Grappling with an unprecedented wave of real property foreclosure actions, New York courts have reached conflicting conclusions regarding the question of whether assignments of mortgages and related notes may validly be made by the Mortgage Electronic Registration System (“MERS”), rather than by the financial institution that holds the relevant note and beneficial interest in the relevant mortgage. The United States Bankruptcy Court for the Eastern District of New York, applying New York law, has concluded that MERS lacks the authority to assign mortgages and notes, while several New York state courts have reached a contrary conclusion. The unsettled state of the law regarding MERS mortgage assignments in New York is likely to create considerable uncertainty in certain foreclosure actions, at least until the New York appellate courts weigh in on the issue.
The Role of MERS
MERS was established in the 1990s by the mortgage banking industry to facilitate the computerization of mortgage loan records, and to expedite the assignment and securitization of mortgage loans. It maintains a national mortgage registration database, reflecting information concerning the ownership and assignment of millions of home mortgage loans. Acting as a nominee of the owner of the mortgage note, MERS is recorded in local land records as the “mortgagee of record.” Subsequent transfers of the mortgage note occur within the MERS database. MERS estimates that some 50% of the mortgages in the United States utilize the MERS registration system.
Pursuant to its membership agreement, membership rules, and certain provisions of the mortgages for which it serves as mortgagee of record, MERS takes the position that it may lawfully commence foreclosure proceedings on behalf of the owner of the note, as well as effectuate mortgage and note assignments. Parties resisting foreclosure, however, have frequently sought to challenge MERS’ standing to foreclose, as well as its standing and authority to effectuate mortgage and note transfers. See Multidistrict Court Dismisses Mortgage Foreclosure Class Actions, Financial Services Litigation Newswire, December 2010.
The Bankruptcy Court’s Agard Decision
On February 10, 2011, in deciding whether to grant a mortgage servicer’s motion for relief from the automatic bankruptcy stay to foreclose on a debtor’s real property, the United States Bankruptcy Court for the Eastern District of New York concluded that MERS lacks the authority to assign mortgage notes. In re Agard, No. 810-77338-REG, 2011 WL 499959 (E.D.N.Y. 2011). Despite this conclusion, based on a prior state court judgment of foreclosure, the court ultimately held that the Rooker-Feldman doctrine (which prohibits the lower federal courts from reviewing state court judgments) and the doctrine of res judicata precluded the debtor’s standing challenges. Thus, the court granted the mortgage servicer’s motion, permitting it to foreclose.
The court went on, however, to analyze the merits of the mortgage servicer’s standing as the agent of the mortgagee, U.S. Bank. Notwithstanding its holding that the standing issue was resolved by the application of res judicata, the court stated it “believe[d] this analysis is necessary for the precedential effect it will have on other cases pending before this court.” In analyzing the merits, the court noted that to have standing to foreclose, the mortgagee must hold both the note and the mortgage.
The court found there was insufficient proof that U.S. Bank actually held the note. While MERS represented that U.S. Bank was reflected in its database as the owner of the note, the court found that no showing had been made that the note had been validly assigned to U.S. Bank. The court concluded that an Assignment of Mortgage executed by MERS in favor of U.S. Bank was not sufficient—despite language stating that U.S. Bank was “to have and to hold the said Mortgage and Note”—to effect a transfer of the note. The court reasoned that this language was “vague and insufficient to prove an intent to assign the Note,” that MERS was not a party to the note, and that the record did not show that the original noteholder had authorized MERS to assign the note.
Next, the court found that MERS lacked the power to assign the mortgage to U.S. Bank. MERS argued that it had the authority to assign a mortgage because it is the named “mortgagee of record” and a “nominee” for the mortgagee in the mortgage itself. The court found this language insufficient to confer any authority upon MERS to assign the mortgage, absent evidence of specific authority to assign the mortgage. The court concluded that MERS had not shown that it was granted the “specific right to assign the mortgage” in writing, and as such, found that MERS lacked the authority to assign the mortgage. The court also found that MERS’ membership rules, to which all MERS member institutions agree, did not grant “clear authority to MERS” to assign the Mortgage, and that the statute of frauds barred the court from finding that MERS had mortgage assignment authority unless such authority was clearly memorialized in writing.
