AMENDMENTS TO UNIFORM COMMERCIAL CODE ARTICLES 1, 3, AND 9

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1 D R A F T FOR DISCUSSION ONLY AMENDMENTS TO UNIFORM COMMERCIAL CODE ARTICLES 1,, AND NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS Interim Draft Copyright 1 By NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS The ideas and conclusions set forth in this draft, including the proposed statutory language and any comments or reporter s notes, have not been passed upon by the National Conference of Commissioners on Uniform State Laws or the Drafting Committee. They do not necessarily reflect the views of the Conference and its Commissioners and the Drafting Committee and its Members and Reporter. Proposed statutory language may not be used to ascertain the intent or meaning of any promulgated final statutory proposal. November, 1

2 DRAFTING COMMITTEE ON AMENDMENTS TO UNIFORM COMMERCIAL CODE ARTICLES 1,, AND The Committee appointed by and representing the Uniform Law Commission in preparing this Act consists of the following individuals: EDWIN E. SMITH, One Federal St., Boston, MA 0-1, Chair KRISTEN D. ADAMS, 101 1st St. S., Gulfport, FL 0, ALI Representative BORIS AUERBACH, 1 E. St., Indianapolis, IN AMELIA H. BOSS, Drexel University School of Law, Market St., Philadelphia, PA 1, ALI Representative THOMAS J. BUITEWEG, 0 Boardwalk St., Suite 0, Ann Arbor, MI NEIL B. COHEN, Brooklyn Law School, Joralemon St., Brooklyn, NY 1-00, ALI Representative MICHAEL A. FERRY, 0 N. Broadway, Suite 0, St. Louis, MO PATRICK A. GUIDA, One Financial Plaza, th Floor, Providence, RI 0- TERESA W. HARMON, One S. Dearborn St., Chicago, IL 00, ALI Representative WILLIAM H. HENNING, Texas A & M School of Law, 11 Commerce St., Fort Worth, TX RONALD J. MANN, Columbia Law School, W. th St., New York, NY 0, ALI Representative H. KATHLEEN PATCHEL, 1 E. th St., Indianapolis, IN NORMAN M. POWELL, Rodney Square, 00 N. King St., Wilmington, DE 01, ALI Representative SANDRA S. STERN, W. rd St., Suite, New York, NY 0- STEVEN O. WEISE, Century Park E., Suite 0, Los Angeles, CA 00-, ALI Representative STEVEN L. HARRIS, Chicago-Kent College of Law, W. Adams St., Chicago, IL 01-1, Reporter EX OFFICIO ANITA RAMASASTRY, University of Washington School of Law, William H. Gates Hall, Box 0, Seattle, WA 1-0, President JOHN T. MCGARVEY, 01 S. th St., Suite 00, Louisville, KY 0, Division Chair NEIL B. COHEN, Brooklyn Law School, Joralemon St., Brooklyn, NY 1-00, PEB for UCC, Director of Research AMERICAN LAW INSTITUTE DIRECTOR RICHARD L. REVESZ, New York University School of Law, 0 Washington Sq. S., Room, New York, NY 0-0, ALI Director AMERICAN BAR ASSOCIATION ADVISOR EILEEN S. EWING, 1 Country Way, Needham, MA 0, ABA Advisor EXECUTIVE DIRECTOR LIZA KARSAI, 1 N. Wabash Ave., Suite, Chicago, IL 00, Executive Director

3 Copies of this act may be obtained from: NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS 1 N. Wabash Ave., Suite Chicago, Illinois 00 /0-00

