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Higgins v. BAC Home Loans Servicing, LP

United States District Court, E.D. Kentucky, Central Division, Lexington

March 31, 2014

LARRY HIGGINS, et al., Plaintiffs,
v.
BAC HOME LOANS SERVICING, LP, et al., Defendants.

OPINION AND ORDER

KAREN K. CALDWELL, Chief District Judge.

This matter is before the Court on the motion to dismiss filed by the Defendants Bank of America, N.A., JPMorgan Chase Bank, N.A., and Wells Fargo Bank, N.S. (DE 53). There are seven defendants in this action. Although the motion before the Court was filed by only three of them, the remaining four defendants have joined in the motion.

The issue in this case is whether certain Kentucky statutes requiring that mortgage assignments be filed with the county clerk require that all mortgage assignments be filed, including those that occur by operation of law when the underlying note is assigned.

I. Facts

The Plaintiffs are Kentucky homeowners who borrowed money to purchase homes and also pledged their homes as collateral for the loans by way of a mortgage. The Plaintiffs assert that the Defendants violated two Kentucky statutes because the Defendants were assigned the mortgages securing the Plaintiffs' notes but never recorded the assignments with the county clerk. (DE 32, Complaint, ¶¶ 11-40.)

The first statute provides that "[w]hen a mortgage is assigned to another person, the assignee shall file the assignment for recording with the county clerk within thirty (30) days of the assignment" KRS 382.360(3). That requirement is echoed in the second statute which provides that "an assignee of a lien on real property shall record the assignment in the county clerk's office as required by KRS 382.360." KRS 382.365(2).

According to the Plaintiffs, the Defendants are all lenders who are members of Mortgage Electronic Registration Systems, Inc., or "MERS." (DE 32, Amended Complaint ¶ 12.) The Plaintiffs allege, and there does not appear to be any dispute, that MERS was formed by lenders in order to avoid having to record mortgage assignments and pay county clerks the associated recording fees. (DE 32, Amended Complaint ¶ 41.) See Christian Cty. Clerk v. Mortgage Elec. Registration Sys, Inc., 515 F.Appx. 451, 452-53 (6th Cir. 2013).

When lenders who are members of MERS loan money to a borrower to purchase a home, they receive a promissory note from the borrower. The borrower also signs a mortgage which states that it secures to the lender the repayment of the loan and the borrower's performance under the mortgage and the note. (DE 53-2, Mortgage at CM-ECF p. 5.) While the mortgage is intended to provide security to the lender, the mortgage states that MERS is the mortgagee, but "solely as nominee for Lender and Lender's successors and assigns." (DE 53-2, Mortgage at CM-ECF pp. 4-5.) A nominee is the same thing as an agent. BF Avery & Sons Co. v. Glenn, 15 F.Supp. 544, 548 (W.D. Ky. 1936).

The borrower continues to owe the lender under the note and it is the lender that has the right to take action under the mortgage if the borrower should default on its obligations. (DE 53-2, Mortgage at CM-ECF pp. 6, 10.) MERS is the mortgagee in name only. According to the Plaintiffs, MERS acts solely through its "certifying officers, " most of whom are employees of its member banks. (DE 55, Pfs.' Mem. at CM-ECF p. 4.)

The mortgage is then recorded in the local land records with MERS as the named mortgagee. When the original lender assigns the promissory note to a second entity, as long as the assignee is also a MERS member, the MERS database tracks the transfer but neither the assignor lender nor the assignee lender record the assignment in the public records. This is because, according to MERS, the mortgagee remains MERS as nominee for the lender no matter how often the note is assigned. Thus, throughout the assignments of the note, the public records continue to reflect that MERS is the mortgagee. See Christian Cty. Clerk, 515 F.Appx. at 452.

II. Analysis

A. The statutes require that all mortgage assignments be recorded.

The Defendants state in their motion to dismiss that Kentucky courts have "consistently held that MERS complies with Kentucky law." (DE 53-1, Defs.' Mem. at 5.) In support of that assertion, the Defendants cite various cases in which Kentucky court have recognized that the borrower "executed a mortgage with MERS." Hall v. Mortgage Elec. Registration Sys, Inc., 396 S.W.3d 301, 302 (Ky. 2012); Mortgage Elec. Registration Sys., Inc. v. Abner, 260 S.W.3d 351, 352 (Ky. App. 2008).

Other cases cited by the Defendants recognize MERS' status as a nominee for the lender pursuant to the language of the mortgage. In re Jessup, No. 09-50922, 2010 2926050, at *3 (Bankr. E.D. Ky. 2010); Mortgage Elec. Registration Sys., Inc. v. Roberts, 366 S.W.3d 405, 407 n.1 (Ky. 2012); Robinson v. Countrywide Home Loans Servicing, L.L.P., No. 2010-CA-002327, 2012 WL 1142947, at *1 (Ky. App. 2012); McCord v. Countrywide Home Loans Servicing, LP, No. 2009-CA-002048, 2011 WL 832435, at *1 (Ky. App. 2011); Bell v. Countrywide Home Loans, Inc., No. 2010-CA-000347, 2012 WL 1758092, at *1 (Ky. App. 2012); Morgan v. HSBC Bank USA, No. 2009-CA-597, 2011 WL 3207776, at *1 (Ky. App. 2011).

