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What is the difference between the note and the debt? What difference does it make?

livinglies.wordpress.com | May 13, 2019

NOTE: This case reads like law review article. It is well worth reading and studying, piece by piece. Judge Marx has taken a lot of time to research, analyze the documents, and write a very clear opinion on the truth about the documents that were used in this case, and by extension the documents that are used in most foreclosure cases.

Simple answer: if you had a debt to pay would you pay it to the owner of the debt or someone else who says that you should pay them instead? It's obvious.

Second question: if the owner of the debt is really different than the party claiming to collect it, why hasn't the owner shown up? This answer is not so obvious nor is it simple. The short version is that the owners of the risk of loss have contracted away their right to collect on the debt, note or mortgage.

Third question: why are the technical requirements of an indorsement, allonge etc so important? This is also simple: it is the only way to provide assurance that the holder of the note is the owner of the note. This is important if the note is going to be treated as evidence of ownership of the debt.

NY Slip Opinion: Judge Paul I Marx carefully analyzed the facts and the law and found that there was a failure to firmly affix the alleged allonge which means that the note possessor must prove, rather than presume, that the possessor is a holder with rights to enforce. U.S. Bank, N.A. as Trustee v Cannella April 15, 2019.

Now the lawyers who claim U.S. Bank, N.A. is their client must prove something that doesn't exist in the real world. This a problem because U.S. Bank won't and can't cooperate and the investment bank won't and can't allow their name to be used in foreclosures.

See 2019 NY Slip Op 29112 US Bnk v Cannella (PDF)

Words actually matter --- in the world of of American Justice, under law, without words, nothing matters.
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So it is especially important to presume nothing and actually read words without making any assumptions. Much of what we see in the language of what is presented as a conveyance is essentially the same as a quitclaim deed in which there is no warranty of title and which simply grants any interest that the grantor MIGHT have. It is this type of wording that the banks use to weaponize the justice system against homeowners.
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There is no warranty of title and there is no specific grant of ownership in an assignment of mortgage that merely says the assignor/grantor conveys "all beneficial interest under a certain mortgage." Banks want courts to assume that means the note and the debt as well. But that specific wording is double-speak.
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It says it is granting rights to the mortgage; but the rest of wording is making reference only to what is stated in the mortgage, which is not the note, the debt or any other rights. So in effect it is saying it is granting title to the mortgage and then saying the same thing again, without adding anything. That is the essence of double speak.
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In the Cannela Case Judge Marx saw the attempt to mislead the court and dealt with it:

The language in RPAPL § 258, which this Court emphasized—”together with the bond or obligation described in said mortgage“—stands in sharp contrast to the language used here in the Assignment—”all beneficial interest under a certain Mortgage”. If such language is mere surplusage, as Plaintiff seems to believe, the drafters of RPAPL § 258 would not have included it in a statutory form promulgated for general use as best practice.

