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From Banking and Finance Law Daily, April 1, 2014

Kentucky law requires that all mortgage note assignments be recorded

By Richard A. Roth, J.D.

A U.S. district judge has handed a rare setback to Mortgage Electronic Registration Systems, Inc.’s business model, deciding that Kentucky law requires all mortgage note assignments to be filed with the county clerk, whether the mortgage is transferred separately or not. While the complaining homeowners will not be permitted to seek an injunction against the practice of not recording note assignments, they will be able to pursue damages for creditors’ failure to file (Higgins v. BAC Home Loans Servicing, LP, March 31, 2014, Caldwell, Chief Judge).

As described by the judge, MERS was formed by lenders as a way to avoid recording successive mortgage assignments. When a MERS member lender extends a mortgage loan, the homeowners sign a note promising to repay the lender and a mortgage giving MERS a security interest as the lender’s nominee. If the original lender then assigns the note to another creditor that also is a MERS member, the assignment is noted in MERS’ records, but nothing is filed in any public records because MERS remains the mortgagee.

The homeowners claimed that this practice violated two Kentucky laws. The first law says that when a mortgage is assigned, the assignee must file the assignment for recording with the county clerk (KRS 382.360(3)). The second law provides that an assignee of a lien on real property must record the assignment in accordance with the first law. The homeowners asserted that under these two laws, all assignments of real estate liens must be recorded, even if the assignment is by operation of law and is not evidenced by any separate written instrument.

MERS business model. The judge noted initially that the issue was not whether MERS’ method of operation was legal. It was clear that MERS could act as a nominee for lenders, the judge said, even to the extent of enforcing security interests granted by mortgages. The issue was whether, under Kentucky law, a creditor’s assignment of a note secured by a mortgage effected an assignment of the mortgage itself that was to be recorded. This was a matter of first impression.

Assignment of mortgage. The first question was whether assigning a note secured by a mortgage automatically transferred the mortgage, the judge said. Under Kentucky law, the assignee of a note secured by a mortgage obtains all of the interest in that mortgage, including the right to rely on the security to collect the amount due. The creditors did not raise a substantial argument that the mortgage not was assigned, the judge said.

Recording requirement. The second, and contested, question was whether such an assignment of a mortgage was to be recorded. The creditors argued that only written assignments were to be filed and recorded. The judge disagreed.

According to the state law, “When a mortgage is assigned to another person, the assignee shall file the assignment for recording with the county clerk . . .,” the judge pointed out. There was no requirement of a written document other than the assignment of the note.

Under Kentucky law, notes and mortgages are assigned together, the judge said, and the assignment of the note by itself would operate to assign the mortgage. If the only document involved was the note assignment, then the note assignment should be recorded.

This result was consistent with the state’s intent to create and maintain accurate records of real estate ownership, the judge continued. The recording requirement, which had been added in 2006, was intended to ensure that property owners could learn to whom loan payoffs should be sent and from whom mortgage releases could be obtained.

Unwritten assignments. The fact that a note assignment could be accomplished by delivery of a note endorsed in blank, without any written transfer, did not change the judge’s opinion. The note still could be presented to the county clerk to be recorded by a notation in the blank space or margin of the records.

Remedies. The homeowners could sue creditors that had not recorded assignments even if they had not paid off their loans, the judge then decided. A creditor’s failure to record a release was not the only actionable failure. The state law explicitly permitted a suit by any property owner, and made the creditor liable for up to three times the owner’s actual damages, attorney fees, and costs, with a minimum award of $500.

However, since the state law explicitly authorized suits for damages but said nothing about equitable relief, the homeowners’ request for an injunction was dismissed.

Conspiracy. The homeowners also will be able to proceed with their claim that the creation of MERS was a civil conspiracy to unlawfully avoid paying recording fees. Their assertion that MERS had been formed to avoid recording assignments and paying fees and that each of the creditors was an active participant in MERS was enough to outline a conspiracy, the judge said.

The case is No. 12-cv-183-KKC.

Attorneys: Carroll M. Redford, III (Miller, Griffin & Marks, PSC) for Larry Higgins. Christopher Tyson Gorman (Wyatt, Tarrant & Combs, LLP) for BAC Home Loans Servicing, LP. Dustin E. Meek (Tachau Meek PLC) for JPMorgan Chase Bank, NA. Christina A. Ames (Stites & Harbison, PLLC) for Wells Fargo Bank, NA. Jill L. Nicholson (Foley & Lardner, LLP) for Federal National Mortgage Association.

Companies: BAC Home Loans Servicing, L.P.; Bank of America, N.A.; JPMorgan Chase Bank, N.A.; Mortgage Electronic Registration Systems, Inc.; Wells Fargo Bank, N.S

MainStory: TopStory ConsumerCredit Loans Mortgages KentuckyNews

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