Dow Family, LLC v. PHH Mortgage Corporation , 354 Wis. 2d 796 ( 2014 )

2014 WI 56SUPREME COURT OF WISCONSIN
CASE NO.: 2013AP221
COMPLETE TITLE: Dow Family, LLC,
Plaintiff-Appellant-Petitioner,
v.
PHH Mortgage Corporation,
Defendant-Respondent,
U.S. Bank, N.A.,
Defendant.
REVIEW OF A DECISION OF THE COURT OF APPEALS
Reported at 350 Wis. 2d 411, 838 N.W.2d 119(Ct. App. 2013 – Published)
PDC No: 2013 WI App 114OPINION FILED: July 10, 2014
SUBMITTED ON BRIEFS:
ORAL ARGUMENT: March 19, 2014
SOURCE OF APPEAL:
COURT: Circuit
COUNTY: Barron
JUDGE: James D. Babbitt
JUSTICES:
CONCURRED: ABRAHAMSON, C.J., concurs. (Opinion filed.)
DISSENTED:
NOT PARTICIPATING: BRADLEY, J., did not participate.
ATTORNEYS:
For the plaintiff-appellant-petitioner, there were briefs
by Joe Thrasher and Thrasher, Pelish, Franti & Heaney, Ltd.,
Rice Lake, and oral argument by Joe Thrasher.
For the defendant-respondent, there was a brief by Mary Sue
Anderson and Mallery & Zimmerman, S.C., Wausau, and oral
argument by Mary Sue Anderson.
An amicus curiae brief was filed by John E. Knight, Kirsten
E. Spira, and Boardman & Clark LLP, Madison, on behalf of
Wisconsin Bankers Association, and oral argument by John E.
Knight.
An amicus curiae brief was filed by Michael B. Apfeld and
Godfrey & Kahn, S.C., Milwaukee; and Robert J. Pratte and
Fulbright & Jaworski LLP, Minneapolis, on behalf of Mortgage
Electronic Registration Systems, Inc.
2
2014 WI 56NOTICE
This opinion is subject to further
editing and modification. The final
version will appear in the bound
volume of the official reports.
No. 2013AP221
(L.C. No. 2010CV355)
STATE OF WISCONSIN : IN SUPREME COURT
Dow Family, LLC,
Plaintiff-Appellant-Petitioner,
v.
FILED
PHH Mortgage Corporation,
JUL 10, 2014
Defendant-Respondent,
Diane M. Fremgen
U.S. Bank, N.A., Clerk of Supreme Court
Defendant.
REVIEW of a decision of the Court of Appeals. Affirmed and
cause remanded to the circuit court.
¶1 N. PATRICK CROOKS, J. In 2009, Dow Family, LLC, (Dow)
purchased a condominium located at unit four in the Island of
Happy Days Condominiums. Unfortunately, the purchase did not
result in happy days for Dow because PHH Mortgage Corporation
(PHH) asserted that the condominium remained burdened by a
mortgage after closing. Dow asks this court to find that the
outstanding mortgage is unenforceable. Specifically, Dow argues
No. 2013AP221
that even if PHH can prove it holds the underlying note in
question, it does not follow that PHH also holds the mortgage,
which would give PHH the right to bring a foreclosure action in
regard to the property to satisfy any outstanding debts.
¶2 At the time of purchase, Dow satisfied a mortgage from
2003. Before closing, Dow also inquired about another mortgage
from 2001 that was listed on the title commitment. The sellers'
attorney informed Dow that the 2001 mortgage was mistakenly
listed on the title commitment. This information, however, was
incorrect because the 2001 mortgage, purportedly owed to PHH,
did exist and went unsatisfied at the time of closing.
¶3 Dow sought declaratory judgment that the 2001 mortgage
did not constitute a lien on the property at the time of the
2009 sale. Dow's position is that the statute of frauds
requires written documentation of mortgage assignments.
Specifically, Dow asserts that PHH is unable to produce
documentation indicating that the mortgage was assigned to PHH
at the time of closing. Therefore, Dow argues the 2001 mortgage
was not an enforceable lien at the time it purchased the
condominium in 2009. After PHH initiated a foreclosure action
against Dow, the circuit court consolidated the two cases.
¶4 We are asked to determine whether PHH could properly
enforce the 2001 mortgage at the time Dow purchased the property
in 2009. PHH argues 1) that it received the applicable note by
assignment in 2001, and 2) that it also held the mortgage at the
time of the 2009 sale because, under the doctrine of equitable
assignment, the mortgage follows the note. To evaluate PHH's
2
No. 2013AP221
argument we must determine whether the doctrine of equitable
assignment exists in Wisconsin. We must then determine whether
that doctrine exempts mortgage assignments from the statute of
frauds.
¶5 We agree with the circuit court and the court of
appeals that the doctrine of equitable assignment is alive and
well in Wisconsin. The doctrine's existence is evidenced in our
case law, and we are convinced that the case law we rely upon
should not be distinguished or discredited due to its age or
changes in banking practices. We further conclude that the
language of Wis. Stat. § 409.203(7) (2011-12),1 which governs
liens securing the right to payment, codifies equitable
assignment. Finally, the application of equitable assignment in
this case results in no unfairness to Dow.
¶6 We further hold that the doctrine of equitable
assignment does not conflict with the statute of frauds outlined
in Wis. Stat. § 706.02. Equitable assignment occurs by
operation of law, which satisfies Wis. Stat. § 706.001(2)(a),2 a
statutory exception to the statute of frauds.
1
All references to the Wisconsin statutes are to the 2011-
12 version unless otherwise indicated. Wisconsin Stat.
§ 409.203(7) governs "Lien securing right to payment." It
provides, "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, mortgage, or other lien." Wis. Stat.
§ 409.203(7).
2
Wisconsin Stat. § 706.001(2)(a) excludes transfers of land
from the statute of frauds when the land transaction occurs
"[b]y act or operation of law."
