Opinion ID: 2197300
Heading Depth: 3
Heading Rank: 2

Heading: Assignment of the Mortgage by Operation of Law

Text: Plaintiffs contend that even if the plain language of the foreclosure by advertisement statutes uses the term mortgage to refer only to the security instrument, a promissory note assignment is an assignment of the security instrument by operation of law, and therefore must be recorded in order to foreclose by advertisement. More specifically, plaintiffs argue that because Minnesota case law states that the mortgage follows the note, when a MERS member assigns a promissory note, an assignment of the mortgage/security instrument occurs. Therefore, according to plaintiffs, an assignment of the promissory note results in an assignment of the security instrument that must be recorded under the foreclosure by advertisement statutes. We have held that, absent an agreement to the contrary, an assignment of the promissory note operates as an equitable assignment of the underlying security instrument. First Nat'l Bank of Mankato v. Pope, 85 Minn. 433, 434-35, 89 N.W. 318, 318-19 (1902). [5] Our precedent also establishes that in order to foreclose by advertisement, both record and legal title must concur and co-exist at the same time in the same person or persons who alone have the authority to foreclose the mortgage regardless of other equitable interests vested in third parties. Clarke v. Mitchell, 81 Minn. 438, 441, 84 N.W. 327, 328 (1900). Given this precedent, our decision turns, in part, on the difference between legal and equitable title to the security instrument in the property as applied to Minnesota's foreclosure by advertisement statutory scheme. In the context of real property interests, equitable title refers to a beneficial interest in property and gives the holder the right to acquire formal legal title. Black's Law Dictionary 1523. Likewise, an equitable assignment of a real property interest is one which although not legally valid, will be recognized and enforced in equity. Id. at 128. Legal title, on the other hand, is a title that evidences apparent ownership but does not necessarily signify full and complete title or a beneficial interest. Id. at 1523. Finally, record title refers to a title as it appears in the public records after the deed is properly recorded. Id. We have said that the manifest purpose of the foreclosure by advertisement statute's recording requirement is to make the contents of the mortgage, and, as far as the statute goes, to make the title to the mortgage [a] matter of record. Morrison v. Mendenhall, 18 Minn. 212 (Gil. 212, 219) (1872) (emphasis added). It is the plain intent of that statute that it is a condition precedent to the right to foreclose by advertisement that the title of an assignee of a mortgage appear of record, and of record in such manner that evidence extraneous to the record will not be needed to put [the title of the assignee of the mortgage] beyond reasonable question. Soufal, 159 Minn. at 255, 198 N.W. at 808. We have explained that this requirement is not one of supertechnical niceties and details of description. Id. Rather, the requirement is that the record, without the aid of extraneous evidence, put[s] the title of the assignee of a mortgage beyond doubt. Id. at 255, 198 N.W. at 808-09. Therefore, we have not required the recording of mere equitable interests for purposes of foreclosure by advertisement. See Morrison, 18 Minn. at 219-220 (Gil at 219-20); Bottineau v. Aetna Life Ins. Co., 31 Minn. 125, 16 N.W. 849 (1883); Burke v. Backus, 51 Minn. 174, 53 N.W. 458 (1892). As we explained in Morrison, the statutory requirements are important because they provide some permanent and accessible evidence of the existence and contents of the mortgage and the title. 18 Minn. at 219 (Gil. at 219). We further explained that because the requirements had the purpose that assignments shall be recorded, it follows that they must be made so that they can be recorded. Id. For that reason we concluded that a mere equitable or parol assignment would not serve the purposes of the requirements in the foreclosure by advertisement statute. Id. But plaintiffs contend that when a MERS member transfers a promissory note, the transfer is not a mere equitable assignment. They argue that because MERS is a nominee or agent for the member, MERs does not actually hold legal title. [6] Rather, plaintiffs argue that the member holds legal title, and therefore when the promissory note is assigned a transfer of legal title has actually occurred which must be recorded before foreclosure by advertisement. Yet, MERS is the mortgagee of record on plaintiffs' loans, and for the reasons stated in Morrison, we have held that a mortgagee of record does not lose legal title when the mortgagee transfers interests in the promissory note. In cases where the mortgagee of record has made several partial assignments to third parties but retained some personal interest in the