It’s a rare day in the court system where a litigant wins a case and still comes out the big loser. But MERS has managed the feat. [For a detailed background on MERS’ business model, see my earlier post here. – PCQ]
In a recent bankruptcy case, In re: Agard, the U.S. Bankruptcy Court for the Eastern District of New York, per the Hon. Robert E. Grossman, Select Portfolio Servicing, Inc., acting as servicer for U.S. Bank National Association, Trustee of a securitized trust (collectively, “the Bank”), won the right to pursue a foreclosure against a debtor (“Agard”) who had recently filed for bankruptcy.
In lay terms, this means that the although Mr. Agard was in bankruptcy, and therefore entitled to protection from creditors (the so-called “stay”), the Bank filed a motion for relief from the stay (“the Motion”), so it could proceed against him. The Bank based its right of foreclosure upon an assignment of the mortgage from MERS as “nominee” for the original lender, First Franklin. Mr. Agard put up limited opposition to the Bank’s Motion, arguing that MERS did not have the power to make the assignment to the Bank, and therefore the Bank had no standing to foreclose. Problem was, the Bank had already obtained a judgment of foreclosure in the New York state court, which had been entered before Mr. Agard filed for bankruptcy. Thus, under well-established legal principles [known as res judicata – PCQ], the Court had no alternative but to honor the prior state court judgment of foreclosure. Therefore, in less than three pages into the 37-page Memorandum Opinion, Judge Grossman concluded that the Bank had the legal right to lift the bankruptcy stay.
MERS, which was not originally a party, intervened in the proceeding, based upon the following arguments:
- The issues in the Agard case “…directly affects the business model of MERS.”
- “[A]pproximately 50% of all consumer mortgages in the United States are held in the name of MERS, as the mortgagee of record.”
- A determination in Agard “…will have a significant impact on MERS as well as the mortgage industry in New York and the United States.”
- “MERS has a direct financial stake in the outcome of this contested matter, and any determination of the MERS Issue has a direct impact on MERS.”
So even though this was not MERS’ battle, and even though a favorable outcome of the Bank’s Motion was almost a foregone conclusion, MERS jumped into the fray, and got sucker-punched for its efforts. For the next 34 pages, Judge Grossman performed the surgical equivalent of a post-mortem examination upon MERS, its rules, and its business model. Given the fact that there was a logjam of pending MERS cases, the Judge stated that he felt “…this analysis is necessary for the precedential effect it will have on other cases pending before this Court.”
What follows is a summary of what I regard as the salient findings made by Judge Grossman:
- The Bank’s Status as a Noteholder. The only written assignment the Bank presented to the Court was not an assignment of the Note, but rather an “Assignment of Mortgage” which contained only “a vague reference to the Note.” At the end of the Assignment of Mortgage was the following language: ‘To Have and to Hold the said Mortgage and Note, and also the said property until the said Assignee forever, subject to the terms contained in said Mortgage and Note.’ [Italics added by Court. – PCQ] Such language was “…vague and insufficient to prove an intent to assign the Note….” Therefore, the Court found “…that the Assignment of Mortgage is not sufficient to establish an effective assignment of the Note.”
- MERS’ Role in the Transfer of the Note. Recounting MERS’ description of its business model which clearly explains that it is not responsible for, and did not transfer, the Note, Judge Grossman quickly concluded that “…MERS played no role in the transfer of the Note.”
- The Inseparability of the Note and Mortgage. MERS argued that the Court should follow “…the adage that a mortgage necessarily follows the same path as the note for which it stands as collateral.” In short, that the two documents are “inseparable.” [For a poetic explanation of the problem, here. – PCQ] Noting that it is “…generally true that a mortgage travels a parallel path with its corresponding debt obligation, the parties in this case have adopted a process which by its very terms alters this practice where mortgages are held by MERS as “mortgagee of record.” By MERS’s own account, the Note in this case was transferred among its members, while the Mortgage remained in MERS’s name. MERS admits that the very foundation of its business model as described herein requires that the Note and Mortgage travel on divergent paths. Because the Note and Mortgage did not travel together, [the Bank] must prove not only that it is acting on behalf of a valid assignee of the Note, but also that it is acting on behalf of the valid assignee of the Mortgage.” [Italics mine. – PCQ] It is important to note that the Court left for another day the issue of “…whether mortgages processed through the MERS system properly perfected and valid liens.” However, one suspects his bent; immediately following this statement, he cited an 1872 U.S Supreme Court case for the proposition that “an assignment of a mortgage without the note is a nullity.”
