A closer look at MERS

Posted on January 23, 2010. Filed under: Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , |

REQUIRED READING: There is little doubt that America is infatuated with convenience and efficiency. The assembly line, the microwave, the Internet, speed dating and drive-thrus are just a few examples.

Another example, not as publicly well known or understood as the foregoing, is the MERS system of registering and tracking transfer of interests in deeds of trust. Incorporated in 1997, Mortgage Electronic Registration Systems Inc. (MERS) revolutionized mortgage banking. By acting as the designated “holder” of a loan’s security instrument – albeit, as a nominee for the holder of the loan – MERS circumvents the administrative hurdle of publicly recording documents that reflect each sale or transfer of a secured home loan. As a result, the common burdens, inefficiencies and expenses associated with selling or transferring secured home loans were greatly minimized.

Unfortunately, with convenience and efficiency, come negative side-effects. The assembly line, the microwave, the Internet, speed dating and drive-thrus arguably brought on poor quality, obesity and antisocial behavior. Similarly, with the ease of transfer of loans under MERS, some argue, came a substantial factor in the exploitation of the subprime lending market by unscrupulous lenders. In fact, many defaulted borrowers continue to allege that the MERS system permitted numerous lenders and investors to play “hot potato” with their subprime loans, which they naively believe caused the nation’s current housing crisis.

Finding MERS’ nominee relationship incomprehensible, many defaulted borrowers filing lawsuits today, in an attempt to thwart, or at least delay, foreclosure, allege that MERS’ role as nominee illegally splits the loan from its security instrument, rendering the loan unsecured. Although it is true, with exception, that the law requires a loan and its security instrument to be owned by one entity, these defaulted borrowers attempt to stretch the law beyond its intent.

Nevertheless, courts across the country are having trouble reconciling MERS’ relationship loans and its security instruments. Using a title from one of Clint Eastwood’s best movies, here is the Good, the Bad and the Ugly of the recent MERS debate in the courts.

The good

The first recent noteworthy judicial decision favoring MERS is the case of Ramos v. MERS. There, the Federal District Court of Nevada rejected the plaintiffs’ argument that MERS, as nominee beneficiary, “has no rights or powers to confer upon the [foreclosure] trustee the power to sell” in a deed of trust. The Ramos court held that since Nevada law permits a deed of trust’s beneficiary to foreclose, and because the deed of trust expressly named MERS as its beneficiary, MERS was legally empowered and contractually authorized by the borrower to foreclose and appoint a substitute foreclosure trustee.

Several months after the Ramos case, came the Supreme Court of Minnesota’s decision in Jackson v. MERS. In Jackson, the plaintiffs argued that MERS could not commence foreclosure proceedings because the numerous assignments of the underlying promissory note had not been publicly recorded, in violation of Minnesota law.

Although Minnesota does require the recording of all mortgage assignments before initiating foreclosure, the court in this case distinguished an assignment of the mortgage from an assignment of only the promissory note.

The court articulated that “…an assignment of only the promissory note, which carries with it an equitable assignment of the security instrument, is not an assignment of legal title that must be recorded….” In rendering its decision, the Minnesota Supreme Court held that nominee mortgagees, like MERS, can “hold legal title of the security instrument without holding an interest in the promissory note” since the equitable beneficiary interest – or “real ownership” – in the security is held by the noteholder, which keeps the note and mortgage intertwined.

Bucci v. Lehman Bros. Bank FSB,  from the Superior Court of Rhode Island, is another recent judicial decision in favor of MERS. Similar to the court in Ramos v. MERS, the Bucci court held that MERS had both a contractual and statutory right to commence foreclosure proceedings. First, the Bucci court recognized that the language in the mortgage expressly granted “MERS as nominee for Lender and Lender’s successors and assigns” the “Statutory Power of Sale” and right to foreclose.

Second, the Bucci court reasoned that even though MERS is acting as nominee and does not have a beneficial interest in the note, the express designation in the mortgage that MERS is the “mortgagee” permitted MERS to initiate foreclosure proceedings as a mortgagee pursuant to the Rhode Island law.

A final notable decision in favor of MERS is Cervantes v. Countrywide Home Loans Inc. In this case, the Federal District Court of Arizona dismissed MERS from the action, holding that: (1) MERS, by acting as a nominee beneficiary and never owning or acquiring a beneficial interest in the promissory note, is not a “sham” beneficiary, and (2) the MERS system of tracking assignments of promissory notes, as opposed to public recordings, is not fraudulent.

While MERS was given a legal boost in 2009, MERS also received a few interesting defeats.

The bad

The bad starts in the Midwest, with the Missouri Court of Appeals’ decision in Bellistri v. Ocwen Loan Servicing LLC. There, the court held that because “MERS never held the promissory note…its assignment of the deed of trust to [the assignee] separate from the note had no force,” and, thus, the assignee was without any legal interest in the deed of trust. The Bellistri court relied on the general legal premise that if the note and its deed of trust are separated and not held by the same person, then the note becomes unsecured.

However, the Bellistri decision may have relied more on counsel’s failure to explain MERS’ agency relationship with its principal noteholders, rather than a finding that the note and deed of trust were actually separated. In fact, the court acknowledged that when the holder of the deed of trust is the agent for the holder of the note, a separation or “splitting” does not occur, leaving the deed of trust unaffected and valid.

Relying, in part, on the holding of Bellistri, the Supreme Court of Kansas recently stunned the industry with its decision of Landmark National Bank v. Kesler. In Landmark, MERS was acting as the nominee mortgagee for a second mortgage. When the first lienholder filed a petition to foreclose, neither MERS nor its principal noteholder were named parties or given notice of the litigation.

As a result, the trial court entered a default judgment in favor of the first lienholder. MERS unsuccessfully challenged the ruling. The Supreme Court found that since MERS did not have any tangible interest in the mortgage (i.e., it was not a beneficiary, did not issue the loan and was not entitled to collect on the debt), it was not entitled to notice.

Fortunately, the Landmark Court seemed to imply that it was merely deciding whether the lower trial court acted appropriately, not whether MERS was technically entitled to notice. However, the case could be interpreted both ways, and you can be sure which way the borrowers will read it: If MERS does not have an interest in the mortgage to entitle it to notice, it does not have the right to foreclose.

Another recent negative MERS decision is In Re Hawkins. In Hawkins, the U.S. Bankruptcy Court for the District of Nevada held that MERS did not produce sufficient evidence to demonstrate that it was entitled to lift a bankruptcy stay on foreclosure. The Hawkins court did acknowledge that Nevada only permits enforcement of a note by its holder (i.e., the person to whom the instrument is made payable) or a nonholder in possession with the rights of the holder, but the court found MERS did not prove it was either.

As was the case with the Bellistri court, the Hawkins court recognized that a note cannot be split from its deed of trust, but it also noted the exception of when the holder of the deed of trust is the agent for the holder of the note. As such, the Hawkins court indicated that had MERS proven it was the actual agent for the holder of the note, then MERS would have likely been able to lift the bankruptcy stay, albeit, only in the name of its principal.

The ugly

While extremely limited in scope, the holdings of Bellistri, Landmark and Hawkins have opened the door for numerous class action lawsuits in Arizona, Nevada and California. These class action plaintiffs claim that MERS’ designation as beneficiary under their deeds of trust impermissibly splits the promissory note from its deed of trust, rendering the note unsecured.

On this basis, the class action plaintiffs are seeking to enjoin all foreclosures in Arizona, Nevada and California. Fortunately, there have not been any broad injunctions issued as of yet. The cases are currently awaiting a decision from the Multi-District Litigation (MDL) panel on whether to centralize the cases before one judge. Co-author Robert Finlay had the privilege of sitting in on the MDL hearing in early November at Harvard Law School. Interestingly, half of the lender defendants argued for centralization, while Freddie Mac, Fannie Mae, other lenders and the plaintiffs argued to keep the cases in their respective courts.

A ruling could have been reached by the time this article lands in print. Centralization could be a great result, if the case gets the judge who decided the Cervantes case discussed above. But, centralization with the wrong judge could turn these class actions even uglier.

In addition to the troublesome class actions, numerous homeowners across the country are filing individual lawsuits also challenging MERS’ role as nominee beneficiary/mortgagee. Not only do these lawsuits greatly delay pending foreclosures and require a substantial amount of money in litigation expenses, but they also create more opportunities for the courts to make decisions like Bellistri, Landmark and Hawkins. This will only cause further trouble for MERS and its principal noteholders.

