Vermont Judge: 'Mortgage Does Not Follow Debt' Where Banksters Intend Otherwise; Failure To Assign Security Agreement With Note Stalls Foreclosure

In states where the common law provides that a transfer of a secured promissory note generally carries with it an equitable assignment of the mortgage securing it (ie. "mortgage follows the note"), does this mean that the mortgage will automatically follow the secured note upon the transfer of the latter?

The answer clearly is no, at least not according to Rutland County, Vermont Superior Court Judge William Cohen in a 2009 court ruling in which Judge Cohen refused to allow CitiMortgage to foreclose on a home where, although it obtained an endorsement of a secured note, there was no evidence that it also obtained a corresponding assignment of the mortgage, which was held by MERS.

From Judge Cohen's ruling (bold text is my emphasis):

• Regarding the mortgage deed, “[a] transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise.” Restatement (Third) of Property, Mortgages § 5.4(a). The objective of this rule is to keep the obligation and the mortgage in the same hands unless the parties wish to separate them. Id. at cmt. b.
  
  Here, the parties split the Note and Mortgage Deed; Flagstar Bank retained the Note, which it later indorsed to CitiMortgage, while MERS held the mortgage deed, becoming the mortgagee of record.
  
  Separation of the obligation from the mortgage results in a practical loss of efficacy of the mortgage. Restatement (Third) of Property, Mortgages § 5.4 cmt. a. When the right of enforcement of the note and the mortgage are split, the note becomes, as a practical matter unsecured. Id. The result confers an unwarranted windfall on the mortgagor. Id.
  
  Here, the Note is enforceable by CitiMortgage, but the assignment of the Mortgage Deed from MERS to CitiMortgage has not been filed. CitiMortgage must prove that MERS assigned it the Mortgage Deed; thereby reuniting the obligation and mortgage deed that secures it in the same hands.(1)

In denying CitiMortgage's request to foreclose, Judge Cohen gave it 30 days to get the assignment and submit it to the court; failing that, he would vacate an earlier-entered default judgment.(2)

For the ruling, see Citimortgage v. Bischoff, No. 255-4-09 Rdcv, 2009 Vt. Super. LEXIS 2 (Vt. Super. Ct. Oct. 28, 2009).

(1) Judge Cohen's ruling is consistent with the case law that appears to exist in at least a couple of other "mortgage follows the note" states. See, for example: (bold text is my emphasis):

• Arkansas: Leach v. First Cmty. Bank, CA07-05, 2007 Ark. App. LEXIS 671 (Ct. App., Div II, 2007) (unpublished):
  
  Arkansas has long followed the rule that, in the absence of an agreement or a plain manifestation of a contrary intention, the security of the original mortgage follows the note or renewal thereof, [...] Simpson v. Little Rock North Heights Water District No.18, 191 Ark. 451, 86 S.W.2d 423 (1935).
  .
• Florida: WM Specialty Mortg., LLC v. Salomon, 874 So. 2d 680 (Fla. App. 4th DCA, 2004): A Florida appeals court, quoting from the state Supreme Court ruling in Johns v. Gillian, 134 Fla. 575, 184 So. 140, 143 (Fla. 1938):
  
  However, it has frequently been held that a mortgage is but an incident to the debt, the payment of which it secures, and its ownership follows the assignment of the debt. If the note or other debt secured by a mortgage be transferred without any formal assignment of the mortgage, or even a delivery of it, the mortgage in equity passes as an incident to the debt, unless there be some plain and clear agreement to the contrary, if that be the intention of the parties.
  .
• Minnesota: Jackson v. Mortg. Elec. Registration Sys., N.W.2d 487 (2009):
  
  We have held that, absent an agreement to the contrary, an assignment of the promissory note operates as an equitable assignment of the underlying security instrument. First Nat'l Bank of Mankato v. Pope, 85 Minn. 433, 434-35, 89 N.W. 318, 318-19 (1902).

In Jackson v. Mortg. Elec. Registration Sys., the Minnesota Supreme Court makes an interesting observation that reinforces this point that they bury in an excerpt from footnote 5 of their opinion:

• It is worth noting that the case law contains a caveat for situations in which an agreement to the contrary has been made. First Nat'l Bank of Mankato, 85 Minn. at 435, 89 N.W. at 319.

It therefore appears fair to propose that in some (maybe most) "mortgage follows the note" states, the mortgage really doesn't follow the note where the intent of the parties was to split the two instruments.

Contrast these cases with U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637; 941 N.E.2d 40 (January 7, 2011), where the Massachusetts Supreme Judicial Court reaffirmed longstanding law that, in Massachusetts, the transfer of the promissory note does not operate as an equitable assignment of the underlying mortgage (ie. Massachusetts is not a "mortgage follows the note" state), and consequently, a foreclosing party must hold both instruments to commence a valid foreclosure in all cases.

(2) Inasmuch as it is always the intent for the note and the mortgage to be split apart in these MERS-fiasco cases, it may be that MERS-related foreclosures in "mortgage follows the note" states can't go forward unless the party seeking foreclosure can show that it holds both the note and the mortgage, and that it isn't enough for the foreclosing party to simply assert that the transfer of the promissory note automatically operates as an equitable assignment of the underlying mortgage/deed of trust.

Based on the foregoing, it appears to be incumbent on homeowners' attorneys to vigorously raise the issue of "intent to split note and mortgage" when briefing their MERS-related cases, particularly in those circumstances where foreclosure has already taken place and a voiding of the foreclosure sale (and possibly, any subsequent sale of the foreclosed home to unwitting third parties) is being sought.

It may be that, in MERS-related situations in "mortgage follows the note" states where the foreclosing party failed to prove it held both the promissory note (by a proper endorsement) and the mortgage (by an effective assignment), and the foreclosure sales have already taken place, foreclosing lenders (as well as subsequent unwitting third party purchasers of the foreclosed homes) in those states may find themselves holding the same bag that their bretheren in Massachusetts wound up holding after the ruling in Ibanez came down in January.