Larry Higgins v. BAC Home Loans Servicing, LP, 793 F.3d 688

Background

Plaintiffs are Kentucky homeowners who executed mortgages recorded with MERS named as mortgagee "solely as nominee" for lenders and successors; promissory notes were later transferred among MERS members.
Defendants acquired the promissory notes (and thus equitable interests in the mortgages under Kentucky law) but did not record any assignment of mortgage deeds in county records.
Plaintiffs sued under Kentucky recording statutes (KRS 382.360(3) and KRS 382.365), claiming note transfers are mortgage assignments that must be recorded within 30 days and seeking statutory damages (minimum $500 per violation).
District court denied defendants’ motion to dismiss, holding transfer of a note effects an assignment of the mortgage that must be recorded and that plaintiffs have a private right of action under KRS 382.365(3); court certified interlocutory appeals.
This panel reversed: it held Kentucky’s recording statutes require recording of assignments of mortgage instruments (deeds), not mere transfers of equitable interests incident to note transfers, so plaintiffs’ claims fail.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether transfer of a promissory note constitutes an "assignment of a mortgage" under KRS 382.360(3) requiring recording	Note transfer carries the mortgage interest; thus the transfer is an assignment of the mortgage and must be recorded	The statute requires recording of assignments of mortgage instruments (deeds), not intangible/equitable interests created by note transfers; recording of note transfers is optional under KRS 382.290(2)	Transfer of a promissory note alone does not trigger the mortgage-assignment recording requirement; dismissal proper
Whether plaintiffs have a private right of action under KRS 382.365(3) for unrecorded assignments	Plaintiffs may sue as owners of real property when a lienholder violates the recording requirements	Defendants argued the statutes provide remedies only after satisfaction/release of the debt or for lienholders, limiting private suits	Court did not reach or decide this question on appeal because plaintiffs’ primary claim failed; district-court ruling on this issue was unnecessary
Whether state statutory damages alleged are a "penalty" barred by 12 U.S.C. § 4617(j)(4) as to FHFA/Fannie	Plaintiffs: statutory damages are remedial, not a banned penalty	FHFA/Fannie: the $500 minimum is a penalty barred by the federal statute	Court declined to resolve because merits disposition made interlocutory appeal on this issue moot; appeal dismissed
Whether Kentucky’s statutory scheme treats notes and mortgages distinctly for recording purposes	Plaintiffs argued legislative intent supports treating transfers that carry mortgage interests as recordable mortgage assignments	Defendants pointed to separate statutory provisions: mandatory recording for mortgage assignments and permissive recording for note assignments, plus statutory language referring to instruments	The panel agreed with defendants: statutes treat mortgages as instruments to be recorded and distinguish notes from mortgage deeds

Key Cases Cited

Christian Cnty. Clerk ex rel. Kem v. Mortg. Elec. Registration Sys., Inc., [citation="515 F. App'x 451"] (6th Cir.) (describing MERS system and prior treatment of note/mortgage recording issues)
Ellington v. Fed. Home Loan Mortg. Corp., 13 F. Supp. 3d 723 (W.D. Ky. 2014) (holding note transfers that create equitable interests are not recordable mortgage assignments under KRS 382.360)
In re MERS Litig., 659 F. Supp. 2d 1368 (J.P.M.L. 2009) (background on MERS operations and registry use)
Drinkard v. George, 36 S.W.2d 56 (Ky. 1930) (recognizing that note transfer effects equitable interest in mortgage)
United States v. 0.376 Acres of Land, 838 F.2d 819 (6th Cir. 1988) (statutory construction principle regarding distinct statutory terms)
Smith v. Wedding, 303 S.W.2d 322 (Ky. 1957) (canon that enumeration of particular items excludes others)