Is.promissory.note.Even.enforceable Part.1 2013-10-05

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Is the Promissory Note Even Enforceable?Posted onOctober 5, 2013

Deadly Clear

Derivatives are financial weapons of mass destruction

potentially lethal. Warren Buffet

When all is said and done the courts come back to the

main premise, Did you pay? That is so injudicious on

so many levels. The deeper we get into securitization

and contract law we soon realize (after dissection)there is one very basic question being ignored

Is the Promissory Note even enforceable?

Sheila Bairs (former FDIC Chairperson) new book,

Bull By the Horns, addresses issues that must be takeninto careful consideration when considering the

validity of foreclosures and she does it with

impressive candor. Sheila separates the MBS into 2categories: NTMs (nontraditional mortgages) and

subprime loans. Apparently, they are not one in the

same. However, this is where disputes of validity

actually begin. NTMs were not traditional mortgagesbut no one disclosed that to the homeowners.

The promissory notes in these NTMs and subprime loans are like the Titanic. By its very

make-up it appears the promissory note enforce-ability is sinking out of control. It appears

the loans were never properly assigned to the trusts, but thats not the only problem.

To understand the promissory note issues you

need to review certain regulatory events and

comprehend contract law and how it applies in thisnew realm of NTMs and subprime loans. These

nontraditional mortgages (after the turn of the

century) were a new breed of securitization. Thelending practices that Ms. Bair and her staff had

viewed as predatory in 2001 had become

mainstream among most major mortgagelenders by 2006. By repealingGlass-Steagall in

1999 (thanks to President Clinton and the 1990s
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Republican Congress), the door had swung wide open allowing the banks to run

amok with very little regulation (if any) and questionable oversight (if any at all).

In addit ion to the repeal of a law in 1999 that had protected homeowners since1933, Congress a l so passed the ELECTRONI C SI GNATURES I N

GLOBAL AND NATI ONAL COMMERCE ACT ( E- S i gn) i n 2000 .

What? you say, What does that have to do with mortgages and promissory notes?

Devious planning by the banks had schmoozed legislators into passing a law allowing your signature

on any document (with very few exceptions) to be transferred electronically - if you gave yourexplicit agreement and authorization. That was the consumer protection safe harbor provision

that made it into both (E-Sign and UETA). E-Sign is the federal version of the state ratifiedUniform

Electronic Transactions Act (UETA). How many homeowners were aware of E-Sign and UETA

when they signed their mortgage loans? Raise your hands? Did your loan officer disclose to you that

your explicit agreement to electronic transfers of the loan was necessary? Nah didnt think so. Itwas a well-kept secret because as most people comment when asked this question, hell no!

The hard core fact here is that in order to securitize the loan documents

they need to be electronically transferable. Step one not done.

While failure to get explicit agreement from the homeowner for

electronic transfers does not nullify the underlying contracts it does leave the door open to question the contracts under state law.

See: Electronic Records and Signatures under

the Federal E-SIGN Legislation and the UETA

fn. 67. While not affecting the continued validity of the contract,

[f]ailure to obtain electronic consent or confirmation of consent

would . . . prevent a company from relying on section 101(a) to

validate an electronic record that was required to be provided or madeavailable to the consumer in writing. 146 CONG. REC. S5220

(daily ed. June 15, 2000) (statement of Sen. Leahy).

There is also very interesting paper written in 1999 byR. David Whitakercalled:

Rules Under the Uniform Electronic Transactions Act for

an Electronic Equivalent to a Negotiable Promissory Note

Mr. Whitaker was the Reporter for the Standards and Procedures

for electronic Records and Signatures (SPeRS). He also

served as Reporter for the Mortgage Bankers Association white

paper Security Interests in Transferable Records. He was anactive participant in the drafting of Revised Articles 5 and 9 of

the UCC. He participated in the drafting of the UniformElectronic Transactions Act, where he chaired the Task

Force on Scope and served as reporter for the Task Force.

Mr. Whitaker also advised industry participants on the

creation and drafting of the federal Electronic Signaturesin Global and National Commerce Act. He is one of the

co-authors ofThe Law of Electronic Signatures (West).
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If you are a warrior (and some arent) or if you are a negotiator you should probably

click on the title link above and read this Paper. You really need to read the wholepaper but here are some important segments (click on the clip below to increase and read):

Even in 1999 th e creators and advisers of these electronic signature acts werent atall certain just how well they would fly. Whitaker writes, [A]t this point, it is

not clear whether or not it will be possible to have a true negotiable

promissory note in an electronic environment, in the sense of a unique self-

contained physical token. Here we have homeowners thinking they are

contracting for a traditional mortgage when in fact behind the scenes it has already been

designated as a securities instrument. Voila! You sign a negotiable instrument that is

intended to be whisked away and materially altered into a securities certificate underUCC Article 8 but you dont know it. It was not disclosed to you. Step two no do.

