North Carolina Appellate Decision Raises New Chain of Title Issue

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A potentially important North Carolina appeals court case, In re Gilbert, has not gotten the attention it warrants.

In very short form, the borrowers, who were unable to obtain a loan modification, tried to halt a foreclosure by arguing that the lenders had failed to make required disclosures under the Truth in Lending Act (which they hoped would allow for recission of the loan, and that the party seeking to foreclose had not proved that it was the holder of the Note with the right to foreclose under the instrument. The judges nixed the TILA argument, affirming lower court decisions, but reversed the superior court on the question of the standing of the petitioner.

In Re Gilbert May 3, 2011 North Carolina Appeals Court Decision

What is interesting is the logic of the decision, which blows a hole in one of the pet arguments of the American Securitization Forum, that possession of a note will suffice. We have argued that the contracts that govern the securitization, the pooling and servicing agreement, sets the requirements for conveyance as is contemplated in the Uniform Commercial Code (its Article 1 allows for parties to make their own arrangements as long as certain conditions are met). But if the parties to a case do not argue that the PSA trumps the UCC (and many do not), most judges will reason from the UCC, and securitization attorneys have blithely assumed this will get them out of trouble. This is the position asserted in the ASF’s white paper last fall:

Under the UCC, the transfer of a mortgage note that is a negotiable instrument is most commonly effected by (a) indorsing the note, which may be a blank indorsement that does not identify a person to whom the mortgage note is payable or a special indorsement that specifically identifies a person to whom the mortgage note is payable, and (b) delivering the note to the transferee (or an agent acting on behalf of the transferee). As residential mortgage notes in common usage typically are “negotiable instruments,” this is the most common method to transfer the mortgage note. In addition, even without indorsement, the transfer can be effected by transferring possession under the UCC. Moreover, the sale of any mortgage note also effects the transfer of the mortgage under Article 9. Securitization agreements often provide both for (a) the indorsement and transfer of possession to the trustee or the custodian for the trustee, which would constitute a negotiation of the mortgage note under Article 3 of the UCC and (b) an outright sale and assignment of the mortgage note. Thus, regardless of whether the mortgage notes in a securitization trust are deemed “negotiable” or “non-negotiable,” the securitization process generally includes a valid transfer of the mortgage notes to the trustee in accordance with the explicit requirements of the UCC.

The North Carolina judges blew a hole in that theory. This particular foreclosure had some of the irregularities that are all too common, but the borrowers were deemed to have abandoned the related arguments. However, the judge focused on a specific failure in this deal which is pervasive in securitizations: the final endorsement was to the trustee, not the particular trust. The judges in the case goes through multiple deficiencies in the transfer process: some transfers were made by parties that did not have clear authority to do so, the affidavits were unreliable (as in they were in some cases non-factual and separately made inappropriate conclusions of law), and there was no evidence provided that the securitization trust was the owner and holder of the note (as in the not exactly compelling endorsements ending with a trustee and not a particular trust were inadequate). The most important part was this statement:

…the Allonge in the record contains no indorsement to Deutsche Bank Trust Company Americas as Trustee for Residential Accredit Loans, Inc. Series 2006-QA6

Few courts have questioned whether the final endorsement needs to be to the trust rather than the trustee; we’ve argued that that is necessary because the trusts elect to be governed by New York law and case law has long stipulated that endorsement to a particular trust is necessary. Interestingly, the North Carolina judges came to a similar conclusion independently. We expect this argument to be made in other courts. Given that endorsement to a specific trust seems to be very rare, this could prove to be a potent argument.

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  1. attempter

    Endorsement to the specific trust would’ve made it impossible to assign the mortgages to the “correct” trusts (i.e., the ones set up to take the hits) only after they were defaulted upon.

    It’s the same as how the listings of alleged trust holdings often have vague markers like just a zip code without a street address.

  2. psychohistorian

    I measure progress by hearing that some of these perps are in jail.

    I haven’t heard that yet, have I? Do folks really think we are getting closer to the tipping point? Unfortunately, I think there are now way too many perps for this to end with “….and justice for all.”

    Extend and pretend has worked so far. Whats to keep it from working on into the future? After all, they have fear on their side.

    1. Goodmang

      Sounds like Larace in the Ibanez case. You should contact Glenn Russel (Larace Lawyer): He summed it up in the Larace brief that if they don’t follow the pooling and servicing agreements THEY wrote for trust the foreclosure is void.

  3. Pearl


    This case is not getting much attention yet, either(in fact, as of now, it is unpublished.) But you must check it out–I think this judge might be a Naked Capitalism reader!

    Quoting from in re: Doble :

    21 Specifically, the Court is unclear as to (1)
    whether the PSA intended to transfer the Loan to
    the trust (Was Doble’s Loan listed on the
    mortgage schedule?); (2) whether, if the PSA did
    intend to transfer the Loan to the trust, whether it
    made the transfer and documentation of the
    transfer was lost or whether the Loan was never
    transferred at all (Was the mortgage file conveyed
    to the trustee? Did the trustee certify the receipt of
    the mortgage file? Did the trustee attempt to
    exercise the Repurchase Provisions of the trust?);
    (3) whether, if the PSA intended to transfer the
    Loan, the parties failed to properly transfer it or
    whether [*39] the Loan was properly transferred
    but subsequent documentation was lost; and (4)
    whether, if the PSA did not intend to transfer the
    Loan to the trust, a subsequent transfer to the trust
    is valid under the terms of the PSA (Did the
    trustee receive an REMIC opinion? Did the
    trustee make other arrangements prior to the
    subsequent transfer to protect the trust’s REMIC
    status? Does a violation of the trust’s REMIC
    status negate the transfer or simply leave the trust
    vulnerable to an REMIC adverse event for
    purposes of the Tax Code?)

