Lost Your Promissory Note?

As foreclosure rates rise and the legislative bodies nationwide rush to address this, plaintiffs lawyers are also cashing in with “Foreclosure Defense” lawsuits.

Borrowers pay a fee to the “Foreclosure Defense” attorney to provide a so-called forensic audit of their loan documents. The attorney will often send a demand letter (Qualified Written Request under the Real Estate Settlement Procedures Act, codified as Title 12 section 2605(e) of the United States Code / Truth In Lending Act 15 U.S.C. section 1601) to obtain the loan documents and then file a cookie-cutter complaint shortly thereafter.

The foreclosure defense lawsuits come in three flavors:

  1. TILA rescission;
  2. Lost Promissory Note; and
  3. Everything But the Kitchen Sink (TILA, RESPA, HOEPA, FCRA, RICO, etc.)

The “Lost Promissory Note” lawsuit is reaching high levels of popularity, especially in the present backlash against mortgage-backed securities. The Foreclosure Defense gurus reason that the original note is long gone as it has been sold, or assigned or securitized in a stream of transactions. They further reason that without the original Note, the deed of trust is a “nullity” and there is no proof the borrower ever incurred the debt.

However, in California, the lender is not required to produce a Promissory Note to conduct a non-judicial foreclosure (also known as a “Trustee’s Sale”). The power of sale comes from the Deed of Trust, not the Promissory Note.

The Promissory Note is the debt instrument, just like an IOU. The person holding the original is the one the borrower has to pay. The lender can freely sell or trade that single note around and notify the borrower of who can collect on that note. The Deed of Trust is the collateral for the debt to secure the borrower’s performance.

This means, the real issue about a lost promissory note is “how likely is someone else to try to collect on the same note?”

Under the Uniform Commercial Code, adopted in California as Commercial Code Section 3-309, the lender can still enforce the lost instrument if three prerequisites are satisfied:

  1. the person was in possession of the instrument and entitled to enforce it when loss of possession occurred;
  2. the loss of possession was not the result of a transfer by the person or a lawful seizure; and
  3. the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person who cannot be found or is not amenable to service of process

The most California recent case discussing this code section actually addresses lost checks, and in that circumstance, the Court found it could allow the recipient of the lost check to enforce it so long as the payor (or bank) was adequately protected against a 2nd party who finds the check also seeking to cash it. [Crystaplex Plastics, Ltd. v. Redevelopment Agency, (2000) 77 Cal. App. 4th 990.]

The case of Huckell v. Matranga is illustrative in a circumstance where the beneficiary has lost the original promissory note. In that case, the Court found that Bank of America as Trustee was entitled to request a surety bond before issuing the reconveyance of the Deed of Trust. [Huckell v. Matranga (1979) 99 Cal.App.3d 471.]

Accordingly, there is no requirement that the original promissory note is required in order to conduct a trustee’s sale in California, as the beneficiary can bond around the missing note. That said, a lawsuit on the lost promissory note can certainly slow things down and may be fairly effective in stalling institutional lenders. Private money lenders are less likely to have hypothecated the loans to such a degree as to cause confusion over the location of the note.

Things are different for a judicial foreclosure in California. In that suit, the court clerk will ask for delivery of the original Promissory Note and hand-cancel the instrument as the lender is exchanging that Note for a Judgment instead.



As published in Foreclosures.com ezine.