2011 Commercial Law Developments

VII. Commercial Paper and Electronic Funds Transfers

A. Negotiable Instruments and Holder in Due Course

  • Mayo v. GMAC Mortgage, LLC, 2011 U.S. Dist. LEXIS 3349 (W.D. Mo. 2011) – Concluding mortgage notes are promissory notes and thus a negotiable instrument governed by the UCC without discussing negotiability criteria.
  • In re Veal, 449 B.R. 542 (9th Cir. B.A.P. 2011) (A recent decision by the Bankruptcy Appellate Panel of the Ninth Circuit U.S. Court of Appeals addresses lingering questions regarding transfers of mortgages and accompanying mortgage notes and which parties are entitled to enforce mortgages and mortgage notes. Appears to be the first case to cite a pending PEB Comment on UCC issues relating to mortgage notes).
  • Correia v. Deutsche Bank Nat'l Tr. Co. (In re Correia) , 2011 Bankr. LEXIS 2461 (Bankr. 1st Cir.) – The assignee of the original mortgage holder foreclosed on the mortgage. The mortgagors sued to set aside the foreclosure, because the assignee and servicer had not complied with the pooling and service agreement (“PSA”) governing the mortgage. The court held that the mortgagors had no standing to sue, because they were not parties to the PSA. The court also held without explanation that the mortgagors were not third-party beneficiaries to the PSA.
  • Porter v. First NLC Financial Serv., LLC , 2011 R.I. Super. LEXIS 45 (Rubine, J.) – A mortgagor's declaratory judgment action, challenging the validity of a foreclosure sale, failed because the unambiguous language of the mortgage specifically granted the mortgagee, who was also the lender's nominee, the statutory power of sale, and R.I.G.L.§ 34-11-22 allowed the mortgagee to exercise the power of sale in the mortgage. The Court followed Justice Silverstein's rationale in Bucci v. Lehman Bros. Bank , 2009 WL 3328373 (R.I. 2009). Similar to the case in Bucci , here the plain language of the Mortgage, signed by Plaintiff as Mortgagor, authorizes MERS to exercise the statutory power of sale contained in the recorded mortgage instrument. Plaintiff undisputedly borrowed the funds to buy her home, arranged for the home to serve as security for the Note, and subsequently defaulted by her nonpayment under the Note. No holding of the Court should invalidate the foreclosure, which Plaintiff agreed would ultimately be the consequence of nonpayment of the mortgage loan.
  • Payette v. Mortgage Electronic Registration Systems , 2011 R.I. Super. LEXIS 117 (Rubine, J.) – In 2006, Plaintiffs executed a promissory note in favor of IndyMac Bank, FSB and also executed a mortgage on Warwick property to secure payment of the Note, naming IndyMac as the lender and MERS as the mortgagee and as nominee of IndyMac and IndyMac's successors and assigns. In 2008, the Office of Thrift Supervision closed IndyMac and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver for IndyMac. FDIC reorganized IndyMac into a new entity it named IndyMac Federal, and transferred all of IndyMac's assets to IndyMac Federal. FDIC, acting as receiver for IndyMac Federal, transferred the rights associated with the Note to OneWest Bank, FSB. In Porter vs. First NCL Financial Services, decided earlier in the year (referenced above), the Court had adopted the Superior Court's rulings and reasoning in Bucci v. Lehman Bros. Bank, No. PC-2009‑3888, 2009 R.I. Super. LEXIS 110 . Both Porter and Bucci concerned the propriety of foreclosure sales conducted by MERS, one of the Defendants in this case. This case presents many of the same facts critical to the analyses in those cases. Thus, to the extent that this case presented similar facts implicating the same legal issues, the Court followed Porter and Bucci. The Court found that the undisputed exhibits demonstrate a chain of title to the mortgage that is consistent with the right of OneWest ultimately to conduct the mortgage sale. Pursuant to Porter and Bucci, the Court found that the assignment here was sound as a matter of law. The Court paused to address a factual distinction presented in this case that Plaintiffs argue compelled the Court to deviate from the rulings in Porter and Bucci. Porter and Bucci concerned foreclosures conducted by MERS, the lender's original nominee and mortgage assignee. Here, the original lender, IndyMac, assigned the Mortgage