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Supreme Court of Louisiana
FOR IMMEDIATE NEWS RELEASE FROM: CLERK OF SUPREME COURT OF LOUISIANA The Opinions handed down on the 24th day of January, 2012, are as follows: NEWS RELEASE #005

BY CLARK, J.: 2011-C -1418 FIRST NATIONAL BANK, USA v. DDS CONSTRUCTION, LLC (Parish of St. John) For the foregoing reasons, we reverse the ruling of the court of appeal, reinstating the judgment of the district court on the motion to rank creditors. We hold the Construction Mortgage of First National primes the Bering Mortgage held by US Bank. This matter is remanded for further proceedings consistent with this opinion. REVERSED AND REMANDED KIMBALL, C.J., dissents for reasons assigned by Justice Knoll. JOHNSON, J., dissents for reasons assigned by Justice Knoll. KNOLL, J., dissents and assigns reasons.

01/24/12

SUPREME COURT OF LOUISIANA No. 2011-C-1418 FIRST NATIONAL BANK, USA VERSUS DDS CONSTRUCTION, LLC ON WRIT OF CERTIORARI TO THE COURT OF APPEAL, FIFTH CIRCUIT, PARISH OF ST. JOHN

CLARK, Justice. The issue presented in this matter arose in connection with a motion to rank creditors in a suit for executory process. The district court held a notarial act which cancelled a mortgage could be corrected by an act of correction under La. R.S. 35:2.1 and the lender which erroneously cancelled the mortgage maintained its rank relative to a subsequent mortgage under the statute's provisions. The court of appeal disagreed, holding under these facts the subsequent mortgage primed the mortgage by the first lender, which must be ranked as of the time of the act of correction. After review, we hold the court of appeal erred and reverse, reinstating the ruling of the district court. BACKGROUND INFORMATION1 DDS Construction, LLC ("DDS"), developed the Homewood Place subdivision in Reserve, Louisiana. To fund that development, DDS obtained

various loans from First National Bank, USA ("First National"). To secure its repayment of those loans, DDS granted First National a Multiple Indebtedness Mortgage over individual lots located in the Homewood Place subdivision. One

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The record of this executory process contains no testimony. However, the parties have included this information in their statement of the case, to which no objection has been lodged. The information is provided in order to place the documentary evidence in a readily understandable context. 1

such lot is the property at issue in this matter, Lot 8, Square A, which also has a residential address of 131 Homewood Place, in Reserve, Louisiana. FACTS AND PROCEDURAL HISTORY2 On January 6, 2006, DDS granted a Multiple Indebtedness Mortgage to First National as security for several of its loans ("Construction Mortgage"). This Construction Mortgage originally encumbered Lots 1, 2, 5, 6, 7, 8, 9, 11 and 13, Square A, Homewood Place, in Reserve, Louisiana. The Construction Mortgage was filed in the mortgage and conveyance records of St. John the Baptist Parish on January 10, 2006. In executing the Construction Mortgage, DDS was represented by one of its members, Shondrell P. Campbell ("Campbell"), acting under a specific Certification of Authority to Act for the company.3 Lena Bering ("Bering") bought 131 Homewood Place from DDS on September 29, 2006. In the Act of Cash Sale, the property was described as Lot 8A, Square A. That same day, and in connection with the sale, Bering executed a promissory note ("Bering note") in favor of her lender, EquiFirst Corporation ("EquiFirst") and granted to EquiFirst a mortgage over the property ("Bering Mortgage"). In the Bering Mortgage, the property was also described as Lot 8A, Square A. Although EquiFirst was identified as the lender in the Bering Mortgage, Mortgage Electronic Registration Systems, Inc. ("MERS") was designated as the nominee of EquiFirst and the mortgagee.4 Both the Act of Cash Sale and the Bering Mortgage were filed in the mortgage and conveyance records of St. John

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The facts have been adduced through the parties' argument, pleadings, memoranda and attached documents. At the hearing held on this matter, the parties agreed there was no dispute as to the documents presented by either side, with the exception of First National's objection to the lack of the original note evidencing the intervenor's security interest, discussed infra.

