Provident Bank v. Morequity, Inc.

Citations: 585 S.E.2d 625; 262 Ga. App. 331; 2003 Fulton County D. Rep. 1831; 50 U.C.C. Rep. Serv. 2d (West) 1205; 2003 Ga. App. LEXIS 731Docket: A03A0192, A03A0193

Court: Court of Appeals of Georgia; June 13, 2003; Georgia; State Appellate Court

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Provident Bank initiated a lawsuit against MorEquity, Inc. to recover loan documents, specifically a promissory note related to a mortgage, and to reclaim payments made to MorEquity. In response, MorEquity cross-claimed against Residential Funding Group, Inc. and its CEO Frank Stokes. Both parties sought summary judgment, with the trial court favoring MorEquity and dismissing Provident's claims as moot. Upon review, it was determined that Provident's security interest in the note superseded any claims by MorEquity. The court reversed the trial court's decisions, asserting that MorEquity was not a holder in due course and thus could not claim the note free of Provident's interest, despite MorEquity having compensated Residential for the mortgage. The evidence indicated that Provident had a secured interest in the mortgage loans, which included the notes, reinforcing its claim over MorEquity’s interests. The court also reversed the dismissal of MorEquity's claims against Residential and Stokes.

Provident appeals the denial of its summary judgment motion and the grant of summary judgment to MorEquity regarding a note and its security interest. Provident claims it conditionally provided the note to MorEquity under a bailment letter while maintaining a perfected security interest and argues that MorEquity cannot be a holder of the note since it was not negotiated. MorEquity contends that Provident authorized the sale of the note by Residential, free of any security interest. The appeal centers on the prevailing security interest in the note, governed by the Uniform Commercial Code (UCC), which defines the note as a negotiable instrument.

Under the UCC, a security interest may be perfected, but holders in due course have priority over earlier security interests. A holder in due course is defined as one who takes the instrument for value, in good faith, and without notice of claims. Although MorEquity purchased the mortgage and underlying note in good faith and for value, it was not in possession of the note at the time of the purchase. Upon obtaining the original note, MorEquity was aware of Provident's claim, disqualifying it as a holder in due course.

MorEquity's argument that its position eliminates Provident's security interest fails, as Provident authorized the sale of the mortgage loan only subject to its security interest. The court held that a security interest persists in collateral unless explicitly authorized otherwise. Since MorEquity was not a holder in due course and Provident maintained its security interest in the note, MorEquity could not take priority. Consequently, the court reverses the summary judgment granted to MorEquity and the denial of Provident's motion.

In a related case, MorEquity's appeal of the dismissal of its cross-claim against Residential and Stokes is also reversed, as this claim is now pertinent following the previous ruling. All judgments are reversed.