Mortgage Banking & Consumer Financial
Products Alert
December 22, 2010
Authors:
Laurence E. Platt*
larry.platt@klgates.com
+1.202.778.9034
Trust But Verify: Claim That New York Trust
Law Voids Mortgage Transfer Does Not
Survive Legal Scrutiny
Phoebe S. Winder*
phoebe.winder@klgates.com
+1.617.261.3196
Andrew C. Glass*
andrew.glass@klgates.com
+1.617. 261.3107
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
Millions of mortgage notes may not have been transferred to mortgage securitization
trusts in compliance with New York trust law, according to Associate Professor
Adam J. Levitin of the Georgetown University Law Center in written testimony to
the House Financial Services Committee’s Subcommittee on Housing and
Community Opportunity and in other recent commentary. He contends that there
“may be additional requirements” imposed by New York trust law which might act
to void transfers to mortgage securitization trusts.i Before you rush to sell your
mortgage-backed securities, however, please note Professor Levitin’s use of
conditional language – that there may be additional requirements under New York
trust law. It is a provocative theory, but one that must be verified to be taken
seriously; we were not able to do so.
Much has been made in recent weeks of the alleged deficiencies in the transfer of
mortgage loans from originator to ultimate holder. Were the sales consummated in
accordance with the documentation requirements of the applicable sales agreements,
such as a pooling and servicing agreement (“PSA”)? Did the paper trail of note
endorsements and mortgage assignments satisfy the requirement of the applicable
state’s version of the Uniform Commercial Code (“UCC”)? And if the answers to
either question are equivocal in any way, does the holder have the unequivocal right
to enforce the loan documents against a borrower in default?
Professor Levitin has thrown a new wrinkle into the assignment angst. He claims
that transfers of loans made in accordance with applicable commercial law may not
be valid if the transfers are not made in accordance with applicable trust law. His
thinking seems to be that securitization trusts do not have the legal authority to
accept loans that are not transferred strictly in accordance with the conveyance
documents even if the conveyance otherwise is valid under applicable commercial
law. As we detail below, an otherwise valid loan transfer is not rendered invalid by
virtue of immaterial inconsistencies with the delivery procedures specified in the
PSAs. Nor does a loan transfer that is lawful under one law become unlawful under
another law.
Mortgage Banking & Consumer Financial Products Alert
Does New York Trust Law Impose
Additional Requirements That Would
Void the Transfer of Notes into Such
Trusts?
The UCC, Not Trust Law, Controls the
Transfer of Mortgage Notes into Mortgage
Securitization Trusts.
Professor Levitin’s assertion that New York trust
law governs the transfer of mortgage notes into
mortgage securitization trusts is not correct. Rather,
the UCC governs those transfers.ii Professor Levitin
argues that the UCC is merely “a set of default
rules” and that “[p]arties are free to contract around
it.”iii Professor Levitin then leaps to the conclusion
that PSAs, and similar agreements, impose a higher
level of conduct with which the transfer of mortgage
notes to mortgage securitization trusts must
comply.iv As discussed, no relevant authority that
supports this theory has been provided. To the
contrary, a number of federal and state courts have
held that the UCC governs both the transfer of
mortgage notes to securitization trusts and whether
securitization trustees, or loan servicers acting on
behalf of the trustees, have the authority to enforce
notes.v Our research identified no case that
expressly rejected reliance on the provisions of the
UCC or otherwise found the UCC inapplicable in
such circumstances.
Moreover, that Article 3 of the UCC governs the
transfer of negotiable mortgage notes is borne out by
the express language used in standard PSAs. In one
form or another, and separate and apart from
outright sales and conveyance language, PSAs
typically provide the mechanics for delivery of the
underlying credit documents by requiring that notes
being transferred to a trust bear appropriate
“endorsements.” The word “endorsement,” when
used in connection with negotiable instruments, is a
term that is specific to the UCC, and it can only
mean one thing in the context of a PSA: that the
UCC, and in particular Article 3, is meant to govern
transfers of notes to a trust.vi
New York Trust Law Does Not Impose
Requirements Beyond Those Already
Imposed by Article 3 of the UCC.
Even if New York trust law were applicable to the
transfer of mortgage notes into mortgage
securitization trusts, that body of law would not
impose additional requirements that would void the
transfer of the notes under the circumstances
described by Professor Levitin.
