On February 10, 2011, the United States Bankruptcy Court for the Eastern District of New York issued a memorandum decision addressing whether the alleged holder of a mortgage loan had sufficient status as a secured creditor to seek relief from the automatic stay to pursue a foreclosure action.1 After resolving the primary issue in controversy on purely procedural grounds and granting the requested relief, the Court analyzed whether an entity that acquires its interest in a mortgage loan through an assignment from Mortgage Electronic Registration Systems, Inc. (“MERS”) is a valid, secured creditor. The Court noted that (i) neither the mortgage loan servicer (acting on behalf of the current lender, U.S. Bank National Association, as Trustee for First Franklin Mortgage Loan Trust 2006-FF12, Mortgage Pass-Through Certificates, Series 2006-FF12 (“U.S. Bank”)) nor MERS (as intervenor in the case) had delivered any evidence that U.S. Bank was the holder or owner of the related mortgage note, and (ii) when MERS executed the assignment of the mortgage, it did so only “on behalf of First Franklin a Division of National City Bank of Indiana” (“First Franklin”), which was the original lender, even though First Franklin at that time was no longer owner and holder of the mortgage note. The Court, therefore, concluded that MERS lacked sufficient legal authority to validly assign the mortgage to U.S. Bank. It is important to note that the Court’s analysis of MERS was not essential to the actual holding of the case.
Facts and Procedural History
The mortgagor/borrower in this case (the “Debtor”) financed the acquisition of a parcel of real property located in Westbury, New York (the “Property”) with a mortgage loan originated by First Franklin in 2006. The mortgage note was subsequently assigned by First Franklin to Aurora Bank FSB (“Aurora”) and then assigned by Aurora to U.S. Bank (all such entities are members of MERS). The Debtor later defaulted on its mortgage loan payments and a foreclosure sale for the Property was scheduled for September 21, 2010. In a likely effort to stay the foreclosure sale, the Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on September 20, 2010. Select Portfolio Servicing, Inc., the servicer (“Servicer”), filed a motion seeking relief from the automatic stay to foreclose on the Property on behalf of U.S. Bank. The Debtor filed a limited opposition asserting that the Servicer lacked standing to seek the requested relief because MERS did not have the requisite authority to assign the mortgage to U.S. Bank. As this issue directly impacts MERS’s business model, MERS sought, and was granted, the right to intervene in the proceedings.
The Servicer claimed that U.S. Bank (and therefore the Servicer) had the requisite authority to seek the requested relief before the Court because of a judgment of foreclosure and sale that was entered in favor of U.S. Bank by a state court prior to the Debtor’s filing of its Chapter 7 petition. The Servicer alleged that the judgment of foreclosure was a final adjudication as to U.S. Bank’s status as a secured creditor and requested that the Court grant its relief on the basis of the Rooker-Feldman doctrine and the general legal principle of res judicata. The Court agreed and granted the Servicer’s motion for relief from the automatic stay on these procedural grounds.
Although the Court held for the Servicer, it proceeded to analyze at length in dicta whether the Servicer would have had standing to seek the requested relief if the procedural issues had not been present. The Court noted that the issues identified below as affecting MERS in this proceeding were also relevant in a number of other cases before the Court that could not be similarly dismissed on procedural grounds. Because this case presented the Court with an opportunity to analyze these issues and MERS directly intervened in the subject proceedings, the Court issued what it characterized as a reasoned opinion regarding whether U.S. Bank had sufficiently obtained the status of a secured creditor through an assignment from MERS.
MERS Role in the Residential Mortgage Marketplace
MERS was established in 1993 to facilitate the transfer of beneficial ownership interests in mortgage loans between various members of the mortgage finance industry. Specifically the MERS system allows members of MERS to track the transfer of a mortgage note following a transfer or assignment thereof between different members of MERS. MERS remains the “mortgagee of record” and/or “nominee” for all transferees so long as they are MERS members. In this capacity, MERS updates its electronic records on the MERS system to track all such changes in ownership of a mortgage loan. The MERS system serves as an alternative to the traditional (and generally more time consuming and expensive) approach of recording all such transfers in the state public recordation office. Instead, the original mortgage or assignment of mortgage to MERS is recorded in the public records at the time of origination of the mortgage loan or at the time the mortgage is boarded onto the MERS system, if after origination. Only when a MERS member assigns a mortgage note to a non-MERS member is an actual further assignment of mortgage recorded in the state public recordation office. Significantly, MERS is the mortgagee of record and/or nominee for more than 50% of all residential mortgage loans in the United States, which fact was noted by the Court.
