HSBC Bank USA, N.A. v. Rolando Perez, Juan G. Guerra, Esperanza Medina, LaSalle, Bank, N.A., and U.S. Bank, N.A.

DISTRICT COURT OF APPEAL OF THE STATE OF FLORIDA
FOURTH DISTRICT
HSBC BANK USA, N.A.,
Appellant,
v.
ROLANDO PEREZ, JUAN G. GUERRA, ESPERANZA MEDINA, LaSALLE
BANK, N.A., and U.S. BANK, N.A., as trustee, successor in interest to
Bank of America, N.A., as successor by merger to LaSalle Bank, N.A., as
trustee for Washington Mutual Mortgage Pass-Through Certificates
WMALT Series 2006-6 Trust,
Appellees.
No. 4D13-3193
[May 6, 2015]
Appeal from the Circuit Court for the Seventeenth Judicial Circuit,
Broward County; Barry J. Stone, Senior Judge; L.T. Case Nos. 2008-CA-
059975 and 2009-CA-00264.
Jeremy W. Harris, Masimba M. Mutamba, and Khari E. Taustin of
Morris, Laing, Evans, Brock & Kennedy, Chtd., Wellington, for appellant.
Joseph D. Wargo of Wargo & French, LLP, Miami, and Jeffrey N.
Williams of Wargo & French, LLP, Los Angeles, California, for appellee,
U.S. Bank, N.A.
GROSS, J.
As a result of a fraudulent scheme, two banks took possession of nearly
identical promissory notes secured by the same mortgage. The underlying
transaction contemplated just one note. After payments stopped, both
banks sought to foreclose. The question before us asks which bank may
proceed?
To resolve the dispute, the circuit court applied section 701.02, Florida
Statutes (2008), the recording statute for mortgage assignments. We
conclude that the Uniform Commercial Code, and not the recording
statute, controls this case. Under the Code, the bank that first perfected
its interest in a note and related mortgage is entitled to the priority of its
interest. We therefore reverse the final judgment.
Factual Background
The parties stipulated to the salient facts. On April 17, 2006, appellee
Rolando Perez (“the Borrower”) obtained a loan and mortgage from Federal
Guaranty Mortgage Company (“FGMC”). The mortgage was recorded the
following month in Broward County’s public records. At closing, the
Borrower executed two nearly identical promissory notes in FGMC’s favor,
both for the same amount and both secured by the same mortgage. The
parties agree that the execution of two promissory notes was part of a
larger fraudulent scheme that included other loans.
On June 30, 2006, appellant HSBC Bank USA, N.A. closed on a pooling
and servicing agreement (“PSA”) and took possession of one of the
Borrower’s “original” promissory notes. This transferred promissory note
was specially endorsed from FGMC to American Home Mortgage Corp. and
from American Home Mortgage Corp. to HSBC.
After HSBC’s purchase, appellee LaSalle Bank entered into a separate
PSA, which led to its taking possession of the Borrower’s second “original”
promissory note on August 8, 2006. Like HSBC’s promissory note, the
note obtained by LaSalle Bank contained special endorsements completing
the chain of ownership.
The Borrower defaulted in 2008. At oral argument, it was suggested
that someone other than the Borrower made some payments on one of the
notes to keep the fraudulent scheme alive. After all payments stopped,
both banks commenced separate foreclosure lawsuits and recorded
assignments of mortgage. HSBC recorded its mortgage assignment on
April 24, 2009. LaSalle Bank obtained an assignment of mortgage on June
5, 2009, which stated that the assignment was effective as of January 2,
2009; it recorded this assignment on August 12, 2009. LaSalle Bank
recorded a second assignment of mortgage on October 8, 2010.
At the behest of a third mortgagee, the foreclosure cases were
consolidated. Nevertheless, on March 20, 2012, HSBC—without naming
or serving LaSalle Bank with its motion for summary judgment—obtained
a final judgment of foreclosure and later sold the subject property to Juan
H. Guerra and Esperanza Medina (“the Purchasers”).
With the dual promissory note conundrum still unresolved, the banks
entered into an October 1, 2012 agreed order vacating the final judgment,
sale, and issuance of certificate of title. Frustrated by the divestment of
title, the Purchasers intervened in the consolidated lawsuits and filed a
counterclaim, seeking a declaratory judgment establishing “whether HSBC
or LaSalle is the owner and holder of the FGMC Note and Mortgage which
both parties seek to enforce.” Should HSBC be determined the note’s
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rightful holder, the Purchasers asserted the bank could ratify the prior
sale and execute a new deed in their favor to allow them to retain
possession of the property.