promissory note and security instrument, we have allowed the mortgagee of record to foreclose by advertisement. E.g., Bottineau, 31 Minn. 125, 16 N.W. 849. In Bottineau, we said that the legal title to the mortgage and the power of sale vested in the mortgagee of record despite the partial assignments. Id. at 127, 16 N.W. at 850. We concluded that the mortgagee of record held legal title in trust for [the partial assignees] to the extent of their interest, and that the partial assignees alone could object to his action, or attempt to control him in his action, under such legal title. Id. Thus, it is evident from our case law that while a partial assignment of the promissory note constitutes an equitable assignment of the mortgage, the partial assignment does not affect either legal or record title. Plaintiffs attempt to distinguish Bottineau on the ground that the case concerned only partial assignments of the debt. Plaintiffs argue that because Bottineau involved only partial assignments of the debt, it is an example of an exception to the general rule that a party cannot separate the promissory note from the security instrument. In other words, plaintiffs argue that a mortgagee cannot hold legal title to a mortgage unless that mortgagee also has at least some interest in the underlying indebtedness. For this reason, plaintiffs argue that MERS cannot hold legal title. Plaintiffs point to Hathorn v. Butler, 73 Minn. 15, 75 N.W. 743 (1898) (Collins, Loren, J.), in support of their argument. In Hathorn, Mary Mann asked her brother, Charles Butler, to act as mortgagee on her behalf. Transcript of Hearing at line 56, p. 19, Hathorn, 73 Minn. 15, 75 N.W. 743. [7] At Mann's request, a third party assigned the promissory note and security instrument to Butler. Hathorn, 73 Minn. at 18-19, 75 N.W. at 743. After Butler recorded the mortgage in his name, the promissory note and security instrument were assigned to Mann, but the parties agreed that Butler would continue to serve as record titleholder on her behalf. Id. at 19, 75 N.W. at 743-44. Mann subsequently foreclosed in Butler's name. Id. When the mortgagor challenged Mann's legal ability to foreclose in Butler's name, we concluded that because the promissory note and security instrument had been assigned to Mann, the foreclosure by advertisement statutes prohibited foreclosure by advertisement in Butler's name. Id. at 20, 75 N.W. at 744. We held that, regardless of the parties' intentions, legal title passed upon execution and delivery of the promissory note and the security instrument from Butler to Mann. Id. We said that the power of sale to foreclose by advertisement cannot be severed from the legal ownership of the mortgage itself, and it is to be exercised by the holder of such legal title, provided [the] title has been made a matter of record. Id. But we conclude that Hathorn is not dispositive of this case because the facts are different. In Hathorn, both the promissory note and the security instrument had been assigned. Id. Because the security instrument assignment had been both executed and delivered, we held that legal title had passed. Id. Once legal title to the mortgage had been assigned, the statute required the assignment be recorded before foreclosure by advertisement proceedings could be commenced. Id. Here MERS is not like Butler because, according the evidence before us, it appears that the security instruments securing plaintiffs debts are in MERS's name and have not been assigned. A broader review of our case law demonstrates that it is possible for a party to hold legal title in the security instrumenttitle that evidences apparent ownership but does not necessarily signify a beneficial interestwithout holding an interest in the promissory note. For example, in Wilson v. Hayes, we held that a promissory note assignment did not affect legal title. 40 Minn. 531, 42 N.W. 467 (1889). Wilson was a creditor who endorsed and sold a promissory note to a bank but did not assign the security instrument. Id. at 532, 42 N.W. at 468. After the senior lien had been foreclosed, Wilson repurchased the promissory note from the bank in order to redeem under his junior interest. Id. Wilson's efforts to redeem were challenged on the ground that the transfer of the debt between Wilson and the bank acted as an equitable assignment of the security instrument requiring Wilson to produce documentation of the assignment before he could redeem his interest as a creditor. Id. at 532-33, 42 N.W. at 468. We rejected the challenge in Wilson on the ground that the security instrument stood in Wilson's name all the time. Id. at 533, 42 N.W. at 468. We explained that while an assignment of the promissory note carried with it equitably all beneficial interest in the security instrument, Wilson was returned to his original status when he repurchased the promissory note. Id. At that point, we said, Wilson again became the equitable as well as the legal holder of the mortgage, allowing him to redeem under the statute. Id. Our holding in Wilson demonstrates that equitable interests can be separated from legal title. A year later we expressed more directly our opinion that legal and equitable title can be separated. Carpenter v. Artisans' Sav. Bank was a chattel mortgage case in which equitable title to a security was in one person, and the apparent or legal title was in another. 