In a ruling that borrowers may try to use in seeking to delay foreclosures or bankruptcy proceedings on proofs of claim, the U.S. Bankruptcy Court for the Eastern District of New York finds that the Mortgage Electronic Registration System (MERS) lacks authority to assign mortgages.
The In re Agard decision, issued on February 10, 2011, is only dicta because a state court had previously entered a default judgment in foreclosure in favor of the creditor. However, borrowers may still attempt to use it in cases where a creditor is looking to enforce a mortgage assigned to it by MERS.
The Bankruptcy Court found that MERS was not legally authorized to assign a valid and enforceable interest in the mortgage on the debtor’s home to the creditor who sought relief from the automatic stay to foreclose. The Court also mandated that “in all future cases which involve MERS, the moving party must show that it validly holds both the mortgage and the underlying note in order to prove standing.”
The Court acknowledged that the doctrines of Rooker-Feldman and res judicata precluded it from reexamining the state court’s determination that the creditor was a secured creditor, with standing to seek relief from the automatic stay. Nevertheless, expressing the belief that “this analysis [of MERS’ authority] is necessary for the precedential effect it will have on other cases pending before this Court,” the Bankruptcy Court proceeded to analyze whether, absent the default judgment, the creditor would have the requisite standing.
The note secured by the mortgage had been assigned by the original lender to another entity, which subsequently assigned it to the foreclosing creditor. The Bankruptcy Court observed that to have standing, the creditor needed to hold both the mortgage and the note. It found that the creditor could not show that it held the note because it was unable to show that it had received a valid assignment or that it had physical possession of the note.
The Court then analyzed whether, even if the creditor held the note, MERS had validly assigned the mortgage to the creditor after it became owner of the note. It found that MERS did not have the authority to assign the mortgage on the creditor’s behalf based on its status in the mortgage as “nominee” and/or “mortgagee of record.” It also rejected the argument that such authority was provided by MERS membership rules, under which, according to MERS, each participating lender agreed to appoint MERS to act as its agent. After observing that New York law required the agency relationship to be created in writing because it purported to give MERS “interests in real property,” the Court stated that nothing in the membership rules or other documents created that relationship or even mentioned the word “agency.” Finally, the Court also rejected the argument that MERS had authority to perform the duties of a mortgagee in its own right because it was named “mortgagee of record.”
In our view, Agard is incorrectly decided because it ignores numerous decisions upholding MERS’ authority to assign interests in mortgages among its members, including U.S. Bank v. Flynn, 897 N.Y.S. 2d 855 (Suffolk Co. 2010), and Crum v. LaSalle Bank, N.A., 2009 Ala. Civ. App. LEXIS 491 (Ala. App. Sept. 18, 2009). The decision also ignores well-settled law that rejects the need to use particular wording in creating an agency relationship, and finds the language of the mortgage in Agard and the MERS membership rules to be sufficient to create such a relationship.