Although Bellistri, Landmark and Hawkins provide fodder for the seemingly nationwide attack on MERS, these cases appear to supply the answer for MERS’ plight: demonstrating, elaborating and explaining to the court MERS’ agency relationship with its note-holders.

Both Bellistri and Hawkins recognized the exception to the rule: When the holder of the security instrument is an agent for the holder of the promissory note, the instruments are not split. Unfortunately, the courts in Bellistri and Hawkins were provided insufficient explanations and evidence to demonstrate that MERS’ agency relationship falls within the exception. Consequently, while such litigation will continue – for the short run, anyway – the net result may be favorable for MERS, with changes in the law that finally recognize and incorporate the utility of the MERS system.

Robert Finlay is a partner with Wright, Finlay & Zak LLP specializing in mortgage- and title-related litigation throughout California. He can be contacted at (949) 477-5050 or rfinlay@wrightlegal.net. Nicholas Hood, an attorney with the firm, can be reached via e-mail at nhood@wrightlegal.net.


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IN RE DARRELL ROYCE SHERIDAN, SHERRY ANN SHERIDAN, Chapter 7 Debtors.

Posted on October 25, 2009. Filed under: bankruptcy, Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , , , , , , , , |

Sheridan_decision

In this Chapter 7 case, the trustee, Ford Elsaesser (“Trustee”), objects to amotion under § 362(d) for relief from the § 362(a) automatic stay.1 Motions under § 362(d) are common in bankruptcy cases.2 Most stay relief requests proceed promptly to entry of an order, after proper notice, without any objection.

However, changes in mortgage practices over the past several years have created a number of new issues. The one highlighted in this case is the standing of the moving creditor. Serial assignments of the mortgagee’s interest(s) and the securitization of mortgages have complicated what was previously a generally straight-forward standing analysis. Though many creditors provide in their motions adequate explanation and documentation of their standing to seek relief on real estate secured debts, Trustee challenges the adequacy of the subject motion in this case.

Following hearing and consideration of the arguments of the parties, the Court determines that Trustee’s objection is well taken and the same will be sustained. The motion for stay relief will be denied.

BACKGROUND AND FACTS

On June 24, 2008, Darrell and Sherry Ann Sheridan (“Debtors”) filed their joint chapter 7 bankruptcy petition, schedules and statements. They scheduled a fee ownership interest in a residence located in Post Falls, Idaho. See Doc. No. 1 at sched. A (the “Property”). Debtors asserted the Property’s value was $225,000.00. Id. They indicated secured claims existed in favor of “Litton Loan Servicing” ($197,000.00) and “Citimortgage” ($34,000.00). Id. at sched. D.

While this left no apparent equity in the Property, Debtors nevertheless claimed the benefit of an Idaho homestead exemption. Id. at sched. C.4

Sheridan_decision

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Deutsche Bank v. Debra Abbate Etal.

Posted on October 23, 2009. Filed under: Case Law, Foreclosure Defense, Mortgage Audit, Mortgage Law | Tags: , , , , , , , , , , , , |

Deutsche Bank National Trust Company, AS TRUSTEE FOR THE CERTIFICATE HOLDERS OF CARRINGTON MORTGAGE LOAN TRUST 2005-OPT2, ASSET-BACKED CERTIFICATES, SERIES 2005-OPT2, Plaintiff

against

Debra Abbate, CARMELA ABBATE, KIM FIORENTINO, BOCCE COURT HOMEOWNERS ASSOCIATION, INC., NEW YORK CITY ENVIRONMENTAL CONTROL BOARD, NEW YORK CITY TRANSIT ADJUDICATION BUREAU, NEW YORK CITY PARKING VIOLATIONS BUREAU, and “JOHN DOE No. 1″ through “JOHN DOE #10,” the last ten names being fictitious and unknown to the plaintiff, the person or parties intended being the person or parties, if any, having or claiming an interest in or lien upon the Mortgaged premises described in the Complaint, Defendants.

100893/07

Plaintiff was represented by the law firm of Frenkel Lambert Weiss & Weisman.

Defendant was represented by Robert E. Brown, Esq.

Joseph J. Maltese, J.

The defendants Kim Fiorentino, Debra Abbate, and Carmella Abbate’s motion to dismiss the plaintiff’s complaint is granted in its entirety.

This is an action to foreclose a mortgage dated February 24, 2005, upon the property located at 25 Bocce Court, Staten Island, New York. The mortgage was originated by Suntrust Mortgage Inc. (”Suntrust”) and was recorded in the Office of the Clerk of Richmond County on April 26, 2005. The plaintiff filed the Summons, Complaint, and Notice of Pendency on March [*2]1, 2007.[FN1] However, Suntrust assigned the first mortgage on this property to Option One Mortgage Corporation, which was executed on July 6, 2007. Another assignment to plaintiff Deutsche Bank National Trust Company (”Deutsche Bank”) was executed on March 7, 2007. Both assignments, which were recorded on July 23, 2007, contained a clause expressing their intention to be retroactively effective: the first one to date back to February 24, 2005, and the second one to February 28, 2007.[FN2] On November 19, 2007, this court issued an order of foreclosure and sale on the subject property. This court also granted two orders to show cause to stay the foreclosure on January 9, 2008 and April 8, 2008.[FN3]

Discussion

The Appellate Division, Second Department ruled and reiterated in Kluge v. Kugazy the well established law that “foreclosure of a mortgage may not be brought by one who has no title to it . . . .”[FN4] The Appellate Division, Third Department has similarly ruled that an assignee of a mortgage does not have a right or standing to foreclose a mortgage unless the assignment is complete at the time of commencing the action.[FN5] An assignment takes the form of a writing or occurs through the physical delivery of the mortgage.[FN6] Absent such transfer, the assignment of the mortgage is a nullity.[FN7]

Retroactive Assignments of a Mortgage are Invalid
The first issue this court must resolve is whether the clauses in the July 6, 2007 and March 7, 2007 assignments setting the effective date of the assignment to February 24, 2005 and February 28, 2007 respectively are permissible. This court rules that, absent a physical or written transfer before the filing of a complaint, retroactive assignments are invalid.

Recently, trial courts have been faced with the situation where the plaintiff commenced a [*3]foreclosure action before the assignment of the mortgage.[FN8] In those cases the trial courts have held,

. . . where there is no evidence that plaintiff, prior to commencing the foreclosure action, was the holder of the mortgage and note, took physical delivery of the mortgage and note, or was conveyed the mortgage and note by written assignment, an assignment’s language purporting to give it retroactive effect prior to the date of the commencement of the action is insufficient to establish the plaintiff’s requisite standing. . .[FN9]

In this case, the plaintiff failed to offer any admissible evidence demonstrating that they became assignees to the mortgage on or before March 1, 2007; as such, this court agrees with its sister courts and finds that the retroactive language contained in the July 26, 2007 and March 7, 2007 assignments are ineffective. This court therefore rules that it lacks jurisdiction over the subject matter when the plaintiff has no title to the mortgage at the time that it commenced the action.

The next issue this court must resolve is whether the defendants waived subject matter jurisdiction because they did not raise that issue in their prior applications to this court.

