UCC Editorial Board Issues Report on Application of the UCC to Mortgage Notes

November 28, 2011


Mortgage servicers are hiring attorneys ignorant of their clients’ rights under state commercial law, and in particular Articles 3 and 9 of the state Uniform Commercial Code (UCC). Some courts presiding over mortgage foreclosures also disregard those statutes in invoking older, conflicting judicial precedent. Among them, the Massachusetts Supreme Court, which in U.S. Bank v. Ibanez, 458 Mass. 637 at 652-53, 941 N.E.2d 40 at 53-54 (2011) disregarded the effect of the state’s enactment of UCC § 9-203(g) on older common law in stating that a mortgage does not follow a note in the absence of a separate assignment of the mortgage. That is the view of the Permanent Editorial Board for the UCC (“Board”). Concerned with courts and attorneys overlooking the effect of the UCC on the enforcement of mortgage debt, and recognizing the “daunting” complexity of certain UCC provisions, the Board issued a report on November 14, 2011, entitled, “Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes” (“Report”). The Report is available here.

In the Report, the Board sought to clarify that Articles 3 and 9 of the UCC govern certain issues fundamental to foreclosure on mortgage notes, including:

  • To whom obligations under a mortgage note (“note”) are owed;
  • Who is entitled to enforce a note—i.e., which party may have standing to foreclose;
  • The steps required to transfer ownership of a note or use the note as collateral for an obligation;
  • The effect of a transfer of an interest in a note on the mortgage securing it—i.e., on which party may exercise rights under the mortgage instrument (Section 9-203(g), referenced in the first paragraph above, provides that the sale of a mortgage note (or grant of a security interest in the note) also conveys the seller/grantor’s interest in the mortgage securing the note even without a separate assignment of the mortgage.);
  • The right of a person to whom an interest in a note has been transferred but who has not obtained a recordable assignment of the mortgage nonetheless to become the assignee of record in the real estate recording system, as may be required under a state’s real property law for non-judicial foreclosure.

While noting that the UCC provisions should be applied in conjunction with the local real property law governing foreclosure, the Board emphasized that the provisions displaced inconsistent common law precedents. Using a question-and-answer approach with helpful examples to illustrate the technical legal points, the Board clarified that under the UCC:

  • Ownership of a note and the entitlement to enforce it are distinct concepts, and the distinction is for the benefit of the maker (obligor) on the note as the rules governing enforcement provide the maker with a relatively simple way of determining to whom its obligation under the note is owed;
  • The maker’s obligation on the note is to pay the amount of the note to the person entitled to enforce it, such payment results in a discharge of the maker’s obligation, and failure to timely pay such amount to the person entitled to enforce the note constitutes dishonor of the note;
  • The UCC provides only three ways a person may qualify as the person entitled to enforce a note that is a negotiable instrument: to be the holder of the note (i.e., to be in possession of a note payable either to that person or to the bearer); to be a nonholder in possession of the note that has the rights of a holder, based on proving that the holder/transferor intended to transfer along with the note the right to enforce it; to be a nonpossessor of the note that is able to prove it cannot reasonably obtain possession of the note, it or its transferee was entitled to enforce the note when possession was lost, and that such loss was not the result of transfer (as defined in the UCC) or lawful seizure;
  • Article 9 regulates transactions by which an interest in a payment right, including a mortgage note, is transferred, whether by outright sale or as collateral for an obligation.
  • The UCC unambiguously provides that the sale of a mortgage note or grant of a security interest in the note that is unaccompanied by a separate conveyance of the mortgage securing the note does not result in the mortgage being severed from the note, but rather that the attachment of a person’s “security interest” in a right to payment (as defined to include a buyer’s right to payment on a note) also effects attachment of a security interest in the mortgage securing such payment right; and
  • The UCC provides a mechanism by which a party with an interest in a note and the mortgage securing it may in certain circumstances, upon default of the maker of the note, record its interest in the mortgage in the local realty records in order to conduct a non-judicial sale.

For more information on the right of a person to enforce a mortgage note by foreclosure under the UCC and state real property law, please contact any of the following persons:

Elizabeth Lemond McKeen
Trevor Lain
Danielle Oakley