4 AMENDMENTS TO UNIFORM COMMERCIAL CODE ARTICLES 1,, AND TABLE OF CONTENTS SECTION 1-1. GENERAL DEFINITIONS SECTION -. DEFINITIONS.... SECTION -. NEGOTIABLE INSTRUMENT.... SECTION -1. NEGOTIATION.... SECTION -. TRANSFER OF INSTRUMENT; RIGHTS ACQUIRED BY TRANSFER... SECTION -01. PERSON ENTITLED TO ENFORCE INSTRUMENT.... SECTION -0. HOLDER IN DUE COURSE.... SECTION -0. PROOF OF SIGNATURES AND STATUS AS HOLDER IN DUE COURSE.... SECTION -0. ENFORCEMENT OF LOST, DESTROYED, OR STOLEN INSTRUMENT.... SECTION -1. OBLIGATION OF INDORSER SECTION -1. TRANSFER WARRANTIES SECTION -0. EXCUSED PRESENTMENT AND NOTICE OF DISHONOR SECTION -0. PAYMENT SECTION -0. DISCHARGE BY CANCELLATION OR RENUNCIATION.... SECTION -. RULES FOR DETERMINING WHETHER CERTAIN OBLIGATIONS AND INTERESTS ARE SECURITIES OR FINANCIAL ASSETS.... SECTION -. DEFINITIONS AND INDEX OF DEFINITIONS.... SECTION -. SUFFICIENCY OF DESCRIPTION.... SECTION -A. CONTROL OF ELECTRONIC MORTGAGE NOTE.... SECTION -. ATTACHMENT AND ENFORCEABILITY OF SECURITY INTEREST; PROCEEDS; SUPPORTING OBLIGATIONS; FORMAL REQUISITES.... SECTION -. RIGHTS AND DUTIES OF SECURED PARTY HAVING POSSESSION OR CONTROL OF COLLATERAL.... SECTION -0. WHEN SECURITY INTEREST OR AGRICULTURAL LIEN IS PERFECTED; CONTINUITY OF PERFECTION.... SECTION -. WHEN FILING REQUIRED TO PERFECT SECURITY INTEREST OR AGRICULTURAL LIEN; SECURITY INTERESTS AND AGRICULTURAL LIENS TO WHICH FILING PROVISIONS DO NOT APPLY.... SECTION -. PERFECTION OF SECURITY INTERESTS IN CHATTEL PAPER, DEPOSIT ACCOUNTS, DOCUMENTS, GOODS COVERED BY DOCUMENTS, INSTRUMENTS, INVESTMENT PROPERTY, LETTER-OF-CREDIT RIGHTS, AND MONEY; PERFECTION BY PERMISSIVE FILING; TEMPORARY PERFECTION WITHOUT FILING OR TRANSFER OF POSSESSION SECTION -. WHEN POSSESSION BY OR DELIVERY TO SECURED PARTY PERFECTS SECURITY INTEREST WITHOUT FILING.... SECTION -1. PERFECTION BY CONTROL.... SECTION -. PRIORITIES AMONG CONFLICTING SECURITY INTERESTS IN AND AGRICULTURAL LIENS ON SAME COLLATERAL.... SECTION -0. PRIORITY OF PURCHASER OF CHATTEL PAPER, ELECTRONIC MORTGAGE NOTE, OR INSTRUMENT....

5 SECTION -0. DISCHARGE OF ACCOUNT DEBTOR; NOTIFICATION OF ASSIGNMENT; IDENTIFICATION AND PROOF OF ASSIGNMENT; RESTRICTIONS ON ASSIGNMENT OF ACCOUNTS, CHATTEL PAPER, PAYMENT INTANGIBLES, AND PROMISSORY NOTES INEFFECTIVE.... SECTION -1. TRANSFER OF RECORD OR LEGAL TITLE.... Appendix...

6 AMENDMENTS TO UNIFORM COMMERCIAL CODE ARTICLES 1,, AND Reporter s Prefatory Note Previous drafts of these UCC amendments tracked drafts of the proposed National Mortgage Note Repository Act of 1. The latter included the commercial-law rules applicable to electronic mortgage notes that would be created by, and maintained in, a proposed federal repository. The most recent (September, 1) draft of the proposed federal legislation, now titled the National Mortgage Note Repository Act of, contemplates that the UCC-related provisions would drop out of the federal act in the summer of, when the UCC amendments are promulgated by the ALI and the ULC. Federal law would then provide that the UCC amendments would apply as enacted to electronic mortgage notes secured by residential real property located in a jurisdiction that substantially enacts amended UCC Articles,, and and the related definitions in Article 1. For other states, federal law would provide that the UCC issues would be governed by the law of the relevant state as if it had enacted amended the Official Text of UCC Articles, and (and related definitions in Article 1). SECTION 1-1. GENERAL DEFINITIONS. (b) Subject to definitions contained in other articles of [the Uniform Commercial Code] that apply to particular articles or parts thereof: () Holder means: (A) with respect to a negotiable instrument other than an electronic mortgage note, the person in possession of a negotiable instrument that if the negotiable instrument is payable either to bearer or to an identified person that is the person in possession; or (B) with respect to a document of title, the person in possession of a document of title if the goods are deliverable either to bearer or to the order of the person in possession; or (C) with respect to an electronic mortgage note, the registrant if, at the 1

7 time the related mortgage note was submitted to the repository system, the submitter: (i) was the holder of the mortgage note; or (ii) held a security interest in the mortgage note which was created in favor of the submitter by a person that was the holder at the time the security interest was created. (c) The following terms are defined in the [National Mortgage Note Repository Act of ] as it may be amended from time to time: (1) Authorized transferor. () Electronic mortgage note. () Mortgage note. () Registered transfer. () Registrant. () Repository operator. () Repository system. () System rules. Legislative Notes: 1. These amendments are designed to implement a specific federal law, the [National Mortgage Note Repository Act of ]. This federal act, like all laws, is subject to change. Accordingly, rather than restate the relevant federal-law definitions, these amendments incorporate by reference the federal-law definitions as they may be amended from time to time. Under the applicable federal choice-of-law rules, a change in a federal-law definition may result in a change to the definitions enacted by a State as they apply to electronic mortgage notes, even if the State enactment does not include the phrase, as it may be amended from time to time.. A State that chooses to restate, rather than incorporate by reference, the federal-law definitions should do so with great care, inasmuch as some of the definitions may use terms that are defined differently in the federal law than they are the Uniform Commercial Code.

