What’s an Allonge anyway ??? thanks Jake

16 Jun

Do We Have a Fraud Problem? The Case of the Mysteriously Appearing Allonge posted by Adam Levitin I have generally been willing to give mortgage servicers, servicer support shops (like LPS), and foreclosure attorneys the benefit of the doubt when it comes to documentation irregularities (to put it mildly) in foreclosures. My working assumption up to this point has been that the documentation problems have been a function of corner cutting with securitization based on the assumptions that (1) the loans would perform better than they did and (2) those that defaulted would result in default judgments in foreclosure, so no one would ever notice the problems. I’ve also assumed that lack of capacity has played a critical role in problems in the default management chain–the system is held together by Scotch tape at this point. In other words, the problems in the system weren’t caused by malice.

I got some grief about this from people down in the trenches when I posted a comment about this a couple of weeks ago. And I was tempted to write it off as a function of litigants being too close to their cases. But a document I read today is making me rethink these assumptions. Here is an order from a Florida court that makes me start to wonder if we might have a serious fraud problem going on with blank endorsements and allonges.

To be sure, one data point isn’t an epidemic, but servicing is an industry where things tend to happen en masse. As Obi-Wan Kenobi

explains:

Obi-Wan: “A fighter that size couldn’t get this deep into space on its own.”

Luke: “Yeah, he must have gotten lost, been part of a convoy or something.”

Han: “Well, he ain’t going to be around long enough to tell anyone about us.”

Luke: “Look at him. He’s headed for that small moon.”

Han: “I think I can get him before he gets there. He’s almost in range.”

Obi-Wan: “That’s no moon. It’s a space station.”

Han: “It’s too big to be a space station.”

Luke: “I have a very bad feeling about this.”

Obi-Wan: “Turn the ship around.”

Han: “Yeah, I think your right. Full reverse! Chewie, lock in the auxiliary power.”

To start with, let me explain endorsements and allonges. And endorsement (or indorsement) is a signature on an instrument for the purpose of transferring rights in the instrument. (See UCC 3-204 for more details.) They work the same with notes as with checks and are governed by the same law. There are three types of endorsements. There are endorsements in blank–just your signature, nothing more (e.g., Adam J. Levitin), and special endorsements (Adam J. Levitin to Katherine Porter), and restrictive endorsements (Adam J. Levitin, for deposit only in Safe’n’Sound Bank).

A blank endorsement (by the instrument’s payee, of course) turns the instrument into bearer paper. That means it’s like cash. Whoever physically possesses the note, including a theif, can enforce it against the maker. And as a recent 9th Circuit BAP opinion, In re Veal (about which I hope to blog more) noted (fn 25), bearer paper has long had lots of nefarious associations (I would add Godfather III to the bearer bonds movie list in that note). In contrast, a special endorsement limits who can enforce the note; only the specially noted endorsee has rights in that note and can enforce it (they could transfer it to someone else, but that’s another matter).

Now allonges.  An allonge isn’t a delicious throat-soothing lozenge from Switzerland. It’s a piece of paper that goes a-long with the note. The allonge is basically an overflow sheet for extra endorsements. Frankly, no one should ever be using an allonge if there is room for an endorsement on the original note. Yes, it’s easier to print on the allonge, but allonges create evidentiary problems, namely that it can be difficult to tell when the endorsement on the allonge was done or if the allonge is even meant to go with that particular note. And I’m not sure what the evidentiary weight of an affidavit or testimony on this point could possibly be. Unless the affiant or witness has some basis for knowing that this particular allonge goes with this particular note (“I distinctly remember the peculiar coffee stain on both pieces of paper–it looked like Karl Malden’s nose”), then there’s little probative value from the affidavit or testimony.

The law on allonges is not particularly well-developed. The 1951 version of the UCC, in force in NY and South Carolina (I think), covers them in section 3-202, but the current version does not. The old version of the UCC required that allonges be “firmly attached.”

That requirement seems to have been fulfilled via pasting or gluing and maybe stapling. Query whether paper clip or rubber band or simply in the same folder will suffice. I’m not sure why any of them would.

None of these methods answers the question of when the allonge was created. I can paste or rubberband the day of trial. There’s a smidgen of state law on this, but it hasn’t been a major issue previously.

Which brings us to BONY v. Faulk. In this case, the foreclosure filing included a 3 page note. The note lacked endorsements connecting the originator to BONY as trustee for the foreclosing securitziation trust. This set up a motion to dismiss on the grounds that BONY didn’t have any right to do anything–it had no connection with the note.

But wait!  Suddenly BONY’s attorney tells the court that she is in possession of the fourth page of the note, which includes a blank endorsement. Puhlease…  What a ridiculous deus ex machina ending.

Are we do believe that this attorney filed 3 pages of the note, but not the 4th? If so, I sure hope she’s not billing for that screw up.