There are three elements involved in effecting the
transfer of property pursuant to New York common
law: (1) donor intent to transfer an asset, (2) donor
surrender of the asset, and (3) donee receipt or
acceptance of the asset and its duties and obligations
as a trustee. vii A valid transfer to a trust is achieved
when a trust donor, with the intent to vest title to the
asset in a donee, divests itself of such control and
dominion, and the donee obtains control and
dominion over the asset. viii
In the context of mortgage securitization
transactions, all three of these elements are met.
PSAs (1) express the intent of the depositor to vest
all interest in the mortgage notes in the
securitization trustee, (2) contain provisions that
effect the unconditional sale and transfer of the
mortgage notes to the trustee, and (3) specify that
the depositor deliver the notes to the trustee or its
custodian and that the trustee certify or
acknowledge the receipt of the same. These
provisions are typical in PSAs and are a matter of
common practice in the secondary mortgage market.
Professor Levitin relies on a 1928 case, Vincent v.
Putnam,ix in support of his proposition that New
York trust law imposes additional requirements on
the transfer of notes into securitization trusts. But
that case, which pre-dates the UCC and the creation
of mortgage securitization trusts, does not concern
the transfer of property by contract for
consideration, let alone the transfer of mortgage
notes by contract for consideration.x Indeed, the
case does nothing to assist Professor Levitin’s
position. That is because the court in Vincent held
that it must strive to uphold the original donor’s
intent to effect the transfer of assets to his issue after
his wife’s death. Under this precept, fundamental to
contract and trust law, a court is obliged to uphold
the intent of the parties to the PSA, which expressly
December 22, 2010
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Mortgage Banking & Consumer Financial Products Alert
provides for the transfer of notes to a trust by a
mechanism governed by the UCC.xi
Professor Levitin also contends that New York trust
law imposes additional requirements because
delivery to a trust must be “in as perfect a manner as
possible.”xii But the case upon which Professor
Levitin relies, In re Van Alstyne,xiii says something
different. Van Alstyne, in fact, states that delivery
must be in “as perfect as the nature of the property
and the circumstances and surroundings of the
parties will reasonably permit.”xiv The “nature of
the property” for purposes of this discussion is a
negotiable instrument, as that term is defined by the
UCC. As part of the securitization process, a PSA is
given effect, in part, through the delivery of
negotiable instruments (that is, mortgage notes) to
the securitization trustee or its custodian. Delivery
in this manner is no more or less than what both trust
law and Article 3 of the UCC require,xv and
Professor Levitin is wrong to suggest that something
more is imposed by New York trust law. And while
Professor Levitin claims that there are instances in
which physical delivery of a mortgage note to a
securitization trustee has not occurred, he cites only
to one-off examples. The millions of notes currently
in the possession of trustees and custodians of
securitization trusts demonstrate that it is the
practice of parties to PSAs to physically deliver
mortgages and other related documents in order to
effectuate the terms of their agreement.
Does New York Trust Law Control the
Validity of the Transfer of Mortgage
Notes into Mortgage Securitization
Trusts?
Professor Levitin asserts that under many standard
PSAs, for a mortgage note to validly transfer to a
mortgage securitization trust, the note must bear
special endorsements evidencing each and every
transfer of the note from the originator of the loan to
the securitization trustee. Professor Levitin contends
that a note bearing a “blank” endorsement by the
originator, or by another entity further along in the
chain of transfer, does not satisfy the requirements
of certain PSAs, and thus that the transfer of such a
note into a trust is rendered void by New York
Estate, Powers and Trust Law § 7-2.4. We believe
his argument is incorrect on a number of fronts.
Standard PSA Language Does Not
Require Transfer of Mortgage Notes to
Mortgage Securitization Trusts by Special
Endorsement.
Professor Levitin appears to posit that some PSAs
require that the mortgage note bear the special
endorsement of each entity in its transfer history,
specifically identifying the transferee for each
transfer that occurs from the originator to the
trustee.xvi In other words, where a note is
transferred from A to B to C to D (the trustee),
Professor Levitin argues that the note must bear
special endorsements from A to B, from B to C, and
from C to D, rather than from A to blank, or from A
to B and from B to blank.
To fully assess Professor Levitin’s position, it is
necessary to examine the language of common
forms of PSAs, including those referenced in
Professor Levitin’s recent commentary.xvii Many
PSAs provide that the “Depositor” “deliver to, and
deposit with the Trustee, or its designated agent, …
the original Mortgage Note, endorsed in blank.”