8 Reporter s Notes 1. This draft is specifically designed to implement the National Mortgage Note Repository Act of ( RA or Repository Act ), which has yet to be enacted. It is essential that the resulting UCC amendments governing electronic mortgage notes fit seamlessly into the Repository Act. Accordingly, this draft incorporates by reference the definitions of certain terms borrowed from the Repository Act. See draft 1-1; -; -A. The current definitions of these Repository Act terms are set forth in the Appendix and will appear in the Official Comments. Once enacted, the Repository Act may be amended. Accordingly, this draft refers to the Repository Act as it may be amended from time to time. Some States may be precluded from including this phrase or its equivalent in their legislation. Even so, if the definition in the Repository Act is amended, the supremacy of federal law may result in a change to the applicable definition in such a State. Some of the Repository Act definitions include words that are themselves defined in the Repository Act. Accordingly, any incorporation of these definitions into the Uniform Commercial Code in haec verba will require great care.. Draft subsection (b)()(c) would provide a new definition of a holder of an electronic mortgage note. To see how this subsection is meant to work, consider first the person who becomes initial registrant. Under earlier drafts of the Repository Act, the person who submitted a mortgage note for conversion became the registrant. If this person was the holder of the mortgage note, then it would have followed that the initial registrant of the related electronic mortgage note who, after all, is the same person would be the holder of the electronic mortgage note. Draft 1-1(b)()(C)(i) addresses this situation. In response to the Drafting Committee s discussions, the Repository Act was revised to allow a secured party in possession or control of a negotiable mortgage note (including a transferable record) to submit the mortgage note to the repository without itself becoming the initial registrant. See RA (b)(); (c)()(b). In this case, the secured party would become the authorized transferor, and its debtor would become the initial registrant. RA (c)()(b). If the submitting secured party is the holder of the mortgage note and its debtor becomes the initial registrant of the related electronic mortgage note, the debtor would become the holder of the electronic mortgage note under draft 1-1(b)()(C)(i). In addition, the secured party would become obligated as if it had indorsed the note in blank, unless it disclaims liability in the repository system. See draft -1(f)(1). Likewise, if a submitting secured party is a nonholder in possession of a mortgage note of which the secured party s debtor had been the holder and the debtor becomes the initial registrant of the related electronic mortgage note, the debtor would become the holder of the related electronic mortgage note under draft 1-1(b)()(C)(ii).

9 Under this approach, a secured party who is a holder, or holder in due course, of a mortgage note may retain its status with respect to the related electronic mortgage note by becoming the initial registrant. However, a secured party who chooses to utilize the repository system without itself becoming the registrant would deprive itself of this status. The debtor ordinarily would acquire the secured party s right to enforce, including any rights as a holder in due course, and the secured party ordinarily could reacquire those rights by becoming the transferee of a registered transfer of the electronic mortgage note. See draft -(b). If a secured party submits a note as to which neither the secured party nor its debtor is the holder, there would be no holder of the related electronic mortgage note. The initial registrant would become the person entitled to enforce the electronic mortgage note.. E-SIGN provides that a person having control of a transferable record is the holder, as defined in section 1 1() of the Uniform Commercial Code, of the transferable record. 1 U.S.C. 0(d). Accordingly, 1-1(b)()(C) of this draft may apply to a submitted mortgage note that is intangible.. Under draft 1-1(b)()(C), if the initial registrant of an electronic mortgage note is the holder, then all subsequent registrants would be holders.. In some situations, a secured party with a security interest in a mortgage note may have more than one debtor. Suppose, for example, that the mortgagee (Bank) creates a security interest by selling the mortgage note to SP-1. SP-1 takes delivery without Bank s indorsement. SP-1 then sells and delivers the mortgage note to SP- without an indorsement. SP- has two debtors, Bank and SP-1. Bank was a holder; SP-1 was not. SP-, as the assignee of a security interest created by Bank in favor of SP-1, should not be able to elevate itself and become a holder or even a holder in due course by converting the mortgage note to an electronic mortgage note and becoming the registrant. Draft 1-1(b)()(C) would not allow SP- to do so. Although SP- holds a security interest that Bank created a security interest at the time it was the holder of the mortgage note, Bank did not create the security interest in favor of the submitter [SP-]. SECTION -. DEFINITIONS. (a) In this article: () Transferable record means a transferable record as defined in the [National Mortgage Note Repository Act of ] as it may be amended from time to time.

10 Legislative Note: See the Legislative Notes to Section 1-1. SECTION -. NEGOTIABLE INSTRUMENT. (a) Except as provided in subsections (c) and (d), negotiable instrument means: (1) an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: (1)(A) is payable to bearer or to order at the time it is issued or first comes into possession of a holder; ()(B) is payable on demand or at a definite time; and ()(C) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor; and () an electronic mortgage note. Reporter s Note This change would bring electronic mortgage notes within the scope of UCC Article, which applies to negotiable instruments. UCC -(a). Section - defines instrument to include negotiable instruments; however, draft - would exclude electronic mortgage notes from that definition and instead classify an electronic mortgage note as a payment intangible for purposes of Article. The Reporter s Notes to that section summarize the consequences of the classification.

