Daily Development for Thursday, September 18, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

MORTGAGES; FORECLOSURE; PARTIES; MERS: Although MERS is recorded as a mortgagee, it is not entitled to be served or joined as a party to the foreclosure of a senior mortgage because it is a “mere” nominee, and not a true obligee under the debt or holder of rights under the mortgage. 

Landmark Nat’l Bank v. Kessler, 2008 Westlaw 4180346 (Kansas App. 9/12/08)

This is really quite an awful opinion awful for MERS and still another body blow to securitized mortgages if it stands.  It formally addresses only a narrow point of law, but does not appear to acknowledge established law that is relevant to the eventual outcome of the case, so we’re left uncertain as to what the court really intends There will be an appeal, but right now it’s the law in at least part of Kansas and will start the wolves howling elsewhere as well.  Some of the factual detail comes from one of the lawyers in the case.

Kessler had a first mortgage on Kansas property securing a debt of about $60,000.  There was a second mortgage securing a debt of $90,000 loaned by Millennia, but Millennia participated in the MERS process and anticipated transferring its loan on the secondary market, so it arranged for the original recording of the loan to be in the name of MERS, as nominee for Millennia or its assigns.  Subsequently, the mortgage was assigned on to Sovereign Bank, and the assignment was duly recorded on MERS database.  No assignment was recorded, of course, since MERS, by virtue of agreement of Millennia and Sovereign, now stood as nominee of Sovereign. 

Kessler defaulted on the first mortgage and Landmark, the first mortgagee, instituted judicial foreclosure proceedings.  Apparently it sought advice from a title insurer, which advised it to serve only Millennia  and Kessler, even though MERS was of record, and even though the identity of the current owner of the mortgage could have been found by checking with MERS.  Note that Millennia was not of record as the holder of the mortgage, but one assumes that the title company somehow was informed that Millennia was the original mortgagee of the MERS recorded mortgage.

The second mortgage contained language requesting that any senior mortgagee provide the holder of the second mortgage with notice of the default and foreclosure.  This language was irrelevant in Kansas, to the editor’s knowledge, and conferred no duty on the senior and no rights on the junior.  It likely was part of a “national” form.

Both Kessler and Millennia failed to show at the foreclosure hearing, and the court entered a default judgment of foreclosure, with the sale to be conducted at a later date by the sheriff and thereafter to be confirmed by the court.  Before the sheriff’s sale,  Sovereign got wind of what was happening and appeared in court asking to intervene and  to set aside the judgment.  Sovereign appeared after the sheriff’s auction, but before the required judicial confirmation of the sale.  The trial court ruled, however, that Sovereign was far beyond the ten day period following the judgment that Kansas permits for intervenors.

Apparently the trial court expressed the view that Sovereign lacked standing to intervene, as it was not a record owner of the mortgage,  so Sovereign sought out MERS and MERS brought its own action to intervene and set aside the foreclosure.  It appears that the MERS petition was before the confirmation of the sale (but after the sheriff’s auction itself), and MERS made the point that the it was a necessary party to the foreclosure action as it held a recorded mortgage.  MERS further argued that to terminate its interest without notice and hearing violated its due process rights. 

The trial court ruled that MERS was not a necessary party to the action because, as it readily admitted, it was a nominee, and not, in the view of the court, the holder of any real interest in either the note or mortgage.  As to due process rights, the court noted that since MERS had no property right at stake it was not entitled to due process.  The court did not mention that Sovereign, the lawful assignee of the mortgage, was certainly discoverable and should have been served, either through its nominee MERS or otherwise.  The court also was of the view, apparently, that neither MERS nor Sovereign had any further rights as an omitted junior lienholder, and that the mortgage terminated their rights.  This finding may not have been necessary to the ruling on the motion to intervene.

On appeal, a three judge Kansas Appellate panel upheld the trial court’s ruling in all respects. 

The appeals court relies upon Black’s Law Dictionary for a significant portion of its analysis.  The analysis itself is so incredible to the editor that he feels that it is best that he merely set it forth verbatim:

“. . . [T]he tie between a mortgage and an underlying debt is so intrinsic that Kansas law provides that "[t]he assignment of any mortgage . . . shall carry with it the debt thereby secured." K.S.A. 58-2323. Indeed, an assignment of a mortgage without the debt transfers nothing. 55 Am. Jur. 2d, Mortgages § 1002. Thus, the mortgagee, who must have an interest in the debt, is the lender in a typical home mortgage.