But here’s what perplexes me. Suppose that an allonge is produced. How are we going to know when that allonge was created or that it even relates to the note in question? (Just so everyone’s clear–if the endorsement were created later, then BONY as trustee for CWABS 2006-13 trust had no standing at the time the action was filed because the trust didn’t own the note at that time.) How do we know that this attorney isn’t engaged in fraud on the court (and a host of other violations of state and federal law)?

And this isn’t even getting into the question of whether the PSA at issue requires specific endorsements, not endorsements in blank. As it turns out that’s a problem in this particular case. Here’s the PSA for CWABS 2006-13 trust.  Section 2.01(g)(1) provides that the Depositor deliver to the trustee:

the original Mortgage Note, endorsed by manual of facsimile signature in blank in the following form: “Pay to the order of _______ without recourse”, with all intervening endorsements that show a complete chain of endorsement from the originator to the Person endorsing the Mortgage Note…

As an aside, let me point out that “endorsement…in blank” does not mean endorsed in blank in the UCC sense. In the UCC sense, endorsed in blank simply means the endorser’s signature, just as you might put on the back of a check before depositing it. Here, it means endorsed with a blank for the endorsee’s name.  Critically, this PSA requires a complete chain of endorsement with all intervening endorsements. A single endorsement in blank ain’t gonna do it if this PSA means anything. And there were a lot of MBS investors who assumed that it was going to be followed.

I think this PSA just puts the attorney in an even worse place. The only way there should be a separate blank endorsement page is if there was non-compliance with the PSA. Are we really to believe that happened? (Well, yes, but the attorney can’t really argue that BONY generally doesn’t comply with its duties as trustee, now can she?)

We’ve already seen pretty shocking evidence of documentation fraud in foreclosures.  Remember that the robosigning scandal was the by-product of depositions that aimed to show backdating of assignments to trusts. The shame of the robosigning press coverage was that it focused on some shmucks signing 10,000 assignments in a month–which didn’t necessarily produce any harm itself, just carpal tunnel syndrome–and overlooked the really quite serious criminal problem of the backdating of assignments. The depositions showed pretty clearly that there was backdating–the notarizations were by notaries who didn’t have their commissions until a couple of years subsequent or were done on Christmas Day, etc.

Document fraud in the mortgage industry is nothing new. It’s appeared in all flavors and sizes for centuries. The laws of negotiability are first and foremost evidentiary laws meant to protect against fraud.

Negotiable instruments are reified obligations–the instrument itself is the right to payment (UCC 3-203, cmt. 1).  That means that one can sue on either the instrument or on the underlying contract (but Statute of Frauds might require some writing for enforceability). I hope that courts will recognize that real serious potential for fraud that exists when one combines endorsements in blank with allonges and start demanding (1) that the complete note be filed with the original filing and (2) that anyone using an allonge prove that the allonge goes with the note in question. I think we’ve passed the point were there can be any assumptions of good faith and fair dealing.

I’d be curious to hear if any foreclosure defense attorneys have been pushing on the evidentiary status of allonges–namely what proof beyond a staple or the like is there that an allonge goes with a particular mortgage and wasn’t just photocopied from another one.

And yes, this sort of evidentiary scrutiny adds huge costs to the system. But it would be pretty easily avoided if PSAs had been followed in the first place–there was a reason that they required complete, unbroken chains of endorsement.

June 16, 2011 at 8:43 PM in Mortgage Debt & Home Equity

Adam J. Levitin

Associate Professor of Law

A.B. Harvard; A.M., M.Phil. Columbia; J.D. Harvard

Address:

600 New Jersey Avenue N.W.

Washington, DC 20001-2075

Office Location:  Hotung 6022

Office Phone:  202.662.9234

Office Fax:  202.662.4030

e-mail (preferred contact method): adam.levitin<at>law.georgetown.edu

(replace the <at> with the @ sign in the e-mail)

Assistant:  Terican Gross

Phone:  202.662.9485

Blog:  http://www.creditslips.org

*Please note that I do not provide personal legal advice, including on credit card and mortgage foreclosure issues.*

Biography

Professor Levitin specializes in bankruptcy, commercial law, and financial regulation.  His research focuses on consumer and housing finance, payments, and debt restructuring.

Before joining the Georgetown faculty, Professor Levitin practiced in the Business Finance & Restructuring Department of Weil, Gotshal & Manges LLP in New York and served as law clerk to the Honorable Jane Richards Roth on the United States Court of Appeals for the Third Circuit.  While at Georgetown, he has served as Special Counsel to the Congressional Oversight Panel and as the Robert Zinman Scholar in Residence at the American Bankruptcy Institute.

Professor Levitin holds a J.D. from Harvard Law School, an M.Phil and an A.M. from Columbia University, and an A.B. from Harvard College, all with honors.