The Defendants also cite case law from other states recognizing that parties can agree that an agent, such as MERS, can act on behalf of the noteholder to enforce rights granted in a mortgage. See Commonwealth Prop. Advocates, LLC v. MERS, 680 F.3d 1194, 1202, 1204 (10th Cir. 2011); In re Trierweiler, 484 B.R. 783, 791-92 (10th Cir. B.A.P. 2012); Edelstein v. Bank of New York Mellon, 286 P.3d 249, 258 (Nev. 2012); Residential Funding Co., L.L.C. v. Saurman, 805 N.W.2d 909, 910 (Mich. 2011).

This case is not about whether MERS is a nominee for the lender pursuant to the language of the mortgage or whether it has the right to enforce the noteholder's rights under the mortgage. Neither of those issues is in dispute in this case. The issue in this case is whether, under Kentucky law, when a MERS member assigns a promissory note to another MERS member, that note assignment effects an assignment of the mortgage that must be recorded. The cases cited by the Defendants that have involved MERS in other states do not address this issue. (DE 53-1, Defs.' Mem. at 8, n.12.) Nor do any of the cases submitted by the Defendants after briefing on their motion to dismiss was complete. (DE 69, Notice of Supplemental Authority.) In fact, neither party has cited any case that addresses the particular issue presented in this one and no case has.

In answering the precise question before this Court, the first issue that must be addressed is whether, under Kentucky law, the assignment of a note secured by a mortgage also transfers the mortgage. If the answer to that question is yes, then the Court must address the second issue which is whether, when a mortgage assignment occurs by way of a note assignment, Kentucky's statutes require that the assignment be recorded.

As to the first issue, the Defendants begin their argument with a section titled, "[T]ransfer of a note does not transfer the mortgage." (DE 53-1, Defs.' Mem. at p. 9.) For this proposition, the Defendants cite Chambers v. Wool Growers Bank, 5 Ky. Op. 758, 1872 WL 10797 (Ky. 1872). In that case, the court recognized two kinds of mortgagees - a "beneficial owner" and a mortgagee that has "legal title" to the mortgage. But the court also specifically recognized that "[t]he benefit of the mortgage passed as an incident when the notes were assigned...." Id. at *1.

It has long been the law in Kentucky, that, when a note is assigned, the assignee obtains "all interest in the mortgage" including "the right to pursue the mortgaged property for the satisfaction of the note." Miles v. Gray, 4 B. Mon. 417, 1844 WL 3490, at *1 (Ky. 1844). "The assignment of a note secured by a mortgage carries with it all the right[s] of [the] mortgagee." Id at *2. The Defendants themselves recognize this in their memorandum when quoting the holding in Drinkard v. George, 36 S.W.2d 56, 57 (Ky. 1930), that "the transfer of the notes operated as an equitable assignment of the mortgage." (DE 53-1, Defs.' Mem. at 10).

The Sixth Circuit has recently made this clear. "Although a promissory note and mortgage deed are separate legal instruments, the Kentucky courts have long recognized that the assignment of a note secured by a mortgage transfers the interest in the underlying mortgage." Christian County Clerk, 515 F.Appx. at 455 (citing Napier v. Duff, 136 S.W.2d 1083, 1085 (Ky. 1939); Drinkard, 36 S.W.2d at 57; Sec. Inv. Co. of St. Louis v. Harrod Bros., 7 S.W.2d 492, 493 (1928); KRS § 355.9-203(7) ("The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the... mortgage, or other lien."); U.C.C. § 9-203(g)).

Again, the Defendants recognize in their memorandum that, under Kentucky law, when a secured note is assigned, so is the mortgage that secures the note. The Defendants focus more on the second issue that the Court must resolve: whether Kentucky statutes require the filing of a mortgage assignment that is effected solely by assignment of the underlying note. The Defendants argue that that the statutes require only the filing of mortgage assignments that happen by way of a writing separate and apart from the note assignment.

In determining whether this is correct, the Court looks first to the language of the statute. United States v. Moore, 567 F.3d 187, 190 (6th Cir. 2000). The applicable provision provides as follows:

When a mortgage is assigned to another person, the assignee shall file the assignment for recording with the county clerk within thirty (30) days of the assignment and the county clerk shall attest the assignment and shall note the assignment in the blank space, or in a marginal entry record, beside a listing of the book and page of the document being assigned. Provided, however, that an assignee that reassigns the note prior to the thirtieth day after first acquiring the assignment may request that the subsequent assignee file the unfiled assignment with the new assignment.

KRS 382.360(3) (emphasis added).

Thus, by its language, the statute applies anytime "a mortgage is assigned to another person." It does not limit itself to instances in which the assignment occurs by a ...


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