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Negotiating the American Dream: A Critical Look at the Role of Negotiability in the Foreclosure Crisis

Featured Article

House underwater Contemporary negotiable instruments law developed hundreds of years ago, before every important institution of the modern financial world: incorporated banks, business corporations, developed capital markets, global monetary systems, electronic transfers, and even paper currency.1 It is counterintuitive that this ancient law of negotiable instruments would have any relevance to one of the world’s most sophisticated, cutting-edge tools of high finance — the pooling and securitization of mortgage loans. Yet, the courts routinely look to such law to resolve a foreclosure crisis spawned by the collapse of mortgage-backed securitization, a process which is as strained as trying to decide First Amendment issues using cases pre-dating the Constitution. It is all the more extraordinary that, just as the nation begins to awaken to “robo-signing” and other such pervasive and methodical abuses of the court systems, judges should find themselves slavishly compelled to apply a body of law shaped (and then abandoned) by the very authors of such scandals: the financial institutions.

This article explores the historical underpinnings of negotiability and whether the evidentiary shortcut that negotiability appears to offer as a means of proving a plaintiff’s standing to sue can or should be applied in the context of the foreclosure cases facing the courts today. Examination of the original purposes of negotiability, as well as recent changes to the Uniform Commercial Code, leads to the conclusion that mere possession of a negotiable instrument (the promissory note) is insufficient to enforce a mortgage. The possessor or “holder” must prove ownership of the instrument — a complete chain of title from the original creditor — to invoke the equitable remedy of foreclosure.

The Private Currency of Merchants
The concept of negotiability is rooted in European mercantile customs, which, as of the 17th century, had developed a means of paying for goods, principally in international transactions, using documents called “bills of exchange.”2 Similar to a cashier’s check today, the bill of exchange was an instrument representing an amount of money that the buyer had deposited with a third party. The bill instructed a fourth party, typically located near the foreign seller of the goods, to pay the seller upon presentment of the bill. Bills of exchange offered the advantage of being easier and safer to transport than precious metals or other valuables.3

As the use of these instruments became more common, merchants developed the practice of transferring the bills among themselves by endorsement.4 Rather than presenting the bill to the local “fourth party” for payment, the payee would endorse the bill to another merchant as payment for goods or services.5 Such instruments were often transferred dozens of times and served the function that currency serves today.6

This practice of transferring the bill to additional parties by way of “negotiation” and “endorsement” was later extended to promissory notes — two-party debt instruments.7 As the courts came to recognize and enforce this endorsement-and-delivery method of transfer, documents that could be circulated in this manner came to be known as “negotiable” instruments. The “negotiability” of the instrument typically referred to its degree of “transferability.”8

Holder in Due Course Doctrine
The “holder in due course” doctrine is said to be, not only the primary feature of negotiable instrument law, but “the most important principle in the whole law of bills and notes.”9 This doctrine grew out of an information vacuum typical in the age before computers and worldwide communications. In those days, the more times a particular instrument was transferred, the more attenuated the later recipients’ knowledge about the original transaction became. Merchants, therefore, developed rules of negotiability to enhance the liquidity of the instruments by reducing the need for information about transactions earlier in the chain.10 The most important of these was the “holder in due course” status, which simply disallowed most claims or defenses that might undermine the value of the instrument.11 The holder in due course was a “good faith purchaser”—someone who paid value for the document without knowledge of any defect in either the seller’s right to sell it or in the transaction that created it.12 Because the holder in due course was a transferee that could receive greater rights than those of the transferor, the doctrine was a remarkable departure from basic common law principles that governed ordinary contracts,13 but one necessary for the documents to function as a currency substitute.

Over time, governments began to issue paper currency,14 supplanting the need for the unfettered transferability of bills and notes. New technology revolutionized payment systems by creating the means for instantaneous transfers of money and information about transactions. Negotiability had become anachronistic and unnecessary.15 Nevertheless, in 1952, the already antiquated holder in due course rules were codified into Article 3 of the Uniform Commercial Code (UCC).16 As a result, the “law for clipper ships and their exotic cargoes from the Indies”17 became frozen in time and, rightly or wrongly, continues to influence court decisions today.18

Evolving from Article 3 Negotiability to Article 9 Sales as a Means to Transfer Mortgage Loans
Article 3 has been criticized as having been drafted by a process that was “captured by bank attorneys” such that the end result was “a pro-bank statute.”19 Yet, as the technology of payment systems continued to advance, the banking industry itself became dissatisfied with Article 3 as a means of transfer, particularly with respect to mortgage loans. The necessity of physical delivery of the documentation became a nuisance that hindered, rather than expedited transferability.20