3
No. 2013AP221
¶7 Therefore, under the doctrine of equitable assignment,
we hold that a mortgage automatically passes by operation of law
upon the assignment of a mortgage note, which, as we noted
above, satisfies a statutory exception to the statute of frauds.
Accordingly, we affirm the court of appeals decision, which
affirmed the circuit court, in part, reversed in part, and
remanded the cause. Like both the circuit court and court of
appeals, we conclude that the doctrine of equitable assignment
applies and does not violate the statute of frauds; however, the
issue of whether PHH has the necessary documents to enforce the
note in question must be determined by the circuit court.
I. PROCEDURAL BACKGROUND
¶8 The circuit court ruled in favor of PHH and held that
"there is no material issue of fact as to PHH holding the note
and thereby getting the mortgage equitably assigned to them."
This ruling from the bench by the Barron County Circuit Court,
Honorable James D. Babbitt presiding, followed arguments on
PHH's summary judgment motion. The circuit court held that the
doctrine of equitable assignment is alive and well in Wisconsin
and that PHH possessed the underlying note. Therefore, it
concluded that under the doctrine of equitable assignment, the
2001 mortgage was equitably assigned to PHH when it received the
note in 2001. Because the 2001 mortgage remained unsatisfied at
the time of the 2009 sale, foreclosure in favor of PHH was
appropriate. Accordingly, the circuit court granted PHH's
motion for summary judgment. The circuit court later issued its
4
No. 2013AP221
written findings of fact, conclusions of law, and judgment of
foreclosure.
¶9 We now review a published court of appeals decision
that affirmed the circuit court in part, reversed in part, and
remanded for further proceedings. Dow Family, LLC v. PHH Mortg.
Corp., 2013 WI App 114, ¶2, 350 Wis. 2d 411, 838 N.W.2d 119.
The court of appeals, relying on Tidioute Sav. Bank v. Libbey,
101 Wis. 193, 77 N.W. 182 (1898), Tobin v. Tobin, 139 Wis. 494,
121 N.W. 144 (1909), Muldowney v. McCoy Hotel Co., 223 Wis. 62,
269 N.W. 655 (1936), and Wis. Stat. § 409.203(7), agreed with
the circuit court that the doctrine of equitable assignment
applies in Wisconsin. Dow Family, LLC, 350 Wis. 2d 411, ¶¶26-
37. It further held that application of equitable assignment
did not conflict with the statute of frauds outlined in Wis.
Stat. § 706.02. Id., ¶38. It held that because the mortgage
was equitably assigned to PHH by virtue of PHH holding the note,
the transfer of the mortgage occurred by operation of law, which
is an exception to the statute of frauds. Id.; see also Wis.
Stat. § 706.02(2)(a).
¶10 The court of appeals, however, found that the circuit
court erred in granting summary judgment to PHH because PHH
failed to show that it could enforce the note. Dow Family, LLC,
350 Wis. 2d 411, ¶24. Specifically, the court of appeals
concluded that PHH's documentation at summary judgment did not
show that it held an authenticated copy of the note in question.
Id. Furthermore, the court of appeals held that PHH's arguments
as to whether the note could be considered self-authenticating
5
No. 2013AP221
were undeveloped, and it declined to address those arguments.
Id., ¶22. Therefore, the court of appeals reversed and remanded
for trial on the issue of PHH's ability to enforce the note in
question.3 Id., ¶24.
¶11 Dow appeals, arguing that even if the doctrine of
equitable assignment exists in Wisconsin, a point that it does
not concede, the doctrine cannot serve as an exception to the
statute of frauds, which it argues requires that mortgage
assignments be done in writing. Dow further contends that
because the statute of frauds cannot be overcome by the doctrine
of equitable assignment, no enforceable lien existed when Dow
purchased the condominium in question; therefore, Dow asserts
that PHH cannot foreclose on the property.4
II. FACTUAL BACKGROUND
¶12 In 2001, U.S. Bank loaned William E. Sullivan and Jo
Y. Sullivan $146,250. A note dated May 17, 2001, which lists
3
PHH did not appeal the portion of the court of appeals'
decision that reversed the circuit court and remanded the cause.
Therefore, the issue of whether PHH can produce and enforce an
authenticated copy of the note in question is not before this
court.
4
If this court were to decide that the doctrine of
equitable assignment does not apply, Dow asks this court to
decide two additional issues. First, Dow asks the court to hold
that it took the property in question free and clear of the 2001
mortgage. Second, Dow asks whether its good faith in purchasing
the property is relevant to PHH's ability to foreclose on the
property. Because we conclude that equitable assignment applies
and is not in conflict with the statute of frauds, we do not
address Dow's additional arguments.
6
No. 2013AP221
U.S. Bank as the lender and the Sullivans as the borrowers
evidences this transaction.
¶13 The 2001 note is secured by a mortgage on a
condominium located at unit four, Island of Happy Days, Mikana,
Wisconsin, in Barron County. The mortgage documentation is
dated May 17, 2001, and explicitly references the above-
described 2001 note. The mortgage lists the Sullivans as the
borrower/mortgagor and U.S. Bank as the lender. The mortgage
also lists the Mortgage Electronic Registration System (MERS)5 as
both the nominee for U.S. Bank and the mortgagee.6 The mortgage
was recorded with the Barron County Register of Deeds on June
5
Generally speaking,
Mortgage Electronic Registration Systems, Inc.,
commonly known as MERS, is a corporation registered in
Delaware and headquartered in the Virginia suburbs of
Washington, D.C. MERS operates a computer database
designed to track servicing and ownership rights of
mortgage loans anywhere in the United States.
Originators and secondary market players pay
membership dues and per-transaction fees to MERS in
exchange for the right to use and access MERS records.
Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending,
and the Mortgage Electronic Registration System, 78 U. Cin. L.
Rev. 1359, 1361 (2010).
6
It is unclear to us how MERS can act as both a nominee of
U.S. Bank and as the mortgagee. See Peterson, supra note 5, at
1374-75 (explaining that MERS cannot act as "both an agent and a
principal with respect to the same property right"). To resolve
the narrow questions before us, we need not determine whether
the dual role of MERS is proper.
