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Application of Kentucky Mortgage Requirements to Promissory Note Transfers
By Latif Zaman

A benefit of the MERS system is that it allows parties to avoid recording fees related to the sale of a loan. However, courts across the country have been divided on the issue of whether an assignment of a promissory note constitutes an assignment of the underlying mortgage for purposes of state mortgage recording statues.

In Higgins v. BAC Home Loans Servicing, LP, 2015 U.S. App. LEXIS 12275 (6th Cir. Ky. July 16, 2015), the United States Court of Appeals for the Sixth Circuit determined that under Kentucky law, transfer of a note is not an assignment of the corresponding mortgage and does not need to be recorded as a mortgage assignment.

In Higgins a class of landowners obtained loans from creditors in exchange for promissory notes secured by mortgages. These mortgages were all duly recorded. The original noteholders and their assignees-all members of MERS-subsequently transferred the notes to the defendant banks, all of whom were also members of MERS. The landowners sued the defendant banks in a federal district court for failing to record the transfers of the notes within 30 days. The Kentucky mortgage recording statute provides as follows:

When a mortgage is assigned to another person, the assignee shall file the assignment for recording with the county clerk within thirty (30) days of the assignment.

KRS 382.360(3).

Kentucky's recording statutes also create a private right of action for certain violations of the recording requirement. See KRS 382.365(3). The landowners argued that a transfer of a note is an assignment of the mortgage securing the note, and therefore the transfer must be recorded.

The defendant banks moved to dismiss. The defendant banks argued that the transfer of a note is not an assignment of the corresponding mortgage for purposes of Kentucky's recording statutes. The district court issued an order denying the defendant banks' motion to dismiss. The district court, however, certified the order for an interlocutory appeal. The United States Court of Appeals, Sixth Circuit agreed with the defendant banks, reversed the district court's ruling and dismissed the suit.

The appellate court acknowledged that, under Kentucky law, transfer of a promissory note effects transfer of an equitable interest in any corresponding mortgage. However, the appellate court determined that acquiring an equitable interest in a mortgage, as is effected through a transfer of a note, is not a mortgage assignment and is not a recordable event. As the court explained, "recording is not required when a party acquires merely an interest in the mortgage, without acquiring the actual mortgage deed." Kentucky's recording statutes expressly distinguished between mortgage assignments-which must be recorded (See KRS 382.360(3))-and note transfers-for which recording is optional (KRS 382.290(3)).

Because the defendant banks only transferred an interest in the notes, the appellate court ruled that the action against the defendant banks should be dismissed. The appellate court summarized the role of MERS as follows:

When a home is purchased, the lender obtains from the borrower a promissory note and a mortgage instrument naming MERS as the mortgagee (as nominee for the lender and its successors and assigns). In the mortgage, the borrower assigns his right, title, and interest in the property to MERS, and the mortgage instrument is then recorded in the local land records with MERS as the named mortgagee. When the promissory note is sold (and possibly re-sold) in the secondary mortgage market, the MERS database tracks that transfer. As long as the parties involved in the sale are MERS members [as are most large financial institutions] MERS remains the mortgagee of record (thereby avoiding recording and other transfer fees that are otherwise associated with the sale) and continues to act as an agent for the new owner of the promissory note.

Higgins v. BAC Home Loans Servicing, LP, 2015 U.S. App. LEXIS 12275 (6th Cir. Ky. July 16, 2015).

A large part of state statutory law affecting the mortgage industry was drafted before the MERS system became an integral part of that industry. Accordingly, MERS operates in a manner that was not considered when relevant statutes were drafted. In Higgins, the court found that MERS still complies with Kentucky mortgage recording requirements.

Higgins v. BAC Home Loans Servicing, LP, 2015 U.S. App. LEXIS 12275 (6th Cir. Ky. July 16, 2015)

Latif Zaman is an associate in the Maryland office of Hudson Cook, LLP. Latif can be reached at 410.782.2346 or by email at

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