In response, the industry orchestrated a change to Article 9 of the UCC in 1998 that brought mortgage loans within its purview.21 Specifically designed to facilitate securitization,22 not only did the new Article 9 provide for automatic perfection of the buyer’s interest upon sale, even without the transfer of possession,23 but it officially sanctioned the practice of using third-party agents as document custodians to “possess” the instruments.24 When the transferor and transferee used the same document custodian, the transfers of possession could take place without physically moving the documents; the custodian could simply acknowledge the change.25 Most importantly, revised Article 9 applied regardless of whether the promissory notes were actually negotiable.26 Article 9, therefore, now provides all the benefits of negotiability, such as transferability and liquidity, without the outdated custom of transporting the note and mortgage.27

Infusion of the Concept of “Holder” into Foreclosure
In the early days of the foreclosure crisis, the allegations of standing in complaints filed in Florida merely tracked the language of the foreclosure form approved by the Florida Supreme Court — that the plaintiff bank “owns and holds the note and mortgage.”28 Over time, the complaints have evolved such that the word “holder” has been substituted for the “owns and holds” language approved by the Florida Supreme Court.29 Replacing the traditional language with the unrelated Article 3 term “holder”30 permits the bank to argue that mere possession of a document that its attorney asserts to be an original note endorsed in blank (or specially endorsed to the plaintiff bank) conclusively establishes its standing to foreclose.

Thus, despite the shift toward Article 9 as the real-world mechanism for transferring loans, Article 3 negotiability has become the dominant legal theory argued by plaintiffs in support of their standing to bring foreclosure actions. In the courtroom, Article 3 serves as the basis for arguing an evidentiary shortcut which not only discards ownership of the loan as an element of proof, but which circumvents basic foundational evidence for the authenticity of the note itself. claiming that promissory notes are “self-authenticating” under the UCC,31 standing is now routinely, albeit incorrectly,32 established on a single unsworn representation by plaintiff’s counsel that the document presented is the original note.

Can a Thief Really Enforce a Note?
The key to this evidentiary shortcut, this indifference to who actually owns the loan, is the idea that, under Article 3, mere possession, even wrongful possession, of a bearer instrument confers an unassailable right of enforcement. This argument holds that the court need not inquire into the true ownership of the note because, even if the bank’s possession is shown to be illegitimate, the matter does not concern the borrower (or the court), but rather, concerns only the true owner.33

The notion that a borrower is precluded from challenging a holder’s right of enforcement is often expressed apothegmatically as: “Even a thief is entitled to enforce a bearer instrument.”34 Needless to say, the assertion that a thief can obtain or pass title to stolen property flies in the face of common law.35 It also offends the commonsense of the average citizen to say that a court of law has no choice but to employ its constitutionally granted powers on behalf of those with no legitimate right to the note so that they may profit from what must surely be a crime. Indeed, under negotiable instrument law prior to Article 3, only a holder in due course was immune to the defense of theft, not a mere holder.36 Even the claimed status of holder in due course could be impeached with evidence that the note was not acquired in good faith, at which time the burden “shifted to the holder to prove that he took it free from defect or infirmity.”37

Yet, §3.301 of the current version of the UCC states: “A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument. ”38 The drafters’ comments to Article 3 state without reservation that a “thief” or a “finder” may become a holder.39 Still, after the adoption of the UCC, there was considerable debate as to whether its drafters meant to grant such rights to thieves.40 At least one commentator has labeled this result an “authorization anomaly” and questioned whether any court will “accept such a daring theory” that a thief is entitled to enforce an instrument because it is an “obvious abuse of the term ‘entitlement.’”41

Even the text of the UCC itself appears strangely ambivalent on the issue. It declares that one becomes a “holder” through “negotiation,” which in turn is defined as a “transfer of possession [of an instrument] whether voluntary or involuntary.”42 Yet, a “transfer” of an instrument is described as a delivery — a “voluntary transfer of possession”43 & #x2014; of that instrument “for the purpose of giving the person receiving delivery the right to enforce the instrument.”44 Because no one intends to give a thief, or even a finder, the right to enforce an instrument, the two provisions appear irreconcilable.

Moreover, UCC §3.60245 provides that payment made to a person entitled to enforce the instrument (which presumably includes a thief), discharges the borrower, unless the borrower knows “that the instrument is a stolen instrument and pays a person it knows is in wrongful possession of the instrument.” Coupled with the thief’s right of enforcement, this implies that the borrower can be compelled to pay an admitted thief, yet will still be liable to the rightful owner of the note.