The matter went to a non-jury trial. By that point, LaSalle Bank had
been succeeded as party plaintiff by U.S. Bank, N.A. (“U.S. Bank”). The
trial court entered a final declaratory judgment in U.S. Bank’s favor after
applying section 701.02—Florida’s recording statute for mortgage
assignments. Finding that section 701.02 “appl[ies] to all subsequent
assignments of the original mortgagee,” the trial court found it
determinative that before HSBC recorded its mortgage assignment, “US
Bank obtained its assignment of the same mortgage by closing on its
pooling and servicing agreement, thereby obtaining its equitable interest
in the mortgage.” Since U.S. Bank “obtained its [equitable] assignment for
valuable consideration and without notice of HSBC’s prior assignment,”
the trial court held that, pursuant to section 701.02, U.S. Bank
maintained a priority interest over HSBC as a subsequent bona fide
purchaser.
The Uniform Commercial Code
Article 9 of Florida’s Uniform Commercial Code governing secured
transactions is contained in Chapter 679, Florida Statutes. Generally,
Chapter 679 “does not apply to the creation of” a real property mortgage.
§ 679.1091, Fla. Stat. Ann., UCC cmt. 7 (West 2008); see also §
679.1091(3)(k), Fla. Stat. (2008). However, if, as occurred in this case, the
note in a mortgage transaction is sold or assigned, Chapter 679 applies to
the security interest created in favor of the purchaser or assignee of the
note. As Comment 7 to section 679.1091 explains:
O borrows $10,000 from M and secures its repayment
obligation, evidenced by a promissory note, by granting to M
a mortgage on O’s land. [Article 9] does not apply to the
creation of the real-property mortgage. However, if M sells the
promissory note to X or gives a security interest in the note to
secure M’s own obligation to X, [Article 9] applies to the
security interest thereby created in favor of X. The security
interest in the promissory note is covered by [Article 9] even
though the note is secured by a real-property mortgage.
Once HSBC took possession of the note it had an Article 9 security interest
in the note. Because of the application of section 679.1091(2), HSBC’s
possession of the note gave it “an attached security interest in the
mortgage lien that secure[d] the note.” § 679.1091, Fla. Stat. Ann., UCC
cmt. 7 (West 2008). Once HSBC perfected its security interest in the note,
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“the security interest in the mortgage lien likewise [was] perfected.” Id.;
see also Report of the Permanent Editorial Board for the Uniform
Commercial Code: Application of the Uniform Commercial Code to Selected
Issues Relating to Mortgage Notes, at 2 (Nov. 14, 2011), available at
http://www.ali.org/00021333/PEB%20Report%20-
%20November%202011.pdf.
This scenario is consistent with the notion that the promissory note,
not the mortgage, is the operative instrument in a mortgage loan
transaction, since “a mortgage is but an incident to the debt, the payment
of which it secures, and its ownership follows the assignment of the debt.”
WM Specialty Mortg., LLC v. Salomon, 874 So. 2d 680, 682 (Fla. 4th DCA
2004) (quoting Johns v. Gillian, 184 So. 140, 143 (Fla. 1938)). “If the note
or other debt secured by a mortgage be transferred without any formal
assignment of the mortgage, or even a delivery of it, the mortgage in equity
passes as an incident to the debt . . . . ” Id.Under section 679.2031(1), Florida Statutes (2008), a security interest
attaches to collateral “when it becomes enforceable against the debtor with
respect to the collateral.” An assignment of a promissory note “attaches”—
in other words, becomes enforceable against the assignor and debtor with
respect to the collateral—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,
(2008). See § 679.2031(1), (2), Fla. Stat. (2008). As applied to the third
requirement, the promissory note itself is the “collateral,” see §
679.1021(1)(l)2., Fla. Stat. (2008), and the written assignment constitutes
the “security agreement,” see §§ 679.1021(1)(ttt), 671.201(35), Fla. Stat.
(2008). Here, HSBC’s security interest attached, at the latest, when it took
possession of its note.
