Negotiating the American Dream: A Critical Look at the Role of Negotiability in the Foreclosure Crisis

by Thomas Erskine Ice

Contemporary negotiable instruments law developed hundreds of years ago, before every important institution of the modern financial world: incorporated banks, business corporations, developed capital markets, global monetary systems, electronic transfers, and even paper currency.1 It is counterintuitive that this ancient law of negotiable instruments would have any relevance to one of the world’s most sophisticated, cutting-edge tools of high finance — the pooling and securitization of mortgage loans. Yet, the courts routinely look to such law to resolve a foreclosure crisis spawned by the collapse of mortgage-backed securitization, a process which is as strained as trying to decide First Amendment issues using cases pre-dating the Constitution. It is all the more extraordinary that, just as the nation begins to awaken to “robo-signing” and other such pervasive and methodical abuses of the court systems, judges should find themselves slavishly compelled to apply a body of law shaped (and then abandoned) by the very authors of such scandals: the financial institutions.

This article explores the historical underpinnings of negotiability and whether the evidentiary shortcut that negotiability appears to offer as a means of proving a plaintiff’s standing to sue can or should be applied in the context of the foreclosure cases facing the courts today. Examination of the original purposes of negotiability, as well as recent changes to the Uniform Commercial Code, leads to the conclusion that mere possession of a negotiable instrument (the promissory note) is insufficient to enforce a mortgage. The possessor or “holder” must prove ownership of the instrument — a complete chain of title from the original creditor — to invoke the equitable remedy of foreclosure.

Rest here…