Under Article 3 of the UCC, a mortgage note that is
endorsed in blank becomes bearer paper and can be
transferred, or, in the language of the UCC,
“negotiated,” merely by transferring possession.xviii
As such, the delivery of a mortgage note, endorsed
in blank, from the depositor to the trustee is fully
compliant with the terms of the form of PSA quoted
above and, most importantly for purposes of the
trustee, transfers the right to enforce the mortgage
note to the trustee.
Professor Levitin acknowledges that “[d]eal
language may vary,” and that PSAs containing
language such as that quoted above are not subject
to the parade of horribles that he describes.xix
Nevertheless, Professor Levitin focuses on only one
form of PSA that contains more detailed language.
Specifically, he cites to a form of PSA that requires
delivery of mortgage notes to the trustee as follows:
the original Mortgage Note bearing all
intervening endorsements showing a
complete chain of endorsements from
the originator to the last endorsee,
endorsed “Pay to the order of ____,
without recourse” and signed (which
may be by facsimile signature) in the
December 22, 2010
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Mortgage Banking & Consumer Financial Products Alert
name of the last endorsee by an
authorized officer.xx
To Professor Levitin, the phrases “bearing all
intervening endorsements” and “a complete chain of
endorsements from the originator to the last
endorsee” require that the mortgage note bear the
special endorsement of each entity to hold the note
in the chain of transfer. We believe his reading of
these phrases goes beyond their plain meaning and
does not withstand scrutiny.
Article 3 of the UCC defines an endorsementxxi to
include “a signature … that alone or accompanied
by other words is made on an instrument [here, a
mortgage note] for the purpose of … negotiating the
instrument.”xxii Article 3, furthermore, provides for
two different types of endorsements: (1) a special
endorsement; and (2) a blank endorsement.xxiii A
“special” endorsement is one that specifically
“identifies a person to whom it makes the instrument
payable.”xxiv A “blank” endorsement, on the other
hand, is one that does not identify a person to whom
the instrument is payable, but will either be payable
to “bearer” or payable to the “order of _____.”xxv If
specially endorsed, a mortgage note may only be
negotiated and transferred by (1) either a new
special endorsement or an endorsement in blank
made by the last “special” endorsee, and (2) transfer
of possession of the mortgage note.xxvi Under
Article 3 of the UCC, the transfer of the mortgage
note is equally “completed” whether or not the
negotiation was effected by way of special or blank
endorsement.xxvii
The PSA language relied on by Professor Levitin
does not expressly require the “special” endorsement
of each entity to hold the note during the
securitization process or specifically prohibit
“blank” endorsements. The parties would have
stated as much if that were their intention. Instead,
the plain language of the PSA merely requires a
complete chain of endorsements (i.e., no gaps) that
both effects a transfer to the trust and allows the
trustee to trace its right to enforce the note – a right
that is governed by the long-standing provisions of
Article 3 of the UCC. Such a “complete chain” of
“all intervening endorsements” may be shown either
by a series of special endorsements, a single blank
endorsement, or a chain that includes a combination
of special and blank endorsements.
Nor does Professor Levitin’s rationale for his
interpretation of PSA language hold up on
examination. Professor Levitin contends that
delivery of mortgage notes must occur “in a manner
such that no one else could possibly claim
ownership” such that it “provide[s] a clear
evidentiary basis for all of the transfers in the chain
of title.”xxviii Based on that rationale, Professor
Levitin speculates that “an endorsement in blank
might not be sufficient to effectuate a transfer to a
trust because endorsement in blank turns a note into
bearer paper to which others could easily lay
claim.”xxix This argument turns long-established
commercial law on its head and is at odds with the
manner in which most commerce, not just mortgage
securitization processes, is conducted today. That,
prior to a depositor’s transfer of a note to a trustee,
an interloper might steal the note and falsely claim
ownership of it amounts to pure conjecture on
Professor Levitin’s part, and he never explains why
this hypothetical scenario would uniquely apply to
transfers to securitization trusts – as opposed to
transfers to an individual, a corporation, or any
other entity. Indeed, the fundamental premise
underlying the transfer of negotiable instruments is
that an instrument endorsed in blank should be
easily and freely transferred by the mere transfer of
possession of that note.xxx As such, the transferee
of a note, endorsed in blank, need not inquire into
the history of possession or transfer of that note, and
becomes the holder upon the transfer.xxxi
The fact that the note is bearer paper does not
invalidate the delivery of the mortgage note to the
trust under the UCC.xxxii Negotiable instruments,
such as mortgage notes, may be effectively
negotiated and transferred through evidence of
transfer that may be demonstrated either by special
or blank endorsement. We think that Professor
Levitin is simply wrong when he suggests that New
York trust law might preclude the transfer to a trust
of a mortgage note, or any negotiable instrument,
that is endorsed in blank.xxxiii Standard
securitization PSAs cannot be interpreted as
“contracting around,” or rendering ineffective, the
provisions of the UCC that govern the transfer of
mortgage notes to mortgage securitization trusts.