So here is the real problem. The whole discussion in Canella is about the note, the indorsement and the allonge. But notice the language in the opinion --- "The Assignment did not go on to state that the referenced debt ".... So the Judge let it slip (pardon the pun) that when he refers to the note he means the debt.
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The courts are using "the debt" and "the note" as being interchangeable words meaning the same thing. I would admit that before the era of false claims of securitization I used the words, debt, note and mortgage interchangeably because while there were technical difference in the legal meaning of those terms, they all DID mean the same thing to me and everyone else.
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While a note SHOULD be evidence of the debt and the possession of a note SHOULD be evidence of being a legal note holder and that SHOULD mean that the note holder probably has rights to enforce, and therefore that note "holder" should be the the owner of a debt claiming foreclosure rights under a duly assigned mortgage for which value was paid, none of that is true if the debt actually moved in one or more different directions --- different that is from the paper trail fabricated by remote parties with no interest in the loan other than to collect their fees.
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The precise issue is raised because the courts have almost uniformly assumed that the burden shifts to the homeowner to show that the debt moved differently than the paper. This case shows that might not be true. But it will be true if not properly presented and argued. In effect what we are dealing with here is that there is a presumption to use the presumption.
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If Person A buys the debt (for real) for value (money) he is the owner of the debt. But that is only true if he bought it from Person B who also paid value for the debt (funded the origination or acquisition of the loan). If not, the debt obviously could not possibly have moved from B to A.
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It is not legally possible to move the debt without payment of value. It IS possible to appoint agents to enforce it. But for those agents seeking to enforce it the debtor has a right to know why he should pay a stranger without proof that his debt is being collected for his creditor.
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The precise issue identified by the investment banks back in 1983 (when securitization started) is that even debts are made up of component parts. The investment banks saw they could enter into "private contracts" in which the risk of loss and other bets could be made totalling far more than the loan itself. This converted the profit potential on loans from being a few points to several thousand percent of each loan.
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The banks knew that only people with a strong background in accounting and investment banking would realize that the investment bank was a creditor for 30 days or less and that after that it was at most a servicer who was collecting "fees' in addition to "trading profits" at the expense of everyone involved.
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And by creating contracts in which the investors disclaimed any direct right, title or interest in the collection of the loan, even though the investor assumed the entire risk of loss, the investment banks could claim and did claim that they had not sold off the debt. Any accountant will tell you that selling the entire risk of loss means that you sold off the entire debt.
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* Thus monthly payments, prepayments and foreclosure proceeds are absorbed by the investment bank and its affiliates under various guises but it never goes to reduce a debt owned by the people who have paid value for the debt. In this case, and all similar cases, U.S. Bank, N.A. as trustee (or any trustee) never received nor expected to receive any money from monthly payments, prepayments or foreclosure proceeds; but that didn't stop the investment banks from naming the claimant as U.S. Bank, N.A. as trustee.
*
**So then the note might be sold but the alleged transfer of a mortgage is a nullity because there was no actual transfer of the debt. Transfer of the debt ONLY occurs where value is paid. Transfer of notes occurs regardless of whether value was paid.
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US laws in all 50 states all require that the enforcer of a mortgage be the same party who owns the debt or an agent who is actually authorized by the owner of the debt to conduct the foreclosure. For that to be properly alleged and proven the identity of the owner of the debt must be disclosed.
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That duty to disclose might need to be enforced in discovery, a QWR, a DVL or a subpoena for deposition, but in all events if the borrower asks there is no legal choice for not answering, notwithstanding arguments that the information is private or proprietary.
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The only way that does not happen is if the borrower does not enforce the duty to disclose the principal. If the borrower does enforce but the court declines that is fertile grounds for appeal, as this case shows. Standing was denied to U.S. Bank, as Trustee, because it failed to prove it was the holder of the note prior to initiating foreclosure.
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It failed because the fabricated allonge was not shown to be have been firmly attached so as to become part of the note itself.
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Thus the facts behind the negotiation of the note came into doubt and the presumptions sought by attorneys for the named claimant were thrown out. Now they must prove through evidence of transactions in the real world that the debt moved, instead of presuming the movement from the movement of the note.
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But if B then executes an indorsement to Person C you have a problem. Person A owns the debt but Person C owns the note. Both are true statements. Unless the indorsement occurred at the instruction of Person B, it creates an entirely new and separate liability under the UCC, since the note no longer serves as title to the debt but rather serves as presumptive liability of a maker under the UCC with its own set of rules.
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And notwithstanding the terms of the mortgage to the contrary, the mortgage no longer secures the note, which is no longer evidence of the debt; hence the mortgage can only be enforced by the person who owns the debt, if at all. The note which can only be enforced pursuant to rules governing the enforcement of negotiable instruments, if that applies, is no longer secured by the mortgage because the law requires the mortgage to secure a debt and not just a promissory note. See UCC Article 9-203.
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This is what the doctrine of merger is intended to avoid --- double liability. But merger does not happen when the debt owner and the Payee are different parties and neither one is the acknowledged agent of a common principal.
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Now if Person B never owned the debt to begin with but was still the payee on the note and the mortgagee on the mortgage you have yet another problem. The note and debt were split at closing. In law cases this is referred to as splitting the note and mortgage which is presumed not to occur unless there is a showing of intent to do so. In this case there was intent to do so. The source of lending did not get a note and mortgage and the broker did get a note and mortgage.
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Normally that would be fine if there was an agency contract between the originator and the investment bank who funded the loan. But the investment bank doesn't want to admit such agency as it would be liable for lending and disclosure violations at closing, and for servicing violations after closing.
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***So when the paperwork is created that creates the illusion of transfer of the mortgage without any real transaction between the remote parties because it is the investment bank who is all times holding all the cards. No real transactions can occur without the investment bank. The mortgage and the note being transferred creates two separate legal events or consequences.
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Transfer of the note even without the debt creates a potential asset to the transferee whether they paid for it or not. If they paid for it they might even be a holder in due course with more rights than the actual owner of the debt. See UCC Article 3, holder in due course.
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Transfer of the note without the debt (i.e. transfer without payment of value) would simply transfer rights under the UCC and that would be independent of the debt and therefore the mortgage which, under existing law, can only be enforced by the owner of the debt notwithstanding language in the mortgage that refers to the note. The assignment of mortgage was not enough.

