Daily Development for Tuesday, November 9, 1999

Daily Development for Friday, November 30, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

The first response I got to this pointed out an important typo. FGB, the recorded holder of the deed of trust, was the agent of Nomura, not the agent of the FDIC. Sorry.

Thanks to Jim Davis of the D.C. bar for this case, which his firm won.

MORTGAGES; ASSIGNMENTS; PRIORITIES: Holder of two notes secured by same deed of trust may separate the deed of trust security from one of the notes while retaining it on the second, and assign one note secured and second note unsecured.

Crosby v. First Bank of Beverly Hills, D.D.C. Civil Action 98-82 (RCL) 3/25/99)

This fascinating unpublished opinion likely is one of the first shot in what is likely to be a long series of engagements in this Brave New World of secured mortgage loans being traded more frequently than bubble gum cards.

The facts are complicated, but necessary to appreciate the issues:

Footes executed two notes to Roosevelt Bank, one for $90,000 and one for $70,000. As security for the entire $160,000 debt, Footes gave a recorded deed of trust on two properties - the 11th Street Property and the S Street Property. Roosevelt Bank failed a few years later, and the FDIC took over the assets.

FDIC then packaged a "bundle" of secured notes for a public bid. It originally included both notes in the package, but before the auction withdrew the $70,000 note (perhaps because it was in default at that time - the facts are not clear as to why). Nomura bought the package. In connection with the sale, the FDIC executed a form "Assignment of Mortgage/Deed of Trust." This document stated that the FDIC: "grants, assigns and transfers to [Nomura] all of [FDIC's] right title and interest in an to that certain Deed of Trust/mortgage listed in Exhibit 1, attached hereto, together with the note or notes described or referred to in the said Deed of Trust/Mortgage, the money due and to become due thereon with interest, and all rights accured under the said Deed of Trust/Mortgage, without recourse."

The court's quote from the assignment suggests that it was an individual assignment document for one deed of trust, but it was clearly form language. The assignment was recorded in November, 1993. The FDIC also delivered possession of the $90,000 note to Nomura.

In January, 1994, Nomura recorded an assignment of its interest in the $90,000 secured note to its mortgage loan servicer, FGB Realty Advisors, Inc.

At about the same time, the Foote sold the 11th Street Property to Crosby. Crosby's settlement attorney contacted FGB to obtain payoff information for the deed of trust. FGB agreed to release the property from the deed of trust for a payment of $80,000. It appears that this amount was not enough to retire the outstanding balance on the original $90,000 note, but was a partial payment for which FGB agreed to release the lien on the 11th Street Property The money was paid to FGB out of the settlement, but it never issued a release. Just before receiving the payment, FGB transferred the debt and deed of trust to Fairbanks Capital Corporation. It is unclear from the case exactly what Fairbanks thought that it was buying, but it is likely that it thought that it was buying the balance owed on the $90,000 note.

About a year later, the Footes sold the S Street property to Johnson. Johnson's settlement agent contact FGB, the record holder of the mortgage, which referred the agent to Fairbanks. Fairbanks demanded payment of $37,8000 to payoff the outstanding balance on the note. The Fairbanks letter stated: "[p]lease forward payoff funds to [Fairbanks] and I will make sure the collateral is released." At the closing, in February, 1995, the agent paid the money to Fairbanks, but by then the deed of trust had been transferred back to FGB, and Fairbanks forwarded the payoff to FGB, which then recorded a reconveyance of the deed of trust (remember that FGB had been the record holder of the deed of trust for some time.) The reconveyance stated on its face that the original $160,000 indebtedness [yes the entire $160,000] had been paid in full and that as a consequence FGB, "the legal and equitable holder of said Deed of Trust does hereby reconvey . . . " The reconveyance was delivered in October of 1995.

Remember that all this time the other note, for $70,000, was still outstanding. In April, 1995, the FDIC endorsed the note to Wilshire, and executed an assignment, dated September 15, 1995, transferring the deed of trust to Wilshire as well. According to the court, this assignment does not show in the record, though another document in the record refers to it and indicates that the assignment was recorded on October 1, 1997 [yes 1997 - although the court may have this date wrong].

The holders of the $70,000 note sought to have the note paid and threatened to foreclose the deed of trust on both properties, triggering a quiet title action from the owners of those properties [ or, presumably, from their title insurers].

The holding is far less complex than the facts. The court held for the property owners, ruling that the deed of trust on both properties had been fully released by the actions involving FGB or its agents, since the FDIC has transferred the deed of trust with the assignment of the first note, severing it at that time from the second note. The court left to other proceedings the question of whether the $70,000 note was valid, and whether FDIC had any liability to the assignees of that note.

The court stated that after the 1993 assignment to Nomura, FDIC had no interest in the deed of trust, and consequently its later assignment to Wilshire was a nullity. The court acknowledged that the normal rule, as set forth in the Restatement, is that a mortgage follows the assignment of a note, and admitted that the $70,000 note had been validly assigned to Wilshire. But the court concluded that the FDIC had "stripped" the note of its security when it transferred "all of the [FDIC's] right title and interest] to Nomura in 1993.

Comment 1: The court goes right past the problem that the assignment language upon which it relies also purported to transfer all of the notes secured by the Deed of Trust, even though only one note had been transferred. It is very likely that Nomura in fact was aware of the fact that the $70,000 note had been removed from the package, as this happened during the offering process, so Nomura was under no illusion that the $70,000 note was being sold to it. Doesn't this render the entire assignment ambiguous? How can the court rely upon the language "all right title and interest" when demonstrably the FDIC was not transferring all its interest in the note?

Comment 2: Of course, at the time of the sales of the secured properties, the record relating to ownership of the deed of trust was clear. The FGB Realty Advisors were the owners of record of the deed of trust. Crosby and Johnson, purchasers of the secured properties, relied upon the record. If D.C. is a "notice theory" state (is it?) then the receipt of a release from FGB likely made them BFP's and would have cleared their title.

But Crosby never received an executed release. Johnson may be better off, if the court's dates are correct. Johnson received an executed release prior to there being any record information suggesting that FGB was not the owner of the deed of trust. But there is no indication that either Crosby or Johnson ever recorded releases, so if D.C. is a "race/notice" state, then they may not be protected as BFP's under the recording acts versus Wilshire (assuming Wilshire indeed did properly record its assignment of deed of trust in a chain of title that makes sense [again - no information in the opinion].

Comment 3: In attempting to push the entire steaming problem to the doorstep of the FDIC, the court probably had the correct instinct. Further, it probably is correct that a holder of a secured note has the power to strip away the security before transferring the rights under the note, and there seems to be no reason why the holder couldn't strip away the security for one of two notes secured by the same deed of trust. But there is some cognitive disonance in the court's holding that an assignment purporting to be a transfer of "all right title and interest" in two notes and a deed of trust securing them can be viewed as a transfer of only one of the notes, and simultaneously a transfer of all the deed of trust rights. That was not what the FDIC intended. The language upon which the court relies is ambiguous.

It's a good thing no one is likely to pay much attention to this case. (Cross your fingers.)

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