REQUIRED READING: With foreclosure rates maintaining record highs, borrowers and bankruptcy trustees in the past two years have started seeking new and inventive ways to stall or avoid a foreclosure. Mortgage Electronic Registration Systems Inc. (MERS) is in the center of these attacks.
Early decisions were disappointing for both lenders and MERS. The problem has escalated to the point that, in some jurisdictions, if a borrower articulates a defense that begins, ‘This is a MERS loan,’ courts throw out the fundamental legal concepts that support a mortgage foreclosure. However, recent key victories discussed below may finally put an end to the attacks against MERS.
Round one to Bellistri
In Bellistri v. Ocwen Loan Servicing, Bellistri, a tax-sale purchaser, brought a quiet title action against the taxpayer and deed-of-trust assignee. The court granted judgment for Bellistri. On appeal, the lender argued that Bellistri failed to comply with the statutory requirements for notice of redemption. The lender also argued it had standing to make the challenge, because it was the assignee of a deed of trust from MERS as nominee for the original lender.
The court decided that whether a lender has an interest in real property for purposes of standing hinges on evidence of who holds the promissory note. The only evidence of note ownership was the MERS assignment of the deed of trust, which purported to assign the deed of trust ‘together with any and all notes.’ The court found this insufficient due to the lack of evidence that MERS had authority to transfer the note. Without any separate evidence that the lender held the promissory note, the court held the lender did not have standing to challenge the quiet title aciton.
The Box-ing continues
Cases that followed and cited Bellistri were equally disappointing. The Western District of Missouri Bankruptcy Court weighed in on MERS and the issues of standing for motions for relief from the automatic stay in In re Box. Box arose out of a lender's motion for relief from an automatic stay. The lender that sought relief was not the original lender on the note or deed of trust, and accordingly, the trustee objected to the lender's standing to bring the motion.
Despite an assignment of the deed of trust from MERS to the lender and a promissory note endorsed in blank, the trustee alleged there was not enough evidence to prove the lender had standing. The court relied on Bellistri in finding that the case turned on whether the lender had possession of the original promissory note. The court decided that the copy of the endorsed note in blank with an affidavit that simply recited that the lender was the "holder" of the original note was insufficient proof of actual possession of the note. As such, the court denied the motion for relief.
Box imposes an extremely burdensome requirement: the production of original promissory notes. Such an imposition is contrary to the requirements set forth for a motion for relief in 11 USC 362(g)(1). However, Box is more important for the road map created by the court for future litigation in the jurisdiction regarding MERS. Foreclosure counsel practicing in this jurisdiction should take heed of the following excerpt from the decision, as the court has yet to take up whether a MERS mortgage is split from the promissory note:
"This Order does not go further than necessary, and specifically does not decide whether the structure of MERS is fatally flawed under Missouri law, because it splits the note and deed of trust between different entities. I am well aware that there would be far-reaching consequences from such a determination on creditors holding what they believed were mortgage loans, and also on debtors, who may or may not be able to obtain new financing in order to purchase their homes from the estate at current value. Therefore, I would hope to decide those issues in a proceeding in which the promissory note is produced and in which evidence is offered as to the relationship between MERS and lenders for whom it purports to act, as well as the powers granted to it by them. Such evidence might include, for example, an agency agreement, if one exists."
Cases outside the jurisdiction also caught on to Bellistri. Landmark National Bank v. Kesler (Kansas, 2009), which gained national attention for its discussion of MERS, owes some of its reasoning to Bellistri. Landmark cites Bellistri for the proposition that a MERS mortgage may be split from the underlying promissory note, thus making both the note and mortgage unenforceable. While the citation to Bellistri was secondary and irrelevant to the ultimate holding of Landmark, that portion of the opinion is frequently cited as a defense against foreclosures and bankruptcy actions.
Moreover, Landmark left unclear whether MERS needed to be named as a defendant and served with notice in foreclosure proceedings. This uncertainty threatened a fundamental aspect of MERS' business model, in that when MERS is served with a legal proceeding, MERS accesses its system to locate the current lender and notify it of the lawsuit.
MERS KO's Bellistri
The momentum against MERS picked up after the Bellistri and Box cases. Counsel for borrowers considered MERS to be "on the ropes." These decisions were particularly frustrating, because MERS was not a party to the litigation; however, the decisions had a significant impact on MERS' business. In an effort to resolve the troubles caused by Bellistri, MERS filed a complaint in the Eastern District of Missouri against Bellistri, seeking to set aside the tax deed. MERS asserted that Bellistri violated MERS' due-process rights by failing to give MERS notice of its redemption rights. Both parties filed motions for summary judgment.
On July 1, the court entered judgment for MERS, finding that (1) Bellistri violated state law by failing to notify MERS of its right to redeem the property, (2) Bellistri's failure to provide MERS with notice of its redemption rights also violated MERS' rights of procedural due process under the Fifth and 14th amendments to the U.S. Constitution, and (3) the collector's deed issued to Bellistri is null and void.
The 29-page judgment elaborates extensively on the development and business model of MERS. The MERS-friendly set of facts appears to be due – in part, at least – to a procedural error by Bellistri in failing to controvert MERS summary judgment facts, thus deeming all to be admitted and uncontroverted.
Is MERS turning the corner?
The victory over Bellistri is not the only cause for celebration as of late. MERS' efforts are paying off and may secure its critical role in the servicing industry. In Kansas, due to the uncertainty left by the Landmark v. Kesler decision, MERS focused its efforts on passing legislation to amend the Kansas Rules of Civil Procedure. House Bill 2656, which became effective July 1, amended the rule regarding contingently necessary parties to a civil proceeding. Kansas Statute 60-217 now makes it clear that, in any action that would determine title or affect a mortgage on real property, MERS must be named as a party and served with process.
In Arizona, a borrower brought suit against the original lender's successor and MERS, alleging that by identifying MERS as the nominee on the deed of trust, the deed of trust had been split from the note, rendering both "fatally defective" (Ciardi v. Lending Co. Inc. (Arizona, 2010)). In dismissing the suit, the court noted that the borrower alleged no facts to support its "splitting" theory and that the plain language of the deed of trust appoints MERS as the nominee for the lender and its "successors and assigns."
Even when pitted against the third-party bankruptcy trustee, MERS has prevailed as of late. In In re Jessup (Eastern District of Kentucky Bankruptcy Court), the bankruptcy trustee attempted to avoid a mortgage lien based on a similar theory as in the Ciardi case. In Jessup, the trustee argued invalidity of the mortgage, because the lender offered no proof of a "written nomination of MERS to act as mortgagee."
In granting the lender's motion for summary judgment, the Eastern District of Kentucky found that extrinsic evidence of MERS mortgagee status was not necessary because the language in the mortgage was clear in defining MERS' role. The court also upheld an assignment of the mortgage from MERS to the current lender, despite a question as to the authority of the signee who had been inadvertently left off the corporate resolution for signing authority.Â
Although the boxing is over in Missouri, MERS is sure to go several more rounds throughout the country. In order to stay on the winning side, lenders need to continue to adapt their procedures and policies to timely provide foreclosure counsel with documents and information. Likewise, foreclosure counsel must continue to update their archive of case law with favorable decisions, such as the ones cited in this article. With a united front in defending these challenges, MERS will knock out claims left and right, eventually finding itself in a permanent place of victory.
Adrienne Strecker is a litigation attorney for South & Associates PC, a creditors' rights law firm. Her practice is primarily focused on contested bankruptcy matters. She can be reached at adrienne.strecker@southlaw.com.