Additional multiple indebtedness mortgages were granted by DDS to First National over other property located in St. John the Baptist Parish and in St. James Parish.
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3

As will be further explained, the Bering Mortgage was subsequently assigned to U.S. Bank National Association, the intervenor in the executory process which forms the framework for this matter. 2

the Baptist Parish on October 17, 2006. Although the proceeds from DDS's sale of the property to Bering should have been used to pay off the Construction Mortgage, both parties agree DDS misappropriated the funds. As a result, the property was not released from the Construction Mortgage at the time of its sale to Bering. DDS began defaulting on the various promissory notes secured by the Construction Mortgage. First National contends Campbell, on behalf of DDS, met with bank officials on February 27, 2008. At that time, she informed the bank DDS sold one of the lots First National held as collateral, without obtaining a release of the bank's mortgage. First National undertook an investigation of the matter and learned of the Act of Cash Sale by DDS to Bering and the Bering Mortgage, both of which identified the property at issue as "Lot 8A." Based on the information received from Campbell and an examination of the mortgage and conveyance records of St. John the Baptist Parish, First National determined the notary who passed both the Bering sale and the Bering Mortgage was Abril B. Sutherland ("Sutherland"), an attorney and notary with Louisiana Property and Title Company, L.L.C. First National's attorney sent a letter to Sutherland, dated March 6, 2008, advising her the bank had a Construction Mortgage on Lot 8, Square A, Homewood Place, and to the extent that the transactions over which she officiated were meant to effect Lot 8, rather than Lot 8A (which did not exist), the bank's mortgage had not been discharged. On March 13, 2008, First National received a fax communication from Louisiana Property and Title Company, L.L.C., Sutherland's company, requesting a loan payoff amount for Lot 8.5 First National responded the same day with another letter addressed to Sutherland, indicating the bank would accept a certain
5

The communication indicated the firm had been retained by the buyer of the property to conduct the closing which occurred on September 29, 2006, the date on which DDS sold Bering Lot "8A." R., p. 203. 3

sum as the payoff amount for Lot 8, if paid within 10 days. If the requested sum was not paid in that amount within that time frame, First National reserved the right to require that all of the indebtedness, or a larger portion of that indebtedness, secured by the Construction Mortgage, be paid before the property would be released. The bank made clear in its letter the only property that would be released from any mortgage under these terms was Lot 8. First National received no reply to this communication. When the DDS loans continued in default, First National chose to accelerate all of its debt, and, on April 29, 2008, filed a petition for executory process in St. John the Baptist Parish.6 In connection with the Construction Mortgage at issue, the bank sought to foreclose on Lots 1 and 8. The district court signed the order of executory process on April 29, 2008. Thereafter, DDS made certain payments on the notes sued upon and First National agreed to voluntarily release certain property from the Construction Mortgage. On February 9, 2009, First National filed a supplemental petition for executory process, informing the court of the payments made by DDS and the partial releases agreed upon. Based on the payments made, First National agreed to release Lot 1 from the Construction Mortgage, but not Lot 8, which remained encumbered.7 The district court ordered the executory process to issue as prayed for in the supplemental petition on February 10, 2009. Having heard nothing from Sutherland, First National sought to apprise the

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Included in this petition for executory process were allegations with regard to the other multiple indebtedness mortgage granted by DDS over other property in St. John the Baptist Parish. A separate petition for executory process was filed in St. James Parish for the mortgaged property located there.
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Based on payments made, First National released all of the property encumbered by the other mortgage in St. John the Baptist Parish and some of the properties under separate petition for executory process in St. James Parish. 4