Similarly, UCC §3-501(b)(2)46 provides that, upon demand for payment, the borrower may ask that the person seeking payment give “reasonable identification” and if the demand is made on behalf of someone else, “reasonable evidence of authority to do so.”47 If even a thief is entitled to enforce the note, it seems inconsistent to require the thief to produce evidence of his or her authority to enforce the note.

This labyrinth of seeming self-contradictions in the UCC can be aligned by an interpretation of Article 3 that is consistent with prior negotiable instrument law. Specifically, the statutory declaration that a holder may enforce a stolen or found instrument should be construed as a description of what constitutes a prima facie case. Rather than a bar to evidence that the instrument is stolen, it merely creates a presumption that temporarily shifts the burden of introducing evidence of ownership to the defendant.

Protecting Consumers from Negotiability
Borrowers in foreclosure are, for the most part, consumers who had no bargaining power with which to influence a single term in the note and mortgage they signed. Most lacked even an understanding of the terms of those documents, much less, the destructive effect of negotiability on their defenses. In the context of credit transactions involving goods and services, the federal government took steps in 1971 to limit the negative effects of negotiability on consumers.48 Specifically, the Federal Trade Commission promulgated a regulation entitled “Preservation of consumers’ claims and defenses, unfair or deceptive acts or practices,” also known as the “Holder Rule,” which requires a notice on all consumer credit contracts that the holder would be subject to all claims and defenses that the consumer could assert against the seller of goods or services.49

In Tinker v. De Maria Porsche Audi, Inc., 459 So. 2d 487 (Fla. 3d DCA 1984), the court held that “the effect of the federal [Holder Rule] is to defeat the holder in due course status of the assignee institutional lender, thus, removing the lender’s insulation from claims and defenses which could be asserted against the seller by the consumer.”50 The FTC recently reaffirmed the rule, issuing an opinion letter that condemned court decisions, such as one in Florida,51 which have barred consumers from affirmative recoveries under the Holder Rule unless rescission is warranted.52

It is against this backdrop that the courts are being asked to make decisions in foreclosure actions based on a presumed negotiability of mortgage notes, often with no analysis as to whether Article 3 is even applicable. Given the general obsolescence of negotiability and the banking industry’s own rejection of Article 3 in favor of Article 9, the courts should not only analyze whether the notes are negotiable, but should employ a healthy skepticism when doing so.

Negotiability of Modern Mortgage Notes
It is perplexing that modern jurists often assume that all mortgage-backed promissory notes are negotiable, when the assumption runs counter to the historically essential requirement that a negotiable instrument be simple, unconditional, and without contingencies — a “courier without luggage.”53 In reality, a mortgage note is laden with the mortgage itself — a veritable steamer trunk full of additional rights and obligations that must accompany the note on all its travels. The Permanent Editorial Board for the Uniform Commercial Code has itself warned that “[i]t should not be assumed that all mortgage notes are negotiable instruments.”54

The more intuitive stance is that today’s complex mortgage loan transactions produce lengthy interrelated documents that do not qualify as negotiable instruments. Indeed, the banking industry’s abandonment of Article 3 in favor of Article 9 transfers suggests there would be little reason for the industry to ensure that the notes it drafts for loans intended for securitization would comply with all the rules of negotiability.

Examination of the most commonly used form for the mortgage loan note, the “Fannie Mae/Freddie Mac Uniform Instrument Note” or “UI Note,”55 supports the conclusion that negotiability is not at the forefront of the drafters’ objectives. Fifteen years ago, one commentator argued that that the UI Note does not meet the requirements of negotiability because it contains an undertaking in addition to the payment of money, which is forbidden by UCC Article 3-104(a)(3).56 Specifically, he argued that the requirement that the borrower notify the note holder in writing of any prepayment is just such an additional undertaking.57 Courts, however, have recently begun to reject this argument, finding that the nonmonetary obligation is not a condition placed on the borrower’s promise to pay. Rather, the notification requirement conditions the exercise of the right of prepayment, a benefit of which the borrower is not obliged to avail himself or herself.58 Still, there are other more compelling reasons to conclude that modern mortgage notes are not negotiable.

