The anlysis is elegantly simple, dealing with the Uniform Commercial Code and the differences between a "holder" and a "transferee." More importantly, the Court gives yearning litigation lawyers a standard analysis for establishing the "standing" of their lender clients. In practice, the standard will impose a large investigative burden on the lender. But it is perfectly reasonable for any entity seeking relief from the court to do the work required to establish it's particular entitlement, n'est pas? Take a walk through the decision, after the jump.
The decision and my prior posting have concise recitations of the facts, so I am not going to waste your time coughing them up, again. Let's whiz through the analysis and figure out how the court has made lawyer life easier, while pressing our lender clients to work harder.
Here is the guts of the decision: The standing of a lender to enforce a debt instrument is determined by Maryland's adaptation of the Uniform Commercial Code. Within the UCC, the lender must demonstrate that it is either a "holder," or "transferee" of the debt instrument.
A "holder" receives the debt instrument through negotiation from the original payee, or from intermediate holders. The act of negotiation is evidenced by an endorsement appearing on the instrument. And so, a lender with possession of the original document, accompanied by an unbroken chain of endorsements ending with it's name, can act as the "holder." This is very standard stuff, and still gives me dark visions of first year commercial law exams.
At issue in the case was the rights of a "transferee" of the debt instrument. This is where the entity claiming rights in the debt instrument did not receive the instrument through a series of endorsements, but through a series of actual or constructive assignments originating from the first "holder." (go ahead, take a break for a smoke, a shot of whiskey, or anything else that relieves your vertigo---this stuff has driven some very bright lawyers and students quite mad).
Not all transferees take possession of the actual, blue-ink original documents. For instance, Fannie Mae related notes are stored in a central vault, but the rights to enforce and service the note are passed around by private written agreements. The last one I read was 1026 pages long! If you are feeling fully fortified, take a peek at Fannie's website for this gorgon of a document.
The court confirmed that a lender meeting the definition of a transferee under the UCC, even where there is a series of incomplete or "under endorsements," may sue to enforce the debt instrument. The term "under endorsement" appears in the opinion as an invention of the lawyers who briefed the case to operate as a short hand description of the incomplete allonge, with its gaps between endorsements, or an endorsement in blank.
The opinion does make life easier for the lawyers. Judge Harrell is very clear that where a lender does not rely on "holder" status to estabish its standing, it must demonstrate every link in the chain of transfers before it may claim rights to enforce the instrument. Every legitimate transfer "shelters" the rights to enforce that emanate from the original holder. And if the transfer is constructive, only, such as through the MERS system, the lender must demonstrate the contract rights for that transfer.
So, as counsel for or against a lender in Maryland courts, the focus is on the chain of transfer. This does not necessarily require a piece of paper for each transfer-- a witness may testify to the mechanics of transfer. Each transfer must only be legitimate. And MERS status as the agent of transfer no longer seems to matter here in Maryland. This, alone, seems to insulate Maryland's courts from the bonfire of the vanities that is consuming so many other jurisdictions where MERS standing as "agent," or "nominee" for lenders is at issue. I just don't see it as a matter of significance in Maryland, anymore.
Judge Harrell has simply put the weight of proving standing where it belongs, with the financial institutions and finance vehicles that seek to enforce rights to collect or foreclose. They bear the burden of digging out the complete transfer chain and documentation. In our own office, it often takes months for servicing agents to find the custodian, witnesses and documentation we have always required before filing a complaint. I don't do foreclosure work, and so the concept of a "lost note" approach to the standing issue has absolutely no appeal to me.
And isn't this decision consistent with prior admonitions by the Maryland appellate courts to prepare, proffer and prove up our case?
