A Contract Modification May Not Have the Same Rules as the Original Contract

Every now and then there are cases that seem like they not only affect legal scholars, but also have a tangible, real world effect on everyday people.

Such was a recent case that determined that a loan modification was not a negotiable instrument, the way a promissory note is.

What’s a Promissory Note?

Let’s back up a minute. A promissory note and some contracts need to be proved in court with an original. There are some exceptions when a document has been lost or destroyed, but a suing plaintiff that doesn’t have an original document needs to show how the document was lost or destroyed, or else they can’t sue on the contract.

This is because most home mortgage loans are represented by what are known as negotiable instruments–contracts with special rules and particular legal definitions. An original of a negotiable instrument must be produced at court, and one of the reasons is to submit the note to the court so it’s not floating around the stream of commerce, being bought and sold even after it’s used to get a judgment.

Home Loan Modifications

But as you may remember, during the foreclosure crisis, a large number of home loans had modifications made to them altering the terms of payment. That is, a homeowner would often get a modification to a loan, but subsequently default on the modification. Thus, many foreclosures would involve the original loan and the modification to it.

There was long some confusion over whether the loan modification was the same as the original promissory note–that is, was the modification also a negotiable instrument? Did the original have to be submitted? What happens when a plaintiff/bank had an original home loan but just a copy of a modification?

Court Case Says Only a Copy of Modification is Needed
A court recently made just that decision. While noting that a modification contract is just as important as the promissory note, and while noting that the bank still had to produce evidence of the modification, a bank could, in fact, foreclose with an original of the promissory note but just a copy of a modification agreement.

A modification agreement simply was not the same thing as a negotiable instrument the way a home loan is, and thus, while the bank would have to prove its terms, the requirement that the exact original be filed was not necessary.

Remember that this case was in terms of a home loan. It may not have applicability in other areas, especially where parties modify a negotiable instrument by providing an amendment or modification which is also a negotiable instrument. Still, knowing the difference between both can help your business sue on debts that may be owed to them.

Do you have questions about contracts, agreements or loans, or enforcing your rights under a loan? Do you need loan agreements drafted or reviewed? Contact Tampa estate and tax attorney David Toback to discuss your business documents and enforcement rights.

Resource:

law.cornell.edu/wex/negotiable_instruments