Stites & Harbison, PLLC

The 6th Circuit has issued a significant decision protecting the integrity of secondary mortgage market transactions.

In Rogan v. Bank One, a borrower's bankruptcy trustee sought to avoid a mortgage loan that had been transferred to a securitization pool in the secondary mortgage market, arguing that the bank's failure to record an assignment of the mortgage resulted in a loss of its perfection.

The Bank, represented by Stites & Harbison attorney Richard A. Vance, responded that it held the original promissory note, endorsed in blank, and that possession of the note constituted perfection, giving it the right to enforce the mortgage by operation of law, notwithstanding the lack of recording of an assignment.

In an opinion recommended for full-text publication, the Sixth Circuit rejected the trustee's argument, which would have disrupted transactions involving billions of dollars in mortgage loans. The Court held that the keys to establishing the Bank's right to enforce the mortgage were possession of the note and the initial recording of the mortgage against the borrower. Further, the Court held that the Bank's actions in recording the assignment post-petition were not in violation of the automatic stay.

Importantly, the Court implicitly rejected the rationale of In re Maryville Savings & Loan Corp., 743 F.2d 413 (6th Cir. 1984), which seemed to hold that a mortgage loan can be bifurcated, with one party holding a perfected interest by possession in the note and a different party holding a perfected interest by recording in the mortgage. This troublesome case has irritated practitioners for two decades and was specifically criticized by the drafters of Revised Article Nine. UCC 9-109, Official Comment 7.