7
No. 2013AP221
22, 2001. PHH asserts that it received an assignment of the
2001 note shortly after it came into existence.7
¶14 In 2009, Dow purchased the condominium at issue8 from
the Sullivans. Prior to the purchase, Dow obtained a title
commitment that indicated that the property in question was
subject to the above-described 2001 mortgage as well as a 2003
mortgage in the amount of $140,000.9 The title commitment
7
This court takes no position on whether PHH received an
assignment of the note or whether PHH holds an authenticated
copy of the note. However, the record contains a "notice of
assignment, sale, or transfer of servicing rights" signed by the
Sullivans. The notice states, "You are hearby notified that the
servicing of your mortgage loan . . . is being assigned, sold or
transferred from U.S. Bank, N.A. to PHH Mortgage Services,
effective immediately following the closing of your loan." This
notice is undated except for an electronic date stamp that
appears to read May 11, 2001; therefore, the document may refer
to the 2001 note.
The record also contains a copy of the 2001 note that
includes an undated endorsement in blank to Cendant Mortgage
Corporation, d/b/a PHH Mortgage Services Corporation. Finally,
the record contains a copy of a letter dated November 24, 2009,
which PHH's counsel sent to Dow's attorney. In regard to the
2001 note, the letter states,
A copy of the assignment of the Note and Mortgage from
USBank to MERS has not yet been located. However, our
records clearly evidence that the Note and Mortgage
were assigned into MERS and are now owned by Fannie
Mae. PHH has serviced the loan since 2001 in the name
PHH Mortgage Corporation.
8
Dow's purchase of the condominium was one part of a larger
transaction; however, only the sale of unit four is at issue
here.
9
The title commitment also evidenced a third mortgage,
which is not at issue.
8
No. 2013AP221
documentation listed U.S. Bank as the lender for both the 2001
and 2003 mortgages.10
¶15 Prior to closing, Dow's attorney contacted the
Sullivans' attorney to inquire about the 2001 mortgage. Email
correspondence between the attorneys indicates that William
Sullivan represented that the 2001 mortgage should no longer be
on the title and that the 2001 mortgage was the same as the 2003
mortgage. Dow apparently relied on this information to conclude
that the 2003 mortgage evidenced a refinancing of the note that
underlay the 2001 mortgage. Closing documents reflect that Dow
satisfied a single mortgage to U.S. Bank in the amount of
$143,140.89.
¶16 On November 24, 2009, PHH's counsel informed Dow's
attorney that the 2001 note, serviced by PHH, remained
outstanding and delinquent and that PHH would commence a
foreclosure action if necessary. On June 23, 2010, Dow filed
suit against PHH and U.S. Bank seeking a declaratory judgment
that it purchased the condominium free and clear of the 2001
mortgage. On August 9, 2010, PHH initiated a foreclosure action
against Dow. On February 1, 2011, Dow and PHH stipulated to the
consolidation of the two cases.
¶17 Questions about the assignment, location of, and
authenticity of the 2001 note are not before this court.
Instead, we are asked to determine whether the doctrine of
10
Dow asserts that the title commitment should have
indicated that MERS was the mortgagee under the 2001 mortgage
rather than U.S. Bank.
9
No. 2013AP221
equitable assignment applies in Wisconsin. We first consider
this question before discussing whether the doctrine of
equitable assignment constitutes an exception to the statute of
frauds.
III. STANDARD OF REVIEW AND PRINCIPLES OF INTERPRETATION
¶18 Whether or not the doctrine of equitable assignment
exists in Wisconsin is a question of law. This court reviews
questions of law de novo. D.S.P. v. State, 166 Wis. 2d 464,
471, 480 N.W.2d 234 (1992).
¶19 The question of whether the doctrine of equitable
assignment violates the statute of frauds requires statutory
interpretation. "Statutory interpretation is a question of law
for our independent review; however, we benefit from the
discussions of the court of appeals and the circuit court."
Kroner v. Oneida Seven Generations Corp, 2012 WI 88, ¶78, 342
Wis. 2d 626, 819 N.W.2d 264.
¶20 When conducting statutory interpretation we first look
to the plain language of the statute. State ex rel. Kalal v.
Circuit Court for Dane Cnty., 2004 WI 58, ¶45, 271 Wis. 2d 633,
681 N.W.2d 110. We consider extrinsic sources to determine
statutory meaning only when the plain language of the statute
could reasonably be interpreted in more than one way. Id.,
¶¶46-47.
IV. ANALYSIS
A. EQUITABLE ASSIGNMENT
¶21 Under the doctrine of equitable assignment, the
assignment of a mortgage note is automatically followed by the
10
No. 2013AP221
mortgage. Dow's arguments regarding equitable assignment are
intertwined with its arguments regarding the statute of frauds,
which we address in turn. However, Dow specifically questions
references to equitable assignment in Wisconsin's common law,
which it asserts are outdated and distinguishable.
¶22 PHH counters that equitable assignment is alive in
Wisconsin as evidenced by established case law. PHH also
asserts that Wis. Stat. § 409.203(7) codifies the doctrine of
equitable assignment. Finally, PHH contends that the
application of equitable assignment results in no unfairness to
mortgagors.
¶23 We agree with both the circuit court and the court of
appeals that the doctrine of equitable assignment is alive and
well in Wisconsin. We also agree with the court of appeals'
reliance on both case law and Wis. Stat. § 409.203(7) as
evidence of the doctrine's existence and application in
Wisconsin.
¶24 Evidence of the doctrine of equitable assignment
exists in Wisconsin case law dating back to at least 1859. In
Croft v. Bunster, 9 Wis. 503 (1859),11 a case involving real
estate transfers that were encumbered by mortgages, this court
stated,
The debt is the principal thing, the mortgage the
incident; the transfer of the debt carries with it the
mortgage. It is the debt which gives character to the
11
Both WestLaw and Lexis use 9 Wis. 503 as the citation for
Croft v. Bunster; however, the case appears at 9 Wis. 457 in the
Wisconsin Reports, published by Callaghan & Company.
