Daily Development for Wednesday, September 3, 2009
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; NOTICE; MERS: MERS, identified as nominee of the lender in the mortgage documents, and recorded as mortgagee in the land records, is not entitled to intervene in a confirmation proceeding when a senior mortgagee judicially forecloses and serves notice only upon the originating lender. 

Landmark National Bank v. Kesler, ___ P. 3d ___, 2009 Westlaw 2633640 (Kan. 8/28/09)

The Supreme Court ruled only that MERS and the current holder of the note, for which MERS stood as nominee, were barred from intervening in a proceeding to confirm the sheriff’s sale and distribution from a foreclosure of a mortgage prior to the MERS recorded mortgage when neither party had been named as a party to such foreclosure.  But the court essentially was held that neither had the right to receive notice of the foreclosure to begin with.  This is not surprising with respect to the current holder of the note, Sovereign, because Sovereign had not recorded it assignment of mortgage from the originator, relying on the MERS recording as nominee.  But holding that a recorded nominee of the holder was not entitled to notice is quite significant and disturbing.

The case has nothing to do directly with the right of MERS to transfer rights in the debt or to foreclose the debt, but there is plenty of language in the case that puts those rights into question, and indeed the court cites with approval cases that have questioned those other functions of MERS.

The statutory standard for whether a party is a “contingently necessary party” to a foreclosure proceeding if: . . . “he claims an interest relating to the property or transaction which is the subject of the action and he is so situated that the disposition of the action in his absence may (I) as a practical matter substantially impair or impede his ability to protect that interest . . . .

Needless to say, this standard would apply to the holder of a junior lienholder in a proceeding to foreclose a senior lien.  But the court found that MERS was not a junior lienholder, even though the record so indicated, and in fact did not have “an interest relating to the property” that was the subject of the mortgage. 

The court accepted the description of the secondary market system of which MERS is a part as being one in which “lenders retain the notes as well as the servicing rights to the mortgage” But “lenders can then sell these interest to investors without having to record the transaction in the public record” because MERS is listed as the mortgagee of record through assignment of the members’ interest to MERS and recordation of MERS in the public records.

The mortgage in this case identified MERS as the nominee of the Lender and Lender’s successors and assigns, but it defined the originating lender. Millenia, as the “Lender” under the documents.  The mortgage provided that MERS, as nominee, had the right to exercise any and all of the interests granted in the mortgage, including, but not limited to, the right to foreclose and sell the Property, and to take any action required of Lender, including, but not limited to, releasing or cancelling this mortgage.”

Other places in the mortgage identified the Lender as having certain rights, including, most notably, a notice provision that indicated that notices under the mortgage should be provided to “the Lender.” Another provision stated that notices of default and foreclosure under prior instruments should be provided to “Lender.”  The court emphasized this language, but it should be noted that Kansas is a judicial foreclosure state, so any notice provision in the instruments was not controlling as to notice of foreclosure.

The court made much of the fact that the mortgage instrument continued to identify Lender (identified as the originating lender) has having certain substantive rights despite the fact that MERS had the right to assert those rights as nominee. 

After noting that the parties, at oral argument, and the lower court, citing Kansas authority, had given various meanings to the term “nominee,” and analogizing to blind men and elephants, the court stated that “the legal status of a nominee, then, depends on the context of the relationship of the nominee to its principal . . . The relationship that MERS has to Sovereign [the note holder] is more akin to that of a straw man than to a party possessing all the rights given to a buyer.” 

In justifying its conclusion, the court emphasized that the original mortgage gave certain express rights to the “Lender” [even though it simultaneously gave MERS as nominee the right to exercise those rights.] Consequently, the court concluded that there was separation of the rights of the lender from the holder of the security instrument.   In doing so, of course, the court appeared to ignore the fact that MERS had the right to exercise any and all rights of the Lender, the note holder. 

The court cited to Nebraska authority in which MERS argued successfully that it need not be licensed as a lender because it did not in fact loan or collect money. It appeared to conclude that even though MERS technically had the rights of the lender or its assigns, it customarily did not exercise them and acted simply as a record keeper.

Consequently, since MERS had no tangible interest in the foreclosure proceeding, it was not entitled to notice of the foreclosure as a “contingently necessary party.”  Further, as it had no property interest, there was no denial of due process in failure to notify it of the foreclosure.

Comment: There is not much that MERS can take away from this case that will give cheer.  One point to emphasize is that the court expressly did not hold that MERS was not entitled to notice and service in the original foreclosure, but only that it had no right to intervene to set aside a default judgment against it on the grounds that it had not received notice.  Further, and perhaps even more significant, the court noted that MERS’ principal, Sovereign, although not a recorded interest holder, did receive notice from the bankruptcy proceeding that the senior lender had received leave to foreclose.  Thus, one might argue that MERS’ interest group was aware of the pending foreclosure and that the requirement of service of process was a moot point.  Finally, the court based its decision on the record in the trial court, and perhaps that record might have been better made.  But we have to remember it was only a motion to intervene.  MERS’ counsel may have been saving a broader exposi

tion of the issues for what it anticipated would be a substantive hearing.

But these are slender threads.  This case, coupled with equally hostile holdings on other issues in Arkansas and Missouri, indicate that there has been a cold reception for MERS in the central Midwest.  MERS did get better treatment in Minnesota, as reported earlier.

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