holder of the Bering Mortgage of the pending foreclosure.8 After investigation, First National determined the servicer of the Bering Mortgage was HomEq Servicing, of Sacramento, California ("HomeEq").9 On April 27, 2009, counsel for First National faxed and mailed a letter to HomEq, advising it of the issues surrounding the property in question, the pending sheriff's sale, and the bank's intention to proceed. In connection with its voluntary agreement to release certain of the mortgaged properties from the multiple indebtedness mortgages based on partial payment, First National executed on May 13, 2009, a Request for Cancellation by Licensed Financial Institution ("Request for Cancellation"). This request

instructed and requested the Recorder of Mortgages of St. John the Baptist Parish to cancel from her mortgage records the Construction Mortgage dated January 6, 2006, to the extent that it encumbered "Lots 1, 2, 5, 6, 7, 8, 9, 11 and 13, Square A, Homewood Place." (Emphasis added). According to First National, the inclusion of Lot 8 in the listing of residential lots was error. The Request for Cancellation was executed by Prentiss S. Wilks ("Wilks"), vice-president of First National, on behalf of the bank, before Brandt J. Dufrene, Jr. ("Dufrene"), notary public. The Request for Cancellation of the Construction Mortgage by First National was recorded in the mortgage and conveyance records of the parish on June 10, 2009.10

Although not a part of this record, First National contends formal Mennonite notices were provided to both Bering and her lender in connection with these proceedings. A "Mennonite notice" is so named after the Supreme Court's decision in Mennonite Board of Missions v. Adams, 462 U.S. 791, 103 S.Ct. 2706, 77 L.Ed.2d 180 (1983). Relying on Mennonite, supra, this court has held "[o]ne with a legally protected property interest . . . is entitled to notice of the property's pending sale. `Notice by mail or other means as certain to ensure actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests of any party, ... if its name and address are reasonably ascertainable.'" Magee v. Amiss, 502 So.2d 568, 571 (La. 1987), citing Mennonite, 462 U.S. at 800, 103 S.Ct. at 2712, 77 L.Ed.2d at 188.
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The April 27, 2009 letter from First National spelled the name of the loan servicer as "HomeEq." However, subsequent documents purportedly originating with that company show the spelling of the name as "HomEq." Compare R., p. 206 with R., p. 180 and 210. The record shows on June 4, 2009, Winters Title Agency, Inc., presumably the company 5

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On June 3, 2009, Sutherland, the notary for the sale of the property by DDS to Bering, executed an Act of Correction ("Sutherland Act of Correction"), indicating an error occurred in the description of the property in both the Bering note and the Bering Mortgage when the property was described as "Lot 8A," instead of Lot 8. The Sutherland Act of Correction was filed in the mortgage and conveyance records of St. John the Baptist Parish on June 5, 2009. On June 15, 2009, First National recorded an Act of Correction executed by it through its vice-president, Wilks, and notarized by Dufrene, which sought to amend the Request for Cancellation filed five days earlier ("First National Act of Correction"). First National's Act of Correction stated the release of the

Construction Mortgage as to Lot 8 was in error when, in fact, the mortgage remained in full force and effect as to Lot 8. Copies of email communications show HomEq, the servicer of the Bering Mortgage, received the information sent to it by First National. A HomEq

employee forwarded to its title insurance company a copy of the supplemental petition for executory process on June 19, 2009, which had been sent to her by First National's counsel. Counsel for HomEq contacted First National's attorney by email on August 25, 2009, indicating his law firm was evaluating the matter. HomEq's counsel asked for a payoff amount to release Lot 8 and a copy of the petition for executory process. Recognizing there may be problems with the statutory compliance of the First National Act of Correction, a second act of correction to the Request for Cancellation was made. On October 28, 2009, Dufrene, the notary before whom the original Request for Cancellation by First National was passed, executed an Act of Correction, which was filed on October 29, 2009 in the mortgage and

which handled the sales of the DDS properties, executed a request for cancellation of the mortgages on those properties which were to be released. 6