11
No. 2013AP221
mortgage, and fixes the rights and remedies of the
parties under it, and not the mortgage which
determines the nature of the debt. It cannot be
contended that the securing of a negotiable instrument
by a mortgage, destroys its negotiable character. We
are of opinion, therefore, that both principle and
sound policy require that the rights and remedies of
an assignee, under the mortgage, should be co-
extensive with those which he has under the instrument
securing the debt.
Croft, 9 Wis. at 511.12 While the same party in Croft appears to
have held both the mortgage and the note, see id. at 506, this
fact does not discredit the court's early recognition of the
idea of equitable assignment.
¶25 In addition to Croft, Tidioute, 101 Wis. 193, Tobin,
139 Wis. 494, and Muldowney, 223 Wis. 62, support the existence
and application of equitable assignment in Wisconsin, as the
court of appeals recognized. See Dow Family, LLC, 350 Wis. 2d
411, ¶¶26-37. In Tidioute, Libbey, the defendant, secured two
notes held by W.T. Richards & Co., who later sold each note to a
different bank. Tidioute, 101 Wis. at 193-95. "[N]o formal
assignment of the defendants' guaranty was made in either case."
Id. at 195. While the issue in this case specifically addressed
the distinction between a general guaranty and a special
guaranty to determine whether the defendant could be held
accountable to the current holders of the notes in question, the
12
Croft utilizes a lengthy quotation from Mathews v.
Wallwyn, 4 Vesey 118 (1798), an English case. It appears to rely
on Mathews as the origin of equitable assignment. However, the
conclusion of this quotation is unclear as the Croft opinion
fails to include closing quotation marks. Reference to the text
of Mathews v. Wallwyn itself confirms that the quotation we cite
is from Croft and not from Mathews.
12
No. 2013AP221
case gives ample support for the doctrine of equitable
assignment. The court stated,
A guaranty is defined to be "a separate, independent
contract, by which the guarantor undertakes, for a
valuable consideration, to be answerable for the
payment of some particular debt, or future debts, or
the performance of some duty, in case of the failure
of another person primarily liable to pay or perform;"
and it is said that such guaranty is assignable, with
the obligation secured thereby, and that it goes with
the principal obligation, and is enforceable by the
same persons who can enforce that. The rule is that
the transfer of a note carries with it all security
without any formal assignment or delivery, or even
mention of the latter.
Id. at 196 (citations omitted). The court further explained,
The transfer of these notes to the plaintiffs carried
with it, by operation of law, all securities for their
payment. The debt is the principal thing, and the
securities are only an incident. The transfer of the
former, therefore, carries with it the right to the
securities, and amounts to an equitable assignment of
them. No matter what the form of the security is,
whether a real-estate or chattel mortgage, or a pledge
of collateral notes, bonds, or other personal
property, the purchaser of the principal takes with it
the right to resort to these securities; and this is
so, although the assignment or transfer does not
mention them.
Id. at 197 (emphasis added).
¶26 In Tobin, a father, Joseph Tobin, loaned money to a
third party. Tobin, 139 Wis. at 494. Joseph named his son,
John Tobin, in the note and mortgage related to this loan
without informing John; Joseph continued to hold the note and
recorded the mortgage. Id. at 494-95. Following John's death,
Joseph petitioned the court to declare that John never had any
interest in the note and mortgage. Id. at 495. John's widow
13
No. 2013AP221
later opposed the petition. Id. at 495-96. While no transfer
of the note from Joseph to John occurred in this case, the court
still stated the rule of equitable assignment in its discussion.
Id. at 499. It stated, "A mortgage securing a promissory note
passes as an incident upon transfer of the note." Id.
¶27 Finally, in Muldowney, Esther Muldowney loaned money
to the McCoy Hotel Company (McCoy). Muldowney, 223 Wis. at 64.
Muldowney held on to three of the notes that resulted from this
loan and endorsed the remaining 12 notes. Id. Later, the
Niagara Building Corporation (Niagara) purchased the remaining
12 notes from a third party. Id. McCoy defaulted on its loan
and Niagara initiated a replevin action. Id. McCoy argued
"that the Niagara Building Corporation cannot maintain this
action because no formal assignment of the mortgage or any
interest therein was executed and delivered to it in connection
with the transfer of the notes." Id. at 65. Although this case
addressed a chattel mortgage, the court cited the general
principle of equitable assignment in holding in favor of
Niagara,
It is well established that, in the absence of an
agreement to the contrary, the purchase of a note or
debt secured by a mortgage carries with it the lien of
the mortgage, because of which, in the absence of any
formal assignment of the latter to the purchaser, he
is considered the equitable owner thereof and of the
security afforded thereby.
Id. at 65-66.
¶28 Dow argues that these cases, which each support the
existence and application of equitable assignment of mortgages,
14
No. 2013AP221
are outdated and distinguishable. We recognize that the cases
relied upon by PHH, the court of appeals, and now this court
each deal with different issues and factual scenarios. However,
we agree with the court of appeals that each case stands for
"the general proposition that the security for a note is
equitably assigned upon transfer of the note, without the need
for a written assignment." Dow Family, LLC, 350 Wis. 2d 411,
¶34. Furthermore, references to equitable assignment principles
in Croft are especially noteworthy as that case concerned
mortgages on real estate. Likewise, in Tidioute, the court
explicitly stated that equitable assignment applies to real
estate mortgages.
¶29 We also note that the doctrine of equitable assignment
is not unique to Wisconsin case law. In Carpenter v. Longan, 83
U.S. 271, 275 (1872), the United States Supreme Court stated:
"The transfer of the note carries with it the security, without
any formal assignment or delivery, or even mention of the
latter." In the Restatement (Third) of Property (Mortgages)
§ 5.4(a) (1997) we find additional support for the doctrine of
equitable assignment: "A transfer of an obligation secured by a
mortgage also transfers the mortgage unless the parties to the
transfer agree otherwise."