Attachment has “two general consequences.” 4 James J. White &
Robert S. Summers, Uniform Commercial Code § 31-1, at 111 (6th ed.
2010). “First, if the debtor defaults, the secured creditor can foreclose or
otherwise realize on the collateral to satisfy the claim.” Id. Second, subject
to exceptions, “the secured party can, in general, take the collateral from,
or to the exclusion of, third parties.” Id. Chapter 679 distinguishes
“attachment” of a security interest from its “perfection.” “It is perfection .
. . that affords maximum secured creditor protection against third parties
. . . . ” Id.; see also Commercial Credit Counseling Servs., Inc. v. W.W.
Grainger, Inc., 840 N.E.2d 843, 848 (Ind. Ct. App. 2006).
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Perfection
One method of perfecting a security interest in a promissory note is by
taking possession of the original promissory note. See § 679.3131(1), Fla.
Stat. (2008);1 4 J. White & R. Summers, supra, § 31-8. A note is an
“instrument” and a security interest can be perfected by taking possession
of it. See First Nat’l Bank of Boston v. Larson (In re Kennedy Mortg. Co.),
17 B.R. 957, 964-65 (Bankr. D. N.J. 1982).
Perfection is significant because it serves two important purposes: (1)
determining matters of priority and (2) providing third parties with notice
of the transaction. Article 9’s perfection requirements were “adopted to
provide a notice system similar to that provided by the recordation of real
estate conveyances.” In re S. Props., Inc., 44 B.R. 838, 844 (Bankr. E.D.
Va. 1984). As one commentator has explained:
The basic idea is that the secured creditor must do something
to give effective public notice of his interest; if he leaves the
property in the debtor’s possession and under his apparent
control, the debtor will be . . . enabled to sell the property to
innocent purchasers or to induce other innocent persons to
lend money to him on the strength of his apparently
unencumbered assets.
David A. Ebroon, Perfection by Possession in Article 9: Challenging the
Arcane but Honored Rule, 69 Ind. L.J. 1193, 1194 (1994) (quoting Grant
Gilmore, Security Interests in Personal Property § 14.1, at 438 (1965)).
Possession of a promissory note effectively gives “notice to third-parties
that the creditor has an interest in the collateral.” Hutchison v. C.I.T. Corp.,
726 F.2d 300, 302 (6th Cir. 1984). “The debtor’s lack of possession
coupled with actual possession by the creditor, the creditor’s agent or the
bailee serves to provide notice to prospective third party creditors that the
1Section 679.3131(1) provides:
(1) Except as otherwise provided in subsection (2), a secured party
may perfect a security interest in negotiable documents, goods,
instruments, money, or tangible chattel paper by taking possession
of the collateral. A secured party may perfect a security interest in
certificated securities by taking delivery of the certificated securities
under s. 678.3011.
In addition, possession can be effectuated through a bailee. See § 679.3131(3),
Fla. Stat. (2008).
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debtor no longer has unfettered use of (his) collateral.” Heinicke
Instruments Co. v. Republic Corp., 543 F.2d 700, 702 (9th Cir. 1976)
(internal quotation omitted). The Ninth Circuit has written that “the only
notice sufficient to inform all interested parties that a security interest in
instruments has been perfected is actual possession by the secured party,
his agent or bailee.” Huffman v. Wikle (In re Staff Mortg. & Inv. Corp.), 550
F.2d 1228, 1230 (9th Cir. 1977). An inability to produce a note that is in
a secured party’s possession would effectively give notice of the secured
party’s interest. 4 J. White & R. Summers, supra, § 30-8.
Priority
Both the timing and the method of obtaining perfection are key to
establishing priority. Pursuant to section 679.322(1)(a), Florida Statutes
(2008), “[c]onflicting perfected security interests . . . rank according to
priority in time of filing or perfection.” The “guiding principle” of section
679.322 “is that the secured party who . . . perfects before the other
person, wins.” 4 J. White & R. Summers, supra, § 33-3, at 326. Section
679.330(4), Florida Statutes (2008), dictates that “a purchaser of an
instrument has priority over a security interest in the instrument
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.”
(Emphasis added).
In this case, by taking possession of the promissory note before LaSalle
Bank, HSBC was the first to perfect its interest in a note connected to the
underlying mortgage.
Under these principles, HSBC’s reliance upon Provident Bank v.
