Recognizing MERS’s role in modern day mortgage lending, the Arizona Court of Appeals confirmed in Delo v. GMAC Mortgage, LLC that tax lien purchasers must notify MERS when identified in the Deed of Trust before foreclosing on real property. 

In this case, Delo purchased a tax lien in 2007. After the redemption period passed, Delo filed a tax lien foreclosure action naming only the original mortgage lender and the homeowners, even though the Deed of Trust identified MERS as the record beneficiary. The original lender was no longer in business, and the homeowners, who were already in default on their mortgage loan, failed to appear. The court accordingly entered a default judgment for Delo, who then obtained a Treasurer’s Deed for the property. In the meantime, the property was sold at a trustee’s sale. GMAC was the successful bidder, acquiring the property by credit bid.

Delo then sued GMAC to quiet title. Following cross-motions for summary judgment, the trial court entered judgment for Delo finding that GMAC’s interest in the property was not recorded as of the date of the foreclosure action, and the recorded lis pendens put GMAC on notice of the need to intervene in the foreclosure action to protect its interest. As to MERS, Delo argued that he was not required to give it notice, because MERS was only an agent of the original lender, whom he named and defaulted in the prior foreclosure action.

MERS, who was not made aware of the quiet title action, or the prior foreclosure action, until after the quiet title judgment issued, sought to appeal the quiet title judgment as an aggrieved nonparty. The Court of Appeals permitted MERS to appeal, and also permitted it to intervene in GMAC’s appeal. Following briefing and argument, the Court of Appeals sided with MERS and GMAC, and reversed, directing the trial court to enter judgment in favor of GMAC, on the basis of the references to MERS in the Deed of Trust.

In reversing, the Court of Appeals noted that equity favors redemption, and twice observed that Delo’s pre-foreclosure title search revealed MERS’s interest in the real property. Yet, Delo chose not to join MERS in the foreclosure action even though “the Deed of Trust not only expressly identifies MERS as the nominee for the lender, but also as beneficiary, and the holder of legal title to the property.” MERS’s interests, the Court of Appeals observed, “protected the interests of [GMAC].” The burden was not on GMAC to intervene in the foreclosure action, as Delo argued, but “rather on Delo to ascertain those with a legal or equitable interest in the property.”

Accordingly, the Court of Appeals held that “those who purchase tax liens and seek to foreclose on them must give MERS notice of the foreclosure proceedings when they are identified in the Deed of Trust.”

This is an important decision for the mortgage lending industry, because it validates the expectations of secondary mortgage market participants that their property interests are protected through MERS’s role as holder of the security instrument entitled to notice of all legal proceedings.  Delo v. GMAC Mortgage, LLC also provides clarity to tax lien purchasers and others of their notice obligations when foreclosing.