It certainly appears these promissory notes were designed to be transferred and

reckoned with under UCC Article 8 not Article 3. Article 8 governs a broader scope

than just securities it covers all financial assets including securities and anyproperty held by a securi ties intermediary for another person if it is agreed to be

treated as a financial asset, writes Whitaker. He ends with the point that the obligor

(borrower) is entitled to have access to the authoritative copy. And it appears courts inthe past have felt that only the originals can provide sufficient warranty and clarification.
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For nearly 14 years the banking industry has been stumbling,

fumbling and fouling the homeowners and the American public inan un-perfected process that is full of holes. The courts are trying to

navigate but its like playing football in a swamp during a

tsunami. Most attorneys slept during Uniform Commercial Codelectures (karma is a bear) and so now we are faced with challenging

the validity and enforce-ability of contracts where there were no

disclosures, no meeting of the minds and a future intent that had

already taken place but with no detail or disclosure to thehomeowner. Dont think for a minute that securitization didnt take

its toll which will be haunting the housing market for years.

Another interesting document isContracts 2.0: Making and

Enforcing Contracts Online.Online contracts also have the UETA

and E-Sign necessity. While many homeowners used Internet orphone and email in their loan process it still requires notification,

explicit agreement and clearly a meeting of the minds.

A meeting of the minds must exist with respect to each material issue in the agreement.Montagna, 269 S.E.2d at 845; Scott v. Pacific Gas & Elec. Co., 904 P.2d 834, 841 (Cal. 1995).

Failure to agree on essential terms of a contract indicates a lack of mutual assent. Id. Online agreements must demonstrate both parties intend to be bound.

See Feldman v. Google, Inc., 513 F. Supp. 2d 229, 236 (E.D. Pa. 2007). See generally Martin v.

Snapple Bev. Corp., No. B174847, 2005 Cal. App. Unpub. LEXIS 5938, at *15 (Cal. Ct. App. July

7, 2005) (Whereas browse-wrap license agreements are part of the website and the user assents to the

contract when the user visits the website, a click-wrap license/agreement permits the consumer tomanifest his or her consent to the terms of a contract by clicking on an acceptance button.).

While online agreements cover a good deal of Internet

activity; promissory notes, however, are viewed a bit

differently. Even if it was downloaded from theInternet UETA still mandates that the explicit

agreement bemade at the time of issuance

Check your mortgage and note do you see

any explicit notations relating to UETA

safe harbor c lauses that you s igned?

o Mutual assent i s determined under an object ive s tandard: what would areasonable person think of the meaning of the outward express ions of

the par t ies? See Costar Real ty Informat ion , 612 F. Supp. 2d 660,669 (D. Md. 2009); Cochran v. Norkunas , 919 A.2d 700, 710 (Md. 2007)

Definitiveness of Terms.

Terms of the agreement should be clear and unambiguous, and it is the duty of a court,not a jury, to determine if a valid contract exists. See W.J. Schafer Assocs., Inc. v.

Cordant, Inc.., 493 S.E.2d 512, 519 (Va. 1997).

When plain and unambiguous, a court must presume parties meant what they expressed, andwill not consider what parties may have subjectively intended. See Cochran, 919 A.2d at 710.

Ambigui ty ar i se s i f a reasonable person would be l i eve l anguagei s s u s c e p t i b l e t o m o r e t h a n o n e m e a n i n g . ( e m p h a s i s a d d e d )
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A contract must be construed in its entirety.Id.; City of Los Angeles v. Superior Court ofthe County of Los Angeles, 333 P.2d 745, 750 (Cal. 1959).

All of these issues affect the overall validity of a contract

and it appears are rarely plead before the foreclosurecourts by competent attorneys. As noted earlier

there are warriors and there are negotiators and it all

depends upon how much your judge or the appellate

cour t wi l l comprehend and how wel l i t i s a rgued.

One of the more essential elements that addresses

the lack of disclosure about securitization falls under :

Agreement to Agree

See City of Los Angeles v. Superior Court of the County of Los Angeles, 333 P.2d 745, 750

(1959); see also W.J. Schafer Assocs., Inc. v. Cordant, Inc., 493 S.E.2d 512, 519 (Va. 1997)(arguing contract was agreement to agree and thus too vague and indefinite to enforce).

A promise to agree in the future is not binding on theparties, and therefore creates a failure of consideration.

RULE: If essential element of a promise is reserved for future agreement, the

promise gives no rise to legal obligations until the future promise is made. See City of Los Angeles, 333 P.2d at 750

Depends on relative importance and severability of future matter. Id. If unessential, parties must accept reasonable determination of unsettled point. Id.

Lets take a look at that may transfer clause in the Promissory Note. The originator or lender

may transfer the note. It does not say the lender will transfer the note, or is going to

transfer the note, or even already has transferred the note. The clause quite clearly infers thatsometime in the future the lender may transfer the note to someone else. May as defined

by Blacks Law Dictionary (8th ed. 2004) is futuristic:

may, vb. 1. To be permitted to . [Cases: Statutes 227. C.J.S. Statutes 362369.]