Rather, standard PSA language specifically invokes
the transfer and negotiation principles of Article 3
of the UCC, and thus, the practice of transferring
December 22, 2010
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Mortgage Banking & Consumer Financial Products Alert
mortgage notes by way of “blank” endorsements is
fully consistent with even the purportedly most
restrictive PSA language cited by Professor Levitin.
The Trustee’s Receipt and Acceptance of
Mortgage Notes into a Mortgage
Securitization Trust Has No Bearing on
Whether Those Notes Were Validly
Delivered to the Trust.
Professor Levitin proposes that PSAs require a
specific form of transfer, and he goes on to assume
that a trustee’s acceptance of mortgage notes that do
not conform to this specific form of transfer voids
the underlying transfer of the notes. He assumes too
much.
In support of his argument, Professor Levitin relies
solely on New York Estates, Powers and Trusts Law
§ 7-2.4.xxxiv That statute provides that “[i]f the trust
is expressed in the instrument creating the estate of
the trustee, every sale, conveyance or other act of the
trustee in contravention of the trust, except as
authorized by this article and by other provision of
law, is void.”xxxv But the act of transferring
mortgage notes to a trust is not an “act of the
trustee”; it is an act of the depositor. Indeed, PSAs
typically provide that “the Depositor” must deliver
to and deposit with the trustee the mortgage notes
and related documents for each mortgage loan.
Because it is the responsibility of the depositor, and
not the trustee, to transfer the mortgage notes, New
York Estates, Powers and Trusts Law § 7-2.4 does
not apply to the transfer of the mortgage notes and
cannot “void” the transfer of notes that, according to
Professor Levitin, may not comport with the terms
of the PSA.
Furthermore, the trustee’s only “act” with respect to
the depositor’s transfer of the mortgage notes and
related documents is to receive those documents
from the depositor and to acknowledge receipt
thereof. In doing so, PSAs typically provide that the
trustee need not verify or certify the validity,
enforceability, sufficiency or genuineness of the
mortgage note for the transfer to be complete.
Moreover, courts have held that there is a conclusive
presumption in favor of acceptance regardless of the
form of the asset delivered.xxxvi Thus, even if a nonconforming mortgage note were transferred to a
securitization trust, the mere fact that it does not
meet the requirements of the PSA does not render
the transfer invalid. New York law does not
prohibit the transfer of non-conforming assets to a
trust or call for the voiding of such a transfer.xxxvii
Indeed, PSAs typically permit the depositor or seller
to cure any defects in the documents within a
certain period of time. If there is no cure, or if the
defect is not identified in a timely manner and is
material under and otherwise satisfies the terms of
the PSA and related documents with respect to
remedies, the remedy might be a repurchase
demand, or an action for damages by a party to or
intended beneficiary of (e.g., certificate holder) the
PSA. It would not be a voiding of the transfer
itself.xxxviii
A securitization trustee may have a limited duty to
review the documents transferred to it and to certify
that the required documents exist for each mortgage
loan and that the documents appear to be that which
they purport to be on their face. Typically, the
trustee performs this “act” in three stages: (1) an
initial certification provided at the date of closing of
the PSA (which contemplates a limited review prior
to closing and acceptance of the mortgage loans into
the trust); (2) a second certification, normally
provided within thirty or sixty days from the
closing; and (3) a final certification, normally
provided within ninety days to a year from the
closing. Thus, the trustee may either reject any nonconforming mortgage notes before the closing of the
securitization trust or accept them subject to its
contractual right to require cure or repurchase of
any such non-conforming mortgage notes subject to
the repurchase requirements and conditions of the
PSA. This certification process, however, is
independent from the delivery effectuated by the
depositor and is expressly limited as the trustee is
under no duty or obligation to inspect, review or
examine the loan documents to determine if they are
genuine, enforceable, or appropriate for the
represented purpose or that they are other than what
they purport to be on their face.
