August 29, 2014
by Patricia Lonzo
Gray & Associates, L.L.P. – USFN Member (Wisconsin)
The Wisconsin Supreme Court upheld the long-standing theory of equitable assignment resulting in a victory for PHH Mortgage Corporation and, in turn, a victory for MERS in Dow Family, LLC v. PHH Mortgage Corporation, 2014 WI 56, 848 N.W.2d 728 (July 10, 2014). The court concluded that old law is good law as it pertains to equitable assignment. Having affirmed that equitable assignment is “alive and well in Wisconsin,” the majority opinion did not take issue with the MERS assignment. This decision exemplifies why it is important to maintain possession of the note and the records surrounding its custody. Possession of the properly endorsed note is what will win a case.
Dow Family has a unique set of facts. The court of appeals decision was previously reported on in the USFN’s September 2013 e-Update; therefore, the facts of this case might sound familiar to you. Dow Family purchased a property from PHH’s borrower. During that transaction Dow Family obtained a title commitment that indicated that there were three mortgages on the property. The commitment showed that the first and third mortgage were to US Bank. The mortgage in first lien position was actually to MERS as nominee for US Bank. This first mortgage is the mortgage now held by PHH. The mortgage was assigned to PHH from MERS after the Dow Family purchased the property. While the assignment was recorded after Dow purchased the property, PHH had been transferred the note and servicing of the loan shortly after its origination years earlier.
Dow Family had been convinced by the seller’s attorney that the first mortgage on title had been paid off in full by the subsequent mortgage on title to US Bank. The closing went ahead and Dow Family purchased the property without obtaining a satisfaction or release of the PHH mortgage. Nor were any closing funds applied to satisfy the PHH mortgage. The PHH Mortgage borrower then immediately defaulted on his mortgage. Once the true facts were revealed, that the first mortgage on title had not been paid off by the subsequent US Bank mortgage, Dow Family filed an action to extinguish the lien on the property and PHH initiated a foreclosure action.
The attorney for the Dow Family sought to paint his client as a victim of the MERS system. A system that, Dow Family argued, was unfair, deceptive, and deserving to be rejected in Wisconsin. Dow Family advanced a number of legal arguments attempting to support their position, including that the note and mortgage were separated and, alternatively, that the statute of frauds was violated resulting in an unenforceable mortgage.
Instead of rejecting the MERS system, the court rejected Dow Family’s arguments. The court found that equitable assignment is a valid legal theory stemming back to the 1800s in Wisconsin case law. The legal theory of equitable assignment focuses on the fact that the note is an inherently valuable document. When the note is transferred, the mortgage is transferred with it. The right to enforce the mortgage is equitably assigned to the new note holder by operation of law when the note is transferred. Assignments out of MERS do not typically take place until an event occurs making the assignment necessary, which may be years after the note was transferred. The court further found that equitable assignment has been codified in the Wisconsin Statutes in § 409.203(7).
The Dow Family decision strikes down the various legal arguments centered on the time delay between the transfer of the note and the recording of an assignment of mortgage. The lesson from Dow Family is not a new one but its importance cannot be overlooked; possession and production of the original note when necessary are crucial in a foreclosure action.
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