For negotiable notes, UCC 3 governs how these notes may be transferred, the effect of the transfer of ownership of the notes on the ownership of the mortgages securing those notes, and the right of the transferee, under certain circumstances, to record its interest in the mortgage in the applicable real estate office.

    1. Who is the person entitled to enforce a mortgage note and to whom the obligation to pay the note is owed?
    2. If the note is a negotiable instrument , Article 3 determines who may enforce those obligations and to whom these obligations are owed. If the note is non-negotiable, contract law governs.

      First, identify the “person entitled to enforce” the note. The owner is not synonymous with person entitled to enforce, a person need not be the owner to be entitled to enforce. The reason it is necessary to identify the “PETE” is that

      i. the maker’s obligation is to pay the amount of the note to PETE;
      ii. the maker’s payment to PETE results in discharge of the maker’s obligation; and
      iii. the maker’s failure to pay; when due, the amount of the note to PETE constitutes dishonor of the note.

      UCC 3-301 provides only three ways in which a person may qualify as a PETE, two of which require the person to be in possession of the note (which may include possession by a third party as an agent. (See UCC §§3-1-103(b), UCC § 3-402.) “Delivery” of a NI (negotiable instrument) is defined as “a voluntary transfer of possession.” UCC 1-201(b)(15).

      The first way a person may qualify as a PETE is to be its “holder”. UCC § 1-201(b) (21) (A), requires that the person be in possession of the note and either the note is payable to that person or (ii) the note is payable to bearer. This requires examination of the note and any subsequent endorsements.

      The second way that a person may be a PETE is to be a “nonholder in possession of the note who has the rights of a holder.” A nonholder may have the rights of a holder if the delivery of the note to that person constitutes a “transfer” as defined in Article 3 because transfer of a note “vests in the transferee any right of the transfer or to enforce the instrument.” UCC 3-203(b). If a payee delivers the note to an assignee without indorsing it, the assignee will NOT BE a holder because the note is still payable to the payee. The person in possession of the note must also demonstrate the purpose of the delivery of the note in order to qualify as the PETE.

      The third method does not require possession of the note but is limited because it applies only in cases in which “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 that cannot be found or is not amenable to service of process.” UCC §3-309(a)(iii). In such cases, a person qualifies as a PETE if he demonstrates not only that one of the circumstances is present but also that the person was formerly in possession of the note and entitled to enforce it when the loss of possession occurred and that the loss of possession was not a result of transfer or lawful seizure. If the person proves those facts as well as the terms of the note, the person may enforce the note but the court may not enter judgment in favor of the person unless the court finds that the maker is adequately protected against loss that might occur if the note subsequently appears.