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Dry pen trumps wet ink

Catchwords: Business law, the “original wet ink” signature defence is a non-defence, foreclosure sales USA, banks sales risky, Ibanez Case, power of sale, registration of title versus title by registration

Some stressed borrowers in Australia believe that they can avoid enforcement following default under a bank mortgage because the bank does not possess an “original wet ink” signed agreement.

They can latch onto this belief mindful of the recent publicity in the USA of the case of Ibanez [U.S. Bank National Association vs. Antonio Ibanez & Ors. Supreme Judicial Court (Massachusetts) 7 October 2010 (Full Court: Gants, Cordy, Botsford JJ)]. [Readable copy here] However, it was not the “original wet ink” signature which was in issue in this case.

That well reasoned decision of the full appeal Court saw the Judgments of the lower Court affirmed and Ibanez and La Race, the mortgagors, succeed against the banks which had “foreclosed” and purchased the properties back at “foreclosure” sales after default by the borrowers.

These type of “foreclosure investments” have been touted in Australia as suitable for Australians wanting to profit after the Global Financial Crisis (“GFC”) and buy up under value houses in the USA.

The Ibanez “house mortgage” of $US103,500, which was recorded, was the subject of a “chain” of 5 successive sales and assignments after the original mortgagee to various institutions, passing through Lehman Brothers Bank, in a process known as “securitization”. This process saw a number of mortgage loans “pooled” together by assignment into a “trust” and converted into mortgage backed securities or “promissory notes” which carried an income stream for an “investor” down the chain. This process has been identified as instrumental to the “subprime” crisis with toxic debt in the USA and the ensuing GFC.

Massachusetts is a “title theory” state (not a “lien theory” state) which means legally that a mortgage is a transfer of the legal title in the land and the mortgagor retains only an equitable title. So the end result is that these investors down the “chain” have legal title to someone’s home or land.

There was a default in the borrowers’ obligations and the purported mortgagees exercised their contractual “power of sale” without any Court order and foreclosed. However, under the legal code in Massachusetts (G.L. c. 183, S. 21 and G.L. c. 244, S 14) only a valid assignee of a mortgage at the time of foreclosure can exercise the right to foreclose.

The banks could not prove that they were in fact the title holders to the mortgagees at the time of foreclosure. Assignments happened only afterwards. During the chain of successive multiple assignments and the pooling process, the banks had not done their paperwork. The issue in this case was not whether than banks had an original wet ink signature. The issue was that the foreclosure sales occurred before the assignments of the mortgages and the banks did not have title as mortgagees at that crucial time.

In the USA, most States have a conveyancing system of land which is based on “registration of title”. In Australia, under the Torrens system (commenced by Sir Robert Torrens, Premier of South Australia in 1858), as in most Commonwealth Nations, the system is “title by registration” and that title is “indefeasible” once it is on the register. The difference is not semantics.

In the USA title to land is mostly conveyed immediately upon delivery of a valid signed deed, whereas in Australia title to land is conveyed upon registration, (with the exception of old system title now not that common). In Australia, the borrower has the legal title to the land and possession, subject to the interests of the lender recorded on the folio of the register. In Australia, “foreclosure” is not as common as in the USA, and an order for the “power of sale” sought from the Court is preferred, because if a bank uses “foreclosure”, it is barred from recovery personally against the borrower of any shortfall.

The system of “registration of title” in most states in the USA leads to uncertainty in “the chain of title”. A buyer of land or assignee of a mortgagee has to make enquiries, or be at risk of their own peril, as to the validity of prior title holders’ interests up the chain. The legal principal is you can’t give what you don’t have, so if there was a defect up the chain, the buyer or mortgagee down the chain does not have good title. That uncertainty is compounded by the practice of many banks in the USA, unlike in Australia, to sell their mortgages on, or assign by “note” their interests to 3rd party investors.

In Australia, any “instrument”, which creates an interest in land, including a “deed” and a memorandum of mortgage, which is also a “dealing”, must be in writing and signed to be valid, with some exceptions not relevant here. [Conveyancing Act NSW S 23C (1), Property Law Act VIC S 53 (1), Property Law Act QLD S11 (1)] There is no legal requirement that a valid “instrument” also be an original, only that it is in writing and signed.

One of the benefits of title by registration in Australia is that a copy of a “dealing” is kept on the register. The “original document rule” was abolished in 1995 by the Uniform Evidence Law, (S51 of the Evidence Acts) so the contents of a document can be proved in Court by a copy.

In the writer’s humble opinion, there is no legal requirement in Australia for a bank mortgagee to produce an “original wet ink” document to prove a valid mortgage and enforce it against a borrower. It is no defence.

The Ibanez case serves as a stern warning (although it didn’t decide the position of 3rd parties) to Australian or overseas investors interested in buying “foreclosure title” properties in the various states of the USA at under value, following the post- GFC fallout. They are not going to be “innocent” of the foreclosure, of which they have notice. They need to be very cautious as to title and have the title examined professionally. It can be disarmingly persuasive to an investor if there is a bank vendor with a purported title. The increased cost of “title insurance” in “registration of title” states to solve concerns has to be factored in and there are risks with title insurance, including the solvency of the insurer as seen with the bankruptcy of “Land America”.

Rather than using the spurious “original wet ink” defence, the better defence would be the “dry pen”. If the borrower never signed the mortgage, because the ink ran out, then that is a complete defence in both Australia and the USA.

Jonathan de Vere Tyndall

Article originally published by New Lawyer Magazine 13/1/2012 . Online copy at

Editors note: The articles published contain comment only and not legal advice, for which you should retain a solicitor. No responsibility is accepted for the accuracy of the contents.