Larry Higgins, et al v. BAC Home Loans Servicing, LP, et al

Filing

OPINION and JUDGMENT filed : The order appealed from in Case No. 14-6168 is REVERSED, and the interlocutory appeal in Case No. 14-6167 is DISMISSED. Decision for publication. Gilbert S. Merritt, Danny J. Boggs, and John M. Rogers (AUTHORING), Circuit Judge. [14-6167, 14-6168]

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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 15a0153p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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LARRY HIGGINS, W. GLENN PERRY, JUANITA
BUCKHALTER CLARKE, SHEILA H. BAKER, RHONDA
A. DAY, DAVID NADEAU, and MARTHA MEGREDY,
Plaintiffs-Appellees,

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Nos. 14-6167/6168

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v.
BAC HOME LOANS SERVICING, LP, BANK OF
AMERICA, N.A., JPMORGAN CHASE BANK, N.A.,
U.S. BANK, N.A., and WELLS FARGO BANK, N.A.
(14-6168); FEDERAL NATIONAL MORTGAGE
ASSOCIATION and FEDERAL HOUSING FINANCE
AGENCY (14-6167),
Defendants-Appellants.

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Appeal from the United States District Court
for the Eastern District of Kentucky at Lexington.
No. 5:12-cv-00183—Karen K. Caldwell, Chief District Judge.
Argued: April 30, 2015
Decided and Filed: July 16, 2015
Before: MERRITT, BOGGS, and ROGERS, Circuit Judges.
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COUNSEL
ARGUED: Michael A.F. Johnson, ARNOLD & PORTER LLP, Washington, D.C., for
Appellants in 14-6167. Thomas M. Hefferon, GOODWIN PROCTER LLP, Washington, D.C.,
for Appellants in 14-6168. Carroll M. Redford, III, MILLER, GRIFFIN & MARKS, P.S.C.,
Lexington, Kentucky, for Appellees. ON BRIEF: Michael A.F. Johnson, Howard N. Cayne,
Asim Varma, Dirk C. Phillips, ARNOLD & PORTER LLP, Washington, D.C., Jill L. Nicholson,
FOLEY & LARDNER LLP, Chicago, Illinois, for Appellants in 14-6167. Thomas M. Hefferon,
Joseph F. Yenouskas, GOODWIN PROCTER LLP, Washington, D.C., Richard A. Vance,
Bethan A. Breetz, STITES & HARBISON, PLLC, Louisville, Kentucky, Dustin E. Meek,
TACHAU MEEK PLC, Louisville, Kentucky, Elizabeth Frohlich, MORGAN LEWIS &

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BOCKIUS LLP, San Francisco, California, Allyson N. Ho, MORGAN LEWIS & BOCKIUS
LLP, Dallas, Texas, for Appellants in 14-6168. Carroll M. Redford, III, David T. Faugh,
Elizabeth C. Woodford, MILLER, GRIFFIN & MARKS, P.S.C., Lexington, Kentucky, J.D.
Kermode, ATKINSON, SIMS & KERMODE PLLS, Lexington, Kentucky, for Appellees.
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OPINION
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ROGERS, Circuit Judge. Kentucky’s recording statutes require that an assignment of a
mortgage must be recorded within 30 days. Plaintiffs in this putative class action contend that,
for purposes of the recording requirement, a transfer of a promissory note is an assignment of a
mortgage securing the note, such that the transfer must be recorded. The district court below
agreed and issued an order to that effect, but certified the order for interlocutory appeal, which
we granted. Notwithstanding the thoughtful opinion of the district court, the text, structure, and
purposes of Kentucky’s recording statutes indicate that transfer of a promissory note is not, by
itself, an assignment of a mortgage securing the note. Our resolution of that question makes it
unnecessary to resolve the companion interlocutory appeal before us regarding whether the
applicable enforcement provision of Kentucky’s recording statutes imposes a “penalty” of the
sort from which defendant Federal National Mortgage Association is immune under federal
statute.
These appeals arise in the context of the widespread use of the Mortgage Electronic
Registration System (“MERS”), “a privately-held company that operates a national electronic
registry to track servicing rights and ownership of mortgage loans in the United States.”
Christian Cnty. Clerk ex rel. Kem v. Mortg. Elec. Registration Sys., Inc., 515 F. App’x 451, 452
(6th Cir. 2013). We have previously summarized MERS’s operations 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],