11 An electronic mortgage note may be derived from a mortgage note that was not negotiable. Such an electronic mortgage note would be a negotiable instrument under Article ; however, there can be no holder, and thus no holder in due course, of such an electronic mortgage note. See draft 1-1(b)()(C); -1(d); -0(h) SECTION -1. NEGOTIATION. (a) Negotiation, with respect to an instrument other than an electronic mortgage note, means a transfer of possession, whether voluntary or involuntary, of an the instrument by a person other than the issuer to a person who thereby becomes its holder. The term includes the conversion of a mortgage note to an electronic mortgage note if, at the time the mortgage note was submitted to the repository system, the submitter: (1) was the holder of the mortgage note; and () held a security interest in the mortgage note which was created by the person who becomes the initial registrant of the related electronic mortgage note. (b) This subsection does not apply to an electronic mortgage note. Except for negotiation by a remitter if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder. If an instrument is payable to bearer, it may be negotiated by transfer of possession alone. (c) Negotiation, with respect to an electronic mortgage note, means a registered transfer of the electronic mortgage note to a person who thereby becomes its holder. (d) There cannot be a holder of an electronic mortgage note that the repository operator creates based on submission of a mortgage note that: (1) was not a negotiable instrument or transferable record at the time of submission; or () was not submitted by a person who, at the time of submission, was the holder

12 of the mortgage note or held a security interest in the mortgage note which was created in favor of the submitter by a person that was the holder at the time the security interest was created. Reporter s Notes 1. Negotiation is the process whereby one person replaces another person as the holder of a negotiable instrument. Negotiation of a written negotiable instrument requires a transfer of possession, an event that is not possible with respect to an electronic mortgage note. In many cases, negotiation also requires the placing of an indorsement on the instrument. Inasmuch as an indorsement is a signature, an electronic mortgage note cannot be indorsed. See 1-1(b)() ( Signed includes using any symbol executed or adopted with present intention to adopt or accept a writing. ); 1-1 (b)() ( Writing includes printing, typewriting, or any other intentional reduction to tangible form. ). For these reasons, draft subsections (a) and (b) would be amended to exclude electronic mortgage notes from their scope. Draft subsection (c) would provide that negotiation of an electronic mortgage note occurs when there is a registered transfer of the electronic mortgage note to a person that becomes the holder. A negotiation would occur under this subsection if, and only if, the transferor is a holder as defined in draft 1-1(b)()(C). In some instances, a person who would have become a holder had the mortgage note not been converted would become a nonholder of the related electronic mortgage note. Suppose, for example, the payee of a negotiable mortgage note ( Payee ), who is the holder, transfers the instrument to a nonholder ( Transferee ). Sometime later, Transferee transfers the instrument back to Payee. Payee would become the holder of the mortgage note again. However, if Transferee submits the mortgage note to the repository, becomes the registrant of the resulting electronic mortgage note, and then transfers the electronic mortgage note to Payee, Payee would not become the holder of the electronic mortgage note.. Draft subsection (d) follows from the definition of holder in draft 1-1(b)()(C). However, the Drafting Committee thinks it advisable to state the rule in the statute rather than require those who use the statute to deduce it from the definition. SECTION -. TRANSFER OF INSTRUMENT; RIGHTS ACQUIRED BY TRANSFER. (a) An instrument, other than an electronic mortgage note, is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument. An instrument that is a mortgage note is transferred also when it is converted to an electronic mortgage note if the person that submitted the

13 mortgage note to the repository system was the person entitled to enforce the instrument at the time of submission and does not become the initial registrant of the related electronic mortgage note. An electronic mortgage note is transferred when a registered transfer occurs. (b) Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course, but the transferee cannot acquire rights of a holder in due course by a transfer, directly or indirectly, from a holder in due course if the transferee engaged in fraud or illegality affecting the instrument. The transferor of an electronic mortgage note is the person that was the registrant of the electronic mortgage note immediately before the transfer, even if the authorized transferor effected the transfer. Reporter s Notes 1. Transfer of an electronic mortgage note. Under subsection (b), transfer of an instrument, whether or not it is a negotiation, transfers the right to enforce the instrument. Under existing law, an instrument is transferred by delivery, which Article 1 defines for this purpose as voluntary transfer of possession. 1-1(b)(1). An electronic mortgage note cannot be the subject of possession. Accordingly, the third sentence of draft subsection (a) would provide that an electronic mortgage note is transferred when a registered transfer occurs under the Repository Act. Under the Repository Act, the authorized transferor may initiate a registered transfer. Draft subsection (b) would provide that, even in this case, the registrant immediately prior to the subsection (b) transfer who by definition is the person entitled to enforce the electronic mortgage note, see draft -01(a)() is the transferor. As the transferor, the old registrant makes the transfer warranties in draft -1(a) if the transfer is for consideration, and becomes obligated to pay the electronic mortgage note as if it were an indorser. See draft -1(f)().. Transfer arising from the conversion of a mortgage note. The second sentence of draft -(a) addresses the common situation in which a secured party who is the person entitled to enforce a negotiable mortgage note (including a transferable record) submits the mortgage note to the repository without itself becoming the initial registrant. The sentence would provide that, in these circumstances, a transfer occurs when the mortgage note is converted to an electronic mortgage note.

