There is a difference between the note contract and the mortgage contract. They each have different terms. And there is a difference between those two contracts and the “loan contract,” which is made up of the note, mortgage and required disclosures.Yet both lawyers and judges overlook those differences and come up with bad decisions or arguments that are not quite clever.
There is a difference between what a paper document says and the truth. To bridge that difference federal and state statutes simply define terms to be used in the resolution of any controversy in which a paper instrument is involved. These statutes, which are quite clear, specifically define various terms as they must be used in a court of law.
The history of the law of “Bills and Notes” or “Negotiable Instruments” is rather easy to follow as centuries of common law experience developed an understanding of the problems and solutions.
The terms have been defined and they are the law not only statewide, but throughout the country, with the governing elements clearly set forth in each state’s adoption of the UCC (Uniform Commercial Code) as the template for laws passed in their state.
The problem now is that most judges and lawyers are using those terms that have their own legal meaning without differentiating them; thus the meaning of those “terms of art” are being used interchangeably. This reverses centuries of common law and statutory laws designed to prevent conflicting results. Those laws constrain a judge to follow them, not re-write them. Ignoring the true meaning of those terms results in an effective policy of straying further and further from the truth.
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There is an interesting point here. Husband owed the money and Wife did not and still doesn’t. If foreclosure of the mortgage lien is triggered by nonpayment on the note, it would appear that the mortgage lien is presently unenforceable by foreclosure except as to OTHER duties to maintain, pay taxes, insurance etc. (as stated in the mortgage).
She should neither be sued for a nonexistent default on a nonexistent obligation nor should she logically be subject to losing money or property based upon such a suit. But the lien survives. What does that mean? The lien is one thing whereas the right to foreclose is another. The right to foreclose for nonpayment of the debt or the note has vanished.
Since title is now entirely vested in the Wife by the deed and by operation of law in Probate it would seem logical that the “bank” should have either sued the Husband’s estate on the note or brought claims within the Probate action. If they wanted to sue for foreclosure then they should have done so when the estate was open and claims were not barred, which leads me to the next thought.
The law and concurrent rules plainly state that claims are barred but perfected liens survive the Probate action. In this case they left off the legal description which means they never perfected their lien. The probate action does not eliminate the lien. But the claims for enforcement of the lien are effected, if the enforcement is based upon default in payment alone. The action on the note became barred with the closing of probate, but that left the lien intact, by operation of law.
The “free house” mythology has polluted judicial thinking. The mortgage remains as a valid encumbrance upon the land.
This is akin to an IRS income tax lien on property that is protected by homestead. They can’t foreclose on the lien because it is homestead, BUT they do have a valid lien.
In this case the mortgage remains a valid lien BUT the Wife cannot be sued for a default UNLESS she defaults in one or more of the terms of the mortgage (not the note and not the debt). She did not become a co-borrower when she signed the mortgage. But she did sign the mortgage and so SOME of the terms of the mortgage contract, other than payment of the loan contract, are enforceable by foreclosure.
So if she fails to comply with zoning, or fails to maintain the property, or fails to comply with the provisions requiring her to pay property taxes and insurance, THEN they could foreclose on the mortgage against her. The promissory note contained no such provisions for those extra duties. The only obligation under the note was a clear statement as to the amounts due and when they were due. There are no duties imposed by the Note other than payment of the debt. And THAT duty does not apply to the Wife.
The thing that most judges and most lawyers screw up is that there is a difference between each legal term, and those differences are important or they would not be used. Looking back at AMJUR (I still have the book award on Bills and Notes) the following rules are true in every state:
- The debt arises from the circumstances — e.g., a loan of money from A to B.
- The liability to pay the debt arises as a matter of law. So the debt becomes, by operation of law, a demand obligation. No documentation is necessary.
- The note is not the debt. Execution of the note creates an independent obligation. Thus a borrower may have two liabilities based upon (a) the loan of money in real life and (b) the execution of ANY promissory note.
- MERGER DOCTRINE: Under state law, if the borrower executes a promissory note to the party who gave him the loan then the debt becomes merged into the note and the note is evidence of the obligation. This shuts off the possibility that a borrower could be successfully attacked both for payment of the loan of money in real life AND for the independent obligation under the promissory note.
- Two liabilities, both of which can be enforced for the same loan. If the borrower executes a note to a third person who was not the party who loaned him/her money, then it is possible for the same borrower to be required, under law, to pay twice. First on the original obligation arising from the loan, (which can be defended with a valid defense such as that the obligation was paid) and second in the event that a third party purchased the note while it was not in default, in good faith and without knowledge of the borrower’s defenses. The borrower cannot defend against the latter because the state statute says that a holder in due course can enforce the note even if the borrower has valid defenses against the original parties who arranged the loan. In the first case (obligation arising from an actual loan of money) a failure to defend will result in a judgment and in the second case the defenses cannot be raised and a judgment will issue. Bottom Line: Signing a promissory note does not mean the maker actual received value or a loan of money, but if that note gets into the hands of a holder in due course, the maker is liable even if there was no actual transaction in real life.
- The obligor under the note (i.e., the maker) is not necessarily the same as the debtor. It depends upon who signed the note as the “maker” of the instrument. An obligor would include a guarantor who merely signed either the note or a separate instrument guaranteeing payment.
- The obligee under the note (i.e., the payee) is not necessarily the lender. It depends upon who made the loan.
- The note is evidence of the debt — but that doesn’t “foreclose” the issue of whether someone might also sue on the debt — if the Payee on the note is different from the party who loaned the money, if any.
- In most instances with nearly all loans over the past 20 years, the payee on the note is not the same as the lender who originated the actual loan.
In no foreclosure case ever reviewed (2004-present era) by my office has anyone ever claimed that they were a holder in due course — thus corroborating the suspicion that they neither paid for the loan origination nor did they pay for the purchase of the loan.
If they had paid for it they would have asserted they were either the “lender” (i.e., the party who loaned money to the party from whom they are seeking collection) or the holder in due course i.e., a third party who purchased the original note and mortgage for good value, in good faith and without any knowledge of the maker’s defenses). Notice I didn’t use the word “borrower” for that. The maker is liable to a party with HDC status regardless fo whether or not the maker was or was not a borrower.
“Banks” don’t claim to be the lender because that would entitle the “borrower” to raise defenses. They don’t claim HDC status because they would need to prove payment for the purchase of the paper instrument (i.e., the note). But the banks have succeeded in getting most courts to ERRONEOUSLY treat the “banks” as having HDC status, thus blocking the borrower’s defenses entirely. Thus the maker is left liable to non-creditors even if the same person as borrower also remains liable to whoever actually gave him/her the loan of money. And in the course of those actions most homeowners lose their home to imposters.
All of this is true, as I said, in every state including Florida. It is true not because I say it is true or even that it is entirely logical. It is true because of current state statutes in which the UCC was used as a template. And it is true because of centuries of common law in which the current law was refined and molded for an efficient marketplace. But what is also true is that law judges are the product of law school, in which they either skipped or slept through the class on Bills and Notes.
Filed under: foreclosure | Tagged: borrower, creditor, debt, default, HOLDER, holder in due course, legal standing, liability, maker, merger doctrine, mortgage contract, non-creditor, note contract, Obligation, Payee, probate, promissory note | 8 Comments »