Dow Family, LLC v. PHH Mortgage Corporation

Citations: 354 Wis. 2d 796; 2014 WI 56; 2014 Wisc. LEXIS 694; 84 U.C.C. Rep. Serv. 2d (West) 87; 848 N.W.2d 728Docket: 2013AP000221

Court: Wisconsin Supreme Court; July 10, 2014; Wisconsin; State Supreme Court

Original Court Document: View Document

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In the case Dow Family, LLC v. PHH Mortgage Corporation, the Supreme Court of Wisconsin reviewed an appellate decision concerning a disputed mortgage on a condominium purchased by Dow in 2009. After the purchase, PHH Mortgage Corporation claimed the property was still encumbered by an unsatisfied mortgage from 2001. Dow contended that the mortgage was unenforceable, arguing that even if PHH held the underlying note, it did not hold the mortgage necessary to initiate foreclosure. Dow highlighted that the sellers' attorney incorrectly informed them about the mortgage status, causing confusion during the transaction. Dow sought a declaratory judgment asserting that the 2001 mortgage did not constitute a lien at the time of purchase, citing the statute of frauds which requires written documentation for mortgage assignments. PHH argued it had received the note by assignment in 2001 and maintained that the mortgage followed the note under the doctrine of equitable assignment, which needed to be evaluated for its validity in Wisconsin law. The Supreme Court affirmed the Court of Appeals’ decision and remanded the case to the circuit court for further proceedings.

The Wisconsin courts affirm the doctrine of equitable assignment, stating it is valid and applicable in the state, supported by both case law and Wis. Stat. 409.203(7), which governs liens securing payment rights. The courts concluded that equitable assignment does not create unfairness to Dow and does not conflict with the statute of frauds in Wis. Stat. 706.02, as it occurs by operation of law, satisfying an exception to the statute. The circuit court, led by Judge James D. Babbitt, ruled in favor of PHH, stating there were no material facts in dispute regarding PHH's holding of the note and the equitable assignment of the mortgage to them in 2001. The court granted PHH's summary judgment for foreclosure, as the mortgage was unsatisfied during a 2009 sale. 

The court of appeals upheld parts of the circuit court's decision, referencing historical case law to support the existence of equitable assignment. However, it reversed the summary judgment, indicating that PHH had not demonstrated its ability to enforce the note, specifically lacking authenticated documentation. The court declined to address PHH's undeveloped arguments regarding self-authentication and remanded the case for further proceedings to determine PHH's enforcement capabilities.

Dow appeals on the basis that the doctrine of equitable assignment, if recognized in Wisconsin, cannot override the statute of frauds, which mandates that mortgage assignments be in writing. Dow argues that since the statute of frauds cannot be circumvented by equitable assignment, no valid lien existed upon Dow’s purchase of the condominium, thereby preventing PHH from foreclosing. 

In 2001, U.S. Bank issued a loan of $146,250 to William E. Sullivan and Jo Y. Sullivan, documented by a note that secured a mortgage on a condominium in Mikana, Wisconsin. The mortgage, recorded on June 22, 2001, identified the Sullivans as borrowers and U.S. Bank as the lender, with MERS acting as the nominee. PHH claims to have received an assignment of this note shortly after its creation. 

In 2009, Dow purchased the condominium from the Sullivans, having reviewed a title commitment that indicated the property was encumbered by the 2001 mortgage and a subsequent 2003 mortgage for $140,000. Dow’s attorney communicated with the Sullivans’ attorney, who suggested that the 2001 mortgage was no longer valid and was essentially replaced by the 2003 mortgage. Dow relied on this information, believing the 2003 mortgage refinanced the original. Dow's closing documents reflected a payment to U.S. Bank to satisfy the mortgage.

Following Dow's purchase, on November 24, 2009, PHH notified Dow of the delinquency of the 2001 note, indicating potential foreclosure action. Consequently, Dow filed a lawsuit on June 23, 2010, seeking a declaratory judgment that the condominium was purchased free of the 2001 mortgage, while PHH initiated a foreclosure action on August 9, 2010. The cases were later consolidated. 

