Opinion
NO. 2013-CA-000543-MR
05-16-2014
NICKEY D. SMITH APPELLANT v. CITIMORTGAGE, INC. APPELLEE
BRIEFS FOR APPELLANT: Lois Renfro Morris Barbourville, Kentucky BRIEF FOR APPELLEE: Shannon O'Connell Egan Harry W. Cappel Ft. Mitchell, Kentucky
NOT TO BE PUBLISHED
APPEAL FROM WHITLEY CIRCUIT COURT
HONORABLE PAUL K. WINCHESTER, JUDGE
ACTION NO. 08-CI-00550
OPINION
AFFIRMING
BEFORE: DIXON, LAMBERT, AND NICKELL, JUDGES. LAMBERT, JUDGE: Nickey D. Smith has appealed from the summary judgment of the Whitley Circuit Court in favor of CitiMortgage, Inc., in a foreclosure action. Because we disagree with Smith's contention that CitiMortgage failed to establish that it was entitled to enforce the note and foreclose on the mortgage, we affirm.
In March 2006, Smith purchased property on East Highway 904 in Williamsburg, Kentucky. In order to pay for this property, Smith obtained a loan for $85,650.00 from Hamilton Mortgage Company, an Arizona corporation. To secure the note, Smith gave a mortgage to Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for Hamilton Mortgage. The mortgage was signed on March 7, 2006, and recorded on April 27, 2006. In December 2007, Smith entered into a loan modification agreement with MERS. CitiMortgage was listed as the lender. At that time, the unpaid principal balance was $84,440.75.
On June 2, 2008, CitiMortgage filed a complaint against Smith and Whitley County, seeking reformation of a mortgage and foreclosure, and stating that it was the holder and owner of a note and a loan modification on which Smith had defaulted and owed $88,169.22 as well as interest. CitiMortgage also stated that it was the holder of the mortgage given to secure payment of the note, which was a valid first lien, and noted that the mortgage Smith originally executed contained an incorrect parcel number as the result of a scrivener's error. CitiMortgage requested that the mortgage be reformed to reflect the correct parcel number and that the property be sold at a Master Commissioner's sale.
CitiMortgage named Whitley County as a party because it might claim an interest in the property for unpaid real estate taxes or assessments that were due.
The mortgage referenced parcel number 178-00-00-024.00 rather than parcel number 178-00-00-029.03.
Whitley County filed an answer, counterclaim, and cross-claim, in which it asserted a lien on the property for real estate taxes. CitiMortgage filed a motion for a default judgment against Smith when he failed to respond to the complaint. However, Smith filed a motion in October 2009 asking to file a late answer, stating that he had been negotiating with CitiMortgage, was unaware that CitiMortgage was seeking a judgment against him, and needed time for his attorney to review the documents. The court granted the motion and permitted Smith to file a late answer, in which he asserted that CitiMortgage had failed to prove that it was the owner of the note, stating that there was no assignment attached to the note or the mortgage and that it was CitiMortgage's burden to establish that it was the holder of the note and that it had been properly assigned to it. Therefore, Smith argued that CitiMortgage did not have standing to pursue the claim. Furthermore, Smith asserted in the alternative that CitiMortgage was covered by the Making Home Affordable Program and was required to determine whether he qualified under this program.
On January 11, 2010, CitiMortgage filed its first motion for summary judgment, arguing that that there were no genuine issues of material fact and that it was entitled to a judgment in its favor as a matter of law. CitiMortgage stated that it had met its burden by establishing the existence, amount, and default of a secured debt. To the motion, CitiMortgage attached a copy of the March 2006 note with an undated endorsement from Hamilton Mortgage to CitiMortgage as well as an Assignment of Mortgage establishing that MERS, as the nominee for Hamilton Mortgage, had assigned the mortgage to CitiMortgage on July 7, 2008.
The note attached to the complaint did not include this endorsement.
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Smith objected to the motion for summary judgment, arguing that he had not received discovery he had requested from CitiMortgage, including the production of the original note and any allonges. He stated that there was no evidence that CitiMortgage had the original note, which he argued was necessary under the Uniform Commercial Code (UCC) to enforce the note and mortgage. Accordingly, CitiMortgage did not have standing.
In reply, CitiMortgage indicated that it met the exception to the requirement that an original instrument be produced, stating that it had established satisfactory proof of ownership, the terms of the instrument, and the circumstances surrounding the loss of the instrument pursuant to Kentucky Revised Statutes (KRS) 355.3-309. CitiMortgage stated that it had provided ample proof of ownership and the terms of the instrument by attaching true, accurate, and complete copies of the original note and mortgage to the complaint as well as the assignment of the mortgage and endorsement of the note to it. Furthermore, CitiMortgage stated that it had taken all reasonable steps to find the original note and explained the temporary unavailability of the document by referencing the difficulty with managing volumes of paper promissory notes and mortgages.
