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Bankruptcy Court States - But Does Not Hold - That MERS Lacks Authority to Assign Mortgages

State Issues

On February 10, a judge in the United States Bankruptcy Court for the Eastern District of New York concluded, in dicta, that the Mortgage Electronic Registration System (MERS) lacks authority under New York law to assign interests in mortgages among its members. In re Agard, No. 810-77338 (Bankr. E.D.N.Y. Feb. 10, 2011). The issue arose on a mortgage servicer’s motion to lift the automatic stay in order to foreclose on the home of a Chapter 7 debtor. In such a situation, only a secured creditor (or a servicer acting on its behalf) has standing to seek to lift the stay. The debtor argued that the servicer lacked standing because the assignment of the security interest to the purported creditor, accomplished through the MERS system, was invalid. The court did not need to confront that issue to resolve the case, as it held that a prior state court judgment, which could not be challenged in federal court under the Rooker-Feldman and res judicata doctrines, had sufficiently established the servicer’s status as a secured creditor. Nevertheless, the court proceeded to consider the MERS issue in order to establish a "precedential effect" on the many other pending cases questioning whether an "entity which acquires its interests in a mortgage by way of assignment from MERS, as nominee, is a valid secured creditor with standing to seek relief from the automatic stay," notwithstanding the questionable precedential effect of the lengthy analysis in dicta. The court concluded that the servicer had failed to establish that the alleged creditor was the rightful holder of the Note or of the Mortgage, either of which was sufficient to defeat standing. With respect to the Note, the court determined that there was no evidence of either the creditor’s physical possession of the Note or of a valid written assignment because there was no proof that an assignment according to MERS’s standard processes had actually taken place. With respect to the Mortgage, the court’s dicta concluded that the servicer had failed to show a valid assignment from the original lender to the current creditor for several reasons:

  • First, a note and mortgage are not "inseparable," as MERS "admits that the very foundation of its business model as described herein requires that the Note and Mortgage travel on divergent paths."
  • Second, the mortgage documents themselves, which referred to MERS as the lender’s "nominee" or as the "mortgagee of record," were insufficient to give MERS the authority to transfer the Mortgage because the law affords those statuses very limited powers. However, this defect could have been cured had the lender executed a document clearly authorizing MERS to act as its agent for purposes of transferring the Mortgage.
  • Third, the MERS membership rules, to which all of the relevant institutions have agreed, do not contain any explicit reference to an agency relationship and "do 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."
  • Fourth, the agency relationship claimed by MERS constitutes an "interest in real property" because it would authorize MERS as agent to assign the Mortgage. Therefore, the New York statute of frauds requires the agency relationship be committed to writing, but "none of the documents expressly creates an agency relationship or even mentions the word ‘agency.’"
  • Finally, MERS’s claim that, in addition to being the mortgagee’s agent, it possesses the rights of the mortgagee itself by virtue of its designation as "mortgagee of record" is "absurd, at best."

In sum, the court’s dicta concluded that "MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not support[ed] by the law." Thus, notwithstanding the court’s recognition that "an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States," it would have held that the servicer lacked standing to lift the stay and proceed with foreclosure but for the prior state court judgment.

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