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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.
Id. (quoting In re MERS Litig., 659 F. Supp. 2d 1368, 1370 n.6 (J.P.M.L. 2009)).
Plaintiffs are landowners who obtained loans in exchange for promissory notes secured
by mortgages on their Kentucky properties. The mortgages were all duly recorded with the
appropriate county records offices. Each mortgage deed designated MERS as the mortgagee,
“solely as nominee for Lender and Lender’s successors and assigns.”
The original noteholders and their assignees—all members of MERS—subsequently
transferred the notes to defendants, all of whom are also members of MERS. As the notes
changed hands, MERS remained the mortgagee-of-record, in its capacity “as nominee for the
[original] Lender and [that] Lender’s successors and assigns.” In accepting transfer of the notes,
however, defendants acquired—by operation of Kentucky law—equitable interests in the
mortgages securing the notes. See id. at 455. Defendants did not record with county records
offices their acquisitions of these equitable interests in the mortgages.
Plaintiffs filed a complaint in federal district court alleging that transfer of the notes was
an assignment of the underlying mortgages for purposes of Kentucky’s recording statutes. Those
statutes mandate, inter alia, that, “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). The recording statutes also create a private right of action for
certain violations of the recording requirement, see KRS 382.365(3), and specify that damages
for certain violations of the recording requirement “shall not exceed three (3) times the actual
damages, plus attorney’s fees and court costs, but in no event less than five hundred dollars
($500),” KRS 382.365(5).

Because defendants had not timely recorded the mortgage

assignments allegedly resulting from the note transfers, plaintiffs claimed defendants owed them
$500 per transfer.
Defendants moved to dismiss on the ground that transfer of a promissory note is not an
assignment of the corresponding mortgage for purposes of Kentucky’s recording statutes, so that
defendants did not violate Kentucky’s recording statutes by not recording the note transfers. The

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district court rejected that argument, holding, consistent with plaintiffs’ theory of the case, that:
(1) the transfer of a note secured by a mortgage effects an assignment of the underlying
mortgage; (2) Kentucky’s recording statutes require recording of all mortgage assignments,
including those that occur by operation of law; and (3) “where a secured note is assigned by
delivering the note to the assignee, the assignment of the mortgage that occurs by operation of
law should be recorded as provided in Kentucky’s recording statutes.” Higgins, et al. v. BAC
Home Loans Servicing, LP, No. 12-cv-183, 2014 WL 1333069, at *7 (E.D. Ky. Mar. 31, 2014).
In the alternative, defendants argued for dismissal on the ground that plaintiffs lacked a
private right of action against them. Defendants contended that KRS 382.360 and KRS 382.365
authorized suit and recovery against lienholders only after satisfaction of the underlying debt.
Since plaintiffs had not paid off their mortgages or sought release of the mortgages, defendants
insisted that neither KRS 382.360 nor KRS 382.365 afforded plaintiffs a private right of action.
The district court rejected that argument as well, holding that plaintiffs had a private right of
action under KRS 382.365(3), which provides that “A proceeding may be filed by any owner of
real property or any party acquiring an interest in the real property in District Court or Circuit
Court against a lienholder that violates [subsection (2), which requires compliance with the
recording requirements of KRS 382.360].”

Plaintiffs had a cause of action under KRS

382.365(3), the district court reasoned, because they had plausibly alleged that defendants failed
to timely record certain assignments, despite having acquired an interest in the mortgages to
plaintiffs’ properties. Higgins, 2014 WL 1333069, at *13.
On the same day that the district court issued its order largely denying defendants’ joint
motion to dismiss, another federal district court in Kentucky reached the opposite conclusion on
a materially indistinguishable motion in an indistinguishable case. See Ellington v. Fed. Home
Loan Mortg. Corp., 13 F. Supp. 3d 723, 729–30 (W.D. Ky. 2014). The Ellington court held that
transfer of an equitable interest in the mortgage—as occurs with a transfer of a promissory
note—“is not a mortgage assignment or a recordable event under KRS § 382.360.” Id. at 729.
Under plaintiffs’ theory of the case, the Ellington court explained, every note transfer would
result in an obligation to record, because every note transfer would, in effect, double as a
mortgage assignment. The Ellington court determined that such a result was inconsistent with the

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terms of Kentucky’s recording statutes, which treat notes and mortgages as separate legal
instruments, address them in separate provisions, and provide that recording of note transfers is
optional, rather than mandatory. Id. Because “[i]t is a primary rule of statutory construction that
the enumeration of particular things excludes the idea of something else not mentioned,” the
Ellington court held that the mortgage assignment statutes on which the suit rested do not require
recording of a note transfer or the transfer of any interests in the mortgage incidental to the note
transfer. Id.
The statutory language on balance supports the analysis in Ellington, and the district
court in this case should have granted defendants’ motion to dismiss. It is true that, under
Kentucky law, transfer of a promissory note effects a transfer of an equitable interest in any
corresponding mortgage. See, e.g., Drinkard v. George, 36 S.W.2d 56, 57 (Ky. 1930). That,
however, is not the issue in this case. The issue here is whether KRS 382.360(3) requires
recording whenever a party acquires an interest in a mortgage, regardless of whether the party
acquires the actual mortgage. The text, structure, and purposes of Kentucky’s recording statutes
compel the conclusion that recording is not required when a party acquires merely an interest in
the mortgage, without acquiring the actual mortgage deed.
KRS 382.360(3) provides:
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 and the county clerk shall attest the assignment and shall note the
assignment in the blank space, or in a marginal entry record, beside a listing of the
book and page of the document being assigned.
Although the statute does not make express whether “mortgage” means “the mortgage deed” or
simply “an interest in the mortgage,” it does mention “filing” and notation “of the document
being assigned.”

