A Kansas Supreme Court ruling concerned a dispute between real estate lenders with claims on the same collateral. In Kesler, a senior bank initiated a foreclosure action that eventually terminated a junior mortgage on the same property. The junior mortgage named Mortgage Electronic Registration Systems, Inc. (MERS) as mortgagee, but only as “nominee” for the actual junior lender. Senior lender properly served process upon the junior lender, who failed to answer and had a default judgment entered against it. In fact, the junior lender had previously assigned its note to another bank, Sovereign, and therefore no longer had an interest at stake in the legal proceedings. The junior lender apparently did not notify either MERS or Sovereign when it received notice of the lawsuit.

The use of MERS as a nominee is intended to facilitate the purchase and sale of mortgage loans. Lenders who put mortgages in MERS’s name retain equitable and economic ownership of their loans as well as servicing rights and obligations. MERS allows lenders to buy and sell interests in mortgage loans with other MERS participants without having to publicly record those transactions with county real estate offices.

Senior lender did not serve process upon MERS or Sovereign. The foreclosure action eventually culminated in a motion to confirm the results of a sheriff’s sale. Sovereign and MERS at that point became aware of the foreclosure proceedings and filed motions to intervene and to vacate the default judgment. Because Sovereign has no recorded interest in the mortgaged property, its motion was denied.

At issue before the Kansas Supreme Court was whether the trial court had abused its discretion in ruling that MERS, as a non-lender and holder of the junior mortgage in name only, was not a necessary party to the foreclosure proceedings and therefore not entitled to join the proceedings or to seek to vacate previous court orders. By holding that MERS was not so entitled, the trial court allowed the foreclosure sale to stand and the junior mortgage to be extinguished.

The Kansas Supreme Court in Kesler affirmed the lower ruling, holding that parties who do not hold a full range of substantive economic rights in mortgage loans—such as “nominees” like MERS—are not “lenders” and therefore do not have economic interests that are prejudiced by default judgments. As such, there was no “abuse of discretion” in denying MERS’s motions to vacate the default judgment or to intervene in the case.

The procedural posture of this case makes it appear more unfriendly to nominees and organizations like MERS than it actually is. The precise legal issue in Kesler was whether a trial court had “abused its discretion.” This question the court answered in the negative. The Kansas Supreme Court acknowledged that MERS may have been technically entitled to receive service of process, but reasoned that this precise question was not before it. The case calls renewed attention to the administrative and enforcement issues raised by the use of MERS as a nominee, issues which some lenders may not have focused on during the origination process and thereafter.