14 If, however, the submitting secured party s debtor, and not the secured party itself, is the person entitled to enforce the mortgage note, e.g., because the delivery of the instrument to the secured party was not for the purpose of giving to the [secured party] the right to enforce the instrument, -(a), then there will be no transfer of the instrument. As the initial registrant, the debtor would become the person entitled to enforce the related electronic mortgage note under draft -01(a)(). Inasmuch as the parties obligations under the electronic mortgage note are identical to those under the related mortgage note, see draft -(b) and -1(f), the debtor s right to enforce the mortgage note, including any right as a holder in due course, would carry forward to the electronic mortgage note. SECTION -01. PERSON ENTITLED TO ENFORCE INSTRUMENT. (a) Person entitled to enforce an instrument means: (1) with respect to an instrument other than an electronic mortgage note, (i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 0 or (d); and () with respect to an electronic mortgage note, the registrant of the electronic mortgage note. (b) A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument. Reporter s Note The maker of a note is obligated to pay the note to a person entitled to enforce the instrument. See -. A key principle underlying the Repository Act is that the registrant of an electronic mortgage note is the person who is entitled to enforce. See RA (c)()(a)(ii) ( to the extent that the obligation evidenced by an electronic mortgage note is enforceable, the registrant is the holder or other person entitled to enforce ). Draft subsection (a)() would state this principle. SECTION -0. HOLDER IN DUE COURSE. (a) Subject to subsection (c) and Section (d), holder in due course means the holder of an instrument if:

15 (1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and () the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in Section 0, and (vi) without notice that any party has a defense or claim in recoupment described in Section 0(a). (b) Notice of discharge of a party, other than discharge in an insolvency proceeding, is not notice of a defense under subsection (a), but discharge is effective against a person who became a holder in due course with notice of the discharge. Public filing or recording of a document does not of itself constitute notice of a defense, claim in recoupment, or claim to the instrument, except that a record of the repository system that indicates that the obligation of a person on an electronic mortgage note under Section or 1 has been discharged constitutes notice of the discharge. (g) This section is subject to any law limiting status as a holder in due course in particular classes of transactions. (h) There cannot be a holder in due course of an electronic mortgage note that the repository operator creates based on submission of a mortgage note that: (1) was not a negotiable instrument or transferable record at the time of submission; or

16 () was not submitted by a person who, at the time of submission, was the holder of the mortgage note or held a security interest in the mortgage note which was created in favor of the submitter by a person that was the holder at the time the security interest was created. Reporter s Notes 1. Section of the Repository Act mandates the issuance of regulations requiring the registrant to give to the repository operator notice of discharge of a borrower s obligation evidenced by an electronic mortgage note. RA (b)(1). It also requires the establishment of a process by which a borrower may provide notice to the repository operator of the borrower s belief that its obligation or the obligation evidenced by the electronic mortgage note has been discharged and may request the registrant or a court to confirm the discharge to the registry operator. RA (b)(). The amendment to draft -0(b) is premised on the assumption that no reasonable person would take a transfer of an electronic mortgage note without first examining the records of the repository system. If these records indicate that the obligation of one or more obligors on the electronic mortgage note has been discharged, then, under the draft, the discharge would be effective against the transferee-registrant, even if that person became a holder in due course thereafter. The Federal Reserve Bank of New York is considering amendments to the draft Repository Act that will allow for additional clarity concerning which repository records are relevant in determining whether the records indicate that an obligation on an electronic mortgage note has been discharged.. Once the records of the repository system reflect that the obligation evidenced by an electronic mortgage note is discharged with respect to all borrowers, the electronic mortgage note will no longer be transferable by the repository system. RA (c). If an electronic mortgage note is discharged with respect to less than all of the borrowers, however, the electronic mortgage note would remain transferable and potential transferees would have access to a record of the discharge. Accordingly, draft -0(b) would have practical effect only in some cases where there are multiple borrowers.. Draft subsection (h) would incorporate the rule in RA (a)(1)(b). One can deduce this rule from draft -1(d)(1) (providing that there cannot be a holder of an electronic mortgage note that the repository operator creates based on submission of a mortgage note that was not a negotiable instrument or transferable record) and UCC -0(a) (defining holder in due course ).

17 SECTION -0. PROOF OF SIGNATURES AND STATUS AS HOLDER IN DUE COURSE. (a) In an action with respect to an instrument, the authenticity of, and authority to make, each signature on the instrument is admitted unless specifically denied in the pleadings. If the validity of a signature is denied in the pleadings, the burden of establishing validity is on the person claiming validity, but the signature is presumed to be authentic and authorized unless the action is to enforce the liability of the purported signer and the signer is dead or incompetent at the time of trial of the issue of validity of the signature. If an action to enforce the instrument is brought against a person as the undisclosed principal of a person who signed the instrument as a party to the instrument, the plaintiff has the burden of establishing that the defendant is liable on the instrument as a represented person under Section 0(a). (b) This subsection does not apply to an electronic mortgage note. If the validity of signatures is admitted or proved and there is compliance with subsection (a), a plaintiff producing the instrument is entitled to payment if the plaintiff proves entitlement to enforce the instrument under Section 01, unless the defendant proves a defense or claim in recoupment. If a defense or claim in recoupment is proved, the right to payment of the plaintiff is subject to the defense or claim, except to the extent the plaintiff proves that the plaintiff has rights of a holder in due course which are not subject to the defense or claim. (c) This subsection applies to an electronic mortgage note. (1) If the validity of signatures is admitted or proved and there is compliance with subsection (a), a plaintiff producing a current record of the electronic mortgage note, certified by the repository operator, and a current record of the repository system, certified by the repository operator, which identifies the plaintiff as the registrant of the electronic mortgage note is entitled

