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This article ( and any other article on this blog) is no substitute for getting advice from an attorney licensed to practice in the jurisdiction in which the subject property or transaction is located.
There is a difference between alleging you are the holder with rights to enforce and proving it. If the bank, trustee or servicer alleges that it has the right to enforce then they will survive a motion to dismiss. But if the borrower denies that allegation is true, the burden of proof falls on the party making the allegation — the bank, trustee, servicer etc. The mistake made by Judges and lawyers is that they don’t make the distinction between pleading and proof. As a result you get decisions that include multiple rulings that prevent the borrower from conducting adequate discovery and allow the party bringing the foreclosure action to skate by because “it has already been established” that they are a holder with rights to enforce. That being the case the courts further compromise the verdict and judgment by over-ruling objections from the borrower on grounds of relevance.
One of the key points I have been making for 8 years is that the party bringing the foreclosure essentially never says that it is a holder in due course. In fact, we have had cases where opposing counsel expressly denies that the Plaintiff is a holder in due course. That is particularly remarkable where the Plaintiff is, for example, Citimortgage, which maintains an ambiguous status, admitting that it is a servicer but not revealing the creditor or the basis on which they rely in alleging that they are the servicer.
The importance of holder vs holder in due course cannot be over-stated. And if the loan was alleged to have been transferred while the loan was already declared in default, there can’t be a holder or holder in due course because the UCC does not apply those terms to anything but a negotiable instrument which by definition must not be in default at the time of transfer. Otherwise it is not a negotiable instrument and the allegations and proof go the the issue of ownership of the debt.
It is interesting that the banks and servicers, etc. do not allege status as holder in due course. In many cases they have back-dated the assignment or endorsement to before the alleged default. Where the Plaintiff is a trust, all they would need to show is what is in the trust instrument (PSA): purchase in good faith without knowledge of borrower’s defenses. That would be the end of almost every case — the borrower is liable to a holder in due course and may bring claims only against the intermediaries or originator in damages. The foreclosure would be completed in record time and that would be the end of it, except for borrower’s claims for damages against parties other than the Plaintiff who proved they were a holder in due course — i.e., proof of purchase for valuable consideration without knowledge of the borrower’s defenses and in good faith.
The problem with court decisions over the last 10 years is that they treat the alleged “holder” as though they were a holder in due course without any allegation or proof that the foreclosing party purchased the loan, in good faith, without knowledge of borrower’s defenses. A holder is not better than the party before they were an alleged holder. And THAT party is no better than the party before and so on.The only exception to this is where the FDIC involved in certain types of take-overs.
Eventually you get to the origination of the loan. THAT loan contract must be proven by a holder in order to prevail in foreclosure. And as every first year law student knows there is no contract without offer, acceptance and consideration. If the originator did not fund the loan there is no contract and the closing violated Reg Z, which calls such transactions predatory per se (which in turn means that the foreclosing party presumptively has unclean hands and is not entitled to any equitable remedy much less foreclosure).
If an alleged holder did not actually purchase the loan, then they don’t own it. It really is that simple. If they don’t own it then they must allege and prove the basis of their allegation that they possess the right to enforce. That also requires a contract with offer, acceptance and consideration. The existence of assignment does not prove that such a transaction took place but it might be admitted in evidence as evidence that such a transaction took place. On the other hand it might not be admitted in evidence if there are defects relating the instrument to the proof of the matter asserted.
Even if admitted, the assignment is not dispositive. Upon cross examination, the witness will probably know nothing about any transaction in which ownership or the rights to enforce were transferred or conveyed. And it is at that point where Judges and lawyers commit error. The assignment may then be struck from the record as lacking any foundation. This is not just a matter of hearsay. It is a question of how can the trier of fact rely upon an instrument (assignment) when there is nobody to testify that the transaction actually occurred? It is the same problem with the note executed at “closing.” How can the loan contract be completed if the payee on the note didn’t loan any money?
In the article cited above, the author makes the point easily:
As an assignee typically “stands in the shoes” of his assignor,7 without the holder in due course doctrine and its federal counterpart, these allegations may defeat the purchaser’s action or make it much more difficult and costly to pursue, especially given that the purchaser took no part in the these “bad acts,” and that the people who did take part (the management and employees of the failed bank) may be difficult to reach and may have little incentive to cooperate with the purchaser. [e.s.]
most of these difficulties are eliminated by the powerful effect of the holder in due course doctrine as it can clear the way for the purchaser to recover, even if there may have been prior “bad acts” of the failed bank, as the purchaser will acquire the loan free and clear of most defenses—the so-called “personal defenses”— that the borrower could have asserted against the failed bank.8 The holder in due course doctrine, when applicable, enables the purchaser to avoid liability for many of these “personal defenses” which may have been valid defenses to an action brought by the failed bank, but do not impede the ability of a holder in due course to enforce the borrower’s obligation to repay the loan.9 Generally speaking, these defenses are all defenses that would be available in a breach of contract action10 except for the “real defenses,” all of which involve either the original execution of the promissory note or its subsequent discharge in bankruptcy.11 These defenses cannot be avoided, even by a holder in due course. Fortunately, any “bad acts” of the failed bank which may have occurred during the course of the loan will hardly ever form the basis for a “real defense,” and thus can likely be avoided by a holder in due course.
THE RULE IN FLORIDA
In Florida, the holder in due course doctrine is now codified in statute,12 although it first began to develop in the English common-law as early as the late 1600s and early 1700s and was codified in that country by the Bills of Exchange Act in 1882.13 The doctrine first became codified in the United States in the early 1900s as states adopted the Uniform Negotiable Instruments Law, which was later supplanted by the Uniform Commercial Code, which governs today.14
In order to be a holder in due course under current Florida law, a purchaser of a negotiable instrument must generally satisfy three conditions. Specifically, the purchaser must have: (i) acquired an instrument that does not bear any apparent evidence of forgery, alteration, or any other reason to call its authenticity into question;15 (ii) paid value for the instrument;16 and (iii) acquired the instrument in good faith, without notice that it is overdue, dishonored, contains an unauthorized or altered signature, and without notice of any claim to the instrument.17 If these three conditions are met, the purchaser will generally qualify as a holder in due course and take the instrument free all “personal defenses” that the borrower could have asserted against the prior lender.