Community Home Mortgage Corp., 498 F. Supp. 2d 558 (E.D.N.Y. 2007), is
both instructive and persuasive. In Provident Bank, the defendant—
categorized as a “warehouse lender”2—engaged in a scheme known as
2White and Summers explain that a “warehouse lender” operates in the
secondary mortgage market where lenders warehouse mortgages. 4 J. White &
R. Summers, supra, § 30-8(a), at 62.
In warehousing arrangements, one party lends against large
numbers of mortgages for short periods of time. These lenders want
an inexpensive and simple mode of perfection against the creditors
of the mortgagee. The lender may find it prohibitively expensive to
examine the title and to file a real estate recording in the name of
each mortgagee. To require lenders to do so would not materially
enhance the knowledge of third party creditors and might make
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“double-booking,” wherein it had mortgage borrowers “execute[ ] duplicate
original promissory notes and mortgage assignments” so the defendant
could obtain “duplicate funding for one loan from two different” sources.
Id. at 562. The Provident Bank scheme is similar to the fraud in this case.
Pursuant to its scheme, the defendant sold nine promissory notes to two
banks—NetBank and Southwest Securities Bank. In most of the cases,
Southwest recorded its mortgage assignments first but NetBank first took
possession of the notes. Id. at 563. Ultimately, Southwest moved for
summary judgment, contending that pursuant to New York’s recording
statute it held priority over NetBank. Id. at 565. NetBank countered that
Article 9’s priority rules should govern. Id.
The federal district court rejected Southwest’s argument for priority
based in its earlier real estate recording. Id. at 568. The court observed
that recording statutes have “little bearing in a case where . . . the parties
contest the supremacy of perfecting the security interest in the note versus
perfecting the security interest in the mortgage in determining priority.” Id.
The court held that the mortgage follows the debt and that NetBank’s
earlier possession of the notes entitled it to priority as first perfected under
Article 9. Id. at 569, 571.
White and Summers observe that “[t]o the extent that [Provident Bank]
shows that one should look to Article 9 . . . it is clearly right.” 4 J. White
& R. Summers, supra, § 30-8, at 65. Looking to Article 9 for resolution
leads to a “sensible outcome,” but the existence of two “original” notes
“makes the case’s footing in Article 9 slippery.” Id. “In general the rules
in Article 9 are not designed to deal with the transaction in which there
are two ‘originals’ . . . . ” Id. The Provident Bank approach recognizes that
perfection by possession of a note will not be problematic in the vast
majority of cases and avoids the cost of imposing a recording procedure
disruptive to the lending industry based on difficult facts.
Like NetBank, HSBC in this case established its priority in the note—
and, by extension, the mortgage—by virtue of being the first to perfect its
interest through possession. The Code does not leave LaSalle Bank
without a remedy. Under section 673.4161(1), Florida Statutes (2014),
LaSalle has an action for breach of warranty against the transferor of the
note, a remedy more theoretical than practical given the existence of the
scheme to defraud.
traditional practices in the secondary mortgage market so expensive
that they would be abandoned.
Id. § 30-8(a), at 62-63.
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Section 701.02 Does Not Apply as Between the Dueling Mortgage
Assignments in This Case
We reject LaSalle Bank’s argument that section 701.02 compels a result
in its favor. Two cases—American Bank of the South v. Rothenberg, 598
So. 2d 289 (Fla. 5th DCA 1992), and JP Morgan Chase v. New Millennial,
LC, 6 So. 3d 681 (Fla. 2d DCA 2009)—touch on the application of section
701.02 to successive assignees of a note and mortgage. We agree with
Rothenberg that the statute has no application to such successive
assignees, a conclusion reinforced by the 2005 amendments to section
701.02 and Uniform Commercial Code Comment 7 to section 679.1091.
Section 701.02 is entitled “Assignment not effectual against creditors
unless recorded and indicated in the title of document.” The statute
provides:
(1) An assignment of a mortgage upon real property or of any
interest therein, is not good or effectual in law or equity,
against creditors or subsequent purchasers, for a valuable
consideration, and without notice, unless the assignment is
contained in a document that, in its title, indicates an
assignment of mortgage and is recorded according to law.
(2) This section also applies to assignments of mortgages
resulting from transfers of all or any part or parts of the debt,
note or notes secured by mortgage, and none of same is
effectual in law or in equity against creditors or subsequent
purchasers for a valuable consideration without notice, unless
a duly executed assignment be recorded according to law.