conveyance records of St. John the Baptist Parish ("Dufrene Act of Correction"). In the Dufrene Act of Correction, the notary stated that Lot 8 should not have been included among the several lots requested for release from the Construction Mortgage. The Dufrene Act of Correction was intended to be supplementary to, and in addition to, the First National Act of Correction executed on June 15, 2009, which made the same correction. Meanwhile, also on October 28, 2009, U.S. Bank National Association ("US Bank") was made the payee on the Bering note, pursuant to an allonge to the note.11 On November 10, 2009, MERS, as nominee for EquiFirst and mortgagee of the Bering Mortgage, assigned the Bering Mortgage to US Bank. The allonge and the mortgage assignment were filed into the mortgage and conveyance records of St. John the Baptist Parish on November 10, 2009. That same day, November 10, 2009, US Bank filed a Petition for Intervention and Ranking of Creditors in the executory process instituted by First National.12 In its intervention, US Bank claimed First National cancelled its

Construction Mortgage encumbering Lot 8 on June 10, 2009 and improperly attempted to reinstate the cancelled mortgage through the First National Act of Correction filed on June 15, 2009. US Bank claimed the First National Act of Correction did not reinstate the cancelled Construction Mortgage and has no effect under Louisiana law.13 Consequently, US Bank claimed the Bering mortgage was

11

An allonge is "[a] slip of paper sometimes attached to a negotiable instrument for the purpose of receiving further indorsements when the original paper is filled with indorsements. " Black's Law Dictionary 88 (9th ed. 2009). The allonge to the Bering note reflects that Barclays Capital Real Estate, Inc., d/b/a HomEq Servicing, as attorney in fact for EquiFirst Corporation, executed an Allonge to Note in favor of US Bank, referencing the Bering note. US Bank's complete designation on the allonge is as "U.S. Bank National Association, as Trustee under Securitization Servicing Agreement Dated as of February 1, 2007 Structured Asset Securities Corporation Mortgage Pass-Through Certificates, Series 2007-BC2." R., p. 180.
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A separate Motion to Rank Creditors was filed by US Bank in connection with its intervention. Under US Bank's interpretation, this argument applies equally to the Dufrene Act of Correction.
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the superior mortgage encumbering Lot 8 and, as a result, US Bank was entitled to first payment of any proceeds from any judicial sale of the property. The district court set a hearing on the motion to rank creditors on the morning of November 18, 2009. The sheriff's sale for the property was set for later in the morning. At the hearing, no testimony was presented; the parties relied on documents attached to the pleadings and memoranda as support for their arguments. Both parties relied on the provisions of La. R.S. 35:2.1. US Bank relied on the statute for its authority to assert a security interest in the property. US Bank claimed that under the statute's provisions, the Sutherland Act of Correction amended the Bering Mortgage and the Act of Cash Sale, to properly set forth that the actual lot transferred and mortgaged was Lot 8, instead of Lot 8A. First National relied on the statute to amend its Request for Cancellation of the Construction Mortgage, to delete the reference to Lot 8 from the listing of the residential lots for which the Construction Mortgage should be cancelled. After hearing argument, the district court ruled from the bench, granting judgment in favor of First National, and against the intervenor, US Bank, denying the motion to rank creditors, with prejudice and at its cost. The district judge gave the following oral reasons for judgment: The court finds that R.S. 35:2.1, regarding a notarial act, which the act of correction is a notarial act, which affects movable or immovable property, does not in any way except, E-X-C-E-P-T, acts of corrections regarding cancellations of mortgage. Further, there's been no showing that US Bank relied on this error and there's been no prejudice shown during the five days before the act of correction was passed. R., p. 260. The district court then directed the sheriff's sale, set for later that morning, to proceed and for all proceeds from the judicial sale of Lot 8 to be placed into the registry of the court pending a final judgment on appeal. A written judgment incorporating the district court's ruling was signed on January 12, 2010.
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On

