Insights

Once again a New York based court has questioned the efficacy of the Mortgage Electronic Registration System (“MERS”) procedure for assigning mortgage loans. In a Memorandum Decision, Judge Robert E. Grossman, Judge for the United States Bankruptcy Court for the Eastern District of New York, fired a warning shot across the bow of mortgage lenders participating in MERS, stating, in dicta, that MERS and the creditor seeking relief in the case (U.S. Bank) had failed to demonstrate MERS’s legal authority to assign a valid and enforceable interest in a mortgage. In re Agard, 2011 Bankr. LEXIS 488 (February 10, 2011).

The debtor in the bankruptcy case, Agard, challenged U.S. Bank’s right to have the stay in bankruptcy lifted that would enable the bank to enforce the judgment of foreclosure and the sale it had obtained in state court. Agard alleged that U.S. Bank lacked standing to seek the relief requested because MERS, the purported assignor to U.S. Bank, did not have authority to assign the mortgage. Therefore, according to Agard, U.S. Bank could not establish that it was a bona fide holder of a valid security interest in the property.

U.S. Bank countered that MERS had acted as “nominee” for the original owner of the mortgage which gave it the right to assign the mortgage to U.S. Bank on the original creditor’s behalf. U.S. Bank also argued that the judgment of foreclosure and sale entered by the state court established U.S. Bank as the true “owner” of the mortgage. U.S. Bank argued that the Bankruptcy Court was bound, under several judicial doctrines, to recognize the state court’s determination as to the ownership of the mortgage. U.S. Bank won on the “state court’s decision” argument, and the Bankruptcy Court held that U.S. Bank was the owner of the mortgage in Agard’s case. But the discussion in this case goes well beyond the decision with respect to Mr. Agard.

Dicta

Judge Grossman noted that the Court had a number of cases pending before it which involved mortgages assigned through the MERS system. For this reason, the Judge addressed whether, absent the judgment of foreclosure, U.S. Bank would have had standing to bring the motion to lift the stay in Bankruptcy Court. While Judge Grossman’s analysis of U.S. Bank’s standing based on a MERS assignment is technically “dicta” for Agard’s case, the analysis predicts how the Court will treat other MERS cases on its docket.

Judge Grossman stated that to bring an action to lift a stay under bankruptcy law, the creditor must be the “party in interest.” To do that, the creditor must demonstrate that it is the holder of the subject note. The creditor must also demonstrate that it has a security interest in the subject real property, i.e., that it is the holder of the mortgage.

Note Assignment

Under New York law, the Court noted, a creditor can prove that it is the holder of the note by providing proof of written assignment or by demonstrating that it has physical possession of the note. In the documents presented by U.S. Bank, the Court found only an assignment of mortgage “which contains a vague reference to the note” which was insufficient to prove an intent to assign the note. In addition, the Court observed that MERS was not a party to the note, and that the record was barren of any representation that MERS had any authority to take any action with respect to the note. Absent evidence of assignment, the Court looked for evidence in the record that U.S. Bank had physical possession of the note. Again, the Court found no evidence in the record that U.S. Bank had actual physical possession of the note other than MERS’s representation that its computer database reflects that the Note was transferred to U.S. Bank. The Court thus found that U.S. Bank had not satisfied its burden of showing that it was the holder of the Note.

Mortgage Assignment

The Court also stated that the record must provide evidence of U.S. Bank’s ownership interest in the mortgage by way of assignment from MERS. MERS asserted that its right to assign the mortgage to U.S. Bank stems from three sources: the mortgage documents, the MERS membership agreement, and state law.

The Court noted that the mortgage identified MERS as the “nominee for Lender and Lender’s successors and assigns” and as the “mortgagee of record.” The Court further noted that the mortgage contained language purportedly transferring the debtor’s rights in the property to MERS. In each clause, such transfer was qualified by, “solely as nominee for Lender and Lender’s successors and assigns” or similar language identifying MERS as “nominee” for the Lender. The Court stated that, without more, MERS’s “nominee” and the rights bestowed upon MERS in the mortgage document were insufficient to empower MERS to effectuate a valid assignment of mortgage. The Court followed a number of trial court cases which held that the status of “nominee” or “mortgagee of record” bestowed upon MERS in the mortgage documents, by itself, does not empower MERS to effectuate an assignment of the mortgage, absent some evidence of specific authority to assign the mortgage.

The Court also found that the MERS membership rules failed to establish an effective agency relationship between the originating creditor and MERS. The Court observed that the MERS membership rules contained no explicit reference to the creation of an agency or nominee relationship. The rules of membership did require that MERS members name MERS as “mortgagee of record,” and that MERS appear in the public land records as such. But, the rules of membership did not grant any clear authority to MERS to take any action with respect to the mortgages held by MERS members, including but not limited to executing assignments. The Court recognized language in the MERS membership rules that, “MERS shall at all times comply with the instructions of the holder of mortgage loan promissory notes,” but held that this language does not confer any specific power or authority to MERS.

Finally, the Court looked at New York agency law. The Court stated that an agency relationship can be created by a manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and the consent by the other to act. Restating its analysis of the “assignment” issues discussed above, the Court found that MERS’s “nominee” status and “mortgagee of record” status failed to create the required agency relationship. Further, the Court noted that when MERS assigned the mortgage to U.S. Bank, MERS did so at the request of U.S. Bank (the assignee), not the originating creditor (the assignor) for whom MERS was supposed to be acting as agent. The Court observed that, at the time of the mortgage assignment, U.S. Bank had, in theory, already held an interest in the note. Said another way, when MERS assigned the mortgage to U.S. Bank on the originating creditor’s behalf, it took its direction from U.S. Bank, not the originating creditor, to provide documentation of an assignment from an entity that no longer had any rights to the note or the mortgage. Thus, the Court decided, the MERS assignment was not effective under any purported agency relationship between MERS and the originating creditor.

The Decision

Judge Grossman held for U.S. Bank against Agard, saying that the Court must honor the state court’s determination, in that court’s “judgment of foreclosure and sale,” that U.S. Bank was the owner of the Agard note and mortgage. However, Judge Grossman warned 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.”

Geoffrey C. Rogers is a partner in the New York office of Hudson Cook, LLP. Geoff can be reached at (518) 383-9591 or by email at grogers@hudco.com.