A few days ago, I wrote a blog about the four reasons why lender restrictions in short sale addenda are unenforceable. To recap, they are:
The Four Components
1. The restrictions are required without legal “consideration” and are therefore invalid;
2. The restrictions are voidable because there is no “privity” of contract;
3. The restrictions cloud title (some states formally prohibit the restrictions);
4. The restrictions violate the spirit and intention of Uniform Commercial Code.
Today, I will discuss the fourth component of why the restrictions placed by a short selling lender may be unenforceable. The Uniform Commercial Code is a unified collection of laws that are federal and in some form or another they are adopted in all states as well. The laws govern commercial transactions and apply to all lenders and their assignees.
There are two provisions of the UCC that are applicable to the short selling lender tactic of placing restrictions upon the future sale of real estate. I can also argue that these same two principles apply to the requirement that ancillary members of a real estate transaction (real estate agents, closing attorneys and title agents, negotiators, and attorneys representing buyers and sellers).
It would not be practical to discuss the specific aspects of the UCC in a blog. However, Articles, 1, 3 & 9 of the UCC can be utilized to argue that a foreclosing lender does not have standing to foreclose. Courts have upheld the UCC and prohibited foreclosure. The most celebrated case is In Re Veal, a Bankruptcy Appellate Panel case from the 9th Circuit.
In addition to the standing argument, the UCC provides opportunity to challenge the lender on whether it has the original “blue ink” mortgage (deed of trust) and note. In many legal instances (including foreclosure), a party to a lawsuit is required to produce the original documents (if requested by the other party) and typically lenders are unable to do this.
Finally, the UCC also requires business entities to act in a commercially reasonable manner. We all know that lenders and servicers do not act in a commercially reasonable manner in short sale negotiation and foreclosure lawsuits. This provides another opportunity to battle lenders and servicers in short sale negotiation and in defense of foreclosure lawsuits.
In my experience, home owners are not asserting rights under the UCC and I am at a loss to understand why. It applies to every situation imaginable in the current real estate market and it provides relief for home owners.
Paddy Deighan, Esq
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