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Financial Services Law Insights and Observations

MERS' Foreclosures in Michigan Validated

State Issues

On November 16, the Michigan Supreme Court upheld foreclosures by advertisement by the Mortgage Electronic Registration System, Inc. (MERS) in Michigan. Residential Funding Co. LLC v. Saurman, No. 143178-9, 2011 WL 5588929 (Mich. Nov. 16, 2011). In the cases underlying the appeal, the borrowers' mortgages named MERS as nominee for the lender with the right to foreclose under the power of sale. The borrowers defaulted on their loans and MERS foreclosed. Facing eviction, the borrowers argued that MERS was not entitled to foreclose because it lacked an interest in the debt, i.e., the note. The district courts rejected this argument, and the circuit courts affirmed. The Court of Appeals granted borrowers leave to appeal and, in a two-to-one decision, held that MERS did not have authority to foreclose and that MERS' foreclosures in Michigan were void. The Court of Appeals held that an interest in the mortgage alone did not confer an interest in the note because "the indebtedness, i.e., the note, and the mortgage are two different legal transactions providing two different sets of rights." This purported separation of the mortgage and note meant that MERS lacked an ownership interest in the debt, and therefore did not have authority to foreclose. The entities initiating eviction sought leave to appeal to the Michigan Supreme Court, which, in lieu of granting leave, reversed the judgment of the Court of Appeals. In its two-page ruling, the Michigan Supreme Court clarified that,

MERS' status as an "owner of an interest in the indebtedness" does not equate to an ownership interest in the note. Rather, as recordholder of the mortgage, MERS owned a security lien on the properties, the continued existence of which was contingent upon the satisfaction of the indebtedness. This interest in the indebtedness - i.e., the ownership of legal title to a security lien whose existence is wholly contingent on the satisfaction of the indebtedness - authorized MERS to foreclose by advertisement . . . .

The Michigan Supreme Court also held that the Court of Appeals' conclusion was "inconsistent with established legal principles governing Michigan's real property law," including that "the mortgage and the note are to be construed together." 

The Court of Appeals decision had been the basis for several lawsuits-including class actions and at least one lawsuit by a county register of deeds-in Michigan courts seeking to prevent or void foreclosures. Certain class action suits pending in federal court were stayed pending the decision of the Michigan Supreme Court.