Kentucky Bankruptcy Law

Counsel with Care

Foreclosure Defense and Standing

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 endorsed (some spell this 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. But, 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.

July 18, 2012 Posted by | Civil Procedure, Pre-filing planning | , , , , , , , , , | 1 Comment

Foreclosure Defenses: Round 2

So, you have now challenged the party that is prosecuting the foreclosure on your home to produce the original promissory note (loan agreement) to prove they are the holder and thus entitled to enforce the note. And, sure enough, a note is either produced, or they claim it cannot be produced and so move for a copy to be admitted pursuant to Kentucky Rule of Evidence 1003.

Let us take a quick look at Rule 1003. This rule does say it is okay for a copy to be admitted EXCEPT when it would be unfair to admit a duplicate. This unfair language is what you need to focus on here. Remember that a promissory note is a negotiable instrument, just like the checks you write. Would a bank think it is fair for a copy of a check to be used to prove up an obligation? Heck no. So, let us look at a few reasons it would be unfair beyond the fact that they are a bank with virtually unlimited resources and you are so broke you can barely make ends meet.

One way a copy would be unfair is that an endorsement (indorsement in Kentucky statutes) magically appears on the copy and there is now way to tell when it got there. Or, there may be an endorsement in blank (allowing whomever holds the note to enforce it), but one cannot tell if it is a copy of the original or a copy of a copy. When a copy is allowed, magically appearing endorsements are possible and this is unfair to the defendant – you.

Perhaps they do produce the original note, but there is no endorsement on the note itself. Rather, there is an extra piece of paper attached where the alleged endorsement appears. This paper is known as an allonge. However, an allonge is only supposed to be used when there is no way to endorse on the note itself. So, you need to examine that endorsement page and if there is plenty of room for a new endorsement to be added, the allonge becomes suspect. Lastly, an allonge is supposed to be so firmly affixed to the original note so as to make it like part of the original document. Here, you should start checking how many staple marks there are in the note as opposed to the allonge and see if there is reason to question when this allonge appeared.

Do not just give up if a promissory note appears upon your demand. Be sure to examine it carefully and compare it to any prior copies of the note that had been attached to the pleadings or otherwise produced. Check to make sure it is an original and challenge admission of a copy as unfair. See if endorsements have magically appeared or if there is an allonge attached under suspicious circumstances. Again, this is not about getting away with something you are not entitled to; it is about making sure a big creditor does not get away with something they are not entitled to.

April 2, 2012 Posted by | Foreclosure | , , , , , , , , | 1 Comment

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.

March 21, 2012 Posted by | Bankruptcy, Chapter 13, Foreclosure | , , , , , , , , , , , , | 3 Comments