Incorporation of Mortgage Terms: Opting for Security Over Transferability
One of the well-settled rules of negotiability is that the instrument cannot include obligations or conditions that cannot be determined from the four corners of the note itself.59 Thus, incorporating the terms of another document, such as the mortgage, instantly destroys negotiability.60 Mere reference to the mortgage without incorporating its terms, however, has no effect upon negotiability.61

This rule has led to bizarre tight-rope walking by the banking industry attempting to integrate terms from the mortgage into the note while still maintaining negotiability. In Sims v. New Falls Corp., 37 So. 3d 358 (Fla. 3d DCA 2010), for example, Fannie Mae and Freddie Mac were permitted to explain their intent with respect to the drafting of a note (a UI Note for a second mortgage issued in Georgia) and security deed (equivalent to a mortgage). In that case, the term at issue was a choice of law provision that appeared in the mortgage, but not the note. Fannie and Freddie conceded that a conscious effort had been made not to incorporate the term by reference to the mortgage for fear it would “destroy the negotiability of promissory notes and open all foreclosure actions to otherwise barred collateral defenses.”62 Still, wanting to have their cake and eat it, too, Fannie and Freddie maintained that in a foreclosure action (as opposed to an action to enforce the note), the note and the mortgage should “be considered together as an integrated contract and that the choice of law provision in the [mortgage] would govern the enforcement of the [n]ote.”63 So, Sims reveals an important banking industry concession that, in a foreclosure context, its standard note has a decidedly non-negotiable characteristic — it can effectively adopt terms outside its own four corners.

This desire to incorporate terms from the mortgage, without appearing to, is most evident in §10 of the UI Note. Here, Freddie and Fannie begin by merely referencing the mortgage, which, by itself, would have no effect on the note’s negotiability:

In addition to the protections given to the Note Holder under this Note, a Mortgage, Deed of Trust, or Security Deed (the “Security Instrument”), dated the same date as this Note, protects the Note Holder from possible losses which might result if I do not keep the promises which I make in this Note.

The drafters go on, however, to state that the mortgage contains conditions under which the borrower may be required to make immediate payment — in other words, conditions that affect payment which are not contained in the note itself, “That Security Instrument describes how and under what conditions I may be required to make immediate payment in full of all amounts I owe under this Note.”

Section 10 goes on to describe “ some of those conditions” (emphasis added). The drafters’ use of the word “some” unmistakably communicates that the mortgage contains additional promises of the borrower with respect to the loan that do not appear within the four corners of the note. Those additional promises include 1) payment of taxes; 2) payment of casualty insurance; 3) payment of mortgage insurance; 4) payment of community association fees and assessments; 5) furnishing the lender with notices of amounts due for taxes, assessments, and community association charges; and 6) furnishing the lender with receipts evidencing payments of taxes, assessments, and community association charges.64 In addition, the borrower promises to occupy and use the residence as the borrower’s primary residence for a period of at least one year.65 The borrower also agrees to refrain from destroying, damaging, or impairing the property and repairing the property if so damaged.66

Moreover, §10 of the UI Note recites verbatim language from §18 of the UI Mortgage67 that permits acceleration upon alienation of the collateral real estate. In doing so, it incorporates by reference the notice provisions of §15 of the mortgage, without ever describing the specifics of those provisions (emphasis added):

If Lender exercises this option [to accelerate upon sale or transfer of the property to a third party], Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is given in accordance with Section 15 within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.

One example of an additional promise made by the borrower in §15 of the UI Mortgage is to “promptly notify Lender of Borrower’s change of address.” Under the UI Note, the borrower is not obligated to provide a change of address.68

Another complication is that the UI Mortgage defines the term “borrower” as the “mortgagor.” To ensure that the lien applies equally to anyone on the deed, such as nonborrowing spouses or business partners, the practice is to include the names of property owners who borrowed no money as a borrower (and, thus, mortgagor) on the mortgage. The borrower on the UI Note, however, is merely the person obligated to repay the debt. As a result, the borrower on the note will often be one person, while the borrower on the mortgage will often be more than one. Not only does this raise the question of which borrower is being referred to in §10 of the UI Note (that quotes §18 of the UI Mortgage), but suggests that the note is incorporating promises by strangers to the note — parties whose identity cannot be ascertained without looking at the mortgage.

In the end, despite the drafters’ studious avoidance of the word “incorporate,” it cannot be disputed that the intended effect was to incorporate the terms of the mortgage, rather than merely reference them. While it might be said that the careful wording is a passing nod to negotiability, Freddie and Fannie have ultimately decided that negotiability must take a back seat to the preservation and enforcement of the mortgage terms intended to protect the collateral.