¶30 Further, we agree with the court of appeals' reliance
on Wis. Stat. § 409.203(7) and hold that § 409.203(7) codifies
the doctrine of equitable assignment. Chapter 409 sets forth
Wisconsin's adoption of the Uniform Commercial Code (UCC)
governing secured transactions. Wisconsin Stat. § 409.203(7) is
15
No. 2013AP221
titled, "Lien securing right to payment," and it provides: "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."
¶31 The parties disagree over the plain meaning of Wis.
Stat. § 409.203(7). Dow argues that the statute "merely means
that when a secured debt is itself assigned as a security to
another, the original security interest accompanies the debt."
In contrast, PHH argues that the language of § 409.203(7)
codifies equitable assignment.
¶32 Like the court of appeals, we conclude that each party
provides a reasonable interpretation of the plain language of
§ 409.203(7). Therefore, we must look outside of the plain
language of the statute for additional clarification. See
Kalal, 271 Wis. 2d 633, ¶50.
¶33 Wisconsin Stat. § 409.203(7) adopted the exact
language from Section 9-203(g) of the UCC. Compare U.C.C. § 9-
203 (2000), with Wis. Stat. § 409.203(7). The UCC comment to
§ 9-203(g) provides: "Subsection (g) codifies the common-law
rule that a transfer of an obligation secured by a security
interest or other lien on personal or real property also
transfers the security interest or lien." U.C.C. § 9-203 cmt. 9
(2000). The language of the comment directly supports PHH's
argument that § 409.203(7) codified equitable assignment.
¶34 Finally, the application of equitable assignment to
this case results in no unfairness to Dow. Dow spends a
16
No. 2013AP221
considerable amount of time in its brief discussing MERS. In
doing so, Dow cites to numerous authorities that have been
highly critical of MERS practices. We recognize that MERS has
been criticized; however, this case is not about MERS' practices
and MERS is not a party to this case.
¶35 Instead, our decision today clarifies the existence
and application of equitable assignment in Wisconsin. This
clarification results in no unfairness to Dow. First, in
general, equitable assignment does not require mortgagors to
satisfy anything beyond their debt(s) and accompanying liens.
In addition, specific to this case, Dow had notice of the 2001
mortgage prior to the 2009 sale. Here, the title commitment
informed Dow of the outstanding 2001 mortgage. Dow apparently
relied on information from the Sullivans and their attorney to
conclude that the 2001 mortgage was listed on the title
commitment in error. However, Dow had full opportunity to
investigate the existence of the 2001 mortgage prior to the
purchase.
¶36 Our determination that the doctrine of equitable
assignment has long existed in Wisconsin, however, does not end
our discussion. We next consider the heart of Dow's argument:
whether the statute of frauds prevents the application of
equitable assignment under these circumstances.
B. EQUITABLE ASSIGNMENT AND THE STATUTE OF FRAUDS
¶37 Generally speaking, the statute of frauds applies to
real estate conveyances. It requires that "every transaction by
which any interest in land is created, aliened, mortgaged,
17
No. 2013AP221
assigned or may be otherwise affected in law or equity" must be
in writing. Wis. Stat. §§ 706.001, 706.02. Wisconsin Stat.
§ 706.001(2), however, provides several exceptions to the
statute of frauds requirements outlined in Wis. Stat. § 706.02.
One such exception includes "transactions which an interest in
land is affected by act or operation of law." Wis. Stat.
§ 706.001(2)(a).
¶38 Dow argues that this exception does not exempt a
mortgage assignment from the statute of frauds, which thus
invalidates the doctrine of equitable assignment. Specifically,
Dow argues that this court should adopt a definition of "by
operation of law" that is similar to the definition relied upon
by the Michigan Supreme Court in Kim v. JPMorgan Chase, N.A.,
493 Mich. 98, 825 N.W.2d 329 (2012). The Michigan Supreme Court
explained that "a transfer that takes place by operation of law
is one that occurs unintentionally, involuntarily, or through no
affirmative act of the transferee." Id. at 117. Under this
definition, Dow argues that PHH's acquisition of the mortgage
could not have been by operation of law because it occurred
intentionally through the assignment of the note.
¶39 PHH asks this court to hold that equitable assignment
falls within the "by operation of law" exception found in Wis.
Stat. § 706.001(2)(a).
¶40 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. Therefore, we
hold that the "by operation of law exception" found in Wis.
18
No. 2013AP221
Stat. § 706.001(2)(a) exempts the mortgage assignment at issue
from the statute of frauds.
¶41 In reaching our conclusion, we first draw support from
Tidioute. There this court stated, "The transfer of these notes
to the plaintiffs carried with it, by operation of law, all
securities for their payment." Tidioute, 101 Wis. at 197
(emphasis added). Although Tidioute does not explicitly address
the statute of frauds, the statute of frauds existed at the time
the case was decided.
¶42 Wisconsin Stat. ch. 104, § 2302 (1898) was in
operation when this court decided Tidioute in 1898. Section
2302, titled "Conveyance of land, etc. to be in writing"
provided:
No estate or interest in lands, other than leases for
a term not exceeding one year, nor any trust or power
over or concerning lands, or in any manner relating
thereto, shall be created, granted, assigned,
surrendered or declared, unless by act or operation of
law, or by deed or conveyance in writing, subscribed
by the party creating, granting, assigning,
surrendering or declaring the same, or by his lawful
agent, thereunto authorized by writing.
The statute of frauds operating in 1898 contains substantially
similar language to our current statute. Compare Wis. Stat. ch.
104, § 2302 (1898), with Wis. Stat. § 706.001(1)-(2).
¶43 Even earlier evidence exists that the statute of
frauds was operating in the background of this court's
statements in Tidioute and other early cases discussing
equitable assignment. In Yates v. Martin, Justice Hubbell,
writing in dissent, stated, "The statute of frauds of this state
19
No. 2013AP221
declares every contract for the sale of any interest in lands
void, unless it is in writing . . . ." Yates v. Martin, 2 Pin.
171, 178 (Wis. Jan. 1849).