Some quotables from the Slip Opinion:

A plaintiff in an action to foreclose a mortgage “[g]enerally establishes its prima facie case through the production of the mortgage, the unpaid note, and evidence of default”. U.S. Bank Nat. Ass’n v Sabloff, 153 AD3d 879, 880 [2nd Dept 2017] (citing Plaza Equities, LLC v Lamberti, 118 AD3d 688, 689; see Deutsche Bank Natl. Trust Co. v Brewton, 142 AD3d 683, 684). However, where a defendant has affirmatively pleaded standing in the Answer,[6] the plaintiff must prove standing in order to prevail. Bank of New York Mellon v Gordon, 2019 NY Slip Op. 02306, 2019 WL 1372075, at *3 [2nd Dept March 27, 2019] (citing HSBC Bank USA, N.A. v Roumiantseva, 130 AD3d 983, 983-984HSBC Bank USA, N.A. v Calderon, 115 AD3d 708, 709Bank of NY v Silverberg, 86 AD3d 274, 279).

A plaintiff establishes its standing in a mortgage foreclosure action by showing that it was the holder of the underlying note at the time the action was commenced. Sabloff, supra at 880 (citing Aurora Loan Servs., LLC v Taylor, 25 NY3d 355, 361U.S. Bank N.A. v Handler, 140 AD3d 948, 949). Where a plaintiff is not the original lender, it must show that the obligation was transferred to it either by a written assignment of the underlying note or the physical delivery of the note. Id. Because the mortgage automatically passes with the debt as an inseparable incident, a plaintiff must generally prove its standing to foreclose on the mortgage through either of these means, rather than by assignment of the mortgage. Id. (citing U.S. Bank, N.A. v Zwisler, 147 AD3d 804, 805U.S. Bank, N.A. v Collymore, 68 AD3d 752, 754).

Turning to the substantive issue involving UCC § 3-202(2), Defendant contends that the provision requires that an allonge must be “permanently” affixed to the underlying note for the note to be negotiated by delivery. UCC § 3-202(1) states, in pertinent part, that if, as is the case here, “the instrument is payable to order it is negotiated by delivery with any necessary indorsement”. UCC § 3-202(1) (emphasis added). The pertinent language of UCC § 3-202(2) provides that when an indorsement is written on a separate piece of paper from a note, the paper must be “so firmly affixed thereto as to become a part thereof.” UCC § 3-202(2) (emphasis added); Bayview Loan Servicing, LLC v Kelly, 166 AD3d 843 [2nd Dept 2018]; HSBC Bank USA, N.A. v Roumiantseva, supra at 985; see also One Westbank FSB v Rodriguez, 161 AD3d 715, 716 [1st Dept 2018]; Slutsky v Blooming Grove Inn, 147 AD2d 208, 212 [2nd Dept 1989] (“The note secured by the mortgage is a negotiable instrument (see, UCC 3-104) which requires indorsement on the instrument itself `or on a paper so firmly affixed thereto as to become a part thereof’ (UCC 3-202[2]) in order to effectuate a valid `assignment’ of the entire instrument (cf., UCC 3-202 [3], [4])”).

[Editor's note: if it were any other way the free spinning allonge would become a tradable commodity in its own right. ]

The Assignment did not go on to state that the referenced debt was simultaneously being assigned to Plaintiff.

 

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