Does the Mortgage Follow the Holder of the Note or the Owner?
Even if the court decides that a note is negotiable (and that the plaintiff bank is its holder), the bank’s work in a foreclosure case is only half done. Successfully claiming to be an Article 3 holder only entitles the bank to a money judgment on the note. It must now prove that it is entitled to enforce the mortgage.69 For this, the foreclosing bank turns to the common law rule that the “mortgage follows the note.”70 Thus, so the syllogism goes, no document is needed to show that the plaintiff is entitled to enforce the mortgage because that right was transferred to it along with the note itself.71

Notably, the most often cited case for this proposition, Johns v. Gillian, 184 So. 140 (Fla. 1938), actually held that, when there is no written assignment of the mortgage, the plaintiff “would be entitled to foreclose in equity upon proof of his purchase of the debt. ”72 but because even a thief can be a holder entitled to enforce a negotiable instrument, mere presentment of the original note is not evidence of an actual purchase of that note. The “mortgage follows the note” concept, therefore, is not the evidentiary shortcut it is professed to be, but just the opposite. It requires proof of purchase of the note, something that the Article 3 holder was able to skip on the way to enforcing just the note.

Accordingly, when the foreclosing bank is not the original lender, it must prove a purchase and an intent to transfer the mortgage with the note. Such proof of ownership of the loan brings the analysis into harmony with the fact that foreclosure is an equitable action.73 As such, plaintiffs with “unclean hands,” such as those in “wrongful possession” of the note, may not take a home as payment for the debt.74 Requiring a greater showing of entitlement to foreclose than that to obtain a money judgment, i.e., greater than mere possession of a note, is also entirely consistent with the public’s interest in protecting homeownership as reflected in Florida’s Constitution.75

Even if the additional proof requirement of Johns were to be ignored, since an Article 3 holder of the note need not be its owner, the abstract claim by a holder that the “mortgage follows the note” leads the court inexorably to the question of whether it follows the owner of the note or the holder of the note. If the transfer is one that occurs by operation of “equity,” then it strains logic to suggest that equity would strip the true owner of the right to collect upon the collateral securing the note and give that right to a potential thief or finder.

Happily, the court need not ponder too long on the puzzle because the very architecture of the UCC answers the question. The common law concept that the lien faithfully tags along after the note is found in Article 9,76 not Article 3. The UCC supplants common law77 and the court must presume that the legislature, in adopting these provisions, intended that mortgages follow Article 9 owners, not Article 3 holders. Moreover, if there is any conflict between Article 9 and Article 3, the rules in Article 9 govern.78 and finally, while possession is a means of perfection under Article 9, enforcement of the security interest requires proof that the buyer gave value to purchase the mortgage loan from a seller entitled to sell it.79

As a result, enforcement of a mortgage transferred under Article 9 ( i.e. by following the note) requires proof of a sale, just as was required by common law under Johns. And because the foreclosing bank must show that it obtained the mortgage loan from a seller authorized to sell it, the bank must ultimately prove the sale at each link in the chain of ownership. The belief that an entity in wrongful possession of a note may foreclose on a home is firmly refuted by Article 9, and cases that hold that mere presentment of a note endorsed to the plaintiff is alone sufficient to prove standing to foreclose are misguided.

Care should be taken in the rush to extricate ourselves from the current mortgage foreclosure crisis not to elevate negotiability beyond the narrow mercantile milieu from which it developed, where merchants transacted business on an equal footing. In the foreclosure setting, both Article 9 and the common law require proof of the chain of title to the note, making Article 3 negotiability irrelevant to the determination of standing.

1 James Steven Rogers, The End of Negotiable Instruments, Bringing Payment Systems Law Out of the Past 20 (Oxford University Press 2012) [hereinafter Rogers, The End of Negotiable Instruments]; Neil B. Cohen, The Calamitous Law of Notes, 68 Ohio St. L. J. 161, 161-62 (2007).

2 Edward Jenks, The Early History of Negotiable Instruments, 9 L.Q.R. 70 (1893); Grant Gilmore, The Good Faith Purchase Idea and the Uniform Commercial Code: Confessions of a Repentant Draftsman, 15 Georgia L. Rev. 605, 607 (1981); James Steven Rogers, The Early History of the Law of Bills and Notes, A Study of the Origins of Anglo-American Commercial Law (Cambridge University Press 1995); Ali Khan, A Theoretical Analysis of Payment Systems 60 S.C.L.
Rev. 426, 434, n. 45 (2008).

3 Kurt Eggert, Held Up in Due Course: Codification and the Victory of Form Over Intent in Negotiable Instrument Law, 35 Creighton L. Rev. 363, 377-78 (2002).

4 Id. at 390-91; Gilmore, The Good Faith Purchase Idea at 613.

5 Ronald J. Mann, Searching for Negotiability in Payment and Credit Systems, 44 UCLA L. Rev. 951, 957 (1997).

6 Rogers, The End of Negotiable Instruments at 71. (“What gave rise to the law of bills and notes in general, and negotiability in particular, was the circumstance that privately issued instruments circulated as a form of currency substitute.”); see also id. at 93.