(3) Any assignment of a mortgage, duly executed and recorded
according to law, purporting to assign the principal of the
mortgage debt or the unpaid balance of such principal, shall,
as against subsequent purchasers and creditors for value and
without notice, be held and deemed to assign any and all
accrued and unpaid interest secured by such mortgage,
unless such interest is specifically and affirmatively reserved
in such an assignment by the assignor, and a reservation of
such interest or any part thereof may not be implied.
(4) Notwithstanding subsections (1), (2), and (3) governing the
assignment of mortgages, chapters 670-680 of the Uniform
Commercial Code of this state govern the attachment and
perfection of a security interest in a mortgage upon real
property and in a promissory note or other right to payment
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or performance secured by that mortgage. The assignment of
such a mortgage need not be recorded under this section for
purposes of attachment or perfection of a security interest in
the mortgage under the Uniform Commercial Code.
(5) Notwithstanding subsection (4), a creditor or subsequent
purchaser of real property or any interest therein, for valuable
consideration and without notice, is entitled to rely on a full
or partial release, discharge, consent, joinder, subordination,
satisfaction, or assignment of a mortgage upon such property
made by the mortgagee of record, without regard to the filing
of any Uniform Commercial Code financing statement that
purports to perfect a security interest in the mortgage or in a
promissory note or other right to payment or performance
secured by the mortgage, and the filing of any such financing
statement does not constitute notice for the purposes of this
section. For the purposes of this subsection, the term
“mortgagee of record” means the person named as the
mortgagee in the recorded mortgage or, if an assignment of
the mortgage has been recorded in accordance with this
section, the term “mortgagee of record” means the assignee
named in the recorded assignment.
§ 701.02, Fla. Stat. (2008).
Conflicting Case Law
Rothenberg involved a mortgagee-lender who assigned a note and
mortgage to American Bank, delivering to the bank the original promissory
note as collateral for a line of credit. 598 So. 2d at 289. Prior to American
Bank recording an assignment, Rothenberg purchased the note and
mortgage from the mortgagee and recorded an assignment of mortgage.
Id. at 289-90. Rothenberg did not, however, take possession of the note.
The Rothenberg parties framed their priority arguments around the
application of section 701.02. Id. at 290. Ultimately, the Fifth District
resolved the matter in American Bank’s favor, but not based on section
701.02. The court concluded that the section did not apply to successive
assignments of a note and mortgage:
The confusion in this case arises from the failure of both
parties to recognize that section 701.02 . . . is inapplicable.
This case, involving as it does the competing interests of
successive assignees of a note and mortgage, is governed by
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negotiable instruments law, not the recording statute. Section
701.02 was enacted to protect a creditor or subsequent
purchaser of land who has relied on the record satisfaction of
a prior mortgage, which satisfaction was executed by the
mortgagee after he made an unrecorded assignment of the
same mortgage. Manufacturers’ Trust Co. v. People’s Holding
Co., 110 Fla. 451, 149 So. 5 (1933). See Rogers, Chapter
20,954, Acts of 1941 (Dealing with Real Property), 15 Fla. L.J.
276 (Oct. 1941). Nothing in the statute makes it applicable to
successive assignees of mortgages and we decline to so extend
it.
Id. (footnote omitted). With section 701.02 cast aside, the court applied
Chapter 673 of Florida’s Uniform Commercial Code to hold American
Bank’s interest superior to Rothenberg’s by virtue of its status “as
possessor of a valid assignment of mortgage and holder in due course of
the original note.” Id. at 291.