On February 7, 2011, CitiMortgage moved the circuit court to permit it to file an amended complaint and add Hamilton Mortgage as a defendant. In addition, CitiMortgage informed the court that after this matter was filed, Smith entered into a repayment arrangement with it and defaulted on that agreement as well. The loan obligation due was $87,047.85. The court granted the motion, and in the amended complaint, CitiMortgage indicated that Hamilton Mortgage might have an interest in the property as the original holder of the note. It noted that Hamilton Mortgage had transferred its interest to CitiMortgage, but it failed to provide a written endorsement. In his answer, Smith stated that CitiMortgage's statement that Hamilton Mortgage may have failed to endorse the note constituted a judicial admission that CitiMortgage was not the holder of the note and had no rights under it or the mortgage.
On March 30, 2012, CitiMortgage filed its second motion for summary judgment and a motion for default judgment. Hamilton Mortgage had not responded to the amended complaint. In the motion for summary judgment, CitiMortgage stated that it had recently found its endorsed note and attached a copy of it to the motion. The loan history, which had been provided to Smith in discovery, established that Hamilton Mortgage had endorsed the note to CitiMortgage on July 19, 2006. CitiMortgage then endorsed the note in blank, making it bearer paper. CitiMortgage held the note and was its owner by virtue of holding the bearer paper note. Counsel for CitiMortgage stated that he was currently holding the original note at his office as a bailee. Therefore, CitiMortgage argued, as it did before, that it had met its burden to establish the existence, amount, and default of a secured debt. An affidavit from CitiMortgage document control officer Kyle Barton established the existence of the note and mortgage and indicated that Smith owed a total of $105,201.67 as of December 16, 2011, inclusive of late charges, interest, and other fees.
Smith objected to the motion for summary judgment, continuing to argue that CitiMortgage had failed to meet its burden that it was the holder of a properly endorsed note by producing the original note. Smith had not known of the recently found note until CitiMortgage referenced it in its motion and wanted the opportunity to take further discovery on the issue. Furthermore, he argued that CitiMortgage should be bound by its judicial admission in the amended complaint that it did not have a properly endorsed note. Finally, Smith stated that he had sought a Home Affordable Modification Program (HAMP) modification and requested that the court not enter a judgment pending the outcome of that process.
In reply, CitiMortgage contended that a photocopy of the note was admissible, absent fraud, forgery, or unfairness pursuant to Kentucky Rules of Evidence (KRE) 1003. It stated that it sent the original note to its counsel's office after it had been found and included an affidavit to this effect. Regarding its statement that it did not have the note with the endorsement from Hamilton Mortgage, CitiMortgage stated that this was prior to finding the original note and the original endorsement by Hamilton Mortgage. Finally, CitiMortgage stated that the HAMP program did not prevent a foreclosure proceeding, but merely prohibited the sale of the property until the HAMP review was complete. On January 2, 2013, CitiMortgage renewed its motion, and Smith continued to dispute that a copy of the note was sufficient in this case because the statutory requirements to submit the original instead of a copy had not been met.
On February 4, 2013, the circuit court entered a judgment and order of sale, finding that Hamilton Mortgage was in default, that the allegations in the complaint were true, and that Smith owed $105,201.67 pursuant to the promissory note. The court found that there were no genuine issues of material fact and that CitiMortgage was entitled to a judgment as a matter of law. Finally, the court ordered a Master Commissioner's sale.
Smith filed a motion to alter, amend, or vacate the judgment and order of sale, stating that CitiMortgage never complied with its discovery request to examine the original note to determine whether the debt had been properly assigned to it and that CitiMortgage could not sell the property until the HAMP process had been completed. On February 25, 2013, the circuit court entered an order amending the judgment to state that the property could not be sold until the HAMP process had been completed. This appeal now follows.
On appeal, Smith continues to argue that CitiMortgage was not entitled to summary judgment because of its failure to produce the original note and any accompanying allonges pursuant to its discovery requests. CitiMortgage contends that it was entitled to enforce the note and mortgage and that summary judgment was appropriate.
Our standard of review is well-settled in the Commonwealth. "The standard of review on appeal when a trial court grants a motion for summary judgment is 'whether the trial court correctly found that there were no genuine issues as to any material fact and that the moving party was entitled to judgment as a matter of law.'" Lewis v. B & R Corp., 56 S.W.3d 432, 436 (Ky. App. 2001), citing Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky. App. 1996); Palmer v. International Ass'n of Machinists & Aerospace Workers, 882 S.W.2d 117, 120 (Ky. 1994); Kentucky Rules of Civil Procedure 56.03. "Because summary judgment involves only legal questions and the existence of any disputed material issues of fact, an appellate court need not defer to the trial court's decision and will review the issue de novo." Lewis, 56 S.W.3d at 436, citing Scifres, 916 S.W.2d at 781; Estate of Wheeler v. Veal Realtors and Auctioneers, Inc., 997 S.W.2d 497, 498 (Ky. App. 1999); Morton v. Bank of the Bluegrass and Trust Co., 18 S.W.3d 353, 358 (Ky. App. 1999). With this standard in mind, we shall review the judgment on appeal.
