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Reunited and it Feels so Good

May 9, 2017 | Bryan Mouber

On April 21, 2017, the Kansas Supreme Court in FV-I, Inc. v. Kallevig, (No. 111,235) 2017 Kan. LEXIS 135 (Apr. 21, 2017)[1] reviewed a mortgage foreclosure. The dispute was between FV-I, the first mortgage holder, and Bank of the Prairie (BOP), the second mortgage holder[2]

One week before the foreclosure, the mortgage was assigned to FV-I.  Attached to the petition was a copy of the mortgage and a copy of the note with an undated endorsement to a third-party.  At trial, FV-I presented the original note containing an additional two endorsements, ending with an endorsement in blank.  BOP undisputedly had three junior mortgages.

BOP challenged FV-I’s standing to foreclose and the priority of its mortgages.

1.      FV-I’s Standing to Foreclose

BPO alleged that FV-I did not have standing to pursue its claim without establishing enforcement rights in the promissory note as of the date of the filing.  First, FV-I argued that it need not prove possession of the note and the existence of enforcement rights in it at the time it filed its petition in order to establish standing to pursue mortgage foreclosure. Second, FV-I argued that standing could be established by its undisputed possession of the mortgage prior to filing, even without possession of the note.

The Kansas Supreme Court held that:

standing in a foreclosure action is predicated on the plaintiff's ability to demonstrate—either in the pleadings, upon motion for summary judgment, or at trial—that it was in possession of the note with enforcement rights at the time it filed the foreclosure action. Allowing a lack of standing to be cured by a post-petition assignment granting enforcement rights in the note after the foreclosure action has been filed would defeat any incentive for a note holder to ensure that it has enforcement rights prior to filing the action.

Id. at *29.

The Court further held that “possession of the mortgage alone does not establish standing,” because “a person or entity possessing only the mortgage would never experience the cognizable injury, i.e., the default necessary to foreclose the mortgage.” Id. at 46.

The Kansas Supreme Court remanded the action to determine whether FV-I had enforcement rights in the promissory note as of the date of the filing such that it had standing to bring a foreclosure action. Id. at *37.

2.      BOP’s Priority

BOP argued that FV-I’s mortgage was unenforceable, because the note and mortgage had been split; thus, BOP’s mortgages were superior.  The District Court held that FV-I's mortgage and note had split, because the note and mortgage FV-I held had not followed the same path to FV-I, which rendered FV-I's mortgage unenforceable and allowed BOP's mortgages to jump ahead in priority. 

The Supreme Court, in overturning the holding that BOP’s mortgages had priority, noted that the lower court’s decision was based on an “overreading” Landmark Nat. Bank v. Kesler, 289 Kan. 528, 539-40, 216 P.3d 158 (2009)Landmark, did not address the effect of a split on the priority of the mortgage or whether a separated note and mortgage could later be reunited. In short, Landmark never held that a currently unenforceable mortgage, in effect, no longer exists. The Kansas Supreme Court held that, “[r]egardless of whether a split occurred or the party capable of enforcing the note was not a party to this case, the mortgage itself still exists.” Id. at *50.

The Court remanded the case with instruction to determine whether FV-I or BOP had priority consistent with the general rules that the first to record a mortgage has priority so long as the mortgage is not released. Id.



[1] See the full opinion at http://www.kscourts.org/Cases-and-Opinions/opinions/SupCt/2017/20170421/111235.pdf

[2] The homeowners/debtors were no longer involved in the case, because the parties agreed to sell the property and place the proceeds in escrow pending resolution of the matter.  

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The BSCR Kansas Law Blog examines significant developments, trends and changes in Kansas law on a broad range of topics that are of interest to Kansas practitioners and to businesses evaluating risks under Kansas law or managing litigation subject to Kansas law. Learn more about the editor, Bryan Mouber.

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