¶44 Furthermore, we are convinced that equitable
assignment can be considered "under operation of law" under
Dow's proposed definition of the phrase. Here, PHH allegedly
obtained the note through assignment. PHH, however, took no
action with regard to the mortgage itself because the mortgage
automatically transferred upon the alleged assignment of the
note. We consider the automatic nature of the mortgage
following the note under equitable assignment to be "by
operation of law."
V. CONCLUSION
¶45 We agree with the circuit court and the court of
appeals that the doctrine of equitable assignment is alive and
well in Wisconsin. The doctrine's existence is evidenced in our
case law, and we are convinced that the case law we rely upon
should not be distinguished or discredited due to its age or
changes in banking practices. We further conclude that the
language of Wis. Stat. § 409.203(7), which governs liens
securing the right to payment, codifies equitable assignment.
Finally, the application of equitable assignment in this case
results in no unfairness to Dow.
¶46 We further hold that the doctrine of equitable
assignment does not conflict with the statute of frauds outlined
in Wis. Stat. § 706.02. Equitable assignment occurs by
20
No. 2013AP221
operation of law, which satisfies Wis. Stat. § 706.001(2)(a), a
statutory exception to the statute of frauds.
¶47 Therefore, under the doctrine of equitable assignment,
we hold that a mortgage automatically passes by operation of law
upon the assignment of a mortgage note, which, as we noted
above, satisfies a statutory exception to the statute of frauds.
Accordingly, we affirm the court of appeals decision, which
affirmed the circuit court, in part, reversed in part, and
remanded the cause. Like both the circuit court and court of
appeals, we conclude that the doctrine of equitable assignment
applies and does not violate the statute of frauds; however, the
issue of whether PHH has the necessary documents to enforce the
note in question was not appealed and must be determined by the
circuit court.
By the Court.—The decision of the court of appeals is
affirmed and cause remanded to the circuit court.
¶48 ANN WALSH BRADLEY, J., did not participate.
21
No. 2013AP221.ssa
¶49 SHIRLEY S. ABRAHAMSON, C.J. (concurring). This is a
mortgage foreclosure case, one of many in Wisconsin and across
the country.1 PHH Mortgage Corporation, which claims to be
assignee of the note and the mortgage in the instant case, has
been a party in over 2,300 cases filed in the Wisconsin circuit
courts, with many cases still open. PHH, and by extension the
Mortgage Electronic Recording System (MERS), upon which it
relies, represent the modern mortgage system, which has become
the subject of frequent litigation in the Great Recession,
during which many homeowners have lost the American dream——
private home ownership.
¶50 Some fear the economic damage from foreclosures;
others fear the economic damage from encumbering the mortgage
financing industry. MERS benefits its members, but the question
remains whether the MERS system provides benefits to home buyers
and borrowers and whether MERS has a deleterious effect on real
property and mortgage law.
¶51 I do not join the majority opinion or support its
blanket application of the nineteenth-century doctrine of
equitable assignment to the modern mortgage system.
¶52 The doctrine of equitable assignment and the
longstanding state policy favoring recording of documents
1
After the housing bubble burst, foreclosure filings in
Wisconsin "more than doubled from 2005 to 2008." James
McNeilly, An Introduction to Mortgage Foreclosure in Wisconsin,
Inside Track (State Bar of Wisconsin, Madison, Wis.), Mar. 18,
2009, available at
http://www.wisbar.org/newspublications/insidetrack/pages/article
.aspx?volume=1&issue=4&articleid=5513 (last visited June 30,
2014).
1
No. 2013AP221.ssa
affecting real estate are being applied to twenty-first-century
transactions that were not imagined when the equitable
assignment doctrine and the Wisconsin recording statutes
developed. 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 values of the
recording system, or the current and future problems associated
with the modern mortgage system presented in the instant case.
¶53 My concurrence describes the characteristics of
traditional and modern real estate mortgages, the doctrine of
equitable assignment, the purpose and value of the recording
statutes, and unresolved issues raised by the majority opinion's
blanket acceptance of the doctrine of equitable assignment and
MERS.
I
¶54 PHH is just one of a long list of MERS's members.2
Developed in 1993, MERS is a major player in the modern real
estate mortgage system and the secondary mortgage market. MERS
is a private, "member-based organization" whose members include
"lenders, servicers, sub-servicers, investors, and government
institutions."3 Members pay fees to subscribe to MERS's system
2
See MERS Member Search, www.mersinc.org/about-us/member-
search (last visited June 30, 2014).
3
Shelby D. Green & JoAnn T. Sandifer, MERS Remains Afloat
in a Sea of Foreclosures, Prob. & Prop., July/Aug. 2013, at 18,
19.
2
No. 2013AP221.ssa
of "electronic processing and tracking of ownership and
transfers of mortgages."4
¶55 MERS is the mortgagee of record and, as the majority
opinion points out, is strangely also the agent for the entity
that ultimately holds the note and mortgage.5 MERS is presumably
both principal and agent, and the entity on whose behalf MERS
holds legal title to the mortgage changes every time the
promissory note is assigned.6
¶56 MERS does not have an interest in the promissory
notes; it has never had such an interest.7 Yet sometimes the
debtor is advised that MERS does have an interest in the note.8
Further, MERS does not lend money or collect on the notes
secured by mortgages for which it is named as mortgagee.9
¶57 MERS facilitates transfers of mortgage notes without
the necessity of recording an assignment of the mortgage.10
Members of MERS avoid recording fees because "MERS remains the
4
MERSCORP, Inc. v. Romaine, 861 N.E.2d 81, 83 (N.Y. 2006).
5
Majority op., ¶13, n.6.
6
Jackson v. Mortgage Elec. Registration Sys., Inc., 770
N.W.2d 487, 503 (Minn. 2009) (Page, J., dissenting).
7
Green & Sandifer, supra note 3, at 18, 19.
8
See majority op., ¶13, n.7.
9
Christopher L. Peterson, Foreclosure, Subprime Mortgage
Lending, and the Mortgage Electronic Registration System, 78 U.