    The entire Memorandum is posted here:

    I cannot figure out why it has not been published, because it is a very well thought-out decision. The judge really asks the right questions; she seems fair, and very smart. (Perhaps a CA version of Judge Shack in-the-making?)

    1. lambert strether

      “I cannot figure out why it has not been published, because it is a very well thought-out decision. The judge really asks the right questions; she seems fair, and very smart.”

      You can’t? This is irony, right?

  4. Jim A

    I know I’m nitpicking and the logic is unaltered but is “indorse” some form of old fashioned legalese, or an indication that the ASF couldn’t find their own butt with a GPS unit giving them step by step directions? If they are so unfamiliar with the term that they misspell it, can we really give that much creedence to their understanding of how to do it and when it is done correctly?

    1. Mack

      Yes, ‘indorse’ is an accepted spelling, thought not often seen outside this context.

      ‘Creedence’ however, is not.

      Internet rule #318 states that every attempt at correction must contain at least one errrror. (-:

    2. Yves Smith Post author

      This is a weird bankruptcy court quirk. In the US, all bankruptcy courts use “indorse” for “endorse”.

  5. justa70'scaveman

    I’m not sure this is right, or whether it’s a typo. Usually, the conveyance should be to the trustee, as trustee for the trust, not the trust itself. Several states have corrective statutes for this. I will look further.

    1. Yves Smith Post author

      In New York, it is supposed to be to the trust, not the trustee. Very old decisions on that, cited repeatedly in subsequent rulings. NY law was elected as governing law for virtually all securitization trusts.

      The NC ruling goes through the logic on the indorsements and they have a standard version of the UCC.

      1. LMS

        Yves, I have seen some PSA’s that designate Delaware law rather than New York law. How does this affect your analysis? Thanks in advance for any guidance you can provide on this issue.

        1. indio007

          I’ve seen the same thing in some older MBS’s. The first thing that comes to mind the possibility that incorporation will effect the bankruptcy remoteness.

          1. LMS

            Not sure I understand your point about BK remoteness. The PSA did require appointment of a separate Delaware trustee. I’m interested in whether there are material difference in the conveyance rules when comparing New York to Delaware law.

  6. LillithMc

    What happened to the concept that the person funding the loan had a right to know what they were funding? That misrepresenting facts related to the loan was fraud. That loans related to real property needed to go through state courts with adequate documentation. Sorry to vent. Never in my worst dreams could I have imagined this disaster and I worked with loans for 35 years.

  7. Paul Tioxon

    I think there is more awareness of this issue, of chain of title for debt. In Montgomery County, PA, a long time Republican controlled and very wealthy county of 800,000 residents, the Presiding Judge of the Magistrate Courts has ruled that cases brought before a judge must show 2 docs for credit card default pleas by Banks or Debt Collectors: a signed contract or application and the assignment of the debt to the plaintiff suing for default and requesting a judgement be entered for the unsecured debt. Cases will be dismissed unless there is more than a simple affidavit attesting to the truth and accuracy of the claim.

    But perhaps even more startling is the State Attorney General of Minnesota.


    Minnesota Attorney General Lori Swanson today in a legal filing accused one of the nation’s largest “debt buyers” of defrauding Minnesota courts and citizens by filing false and deceptive “robo-signed” affidavits—generated at its offices in St. Cloud, Minnesota—to collect on old consumer debts that it purchased from credit card companies and others for about three cents on the dollar.

    The debt buyer—Midland Funding, LLC and its administrative arm, Midland Credit Management, Inc. (collectively Midland)—has purchased $54.7 billion in old consumer debt from credit card companies and other companies. In 2009, it filed 245,000 lawsuits against individual citizens nationwide, and it has filed over 15,000 lawsuits against citizens in Minnesota courts since 2008. Midland pays for its debt acquisitions with hundreds of millions in financing from some of the nation’s largest banks, including several that sell old debt to it.

    “Encore and Midland are part of the booming debt-buying industry, which purchases electronic databases of billions of dollars of old, charged-off consumer debt from credit card companies, banks, telecommunications firms and others.

    Debt buyers receive just one line of data on each debtor, including the name, an address and the amount, Deputy Attorney General Nate Brennaman said. When purchasing debts, Midland and other companies do not purchase underlying charge slips and contracts to prove money is owed, according to the lawsuit.”

    1. indio007

      What makes the Minnesota robo-signers particularly revolting and sickening is that Minnesota will through people in jail over debts.

      If someone went to jail over robo-signed documents, we are talking about false imprisonment , kidnapping, deprivation of right under color of law etc….
      This goes far beyond simply claiming someone owes money. People have been potentially imprisoned over lies

  8. bmeisen

    Having recently been introduced to BlackRock’s loom factor, including a portrait of Fink (who is one of the several dozen who invented MBS single-handedly), the organization’s computer program Aladdin and the starry-eyed quant who pampers it, I figure the following is on the way: capital can’t trust the banks and it can’t trust the government so it’s going to extend and explode to the basket, i.e. ascend to a private and very dark pool on some Manhattan rooftop.

  9. Sandy

    Am I to understand from this reversal that an allonge that is indorsed in blank and legally correct in its attachment to the note proves that the party in possession of the note at commencement of the foreclosure is the owner of the debt, and has standing to enforce the note and mortgage?

  10. indio007

    I just thought of something…

    Do you suppose the assignment of mortgage/DoT needs to goto to the Trust as well?
    I have never seen an assignment to Soundview Asset-backed Certificates 2006-2 or any other MBS…..

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