18 to payment unless the defendant: (A) produces a record of the repository system, certified by the repository operator more recently than the record produced by the plaintiff, which identifies a person other than the plaintiff as the registrant; or (B) proves that it has a defense or claim in recoupment. () If a defense or claim in recoupment is proved, the right to payment of the plaintiff is subject to the defense or claim, except to the extent the plaintiff proves that the plaintiff has rights of a holder in due course which are not subject to the defense or claim. Reporter s Note Draft subsection (c)(1) is based upon RA (a)(1)(a). Draft subsection (c)() is based upon RA (a)(1)(c). SECTION -0. ENFORCEMENT OF LOST, DESTROYED, OR STOLEN INSTRUMENT. (a) A Except as otherwise provided in subsection (c), a person not in possession of an instrument is entitled to enforce the instrument if: (1) the person seeking to enforce the instrument: (A) was entitled to enforce the instrument when loss of possession occurred; or (B) has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred; () the loss of possession was not the result of a transfer by the person or a lawful seizure; and () the person cannot reasonably obtain possession of the instrument because the

19 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. (c) Subsection (a) does not apply to an instrument that is converted to an electronic mortgage note. Reporter s Notes Subsection (c) follows from the fact that the registrant is the person entitled to enforce an electronic mortgage note, which manifests the same obligation as the related mortgage note.. Under some circumstances, more than one person may be entitled to enforce a written instrument. For example, if a written note payable to bearer is stolen, the thief becomes the holder and is entitled to enforce under -01(i), and the person from whom the instrument was stolen may qualify as a person entitled to enforce under -01(iii) and this section. Electronic mortgage notes are different. At any given moment, there can be only one registrant of, and thus only one person entitled to enforce, an electronic mortgage note. SECTION -. OBLIGATION OF ISSUER OF NOTE OR CASHIER S CHECK. (a) The issuer of a note or cashier s check or other draft drawn on the drawer is obliged to pay the instrument (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder, or (ii) if the issuer signed an incomplete instrument, according to its terms when completed, to the extent stated in Sections and 0. The obligation is owed to a person entitled to enforce the instrument or to an indorser or transferor who paid the instrument under Section 1. (b) If the repository system converts a mortgage note to an electronic mortgage note, the obligation of a maker of, or equivalent obligor on, the mortgage note becomes an obligation on the related electronic mortgage note under subsection (a). 1

20 Reporter s Notes 1. Upon conversion to an electronic mortgage note, a mortgage note loses its significance as the embodiment of the maker s obligation (and the obligation of any indorser) to pay. See RA (a)(). Accordingly, no person has the right to enforce a mortgage note that has been converted to an electronic mortgage note, to obtain possession of such a written mortgage note, or to obtain control of such a mortgage note that was in electronic form (e.g., a transferable record). Under draft subsection (b) and draft -1(f), the obligation to pay a converted mortgage note would become an obligation to pay the related electronic mortgage note. Conversion of a mortgage note to an electronic mortgage note would not impose a new obligation upon a person who is obligated on the mortgage note. The Official Comments would explain that conversion would not affect related issues, such as when a party incurred its obligation.. Article defines the terms maker and indorser with respect to an Article negotiable instrument. See -(a)(), - ( maker ); -(b), (a) ( indorser ). Not every mortgage note that is submitted for conversion will be negotiable. Accordingly, draft -(b) and draft -1(f) would apply as well to equivalent obligor[s], a phrase that appears in E- SIGN, 1 U.S.C. 0(e). SECTION -1. OBLIGATION OF INDORSER. (a) Subject to subsections (b), (c), (d), (e) and to Section 1(d), if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument (i) according to the terms of the instrument at the time it was indorsed, or (ii) if the indorser indorsed an incomplete instrument, according to its terms when completed, to the extent stated in Sections and 0. The obligation of the indorser is owed to a person entitled to enforce the instrument or to a subsequent indorser or transferor who paid the instrument under this section. (b) If Subject to subsection (f), if an indorsement states that it is made without recourse or otherwise disclaims liability of the indorser, the indorser is not liable under subsection (a) to pay the instrument. (c) If notice of dishonor of an instrument is required by Section 0 and notice of dishonor complying with that section is not given to an indorser, the liability of the indorser under subsection (a) is discharged. 1