Seventeen years later, in JP Morgan Chase, the second district
confronted section 701.02’s application to successive assignees of the
same mortgage, albeit under a vastly different fact pattern. In that case,
the mortgagee-lender, AmSouth, assigned the borrower’s two mortgages to
JP Morgan, but the bank failed to record the assignments. 6 So. 3d at
683. Years later, the borrower entered into an agreement to sell the
property to New Millennial. Id. In the process of obtaining title insurance,
New Millennial’s closing agent contacted AmSouth after a title search
revealed two recorded mortgages on the property. Id. Following a phone
conversation, an unidentified AmSouth representative told New Millennial
that the “loans were paid off” and later faxed to the closing agent two
computer screen printouts indicating the payoff. Id. Thereafter, when New
Millennial failed to pay and JP Morgan instituted foreclosure proceedings,
New Millennial argued section 701.02 rendered JP Morgan’s notes and
mortgages ineffective and unenforceable against it because JP Morgan
failed to record its mortgage assignments. Id.The second district ruled in favor of JP Morgan on the grounds that
New Millennial had “actual knowledge” that the two recorded mortgages
existed and had not been satisfied. Id. at 686. However, in reaching this
result, the court interpreted section 701.02(1) as applying “only . . . to
estop an earlier purchaser/assignee of a mortgagee—the person or entity
that loaned the money involved in the mortgage and obtained a security
interest on the piece of property—from claiming priority in the same
mortgage chain as against a subsequent assignee of the same mortgage
when the earlier mortgagee fails to record the earlier assignment of the
mortgage.” Id. at 685 (emphasis added). As illustration, the court used
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the following example: “[I]f the original mortgagee assigns the mortgage to
Entity A and Entity A fails to record that assignment, Entity A cannot claim
priority over a latter assignee of the same mortgage (Entity B).” Id.While JP Morgan Chase did not acknowledge Rothenberg, its
characterization of section 701.02 is directly at odds with the fifth
district—the former standing for the proposition that section 701.02
applies only to competing interests of successive assignees, and the latter
concluding that it does not apply at all.
Both the Plain Language of Section 701.02(1) and the 2005 Amendment
Contained in Section 701.02(4) Demonstrate that the Statute Does Not
Apply to Determine Priority Between the Mortgage Assignments in this
Case
In 1828, Florida enacted its first recording statute, which, at the time,
provided in relevant part:
That no conveyance, transfer or mortgage of real property, or
of any interest therein, shall be good or effectual in law, or in
equity against creditors or subsequent purchasers for a
valuable consideration and without notice, unless the same
shall be recorded in the office assigned by law for that purpose
....
Act Nov. 15, 1828 §§ 4, 9.3 The general recording statute’s current
iteration, codified within section 695.01, Florida Statutes (2008), largely
preserves the original’s wording and force.4
3Anelectronic version of the 1828 Act is available through the State Archives’
website at: https://archive.org/stream/actsofle1828flor#page/156/mode/2up.
4Section 695.01, Florida Statutes (2008), provides in relevant part:
No conveyance, transfer, or mortgage of real property, or of any
interest therein, nor any lease for a term of 1 year or longer, shall
be good and effectual in law or equity against creditors or
subsequent purchasers for a valuable consideration and without
notice, unless the same be recorded according to law; nor shall any
such instrument made or executed by virtue of any power of
attorney be good or effectual in law or in equity against creditors or
subsequent purchasers for a valuable consideration and without
notice unless the power of attorney be recorded before the accruing
of the right of such creditor or subsequent purchaser.
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While the 1828 act referenced “conveyances,” “transfers,” and
“mortgages,” it did not include the term “mortgage assignments.” Some
state courts confronting similar wording construed their recording
statutes to include mortgage assignments. See, e.g., Gray v. Delpho, 162
N.Y.S. 194, 198 (N.Y. Sup. Ct. 1916) (“A mortgage is held to be a
conveyance and an assignee thereof a purchaser within the meaning of
this statute.”); Second Nat’l Bank v. Dyer, 184 A. 386, 388 (Conn. 1936).
Florida, however, did not, as the Supreme Court construed “assignment[s]
of a mortgage lien [a]s not [being] ‘a conveyance’ or a ‘transfer’ of ‘any
interest’ in land covered by the mortgage.” Garrett v. Fernauld, 57 So. 671,
672 (Fla. 1912).
Three years after Garrett, the Florida Legislature enacted section
701.02.5 Although there is no legislative history from that time period,
Justice Stephen Grimes—while a student at the University of Florida Law
School—explained in a 1954 case note that “the statute was apparently
passed to protect purchasers of the land in situations in which the
mortgagee makes a fraudulent satisfaction of the mortgage subsequent to
an unrecorded assignment.”6 Stephen H. Grimes, Mortgages: Effect of
Failure to Record a Mortgage Assignment in Florida, 7 U. Fla. L. Rev. 93, 97
(1954). The fifth district relied upon Justice Grimes’ note to reach its
conclusion in Rothenberg. 598 So. 2d at 290 n.2.
