Foreclosure Defenses: Round 1

First, a shout out to Ben Carter, a former classmate of mine and one fine presenter with a flair for fashion. Thanks Ben for helping make sense out of foreclosure mayhem.

So much has been written about the dilemma of massive numbers of foreclosure actions that I am hesitant to dive into the fray. However, even though many would like us to perceive the economy issues as having resolved, I think the foreclose crisis will continue with us for some time. Ordinarily, if someone has fallen behind on payments on their residence, a Chapter 13 works because payments on those arrears are stretched over five years with zero interest. Sometimes a Chapter 13 just is not a great idea because the non-exempt assets are so high that the plan payments cannot be met due to the monthly budget limitations of the debtor.

When a Chapter 13 is not the best approach and you really are determined to keep the home, then the drop back and punt position is to fight the foreclosure action. Step one in fighting back is to make sure the party bringing the foreclosure action actually has the right to prosecute it. This “right” is referred to as standing. Under Kentucky Revised Statutes (KRS 355.3-301) only certain parties have the right to enforce the promissory note; the right to pursue a lawsuit.

I need to go on a slight tangent here to make sure we are on the same page. Most people focus on the mortgage (real estate lien) in their defense efforts because often the mortgage does not have the name of the company filing the foreclosure on its face. However, the document most pertinent to the issue of standing is the promissory note (loan agreement). The promissory note is a negotiable instrument which means that it usually can be transferred. However, the way it gets transferred is very important (KRS 355.3-201).

Let’s think about a common, ordinary check. A check is a negotiable instrument. You can transfer a check written to you by indorsing your signature on the back of it. If all you do is sign your name, then whoever has that check in their possession can cash it. If you sign your name followed by “to John Quincy Adams”, then only John Quincy Adams can cash it. The former indorsement is “payable to bearer”, but whether it is a payable to bearer or to John Q., they can only cash the original check; they would go to jail for trying to cash a photocopy of a check.

A promissory note for a home loan is exactly the same as a check: 1) to transfer it then it must be indorsed, and 2) it can only be “cashed” or enforced by the party who has physical possession of the original note (see the caveat below). So, if the party bringing the lawsuit cannot produce a properly indorsed original promissory note, then they cannot show they have standing. Challenging standing is the first crucial defense to a foreclosure. At best, the suit will go away because they discover they actually do not bear (hold) the promissory note. At least, it will slow down the case while they dig through tons of documents to locate the original promissory note.

CAVEAT: There are some responses to this defense as described in the Uniform Commercial Code, but they are beyond the scope of this particular article and it is the burden of the party pursuing the bankruptcy to assert them.