Jake Naumer

Resolution Advisors

3187 Morgan Ford

St Louis Missouri 63116

314 961 7600

Fax Voice Mail 314 754 9086

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2 Responses to “What’s an Allonge anyway ??? thanks Jake”

  1. Rita Cheche June 16, 2011 at 11:18 pm #

    Please HELP!!! I am alone in my fight here in Virginia…

    I HAVE A TRAIL DATE OF OCTOBER 18, 2011, in the United States District Court, in the City of Norfork, State of Virginia. My Attorney is Tanya Bullock, of Bullock Cooper… I believe she will do her best, but she is limited by the corruption of being a Commonwealth” & a NonJudicial, STATe…

    I am a single mother, floor & wallpaper installer, company owner, corporate commmercial business owner. I did not run to the mall for the latest handbag, heels, or what ever makes my ass look good. I have always leaped into the deepend with the “big boys”, being beat & abused by the best of my family & their friends; until I found my WRECKING CREW…I’m 5.2″, being a brick layer’s helper during the summers, when I was in high school. Having an almost full time job, 32 hours a week, for 3 years, except during my vacation time, during the summer, when I was a brick mason’s helper. I am a fighter.

    I’m “very” Italian (within a generation of my father’s FAMILY coming to the U.S.)IRISH, Scottish & German. UNHEARD OF…Both parents raised by single mothers in the 40’s, in NEW YORK…

    I’m 5’2″, the runt of the “FAMILY”, BUT THE “FIRST BORN”. MY FATHER INPRESSED UPON Me, my RESPONSIBILITIES. You have one life: provide, sacrafice, DON’T LET ANYONE VIOLATE YOUR RIGHTS…

    GIVE IT ALL YOU GOT…

    MAKE IT WORTH THE JAIL TIME!!! There is plenty of time to make your point before the police arrive, MAKE IT COUNT!!!

    That was one of the many times I learned, YOU CAN NOT COUNT ON ANYONE BEING THEIR TO HELP YOU THRU THE DARKNESS. I’m not a Bible Tumper…but having been given the God givin livin in PUNGO; nothing but dirt, trees, birds & bugs, I realized Im EXACTLY WHERE I’M SUPPOSE TO BE, TO CHANGE THE WORLD. it’s me & them… GOD & JESUS…I can fight!!!

    Sorry, for the DRAMA, THEY HAVE CONSPIRERED, & STOLEN ASSETS OF OVER 2.3 MILLION DOLLARS, NOT COUNTING THE TOTAL DESRUCTION OF MY WORLD, BUT I HAVE ALL MY ORIGINALS FROM 2 FRAUDULENT LOANS, both Wachovia’s. MY ORIGINALS ARE VERY EXTENSIVE, including but not limited to every fax, and correspondence, including documenting dates & conversations.

    I even have horrifying Proof of UNDISPUTABLE PROOF OF FORGERY, AND DOCUMENTED KNOWLEDGE OF RECEIVING MY “NOTICE OF CANCELLATION”, “PRIOR TO THE LOAN CLOSING”, WHICH THE VICE PRESIDENT OF WACHOVIA, JUDY WILLS,(WORLD SAVINGS BANK) answers my complaint to the ATTORNEY GENERAL OF TEXAS, GREG ABBOTT; which he documented FORWARDing TO THE ‘OFFICE OF THE THRIFT SUPERVISION” DEMANDING ANSWERS, BY THE ATTORNEY GENERAL OF TEXAS, GREG ABBOTT.

    THE VICE PRESIDENT OF WACHOVIA, JUDY WILLS, FORGED MY NAME, SPELLING IT DIFFERENTLY THAN MY ORIGINAL, AND…

    DATING THE DOCUMENT 3 YEARS AFTER THE CLOSING….

    IF YOU CAN HELP, PRO BONO OR WHEN WE WIN, AND ARE PAID BY THE DEFENDENTS, (could be one of many, World Savings Bank, Wachovia, Wells Fargo, Peoples Choice Home Loans, Specialized Loan Servicing, L.L.C., the Credit Bureaus).

    CALL RITA CHECHE @ (757) 427-0075. I’m not very good on the computer, losing my internet connection, but my email is rcheche1@cox.net.

  2. Jake Naumer June 19, 2011 at 7:45 am #

    More on Allonges
    Today, June 19, 2011, 38 minutes ago | Adam Levitin

    My post on allonges generated quite a bit of response, on and off the blog. But here’s what’s troubling me–if allonges are being fabricated ex post, who is doing it?

    The servicer?
    The default management shop (e.g., LPS)?
    The network firm (sort of the foreclosure GC)?
    Local counsel?
    I’m curious to hear any insights anyone has on where the document production is taking place.

    I’m also curious to hear insights on whether the production of allonges is because they simply do not exist or because they are being held by document custodians and for whatever reason (cost, trust) they aren’t getting down to local counsel. In other words, is this outright fabrication or simply recreating documents that actually exist somewhere but aren’t moving down to local counsel?


    Jake Naumer
    Resolution Advisors
    3187 Morgan Ford
    St Louis Missouri 63116
    314 961 7600
    Fax Voice Mail 314 754 9086

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