This suggests the statute applies with respect to assignments of fileable

documents—i.e., mortgage deeds—and not with respect to assignments of intangible interests.
Language from other sections of the recording statutes supports the conclusion that a
“mortgage” is an instrument, as opposed to an interest. For example, KRS 382.110(1) provides
that “All deeds, mortgages and other instruments required by law to be recorded . . . shall be
recorded in the county clerk’s office” (emphasis added). Similarly, KRS 382.385(7) explains

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that the section of which it is a part “shall not prohibit the use of other types of mortgages or
other instruments given for the purpose of creating a lien on real property permitted by law”
(emphasis added). “When the Legislature has used the word in a statute in one sense with one
meaning, and when it subsequently uses the same word in legislation respecting the same
subject-matter, it will be understood to have used it in the same sense, unless there is something
in the context or nature of the case to indicate that it is intended a different meaning thereby.”
Bd. of Councilmen of City of Frankfort v. Commonwealth, 94 S.W. 648, 649 (Ky. 1906) (citing
In re Cnty. Seat of Linn Cnty., 15 Kan. 500, 527 (Kan. 1875)). Thus, the language from KRS
382.110(1) and KRS 382.385(7) suggests that, throughout the recording statutes, “mortgages”
refers to one class of “instruments,” and not to a mere interest in an instrument.
Adopting plaintiffs’ interpretation of the recording statutes would also render the
statutory scheme somewhat incoherent.

Plaintiffs concede that their interpretation would

mandate recording of note assignments. But Kentucky’s recording statutes pointedly distinguish
between mortgage assignments—which must be recorded, see KRS 382.360(3)—and note
transfers—for which recording is optional, see KRS 382.290(2). If every note transfer operated
as a mortgage assignment, and every mortgage assignment must be recorded, then every note
transfer would have to be recorded, albeit as a mortgage assignment. It would be strange for
Kentucky’s legislature to require recording of note transfers as mortgage assignments while
elsewhere in the same statutes providing that note transfers need not be recorded. Kentucky’s
distinct treatment of notes and mortgages for recording purposes was laid out compellingly in
Ellington:
Kentucky’s statutes address the recording of notes and mortgages in
separate provisions. [Christian Cnty. Clerk, 515 F. App’x at 455]. KRS
§ 382.290(2) provides that the recording of a note assignment is not required.
Specifically, KRS § 382.290(2) provides “[w]hen any note named in any deed or
mortgage is assigned to any other person, the assignor may . . . note such
assignment in the blank space, or in a marginal entry record [in the county clerk’s
office].” In contrast, KRS § 382.360(3) and KRS 382.365(2) require the
recording of mortgage assignments. KRS § 382.360(3) provides that “[w]hen 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[.]”
Similarly, KRS § 382.365(2) provides that “[a]n assignee of a lien on real
property shall record the assignment in the county clerk's office as required by
KRS 382.360[.]” “Failure of an assignee to record a mortgage assignment shall

