Friday, February 1, 2013

MBE Fast Fact: Transfer of Promissory Notes

Suppose X lends money to Y and to secure repayment of the loan, Y provides X with a promissory note secured by a mortgage. X later transfers the note to a third-party (Z). After the note has been transferred to Z, but before Y has received any notice of the transfer, Y sends a check to X as repayment for the loan, and later Z attempts to collect on the note from Y. Can Z collect from Y?

This is one of the *many* angles tested in the area of mortgages on the MBE. The rule to note is that if a mortgagee does not inform the mortgagor that the note has been transferred, then the mortgagor's payment to the original mortgagee (in this example, X) is effective, even though the payment has not been made to the person entitled to enforce the note (in this example, Z). In other words, because Y paid X, Z can not collect from Y.

On the other hand, if X had informed Y of the transfer to Z, but Y not wanting to be bothered decided to pay X anyway, then the payment to X would be ineffective, and Z would be entitled to collect on the note from Y.

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