21 (d) If a draft is accepted by a bank after an indorsement is made, the liability of the indorser under subsection (a) is discharged. (e) If an indorser of a check is liable under subsection (a) and the check is not presented for payment, or given to a depositary bank for collection, within 0 days after the day the indorsement was made, the liability of the indorser under subsection (a) is discharged. (f) If the repository system converts a mortgage note to an electronic mortgage note, the obligation of an indorser of, or equivalent obligor on, the mortgage note becomes an obligation on the related electronic mortgage note under subsection (a). (g) Except as otherwise provided in subsection (h): (1) if a mortgage note is transferred when it is converted to an electronic mortgage note and the person that submitted the mortgage note to the repository system was the holder of the mortgage note at the time of submission, the transferor becomes obligated under subsection (a) as if the transferor were an indorser; and () a transferor of an electronic mortgage note becomes obligated under subsection (a) as if the transferor were an indorser. (h) Subsection (g) does not apply if the records of the repository system indicate that liability has been disclaimed. Reporter s Notes 1 1. Regarding draft subsection (f), see the Reporter s Notes to draft -.. Inasmuch as an electronic mortgage note is intangible, it cannot be indorsed. However, draft -1(g) imposes indorser liability in two circumstances where an indorsement ordinarily would be made on a tangible mortgage note. Transfer of an electronic mortgage note. Draft - would provide that a registered transfer under the Repository Act is a transfer of an electronic mortgage note for purposes of this Article, and that the transferor is the transferring registrant, regardless of whether the registered transfer was initiated by the registrant or the authorized transferor. Draft subsection (g)() would 1

22 impose indorsement liability on the transferor. To be effective, a disclaimer of this liability must appear in the records of the repository system. See draft subsection (h). An indorser who pays a note is entitled to recover the amount paid from a prior indorser under subsection (a) or the maker under -(a). As amended, these two subsections would afford the same right to a transferor who pays an electronic mortgage note. Transfer arising from the conversion of a mortgage note. Draft -(a) would provide that a transfer occurs if a secured party that submits a mortgage note does not become the initial registrant of the related electronic mortgage note. If the submitting secured party was the holder of the mortgage note, the transfer constitutes a negotiation, by which the initial registrant would become the holder, see draft -1(a), and draft -1(g)(1) would impose indorsement liability on the submitting secured party (unless disclaimed in accordance with draft subsection (h)). SECTION -1. TRANSFER WARRANTIES. (a) A person who transfers an instrument for consideration warrants to the transferee and, if the transfer is by indorsement or the instrument is an electronic mortgage note, to any subsequent transferee that: (1) the warrantor is a person entitled to enforce the instrument; () all signatures on the instrument are authentic and authorized; () the instrument has not been altered; () the instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor; () the warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer; and () with respect to a remotely-created consumer item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn. 1

23 (c) The warranties stated in subsection (a) cannot be disclaimed with respect to checks. A disclaimer of the warranties stated in subsection (a) is effective against a subsequent transferee of an electronic mortgage note only to the extent the records of the repository system indicate the existence and nature of the disclaimer. Unless notice of a claim for breach of warranty is given to the warrantor within 0 days after the claimant has reason to know of the breach and the identity of the warrantor, the liability of the warrantor under subsection (b) is discharged to the extent of any loss caused by the delay in giving notice of the claim. (e) A transfer of a mortgage note which occurs when the mortgage note is converted to an electronic mortgage note is not of itself a transfer for consideration under subsection (a). Reporter s Notes 1. Under draft subsection (a) a registrant who effects, or whose authorized transferor effects, a transfer of an electronic mortgage note would make transfer warranties. See draft -(b) (providing that the transferor of an electronic mortgage note is the person who was the registrant of the electronic mortgage note immediately before the transfer).. The warranties under subsection (a) run in favor of an immediate transferee in all transfers for consideration. They also run in favor of subsequent transferees if the transfer is made by indorsement. An electronic mortgage note cannot be indorsed. Rather, a person who transfers an electronic mortgage note incurs liability under -1 as if the person were an indorser. Draft -1(a) takes the same approach with respect to warranties. Like an indorser, a transferring registrant would make warranties to subsequent transferees as well as to the immediate transferees. This parallel treatment may result in different outcomes, depending on whether a written note or an electronic mortgage note is transferred. This is because every transferring registrant is treated like an indorser, whereas not every transfer of a written note is accompanied by the transferor s indorsement. Consider a written mortgage note that has been indorsed in blank to A. If A sells and delivers the note to B, then A makes transfer warranties to B, but not to subsequent transferees. Suppose, however, that before A sells the mortgage note to B, the mortgage note is converted to an electronic mortgage note with respect to which A is the registrant. If A transfers the electronic mortgage note to B, then A makes transfer warranties not only to B, but also to subsequent transferees.. By submitting a mortgage note for conversion and not becoming the initial registrant of