The court rejected MERS’ arguments that its “mortgagee of record” status under the terms of the Mortgage gave it “the rights of a mortgagee in its own right.” In rejecting this contention, the court noted that MERS had executed the Assignment of Mortgage “as nominee for” the original lender, rather than as mortgagee in MERS’ own right. The court wrote that “MERS’ position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.”
The court was unmoved by concerns that its analysis could create uncertainty in mortgage litigation and in mortgage credit markets, writing that “this Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law.”
While it remains to be seen whether other courts will follow Agard’s analysis or view it as dicta, the Agard decision will likely factor prominently in future MERS foreclosure proceedings in New York. In fact, the court expressed an intent to adhere to its own opinion in “dozens” of other pending cases that did not involve a prior state court judgment of foreclosure. The court wrote 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 before this Court.”
Finally, the court “le[ft] open the issue as to whether mortgages processed through the MERS system are properly perfected and valid liens,” based on the theory that the MERS system impermissibly separates the note and the mortgage.
Such a holding would have far-reaching implications, insofar as it would have the potential, if widely adopted, to invalidate mortgage liens whenever a mortgage is held through the MERS system.
Recent New York State Court Decisions
A number of New York courts have adopted analyses contrary to the Bankruptcy court’s approach in Agard. On March 3, 2011, the New York Supreme Court, Bronx County granted summary judgment in a foreclosure action brought by a MERS assignee. See Bank of New York v. Sachar, Index No. 0380904/2009 (Bronx Co. 2011). Contrary to the Agard court’s analysis, the Sachar court held that the mortgage instrument “conferred broad powers upon MERS as nominee to act on the original lender’s behalf,” including by assigning the mortgage. Moreover, because (unlike the situation in Agard) evidence had been presented that the assignee had taken physical delivery of the mortgage note, the Sachar court held that the note had been validly transferred as well.
The Sachar court followed the analysis of the New York Supreme Court, Suffolk County in U.S. Bank v. Flynn, 27 Misc. 3d 802 (Suffolk Co. 2010), which upheld a MERS assignment of both a mortgage and note based on language in the mortgage instrument similar to that which the Agard court found insufficient. The Flynn court held that “a written assignment of the note and mortgage by MERS, in its capacity as nominee, confers good title to the assignee and is not defective for lack of an ownership interest in the note at the time of the assignment,” because MERS has the power to “act as the nominee of the owner of the note and of the mortgage.” Insofar as the Agard court’s analysis rested in part on a conclusion that MERS had not clearly acted to assign the note, differences in the factual record may partially explain the divergent approaches in Flynn and Agard.
Notwithstanding Flynn and Sachar, New York state courts have not uniformly upheld the foreclosure standing of MERS assignees. In LaSalle Bank National Ass’n v. Lamy, 12 Misc. 3d 1191(A), 2006 WL 225172 (Suffolk Co. 2006), for example, the court found that a MERS assignment was invalid because MERS lacked an ownership interest in the Note at the time of the assignment. Numerous New York courts, however, have upheld MERS’ standing and power of assignment.
The issue of MERS’ standing is a subject of dispute in a variety of jurisdictions nationwide. The uncertainty created by the Agard decision is likely to dissipate as the New York appellate courts weigh in but as this split in authority in New York demonstrates, it is far from clear how courts in a wide array of jurisdictions, applying state law, will resolve these issues. While MERS and its assignees have prevailed in a large majority of cases nationwide, any judicial trend to reject MERS’ standing, or that of its assignees, has the potential to prolong and complicate the foreclosure process nationwide. Moreover, if the “separation of the mortgage and note” theory left open by the Agard court gains traction, it may cast doubt on the enforceability of millions of defaulted mortgages. Lenders with exposure to residential mortgages, or to mortgage-backed securities or other mortgage-related instruments, should continue to monitor developments concerning MERS’ foreclosure standing.