Cin. L. Rev. 1359, 1377-78 (2010).
10
Bank of N.Y. v. Silverberg, 86 A.D.3d 274, 278 (N.Y. App.
Div. 2011).
3
No. 2013AP221.ssa
mortgagee of record" in county recording offices regardless of
how many times the note is transferred.11
II
¶58 The doctrine of equitable assignment is a common-law
principle that "a transfer of an obligation secured by a
mortgage on property also constitutes a transfer of the
mortgage."12 The idea of equitable assignment is that a mortgage
has no significance without reference to the note it secures.
¶59 Although the majority opinion concludes "that the
doctrine of equitable assignment is alive and well in
Wisconsin"13 "as evidenced by established case law,"14 its
proffered case law does not support its conclusion.
¶60 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. See majority op., ¶¶24-28. The
11
Id.12
James M. Davis, The Mortgage-Follows-the-Note Rule,
Norton Bankr. L. Adviser, Sept. 2013. See also Carpenter v.
Longan, 83 U.S. (16 Wall.) 271 (1872); 5 Herbert Thorndike
Tiffany, The Law of Real Property § 1449 (3d ed. 1939).
Article 9 of the Uniform Commercial Code, Wis. Stat.
§ 409.203(7), declares that it codifies the common-law rule of
equitable assignment. However, this provision may apply only to
personal property. See Uniform Commercial Code Comment 1, Wis.
Stat. Ann. § 409.101 (West 2003).
13
Majority op., ¶23.
14
Majority op., ¶22.
4
No. 2013AP221.ssa
Wisconsin cases upon which the majority relies are not analogous
to the instant case.
¶61 The Wisconsin cases cited by the majority opinion do
not all involve real estate and do not involve instances in
which the note and the mortgage are held by different persons.
For example, Tidioute Savings Bank v. Libbey addresses the
validity of a guaranty to repay a sum of money after the
corresponding notes were sold,15 and Muldowney v. McCoy Hotel Co.
concerns the equitable assignment of a chattel mortgage.16 The
majority opinion glosses over the policy concerns unique to real
estate transactions, particularly notice, in its use of these
cases.
¶62 More importantly, the Wisconsin cases the majority
opinion highlights that do address real estate mortgages concern
situations in a traditional setting in which the note and the
mortgage are held by the same party, as in Tobin v. Tobin,17
Croft v. Bunster,18 and Carpenter v. Longan.19 In the instant
case, however, the foreclosure proceedings were initiated when
the note and the mortgage were separated.
15
Tidioute Sav. Bank v. Libbey, 101 Wis. 193, 197, 77
N.W. 182 (1898) (cited by majority op., ¶25).
16
Muldowney v. McCoy Hotel Co., 223 Wis. 62, 269 N.W. 655(1936) (cited by majority op., ¶27).
17
Tobin v. Tobin, 139 Wis. 494, 498, 121 N.W. 144 (1909)
(cited by majority op., ¶26).
18
Croft v. Bunster, 9 Wis. 503, 506 (1859) (cited by
majority op., ¶24).
19
Carpenter v. Longan, 83 U.S. 271, 272 (1872) (cited by
majority op., ¶29).
5
No. 2013AP221.ssa
¶63 The majority opinion relies on "dicta" in nineteenth-
and early-twentieth-century cases (when "dicta" really meant
dicta) and applies the dicta to a new set of twenty-first-
century facts.
¶64 Modern mortgage transactions differ from traditional
mortgage transactions. In the traditional, non-MERS mortgage,
the homeowner borrows money from a lender-mortgagee. The
lender-mortgagee keeps the note and records the mortgage. The
lender-mortgagee may transfer both the note and mortgage but
generally keeps them together, and the assignment of the
mortgage is ordinarily recorded.20
¶65 In a MERS transaction, MERS is neither the lender nor
is it the payee on the promissory note. The borrower executes a
note to the lender. The borrower executes the mortgage,
however, to MERS. MERS is the holder of the mortgage but not of
the promissory note. The mortgage is recorded, with MERS as the
mortgagee.21 Under the traditional view of equitable assignment,
naming MERS as the mortgagee separates the mortgage from the
promissory note and may cause the note to become unsecured.22
20
Adam Leitman Bailey & Dov Treiman, Moving Beyond the
Mistakes of MERS to A Secure and Profitable National Title
System, Prob. & Prop., July/Aug. 2012, at 40, 41.
21
Silverberg, 86 A.D.3d at 278 ("MERS remains the mortgagee
of record in local county recording offices regardless of how
many times the mortgage is transferred . . . .").
22
Restatement (Third) of Property (Mortgages) § 5.4 cmt. a
(1997); Christian J. Hansen, Note, Property: Innovations to
Historic Legal Traditions——Jackson v. Mortgage Electronic
Registration Systems, Inc., 37 Wm. Mitchell L. Rev. 355, 368
(2010).
6
No. 2013AP221.ssa
¶66 The MERS system assists the secondary mortgage market
in which mortgages are bought and sold. Many entities may hold
a partial interest in the note. Indeed, it is sometimes
difficult to track all the assignments of the note.23 Lenders
have been sloppy about keeping track of the promissory notes.
In the present case, PHH asserts that it has the note, yet the
case is remanded to the circuit court to determine whether PHH
actually has the note (and thus the mortgage interest by
equitable assignment) entitling it to foreclosure.
¶67 The majority opinion ignores the characteristics of
the modern real estate mortgage to find a simple solution to the
instant case——a solution that creates its own set of problems.
III
¶68 I turn to the Wisconsin statutes regarding recording
of real estate transactions. Wisconsin statutes governing
recording of real estate transactions date back to 1849.24 The
recording statutes serve the important purpose of compiling a
reliable and public history of title for real estate25 in order
to provide protection, in the form of notice, to all parties
23
See majority op., ¶13 n.7.
24
Wis. Stat. ch. 59, § 24 (1849) ("Every conveyance of real
estate within this state hereafter made, which shall not be
recorded as provided by law, shall be void as against any
subsequent purchaser in good faith, and for a valuable
consideration of the same real estate, or any portion thereof,
whose conveyance shall first be duly recorded.").
