorneys and executives - under threat of perjury - a felony? I have 100's of people who will be there to help out.)

Rob Harrington
Co-founder/ National WAMU Homeowners Support Group.

re: the "free house" and "windfall" arguments - if anyone would be getting a free house, or a windfall, it's the damn foreclosing bank that can't prove it's right to foreclose! my way of arguing this is, someone's getting a free house, who should it be, the bank or the homeowner?

as others correctly note above, a homeOWNER has a provable claim to and investment in the house. the house will never be "free."

I am not saying expunge the mortgage lien, necessarily - but I think some quiet title actions might be in order, since homeowners often don't know who to pay, and risk having their loan wildly inflated due to bank negligence or malfeasance. in that case, just who should get the "free house"? the malfeasant bank, who can't even show ownership? or the invested homeowner?

@ Dana - I filed an objection to the bank's mtn for relief on behalf of the Chapter 7 Trustee. The objection was based on standing. During the oral argument at the preliminary hearing I argued the note was not a negotiable instrument. Two days later the bank withdrew its mtn. The bank based its withdrawal on the fact that I had also filed an adversary proceeding on behalf of the Trustee to avoid the mortgage (for failing to name a mortgagee and because WY has a unique notice statute that requires a mortgage to identify the agency agreement if the named mortgagee is acting in a representative capacity, i.e., "nominee" (MERS was the named mortgagee/nominee on the filing date and the mortgage didn't identify the agreement under which MERS was acting); as a bfp the trustee can avoid the interest of the real entity entitled to the mortgage, perhaps the "equitable mortgagee"). The interesting point is that I would think the bank would still want to continue on with the foreclosure. Now the debtor is likley going to live in the home "rent free" until the adversary is settled, which could be a year or more down the road.

In terms of the non-negotiable issue, I am looking for a case where a court found the mortgage note was not negotiable becuase the note required the borrower to provide written notice if he/she intended to pre pay the debt (the note stated an undertaking to do an act other than the payment of money).

@Adam: Holy chrome, you're just now figuring our ALI is a sock puppet?

@self: My, how simple. And irrelevant, inapposite, and exactly wrong. What's your information source, Fox News?

"figuring OUT"

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