7 Eggert, Held Up in Due Course at 388-389.

8 Rogers, The End of Negotiable Instruments at 8.

9 Rogers, The End of Negotiable Instruments at 22 (quoting William Everett Britton, Handbook of the Law of Law of Bills and Notes 25 (1943)).

10 Mann, Searching for Negotiability in Payment and Credit Systems at 957-958.

11 Id. at 958.

12 Gilmore, The Good Faith Purchase Idea at 605, 607 (1981).

13 Curtis Nyquist, A Spectrum Theory of Negotiability, 78 Marq. L. Rev. 897, 899-100 (1995).

14 Rogers, The End of Negotiable Instruments at 32-35.

15 Id. at 71, 93.

16 Gregory Maggs, Determining the Rights and Liabilities of the Remitter of a Negotiable Instrument: A Theory Applied to Some Unsettled Questions, 36 B.C.L. Rev. 619, 626 (1995).

17 Grant Gilmore, Formalism and the Law of Negotiable Instruments, 13 Creighton L. Rev. 441, 448 (1979).

18 Id. at 461 (Article 3 is “a museum of antiquities — a treasure house crammed full of ancient artifacts whose use and function have long since been forgotten.”).

19 Allen R. Kamp, Uptown Act: A History of the Uniform Commercial Code: 1940-49, 51 SMU L.
Rev. 275, 346 (1998); Frederick K. Beutel, The Proposed Uniform [?] Commercial Code Should Not Be Adopted, 61
Yale L. J. 334, 362-63 (1952) (calling the UCC a “Lawyers and Bankers Relief Act” and railing against what he called a “sellout” of the American Law Institute and the Commission of Uniform Laws to the banking lobby).

20 Dale A. Whitman, How Negotiability has Fouled Up the Secondary Mortgage Market, and What to Do About It, 37
Pepp. L. Rev. 737, 740 (2010) (“[N]egotiability requires that, for every loan sold on the secondary market, the original promissory note must be delivered to the purchaser. In a national or global market, this requirement is extremely inefficient and inconvenient, and in recent years, has been widely ignored, much to the detriment of mortgage purchasers.”); see also Mann, Searching for Negotiability in Payment and Credit Systems at 961.

21 Dale Whitman, Transfers of Mortgage Notes under New Article 9, available at These changes were enacted in Florida in 2001, effective 2002, Fla. Stat. §§679.1011-.709 (2012). The industry has also advocated a shift to paperless eNotes. See Electronic Signatures in Global and National Commerce Act, 15 U.S.C. §7001 et seq. (2012); Uniform Electronic Transaction Act adopted by the National Conference of Commissioners on Uniform State Laws in 1999 (adopted in Florida in 2000, Fla. Stat. §668.50 (2011)); Case Closed, eNotes Are Legal, An Analysis of eNote Enforceability Nationwide, a white paper jointly prepared by Mortgage Industry Standards Maintenance Organization (MISMO), the Electronic Signature and Records Association (ESRA), and the American Land Title Association (ALTA), available at WhitePaper.pdf).

22 Steven Schwarcz, The Impact of Securitization of Revised UCC Article 9, 74 Chicago-Kent L. Rev. 947 (1999); Whitman, Transfers of Mortgage Notes under New Article 9 (apparent purpose of change was to insulate issuers of mortgage-backed securities from attacks by bankruptcy trustees “without the bother of taking physical possession of the notes in question, a process that they often consider irksome”); H. Bruce Bernstein, Commercial Finance Association: Summary of the Uniform Commercial Code Revised Article 9, available at (revised Article 9 facilitated mortgage-backed securitization); David Peterson, Cracking the Mortgage Assignment Shell Game, 85
Fla. B. J. 11, 12 (Nov. 2011) (revisions to Article 9 addressed the needs of banks in the securitization chain by treating mortgages as personal property that could be transferred without regard to the real estate records).

23 Peterson, Cracking the Mortgage Assignment Shell Game at 12.

24 See Fla. Stat. §679.3131(3) (2012).

25 Id.

26 Report of the Permanent Editorial Board for the Uniform Commercial Code, Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes 8 (American Law Institute and the National Conference of Commissioners on Uniform State Laws 2011)[hereinafter PEB Report].

27 See Mann, Searching for Negotiability in Payment and Credit Systems at 969.

28 Fla. R. Civ. P. Form 1.944.

29 The typical standing allegation is now that the plaintiff bank is the “holder of the [n]ote and the [m]ortgage and/or is entitled to enforce them.”