Affirmative Defense of Standing

At the outset of any litigation, the court must ascertain that the proper party requests an adjudication of a dispute.[FN10] As the first step of justiciability, “standing to sue is critical to the proper functioning of the judicial system.”[FN11] Standing is a threshold issue; if it is denied, “the pathway to the courthouse is blocked.” [FN12]

The doctrine of standing is designed to “ensure that a party seeking relief has a sufficiently cognizable stake in the outcome so as to present a court with a dispute that is capable [*4]of judicial resolution.”[FN13] “Standing to sue requires an interest in the claim at issue in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request.”[FN14] Where the plaintiff has no legal or equitable interest in a mortgage, the plaintiff has no foundation in law or in fact.[FN15]

A plaintiff who has no standing in an action is subject to a jurisdictional dismissal since (1) courts have jurisdiction only over controversies that involve the plaintiff, (2) a plaintiff found to lack “standing is not involved in a controversy, and (3) the courts therefore have no jurisdiction of the case when such plaintiff purports to bring it.”[FN16]

On November 7, 2005, in the case of Wells Fargo Bank Minn. N.A. v. Mastropaolo [“Mastropaolo”], this court found that “Insofar as the plaintiff was not the legal titleholder to the mortgage at the time the action was commenced, [the Bank] had no standing to bring the action and it must be dismissed.”[FN17] Erroneously, this court “[o]rdered, that the plaintiff’s summary judgment motion is denied in its entirety and that this action is dismissed with prejudice.”[FN18]

This Court should have ordered that this matter was dismissed without prejudice, which would have given the plaintiff the right to start the action again after it had acquired title to the note and mortgage. Unfortunately, the plaintiff, did not seek a motion to reargue that error, which would have been corrected promptly. Instead, the plaintiff appealed the decision to the Appellate Division, Second Department, which rightfully reversed the decision 18 months later on May 29, 2007 based upon the dismissal with prejudice as opposed to a dismissal without prejudice to refile the action. However, in what appears to be dicta, the court went on to discuss whether lack of standing is tantamount to lack of subject matter jurisdiction. The court further stated that the failure of the initial pro se defendant to make a pre-answer motion or a motion to dismiss, the defense of lack of standing would be waived. But the Appellate Division did not address the issue of subject matter jurisdiction, which may not be waived. [*5]

In the instant case, this court is again faced with similar facts, which raise the issue that the Bank must have title to the mortgage before it can sue the defendant. Clearly, having title to the subject matter (the mortgage) is a condition precedent to the right to sue on that mortgage. This has always been the case, but since the Appellate Division, Second Department’s comments in Mastropaolo, that issue has been clouded.

At the time that the plaintiff improperly commenced the action, the pathway to the Courthouse should have been blocked. Deutsche Bank had no legal foundation to foreclose a mortgage in which it had no interest at the time of filing the summons and complaint. Lack of a plaintiff’s interest at the beginning of the action strips the court’s power to adjudicate over the action.[FN19] Lack of interest and controversy is protected by the umbrella of subject matter jurisdiction. Whenever a court lacks jurisdiction, a defense can be raised at any time and is not waivable.[FN20] In other words, for there to be a cause of action, there needs to be an injury. At the time that the action was commenced, the instant plaintiff suffered no injury and had no interest in the controversy. Since the plaintiff filed this action to foreclose the mortgage before it had title to it, there was no controversy between the existing parties when the action commenced. Therefore, the court lacked subject matter jurisdiction to adjudicate the present case. The defendants are consequently entitled to a dismissal without prejudice because the court lacked jurisdiction over a non-existent controversy.

Accordingly, it is hereby:

ORDERED, that the defendants Kim Fiorentino, Debra Abbate, and Carmella Abbate’s motion to dismiss the plaintiff’s complaint is granted, without prejudice to the plaintiff having the right to refile within the time provided by the Statute of Limitations; and it is further

ORDERED, that the parties and counsel shall appear before this court to further conference this matter on November 20, 2009 at 11:00AM.

ENTER,

DATED: October 6, 2009

Joseph J. Maltese

Justice of the Supreme Court

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Lawyers Tempted By Foreclosure Crisis

Posted on October 14, 2009. Filed under: Foreclosure Defense, Fraud, Loan Modification, Mortgage Law | Tags: , , , , , , , , |

The foreclosure crisis has resulted in a lot of work for lawyers hired to try to help struggling owners hang onto their homes.

But it has also resulted in a record number of complaints concerning claimed unscrupulous practices, some of which have already led to disciplinary action, according to a Daily Business Review article reprinted in New York Lawyer (reg. req.).

“There has definitely been a trend in the last six months or year where attorneys are having some involvement in loan modification scams,” says Arne Vanstrum of the Florida Bar.

He says the Florida Bar received 100 complaints in the last six months concerning lawyers involved in loan modifications, many of them in South Florida. Meanwhile, the state attorney general’s office got 756 complaints through August, a record. In all of 2008, the AG’s office got only 61 such complaints, the business publication recounts in a lengthy article.

Meanwhile, the California State Bar has taken the unusual step of making public the names of 16 attorneys accused of misconduct concerning loan modification matters.

Attorneys often get into trouble because of fee issues. Clients should be charged based on the amount of time it takes to handle their matter, not the size of the mortgage, says George Castrataro. He formerly worked for the Legal Aid Service of Broward County and is now in private practice. Clients also need to be clearly informed if representation will not begin until they have made a number of monthly payments to cover a required minimum retainer, he tells the Daily Business Review.

Another potential ethical pitfall is presented if a lawyer is too closely involved with a non-law-firm loan modification company, says Ryan Wiggins, who serves as deputy director of the state AG’s office.

Under a 2008 federal law that doesn’t apply to attorneys, loan modification companies can’t charge upfront fees, he explains to the business publication. This has led a number of firms to affiliate with attorneys, but unless the attorney is acting as a lawyer and actually representing company clients he or she is then in violation of the federal law, too, according to Wiggins.

Many complainants also contend that lawyers take their money and then do little or no wor

via Tempted By Foreclosure Crisis, Some Lawyers Overcharge & Underwork | ABA Journal – Law News Now.

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Marcy Kaptur to Banks: “Produce The Note”

Posted on October 12, 2009. Filed under: Foreclosure Defense, Fraud, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Politics, Predatory Lending, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , , |

Fight Club entered popular culture in 1999 when director David Fincher adapted Chuck Palahniuk’s novel into a film that reflected the zeitgeist of modern America with its empty culture, obsession with aesthetic beauty, and slavish under and middle classes.

Warning: Decade-old spoiler coming up.

The film ends with the agents of “Project Mayhem,” protagonist Tyler Durden’s followers, destroying the headquarters of the major credit card companies with many tons of explosives. Durden’s theory is that without the records of debt, everyone gets a fresh start. They are no longer slaves to the banks, and they are free.

This concept resonated hugely with Americans, and not just the douche bag frat boys who taped Brad Pitt’s six-pack to their dorm walls. Citizens are working harder for less these days, and the American ennui originating from Reagan’s tyrannical reign of deregulation, union busting, and middle-class rape has now exploded into severe disillusionment and anger. Americans are being crushed by debt, can’t afford health care, and have less job security than ever.

Even the dimmest Americans know they’re getting screwed by Wall Street fat cats, and nothing could have made that reality clearer than the bailouts: $1 trillion dollars of taxpayer money that went to line the pockets of the guys and gals who crashed the economy.

And if that wasn’t bad enough, once the fat cats and credit card companies’ armies of Repo Men were through collecting the contents of the houses, they came back for the houses themselves. The banks tried to sell the old, familiar lie that “irresponsible people” i.e. “black people” went and got themselves into a mess they couldn’t dig themselves out of, which was almost always a lie. Subprime lenders issued mortgages in a predatory fashion, frequently lied, and used creative math to convince people they could afford mortgages with hidden, adjustable interest rates.

Those that can afford to play Capitalism: The Game prosper, while the rest of society suffers. Of course, those of us who don’t work for the Big 4 banks in the Too Big To Fail gang, wither and die. Today, The New York Times announced the 100th small bank failure of 2009. Don’t expect any mourning. The bank isn’t named “JPMorgan Chase.”

It’s projected that by 2012, there will be eight million home foreclosures in the United States. Lots of politicians are siding with the banks during the foreclosure epidemic, but a few brave souls are standing up to the Wall Street criminals.

More…

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MERS v. Southwest Homes of Arkansas

Posted on October 5, 2009. Filed under: Case Law, Finance, Foreclosure Defense, Mortgage Audit, Mortgage Law | Tags: , , , , , , , , , , , |

MORTGAGE ELECTRONIC REGISTRATION SYSTEM, INC., APPELLANT, VS. SOUTHWEST HOMES OF ARKANSAS, APPELLEE

No. 08-1299

SUPREME COURT OF ARKANSAS

2009 Ark. LEXIS 121

March 19, 2009, Opinion Delivered

NOTICE:

THE LEXIS PAGINATION OF THIS DOCUMENT IS SUBJECT TO CHANGE PENDING RELEASE OF THE FINAL PUBLISHED VERSION.