2. To be a possibility .

Transfer, according to Blacks Law is also well defined:

transfer, n.1. Any mode of disposing of or parting with an asset or an interest in anasset, including a gift, the payment of money, release, lease, or creation of a lien or otherencumbrance. The term embraces every method direct or indirect, absolute or

conditional, voluntary or involuntary of disposing of or parting with property or with an

interest in property, including retention of title as a security interest and foreclosure of thedebtors equity of redemption. 2. Negotiation of an instrument according to the forms of law.

The four methods of transfer are by indorsement, by delivery, by assignment, and by

operation of law. [Cases: Municipal Corporations 917. C.J.S. Municipal Corporations 16581660.] 3. A conveyance of property or title from one person to another. [Cases: Bills

and Notes 176222. C.J.S. Bills and Notes; Letters of Credit 4, 29, 139141, 143159.]
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May transfer when dissected appears to mean

sometime in the future the lender mightdispose of its interest in this note to someone

else. The kicker is that in securitization (in most

cases) the warehouse lender / investment bankhad already taken the transfer when it funded

the loan before the homeowner ever signed.

It did not happen in the future it had already

occurred and there was no disclosure,meet ing or the minds or mutual as sent .

What if we go back to contract law and drive the point home that there was securitization already in

play, that the originator failed to obtain explicit agreement to electronically transfer the documents

per UETA, that the mortgage was intentionally designed to skirt the consumer safe harbor of UETA,

and that the clause in the note the lender may transfer the note (in the future) wasnt clearlydefined; when in fact it had already been pledged and paid for in a securitization transfer; and,

undisclosed to the homeowner would it not be far too central to the transaction when it appears

there was never any intention to enter into a binding contract by the originator?

Would not an essential aspect of this NTM (nontraditionalmortgage) be the securitization intention of this loan andit had not been disclosed or completely determined? And

due to the securitization and the material alteration of the

negotiable instrument under UCC Article 3 morphing into amortgage-backed securities under UCC Articles 8 & 9

without disclosure doesnt that seem like a pretty central

issue to the contract no matter when it happened?

CABLE COMPUTER TECHNOLOGY

INC versus LOCKHEED SANDERS INCAs the court opined: The majority might respond that there is no need to decide thosequestions; the only issue is whether the parties bargained in good faith-that is, whether

they performed in good faith their initial agreement to work together to craft a proposal.

But there is no way to measure the good faith of a party that is insisting on its own

proposal, or rejecting the other partys proposal, when there are no bounds to the ultimateagreement that they are supposedly trying to reach. Even if we had a written, executed

agreement to work together to reach a teaming agreement and submit an agreed-upon bid to

Boeing, the written agreement would be unenforceable because of the indefiniteness of its terms.

Thus a written, fully executed joint venture agreement is unenforceable

when the most essential part of the venture is yet to be determined.See Pacific Hills Corp. v. Duggan, 199 Cal.App.2d 806, 812, 19 Cal.Rptr. 291, 295 (1962).

It is true that contracts may sometimes be enforceable when they leave a matter to be determined

in the future, but it is a question of degree and may be settled by determining whether theindefinite promise is so essential to the bargain that inability to enforce that promise strictly

according to its terms would make unfair the enforcement of the remainder of the agreement.

City of Los Angeles v. Superior Court, 51 Cal.2d 423, 433, 333 P.2d 745, 750 (1959). Here, thematter to be left for future determination is the entire teaming enterprise-the sole goal of the

initial agreement to work together. Surely that is far too central to permit enforcement of any
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preliminary agreement to work together for a future agreement. See, e.g., Alaimo v. Tsunoda,

215 Cal.App.2d 94, 99, 29 Cal.Rptr. 806, 808-09 (1963) (option to purchase real estate withprice to be determined later by seller unenforceable); Roberts v. Adams, 164 Cal.App.2d at

315, 330 P.2d at 902 (1958) (option to purchase real estate at specified price payable as

mutually agreed by both parties unenforceable because of uncertainty of terms of payment). Iconclude, therefore, that even we view as a separate contract the initial agreement to work

together to create a teaming agreement and a joint bid, it is too indefinite to be enforceable.

Because I conclude that the parties merely agreed to agree in the future, and that nocontract resulted, I would affirm the district courts dismissal of the promissory

estoppel claim as well. As the majority opinion concedes, the district courts ruling wascorrect ifthere was never any intention to enter a binding contract ; promissory

estoppel cannot create a contract where none exists. See Rennick v. Option Care, Inc.,

77 F.3d 309, 316-17 (9th Cir.1996).

Just this one last thought was there ever

any intention by the originator to enter

into a binding contract especially

considering the pretender lenders thathad already sold the loan upstream even

before the homeowner signed? As one

mortgage broker replied when questioned

how they could write mortgages in their

own name as lender since they were not a

bank, Oh, we never actually owned the

mortgages Countrywide had already

committed and funded the loans beforethe borrower signed. Profound, yeah?

Stay tuned for Part 2 Dissecting Obligations of Persons Under This Note.

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