Before the recent economic downturn, very few attorneys had experience defending foreclosures (or effectively prosecuting them, for that matter). As thousands and thousands of residential foreclosures flooded into our courts, the attorneys that picked up the foreclosure defense cases churned out hundreds of innovative arguments, and most went down in flames spectacularly. The “no note, no foreclosure” defense was among the most popular defenses, and our appellate courts quickly put an end to it. The Seventh Circuit, however, may have resurrected the “no note, no foreclosure” defense in limited circumstances.
How the “no note, no foreclosure” defense used to work.
During the real estate boom of the 90s and early 2000s, when everyone and their dog could qualify for a no-down-payment mortgage loan, many mortgage originators were very sloppy. They were too busy originating new mortgages to be as careful as they should have been, and important documents were occasionally lost. The most important documents for a mortgage loan are the promissory note (which contains the promise to repay in exchange for the money) and the mortgage (which grants the bank the right to foreclose if you fail to repay). The mortgage document itself is never lost because immediately after the loan closes the mortgage document is mailed to the county recorder of deeds and recorded.
The promissory notes, on the other hand, were lost quite frequently. The originators would mail them to the bank, and the bank would stuff the notes into a dusty file cabinet in a basement somewhere, and with the huge volume of loans being made these things were lost all of the time. This problem was compounded by the fact that as the bottom of the economy dropped out, several major mortgage lenders went belly up and their assets (99% of which were these promissory notes) were scattered to the wind to any bank with room on its balance sheet for more loans. In the process of divvying up failed lenders’ assets, some promissory notes were outright lost, others were miss-filed at the new bank, and the end result was that in a fair number of cases, the foreclosing bank’s attorneys were unable to produce the original promissory note to the court.
Attorneys who defended foreclosures salivated at the possibility of the lending having lost the promissory note because promissory notes are (supposed to be) special. They are like checks where the original document has significance in itself and you should not be able to cash (in the case of a check) or negotiate (in the case of a promissory note) a photocopy because what would keep you with making a hundred photocopies and trying to cash them all?
Well, seeing the havoc this would create in our domestic real estate market, our Illinois Appellate Courts have fairly consistently ruled that a promissory note is not like a check in that respect, and the original promissory note is only evidence of the debt obligation. If other evidence of the debt obligation can be produced, the absence of the original promissory note is not fatal to the foreclosing lender’s case.
The Seventh Circuit Court of Appeals resurrects the “no note, no foreclosure” defense somewhat.
Last month the Seventh Circuit handed down its opinion in State Bank of Toulon v. Covey (In re Duckworth), Nos. 14-1561 and 14-1650 (7th Cir. Nov. 21, 2014), which considered a very similar question–what happens if the promissory note is still in existence but the important parts were left blank? In State Bank of Toulon, the debtor, David Duckworth took out a $1.1 million loan from the State Bank of Toulon that was supposed to be secured by an Agricultural Security Agreement on certain farmland and crops. The security agreement, however, did not reference the note specifically by date, and the dollar amount of the security agreement was left blank. The bank tried to prove that it was the $1.1 million promissory note that was secured by the mortgage with parol evidence (a lawyer term for evidence about what a document means that is not contained within the document itself). The Seventh Circuit shot that argument down but carefully limited to apply only to the efforts of bankruptcy trustees to avoid liens.
Fighting your foreclosure in the bankruptcy court is now something you should consider.
If your lender was as sloppy as the State Bank of Toulon lender was, and if there are major terms left blank in the promissory note for your foreclosure case, taking your foreclosure to the bankruptcy court by filing bankruptcy is not so bad of an option. Federal courts will follow this law, and for once it works to the homeowner’s advantage.