The court is tasked with determining the applicability of the doctrine of equitable assignment in Wisconsin and whether it constitutes an exception to the statute of frauds. The court will review the existence of equitable assignment as a legal question and will interpret the statute's language independently, while considering insights from previous court discussions.

Equitable assignment allows the automatic transfer of a mortgage with the assignment of a mortgage note. Dow challenges the relevance of equitable assignment in Wisconsin's common law, claiming it is outdated, but PHH argues that established case law and Wis. Stat. 409.203(7) support its continued application in the state. Both the circuit court and the court of appeals affirm the validity of equitable assignment in Wisconsin, referencing case law dating back to 1859. In Croft v. Bunster, the court established that the debt is the principal matter, with the mortgage being incidental; the transfer of the debt inherently includes the mortgage. This principle is reinforced by cases such as Tidioute and Tobin, which illustrate that a guaranty is assignable and accompanies the principal obligation without the need for formal assignment. Muldowney further supports the doctrine by discussing the transfer of notes and the associated rights. Overall, the courts uphold that equitable assignment is firmly rooted in Wisconsin law, ensuring fair treatment for mortgagors.

Niagara Building Corporation acquired 12 notes from a third party after McCoy defaulted on a loan, prompting Niagara to file a replevin action. McCoy contested this action, arguing that Niagara lacked a formal assignment of the mortgage tied to the notes. The court ruled in favor of Niagara, applying the principle of equitable assignment, which holds that purchasing a debt secured by a mortgage inherently includes the mortgage's lien, even without a formal assignment. The court acknowledged that while McCoy cited cases arguing against the applicability of equitable assignment, the prevailing legal understanding supports that security for a note is equitably assigned upon the note’s transfer. The court also referenced significant precedent, including Carpenter v. Longan, emphasizing that transfer of a note carries its security without a formal assignment. Wisconsin Statute 409.203(7) was identified as codifying equitable assignment, stating that a security interest's attachment automatically includes the associated security interest or mortgage. The interpretations of this statute by both parties were deemed reasonable, and the court found that the application of equitable assignment in this case did not disadvantage McCoy. Dow's arguments against MERS practices were noted, but they did not affect the court's ruling on equitable assignment.

MERS is not a party to this case, and criticisms of its practices are not the focus. The case clarifies the application of equitable assignment in Wisconsin, which does not impose additional burdens on mortgagors beyond their debts and liens. Dow was aware of the 2001 mortgage prior to the 2009 sale, as the title commitment disclosed it. Although Dow relied on the Sullivans and their attorney to claim the mortgage was an error, Dow had opportunities to investigate its existence. The discussion also addresses whether the statute of frauds, which generally requires real estate transactions to be in writing, prevents equitable assignment in this scenario. Wisconsin Stat. 706.001(2) outlines exceptions to this requirement, including situations where an interest in land is affected by "act or operation of law." Dow contends that this exception does not apply to mortgage assignments, arguing for a definition similar to that of the Michigan Supreme Court in Kim v. JPMorgan Chase, which defines "operation of law" as unintentional or involuntary transfers. However, PHH argues that equitable assignment qualifies as "by operation of law," and the court agrees, concluding that a mortgage is automatically transferred by law when the note is transferred. This interpretation is supported by precedent from Tidioute, which indicated that the transfer of notes carries all securities for payment by operation of law. Historical statutes affirm the long-standing existence of this doctrine alongside the statute of frauds.

Justice Hubbell, in dissent in Yates v. Martin, emphasized the requirement of written contracts for land sales as per the state's statute of frauds. He supported the view that equitable assignment qualifies as "under operation of law," particularly in the context of PHH’s alleged assignment of a note, which led to the automatic transfer of the mortgage. The court upheld the validity of the equitable assignment doctrine in Wisconsin, stating it is well-supported by existing case law and should not be dismissed due to its age or evolving banking practices. Wis. Stat. 409.203(7) was interpreted as codifying equitable assignment, allowing a mortgage to transfer automatically with the assignment of a note and conforming to an exception to the statute of frauds. The court affirmed the lower courts' decisions and remanded the case for determination of PHH's standing to enforce the note, while noting that the equitable assignment doctrine does not conflict with the statute of frauds. Chief Justice Abrahamson concurred but expressed reservations about applying this doctrine to contemporary mortgage practices, highlighting concerns over the implications for home ownership and real estate law stemming from the mortgage system's modernization, particularly in light of the foreclosure crisis.

