The Nevada Supreme Court recently reversed – or at least clarified – the impact of MERS in Nevada under the approach set forth in the Restatement (Third) of Property: Mortgages. The Supreme Court had held in 2012 that at the time the note and deed of trust are “split” between the note holder and MERS (as the beneficiary of the deed of trust); no party has standing to foreclose because the note and deed of trust must be “reunified” before foreclosure. The Court very recently “clarified” that 2012 ruling, however, to note that where MERS is the agent of the note holder, such reunification is not required because MERS would be authorized to foreclose for the note holder at the note holder’s request based on the agency relationship.
In 2012, the Nevada Supreme Court adopted the Restatement approach to the transfer of mortgages, holding that the deed of trust and note could be split so long as both were held together at the time the foreclosing party sought to institute foreclosure proceedings. In Edelstein v. Bank of New York Mellon, The Edelstein court distinguished its decision from the traditional rule, under which the assignment of the note carries with it the deed of trust, making the splitting of the note and the deed of trust impossible.
In Edelstein, the borrower challenged Bank of New York Mellon’s standing to engage in mandatory pre-foreclosure mediation – and to foreclose on the property – because the note was “split” from the deed of trust. The Edelstein court held that during the time the note and deed of trust are “split,” because the deed of trust is assigned to MERS, no party has standing to foreclose. Importantly, the court noted that the “split” does not render either instrument permanently invalid; standing to foreclose is restored once the same entity acquires both the note and the deed of trust.
Recently, in In re Montierth, the Nevada Supreme Court changed its position, expressly rejecting the notion that “splitting” the note and the deed of trust invalidates either instrument, even temporarily, where the instruments are split between a principal and an agent. In reaching its decision and attempting to reconcile with the Edelstein holding, the Montierth court noted that while Edelstein accepted the Restatement’s view on the transfer of mortgages, the facts in Edelstein did not require consideration of one of the exceptions contained in the Restatement. The exception states that “foreclosure is not impossible if there is either a principal agent relationship between the note holder and the mortgage holder, or the mortgage holder ‘otherwise has authority to foreclose in the [note holder]’s behalf.’”
The specific facts before the Nevada Supreme Court in Montierth involved a borrower in default on a note and deed of trust; Deutsche Bank held the note, and MERS was the beneficiary of the deed of trust. The borrowers filed for bankruptcy, and after the bankruptcy was filed, MERS assigned its interest in the deed of trust to Deutsche Bank. Deutsche Bank then filed a notice of claim as a secured creditor and sought relief from the bankruptcy stay to foreclose. The borrowers argued that the bankruptcy stay prevented reunification of the note and deed of trust, and, therefore, Deutsche Bank could not foreclose. The Montierth court rejected this argument and held that Deutsch Bank could foreclose because (1) the security interest attached and was perfected before the borrowers filed for bankruptcy, and (2) MERS was the agent of Deutsche Bank and “could compel an assignment of the deed of trust.”
In short, in 2012 the Nevada Supreme Court held in Edelstein that MERS’ status as the beneficiary of the deed of trust creates a split note and deed of trust that could not be foreclosed unless reunified. In 2015, however, the Nevada Supreme Court held that the involvement of MERS actually cures this potentially fatal “defect” of a split note and deed of trust being unenforceable because the note holder could direct or even compel MERS to assign the deed of trust, thus reunifying the instruments, at least theoretically.