SUBSEQUENT HISTORY: Rehearing denied by Mortgage Elec. Registration Sys. v. Southwest Homes of Ark., Inc., 2009 Ark. LEXIS 458 (Ark., Apr. 23, 2009)

PRIOR HISTORY: [*1]

APPEAL FROM THE BENTON COUNTY CIRCUIT COURT, NO. CIV07-223-2, HON. DAVID S. CLINGER, JUDGE.

DISPOSITION: AFFIRMED.

COUNSEL: George Nicholas Arnold – Counsel for the Appellant.

Howard Keith Morrison – Counsel for the Appellant.

Thomas D. Stockland – Counsel for the Appellee.

JUDGES: JIM HANNAH, Chief Justice. IMBER, DANIELSON and WILLS, JJ., concur.

OPINION BY: JIM HANNAH

OPINION

JIM HANNAH, Chief Justice

Mortgage Electronic Registration System, Inc. (”MERS”) appeals a decision of the Benton County Circuit Court denying its motion to set aside a decree of foreclosure and to dismiss the foreclosure action. 1 MERS alleges that the circuit court erred in ordering foreclosure because as the holder of legal title it was a necessary party that was never served. We affirm the circuit court and hold that under the recorded deed of trust in this case, James C. East, as trustee under the deed of trust, held legal title. Because MERS was at most the mere agent of the lender Pulaski Mortgage Company, Inc., it held no property interest and was not a necessary party. As this case presents an issue of first impression, our jurisdiction is pursuant to Arkansas Supreme Court Rule 1-2(b)(1).

1 Mortgage Electronic Registration System, Inc.’s (”MERS”) motion was [*2] entitled Motion to Set Aside Default Judgment; however, the circuit court found, and the parties agree, that MERS was never served. Because MERS was never served, it could not have failed to respond to that service and suffer a default judgment. The relief sought was that the decree of foreclosure be set aside and the foreclosure action be dismissed.

This case arises from foreclosure on a 2006 mortgage granted in a one-acre lot. A prior deed of trust also encumbered the property. In 2003, Jason Paul Lindsey and Julie Ann Lindsey entered into a deed of trust on a one-acre lot in Benton County to secure a promissory note. The lender on that deed of trust was Pulaski Mortgage, the trustee was James C. East, and the borrowers were the Lindseys. MERS was listed on the deed of trust as the “Beneficiary” acting “solely as nominee for Lender,” and “Lender’s successors and assigns.” The second page of the deed of trust states that “the Borrower understands and agrees that MERS holds only legal title to the interests granted by the Borrower and further that MERS as nominee of the Lender has the right to exercise all rights of the Lender including foreclosure.” The deed of trust was recorded.

In [*3] 2006, the Lindseys granted the subject mortgage on the same property to Southwest Homes of Arkansas, Inc. to secure a second promissory note. This mortgage was recorded. On February 9, 2007, Southwest Homes filed a Petition for Foreclosure in Rem against the Lindseys under the 2006 mortgage. The Lindseys, the Benton County Tax Collector, and “Mortgage Electronic Registration System, Inc. (Pulaski Mortgage Company)” were listed as respondents. Pulaski Mortgage was served; however, MERS was never served. Pulaski Mortgage did not file an answer. 2 A Decree of Foreclosure in Rem was entered on April 4, 2007, and the property was auctioned to Southwest. An Order Approving and Confirming Commissioner’s Sale was entered on May 8, 2007. In February 2008, MERS learned of the foreclosure and moved for relief, arguing it was a necessary party to the foreclosure action. The circuit court denied the motion, and this appeal followed.

2 Pulaski Mortgage was the lender of record. No assignment of the deed of trust was recorded nor had Pulaski Mortgage’s security interest been satisfied of record.

MERS asserts that it held legal title to the property and, therefore, it was a necessary party to any action [*4] regarding title to the property. The deed of trust indicates that MERS holds legal title and is the beneficiary, as well as the nominee of the lender. It further purports by contractual agreement with the borrower to grant MERS the power to “exercise any and all rights” of the lender, including the right of foreclosure. However the deed of trust provides that all payments are to be made to the lender, that the lender makes decisions on late payments, and that all rights to foreclosure are held by the lender.

No payments on the underlying debt were ever made to MERS. MERS did not service the loan in any way. It did not oversee payments, delinquency of payments, or administration of the loan in any way. Instead, MERS asserts to be a corporation providing electronic tracking of ownership interests in residential real property security instruments. See In re MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 861 N.E.2d 81, 828 N.Y.S.2d 266 (2006). According to MERS, it was developed by the “real estate finance industry” and was designed to facilitate the sale and resale of instruments in “the secondary mortgage market, which include one of the government sponsored entities.”

MERS contracts with lenders to track security [*5] instruments in return for an annual fee. MERSCORP, supra. Those who contract with MERS are referred to by MERS as “MERS members.” According to MERS, MERS members contractually agree to appoint MERS as their common agent for all security instruments registered with MERS. 3 MERS asserts that it holds the authority to exercise the rights of the lender, and for that purpose, it holds bare legal title. Thus, it is alleged that a principal-agent relationship existed between MERS and Pulaski Mortgage under the contract terms of the deed of trust. 4

3 The Kansas Court of Appeals, in Lankmark National Bank v. Kesler, 40 Kan. App. 2d 325, 192 P.3d 177 (2008), likewise found that Mortgage Electronic Registration System, Inc. acts as an agent. We note the analysis in this case is consistent with our own but also note that the Kansas Supreme Court granted review of the Landmark case.

4 MERS is listed as a nominee on the deed of trust. A nominee is “a person designated to act on behalf of another, usu. in a very limited way.” Black’s Law Dictionary 1076 (8th ed. 2004). A nominee is also a “person who holds bare legal title for the benefit of others or who receives and distributes funds for the benefit [*6] of others.” Id. As discussed above, MERS was not designated to act on behalf of another under the facts of this case. Further, it held no title in this case where title vested in the trustee, and finally, it received and distributed no funds for the benefit of others.

“An agent is a person who, by agreement with another called the principal, acts for the principal and is subject to his control.” Taylor v. Gill, 326 Ark. 1040, 1044, 934 S.W.2d 919, 922 (1996) (quoting AMI 3d 701 (1989)). Thus, MERS, by the terms of the deed of trust, and its own stated purposes, was the lender’s agent, including not only Pulaski Mortgage but also any successors and assigns.

MERS asserts authority to act, arguing that once it becomes the agent on a security instrument, it remains so for every MERS member lender who acquires ownership. This authority is alleged to arise from the contractual relationship between MERS and MERS members. Thus, MERS argues it may act to preserve the rights of the lender regardless of who the lender may be under the MERS electronic registration. We specifically reject the notion that MERS may act on its own, independent of the direction of the specific lender who holds the repayment [*7] interest in the security instrument at the time MERS purports to act. “[A]n agent is authorized to do, and to do only, what it is reasonable for him to infer that the principal desires him to do in the light of the principal’s manifestation and the facts as he knows or should know them at the time he acts.” Hot Stuff, Inc. v. Kinko’s Graphic Corp., 50 Ark. App. 56, 59, 901 S.W.2d 854, 856 (1995) (citing Restatement (Second) of Agency
§ 33 (1958)). Nothing in the record shows that MERS had authority to act. Here, Pulaski Mortgage was the lender and MERS’s principal. Pulaski Mortgage was a named party in the foreclosure action. Thus, MERS was not acting as the lender’s agent at the time it moved to set aside the decree of foreclosure.

However, MERS also argues that it holds a property interest through holding legal title. Specifically, it purports to hold legal title with respect to the rights conveyed by the borrower to the lender. We disagree.

“A deed of trust is ‘a deed conveying title to real property to a trustee as security until the grantor repays a loan.’” First United Bank v. Phase II, Edgewater Addition, 347 Ark. 879, 894, 69 S.W.3d 33, 44 (2001)(quoting Black’s Law Dictionary [*8] 773 (7th ed. 1999)); see also House v. Long, 244 Ark. 718, 426 S.W.2d 814 (1968). The encumbrance created by the deed of trust may be described as a lien. See, e.g., First Amer. Nat’l Bank of Nashville v. Booth, 270 Ark. 702, 606 S.W. 2d 70 (1980).

Under a deed of trust, the borrower conveys legal title in the property by a deed of trust to the trustee. Phase II, supra. “In this state, the naked legal title to real property included in a mortgage passes to the mortgagee, or to the trustee in a deed of trust, to make the security available for the payment of the debt.” Harris v. Collins, 202 Ark. 445, 447, 150 S.W.2d 749, 750 (1941). The trustee is limited in use of the title to passing title back to the grantor/borrower in the case of payment, or to the lender in the event of foreclosure. See Forman v. Holloway, 122 Ark. 341,183 S.W. 763 (1916). The lender holds the indebtedness and is the beneficiary of the deed of trust. House, supra. A trustee under a deed of trust is not a true trustee. Heritage Oaks Partners v. First Amer. Title, Ins. Co., 155 Cal. App. 4th 339, 66 Cal. Rptr.3d 510 (Cal. Ct. App. 2007). Under a deed of trust, the trustee’s duties are limited to (1) upon default undertaking foreclosure [*9] and (2)
upon satisfaction of the debt to reconvey the deed of trust. Id.

In the present case, all the required parties to a deed of trust under Arkansas law are present, the borrower in the Lindseys, the Lender in Pulaski Mortgage, and the trustee in James C. East. Under a deed of trust in Arkansas, title is conveyed to the trustee. Harris, supra. MERS is not the trustee. Here, the deed of trust renamed James C. East as the trustee. The deed of trust did not convey title to MERS. Further, MERS is not the beneficiary, even though it is so designated in the deed of trust. Pulaski Mortgage, as the lender on the deed of trust, was the beneficiary. It receives the payments on the debt.

The cases cited by MERS only confirm that MERS could not obtain legal title under the deed of trust. MERS relies on Hannah v. Carrington, 18 Ark. 85 (1856); however, that case stands for the proposition that a deed of trust vests legal tide in the trustee. We are also cited to Shinn v. Kitchens, 208 Ark. 321, 326, 186 S.W.2d 168, 171 (1945), where this court stated that “[t]he trustee named in the deeds of trust was a necessary party at the institution of the foreclosure suit, as also, of course, was Kitchens, [*10] the holder of the indebtedness.” East, as trustee, was a necessary party. MERS was not. Finally, we are cited to Beloate v. New England Securities Co., 165 Ark. 571, 575,265 S.W. 83 (1924), where this court stated that the real owner of the debt, as well as the trustee in the mortgage, are necessary parties in the action to recover the debt and foreclose the mortgage. Again, this case supports the conclusion that East was a necessary party and MERS was not.

Further, under Arkansas foreclosure law, a deed of trust is defined as “a deed conveying real property in trust to secure the performance of an obligation of the grantor or any other person named in the deed to a beneficiary and conferring upon the trustee a power of sale for breach of an obligation of the grantor contained in the deed of trust.” Ark. Code Ann. § 18-50-101(2) (Repl. 2003). Thus, under the statutes, and under the common law noted above, a deed of trust grants to the trustee the powers MERS purports to hold. Those powers were held by East as trustee. Those powers were not conveyed to MERS.

MERS holds no authority to act as an agent and holds no property interest in the mortgaged land. It is not a necessary party. In [*11] this dispute over foreclosure on the subject real property under the mortgage and the deed of trust, complete relief may be granted whether or not MERS is a party. MERS has no interest to protect. It simply was not a necessary party. See Ark. R. Civ. P. 19(a). MERS’s role in this transaction casts no light on the contractual issues on appeal in this case. See, e.g., Wilmans v. Sears, Roebuck & Co., 355 Ark. 668, 144 S.W.3d 245 (2004).

Finally, we note that Arkansas is a recording state. Notice of transactions in real property is provided by recording. See Ark. Code Ann. § 14-15-404 (Supp. 2007). Southwest is entitled to rely upon what is filed of record. In the present case, MERS was at best the agent of the lender. The only recorded document provides notice that Pulaski Mortgage is the lender and, therefore, MERS’s principal. MERS asserts Pulaski Mortgage is not its principal. Yet no other lender recorded its interest as an assignee of Pulaski Mortgage. Permitting an agent such as MERS purports to be to step in and act without a recorded lender directing its action would wreak havoc on notice in this state.

Affirmed.

IMBER, DANIELSON and WILLS, JJ., concur.

CONCUR BY: PAUL E. DANIELSON

CONCUR

CONCURRING [*12] OPINION.

PAUL E. DANIELSON, Associate Justice

I concur that the circuit court’s order should be affirmed, but write solely because I view the decisive issue to be whether MERS was, pursuant to Arkansas Rule of Civil Procedure 19(a) (2008), a necessary party to the foreclosure action. It can generally be said that “[n]ecessary parties to a foreclosure action are parties whose interest are inseparable such that a court would be unable to determine the rights of one party without affecting the rights of another.” 59A C.J.S. Mortgages § 708 (2008). See also 55 Am. Jur. 2d Mortgages § 647 (2008) (”[A]ll persons who are beneficially interested, either in the estate mortgaged or the demand secured, are proper or necessary parties to a suit to foreclose.”). Moreover, “[p]ersons having no interest are neither necessary nor proper parties, and the mere fact that they were parties to transactions out of which the mortgage arose does not give them such an interest as to make them necessary parties to an action to foreclose
the mortgage.” Id. Indeed, our rules of civil procedure contemplate the same.

Rule 19(a) of the Arkansas Rules of Civil Procedure speaks to necessary parties:

(a) Persons to Be [*13] Joined if Feasible. A person who is subject to service of process shall be joined as a party in the action if (1) in his absence complete relief cannot be accorded among those already parties, or, (2) he claims an interest relating to the subject of the action and is so situated that the disposition of the action in his absence may (i) as a practical matter, impair or impede his ability to protect that interest, or, (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple or otherwise inconsistent obligations by reason of his claimed interest. If he has not been joined, the court shall order that he be made a party. If he should join as a plaintiff, but refuses to do so, he may be made a defendant; or, in a proper case, an involuntary plaintiff.

Ark. R. Civ. P. 19(a) (2008).

Here, a review of the deed of trust for the subject property reveals four parties to the deed: (1) Jason Paul Lindsey and Julie Ann Lindsey, “Borrower”; (2) James C. East, “Trustee”; (3) MERS, “(solely as nominee for Lender, as hereinafter defined, and Lender’s successors and assigns)”; and (4) Pulaski Mortgage Company, “Lender.” The question, then, is whether MERS, [*14] as nominee, was a necessary party that had an interest “so situated that the disposition of the action in [its] absence may” have impaired its ability to protect its interest or left a subsequent purchaser or other subject to a substantial risk by reason of its interest. The answer is no; MERS, as nominee, was not a necessary party to the foreclosure action, because it held no such interest.

Initially, I must note that my review of the deed’s notice provision reveals that the deed clearly contemplated the Lender as the party with interest, in that it provided:

13. Notices. . . . Any notice to Lender shall be given by first class mail to Lender’s address stated herein or any address Lender designates by notice to Borrower. Any notice provided for in this Security’ Instrument shall be deemed to have been given to Borrower or Lender when given as in this paragraph.

Here, as stated in the circuit court’s order of foreclosure. Pulaski Mortgage, as Lender, was served with notice of the foreclosure action, in accord with paragraph thirteen.

But, in addition, MERS claims that because it holds legal title, it has an interest so as to render it a necessary party pursuant to Rule 19(a). Indeed, pursuant [*15] to the deed of trust, MERS held “only legal title to the interests granted” by the Lindseys,

but, if necessary to comply with law or custom, MERS, (as nominee for Lender and Lender’s successors and assigns) has the right to exercise any and all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.

“Legal title” is defined as “[a] title that evidences apparent ownership but does not necessarily signify full and complete title or a beneficial interest.” Black’s Law Dictionary 1523 (8th ed. 2004) (emphasis added). Thus, as evidenced by the definition, holding legal title alone in no way demonstrates the interest required by Rule 19(a).

MERS further claims that its status as nominee is evidence of its interest in the property, making it a necessary party. However, merely serving as nominee was recently held by one court to be insufficient to demonstrate an interest rising to the level to be a necessary party. In Landmark National Bank v. Kesler, 40 Kan. App. 2d 325, 192 P.3d 177 (2008), review granted, (Feb. 11, 2009). MERS also [*16] asserted that it was a necessary party to the foreclosure suit at issue. There, the district court found that MERS was not a necessary party, and the appellate court affirmed. Just as here, MERS was a party to the mortgage “solely as nominee for Lender.” 40 Kan. App. 2d at 327, 192 P.3d at 179. Based on that status, the Kansas court found that MERS was in essence, an agent for the lender, as its right to act to enforce the mortgage was strictly limited. See id.

Agreeing with MERS that a foreclosure judgment could be set aside for failure to join a “contingently necessary party,” the Kansas court observed that a party was “contingently necessary” under K.S.A. 60-219 if “the party claims an interest in the property at issue and the party is so situated that resolution of the lawsuit without that party may ‘as a practical matter substantially impair or impede [its] ability to protect that interest.’” Id. at 328, 192 P.3d at 180 (quoting K.S.A. 60-219). Notably, the language of K.S.A. 60-219 quoted by the Kansas court is practically identical to the language of Ark. R. Civ. P. 19(a).

The Kansas appellate court noted that MERS received no funds and that the mortgage required the borrower [*17] to pay his monthly payments to the lender. See id. It also observed, just as in the case at hand, that the notice provisions of the mortgage “did not list MERS as an entity to contact upon default or foreclosure.” Id. at 330, 192 P.3d at 181. After declaring that MERS did not have a “sort of substantial rights and interests” that had been found in a prior decision and noting that “a party with no beneficial interest is outside the realm of necessary parties,” the Kansas court concluded that “the failure to name and serve MERS as a defendant in a foreclosure action in which the lender of record has been served” was not such a fatal defect that the foreclosure judgment should be set aside. Id. at 331, 192 P.3d at 181-82.

It is my opinion that the same holds true in the instant case. Here, Pulaski Mortgage, the lender for whom MERS served as nominee, was served in the foreclosure action. But, further, neither MERS’s holding of legal title, nor its status as nominee, demonstrates any interest that would have rendered it a necessary party pursuant to Ark. R. Civ. P. 19(a). For these reasons, I concur that the circuit court’s order should be affirmed.

IMBER and WILLS, JJ., join.

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Ruling by judges rattles mortgage industry

Posted on October 4, 2009. Filed under: Banking, bankruptcy, Case Law, Foreclosure Defense, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law | Tags: , , , , , , , , , , , , |

A bankruptcy judge here, joining judges across the country, is throwing a bit of sand in the gears of the mortgage machine and its ruthless foreclosure blade.

She has raised this issue: In many home foreclosures springing out of bankruptcy proceedings, the foreclosure is being triggered by a representative of the lender — a surrogate that may not have a legal, equity stake in the proceedings.

As a result, it is conceivable — though still something of a legal long shot — that the homeowner who is filing for bankruptcy protection could end up saving his house.

The argument that a lender’s surrogate can’t trigger foreclosure has drawn notice of Nevada homeowners, who are preparing a class action lawsuit. They are seeking a preliminary injunction this month to stop their foreclosures.

First, some background:

Law and custom have long required that property transactions be recorded with a county clerk or “recorder of deeds,” along with information about the person who holds the mortgage, and, if there are multiple mortgages, the place in line of each creditor.

For big lenders, tracking that information in hundreds of jurisdictions across the country was an onerous process, so the biggest, including Fannie Mae and Freddie Mac, set up a company that would do it all electronically. It is called Mortgage Electronic Registration Systems and is recognized by its acronym.

The MERS name wound up on millions of mortgages, including more than 987,000 in Nevada alone, according to the company.

via Ruling by judges rattles mortgage industry – Saturday, Oct. 3, 2009 | 2 a.m. – Las Vegas Sun.

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LANDMARK NATIONAL BANK V. KESLER

Posted on September 15, 2009. Filed under: Banking, bankruptcy, Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , , , , , |

No. 98,489

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

LANDMARK NATIONAL BANK,

Plaintiff/Appellee,

v.

BOYD A. KESLER,

Appellee/Cross-Appellant,

MILLENNIA MORTGAGE CORP.,

Defendant,

MORTGAGE ELECTRONIC REGISTRATION

SYSTEMS, INC. AND SOVEREIGN BANK,

Appellants/Cross-Appellees,

and

DENNIS BRISTOW AND TONY WOYDZIAK,

Intervenors/Appellees.

SYLLABUS BY THE COURT

1. A party is not contingently necessary in a mortgage-foreclosure lawsuit when that party is called the mortgagee in a mortgage but is not the lender, has no right to the repayment of the underlying debt, and has no role in handling mortgage payments.

2. In a mortgage-foreclosure lawsuit, a district court does not abuse its discretion when it denies a motion to intervene that is filed by an unrecorded mortgage holder or its agent after the mortgage has been foreclosed and the property has been sold.

Appeal from Ford District Court; E. LEIGH HOOD, judge. Opinion filed September 12, 2008. Affirmed.

Tyson C. Langhofer and Court T. Kennedy, of Stinson Morrison Hecker, L.L.P., of Wichita, for appellants/cross-appellees.

Ted E. Knopp, of Ted E. Knopp, Chartered, of Wichita, for appellee/cross-appellant Boyd A. Kesler.

Ted E. Knopp, of Ted E. Knopp, Chartered, of Wichita, for intervenors/appellees Dennis Bristow and Tony Woydziak.

Before GREENE, P.J., MARQUARDT and LEBEN, JJ.

LEBEN, J.: Landmark National Bank brought a suit to foreclose its mortgage against Boyd Kesler and joined Millennia Mortgage Corp. as a defendant because a second mortgage had been filed of record for a loan between Kesler and Millennia. In a foreclosure suit, it is normal practice to name as defendants all parties who may claim a lien against the property. When neither Kesler nor Millennia responded to the suit, the district court gave Landmark a default judgment, entered a journal entry foreclosing Landmark’s mortgage, and ordered the property sold so that sale proceeds could be applied to pay Landmark’s mortgage.

But Millennia apparently had sold its mortgage to another party and no longer had interest in the property by this time. Sovereign Bank filed a motion to set aside the judgment and asserted that it now held the title to Kesler’s obligation to pay the debt to Millennia. And another party, Mortgage Electronic Registration Systems, Inc. (“MERS”), also filed a motion to set aside the judgment and asserted that it held legal title to the mortgage, originally on behalf of Millennia and later on behalf of Sovereign. Both Sovereign and MERS claim that MERS was a necessary party to the foreclosure lawsuit and that the judgment must be set aside because MERS wasn’t included on the foreclosure suit as a defendant.

The district court refused to set aside its judgment. The court found that MERS was not a necessary party and that Sovereign had not sufficiently demonstrated its interest in the property to justify setting aside the foreclosure.

I. The District Court Properly Refused to Set Aside the Foreclosure Judgment Because MERS Was Not a Necessary Party.

To resolve these claims, we will review some basic concepts of mortgages and foreclosure proceedings. We must pay close attention not only to the terms given to the parties in carefully crafted documents but also to the roles each party actually performed. No matter the nomenclature, the true role of a party shapes the application of legal principles in this case.

A mortgage grants a title or lien against a property as security for the payment of a debt or the performance of a duty. The “mortgagor” is the borrower who grants a mortgage in exchange for a loan; the “mortgagee” is the lender who gives the loan secured by the mortgage. See Black’s Law Dictionary 1031, 1034 (8th ed. 2004). The mortgagee is so well understood as the lender that Black’s Law Dictionary defines a “foreclosure” as an action brought by the lender/mortgagee: a foreclosure is a “legal proceeding to terminate a mortgagor’s interest in property, instituted by the lender (the mortgagee) either to gain title or to force a sale in order to satisfy the unpaid debt secured by the property.” Black’s Law Dictionary 674. Similarly, the tie between a mortgage and an underlying debt is so intrinsic that Kansas law provides that “[t]he assignment of any mortgage . . . shall carry with it the debt thereby secured.” K.S.A. 58-2323. Indeed, an assignment of a mortgage without the debt transfers nothing. 55 Am. Jur. 2d, Mortgages § 1002. Thus, the mortgagee, who must have an interest in the debt, is the lender in a typical home mortgage.

But for reasons thought beneficial by a group of lenders who trade mortgages, the form of mortgage used in this case designates an entity that is not the lender as the mortgagee. See MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 96, 828 N.Y.S.2d 266, 861 N.E.2d 81 (2006) (MERS was established by large lenders to allow easy electronic trading and tracking of mortgages). Specifically, the mortgage says that the mortgagee is MERS, though “solely as nominee for Lender.” Does this mean that MERS really was the mortgagee, even though it didn’t lend money or have any rights to loan repayments? Assuming so, MERS argues that it was a necessary party to the foreclosure and that the foreclosure must be set aside. But the premise upon which MERS bases this argument is flawed.

What is MERS’s interest? MERS claims that it holds the title to the second mortgage, not the real estate. So it does, but only as a nominee. In terms of the roles that we’ve discussed in the mortgage business, MERS holds the mortgage but without rights to the debt. The district court found that MERS was merely an agent for the principal player, Millennia. While MERS objects to its characterization as an agent, it’s a fair one.

MERS had no right to the underlying debt repayment secured by the mortgage; MERS did not even act as the servicing agent to receive the payments and remit them to the lender. MERS’s right to act to enforce the mortgage was strictly limited: if “necessary to comply with law or custom,” MERS could foreclose the mortgage or enter a release of the mortgage. MERS certainly could not act at odds to its principal, the lender. Its role fits the classic definition of an agent: one “‘authorized by another to act for him, or intrusted with another’s business.'” In re Tax Appeal of Scholastic Book Clubs, Inc., 260 Kan. 528, 534, 920 P.2d 947 (1996) (quoting Black’s Law Dictionary 85 [4th ed. 1968]).

Only one Kansas case has discussed the meaning of nominee in any detail. In Thompson v. Meyers, 211 Kan. 26, 30, 505 P.2d 680 (1973), the court noted that the meaning of the term may vary from a pure straw man or limited agent to one who has broader authority.

But whatever authority the nominee may have comes from the delegation of that authority by the principal. In its ordinary meaning, a nominee represents the principal in only a “nominal capacity” and does not receive any property or ownership rights of the person represented. See, e.g., Cisco v. Van Lew, 60 Cal. App. 2d 575, 583-84, 141 P.2d 433 (1943); see also Applebaum v. Avaya, Inc., 812 A.2d 880, 889 (Del. 2002) (referring to nominees “as agents of the beneficial owners”). The Millennia mortgage does not purport to give MERS any greater rights than normally given a nominee. The mortgage says that MERS acts “solely as nominee for Lender.” There is no express grant of any right to MERS to transfer or sell the mortgage or even to assign its duties as nominee. Nor does MERS obtain any right to the borrower’s payments or even a role in receiving payments.

MERS and Sovereign correctly note that a foreclosure judgment may be set aside for failure to join a contingently necessary party. E.g., Wisconsin Finance v. Garlock, 140 Wis. 2d 506, 512, 410 N.W.2d 649 (1987). For the purposes of our case, a party is contingently necessary under K.S.A. 60-219 if the party claims an interest in the property at issue and the party is so situated that resolution of the lawsuit without that party may “as a practical matter substantially impair or impede [its] ability to protect that interest.” The real issue is that of the lender, the true mortgagee, to protect its security interest against the property. Whether MERS may act as a nominee for the lender, either to bring a foreclosure suit or for some other purpose, is not at issue in Landmark’s foreclosure lawsuit. Moreover, an agent for a disclosed principal is not a necessary party to a lawsuit adjudicating the substantive rights of the principal. Hotel Constructors, Inc. v. Seagrave Corp., 99 F.R.D. 591, 592 (S.D.N.Y. 1983); Liles v. Winters Independent School District, 326 S.W.2d 182, 188 (Tex. App. 1959).

In support of the necessary-party argument, MERS and Sovereign cite Dugan v. First Nat’l Bank in Wichita, 227 Kan. 201, 606 P.2d 1009 (1980). In Dugan, a bank agreed to act as escrow agent for three parties who loaned money and obtained a mortgage as collateral. The bank was to receive all repayments made on the various loans and then remit them to the lenders in the appropriate percentages; the bank was also the named mortgagee, apparently due to the multiple lenders who were separate actors. The court held that the bank and the lenders were all necessary parties to the lawsuit, in which the borrower sought reformation or cancellation of the mortgages based on fraud and breach-of-fiduciary-duty claims. The bank was a necessary party even though it had no direct financial interest in the loans and would “be affected only tangentially in its position as designated mortgagee and escrow agent.” 227 Kan. at 212.

In response, Kesler cites Moore v. Petroleum Building, Inc. 164 Kan. 102, 187 P.2d 371 (1947). In Moore, a plaintiff had intervened in a past foreclosure action and later filed suit to enjoin a bank and escrow holder from delivering deeds to another party. The bank was used only to hold deeds that would be delivered upon termination of the leases and was not a party to the original foreclosure. The court held that the plaintiff should have raised issues regarding his rights under the escrow agreement in the previous foreclosure case, noting that “there probably was no necessity that [the bank] should have been made a party, for it stood by only as a custodian of the deeds and for no other purpose.” 164 Kan. at 108.

We find Moore closer to our facts than Dugan. Like the bank in Moore, MERS did not receive any funds on behalf of Millennia or Sovereign. The mortgage set out clearly that the borrower, Kesler, was to pay his monthly payments to the lender. The mortgage also suggests that the reputed mortgagee, MERS, was not interested in receiving notices of default. The Millennia mortgage, which was duly recorded in the public record, included a section titled “Request For Notice of Default and Foreclosure Under Superior Mortgages or Deeds of Trust.” As the district court noted, that section provided that both “Borrower and Lender request” the holder of any mortgage with priority “give Notice to Lender, at Lender’s address set forth on page one of this Mortgage, of any default . . . and of any sale or other foreclosure action.” Millennia’s address was noted on page one of the mortgage; the mortgage did not list MERS as an entity to contact upon default or foreclosure.

Two older Kansas cases should also be noted, though the parties didn’t cite them. In Swenney v. Hill, 65 Kan. 826, 70 P. 868 (1902), the court faced a situation somewhat different than today’s typical residential-mortgage. As part of the same transaction, a couple borrowed money and then gave mortgage bonds to two individuals and a mortgage to an investment company. Repayment of the loan was made to the bondholders, but the mortgagee/investment company had “extensive rights and active powers over the relationship” between the borrowers and the bondholders. 65 Kan. at 828. While the court did not concern itself with why this structure had been chosen, it determined that the mortgagee/investment company was a necessary party because it had a right under the written agreements to advance additional funds, thus increasing the amount of the lien, as well as the right to declare the loan matured and bring suit. In addition, the mortgage could not be released by the bondholders alone; the mortgagee/investment company was also required to approve it. We do not know from the court’s opinion whether the investment company organized the transaction initially or made any guarantee of repayment to the bondholders, but the court said that the investment company had “substantial rights and interests.” 65 Kan. at 829.

A second relevant case is Gibson v. Ledwitch, 84 Kan. 505, 114 P. 851 (1911). It involved the converse of our case–a party sued to quiet title against a mortgage, which would clear the title from the encumbrance of that mortgage. But the plaintiff joined only a trustee who had no beneficial interest in that mortgage; the beneficial owner was not made a party. The court held that the judgment did not bind the beneficial holder of the mortgage since the trustee had no right to the payments, was not the party to declare default, and had no authority to transfer or foreclose the mortgage.

We also believe that the decisions in Swenney and Gibson are supportive of the result here. MERS does not have the sort of “substantial rights and interests” that the investment company had in Swenney. MERS points to its ability to foreclose or to release the mortgage, authority provided in the mortgage “if necessary to comply with law or custom.” Kansas law does require through K.S.A. 58-2309a that a mortgage holder promptly release a mortgage when the debt has been paid; MERS could be required as a matter of law to file a mortgage release after a borrower proved that the debt had been paid. Other than that, however, it is hard to conceive of another act that MERS–instead of the lender–would be required to take by law or custom. And although Gibson involves the converse of our case, it suggests that a party with no beneficial interest is outside the realm of necessary parties.

In addition to the claim that MERS was a necessary party under K.S.A. 60-219, MERS and Sovereign also argue that the failure to include MERS violated its due process rights. But MERS had no direct property interests at stake; even its right to act on behalf of its principal was not at issue in Landmark’s suit. Without a property interest at stake, there can be no due process violation. State ex rel. Tomasic v. Unified Gov’t of Wyandotte County/Kansas City, 265 Kan. 779, 809, 962 P.2d 543 (1998).

We do not attempt in this opinion to comprehensively determine all of the rights or duties of MERS as a nominee mortgagee. As the mortgage suggests may be done when “necessary to comply with law or custom,” courts elsewhere have found that MERS may in some cases bring foreclosure suits in its own name. Mortgage Electronic Registration v. Azize, 965 So. 2d 151 (Fla. Dist. App. 2007). On the other hand, some have suggested potential problems created by MERS’s practices, MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 100-04, 828 N.Y.S.2d 266, 861 N.E.2d 81 (2006) (Kaye, C.J., dissenting), or with the handling of paperwork documenting who owns what in the residential-mortgage industry in general. E.g., In re Nosek, 386 B.R. 374, 385 (Bankr. D. Mass. 2008); In re Foreclosure Cases, 2007 WL 3232430 (N.D. Ohio 2007) (unpublished opinion). In this case, we are only required to address whether the failure to name and serve MERS as a defendant in a foreclosure action in which the lender of record has been served is such a fatal defect that the foreclosure judgment must be set aside. We hold that it is not.

II. The District Court Did Not Abuse Its Discretion by Denying Motions of MERS and Sovereign to Intervene After the Judgment Had Been Entered.

Neither MERS nor Sovereign argue that Landmark was required to join Sovereign. But both MERS and Sovereign argue that the district court wrongly denied their motions to intervene.

On this argument they face a major hurdle: the Kansas Supreme Court has held that there is no jurisdiction even to consider a motion to intervene made after the entry of judgment and the expiration of the 10-day period for filing new-trial motions. Smith v. Russell, 274 Kan. 1076, Syl. ¶ 4, 58 P.3d 698 (2002). Even so, timeliness is to be determined from the specific circumstances of each case. See Mohr v. State Bank of Stanley, 244 Kan. 555, 562, 770 P.2d 466 (1989). Although some caselaw allows intervention after judgment “where it is necessary to preserve some right which cannot otherwise be protected,” these authorities generally have allowed intervention so that there would be appropriate representation in an appeal when a party that originally participated in the case is no longer adequately representing the intervenor’s interest. E.g., Hukle v. City of Kansas City, 212 Kan. 627, 631-32, 512 P.2d 457 (1973). Of course, that’s not our situation.

The intervention argument faces another hurdle too: the decision whether to permit intervention may be reversed only when no reasonable person could agree with the district court’s decision. See Mohr, 244 Kan. at 561-62; Farmers Group, Inc. v. Lee, 29 Kan. App. 2d 382, 385, 28 P.3d 413 (2001). Sovereign’s motion to intervene was filed 76 days after foreclosure, 53 days after the court ordered the property sold, and 26 days after the property was sold. MERS’s motion to intervene was filed 134 days after foreclosure, 111 days after the court ordered the property sold, and 84 days after the property was sold. Especially in light of Smith‘s holding that a court lacked jurisdiction when the motion to intervene came after the 10-day period for filing new-trial motions, we believe it would be extremely difficult–even if the district court had jurisdiction to grant intervention–to reverse for an abuse of discretion on motions filed as far after judgment as those of Sovereign and MERS.

MERS and Sovereign argue that their intervention motions were timely because the time for filing an appeal had not yet run. They base this argument on a claim that the time to file an appeal doesn’t begin until the sheriff’s sale of the property is confirmed. But a judgment of foreclosure is a final judgment for appeal purposes when it determines the rights of the parties, the amounts to be paid, and the priority of claims. Stauth v. Brown, 241 Kan. 1, 6, 734 P.2d 1063 (1987). The foreclosure judgment in this case did so. We find no abuse of discretion in denying intervention.

III. Separate Claims by Kesler and Other Parties Are Not Properly Raised on Appeal.

Dennis Bristow and Tony Woydziak, who together bought the property at a sheriff’s sale, have sought to proceed with Kesler on a cross-appeal to challenge the district court’s orders enjoining them from finalizing sale of the property while the appeal was heard. They also seek a ruling that Sovereign is bound by the district court’s judgment.

Kesler, Bristow, and Woydziak raise issues that are not based on the same judgments on which MERS and Sovereign have filed their appeal. The joint notice of appeal from MERS and Sovereign noted an appeal from “(1) Journal Entry of Judgment filed September 6, 2006; (2) Order filed January 18, 2007; (3) Supplemental Order filed January 18, 2007; and (4) Order Denying Motions for Reconsideration filed March 22, 2007.” But Kesler, Bristow, and Woydziak attempted to include a separate district court decision, entered May 2, 2007, which had denied their motions to dismiss for lack of jurisdiction the motions to intervene by MERS and Sovereign and also granted a stay pending appeal to MERS and Sovereign. A cross-appeal must involve the same judgment as the underlying appeal, but Kesler, Bristow, and Woydziak argue a separate issue from a different district court order.

Even if the same judgment were involved, notice of a cross-appeal must be filed within 20 days of the notice of appeal. MERS and Sovereign filed their joint notice of appeal on March 28, 2007; Kesler, Bristow, and Woydziak did not seek to file a cross-appeal within 20 days of that date.

This court is without jurisdiction to address the separate issues raised on appeal by Kesler, Bristow, and Woydziak.

Conclusion

The district court properly determined that MERS was not a contingently necessary party in Landmark’s foreclosure action. The district court also was well within its discretion in denying motions from MERS and Sovereign to intervene after a foreclosure judgment had been entered and the foreclosed property had been sold. The judgment of the district court is affirmed.

END

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U.S. partners in home loan modifications accused of broad abuses

Posted on August 9, 2009. Filed under: Foreclosure Defense, Fraud, Housing, Legislation, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending | Tags: , , , , , , , , , , , , , , , , , |

WASHINGTON — Billions of dollars that the government is spending to help financially pressed homeowners avert foreclosure are passing through — and enriching — companies accused of preying on the people they are supposed to help, an Associated Press investigation has found.The companies, known as mortgage servicers, collect monthly payments from homeowners and funnel the money to the banks or investors who hold the loans. As the link between borrowers and lenders, they’re in the best position to rework the terms of loans under the government’s$50 billion mortgage-modification program.The servicers are paid by the government if the changes keep home-owners from falling behind on payments for at least three months.But the industry has a checkered history. At least 30 servicers have been accused in lawsuits of harassing borrowers, imposing illegal fees and charging for unnecessary insurance policies. More recently, the companies also have been criticized for not helping homeowners quickly enough.The biggest players in the servicing industry — Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. — all face litigation.But the industry’s smaller players, which specialize in riskier subprime loans and loans already in default, face harsher accusations that they systematically abused borrowers.

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Why banks want you all alone when negotiating a loan modification

Posted on July 5, 2009. Filed under: Banking, bankruptcy, Case Law, Foreclosure Defense, Housing, Legislation, Loan Modification, Mortgage Audit, Mortgage Law, Politics, Predatory Lending, Refinance | Tags: , , , , , , , , , , , , , , , |

They are telling you to run away from loan modification companies who charge a fee. They are paying the politicians to introduce laws making it difficult for you to hire an attorney when negotiating a loan workout. They want you to contact them directly and without the assistance of an advocate. They are scaring you to think that anyone who charges a fee for helping you negotiate a loan modification must be a crook. They claim all mortgage professionals, lawyers and forensic loan examiners who charge a fee are scam artists. They say it should all be free because theoretically you can do all of it yourself.

Just like you can file your own taxes and represent yourself in court, you can also spend the time and effort to learn the ins and outs and nuances of negotiating a favorable loan modification with the same predatory bank that put you in the mess you are in. You can stay up all night and study law so you can go up against their high priced lawyers. You can take time off work and stay on the phone four hours a day trying to get through to their loss mitigation departments. You can re-send the same documents over and over again because mysteriously they keep losing your entire file more than once. That is right you can certainly do this all yourself.

And the reason why you should go to the negotiating table all alone and without any backup is because they want to protect you from the big bad lawyers, mortgage auditors and loan modification companies who have the nerve to charge a fee for helping you! Imagine that. People actually want to make a living while providing a valuable service. What a crime.

Is anyone with an IQ above 10 buying this nonsense? If you had a choice would you go to an IRS audit without a skilled CPA? Would you defend yourself in a criminal trial without the best lawyer money could buy? So why should negotiating with a bank be any different than negotiating with the IRS? Because bankers are more ethical than IRS agents? That must be it.

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