Note versus Mortgage: Who leads the dance?

Earlier this month, Florida’s Fourth District Court of Appeal released an opinion seemingly designed to serve as a primer on perfecting a security interest in a promissory note secured by a mortgage. The analysis is found in HSBC Bank USA, N.A. v. Perez , Case No. 4D13-3193, 2015 WL 2078683, at *1 (Fla. 4th DCA May 6, 2015).The case involved a fraudulent scheme where a borrower executed two nearly identical promissory notes, both secured by the same mortgage. The payee on the notes transferred one of the “original” notes to HSBC Bank, and later transferred the other “original” note to LaSalle Bank, which was succeeded by U.S. Bank. LaSalle Bank obtained an assignment of mortgage on June 5, 2009, which stated that the assignment was effective as of January 2, 2009. This assignment was recorded on August 12, 2009. LaSalle Bank recorded a second assignment of mortgage on October 8, 2010. When both banks attempted to foreclose, the question became: which bank is the owner and holder of the subject note and mortgage?The trial court held that Florida’s recording statute for mortgage assignments (F.S. §701.02) applied in order to determine which bank had priority. It granted judgment in U.S. Bank’s favor because U.S. Bank held an assignment of the mortgage which was obtained before HSBC recorded its mortgage assignment. However, after a lengthy and informative analysis, the Fourth District clarified that when a note in a mortgage transaction is sold or assigned, Article 9 of Florida’s Uniform Commercial Code (“UCC”) applies to the security interest created in favor of the purchaser or assignee of the note, rather than the recording statute.

Although it may seem counterintuitive to a real estate practitioner, the timing of the mortgage assignment is not the key, it’s the delivery of possession of the original note which determines a creditor’s priority.  In reversing, the Fourth District emphasized “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.” Pursuant to the UCC, a note is a negotiable instrument. As such, a security interest in a note can be perfected by taking possession of it. In this case, the Court held that HSBC established its priority in the note, and by extension, the mortgage, by virtue of being the first to perfect its interest through possession of the original note.

Noting that the UCC was not designed to deal with the existence of two “original” notes created fraudulently, the Court nonetheless reasoned that LaSalle Bank was not in a position to enforce the note and mortgage, and was unfortunately left with an action for breach of warranty against the transferor of the note. As such, the decision in this case is unhelpful to lenders who find themselves deceived in a fraudulent transaction, but it is instructive in the typical scenario where parties may argue over whether a lender has standing to enforce the note and mortgage. It also serves as a reminder that in real estate transactions, lenders and their counsel should be aware of the importance of the original note, and related provisions set forth in the UCC.