January 25, 2010, the district court ordered the judgment to be designated as final and appealable. In its appeal, US Bank argued First National's cancellation of the Construction Mortgage with regard to Lot 8 was a substantive error. Thus, US Bank asserted La. R.S. 35:2.1 was not applicable in this fact situation, as the statute applies only to clerical errors. Additionally, US Bank argued the statute could not be used to retroactively reestablish the recordation of a cancelled mortgage. Further, US Bank contended the statute could only be applied to documents executed by two or more parties. First National disagreed, arguing the language of the statute did not place the limitations urged by US Bank on an act of correction. First National also took issue with the documentary evidence, or lack thereof, produced by US Bank to support its authority to assert a security interest in the property. The Louisiana Fifth Circuit Court of Appeal agreed with US Bank's characterization of the erroneous inclusion of Lot 8 in First National's request for cancellation of the Construction Mortgage as a substantive error. First National Bank, USA v. DDS Construction, LLC, 2010-0204, p. 9 (La. App. 5 Cir. 11/9/10); __So.3d__, 2010 WL 4486367. Finding First National made a substantive error, the court of appeal held the error could not be amended or corrected by a notarial act of correction. The analysis made by the court of appeal was brief: Here, the Act of Correction attempted to revoke the cancellation of the mortgage as to Lot 8. An obligation that burdened Lot 8 had been removed, then was attempted to be restored. That is a substantive change, not a clerical error, and as such it could not be performed by a notarial act of correction. This limitation creates a safeguard against the improper alteration of recorded instruments. Id., 2010-0204, p. 9. The court of appeal reversed the district court's judgment in favor of First National. Instead, judgment was rendered in favor of US Bank, granting its motion to rank creditors and finding US Bank to have first priority over the proceeds of the

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November 18, 2009 judicial sale of Lot 8. In all other respects, the matter was remanded for further proceedings. A limited rehearing was granted by the court of appeal, pursuant to La. C.C.P. art. 2133(B), to consider First National's alternative ground for upholding the district court's judgment.14 First National contended US Bank's failure to produce the original Bering note at the hearing on the motion to rank was fatal to its claim of authority to assert a security interest in the matter. First National also contended the original Bering note was necessary to prove the amount due under the note. The court of appeal disagreed, finding the amount due under the note was not pertinent to a hearing where the purpose was to rank creditors rather than to establish the amount of the debt owed. The appellate court also found the record showed neither party had an objection to the documents attached to the pleadings, with the exception of First National's objection regarding the original Bering note. In ruling on this objection, the court of appeal referred to the record, which showed the district court allowed a substitution of the original document. Thus, the

appellate court found the record contained ample evidence to prove US Bank was the party entitled to enforce that instrument. After consideration of First National's alternative argument, the court of appeal maintained its original opinion. Id., 2010-0204, p. 4 (on rehearing). We granted First National's writ to review the correctness of the court of appeal's ruling. First National Bank, USA v. DDS Construction, LLC, 2011-1418 (La. 10/12/11); 74 So.3d 213. LAW AND ANALYSIS Applicable Law
La. C.C.P. art. 2133(B) provides: "A party who does not seek modification, revision, or reversal of a judgment in an appellate court, including the supreme court, may assert, in support of the judgment, any argument supported by the record, although he has not appealed, answered the appeal, or applied for supervisory writs."
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The issue in this case involves the applicability and interpretation of La. R.S. 35:2.1. Thus, the case presents us with a question of law which is reviewed by this court under a de novo standard of review. Broussard v. Hilcorp Energy Co., 20090449, p. 3 (La. 10/20/09); 24 So.3d 813, 815-816; Louisiana Municipal Association v. State, 2004-0227, p. 35 (La.1/19/05); 893 So.2d 809, 836. We will render judgment after our review of the record, giving no deference to the legal conclusions made by the courts below, because this court is the ultimate arbiter of the meaning of the laws of this state. Broussard, 2009-0449, p. 3; 24 So.3d at 816; Cleco Evangeline, LLC v. Louisiana Tax Com'n, 2001-2162, p. 3 (La. 4/3/02); 813 So.2d 351, 353. La. R.S. 35:2.1 provides:

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