30 The word “holds” in the phrase “owns and holds” appears to be unrelated to the Article 3 term “holder.” A search of Florida law reveals that the phrase “owns and holds” is a ubiquitous legalism used in many contexts outside of negotiable instruments. Unlike the Article 3 “holder,” the person who “owns and holds” an instrument is its owner. For example, when Fla. R. Civ. P. Form 1.934 (Promissory Note Complaint) was amended in 1980, the Florida Supreme Court added the same words found in the foreclosure form “the Plaintiff owns and holds the note” specifically “to show ownership of the note.” Committee Note to Fla. R. Civ. P. Form 1.934 adopted by The Florida Bar, In re Rules of Civil Procedure, 391 So. 2d 165 (Fla. 1980).

31 Fla. Evid. Code §90.902 (8) (Self-Authentication). See Riggs v. Aurora Loan Services, LLC, 36 So. 3d 932 (Fla. 4th DCA 2010) .

32 The Florida evidence rule on self-authentication of commercial papers is expressly limited to the “extent provided in the Uniform Commercial Code.” Drafted in the days before high-resolution color copiers, scanners, and printers, however, the UCC speaks only to the authenticity of signatures on documents, not the authenticity of the documents themselves.

33 See Harvey v. Deutsche Bank Nat. Trust Co., 69 So. 3d 300, 304 (Fla. 4th DCA 2011) (even if the borrower could prove that an assignment was fraudulent, the dispute would be between the plaintiff and the actual owner of the note).

34 See In re Veal, 450 B.R. 897, 912, n. 25 (B.A.P. 9th Cir. 2011) (noting that the ability of a thief to obtain payment on bearer instruments has factored in literature and film storylines).

35 Battles v. State, 602 So. 2d 1287 (Fla. 1992) (a thief cannot convey good title to stolen property, even to a good faith purchaser); Alamo Rent-a-Car, Inc. v. Williamson Cadillac Co., 613 So. 2d 517, 518 (Fla. 3d DCA 1993) (a thief cannot pass good title).

36 Antonacci v. Denner, 149 So. 2d 52, 53 (Fla. 3d DCA 1963).

37 Id. at 53-54. The Fifth District later noted that there was a split of authority under prior common law whether the burden would be on the holder to prove his BFP status once the claimant has introduced evidence of ownership. Fid. & Cas. Co. of New York v. Key Biscayne Bank, 501 F.2d 1322, 1325 n. 3 (5th Cir. 1974). While the court declined to decide which party bears the evidentiary burden, the fact that evidence of ownership of the instrument could be introduced against an alleged holder in due course was taken for granted.

38 Fla. Stat. §673.3011 (2012) (emphasis added).

39 Comments of the drafters of Article 3, Fla. Stat. §673.2031 (2012) (“A thief who steals a check payable to bearer becomes the holder of the check and a person entitled to enforce it….”); Fla. Stat. §673.2011 (2012) (“[I]f an instrument is payable to bearer and it is stolen by Thief or is found by Finder, Thief or Finder becomes the holder of the instrument when possession is obtained. In this case there is an involuntary transfer of possession that results in negotiation to Thief or Finder.”).

40 James J. White, Some Petty Complaints About Article Three, 65 Mich. L. Rev. 1315 (1967); Robert F. T. Dugan, A New Approach to “Holder” Conundrums Under Articles 3 of the Uniform Commercial Code – A Reply to Professor White, 13 B.C.L. Rev. 1 (1971). One of the drafters of the UCC publicly lamented its exaltation of transferability over property rights, as being out of step with modern economic realities. Grant Gilmore , The Good Faith Purchase Idea and the Uniform Commercial Code: Confessions of a Repentant Draftsman, 15 Georgia L. Rev. 605 (1981).

41 Khan, A Theoretical Analysis of Payment Systems at 2 n. 9 and 22.

42 U.C.C. §3.201; Fla. Stat. §673.2011 (2012).

43 U.C.C. §1.201(b)(15); Fla. Stat. §671.201(15) (2012).

44 U.C.C. §3.203; Fla. Stat. §673.2031 (2012). The requirement that there be an intent to give the recipient the right to enforce the note is necessary to prevent a mere handler with temporary consensual possession, such as a mailman, from becoming a “holder.”

45 Fla. Stat. §673.6021 (2012).

46 Fla. Stat. §673.5011 (2)(b)2. (2012).

47 Most modern promissory notes for the purchase of homes state that the borrower waives the right to require the holder to make a formal demand for payment. The language does not, however, expressly waive the borrower’s right to require identification and evidence of authority to enforce the note once that demand for payment has been made.

