4th Circuit: Scheider v. Deutsche Bank- Assignment of the Note carries with it Assignment of the Mortgage; Choice of Law

Summary: The Scheiders refinanced their South Carolina home in 2006 with a $1.178 million adjustable rate note payable to Mortgage Network, granting a mortgage securing the note, which provided that MERS would act as the nominee for Mortgage Network. Mortgage Network subsequently transferred the note, with an endorsement that read “Pay to the order of ______ Without Recourse.” , with the blank later being filled with “IndyMac Bank F.S.B.” Indy Mac later endorsed the note in blank, without recourse, and it is currently held by Deutsche Bank. Some of these transfers occurred during the securitization of the note, which was effectuated by a Pooling and Servicing Agreement (“PSA”), governed by New York law, and provided that Indy Mac would deliver to Deutsche Bank an endorsement in blank. The Scheider contended both that the PSA required such endorsement by August 30, 2006, and that, as a condition of its real estate mortgage investment conduit (“REMIC”) tax status, the trust was required to receive all related mortgages before December 2006. Since MERS did not assign the mortgage to Deutsche Bank until August 2011, the Scheider sought a declaratory judgment that the mortgage was not enforceable. On appeal, the 4th Circuit determined, using the “most significant relationship test”, see In re Merritt Dredging Co., 839 F.2d 203, 205 (4th Cir. 1988), that South Carolina law was controlling as both the mortgage expressly selected South Carolina law and, with the note being silent, the Scheiders are South Carolina residents, their property is located in South Carolina, and the note was executed in South Carolina. Then applying South Carolina law, the Court of Appeals stated that “[i]f an indorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a ‘special indorsement’”, becoming payable to the identified person and may be negotiated only by the indorsement of that person.” S.C. Code § 36-3-205(a). Under the ““the familiar and uncontroverted proposition” that the assignment of a note carries with it the assignment of the mortgage, whereas the assignment of the mortgage does not carry with it the assignment of the note, Deutsche Bank became the holder of the mortgage when it was assigned the underlying note. Commentary: This is the same result the 4th Circuit reached in Horvath v. Bank of New York, N.A., 641 F.3d 617, 621 (4th Cir. 2011), which interpreted Virginia law. For a copy of the opinion, please see: Scheider v. Deutsche Bank- Assignment of the Note carries with it Assignment of the Mortgage; Choice of Law