Daily Development for Tuesday, June 9, 2009
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

FORECLOSURE ACTIONS; NECESSARY PARTIES: Despite being designated as a beneficiary and holder of legal title in a deed of trust, MERS, as a “mere agent” to the originating lender,  is only a necessary party to a foreclosure action if the agent is (1) the borrower, trustee, or true beneficiary (receiving payments, making decisions on late payments, and holding foreclosure rights), or (2) specifically authorized by the lender to act on such lender’s behalf in the foreclosure proceedings.  Thus, even when a junior lender forecloses judicially and without notice to MERS, the interest represented by MERS can be extinguished without notice, at least where the original lender is notified. 

Mortgage Electronic Registration System, Inc. v. Southwest Homes of Arkansas, ___ S.W.3d ___ , 2009 Westlaw 723182 ( Ark. 2009).

In 2003, Jason and Julie Lindsey borrowed money from Pulaski Mortgage (“Pulaski”) and executed a deed of trust to secure the promissory note.  Mortgage Electronic Registration System (“MERS”), which was developed by the real estate finance industry to facilitate the sale and resale of instruments in the secondary mortgage market and to track registered security instruments for lenders, was listed in the deed of trust as “Beneficiary” acting “solely as nominee for Lender” and “Lender’s successors and assigns.”  The deed of trust (which was recorded) also stated that “the Borrower understands and agrees that MERS holds only legal title to the interests granted by the Borrower and further that MERS as nominee of the Lender has the right to exercise all rights of the Lender including foreclosure.” 

In 2006, the Lindseys granted a mortgage on the same property to Southwest Homes of Arkansas (“Southwest”) to secure a second promissory note.  The mortgage was also recorded.  In February 2007, Southwest foreclosed on the mortgage, listing the Lindseys and “Mortgage Electronic Registration Systems, Inc. (Pulaski Mortgage Company)” in the foreclosure action.  MERS was never served and Pulaski (the lender of record) did not file an answer.  The decree of foreclosure was entered in April 2007 and the property was sold to Southwest.  In February 2008, MERS learned of the foreclosure and moved for relief, arguing it held legal title to the property and therefore was a necessary party to the foreclosure action.  The circuit court denied MERS’ motion and MERS appealed.

The deed of trust indicated MERS held legal title and was the beneficiary, but it also provided that Pulaski shall receive the payments, make decisions on late payments, and hold foreclosure rights.  MERS did not receive any payments, service the loan or oversee payments, delinquency of payments, or administration of the loan.  MERS’ involvement was limited to providing electronic tracking of ownership interests in residential real property security interests.  Nonetheless, MERS asserted that it held bare legal title due to a principal-agent relationship between it and Pulaski under the express terms of the deed of trust (specifically, the provision that MERS held legal title and was the lender’s “nominee”), and therefore it had authority to exercise Pulaski’s rights under the deed of trust. 

The court first described the nature of the relationship between parties entering into a deed of trust, noting that parties necessary in an action to recover the debt and foreclose the mortgage include the borrower, trustee, and beneficiary. 

The court clarified that despite being designated as the beneficiary and holder of legal title in the deed of trust, Pulaski (it appeared to the court) was the true beneficiary because it received payments on the debt.  Second, the court discussed MERS’ agency argument, concluding that MERS (as Pulaski’s agent) was authorized to do only what Pulaski (as the principal of MERS) desired it to do, and the record did not show MERS had authority to act on Pulaski’s behalf in connection with the foreclosure.  Finally, the court noted that Pulaski was a named party in the foreclosure action, and MERS was not acting as Pulaski’s agent at the time it moved to set aside the decree of foreclosure.  For the foregoing reasons, the court held that MERS was not a necessary party to the foreclosure action.

Comment 1: Despite what might be argued to be difficult language for MERS in the opinion, the holding is based upon a relatively unusual set of facts.  The court appears to have made the assumption that Pulaski, the originating lender, continued as servicer of this loan, and was the party to whom the borrower remitted payments.  When the junior lienholder foreclosed, it did name Pulaski as a party defendant, but did not name its agent, MERS.  Either Pulaski was the owner of the loan or a designated agent of the owner.  Because of these facts, one might distinguish the situation in which it would be necessary to name MERS as a party because that is the only way to notify MERS’ principal - a securitized trust or other transferee of the loan.  But the court plays rather fast with the facts here, and appears to ignore the fact that Pulaski had the power to transfer the note to others.  MERS was there specifically to address that possibililty. 

The court relies on the land records as showing Pulaski was the owner of the loan when in fact it had right there in front of it a mortgage stating that MERS was acting as “nominee for Lender [Pulaski] and Lender’s successors and assigns.”   

Comment 2: In the editor’s view, MERS counsel did not help the situation by arguing that MERS was the holder of title to the property through the deed of trust.  As the court properly analyzed, the title to the property for deed of trust purposes was held by the trustee.  But then, amazingly, the court simply ignores the fact that the trustee wasn’t served either. Maybe one has to be an Arkansas lawyer to understand all of this. 

Comment 2: Notwithstanding Comment 1, the editor feels that the case is wrong, and possibly should be attacked as a violation of Due Process in the federal courts.  Even if the court obtained personal jurisdiction over Pulaski, it lacked jurisdiction to terminate a senior interest in the property in a junior foreclosure.  Typically, when a senior is named, the sole purpose is to ascertain or verify the amount of the senior lien, so that the foreclosure sale purchasers are aware of that claim.  Unless the pleadings provided to Pulaski made crystal clear that Southwest was challenging Pulaski’s priority, this decision is wrong and Pulaski (or its principles) did not receive a fair shake.

Further, it does not appear that the Mullane standard was used to notify the holders of the note when MERS was right there in the record as a means to accomplish such notice. 

Note: The editor’s affiliated law firm represents MERS in some recent actions, but in fact the editor has no knowledge of and has not participated in discussions of this case.  So the editor’s views should be seen as those of the editor alone.

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