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Government Entity Claims Harm Caused by Mortgage Process
By Latif Zaman

The role of MERS in the mortgage process and what “robo-signing” actually entails continues to confuse numerous observers outside the industry. However, in litigation and in enforcement actions, the key issue becomes whether borrowers are actually harmed by the use of MERS and through robo-signing, and the appropriate recourse and remediation for such harm. A recent case decided before a North Carolina court added an interesting wrinkle to this discussion. Guilford County v. Lender Processing Services, Inc., explored whether a county register of deeds could sue various defendants, including lenders, for alleged injuries based on the use of MERS and robo-signing.

Jeff Thigpen, the Register of Deeds of Guilford County in North Carolina, acting on behalf of Guilford County, sued various defendants in North Carolina Superior Court for their role in the process of creating mortgage-backed securities. The allegations particularly concerned the role of MERS and MERS’s members in making multiple transfers of mortgages among themselves without filing the assignments in the public record and without paying related fees and the practice of robo-signing.

The complaint alleged the following injuries to the Register of Deeds, Guilford County and the citizens of Guilford County as a result of the defendants’ actions:

  • Legal uncertainty concerning title;
  • Difficulty or inability to discover and remedy title defects;
  • The loss of homes due to illegal foreclosures;
  • Difficulty or inability to buy and sell property;
  • Decreases in real estate values;
  • Decreases in real estate investments;
  • The inability to put property to its highest and best use;
  • Reductions in tax collections to the County’s Treasury and the concomitant reduction in services to support the public welfare;
  • Decreases in employment, social stability, and quality of life; and
  • The cost of identifying and repairing the issues identified in the complaint.

The Register of Deeds sued for violations of N.C. Gen. Stat. § 45-36.9, for unfair and deceptive trade practices, and for unjust enrichment.

N.C. Gen. Stat. § 45-36.9(a) requires secured creditors to “submit for recording a satisfaction of a security instrument within 30 days after the creditor receives full payment or performance of the secured obligation.” Section 45-36.9 makes secured creditors liable to “landowners.” Although the Register of Deeds was not a landowner, he asserted that he could bring a third-party claim on behalf of landowners in the county. The court stated that to assert third-party standing, a plaintiff first must demonstrate that he has standing in his own right and then must also show that he has a sufficiently “close” relationship with the third party whose rights he seeks to assert and that there exists some hindrance to that third party’s ability to pursue his or her own rights. The court found that the Register of Deeds could not demonstrate his own standing and did not show any hindrance to county landowners in pursuing their own rights. As such, the court dismissed the N.C. Gen. Stat. § 45-36.9 claim, finding that the Register of Deeds lacked standing.

Among other unfair and deceptive trade practice allegations, the Register of Deeds claimed that the practice of robo-signing caused “falsified, forged, and/or fraudulently executed mortgage documents” to be filed both with the Register of Deeds and with similar registry offices across the country. The Register of Deeds also claimed that lenders and other participants in the mortgage industry “unfairly and deceptively utilized MERS to avoid accurately recording property interests, transfers, and satisfactions and to prevent landowners and the public from accessing property records.” The court did not discuss whether robo-signing constituted an unfair or deceptive trade practice. The court noted that there was “at least a colorable argument that Defendants’ utilization of MERS as described in the Complaint …constitutes an unfair or deceptive trade practice.” The court, however stated that for a successful claim for unfair and deceptive trade practices under N.C. Gen. Stat. § 75-1.1 and N.C. Gen. Stat. § 75-16.1, a plaintiff must show that the act or practice in question was in or affecting commerce. The court found that, in the context of receiving public filings, the Register of Deeds was not acting as a market participant but instead as a governmental body fulfilling a statutorily defined administrative role. The court determined that because the administrative interactions were not for the purpose of trade, they were not “in or affecting commerce.” The court also held that the Register of Deeds lacked third party standing as he did not show any hindrance to county landowners pursuing their own rights or the required close relationship to the landowners. As such, the court also dismissed the unfair and deceptive trade practices claim.

The court noted that in order to establish a claim for unjust enrichment, a party must have conferred a benefit on the other party. The court determined that the Register of Deeds based the unjust enrichment claim on lost filing fees. As the court noted, after initially designating MERS as the mortgagee of record for the purpose of public filings, MERS members did not record subsequent assignments of the beneficial interests underlying numerous mortgages and deeds of trust. As a result, the MERS members avoided paying filing fees associated with those subsequent assignments. The court found, however, that not paying filing fees based on assignments that were not recorded could not constitute a benefit conferred.

The Register of Deeds also argued that the lenders and assignees were unjustly enriched by affording themselves of the “protections” of the North Carolina real property laws without paying filing fees. However, the court noted that N.C. Gen. Stat. § 47-17.2 provides that once a mortgage interest is initially recorded with the Register of Deeds, it may be transferred and assigned many times over without each subsequent transfer or assignment also needing to be recorded. The court interpreted N.C. Gen. Stat. § 47-17.2 to provide an assignee to the “protection that a Registry filing confers” regardless of whether additional filings are made or whether additional fees are paid to the Register of Deeds. Therefore, the court noted, whatever protection the assignee receives is commensurate with the “legal efficacy of his predecessors’ filings and the validity of the assignment itself.” The court stated that if, as the Register of Deeds claimed, the assignments at issue were the product of robo-signing and therefore procured by fraud and forgery, then those assignments were invalid and were not afforded any protection under N.C. Gen. Stat. § 47-17.2 anyway. As such, no benefit would have been conferred. The court further stated that if the assignments were legally effective then they were entitled to “the protection a Registry filing confers” regardless of whether additional filings were made or additional fees were paid. As such, the court also dismissed the unjust enrichment claim.

The court did not delve into questions regarding MERS’s role in the mortgage lending process, potential injuries caused by robo-signing or any of the myriad potential improprieties in the process of creating mortgage backed securities. However, in what’s becoming a very litigious industry, the court in Guilford County v. Lender Processing Services, Inc., in effect, found that a county level administrative entity is not harmed, in any way that requires redress, by inconsistencies, imperfections, and violations of proper mortgage procedure. The court also affirmed that a county level administrative entity with no enforcement authority is not the appropriate party to redress wrongs for the average borrower.

Guilford County v. Lender Processing Services, Inc., 2013 NCBC LEXIS 25 (N.C. Super. May 29, 2013)

Latif Zaman is an associate in the Maryland office of Hudson Cook, LLP. He can be reached at 410-782-2346 or by email at lzaman@hudco.com.

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