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not affect the validity or perfection, or invalidity or lack of perfection, of a
mortgage lien under applicable law.” Id. Neither KRS § 382.360(3) nor KRS
§ 382.365(2) mentions the recording of promissory notes which are secured by
the mortgages. Thus, the Court does not interpret the statutes to require the
recording of an assignment of a promissory note. “It is a primary rule of statutory
construction that the enumeration of particular things excludes the idea of
something else not mentioned.” Smith v. Wedding, 303 S.W.2d 322, 323 (Ky.
1957).
Furthermore, throughout KRS Chapter 382, the General Assembly
deliberately utilized the terms “note” and “mortgage” in multiple provisions
recognizing that a promissory note and mortgage deed are separate legal
instruments. Significantly, when the General Assembly amended §§ 382.360(3)
and 382.365(2) in 2006, it required the recording of a mortgage assignment with
the county clerk's office, not the recording of a promissory note with the county
clerk's office. As discussed above, KRS § 382.290(2) instructs on the method of
recording promissory notes emphasizing the permissive nature of the recording.
The terms “note” and “mortgage” are separate and distinct terms, and they have
separate and distinct meanings. For the Court to “infuse the second [word] with
the meaning . . . for the first would obliterate the distinction between the two
terms and make one or the other redundant.” United States v. 0.376 Acres of
Land, 838 F.2d 819, 825 (6th Cir. 1988). If the General Assembly had intended
to require the recording of promissory note assignments under KRS § 382.360
and KRS § 382.365, it could have expressly done so. It did not. Thus, from a
plain reading of the KRS § 382.290, § 382.360(3), and § 382.365(2), only
mortgage assignments are required to be recorded pursuant to KRS § 382.360, not
promissory note assignments.
Ellington, 13 F. Supp. 3d at 728–29.
Plaintiffs argue that portions of the legislative history of KRS 382.360(3) and KRS
382.365(3) support their proffered interpretation of those provisions. That legislative history was
accurately summarized in Ellington:
In 2006, KRS § 362.360 and KRS § 382.365 were amended to ensure timely
release of liens. Specifically, in explaining the reasons for the amendments, the
chairman of the Kentucky Senate Banking Committee explained that “people
were getting fast refinancing, and there was not a good record kept, you couldn't
find out who had the last mortgage. You thought you were sending the payoff,
but they had already been paid off, and there was another company holding” the
debt. (Ky. Sen. Banking & Ins. Cmte. Hearing, Jan. 26, 2006.) According to
Senator Tom Buford, this situation created difficulty for refinancing homeowners
“in trying to determine who is the last holder of the lien.” (Ky. Sen. Chambers,
Feb. 8, 2006.) When the last holder of a lien could not be determined, “payoffs
get delayed and some cannot be made at all, which is unfair to the consumer.”

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(Id.) The Kentucky General Assembly sought “an expedited way to have these
releases taken care of in a court” and, thus, amended KRS § 382.360 and KRS
§ 382.365 in 2006 to provide that an assignee shall file a mortgage assignment
with the county clerk within 30 days of the assignment. (Ky. Sen. Chambers,
April 10, 2006.) KRS § 382.365 likewise noted that “[a] proceeding filed under
this section shall be given precedence over other matters pending before the
court.” In other words, the Kentucky General Assembly viewed these
amendments as an expedited way to ensure that “when a mortgage is not released,
the borrower knows who to go to to get it released.” (Ky. Sen. Banking & Ins.
Cmte. Hearing Jan. 26, 2006).
Id. at 727. This legislative history is consistent with distinguishing between notes and mortgages
for purposes of the Kentucky requirement that mortgage assignments be recorded.
[T]he MERS system aids in the ability to determine the lienholder and advances
the aim of the legislative attempt to ensure the timely release of liens. Once a
loan held by a MERS member is registered in the MERS database, MERS serves
as the nominal mortgagee for the lender and any successors and assigns. When
the security instrument is recorded, the local land records list MERS as the
mortgagee. Thus, when members transfer an interest in a promissory note to
another MERS member, MERS privately tracks the assignment within its system,
but remains mortgagee of record. Thus, the “borrower knows who to go to to get
it released.” (Ky. Sen. Banking & Ins. Cmte Hearing, Jan. 26, 2006.)
Id. at 729–30.
In sum, KRS 382.360(3) applies to those instances in which a transferee fails to record a
transfer of a mortgage deed. It does not require recording of transfers of promissory notes.
Because it is undisputed that defendants transferred only promissory notes and did not fail to
record any transfers of mortgage deeds, defendants did not violate KRS 382.360(3) and the
district court should have dismissed plaintiffs’ action on that basis.
It is not necessary for us to resolve whether plaintiffs would have a cause of action had
we ruled differently, or whether the $500 minimum damages provision in KRS 382.365(5)
applies where there is no “fail[ure] to release a satisfied real estate lien.” We address neither
issue.
The issue in the companion interlocutory appeal granted in this case also does not need to
be resolved. The district court below denied a motion by defendant Federal National Mortgage
Association and its conservator, the Federal Housing Finance Agency (FHFA), to dismiss

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A so-called penalty bar

provides that “[t]he [FHFA] shall not be liable for any amounts in the nature of penalties or fines,
including those arising from the failure of any person to pay any real property, personal property,
probate, or recording tax or any recording or filing fees when due.” 12 U.S.C. § 4617(j)(4). The
district court held that the state damages provision under which plaintiffs sought $500 per
unrecorded note transfer was not a penalty or fine for purposes of the penalty bar, but certified
that issue for interlocutory appeal, which we granted. In light of our ruling on the merits of the
claim against all of the defendants, however, the penalty bar issue no longer presents “a
controlling question of law” the resolution of which “may materially advance the ultimate
termination of the litigation.” 28 U.S.C. § 1292(b). Seen with the benefit of hindsight, the order
resolving this issue does not meet the requirements of § 1292(b), and we therefore withdraw our
discretionary grant of interlocutory appeal.
For the foregoing reasons, we reverse the order appealed from in No. 14-6168, and
dismiss the interlocutory appeal in No. 14-6167.