The concurrence outlines the distinctions between traditional and modern real estate mortgages, the doctrine of equitable assignment, and the implications of recording statutes, particularly in relation to MERS (Mortgage Electronic Registration System). Established in 1993, MERS functions as a private organization for mortgage-related entities, allowing members to electronically process and track mortgage ownership and transfers, thereby avoiding recording fees. MERS acts as the mortgagee of record but does not hold an interest in the underlying promissory notes and does not engage in lending or debt collection. This dual role raises concerns about the enforceability of mortgages and the rights of subsequent purchasers due to the lack of recorded assignments. The text criticizes the majority opinion's unqualified acceptance of equitable assignment without addressing the complexities of modern mortgage transactions, urging caution in its application to protect the rights of all parties involved. The doctrine of equitable assignment, while established, is questioned in its relevance to contemporary practices, as the majority opinion's cited case law does not adequately support its conclusions.

The majority opinion fails to reference any Wisconsin precedent regarding equitable assignment as it pertains to real estate when the note and mortgage are held by different parties. Relevant Wisconsin cases cited do not involve analogous situations, with some focusing on personal guarantees or chattel mortgages rather than the real estate context. The opinion inadequately addresses unique policy concerns related to real estate transactions, particularly regarding notice, by relying on cases where the note and mortgage were held by the same party. 

Moreover, the majority's reliance on outdated judicial dicta does not accommodate the differences in modern mortgage transactions, especially those involving the Mortgage Electronic Registration Systems (MERS). In traditional transactions, the lender retains both the note and mortgage, while in MERS transactions, the borrower signs the mortgage to MERS, which does not hold the promissory note. This separation can leave the note unsecured under the traditional equitable assignment doctrine.

The MERS system facilitates the secondary mortgage market by enabling the buying and selling of mortgages, but it complicates the tracking of ownership interests in promissory notes, leading to issues in verifying who holds the note necessary for foreclosure. PHH claims ownership of the note, but the case is remanded to determine if they possess it, which would grant them the right to foreclose. The majority opinion oversimplifies the complexities of modern real estate mortgages, potentially creating further complications.

Wisconsin's recording statutes, established in 1849, aim to ensure a reliable public record of real estate titles, protecting parties involved in transactions. Historically, real estate rights were documented at county offices, and mortgages were typically linked to their corresponding promissory notes. Currently, MERS functions as the mortgagee of record, yet its private tracking system obscures the true ownership of notes from non-MERS members, undermining the objectives of public recording laws designed to protect innocent purchasers from prior encumbrances. This disconnect between modern electronic mortgage practices and traditional property laws presents significant challenges.

The modern mortgage system represented by MERS (Mortgage Electronic Registration System) and PHH poses challenges to Wisconsin's recording statutes, which promote transparency in real estate transactions. MERS, by design, limits borrower access to their loan servicer, obscuring the identity of the actual lender and hindering transparency. This lack of disclosure can complicate mortgage negotiations and the enforcement of legal rights by preventing homeowners from identifying their mortgagee. The MERS system undermines public records by concealing beneficial ownership and eliminating documentation of assignments, potentially shielding noteholders from liability and obscuring lender errors or predatory practices.

The implications of MERS are significant, especially regarding foreclosure actions in Wisconsin’s circuit courts. Various legal questions arise, including MERS's standing to initiate foreclosure, the necessity of assigning the mortgage to the note owner, and the separation of legal and equitable titles. Additional concerns include the information required to be disclosed to borrowers during mortgage negotiations, the protocols for assisting distressed borrowers, and whether the lack of transparency affects homeowners' ability to renegotiate mortgages or access federal remedies.

The document suggests that existing laws may not adequately address the complexities introduced by electronic mortgage practices, urging legislative attention to the dissonance between current recording statutes and the evolving mortgage landscape. The author expresses disagreement with the majority opinion in the case, noting that its implications extend beyond the immediate matter at hand.