Furthermore, even if the transfer of notes by a
depositor to a trust could constitute an act by a
trustee, the act would not be void where otherwise
authorized by law.xxxix As discussed at length
above, the transfer of mortgage notes to mortgage
securitization trusts is governed by the UCC, and
Article 3 of the UCC expressly permits transfer by
special or blank endorsement. Thus, even if the
December 22, 2010
5
Mortgage Banking & Consumer Financial Products Alert
trustee’s receipt of a note without special
endorsements from each entity in the chain of
transfer somehow contravened the trust (which it
would not), the transfer of notes endorsed in blank
would not be void because the UCC expressly
permits such a transfer. Article 9 also controls the
transfer of the mortgage notes into the trust, as
standard PSAs contain language effecting a sale and
transfer of the mortgage notes under the provisions
of that article, which provisions do not require
endorsement of notes to effectuate a valid transfer.xl
Do Borrowers Have Standing to Sue
Based on Alleged Violations of the
Terms of a PSA?
Finally, Professor Levitin’s arguments appear to be
based on the premise that borrowers have standing
to challenge foreclosures based on alleged PSA
violations involving the transfer of the mortgage
notes to the trust.xli Under the plain language of
most, if not all, PSAs, borrowers and other nonparties to the PSA (with limited exceptions) do not
have standing to enforce purported violations of the
PSA against the trustee, servicer, or anyone else. In
addition, the majority of courts that have considered
this issue have found that so long as there has been a
valid transfer of the mortgage note in compliance
with the UCC, mortgage loan borrowers and other
third parties lack standing or authority to raise
alleged violations of the PSA.xlii Similarly, New
York law recognizes that only the beneficiary of a
trust may challenge the trustee’s alleged breach of
the trust agreement or breach of fiduciary duty.xliii
Conclusion
Upon examination, we do not believe that Professor
Levitin’s assertions about trust law withstand
scrutiny, and his specter of doom for the secondary
mortgage market should be laid to rest. As a
general matter, PSAs contemplate the transfer of
mortgage notes in compliance with Articles 3 and 9
of the UCC, and such transfer is sufficient to
establish and fund a securitization trust. Contrary to
Professor Levitin’s arguments, PSAs do not require
that every link in a chain of transfer be made by
way of special endorsement. They merely require
compliance with the UCC. New York trust law
does not impose additional requirements on the
transfer of mortgage notes into securitization trusts.
Moreover, the act of reviewing mortgage notes is a
limited duty which (1) typically does not require the
trustee to verify or certify the validity,
enforceability, sufficiency, or genuineness of the
mortgage note for the transfer to be complete, and
(2) to the extent non-conforming mortgage notes are
accepted into the trust, is made subject to the
trustee’s contractual right to require cure or
repurchase of any such non-conforming mortgage
notes. Thus, even if a trustee were to act
negligently in its review of mortgage notes in
contravention of the terms of a given PSA, the
transfer of the mortgage notes themselves would not
be void.
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December 22, 2010
6
Mortgage Banking & Consumer Financial Products Alert
xi
* Laurence E. Platt is a partner in the Washington, D.C.
office of K&L Gates LLP. Phoebe S. Winder and Andrew
C. Glass are partners in the Boston office of K&L Gates
LLP. The authors would like to recognize the contributions
of K&L Gates LLP associates Robert W. Sparkes, III, Amy
M. Ling, and Roger K. Smerage.
i
Robo-Singing [sic], Chain of Title, Loss Mitigation, and
Other Issues in Mortgage Servicing: Hearing Before the
Subcomm. on Housing and Community Opportunity of the
H. Fin. Servs. Comm., 111th Cong. 22-24 (2010) (written
testimony of Adam J. Levitin, Associate Professor of Law,
Georgetown University Law Center) (hereinafter
“Testimony”); see also Adam Levitin, Fisking the American
Securitization Forum’s Congressional Testimony, Dec. 4,
2010,
http://www.creditslips.org/creditslips/2010/12/fisking_the_as
f.html; Adam Levitin, The Big Fail, Nov. 22, 2010,
http://www.creditslips.org/creditslips/2010/11/securitizationfail.html.
ii
The transfer of assets into a trust is governed by the state
law applicable to the particular asset or property at issue.