Justice Grimes’ note casts doubt on the statute’s applicability to
assignees of the same note and mortgage, unless courts “construe[d] the
terms ‘creditors or subsequent purchasers’ to include an assignee.”
Grimes, supra, at 96. As quoted in Rothenberg, Justice Grimes expressed
§ 695.01(1), Fla. Stat. (2008).
5As enacted in 1915, the statute provided: “No assignment of a mortgage upon
real property or of any interest therein, shall be good or effectual in law or equity,
against creditors or subsequent purchasers, for a valuable consideration, and
without notice, unless the same be recorded according to law.” Laws 1915, c.
6909, § 1.
6For example, Justice Grimes posited a hypothetical scenario wherein a
mortgagee (1) assigns a mortgage to a third party who fails to record and (2) then
files a satisfaction. Thereafter, a prudent purchaser looking to the real estate
records would see only a satisfaction of the prior mortgage, leading one to believe
the property to be free and clear of encumbrances. Application of section 701.02
would stave off the inequitable result of an unaware purchaser being burdened
with the absent mortgage assignment.
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three concerns for concluding that section 701.02 does not apply to
successive assignments of the same debt and mortgage:
First, the statute by its express terms applies only to
“creditors or subsequent purchasers.” The failure of the
Legislature to include successive assignees among those
protected by the statute is certainly some indication of an
intent to exclude them from its operation. Second, to apply
the statute to successive assignments of the same debt and
mortgage may result in a separation of the debt and the
security. Such a result is patently undesirable. The holder
of the mortgage unaccompanied by the debt has no
enforceable right against the mortgagor. The mortgage, in
such a situation, is a meaningless piece of paper. On the
other hand, the holder of the debt alone has no security upon
which he can depend for satisfaction thereof. In either case,
the mortgagor receives an undeserved windfall. Finally, the
statute was apparently passed to protect purchasers of the
land in situations in which the mortgagee makes a fraudulent
satisfaction of the mortgage subsequent to an unrecorded
assignment. The problem of the priority of successive
assignees of the same note and mortgage was not then before
the Legislature.
598 So. 2d at 290 n.2 (quoting Grimes, supra, at 97); accord Matter of Ascot
Mortg., Inc., 153 B.R. 1002, 1010 (Bankr. N.D. Ga. 1993).7
7The bankruptcy court in Matter of Ascot agreed with the Grimes/Rothenberg
approach to section 701.02, stating:
[T]he Florida recording statute, in common with those of many other
jurisdictions, extends protection only to subsequent purchasers for
value and mortgagees and other lien claimants against the
underlying land (i.e., those operating in the mortgagor’s world).
They do not apply to those operating in the mortgagee’s world.
Where the matter has been carefully considered, the courts have
recognized that the recording acts, if they apply at all, apply only as
between the assignee or other claimant in the mortgage and the
owner of the underlying land or those who claim through him; they
do not apply as between competing assignees or successive
claimants in the mortgage.
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We agree with the Grimes/Rothenberg view that section 701.02 was
designed to confront issues pertaining to real property. See David E.
Peterson, Cracking the Mortgage Assignment Shell Game, 85 Fla. B.J. 10,
15-17 (Nov. 2011). As Justice Grimes observed, section 701.02(1) requires
recording to make an assignment of a mortgage “good or effectual” against
“creditors or subsequent purchasers”; however, the statute omits any
reference to “subsequent assignees.” In a statute dealing with
assignments, had the Legislature intended to treat subsequent assignees
the same as “creditors or subsequent purchasers,” it would have said so.
Any doubt that section 701.02 does not apply to the assignment of a
mortgage was laid to rest in 2005 when the Legislature added section
701.02(4). That subsection provides that “[n]otwithstanding” subsections
701.02(1)-(3) “governing the assignment of mortgages,”
chapters 670-680 of the Uniform Commercial Code of this
state govern the attachment and perfection of a security
interest in a mortgage upon real property and in a promissory
note or other right to payment or performance secured by that
mortgage. The assignment of such a mortgage need not be
recorded under this section for purposes of attachment or
perfection of a security interest in the mortgage under the
Uniform Commercial Code.
The section establishes that it is the Uniform Commercial Code, and
not recording pursuant to section 701.02, that determines “attachment
and perfection” of a security interest in a note and mortgage. As discussed
above, the Code provides that earlier “perfection” gives a secured party
priority over latecomers.
