July 11, 2014 – A company that purchased an Island of Happy Days condo is likely unhappy with the outcome of a recent decision by the Wisconsin Supreme Court, which ruled that the doctrine of equitable assignment may support foreclosure.
The Island of Happy Days Condominiums are located on an island of Red Cedar Lake in Northwest Wisconsin. Dow Family LLC purchased a condo unit there in 2009.
One mortgage on the property was satisfied. After closing, PHH Mortgage Corporation insisted there was a mortgage outstanding that was not satisfied.
The sellers’ lawyer had told Dow Family that the PHH mortgage was mistakenly listed on the title commitment as a separate mortgage but was just a refinancing notation on the existing mortgage. According to PHH Mortgage, that was incorrect.
PHH Mortgage argued that it had acquired the mortgage from U.S. Bank and it went unsatisfied when the property was sold to the Dow Family. Thus, PHH Mortgage instituted a foreclosure action.
Dow Family filed for a declaratory judgment that PHH Mortgage’s secured mortgage was unenforceable and did not constitute a lien on the property the company owned.
But in Dow Family LLC v. PHH Mortgage Corp., 2014 WI 56 (2013AP221), a five-justice majority ruled that the doctrine of equitable assignment is law in Wisconsin and supports PHH Mortgage’s right to foreclose on the property. It remanded the case to resolve another issue.
“[U]nder the doctrine of equitable assignment, we hold that a mortgage automatically passes by operation of law upon the assignment of a mortgage note,” Justice Patrick Crooks wrote for the majority, noting that such assignments do not violate the statute of frauds.
In a concurring opinion, Chief Justice Shirley Abrahamson did not disagree with the outcome but said "I cannot join the majority opinion, whose ramifications stretch far beyond this case." Justice Ann Walsh Bradley did not participate in the case.
Doctrine of Equitable Assignment Alive in Wisconsin
The previous owners had taken a loan of $146,500 to purchase the condo about eight years before Dow Family purchased the condo unit. Closing documents reflect that an existing mortgage held by U.S. Bank was satisfied when Dow Family bought the condo.
But the title commitment listed another mortgage on the property, held by PHH Mortgage. This mortgage was worth $140,000. PHH asserts that it received an assignment of this mortgage from U.S. Bank. The seller said this mortgage notation was just evidence of a refinancing, but there was no other mortgage.
Dow Family argued that the outstanding mortgage was unenforceable. That is, Dow Family argued that PHH Mortgage may have held the underlying note, but it did not hold a mortgage lien as security.
Under the doctrine of equitable assignment, the lawful holder of a promissory note is also the lawful holder of the collateral (the real estate) that secures the note.
The court noted cases from the 1800s establishing the doctrine of equitable assignment in Wisconsin and held that Wis. Stat. section 409.203(7) codifies the doctrine. That provision says “the attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien.”
“[O]ur decision today clarifies the existence and application of equitable assignment in Wisconsin,” wrote Justice Crooks. “This clarification results in no unfairness to Dow.”
“[W]e are convinced that the case law we rely upon should not be distinguished or discredited due to its age or changes in banking practices,” Crooks wrote.
The majority noted that Dow Family was aware of the mortgage lien and “had a full opportunity to investigate” rather than rely on information acquired from the sellers of the property.
Doctrine Does Not Violate Statute of Frauds
Dow Family argued that even if the doctrine of equitable assignment is applicable in Wisconsin, the mortgage assignment, exclusive of the note, must be in writing in order to satisfy the statute of frauds, which requires real estate transactions to be in writing.
Wis. Stat. section 706.02 sets out the formal requisites for a real estate transaction to be valid, but there are exceptions under section 706.001(2), which says the statute of frauds does not apply to transactions affected by “act or operation of law.”
“We agree with PHH and hold that under the doctrine of equitable assignment a mortgage is automatically transferred by operation of law when the note is transferred,” wrote Justice Crooks, citing the statute and cases from the 1800s.
The court remanded the case on the issue of whether PHH Mortgage has the necessary documents to enforce the note at all. The appeals court had ruled that summary judgment for PHH was not warranted because the record did not show PHH had an authenticated copy of the note. That issue may be examined on remand.
Chief Justice Shirley Abrahamson said the outcome was reasonable. But she did not support the majority's blanket application of the doctrine of equitable assignment. She says the 19th century doctrine does not jive with 21st century real estate transactions.
"The majority opinion does not attempt to address the practical concerns of the current mortgage foreclosure crisis, the realities of the modern mortgage market, the value of the recording system, or the current and future problems associated with the modern mortgage system presented in the instant case," she wrote.
"The majority opinion cites no Wisconsin precedent explaining or applying the doctrine of equitable assignment in a case involving real estate in which the note and mortgage were held by two different persons," she explained.
The chief also questioned whether the Mortgage Electronic Recording System (MERS), a member-organization, "has a deleterious effect on real property and mortgage law."
MERS, the chief justice explained, facilitates transfers of mortgage notes and can serve as the mortgagee of record regardless of how many times the mortgage is transferred.
Members avoid filing fees this way and MERS tracks the transfers. In this secondary mortgage market, Abrahamson explained, such transfers can seperate the notes from the mortgages.
The chief justice said the application of the equitable assignment doctrine to the MERS system raises concerns. "It seems wise, at a minimum, to call the legislature's attention to the disparity that exists between the recording statute and the modern-day electronic mortgage industry."