November 9, 2015
by Bill L. Purtell
Lerner, Sampson & Rothfuss
USFN Member (Kentucky, Ohio)
The federal Sixth Circuit Court of Appeals has ruled that a transfer of the note amongst MERS members does not trigger the requirement under Kentucky law to record an assignment of the mortgage. In a 3-0 decision, the Sixth Circuit analyzed Kentucky’s mandatory assignment recording statute, KRS 382.365, and determined that it only applies to written transfers of the mortgage and not to transfers of equitable interests held by a noteholder. A class action suit had been filed against MERS asking for damages of $500 for each assignment of mortgage that was not filed within thirty days of the transfer of the note. This would have resulted in millions of dollars of damages to MERS, and a dismantling of the MERS system in Kentucky.
The Facts — The case, Higgins v. BAC Home Loans Servicing, LP, 2015 U.S. App. LEXIS 12275, 2015 FED App. 0153P (6th Cir. Ky. 2015), stems from a putative class action filed by a homeowner (Higgins) seeking damages because his mortgage was with MERS, but his note was sold to various MERS members. KRS 382.365(2) requires an assignee of a mortgage to record the assignment within thirty days of the assignment. The law authorized Higgins to seek monetary penalties against a mortgagee who fails to comply with this statute.
Higgins asserted that the “mortgage follows the note,” creating an equitable transfer of rights in the mortgage every time a note is sold. Higgins contended that this transfer triggers the requirement to record an assignment. MERS moved to dismiss the case, maintaining that the legislature only intended for written assignments of the mortgage to be recorded, not the transfer of equitable rights that occurs when a note is transferred. The Eastern District of Kentucky sided with Higgins and determined that MERS had a duty to record an assignment every time a note was transferred.
The Sixth Circuit reversed the district court and held that the Kentucky legislature only intended that written assignments of mortgage be recorded with the county clerk. Notes and mortgages are treated differently under Kentucky law, so that the recording statute for mortgages did not apply to transfers of the note under Kentucky’s Uniform Commercial Code. If case law created an equitable transfer of the mortgage, this was not sufficient to trigger the recording statute for mortgages.
Key Points — The Sixth Circuit reiterated Kentucky law: the holder of a note has the power to enforce the mortgage, even in the absence of a written assignment of mortgage. The Sixth Circuit also gave a major victory to MERS and its system by making it unnecessary to record an assignment whenever a note is transferred amongst MERS members.
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