to MERS and MERS then assigned its nominee status and mortgagee interest to OneWest, the foreclosing party. The Court was not convinced that this fact made any a difference in its analysis. Plaintiffs agreed by signing the Mortgage to “mortgage, grant, and convey [the property] to MERS . . . and to the successors and assigns of MERS.” Plaintiffs further contend that IndyMac's initial assignment of the Mortgage to MERS disconnected the Note and Mortgage, leaving both obligations invalid at their inception. The Court disagreed. The analyses in both Porter and Bucci found that an assignment of the mortgage to MERS did not fatally disconnect the Note and Mortgage. Courts in other jurisdictions have squarely addressed this contention, and have found that no disconnection occurs.
  • Ameriquest Mortgage Co. v. Nosek (In re Nosek) , 609 F.3d 6 (1st Cir. 2010) – The debtor obtained a mortgage loan from Ameriquest. Ameriquest later assigned the mortgage to Norwest Bank, but agreed to continue servicing the loan. In the debtor's bankruptcy case, Ameriquest filed a proof of claim in its own name and moved for relief from the automatic stay. Ameriquest's motion asserted that it was the holder of the mortgage. The debtor sued Ameriquest for mishandling the accounting on her loan. Although the claim was ultimately dismissed, while the debtor's judgment against Ameriquest was still in effect, Ameriquest asserted that it was not the mortgage holder. The bankruptcy court assessed $250,000.00 in sanctions against Ameriquest under Fed. R. Bankr. P. 9011; and Fed. R. Civ. P. 11. The First Circuit reduced the sanction to $5,000.00, because there was no substantial evidence that Ameriquest made deliberately false statements or tried to mislead the court or the debtor, and because the debtor suffered no prejudice from Ameriquest's statements.
  • Perry v. Blum , 629 F.3d 1 (1st Cir. 2010) – The original holder of a promissory note went into bankruptcy and disclosed in his bankruptcy that the outstanding balance on the note as $X. The note was later assigned to another party, and the assignee asserted a substantially higher outstanding balance. The maker of the note claimed that the assignee was judicially estopped from asserting the higher balance, based on the original note holder's statement. Judicial estoppel generally applies if (1) a party's earlier and later positions are clearly inconsistent, (2) the party succeeded in persuading a court to accept the earlier position, and (3) the party seeking to assert the inconsistent position must stand to derive an unfair advantage if the court accepts the new position. The maker never proved that the bankruptcy court accepted the original holder's representation of the balance due. Therefore, the court never reached the question whether judicial estoppel argument was a “personal” defense or a “real” defense under UCC § 3-305. The court also upheld the trial court's equitable accounting of the rents on the subject properties. “In performing an equitable accounting, the district court is not a mere scrivener, charged with carrying out a ministerial task. Instead, the court is charged with tempering arithmetic with equity, or, . . . ‘bring[ing] the scales into balance.'” (Internal citation omitted).
  • RBS Citizens Bank, N.A. v. Issler , No. 2009‑356-Appeal., SUPREME COURT OF RHODE ISLAND, 21 A.3d 293; 2011 R.I. LEXIS 78, June 16, 2011 - When a wife and her estranged husband were both signatories on a joint personal bank account, the bank had a right to use funds in that account to set off the husband's debt, even though the funds in the account derived solely from the wife; and even through the signature card's “Agreement” section indicated that the bank only had that right to set off funds in that account upon the death of any account owner, but did not specifically mention the banks right to set off “in praesenti”. Fact that this was joint account with right of survivorship gave Bank all the rights it needed for the set off.
  • McManus v. McManus , No. 2009‑191-Appeal., SUPREME COURT OF RHODE ISLAND, 18 A.3d 550; 2011 R.I. LEXIS 55, May 10, 2011 - Where trustee and settlor of an inter vivos trust opened joint bank account, fact that neither the signature cards nor any signed customer agreement provided the right of survivorship was conclusive evidence of the intent not to transfer an ownership right to the survivor; therefore, the account did not pass by right of survivorship to the trustee and became an asset of the trust after settlor's death.