Smith contends that CitiMortgage failed to establish that it has the right to enforce the note as a real party in interest and that it is therefore not entitled to foreclose on the mortgage. It has long been settled that without proof of the underlying debt, there is no valid mortgage to enforce. "[A] mortgage is merely incident to the debt or obligation it is given to secure, and . . . no relief can be granted under the mortgage after the debt or obligation to which it is incident is barred by limitation." Paintsville Nat. Bank v. Robinson, 220 Ky. 418, 295 S.W. 412, 413 (1927). "[S]o long as the debt continues to be an enforceable obligation, the mortgage, which is an incident thereto, may also be enforced." Craddock v. Lee, 61 S.W. 22, 24 (Ky. 1901). This Court more recently held:
A recorded mortgage serves the purpose of establishing the lender's interest in the land that secures the debt and notice to the world of the lien created thereby. KRS 382.520. Thus, we must focus upon the indebtedness rather than the mortgage for without the debt, there is no mortgage. "[W]hen the debt is extinguished or barred by statute of limitations or otherwise, the mortgage is likewise at an end." Warning's Ex'r, 133 S.W.2d at 67.Wells Fargo Financial Kentucky, Inc. v. Thomer, 315 S.W.3d 335, 338-39 (Ky. App. 2010).
As Smith points out, Article 3 of the UCC, KRS Chapter 355.3, governs the enforceability of a note. KRS 355.3-201 addresses negotiation:
(1) "Negotiation" means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.See Stevenson v. Bank of America, 359 S.W.3d 466, 470 (Ky. App. 2011) ("[W]hen the note was endorsed in blank it became a bearer instrument and no assignment was necessarily required to transfer the right to collect and enforce the note. Mere possession of the original note was sufficient. Because BAC was lawfully in possession of the original note, clearly it was entitled to enforce the obligations secured thereby and was the real party in interest in the litigation below.").
(2) Except for negotiation by a remitter, if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder. If an instrument is payable to bearer, it may be negotiated by transfer of possession alone.
KRS 355.3-301 addresses who is entitled to enforce an instrument:
(1) The holder of the instrument;A "holder" is defined as:
(2) A nonholder in possession of the instrument who has the rights of a holder; or
(3) A person not in possession of the instrument who is entitled to enforce the instrument pursuant to KRS 355.3-309 or KRS 355.3-418(4). A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.
1. The person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession;KRS 355.1-201(2)(u). In Croushore v. BAC Home Loans Servicing, L.P., 381 S.W.3d 331, 332 (Ky. App. 2012), this Court addressed the definition of "holder."
2. The person in possession of a document of title if the goods are deliverable either to bearer or to the order of the person in possession;
or
3. A person in control of a negotiable electronic document of title[.]
A holder is defined as "[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession." Kentucky Revised Statutes (KRS) 355.1-201(2)(u)(1). A party lawfully in possession of the original note is entitled to enforce such note. Stevenson v. Bank of America, 359 S.W.3d 466, 470 (Ky. App. 2011). The record reflects that BAC has proven that they are lawfully in possession of the note on the Croushores' property. A copy of the original mortgage was attachedFor further discussion, see In re Veal, 450 B.R. 897, 910-12 (B.A.P. 9th Cir. 2011).
to the March 31, 2010, complaint, and copies of the mortgage and assignment of mortgage were attached to the April 23, 2010, amended complaint. Both documents were filed in plenty of time for the Croushores to examine them and challenge their authenticity.
Based upon the evidence presented in this case, we must agree with CitiMortgage that it was entitled to summary judgment in this matter. The record reflects that the note was indorsed to CitiMortgage and indorsed in blank, which made it bearer paper by application of KRS 355.3-109(1). The record also reflects that the mortgage was assigned to CitiMortgage. Smith's argument that CitiMortgage failed to produce the original note and allonges is not well-taken based upon the affidavit of CitiMortgage's counsel stating that he was holding the original note in his locked desk as a bailee. This is sufficient to overcome Smith's argument that CitiMortgage had not established its right to enforce the note and foreclose upon the mortgage. Therefore, we hold that there are no genuine issues of material fact to be decided and that CitiMortgage was entitled to a judgment as a matter of law.
For the foregoing reasons, the judgment and amended judgment of the Whitley Circuit Court are affirmed.
NICKELL, JUDGE, CONCURS.
DIXON, JUDGE, CONCURS IN RESULT ONLY. BRIEFS FOR APPELLANT: Lois Renfro Morris
Barbourville, Kentucky
BRIEF FOR APPELLEE: Shannon O'Connell Egan
Harry W. Cappel
Ft. Mitchell, Kentucky