48 16 C.F.R. §433.2.

49 Id. The Holder Rule notice destroys the negotiability of any note upon which it appears because its very presence makes the promise to pay conditional. A revision to Article 3 restored limited negotiability to notes containing the notice, but withheld a key attribute. It declared that no one may be a holder in due course of a note imprinted with the notice. U.C.C. §3-106(d); Fla. Stat. §673.1061(4) (2012); see also, Cohen, The Calamitous Law of Notes at 163-164.

50 Tinker, 459 So. 2d at 492; see also Florida Auto. Fin. Corp. v. Reyes, 710 So. 2d 216, 218 (Fla. 3d DCA 1998).

51 Schauer v. Gen. Motors Acceptance Corp., 819 So. 2d 809, 813 (Fla. 4th DCA 2002).

52 Opinion Letter of the Federal Trade Commission, May 3, 2012, available at

53 See, e.g., Gen. Motors Acceptance Corp. v. Honest Air Conditioning & Heating, Inc., 933 So. 2d 34, 37 (Fla. 2d DCA 2006).

54 PEB Report at 4, n. 13.

55 The version of the form discussed in this article is Form 3210, the Florida Fixed Rate Note — Single Family-Fannie Mae/Freddie Mac Uniform Instrument.

56 Mann, Searching for Negotiability in Payment and Credit Systems at 969-73.

57 Id.

58 In re Walker, 466 B.R. 271, 283 (Bankr. E.D. Pa. 2012).

59 U.C.C. §3-106(a); Fla. Stat. §673.1061(1)(b).

60 Holly Hill Acres, Ltd. v. Charter Bank of Gainesville, 314 So. 2d 209, 211 (Fla. 2d DCA 1975).

61 Id.

62 Sims, 37 So. 3d at 364 (J. Cope’s dissent).

63 Id. at 362.

64 UI Mortgage §3.

65 UI Mortgage §6.

66 UI Mortgage §7.

67 Florida — Single Family — Fannie Mae/Freddie Mac Uniform Instrument, Form 3010.

68 UI Note §7.

69 PEB Report at 1 (“The UCC, of course, does not resolve all issues in this field [the transfer and enforcement of notes secured by a mortgage on real property]. Most particularly, as to both substance and procedure, the enforcement of real estate mortgages by foreclosure is primarily the providence of a state’s real property law….”).

70 Johns v. Gillian, 184 So. 140, 143 (Fla. 1938).

71 Harvey, 69 So. 3d at 304.

72 Johns, 184 So. at 143-414 (emphasis added).

73 See Smith v. Kleiser, 107 So. 262, 263 (Fla. 1926) (foreclosure, as an action in equity, “should be in the name of the real owner of the debt secured”).

74 Knight Energy Services, Inc. v. Amoco Oil Co., 660 So. 2d 786, 789 (Fla. 4th DCA 1995). Equity will intervene even when the wrongful conduct complained of harms someone other than the defendant. Quality Roof Services, Inc. v. Intervest Nat. Bank, 21 So. 3d 883, 885 (Fla. 4th DCA 2009) (“Unclean hands may be asserted by a defendant who claims that the plaintiff acted toward a third party with unclean hands with respect to the matter in litigation.”); see also Yost v. Rieve Enters., Inc., 461 So. 2d 178 (Fla. 1st DCA 1984) (“There is no bar to applying the doctrine of unclean hands to a case in which both the plaintiff and the defendant are parties to a fraudulent transaction perpetrated on a third party.”); Hauer v. Thum, 67 So. 2d 643, 645 (Fla. 1953) (“It would matter not that the [defendants] were parties to the fraudulent transaction nor that the fraud was perpetrated upon a third party.”).

75 Fla. Const. art. X, §4.

76 U.C.C. §§9-203(g) and 9-308(e); Fla. Stat. §§679.2031(7) and 679.3081(5) (2012).

77 U.C.C. §1-103(b); Fla. Stat. §671.103 (2012).

78 U.C.C. §3-102(b); Fla. Stat. §673.1021(2) (2012).

79 U.C.C. §9-203(b); Fla. Stat. §679.2031(2) (2012).

Thomas Erskine Ice is the founder and principal legal strategist of Ice Legal, P.A., in West Palm Beach and Miami, and has practiced law in South Florida for more than 25 years. He is licensed to appear in the courts of Florida and the U.S. federal courts. He handles complex matters including bankruptcy, commercial litigation, personal injury, and wrongful death cases, and is a graduate of the University of Miami School of Law.