The evolution of the distinction between owning and holding a note
Whitman, Dale
It occurred to me that it might be helpful to New York readers to sketch out briefly how the distinction between PETE status (i.e., being the Person Entitled to Enforce) and ownership has come to be understood by the courts. As I have previously outlined in earlier posts, PETE status means that a person has standing to sue on the note or (in most states) foreclose a mortgage securing the note. Ownership, by contrast, refers to the right to the proceeds of foreclosure -- in other words, who gets the money.
Prior to 2011, this distinction was almost completely unnoticed by the courts. It is nearly impossible to find any recognition of it in any judicial opinions before that year. In November 2011, the Permanent Editorial Board of the UCC published its report on Mortgage Notes. It's available here, and everyone who hasn't read it should do so. http://www.uniformlaws.org/Shared/Committees_Materials/PEBUCC/PEB_Report_111411.pdf
My brief description and review of the report is available here: http://www.americanbar.org/content/dam/aba/publications/rpte_ereport/2011/Dec_2011/rp_whitman.authcheckdam.pdf
The report was written for the express purpose of waking courts up to the distinction, and explaining how PETE status was governed by UCC 3 (for negotiable notes only), while ownership was governed by UCC 9 (for all notes, negotiable or not). And amazing, it actually worked. Courts began incorporating its concepts into their opinions, and there are now a pretty large number of them. The great majority of courts in judicial foreclosure states that have issued opinions in this area during 2012-15 have correctly understood this distinction. (Courts in nonjudicial foreclosure states are another, much more cloudy matter, as Dan Marsh pointed out in his recent post.)
Unfortunately, this understanding hasn't percolated into the consciousness of all courts. I have made a couple of posts about the Florida courts' confusion on the issue. New York (in the Appellate Division) is also frequently confused, muddling PETE or holder status with ownership. For an excellent analysis of the New York situation, see Bank of New York Mellon v. Deane, 41 Misc.3d 494, 970 N.Y.S.2d 427 (Sup. Ct. 2013). Anyone in New York dealing with this issue should read Judge Battaglia's thorough opinion in the Dean case.
I have reproduced below the relevant footnote (note 143) from my 2014 article, What We Have Learned from the Mortgage Crisis about Transferring Mortgage Loans, 49 Real Property, Probate & Trust J. 1 (2014). The footnote cites the cases holding that one must be the holder or PETE to enforce the note, and therefore to foreclose the mortgage. The article is available to ABA members on the ABA web site, and also at http://stopforeclosurefraud.com/wp-content/uploads/2014/10/WHAT-WE-HAVE-LEARNED-FROM-THE-MORTGAGE-CRISIS-ABOUT-TRANSFERRING-MORTGAGE-LOANS.pdf
Dale
Dale A. Whitman
Professor of Law Emeritus
University of Missouri-Columbia
Footnote 142
The decisions often use holder synonymously with PETE, although being a holder is only one way of being a PETE. See also J.E. Robert Co. v. Signature Props., LLC, 71 A.3d 492, 499 n.14 (Conn. 2013) (“To enforce a note, one need not be the owner of the note.”) (citation omitted); Edelstein v. Bank of N.Y. Mellon, 286 P.3d 249, 257 (Nev. 2012) (citation omitted) (“Indeed, to foreclose, one must be able to enforce both the promissory note and the deed of trust. Under the traditional rule, entitlement to enforce the promissory note would be sufficient to foreclose . . . .”); BAC Home Loans Servicing, LP v. Kolenich, No. CA2012-01-001, 2012 WL 5306059, at *6 (Ohio Ct. App. Oct. 29, 2012) (“The current holder of the note and mortgage is entitled to bring a foreclosure action against a defaulting mortgagor even if the current holder is not the owner of the note and mortgage.”); cf. In re Tikhonov, No. CC 11 1698 MKBePa, 2012 WL 6554742, at *7–8 (B.A.P. 9th Cir. Dec. 14, 2012) (explaining that a party must show that it holds the note to have standing to