Daily Development for Wednesday, October 25, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

BANKRUPTCY; AVOIDANCE; PERFECTION: Assignment of a mortgage is perfected without recording, and its recording thereafter does not violate the automatic stay. 

In re Cook: Rogan v. Bank One, 457 F.3d 561 (6th Cir. 2006)

Cooks gave a mortgage to NCS in 2000, which was promptly recorded.  A year later, NCS assigned the loan to First Greenwood, and that assignment also was promptly recorded.  The same day, First Greenwood endorsed the note in blank and 9apparently) delivered it and the mortgage to Lehman Brothers, who conveyed it and many other loans to Structured Assets Securities, which transferred them to Bank One as trustee as part of a “pass through” certificate - a form of mortgage securitization.  Bank One took possession of the note, but no assignment was recorded at that time.  Cooks had filed bankruptcy in 2003, and the assignment to Bank One was not recorded until 2004.

Cooks bankruptcy trustee contended that he could “strong arm” Bank One’s security interest from his position as a hypothetical judicial lien creditor.  He claimed that Bank One’s security interest was not perfected because the assignment had not been recorded at the time of the filing.  The bankruptcy court and the district court rejected this claim, but the trustee bumbled ahead and appealed to the federal court of appeals (spending who knows how much of the estate’ assets that would have been available for creditors.)

The Sixth Circuit also rejected the trustee’s claim.  It noted that the endorsement in blank made the note bearer paper under the applicable UCC provision.  Consequently the note was negotiable by transfer of possession alone.  (3-205(2)).  A purchaser of an instrument who gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the right of another secured party has priority over the secured party.  (9-330(4)).   Consequently, Banc One’s interest was perfected.

The court acknowledged that the Trust Agreement under which Lehman Brothers had conveyed the loans to Structured Assets Securities called for the mortgages to be recorded, and that no assignment had been recorded until after the debtor filed.  But neither Cooks nor Bank One were parties to the Trust Agreement, and its recordation requirement was immaterial as to their interests.  But the recording of the original mortgage was all that was necessary to give constructive notice to hypothetical lien creditors and others interested in Cook’s property that there was a mortgage on the property.  It was not necessary to record any assignment, much less that made to the trustee, in order to “perfect” the mortgage as against competing interests in Cook’s property.  

Further, the court, citing Kapila v. Atlantic Mortgage, 184 F 3d 1335 (11th Cir. 1999), concluded that the recording of the assignment post bankruptcy did not violate the automatic state.  The recording of a mortgage assignment is not a transfer nor an attempt to perfect legal title to the debtor’s property; it affected only Bank One’s own equitable interest in the mortgage, which was not part of Cook’s estate. 

Comment 1: As suggested above, the editor views the conclusion in this case as preordained, and the effort to strong arm the mortgage was doomed to failure.  Consequently, all those appeals were a waste of money the other creditors of the estate might have liked to have.  Of course, there may have been other issues and other authorities that gave the case more weight (the requirement of recordation in the trust agreement is a special fact of interest) so it is difficult to make any final judgment on the wisdom of the trustee’s actions as we aren’t sitting in his seat.  But the basic law outlined by the court on the subject of perfection of mortgage interests is quite clear.

Comment 2: Recordation of the mortgage in the land records is not of critical significance to a debtor.  As a practical matter, what a debtor really needs to know is the identity of the servicer.  Notice of changes in servicers are required by federal law.  In the modern world of mortgage securitization, the mortgage note may change hands many times on its way to a mortgage pool, and the benefits of securitization for borrowers would not be realized if all mortgage assignments had to be recorded.  In fact, a striking fact of this record is that the note actually transferred with each assignment until it reached the pool held by the trustee.  This is good practice, but doesn’t always happen.

Comment 3: Note that perfection of the mortgage against subsequent takers of the mortgagor’s property is a different question from perfection of the assignment against competing assignees for security.  This can be accomplished either by possession of the note or by recording a “realty paper” filing as a UCC filing. 

Readers are encouraged to respond to or criticize this posting.

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