But for reasons thought beneficial by a group of lenders who trade mortgages, the form of mortgage used in this case designates an entity that is not the lender as the mortgagee. See MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 96, 828 N.Y.S.2d 266, 861 N.E.2d 81 (2006) (MERS was established by large lenders to allow easy electronic trading and tracking of mortgages). Specifically, the mortgage says that the mortgagee is MERS, though "solely as nominee for Lender." Does this mean that MERS really was the mortgagee, even though it didn't lend money or have any rights to loan repayments? Assuming so, MERS argues that it was a necessary party to the foreclosure and that the foreclosure must be set aside. But the premise upon which MERS bases this argument is flawed.

What is MERS's interest? MERS claims that it holds the title to the second mortgage, not the real estate. So it does, but only as a nominee. In terms of the roles that we've discussed in the mortgage business, MERS holds the mortgage but without rights to the debt. The district court found that MERS was merely an agent for the principal player, Millennia. While MERS objects to its characterization as an agent, it's a fair one.

MERS had no right to the underlying debt repayment secured by the mortgage; MERS did not even act as the servicing agent to receive the payments and remit them to the lender. MERS's right to act to enforce the mortgage was strictly limited: if "necessary to comply with law or custom," MERS could foreclose the mortgage or enter a release of the mortgage. MERS certainly could not act at odds to its principal, the lender. Its role fits the classic definition of an agent: one "'authorized by another to act for him, or intrusted with another's business.'" In re Tax Appeal of Scholastic Book Clubs, Inc., 260 Kan. 528, 534, 920 P.2d 947 (1996) (quoting Black's Law Dictionary 85 [4th ed. 1968]).”
Do you think that MERS, both by custom and practice and by agreement, performs the function of a legal representative of the owner of a mortgage, and that its nominee status therefore entitles it to be a party to an action involving that mortgage?  Do you think that, at the very least, MERS serves as a record indicator to a party searching title that there is a possible holder of a mortgage interest in the property and that inquiry of MERS would be appropriate?  Unfortunately, you don’t sit on the Kansas Court of Appeals, and the views of that body, set forth above, are so far controlling.

As to Sovereign’s motion, the court ruled simply that it didn’t act in a timely fashion, and doesn’t discuss its due process rights

The only sop given to the parties is a paragraph stating the limitations of the court’s precise ruling:

“We do not attempt in this opinion to comprehensively determine all of the rights or duties of MERS as a nominee mortgagee. As the mortgage suggests may be done when "necessary to comply with law or custom," courts elsewhere have found that MERS may in some cases bring foreclosure suits in its own name. , 965 So. 2d 151 (Fla. Dist. App. 2007). On the other hand, some have suggested potential problems created by MERS's practices, , 8 N.Y.3d 90, 100-04, 828 N.Y.S.2d 266, 861 N.E.2d 81 (2006) (Kaye, C.J., dissenting), or with the handling of paperwork documenting who owns what in the residential-mortgage industry in general. , 386 B.R. 374, 385 (Bankr. D. Mass. 2008); , 2007 WL 3232430 (N.D. Ohio 2007) (unpublished opinion). In this case, we are only required to address whether the failure to name and serve MERS as a defendant in a foreclosure action in which the lender of record has been served is such a fatal defect that the foreclosure judgment must be set aside. We hold that it i
s not.”

Thus, although MERS and Sovereign begged the appeals court in oral argument to find at least that the Sovereign mortgage was not cut off by the foreclosure, it said nothing express on this issue, at least in writing.  As noted, the court appeared to be of the view that the mortgage was cut off.  The trial court had stayed the delivery of the deed to the foreclosure purchasers pending this appeal, so that issue may still be resolved if the appeal continues.

Comment 1: This case certainly does some damage to MERS claims in other courts that it is entitled to bring foreclosure actions or perform other functions as the nominee of the owner of the note and mortgage.  The relatively unusual context of the foreclosure of a first mortgage may limit the damage, but it is still significant, as it permits foreclosure of junior mortgages held by MERS as a nominee of record without notice or hearing.

Comment 2: According to hearsay, the property sold at foreclosure to third parties for $90,000 - significantly more than the $60,000 debt; and Kessler, who had defaulted at the foreclosure proceeding, got wind of this and appeared in court to collect his $30,000 surplus.  He apparently has declared bankruptcy and discharged the $90,000 debt, so if Sovereign loses its security interest here, Kessler will get to keep the money. Kessler still apparently also has statutory redemption rights, and the property in fact may be worth close to $130,000.  Kessler will be able to redeem that property for $90,000 and reap another $40,000 gain - a $70,000 windfall when he didn’t even show up.  That’s show business!!

Comment 3: The editor understands that there will be an attempt to get a rehearing en banc and a possible appeal to the Kansas Supreme Court.  Perhaps amicus briefs would be acceptable.  Interested parties might want to check with MERS general counsel’s office. 

Readers are encouraged to respond to or criticize this posting.

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