For purposes of the discussion herein, the relevant law is
the UCC, which has been adopted as law, with some
variation, by all states, the District of Columbia, and the
U.S. Virgin Islands. See UCC § 1-101 & annotation (noting
that all states, the District of Columbia, and the U.S. Virgin
Islands have adopted a version of the UCC).
iii
Testimony at 23.
iv
Id.
v
See, e.g., In re Parker, No. 09-10186, 2010 WL 3927732,
at *3 (Bankr. D. Vt. Sept. 29, 2010) (the determination of
the enforceability of a mortgage note held in a securitization
trust is governed by the UCC, “specifically Article 3 dealing
with negotiable instruments”) (applying Vermont law); In re
Samuels, 415 B.R. 8, 20 (Bankr. D. Mass. 2009) (“As a
negotiable instrument, the Note may be transferred in
accordance with Article 3 of the Uniform Commercial Code
…. By virtue of its possession of a note indorsed in blank,
[the securitization trustee] is the holder of the Note and as
such has standing in this case to seek payment thereof.”)
(applying Massachusetts law); Mortgage Elec. Registration
Sys., Inc. v. Coakley, 838 N.Y.S.2d 622, 622 (N.Y. App.
Div. 2007) (the mortgage note “was a negotiable instrument
within the meaning of the Uniform Commercial Code,”
Article 3 ) (applying New York law).
vi
Standard PSAs also contain language effecting a sale
and transfer of mortgage notes pursuant to Article 9 of the
UCC. For example, a common provision is as follows:
“[t]he Depositor and the Trustee intend that the assignment
and transfer herein contemplated constitute a sale of the
Mortgage Loans and the Related Documents [defined to
include the mortgage note], conveying good title thereto
free and clear of any liens and encumbrances, from the
Depositor to the Trustee.”
vii
See In re Estate of Campbell, 655 N.Y.S.2d 913, 917
(N.Y. Sup. Ct. 1997) (discussing creation of trust); Ross v.
Ross, 253 N.Y.S. 871, 883-84 (N.Y. App. Div. 1931)
(discussing delivery of trust instrument and corpus).
viii
Vincent v. Putnam, 161 N.E. 425, 428 (N.Y. 1928).
ix
161 N.E. 425 (N.Y. 1928).
x
Id. at 426-27.
Generally speaking, courts enforce New York trusts in a
manner most congruous with the settlor’s or testator’s purposes
in establishing the trust. In re McManus, 407 N.Y.S.2d 180,
184 (N.Y. App. Div. 1978) (the New York trust statutes “were
enacted to compel the carrying out of the intention of the
person creating a trust not to frustrate such intention” (quoting
In re Fishberg’s Will, 285 N.Y.S. 303, 307 (N.Y. Sup. Ct.
1936)); In re Morris’ Will, 97 N.Y.S.2d 740, 749 (N.Y. Sup. Ct.
1949); see also In re Fields’ Trust, 97 N.E.2d 896, 900-01 (N.Y.
1951).
xii
See Testimony at 22 (emphasis in original).
xiii
In re Van Alstyne, 100 N.E. 802 (N.Y. 1913).
xiv
Id. at 806. Additionally, courts in cases like Van Alstyne
have addressed whether there has been delivery of the asset
or sufficient evidence of the asset, e.g., a writing or other
symbol, not whether there has been delivery “as perfect as
possible.” See 9-48 CORBIN ON CONTRACTS § 48.3
(Matthew Bender & Co., 2010). While bearer securities may
require physical delivery, they do not require physical delivery
of the highest degree of perfection possible. See Corporacion
Venezolana de Fomento v. Vintero Sales Corp., 452 F. Supp.
1108, 1117 (S.D.N.Y. 1978) (constructive delivery may be
made to transferee’s agent so long as there is “the
unmistakable intention of transferring title to the instrument”);
Irving Trust Co. v. Leff, 171 N.E. 569, 571 (N.Y. 1930) (delivery
of negotiable instruments may, in some circumstances, be
presumed when instrument is in possession of person other
than maker).
xv
Delivery, however, is not a requirement under Article 9 of the
UCC, and as referenced in footnote vi, standard PSAs contain
language effecting a sale and transfer of mortgage notes
pursuant to Article 9.
xvi
See Testimony at 23.
