Is the Promissory Note Even Enforceable?

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 Bair’s (former FDIC Chairperson) new book, Bull By the Horns, addresses issues that must be taken into careful consideration when considering the validity of foreclosures – and she does it with impressive candor. Sheila separates the MBS into 2 categories: 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 mortgages but 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 that’s not the only problem.

Monopoly_electronic_banking_editionTo understand the promissory note issues you need to review certain regulatory events and comprehend contract law and how it applies in this new realm of NTMs and subprime loans. These nontraditional mortgages (after the turn of the century) were a new breed of securitization. The lending practices that Ms. Bair and her staff had viewed as “predatory” in 2001 had become “mainstream among most major mortgage lenders” by 2006. By repealing Glass-Steagall in 1999 (thanks to President Clinton and the 1990’s 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 addition to the repeal of a law in 1999 that had protected homeowners since 1933, Congress also passed the ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT (E-Sign) in 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 your explicit 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 ratified Uniform 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 – didn’t think so. It was a well kept secret because as most people comment when asked this question, “hell no!”

Mr.Monopoly-staandThe 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 made available 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 by R. David Whitaker called:

Rules Under the Uniform Electronic Transactions Act for an Electronic Equivalent to a Negotiable Promissory Note

R. David WhitakerMr. 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 an active participant in the drafting of Revised Articles 5 and 9 of the UCC. He participated in the drafting of the Uniform Electronic 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 Signatures in Global and National Commerce Act. He is one of the co-authors of The Law of Electronic Signatures (West).

If you are a warrior (and some aren’t) 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 whole paper but here are some important segments (click on the clip below to increase and read):

Crafting an Electronic Equivalent

Even in 1999 the creators and advisers of these electronic signature acts weren’t at all 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 under UCC Article 8 – but you don’t 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 any property held by a securities 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 in the past have felt that only the originals can provide sufficient warranty and clarification.

Whitaker ConclusionFor nearly 14 years the banking industry has been stumbling, fumbling and fouling the homeowners and the American public in an un-perfected process that is full of holes. The courts are trying to navigate… but it’s like playing football in a swamp during a tsunami. Most attorneys slept during Uniform Commercial Code lectures (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 the homeowner. Don’t think for a minute that securitization didn’t take its toll which will be haunting the housing market for years.

Another interesting document is Contracts 2.0: Making and Enforcing Contracts OnlineOnline contracts also have the UETA and E-Sign necessity. While many homeowners used Internet or phone 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 to manifest his or her consent to the terms of a
contract by clicking on an acceptance button.”).

logo_explicit_blanc_sur_noirWhile online agreements cover a good deal of Internet activity; promissory notes, however, are viewed a bit differently. Even if it was downloaded from the Internet – UETA still mandates that the explicit agreement be made at the time of issuance

Check your mortgage and note – do you see any explicit notations relating to UETA “safe harbor” clauses that you signed?

    • Mutual assent is determined under an objective standard: what would a reasonable person think of the meaning of the outward expressions of the parties? See Costar Realty Information, 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, and will not consider what parties may have subjectively intended. See Cochran, 919 A.2d at 710.
  • Ambiguity arises if a reasonable person would believe language is susceptible to more than one meaning.
  • A contract must be construed in its entirety. Id.; City of Los Angeles v. Superior Court of the County of Los Angeles, 333 P.2d 745, 750 (Cal. 1959).

comprehensionAll of these issues affect the overall validity of a contract – and it appears are rarely plead before the foreclosure courts 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 court will comprehend and how well it is argued.

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 the parties, 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.

Let’s 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 that “sometime in the future” the lender “may” transfer the note to someone else. “May” as defined by Black’s Law Dictionary (8th ed. 2004) is futuristic:

may, vb. 1. To be permitted to <the plaintiff may close>. [Cases: Statutes 227. C.J.S. Statutes §§ 362–369.] 2. To be a possibility <we may win on appeal>.

Transfer, according to Black’s Law is also well defined:

transfer, n.1. Any mode of disposing of or parting with an asset or an interest in an asset, including a gift, the payment of money, release, lease, or creation of a lien or other encumbrance. • 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 the debtor’s 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 §§ 1658–1660.] 3. A conveyance of property or title from one person to another. [Cases: Bills and Notes 176–222. C.J.S. Bills and Notes; Letters of Credit§§ 4, 29, 139–141, 143–159.]


Mr_monopoly_the_3d_agency_3“May transfer” when dissected appears to mean “sometime in the future” the lender might dispose of its interest in this note to someone else. The kicker is that in securitization (in most cases) the warehouse lender / investment bank had 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, meeting or the minds or mutual assent.

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) wasn’t clearly defined; 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 (nontraditional mortgage) be the securitization intention of this loan – and it 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 a mortgage-backed securities under UCC Articles 8 & 9 without disclosure – doesn’t that seem like a pretty central issue to the contract – no matter when it happened?


As the court opined:  “The majority might respond that there is no need to decide those questions;  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 party’s proposal, when there are no bounds to the ultimate agreement 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 the indefinite 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, the matter 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 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 with price 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). I conclude, 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 no contract resulted, I would affirm the district court’s dismissal of the promissory estoppel claim as well. As the majority opinion concedes, the district court’s ruling was correct if there 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).”

basic contract lawJust this one last thought – was there ever any intention by the originator to enter into a binding contract… especially considering the pretender lenders that had 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 before the borrower signed.” Profound, yeah?

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