Legislative history of the 2005 amendment supports the notion that it
is the Uniform Commercial Code that determines priority of mortgage
assignments and not section 701.02. The staff analysis explained its
purpose as deriving from the concerns of warehousing banks8 dealing in
153 B.R. at 1010 (quoting Jan Z. Krasnowiecki, et al., The Kennedy Mortgage Co.
Bankruptcy Case: New Light Shed on the Position of Mortgage Warehousing Banks,
56 Am. Bankr. L.J. 325, 336 (1982)).
8According to the staff analysis:
Mortgage warehousing is a process in which a warehousing bank
provides financing to mortgage lenders to issue mortgage loans.
The financing from the warehousing bank to the mortgage lender is
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large volumes of mortgages that they would not “be secure in the
underlying mortgages without having to record the assignment of the
security interest and incur the costs of recording.” Fla. S. Justice Approp.
Comm., S.B. 370 (2005) Staff Analysis 4 (Apr. 4, 2005). The source of the
banks’ uneasiness derived from Rucker v. State Exchange Bank, 355 So.
2d 171, 174 (Fla. 1st DCA 1978), which held that “the assignment of a real
estate mortgage securing a promissory note as collateral for a bank loan
is not a secured transaction under Article 9” of the UCC. Some in the
mortgage-servicing industry interpreted Rucker as potentially standing “for
the proposition that the assignment of a security interest in a mortgage or
the assignment of a mortgage must be recorded in order to perfect the
security interest in the mortgage.” Id. at 5.
The staff analysis explained the bill sought to debunk this myth,
stating:
Article 9 of the [UCC], which is codified as ch. 679, F.S., was
revised since Rucker to clearly indicate that the assignment of
a mortgage securing a promissory note is a secured
transaction. Under s. 679.3131, F.S., one perfects a security
interest in a real estate mortgage by possession of the
promissory note. Alternatively the secured party can be
perfected through filing under s. 679.3121, F.S. . . . The act
of recording an interest in a mortgage is costly to the mortgage
lending industry in terms of time and money. As a result,
many assignments of an interest in Florida mortgages are not
recorded. These unrecorded mortgage assignments are
viewed by warehousing banks as having more risk than
recorded assignments. Florida borrowers may pay for the
increased risk borne by warehousing banks through higher
borrowing costs.
Id. (footnotes omitted). The staff analysis echoes the same concerns voiced
by White and Summers in footnote 2, above.
In sum, the Legislature added subsection (4) to eliminate any
“ambiguity as to whether assignments of security interests in
mortgages must be recorded to be secured” by “clarify[ing] that the
secured by a security interest in the underlying mortgages. The
funds are advanced to the mortgage lender for a temporary period
of time to allow the mortgage to be sold to a permanent investor.
Fla. S. Justice Approp. Comm., S.B. 370 (2005), Staff Analysis 4 (Apr. 4, 2005).
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[UCC] governs whether an assignment of a security interest in a mortgage
has perfected or attached to the mortgage.” Id. at 7-8 (emphasis added).
Finally, the inapplicability of section 702.01 to determine priority
between competing mortgage assignments is supported by Uniform
Commercial Code Comment 7 to section 679.1091. Comment 7 provides
that it follows from subsection 679.1091(2)9
that an attempt to obtain or perfect a security interest in a
secured obligation by complying with non-Article 9 law, as by
an assignment of record of a real-property mortgage, would be
ineffective. Finally, it is implicit from [subsection (2)] that one
cannot obtain a security interest in a lien, such as a mortgage
on real property, that is not also coupled with an equally
effective security interest in the secured obligation.
Because section 702.01 does not apply as between HSBC and LaSalle
Bank, HSBC’s earlier perfection of its security interest in a note arising
from the Perez-FGMC transaction establishes its priority over LaSalle. We
therefore reverse the final judgment and remand to the circuit court for
the entry of a final judgment in favor of HSBC.
WARNER and FORST, JJ., concur.
* * *
Not final until disposition of timely filed motion for rehearing.
9Subsection 679.1091(2) states:
The application of this chapter to a security interest in a secured
obligation is not affected by the fact that the obligation is itself
secured by a transaction or interest to which this chapter does not
apply.
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