seek relief from an automatic stay of foreclosure in bankruptcy); Roisland v. Flagstar Bank, No. 3:13–cv–0588–MO, 2013 WL 6061590, at *5 (D. Or. Nov. 15, 2013) (finding that under Oregon law, the holder of a note automatically becomes the holder of the deed of trust and can appoint a successor trustee to commence nonjudicial foreclosure); In re Martinez, 455 B.R. 755, 763 (Bankr. D. Kan. 2011) (holding that under Kansas law, “the holder of an instrument whether or not he is the owner may . . . enforce payment in his own name” and hence may foreclose); In re Kemp, 440 B.R. 624, 634 (Bankr. D.N.J. 2010) (holding that the party seeking foreclosure, despite owning the note, cannot enforce it without possession); Nelson v. Fed. Nat’l Mortg. Ass’n, 97 So. 3d 770, 779 (Ala. Civ. App. 2012) (“[T]he owner of the debt may foreclose on property that is the subject of a mortgage securing that debt if the owner is the holder of the promissory note at the time the owner initiates foreclosure proceedings.”); Wells Fargo Bank, N.A. v. Morcom, 125 So. 3d 320, 321 (Fla. Dist. Ct. App. 2013) (“[T]he person having standing to foreclose a note secured by a mortgage may be either the holder of the note or a nonholder in possession of the note who has the rights of a holder.”) (citation omitted) (internal quotation marks omitted); Bank of Am., N.A. v. Inda, 303 P.3d 696, 703 (Kan. Ct. App. 2013) (holding that “because [servicer] was the holder of the Note, [servicer] was also the holder of the Mortgage”); Bank of Am., N.A. v. Cloutier, 61 A.3d 1242, 1246 (Me. 2013) (“[A] foreclosure plaintiff [must] identify the owner or economic beneficiary and, if it is not itself the owner, prove that it has power to enforce the note.”); Deutsche Bank Nat’l Trust Co. v. Brock, 63 A.3d 40, 49 (Md. 2013) (concluding that a note holder is also entitled to foreclose the deed of trust); Eaton v. Fed, Nat’l Mortg. Ass’n, 969 N.E.2d 1118, 1129 (Mass. 2012) (“[W]e construe the term ‘mortgagee’ in [the foreclosure statute] to mean a mortgagee who also holds the underlying mortgage note.”); U.S. Bank, N.A. v. Burns, 406 S.W.3d 495, 499 (Mo. Ct. App. 2013) (holding that the facts “qualify U.S. Bank as the holder of the Note under the UCC . . . . [A]s such, U.S. Bank is . . . therefore entitled to enforce the Deed of Trust.”); Bank of Am., N.A. v. Limato, No. F-61880-09, 2012 WL 2505725, at *5 (N.J. Super. Ct. App. Div. July 2, 2012) (holding that a foreclosing party provided insufficient proof of entitlement to enforce note); Bank of N.Y. Mellon v. Deane, 970 N.Y.S.2d 427, 431–33 (N.Y. 2013); CPT Asset Backed Certificates v. Cin Kham, 278 P.3d 586, 591 (Okla. 2012) (“To commence a foreclosure action in Oklahoma, a plaintiff must demonstrate it has a right to enforce the note . . . .”); Niday v. GMAC Mortg., LLC, 302 P.3d 444, 454 n.8 (Or. 2013) (en banc); JP Morgan Chase Bank, N.A. v. Murray, 63 A.3d 1258, 1265–66 (Pa. Super. Ct. 2013); Bank of Am., N.A. v. Draper, 746 S.E.2d 478, 482–83 (S.C. Ct. App. 2013); Wells Fargo Bank Minn., N.A. v. Rouleau, 46 A.3d 905, 909–10 (Vt. 2012); Bain v. Metro. Mortg. Grp., Inc., 285 P.3d 34, 44 (Wash. 2012) (relying on the definition of PETE in U.C.C. section 3-301); Trujillo v. Northwest Trustee Services, Inc. , 326 P.3d 768 (Wash.Ct.App. 2014) (holding that the UCC, “properly read, does not require [the holder} to also be the owner of the note”). A few recent cases display some confusion on the distinction between ownership and the right to enforce. See RMS Residential Props., LLC v. Miller, 32 A.3d 307, 314 (Conn. 2011) (arguing that the holder of the note is presumed to be the owner of the debt, and unless the presumption is rebutted, the holder has standing to foreclose); U.S. Bank, N.A. v. Thomes, 69 A.3d 411, 414–15 (Me. 2013) (concluding that a foreclosing party must show entitlement to enforce the note if the party is not the note’s owner). But see JPMorgan Chase Bank, N.A. v. Erlandson, 821 N.W.2d 600, 609 (Minn. Ct. App. 2012) (holding that proof of the right to enforce the note is not necessary, even to pursue a judicial foreclosure).