No Note, No Possession, Conn. Ct. Says

Daily Development for Wednesday, June 25, 2003
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

MORTGAGES; ASSIGNMENT; Connecticut court concludes
assignee of mortgage that lacks possession or formal assignment of note
may not foreclose.

Fleet National Bank v. Nazareth, 818 A. 2d 69 (Conn. App. 2003)

In 1994, Nazareth executed a promissory note and mortgage, securing
repayment of $184,000, in favor of Shawmut Mortgage Company.

Later, Shawmut Mortgage merged with, and became known as, Fleet
Mortgage Corporation. Fleet Mortgage assigned its interest in the
mortgage, but not the note, to Fleet National Bank (which appears to
have been a sister corporation to Fleet Mortgage). Fleet National Bank
then assigned the mortgage to R.I. Waterman Properties, Inc. (which was
a subsidiary of Fleet National Bank, responsible for handling the Bank's
foreclosures).

The Nazareth loan became delinquent and Fleet National Bank filed an
action for judicial foreclosure. In due course, Waterman Properties was
substituted as plaintiff in the judicial foreclosure action.

At trial, defendants Nazareth claimed that Waterman Properties lacked
standing to bring the action because it was not a holder of the underlying
note. The court stated that it was "undisputed" that Fleet Mortgage was
still the holder (i.e., owner) of the note, while Waterman Properties was
holder (i.e., owner by assignment) of the mortgage. It appears Waterman
Properties argued that failure to assign the note with the mortgage was
clearly an oversight. The trial court ruled in favor of Waterman
Properties, and defendants appealed.

The Court of Appeals reversed, holding there is no legal authority for the
assignee of a mortgage to foreclose absent proof of assignment of the
underlying note. The court distinguished prior Connecticut cases
upholding enforcement of a mortgage where the holder was shown to
have an interest in the underlying note but, as in one case, the note was
lost.

Likewise, the Court said the Connecticut statute permitting a note holder
to foreclose a related mortgage, even though the mortgage has not been
assigned, did not help Waterman Properties in this 'opposite' situation.
Said the Court, "(w)e conclude, therefore, that the legislature did not
intend to permit the holder of the mortgage, without having been
assigned the note, the ability to foreclose on the property." (See
Connecticut General Statutes section 49-17.)

Reporter's Comment: There's a familiar rule that "the security follows
the debt,"
or the mortgage interest goes with the note, but, as illustrated in this case,
the converse may not always be true.

I'll confess this result doesn't make perfect sense to me. Wouldn't it seem
that assignment of the mortgage evidences an intention to assign at least
some part of the underlying debt? If not, why was the mortgage
assigned? Rhetorical question--or at least one, in Connecticut anyway, to
be put to the legislature rather than a court.

A tough result for mortgage assignees, and their lawyers, who may seek
to enforce mortgages that have been passed through now defunct
corporations, with neither records nor witnesses to explain what was
intended.

Editor's Comment 1: The critical fact to the editor here is the statement
in the opinion that it was "undisputed" that the party bringing the
foreclosure action was not the owner of the obligation.

Editor's Comment 2: The prevailing rule is to assume that the parties
intended to assign the debt along with the mortgage, even if there is no
evidence of anything by the mortgage assignment. Nelson and Whitman
discuss this concept and cite cases in their treatise: Real Estate Finance
Law pp 373-374 (4th Ed. West 2001) They also recommend this approach
in the Restatement of Mortgages, Sec. 5.4b. This presumption solves
most problems. But it does not solve the problem where the holder of
the debt does not agree that it is no longer the owner of the debt and
insists that it assigned the mortgage separately. In that case, then at best
the owner of the debt ought to be an additional party plaintiff in the
mortgage foreclosure action. At worst, the transfer is a nullity and only
the debt holder can foreclose. For this more conservative position that
the transfer is a nullity, the minority rule, Nelson and Whitman cite case
law in Florida, Arizona, New York, California, Indiana, and South
Dakota. Even though a minority rule, when you've got New York and
California following it, you've got a rule with some "legs."

Editor's Comment 3: The lender brought this on itself by establishing a
foreclosure method that seemed quite likely to fail, especially in a title
theory state like Connecticut. The editor wonders why the lender would
take this case up on appeal rather than clean up the ownership problem -
either transferring the note to the foreclosing party or transferring the
mortgage to the note holder and then reforeclosing. Maybe there were
statute of limitations issues or bankruptcy issues, but that does seem to
have been a smoother path.

The reporter for this item was Bert Rush of First American Title in
California, writing in the First American newsletter, Landsakes.

Readers are encouraged to respond to or criticize this posting.

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