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Florida Court Holds UCC Article 9 Governs in Mortgage Fraud Dispute

LogonSeal4The Florida Fourth District Court of Appeal recently held that the priority between two assignees of notes secured by the same mortgage due to fraud is determined by Article 9 of the Uniform Commercial Code and not the recording statute applicable to assignments of mortgage.

The Court held that the transferee that first perfected its interest in a note and related mortgage is entitled to the priority of its interest.

A copy of the opinion is available at:

In April 2006, a borrower obtained a loan and signed a mortgage securing the loan. At closing, the borrower signed two almost identical notes for the same amount, both secured by the same mortgage, as part of a mortgage fraud scheme.

In June 2006, the appellant bank (the “first bank”) entered into a pooling and servicing agreement (“PSA”) and took possession of one of the promissory notes. Thereafter, the appellee bank (the “second bank”) entered into a different PSA, and acquired possession of the second promissory note. Both notes contained special indorsements showing the chain of ownership from the original lender to each bank.

The borrower defaulted in 2008. The banks recorded their assignments of mortgage and each filed its own foreclosure action, which were consolidated upon request of a third mortgagee.  Despite the consolidation, the second bank obtained a summary judgment without giving notice to the first bank, and later sold the property to bona fide third party purchasers.

The banks agreed in October 2012 to an order vacating the final judgment, sale and certificate of title. The buyers then intervened and sought a declaratory judgment in their favor.

A third bank was substituted as plaintiff for the second bank, and the consolidated cases were tried without a jury. The trial judge entered a final declaratory judgment in favor of the third bank based on Florida’s recording statute for mortgage assignments, section 701.02, Florida Statutes. The trial court reasoned that by closing on its PSA, the third bank had acquired an equitable interest in the mortgage, and because the third bank acquired its equitable interest in the mortgage for value and without notice of the first bank’s prior assignment, the third bank had priority as a subsequent bona fide purchaser pursuant to section 701.02.

On appeal, the Appellate Court began its analysis by pointing out that, although Article 9 of Florida’s Uniform Commercial Code (codified at Chapter 679, Florida Statutes) does not apply to the creation of a mortgage on real property, when the note is sold or assigned, Chapter 679 governs the security interest that arises in favor of the purchaser or assignee of the note.

A security interest attaches or becomes enforceable against collateral under section 679.2031(1), Florida Statutes, “when it becomes enforceable against the debtor with respect to the collateral.”  The assignment of a note attaches and becomes enforceable by the transferee against the assignor and the debtor when (a) value has been given (b) the assignor has rights in the collateral or the power to transfer rights in the collateral to a secured party, and (c) the assignor has either “authenticated a security agreement that provides a description of the collateral” or the assignee has taken possession of the note under section 679.3131, Florida Statutes.

The Court noted that, as to the third requirement, the note itself is the “collateral” as defined by section 679.1021(1)(l)2., Florida Statutes, and the written assignment or sale agreement constitutes the “security agreement” as defined by subsections 679.1021(1)(ttt) and 671.201(35), Florida Statutes. Thus, the first bank’s security interest attached when it took possession of its note.

Having discussed when a security interest “attaches,” the Court moved on to discuss how a security interest is “perfected” after it attaches. First, if the borrower defaults, the secured party can foreclose against collateral; second, with some exceptions, the secured party takes priority over the interests of third parties. Only when a security interest is perfected does it afford maximum protection against third parties.  One way of perfecting a security interest in a note is to take possession of the original note, which effectively provides notice of the secured party’s interest to third parties.

The Court then turned to the issue of priority, which depends on the timing and method used to perfect the security interest. Under section 679.322(1)(a), Florida Statutes, “[c]onflicting perfected security interests … rank according to priority in time of filing or perfection.” The person who perfects first, wins.

Section 679.330(4), Florida Statutes, in turn provides that “a purchaser of an instrument has priority over a security interest perfected by a method other than possession if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party.”

Because the first bank took possession of its promissory note before the second bank, the Court concluded that it perfected its security interest in its note first, finding persuasive the federal district court’s ruling in Provident Bank v. Community Home Mortgage Corp., 498 F. Supp. 2d 558 (E.D.N.Y. 2007). Provident Bank involved a similar scheme known as “double-booking,” in which borrowers execute duplicate original notes and mortgage assignments so the fraudster can get “duplicate funding for one loan from two different” lenders.

In Provident Bank, the district court, relying on the principle that the mortgage follows the note, held that the lender that first had possession of its original note had priority over the lender that had previously recorded its assignment of mortgage, reasoning that the recording statutes are not relevant in a case where the parties are contesting who perfected their security interest in the note, as opposed to the mortgage.

The Appellate Court pointed out that the second bank has a remedy against the transferor of the note for breach of warranty under section 673.416(1), Florida Statutes, but acknowledged the difficulty of pursuing this route given the scheme to defraud.

The Court rejected the second bank’s argument that section 701.02, Florida Statutes (entitled “Assignment not effectual against creditors unless recorded and indicated in the title of document”), governed and required a ruling its favor.  The Appellate Court reasoned that prior Florida case law, the language of a 2005 amendment to the recording statute, and Comment 7 to section 679.1091 of the Uniform Commercial Code, all compelled the conclusion that the statute does not apply to successive assignees of a note and mortgage.

The Court reversed the final judgment in favor of the second bank that recorded its assignment of mortgage first, and remanded for the entry of judgment in favor of the first bank that had taken possession of its original note first.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.