MERS’s Authority to Effectuate Assignments of Mortgage The Court first addressed the way in which a party demonstrates that it holds both the mortgage note and the mortgage for the purpose of establishing standing as a secured creditor with respect to a mortgage loan. First, the party must hold the mortgage note and must substantiate that by either providing proof of a written assignment of the mortgage note to such party or demonstrating that it has physical possession of the mortgage note which is endorsed to it. Here, the Servicer was unable to produce evidence that the mortgage note was endorsed or otherwise assigned to U.S. Bank or that U.S. Bank even possessed the mortgage note.
The Court then addressed whether the parties had sufficiently established that U.S. Bank was the assignee of the mortgage. Notwithstanding that New York law supports the generally held principle that the “mortgage follows the mortgage note,” in this case, MERS admitted that the mortgage and the mortgage note necessarily traveled on different paths because of the very nature of the MERS system. Therefore the Court highlighted that if the mortgage note and the mortgage do not travel together (i.e., the lender possesses the mortgage note, but the mortgage is registered with MERS), there must be a showing that the current lender not only possesses the mortgage note or is otherwise the valid assignee of the mortgage note, but is also the valid assignee of the mortgage, in order to establish that it is a secured creditor of the Debtor. MERS asserted that it holds the legal title in mortgage loans as the “mortgagee of record” and/or “nominee” of U.S. Bank and argued that the legal authority supporting U.S. Bank as the valid assignee emanated from the related mortgage documents, the MERS membership agreement and applicable state law.
In this case, the mortgage named MERS as the nominee for First Franklin and its successors and assigns, and the assignment of mortgage named MERS as the nominee for First Franklin as assignor to U.S. Bank as assignee. Additionally, the mortgage expressly transferred the Debtor’s rights to the Property to MERS as nominee. The Court relied on prior New York State court decisions to suggest that the mere label of “mortgagee of record” or “nominee” on the loan document, without more, is insufficient to establish that MERS effectuated a valid assignment of the mortgage to U.S. Bank, even if, as the Court noted, the Debtor acknowledged in the mortgage that MERS may do so on behalf of the original lender and its successors in interest. The Court reasoned that mere title of “mortgagee of record” alone does not grant substantive agency authority to MERS -- the original lender must affirmatively bestow these rights on MERS. One example offered by the Court of the way in which this should be done is for the original lender to execute a power of attorney to MERS.
The Court then expressed its disagreement with MERS’s assertion that the terms and conditions of the MERS membership agreement confer agency status upon MERS by its members, on the grounds that the terms and conditions neither explicitly refer to the creation of an agency agreement nor grant any express authority upon MERS to take any actions with respect to the assignment of mortgages beneficially held by its members.
Finally, the Court addressed MERS’s state law argument that New York agency laws establish a principal-agency relationship between MERS and the original lender (and its successors) allowing MERS to validly assign the mortgage. The argument was called into question on the basis that the New York statute of frauds requires such a relationship be evidenced in writing and the record lacked any evidence of such written authority. As discussed above, the Court did not find that MERS’s rules of membership and terms and conditions satisfied this criteria. Rather, the Court concluded that even if MERS assigned the mortgage on behalf of the entity that held the mortgage note at the time of the assignment, it lacked authority as “nominee” or agent to do so absent evidence of specific written directions by, in the Court’s words, “its principal” (presumably, the mortgage note holder).
As stated above, the substantive legal issue in the case was decided in favor of the Servicer on procedural grounds and the ensuing discussion about whether the Servicer had sufficient authority to seek relief from the stay on behalf of U.S. Bank as either holder of the mortgage note or the mortgage should be regarded as dicta. Given that fact, the Court’s discussion of MERS should have no precedential value.
Nevertheless, this case is among several recent decisions that question MERS’s authority to take formal actions on behalf of its members, including effectuating assignments of mortgages.