  • Creative Ventures, LLC v. Jim Ward & Assocs. , (2010) 195 CA. 4th 1430, 2011 Cal. App. LEXIS 666 – Certain types of loan transactions are exempt from California usury laws, including loans arranged by a person licensed as a real estate broker and secured, directly or collaterally, by liens on real property (Cal. Const. art. XV and Cal. Civ. Code § 1916.1). It is crucial that the person or entity “arranging” the exempt loan is properly licensed with the relevant licensing board.
  • Kreisler & Kreisler, LLC v. National City Bank , 657 F.3d 729 (8th Cir. 2011) – Promissory note providing for a variable “annual interest rate” based on the lender's prime “per annum” rate, to be computed on a 365/360 basis was neither ambiguous nor misleading even though the 365/360 method results in an effective interest rate of 1.01389 times the stated rate in a non-leap year.
  • McDonald v. Clay , 2011 WL 6396526 (Ca. Ct. App. 2011) – Because the buyer's promissory note was itself unambiguous, the parol evidence rule prevented consideration of a contemporaneously executed purchase agreement that contained a recital stating that the purchase was “without recourse,” even though writings are to be read together if they relate to the same matter and are executed by the same parties as parts of one transaction.
  • 1/2 Price Checks Cashed v. United Automobile Insurance Co. , 344 S.W.3d 378 (Tex. 2011) – Because a check is a contract, holder of dishonored check that successfully sued the drawer is entitled to attorney's fees under state statute allowing a claimant to recover attorney fees in a suit on a contract; the statute does not conflict with Article 3.
  • Fifth Third Bank v. Automobili Lamborghini S.P.A. , 2011 WL 307406 (N.D. Ill. 2011) – Summary judgment denied on lender's unjust enrichment claim against debtor's supplier for initiating, two months after it received notification of the termination of debtor's line of credit, an ACH draft for a vehicle shipped prior to termination of the line of credit.
  • Banc of America Leasing & Capital, LLC v. Sferas , 2011 WL 1744943 (Cal. Ct. App. 2011) – Judgment creditor that had levied on deposit account held jointly by judgment debtor and his cousin had to return the funds because the judgment debtor had never made any deposits to or withdrawals from the deposit account and the cousin had added the judgment debtor's name to the deposit account for the purpose of transmitting the funds to the cousin's daughter in the event of the cousin's death, thereby proving that the deposit accounts were the property of the cousin despite being held in joint name.
  • Beacon Tower Development, LLC v. Great Basin Technologies, LLC , 2011 WL 835881 (D. Utah 2011) – Creditor had not exercised its right to convert promissory note obligation to equity by sending letter expressing intent to do so because the note expressly provided that conversion will “be deemed to have been effected as of the close of business on the date on which this Note was surrendered by Holder” and the creditor never surrendered the note. Consequently, creditor retained its rights to enforce the note.
  • Mayo v. GMAC Mortgage, LLC, 2011 U.S. Dist. LEXIS 3349 (W.D. Mo. 2011) – Mortgage notes are promissory notes and thus a negotiable instrument governed by the UCC without discussing negotiability criteria.
  • 3525 North Reta Inc. v. FDIC , 2011 U.S. Dist. LEXIS 1879 (N.D. Ill. 2011) – Upholding under Illinois law an interest rate provision in a commercial loan agreements that was pegged to the lender bank's base lending rate. The fact that the rate varied by customer and was not based on a specific index did not render the interest rate too indefinite to enforce a violation of the Illinois Interest Act or common law. In re Veal , 449 B.R. 542 (9th Cir. B.A.P. 2011) – Addresses questions regarding transfers of mortgage notes and related mortgages and which parties are entitled to enforce mortgages and mortgage notes. The court cites the PEB Commentary on UCC issues relating to mortgage notes.

B.  Electronic Funds Transfer

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