BLOG VIEW: In recent years, Mortgage Electronic Registration Systems Inc., or MERS, has been the subject of an onslaught of litigation challenging the validity of the MERS system; the authority of MERS to foreclose; the validity of assignments of mortgage from MERS to the foreclosing party; and the avoidance of recording fees. Because of the structure of the MERS system, borrowers and land recording offices in particular have swiftly been taking cases to court.
Though the list of these cases is expansive, the overwhelming majority of courts have decided in favor of MERS. These actions are beginning to define the scope and personality of MERS and, most importantly for practitioners, dictate how MERS is legally allowed to operate. Of interest, and the focus of this article, is how case law is developing in the State of Pennsylvania.
Pennsylvania is a mandatory recording state. As the challenges to MERS' authority to foreclosure rose in number, Pennsylvania courts held that MERS has legal and record title to the mortgage and, therefore, vested authority to foreclose based on the clear language of the mortgage that borrowers explicitly acknowledge (MERS v. Ralich, 2009). The Superior Court of Pennsylvania held in Ralich, that ‘the mortgage vests MERS with the authority, as nominee, to enforce the loan’ and that the borrower's insistence that the foreclosure proceedings should be set aside ‘is directly at odds with the explicit acknowledgement by [the] Ralich[s] at the time of refinancing that MERS would have precisely the authority [the] Ralichs[s] now contest.’
Likewise, when litigation arose over the validity of assignments of mortgage from MERS, Pennsylvania again joined the majority of decisions upholding the assignments from MERS. At that point, the courts reasoned that MERS's authority to assign was granted in the plain language of the mortgage contract, because as mortgagee under the security instrument, MERS ‘was acting solely as nominee for original mortgage lender and lender's successors and assigns (Marjer Inc. v. Ligus, 2013).
However, uniquely, the most recent decision out of Pennsylvania is raising a widespread concern. While other mandatory recording states have dismissed claims brought by county clerks on the grounds that the recording statutes were not created with the intent to benefit the county clerks, the court in Montgomery County v. MERSCORP noted a loophole in which quiet title actions under Pennsylvania law do not require the moving party to have interest in the underlying land. There, the recorder of deeds of Montgomery County brought suit on behalf of herself and all Pennsylvania recorders of deeds against MERS, alleging that MERS violated state statutes by circumventing the need to record transfers and conveyances each time it is sold.
In reviewing the history of the recording statute, the court held that ‘a mortgage assignment is a 'conveyance' subject to the recording mandate of [section 351 of the recordation statutes]’ and that ‘the Pennsylvania Recording Act does, in fact, require the transfer of secured debt to first be documented in a form suitable for recording and then recorded in the land records because it creates in the transferee an equitable interest in the mortgage.’
As a result of the foregoing findings, the court further held that MERS was a proper party to be held responsible as an undisclosed agent of the lenders for whom it was acting as nominee and that its failure to create and record documents proving the transfers violated the Pennsylvania Recording Statute. The court reserved decision on the amount of damages to award until a later trial on the issue.
MERS was unable to prevail at the motion to dismiss or summary judgment phases, indicating that this claim may have teeth – and setting a precedent for other states to look for causes of action that are not dependent on the moving parties' interests in the land.Â
The implications of this case could be widespread, with the Montgomery County clerk being the first of possibly many to bring a hopeful case against the mortgage giant.Â
Though the review of case law regarding the ability of the county clerk to enforce the state recording statute is limited to this one, isolated incident, it will be interesting to observe how MERS reacts to this ruling.
Natalie Grigg is a partner at Woods Oviatt Gilman LLP, and Joanne LaFontant-Dooley is a default services attorney at Klatt, Odekirk, Augustine, Sayer, Treinen & Rastede PC (Klatt Law).
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