25
Kordecki v. Rizzo, 106 Wis. 2d 713, 718 & n.4, 317
N.W.2d 479 (1982) (citing Thauer v. Smith, 213 Wis. 91, 96, 250
N.W. 842 (1933)).
7
No. 2013AP221.ssa
involved in the transfer of real estate, that is, the
purchasers, sellers, creditors, and debtors.
¶69 In the nineteenth century, transfers of real estate
rights were expected to be documented at the county recording
office,26 and mortgages were rarely separated from the promissory
note.27
¶70 Today under MERS, MERS remains the mortgagee of
record. When MERS members transfer the notes, non-MERS members
cannot access the identity of the true owner of a note and
mortgage through the public recording system.28 As Chief Judge
Judith Kaye of the New York Court of Appeals has written:
[T]he MERS system, developed as a tool for banks and
title companies, does not entirely fit within the
purpose of the Recording Act, which was enacted to
"protect the rights of innocent
purchasers . . . without knowledge of prior
encumbrances" and to "establish a public
record . . . ." It is the incongruity between the
needs of the modern electronic secondary mortgage
market and our venerable real property laws regulating
the market that frames the issue before us.29
26
W. Scott Van Alstyne, Jr., Land Transfer and Recording in
Wisconsin: A Partial History—Part I, 1955 Wis. L. Rev. 44, 44-45
(describing the recording process as expressing "a basic social
value" underlying the recording system).
27
See, e.g., Carpenter v. Longan, 83 U.S. 271, 272 (1872)
("[T]he note and mortgage" were assigned to the appellant); In
re Tobin's Estate, 139 Wis. 494, 498, 121 N.W. 144 (1909)
("[T]he note and the mortgage" were in the name of the same
person).
28
MERS tracks member-to-member mortgage assignments within
its private system, leaving non-MERS members unaware of these
assignments. Bank of N.Y. v. Silverberg, 86 A.D.3d 274, 278
(N.Y. App. Div. 2011).
29
Romaine, 861 N.E.2d at 86 (Kaye, C.J., dissenting in
part) (citations omitted).
8
No. 2013AP221.ssa
¶71 The modern mortgage system represented in the instant
case by MERS and PHH has increasingly challenged Wisconsin's
recording statutes and the state's strong policy in favor of
recording all real estate transactions. The recording system
fosters disclosure of real estate transactions; MERS fosters
secrecy. Under the MERS system, a borrower may access only his
or her loan servicer, not the underlying lender.30 As Chief
Judge Kaye has written, this secrecy and avoidance of public
recording have undesirable consequences:
The lack of disclosure may create substantial
difficulty when a homeowner wishes to negotiate the
terms of his or her mortgage or enforce a legal right
against the mortgagee and is unable to learn the
mortgagee's identity. Public records will no longer
contain this information as . . . the MERS system will
render the public record useless by masking beneficial
ownership of mortgages and eliminating records of
assignments altogether. Not only will this
information deficit detract from the amount of public
data accessible for research and monitoring of
industry trends, but it may also function, perhaps
unintentionally, to insulate a noteholder from
liability, mask lender error and hide predatory
lending practices.31
IV
¶72 Mortgage foreclosure actions are frequently before the
Wisconsin circuit courts. Numerous issues may arise from the
application of the equitable assignment doctrine to the MERS
system. Indeed, we do not know the extent of the concerns that
30
Bailey & Treiman, supra note 20, at 40, 42. ("MERS does
not allow nonmembers access to any of its records.").
31
Romaine, 861 N.E.2d at 88 (Kaye, C.J., dissenting in
part).
9
No. 2013AP221.ssa
will be realized. They are left for another day. Here are a
few raised in the case law and the literature:
• Does MERS have standing to bring a foreclosure action?
• Must MERS assign the mortgage to the note owner before
a foreclosure action can be initiated?
• What difference does it make that an assignment of the
promissory note operates as an equitable rather than
legal assignment of the security instrument?
• Can legal and equitable title be separated?
• Must the entity seeking to foreclose have both
equitable and legal title?
• What information must be disclosed to the borrower
when the mortgage transaction is negotiated?
• What protocols are warranted for dealing with a
borrower in financial distress?
• Does the lack of disclosure create difficulty when the
homeowner wants to renegotiate the terms of the
mortgage or enforce a legal right against the
mortgagee and is unable to learn the mortgagee's
identity?
• Does the majority opinion preclude federal remedies
that are otherwise available to homeowners?
• Are existing rules on negotiable instruments suitable
for transfers of mortgages?
• What is the distinction between note ownership and
entitlement to enforce a note?
10
No. 2013AP221.ssa
• What is the impact of the comment to Restatement
(Third) of Property (Mortgages) § 5.4 cmt a. (1997),
which states, "When the right of enforcement of the
note and the mortgage are split, the note becomes, as
a practical matter, unsecured"?32
¶73 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.
¶74 Although the outcome in the instant case seems
reasonable enough, I cannot join the majority opinion, whose
ramifications stretch far beyond this case.
¶75 For the foregoing reasons, I write separately.
32
These questions and more are discussed in U.S. Bank
National Ass'n v. Ibanez, 941 N.E.2d 40 (Mass. 2011);
Silverberg, 86 A.D.3d at 278; Jackson, 770 N.W.2d at 490, 500-
02; Shelby D. Green & JoAnn T. Sandifer, MERS Remains Afloat in
A Sea of Foreclosures, Prob. & Prop., July/Aug. 2013; Zachary A.
Kisber, Reevaluating MERS in the Wake of the Foreclosure Crisis,
42 Real Est. L.J. 183 (2013); Bailey & Treiman, supra note 20,
at 40; Christopher L. Peterson, Two Faces: Demystifying the
Mortgage Electronic Registration System's Land Title Theory, 53
Wm & Mary L. Rev. 111 (2011).
11
No. 2013AP221.ssa
1