Kansas Supreme Court Opinion Limits Enforceability of Lender Remedies Under Mortgage Agreement

September 24, 2020 Advisory

On Sept. 11, 2020, the Kansas Supreme Court issued an opinion that restricts lender remedies if a borrower defaults under a mortgage agreement. In Fairfax Portfolio LLC v. Carojoto, the Kansas Supreme Court held that a mortgage agreement alone cannot provide the express consent necessary for a lender to take possession of the mortgaged property prior to a court action. This opinion must be considered by mortgage lenders first when entering mortgage agreements and further when determining courses of action against a borrower if a borrower defaults.

In Fairfax, the lender took possession of the mortgaged property, over the objection of the borrower, due to a default of the borrower under the parties’ loan documents. After the lender had taken possession of the property, it filed a mortgage foreclosure action. Subsequently, the lender acquired the property through a foreclosure sale authorized by the district court. The borrower then filed a lawsuit claiming that the lender improperly took possession of the property prior to a foreclosure action.

The mortgage clause reviewed by the Kansas Supreme Court provided, in part, that the borrower agreed that the lender may take possession of the mortgaged property if a borrower defaults under the mortgage. The Court analyzed the enforceability of this clause by citing K.S.A. 58-2301, which states: “In the absence of stipulations to the contrary, the mortgagor of real property may retain the possession thereof.” The Court emphasized that Kansas case law provides that a lender cannot take possession of mortgaged property before filing suit against the borrower without the consent or acquiescence of a borrower. After reviewing this case law, the Court determined that the mortgage alone is unable to provide consent required for a lender to take possession of the property without a proper court action. As such, the Court concluded that the language from the mortgage that purportedly allowed the borrower to take possession of the property if a borrower defaults was unenforceable under K.S.A. 58-2301.

Fairfax makes clear that under Kansas law, mortgage lenders cannot rely solely on a mortgage agreement to take possession of mortgaged property if a borrower defaults. Rather, the Kansas Supreme Court instructed that, absent subsequent consent or acquiescence of a borrower, a lender must first file an action with the district court and then seek its remedies for a borrower’s default.

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