24 the related electronic mortgage note, a secured party may transfer the instrument. See draft - (a). Subsection (e) would make clear that such a transfer would not necessarily be for consideration and that the secured party would not necessarily make transfer warranties. SECTION -0. EXCUSED PRESENTMENT AND NOTICE OF DISHONOR. (a) Presentment for payment or acceptance of an instrument is excused if (i) the person entitled to present the instrument cannot with reasonable diligence make presentment, (ii) the maker or acceptor has repudiated an obligation to pay the instrument or is dead or in insolvency proceedings, (iii) by the terms of the instrument presentment is not necessary to enforce the obligation of indorsers or the drawer, (iv) the drawer or indorser whose obligation is being enforced has waived presentment or otherwise has no reason to expect or right to require that the instrument be paid or accepted, or (v) the drawer instructed the drawee not to pay or accept the draft or the drawee was not obligated to the drawer to pay the draft, or (vi) the instrument is an electronic mortgage note. Reporter s Note The Article default rule is that failure to give a required notice of dishonor discharges the obligation of an indorser to pay. UCC -1(c). See also UCC -0(a) (specifying when notice of dishonor is required). Presentment is a condition of dishonor. UCC -0. The requirements of presentment and notice of dishonor are excused if, by the terms of the instrument, they are not necessary to enforce the indorser s obligation. UCC -0(a) (presentment), (b) (notice of dishonor). These provisions are sufficiently common in mortgage notes that it would make sense to amend UCC -0 to excuse presentment of all electronic mortgage notes. SECTION -0. PAYMENT. (a) Subject to subsection (e), an instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument, and to a person entitled to enforce the instrument. 1

25 (b) Subject to subsection (e), a note is paid to the extent payment is made by or on behalf of a party obliged to pay the note to a person that formerly was entitled to enforce the note only if at the time of the payment the party obliged to pay has not received adequate notification that the note has been transferred and that payment is to be made to the transferee. A notification is adequate only if it is signed by the transferor or the transferee; reasonably identifies the transferred note; and provides an address at which payments subsequently are to be made. Upon request, a transferee shall seasonably furnish reasonable proof that the note has been transferred. Unless the transferee complies with the request, a payment to the person that formerly was entitled to enforce the note is effective for purposes of subsection (c) even if the party obliged to pay the note has received a notification under this paragraph. (c) Subject to subsection (e), to the extent of a payment under subsections (a) and (b), the obligation of the party obliged to pay the instrument is discharged even though payment is made with knowledge of a claim to the instrument under Section -0 by another person. (d) Subject to subsection (e), a transferee, or any party that has acquired rights in the instrument directly or indirectly from a transferee, including any such party that has rights as a holder in due course, is deemed to have notice of any payment that is made under subsection (b) after the date that the note is transferred to the transferee but before the party obliged to pay the note receives adequate notification of the transfer. (e) The obligation of a party to pay the instrument is not discharged under subsections (a) through (d) if: (1) a claim to the instrument under Section -0 is enforceable against the party receiving payment and (i) payment is made with knowledge by the payor that payment is prohibited by injunction or similar process of a court of competent jurisdiction, or (ii) in the case

26 of an instrument other than a cashier s check, teller s check, or certified check, or electronic mortgage note, the party making payment accepted, from the person having a claim to the instrument, indemnity against loss resulting from refusal to pay the person entitled to enforce the instrument; or () the person making payment knows that the instrument, other than an electronic mortgage note, is a stolen instrument and pays a person it knows is in wrongful possession of the instrument. Legislative Note: The relevant provisions of the [National Mortgage Note Repository Act of ] are consistent with the 0 amendments to this section. A jurisdiction that has not enacted those amendments should do so in conjunction with enactment of the amendment shown here. Reporter s Note The suggested amendment is meant to conform this section with RA (a)()(c), which provides that the obligation of the borrower is discharged even though payment is made with knowledge of an adverse claim to the electronic mortgage note by another person. 1 SECTION -0. DISCHARGE BY CANCELLATION OR RENUNCIATION. (a) A person entitled to enforce an instrument, with or without consideration, may discharge the obligation of a party to pay the instrument (i) by an intentional voluntary act, such as surrender of the instrument to the party, destruction, mutilation, or cancellation of the instrument, cancellation or striking out of the party s signature, or the addition of words to the instrument indicating discharge, or (ii) by agreeing not to sue or otherwise renouncing rights against the party by a signed record. Neither submission of a mortgage note to the repository system nor conversion of a mortgage note to an electronic mortgage note discharges the obligation of a party to pay the instrument.

27 (b) Cancellation or striking out of an indorsement pursuant to subsection (a) does not affect the status and rights of a party derived from the indorsement. (c) In this section, signed, with respect to a record that is not a writing, includes the attachment to or logical association with the record of an electronic symbol, sound, or process with the present intent to adopt or accept the record. SECTION -. RULES FOR DETERMINING WHETHER CERTAIN OBLIGATIONS AND INTERESTS ARE SECURITIES OR FINANCIAL ASSETS. (h) An electronic mortgage note is not a security, but is a financial asset if it is held in a securities account. Reporter s Note Some writings meet the definition of both negotiable instrument in Article and security certificate in Article. These writings ordinarily would be governed by Article, UCC -(d), and would constitute investment property and not instruments under Article. UCC -(a)() (defining investment property to include certificated securities); UCC -(a)() (defining instrument to exclude investment property). Draft subsection (h) would change this rule by providing that an electronic mortgage note is not an Article security. A mortgagee or its assignee may, however, cause the electronic mortgage note to be credited to a securities account as a financial asset. In this case, the electronic mortgage note would remain in the repository system and the broker or other securities intermediary would be the registrant. The mortgagee s (or assignee s) rights with respect to the electronic mortgage note would be a security entitlement, which is a kind of investment property under Article. SECTION -. DEFINITIONS AND INDEX OF DEFINITIONS. (a) [Article definitions.] In this article: