The Supreme Court of Tennessee recently affirmed judgment on the pleadings in favor of a tax sale purchaser, holding that although a party challenging the validity of a tax sale for lack of notice does not have to tender the amount owed before filing suit under the Tennessee tax sale statute, MERS had no protected interest in the property arising from the deed of trust’s designation of MERS as beneficiary and nominee for the lender or it being the alleged holder of bare legal title for the purpose of enforcing the lender’s rights.

The Court held that, because MERS was only the lender's agent and not a true beneficiary, it had no protected interest in the subject property, and its due process rights were not violated by the county’s failure to give notice of the tax foreclosure proceeding or the tax sale.

A copy of the opinion is available at: Link to Opinion.

The borrowers took out a $60,000 loan secured by a deed of trust on their property. The deed of trust reflected Mortgage Electronic Registration Systems, Inc. (MERS), a company that operates a national electronic mortgage loan registry, as the beneficiary and nominee for the lender and its successors and assigns.

The borrowers failed to pay the 2006 property taxes, and in February 2008, the county filed a delinquent tax lawsuit. The clerk's office searched the public records, served the borrowers by certified mail and attempted to serve notice on the original lender named in the deed of trust by certified mail, but the letter was returned as undeliverable. The original lender was later served with process through its registered agent. The county did not, however attempt to serve or otherwise provide notice to MERS.

The delinquent taxes were never paid, and in June 2010 the property was sold at a tax sale to a third party.  Shortly thereafter, the trial court confirmed the sale. The property was not redeemed within one year after the sale confirmation, such that the purchaser was presumed to have “perfect title” under Tennessee law.

In January 2012, MERS filed suit to set aside the tax sale and for declaratory judgment, arguing that the tax sale and trial court's order confirming the sale were void ab initio because the county failed to give notice of the tax sale to MERS in violation of its constitutional right to due process.

The trial court consolidated the tax lawsuit with MERS’s lawsuit to set aside the tax sale, and after a flurry of motions, held that MERS had only a nominal stake in the outcome of the tax foreclosure proceeding and, because it had no property interest, it could suffer no injury and its due process rights were not violated.

The appellate court took a different view, but reached the same result, holding that MERS sustained no injury or damage from the tax sale and thus did not have standing to sue.

Both the tax sale purchaser and MERS sought, and were granted, permission to appeal to the Supreme Court of Tennessee.

MERS appealed the appellate court's ruling that it did not have standing to set aside the tax sale based on the county's failure to provide notice of the sale. The purchaser appealed the appellate court's ruling that MERS was not required to tender the delinquent taxes prior to suing to set aside the tax sale.

The Supreme Court of Tennessee first addressed the threshold issue of whether MERS was required to tender payment prior to suing to set aside the tax sale.

The Court reasoned that MERS’s petition was not based on any grounds contained in the governing statute, but instead challenged the constitutionality of the tax sale. This meant that the issue before the Court was whether the pre-suit tender requirement in the statute “applies where the plaintiff files a lawsuit that seeks to have a tax sale declared void due to lack of constitutionally-required notice, as opposed to a lawsuit that seeks to have the tax sale ‘invalidated’ on one of the grounds set for in [the statute].”

After reviewing Tennessee cases on whether the statutory pre-suit tender requirement applies where the tax sale is alleged to be void ab initio, the Supreme Court of Tennessee held that “when a plaintiff claims to have a protected interest in the subject property and files suit to have the tax sale of the property declared void ab initio based on lack of constitutionally-required notice, the pre-suit tender requirement … is inapplicable to the petition to set aside the tax sale.”  It thereby rejected the purchaser's argument that the trial court should have granted its motion to dismiss based on MERS’s failure to comply with the pre-suit tender requirement.

The Court then addressed whether MERS “has a property interest that is protected under the Due Process Clause,” an issue of first impression in Tennessee.

Looking first to the language of the deed of trust, which provided that MERS “is the beneficiary but acts solely as the nominee for the lender and its successors and assigns, holds only legal title to the interests granted by the borrowers in the [deed of trust], but if necessary to comply with law or custom it may exercise some rights of the lender such as foreclosing on the property,” the Court was perplexed “at the mishmash of descriptive terms and qualifiers” in the deed of trust.

Surveying the case law involving MERS, the Supreme Court of Tennessee noted that “[m]ost of these cases have addressed whether [MERS] has the power to assign a deed of trust, foreclose on a note, or otherwise exercise the interests of the lender … [t]hey have not addressed the precise issue presented here, namely, whether [MERS] itself has an interest in the subject property that is subject to due process protections.” The Court noted, however, that although courts that have considered the issue are divided, they are instructive because they discuss the registry's “role in the overall transaction as that of an agent for the lender or successor lender.”

The Court also noted that the Supreme Courts of Kansas and Arkansas have held that, absent a protected property interest, MERS’s due process rights were not violated.  The Court further noted that other courts have held that the registry is not the true beneficiary of the deed of trust despite the deed's language to the contrary, but rather merely an agent of the lender.  From this, the Supreme Court of Tennessee reasoned that the registry couldn't have it both ways or “be all things to all people,” agreeing with the appellate and trial court that the registry “was never given an independent interest in the property” and “has no interest in the subject property that is protected under the Due Process Clause, so notice to [it] was not compelled by the Constitution.”

Accordingly, the trial court's grant of judgment on the pleadings in favor of the tax sale purchaser was affirmed.