44 Minn. 521, 522, 47 N.W. 150, 150 (1890). The holder of the equitable interest in the loan foreclosed in the name of the legal title holder. Id. Relying on Bottineau v. Aetna Life Insurance Co., 31 Minn. 125, 16 N.W. 849 (1883), we allowed the owner of the equitable interest to foreclose, stating: [It must] be true, that if the holder of the legal title allows the equitable owner to foreclose, using his name, both are bound, and the foreclosure is valid. It is a matter between them alone, and does not concern the mortgagor.... So in this case, if the one in whom the legal title to the mortgage stood was content that the equitable ownerthe one entitled to have the mortgage foreclosed, and to the benefit of the foreclosure should foreclose, using his name for the purpose, it did not affect the interests of the mortgagor, and he could not object. Carpenter, 44 Minn. at 523, 47 N.W. 150, cited in Clarke v. Mitchell, 81 Minn. 438, 441, 84 N.W. 327, 328 (1900) (applying the legal principle in a foreclosure by advertisement case) and Curtis v. Cutler, 76 F. 16, 17 (8th Cir.1896). The principle articulated in Carpenter was reaffirmed in Burke v. Backus, 51 Minn. 174, 53 N.W. 458 (1892), where in the course of deciding the dispute before us, we discussed a hypothetical very similar to the situation presented by the facts of this case. The hypothetical involved a person who buys a debt secured by a security instrument. Id. at 178, 53 N.W. at 459. But the person does not take a formal assignment of the security instrument on the premise that, because the mortgage follows the debt, he is the equitable owner of the security instrument. Id. We said that no one would claim ... that the assignee of the debt could exercise the power of sale in his own name. Id. Rather, we held that our own decisions have repeatedly recognized the doctrine that the debt, and consequently the real ownership of the security instrument, may be in one person, while what may be termed the `legal title' to the security instrument is in another. Id. at 178-79, 53 N.W. at 459 (citing Brown v. Delaney, 22 Minn. 349; Bottineau, 31 Minn. 125, 16 N.W. 849; Solberg v. Wright, 33 Minn. 224, 22 N.W. 381). We said that in such cases the power of sale must be exercised in the name of the party who has the legal title to the instrument. Id. at 179, 53 N.W. at 459. We affirm today the principles set forth in the foregoing cases. Our case law establishes that a party can hold legal title to the security instrument without holding an interest in the promissory note. The cases demonstrate that an assignment of only the promissory note, which carries with it an equitable assignment of the security instrument, is not an assignment of legal title that must be recorded for purposes of a foreclosure by advertisement. In essence, any disputes that arise between the mortgagee holding legal title and the assignee of the promissory note holding equitable title do not affect the status of the mortgagor for purposes of foreclosure by advertisement. E.g., Carpenter, 44 Minn. at 523, 47 N.W. at 150; Bottineau, 31 Minn. at 127, 16 N.W. at 850; see also Bausman v. Faue, 45 Minn. 412, 419, 48 N.W. 13, 16 (1891) (writing that the legal title holder of the security instrument holds the security instrument in trust for those with equitable interests). Thus, we hold that even though an assignment of the promissory note with no accompanying assignment of the security instrument constitutes a mere equitable assignment of the mortgage, it does not by operation of law need to be recorded to meet the requirements necessary to commence a foreclosure by advertisement. [8] In sum, we conclude that both of plaintiffs' arguments fail. First, we conclude that the plain language of sections 580.02 and 580.04 of the foreclosure by advertisement statutes use the term mortgage to refer to security instrument assignments and not to promissory note assignments. Second, this interpretation is consistent with our longstanding principles of real property law which establish that while a promissory note assignment does constitute an equitable assignment of the security instrument, a promissory note assignment is not an assignment affecting legal title, and only assignments of legal title of the security instrument must be recorded in order to commence a foreclosure by advertisement. Thus, on the facts before us, the term mortgage as used in the foreclosure by advertisement statutes does not appear to require MERS members to record promissory note assignments before foreclosure by advertisement.