The Kansas Court of Appeals recently held that a mortgage was never severed from the underlying note and that a foreclosure was thus permissible, where the mortgage itself clearly established an agency relationship between MERS (as the lender's nominee and the initial mortgagee), and the holder of the note.
A copy of the opinion is available at:
A borrower obtained a loan and was the sole signer of the promissory note. To secure the loan, both the borrower and his wife ("Surviving Mortgagor") executed a mortgage granting the lender ("Plaintiff Bank") a security instrument in property jointly owned by the borrower and the Surviving Mortgagor. The mortgage identified Mortgage Electronic Registration Systems, Inc. ("MERS") as the nominee for Plaintiff Bank, and gave MERS certain rights, including the right to foreclose and sell the property and "to take any action required of Lender." MERS served as the mortgagee of record on behalf of the lender.
The borrower subsequently died and Surviving Mortgagor stopped making payments on the underlying loan. After the loan went into default, MERS assigned the mortgage to Plaintiff Bank. Seeking recovery against the property only, Plaintiff Bank filed a petition to foreclose on its mortgage.
Surviving Mortgagor moved for summary judgment, arguing that she was not personally liable on the debt and that Plaintiff Bank could not foreclose on the property, because the note and mortgage had been "irreparably severed" in that MERS had held the mortgage while Plaintiff Bank held the underlying debt. Surviving Mortgagor also claimed that the borrower's estate was not liable under the note, because Plaintiff Bank had failed to make a timely demand for payment under K.S.A. 59-2239(1), which establishes deadlines for asserting certain claims against a decedent's estate.
Plaintiff Bank filed a cross-motion for summary judgment, arguing in part that the note and mortgage were never severed, because MERS acted as Plaintiff Bank's agent in its role as "nominee for Lender."
The lower court granted Plaintiff Bank's motion for summary judgment, ruling that even if there had been no agency relationship between MERS and Plaintiff Bank due to a split of the note from the mortgage, any such severance had been "cured" by MERS's assignment of the mortgage to Plaintiff Bank, thereby allowing Plaintiff Bank to foreclose on the mortgage.
The Surviving Mortgagor appealed. The Court of Appeals affirmed.
Exploring whether MERS acted as Plaintiff Bank's agent in this case, the appellate court pointed out that, although under Kansas law a mortgage is generally unenforceable when the mortgage is not held by the same party that holds the underlying note, an exception exists where there is an agency relationship between the note holder and the holder of the mortgage. See Landmark Nat'l Bank v. Kesler, 289 Kan. 528, 216 P.3d 158 (2009)(agency relationship between holder of a trust deed and note holder would allow foreclosure).
Following the reasoning of a bankruptcy court that confronted the same issue, the Court observed that the mortgage in this case established an express agency relationship between MERS and Plaintiff Bank. See In re Martinez, 444 B.R. 192 (Bankr. D. Kan. 2011)(a note and mortgage were never severed because the language in the mortgage document explicitly established an agency relationship between MERS and the lender). The Court noted that the mortgage "explicitly authorize[d] MERS to act on behalf of [Plaintiff Bank] in all situations related to the enforcement of the Mortgage." In so doing, the Court pointed out that the use of the term "nominee" rather than "agent" did not alter the nature of the relationship between MERS and Plaintiff Bank.
Accordingly, in ruling that the plain language of the mortgage itself provided undisputed evidence that MERS acted as agent for Plaintiff Bank and that the note was thus never severed from the mortgage, the Court concluded that Plaintiff Bank was entitled to foreclose on its mortgage.
With respect to Surviving Mortgagor's assertion that Plaintiff Bank could not foreclose on the mortgage for failure to demand payment on the note within the time prescribed by K.S.A. 59-2239(1), the Court ruled that the provision was inapplicable in this case, because the statute expressly exempts liens existing at the date of a decedent's death.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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