xvii
While acknowledging that different forms of PSAs contain
different requirements, Professor Levitin limits his discussion to
the requirements in one form of PSA that allegedly supports his
argument. He then assumes that his interpretation of that PSA
language “must” apply widely to most PSAs and, on that basis
alone, predicts limitless catastrophes for the secondary
mortgage market.
xviii
See UCC § 3-205(b) (“When indorsed in blank, an
instrument becomes payable to bearer and may be negotiated
by transfer of possession alone until specially endorsed.”).
xix
See Testimony at 23 & n.98.
xx
See id. at 23.
xxi
The UCC spells this term “indorsement.” UCC § 3-204(a).
xxii
UCC § 3-204(a). An endorsement is deemed to be made
“on an instrument” when it is made either on the mortgage note
itself or on a separate paper, known as an “allonge,” that is
affixed to the original mortgage note. Id.
xxiii
See UCC § 3-205.
xxiv
See UCC § 3-205(a).
xxv
See UCC § 3-205(b).
xxvi
See UCC §§ 3-201, 3-205.
xxvii
See UCC § 3-205.
xxviii
Testimony at 22.
xxix
Id.
xxx
See UCC § 3-205(b).
xxxi
See, e.g., Overton v. Tyler, 3 Pa. 346, 347 (1846) (“[A]
negotiable bill or note is a courier without luggage.”); UCC § 3203 cmt. 1.
xxxii
See UCC § 3-205(b).
December 22, 2010
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Mortgage Banking & Consumer Financial Products Alert
xxxiii
New York law provides that “a trust can be created in
any property, real or personal, which is, in the eye of a
court of equity, property of value.” See In re Leverich’s
Will, 238 N.Y.S. 533, 550 (N.Y. Sup. Ct. 1929), aff’d, 251
N.Y.S. 870 (N.Y. App. Div. 1931); see also N.Y. EST.
POWERS & TRUSTS LAW § 11-1.1(b)(8) (vesting authority
in trustee “to foreclose, as an incident to collection of any
bond or note, any mortgage securing such bond or note,
and to purchase mortgaged property or acquire the
property by deed from the mortgagor in lieu of
foreclosure”).
xxxiv
See Testimony at 23.
xxxv
N.Y. EST. POWERS & TRUSTS LAW § 7-2.4
(emphasis added).
xxxvi
See Irving Trust Co. v. Leff, 171 N.E. 569, 571 (N.Y.
1930) (“for the protection of negotiable paper,” delivery of
negotiable paper may be presumed when no longer in the
maker’s possession); see also Craig v. Bank of New York,
No. 00-CV-8154 (SAS), 2002 WL 1543893, at *4 (S.D.N.Y.
July 12, 2002) (suggesting that the receipt of nonconfirming assets does not render the trust or transfer of
assets into the trust “void” under New York law).
xxxvii
See Craig, No. 00-CV-8154 (SAS), 2002 WL
1543893, at *4 (S.D.N.Y. 2002).
xxxviii
Professor Levitin admits that a deviation from the
material terms of a contract may give rise to a breach of
contract claim but does not void the action as a matter of
law. See Testimony at 23.
xxxix
N.Y. EST. POWERS & TRUSTS LAW § 7-2.4.
xl
See notes vi & xv, supra; UCC § 9-109 (defining the
scope of Article 9 to include the “sale of … promissory
notes”).
xli
See Testimony at 23-26.
xlii
See, e.g., Bittinger v. Wells Fargo Bank NA, No. H-101745, 2010 WL 3984626, at *4 (S.D. Tex. Oct. 8, 2010)
(dismissing borrower claim for breach of PSA; borrower “is
not a party to this agreement and did not become … thirdparty beneficiary of the agreement [when] his loan was
‘bundled’ and sold or transferred under this agreement”);
Livonia Prop. Holdings, L.L.C. v. 12840-12976 Farmington
Road Holdings, L.L.C., 717 F. Supp. 2d 724, 748 (E.D.
Mich. 2010).
xliii
See, e.g., In re Estate of McManus, 390 N.E.2d 773,
774, 47 N.Y.2d 717, 719 (N.Y. 1979) (non-beneficiary of a
trust lacked standing to challenge the actions of the
trustee); Select Constr. Corp. v. 502 Old Country Road
LLC, 11 Misc.3d 1078(A), 2006 WL 948127, at *3 (N.Y.
Sup. Apr. 4, 2006).
December 22, 2010
8