- The Bank’s Mortgage. In Agard, the Bank’ Assignment of Mortgage referenced the Mortgage and defined the “Assignor” as MERS. The “Assignee” was identified as U.S. Bank. Based upon these designations in the Assignment document, MERS argued that it had full authority to execute the Assignment and that as of the commencement of the foreclosure, the Bank “held both the Note and the Mortgage.” However, Judge Grossman concluded that “…without more, this Court finds that MERS’s “nominee” status and the rights bestowed upon MERS within the Mortgage itself, are insufficient to empower MERS to effectuate a valid assignment of mortgage.” [Italics mine. – PCQ]
- The MERS Membership Rules. MERS argued that each of its lender-members agree to appoint MERS to act as their agent. In support of this contention, MERS offered the testimony of MERS’ Treasurer, William C. Hultman, that “pursuant to the MERS’s Rules of Membership, Rule 2, Section 5. . . First Franklin appointed MERS to act as its agent to hold the Mortgage as nominee on First Franklin’s behalf, and on behalf of First Franklin’s successors and assigns.” (Affirmation of William C. Hultman, ¶7). However, in a not too subtle smackdown, Judge Grossman noted that “Section 5 of Rule 2, which was attached to the Hultman Affirmation as an exhibit, contains no explicit reference to the creation of an agency or nominee relationship. Consistent with this failure to explicitly refer to the creation of an agency agreement, the rules of membership 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.” [Italics mine. – PCQ]
- New York State Laws. The Court found that “…the record of this case is insufficient to prove that an agency relationship exists under the laws of the state of New York between MERS and its members.” Judge Grossman did not buy that argument that the principal/agent relationship among MERS and its members was created by its rules of membership when coupled with the Mortgage itself. He concluded the issue as follows: “MERS would have this Court cobble together the documents and draw inferences from the words contained in those documents. For example, MERS argues that its agent status can be found in the Mortgage which states that MERS is a “nominee” and a “mortgagee of record.” However, the fact that MERS is named “nominee” in the Mortgage is not dispositive of the existence of an agency relationship and does not, in and of itself, give MERS any “authority to act.” *** Rather, the rules are ambiguous as to MERS’s authority to take affirmative actions with respect to mortgages registered on its system.
- MERS as Mortgagee and Agent of Mortgagee. The Court made short shrift of this foundational argument upon which MERS commonly relies: “MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.”
- What Does the Originating Bank Have to Assign? [The following observation is pivotal, since it points up a basic flaw in the entire MERS business model – i.e. you can’t assign what you no longer have. – PCQ] “Adding to this absurdity, it is notable in this case that the Assignment of Mortgage was by MERS, as nominee for First Franklin, the original lender. By the [Bank’s] and MERS’s own admission, at the time the assignment was effectuated, First Franklin no longer held any interest in the Note. Both the [Bank] and MERS have represented to the Court that subsequent to the origination of the loan, the Note was assigned, through the MERS tracking system, from First Franklin to Aurora, and then from Aurora to U.S. Bank. Accordingly, at the time that MERS, as nominee of First Franklin, the assigned the interest in the Mortgage to U.S. Bank, U.S. Bank allegedly already held the Note and it was at U.S. Bank’s direction, not First Franklin’s, that the Mortgage was assigned to U.S. Bank. Said another way, when MERS assigned the Mortgage to U.S. Bank on First Franklin’s behalf, it took its direction from U.S. Bank, not First Franklin, to provide documentation of an assignment from an entity that no longer had any rights to the Note or the Mortgage. The documentation provided to the Court in this case (and the Court has no reason to believe that any further documentation exists), is stunningly inconsistent with what the parties define as the facts of this case.” [Italics in quote are contained in the original opinion. – PCQ]
- Can an Assignment Occur Without Written Instructions? Not according to Judge Grossman: “…[E]ven if MERS had assigned the Mortgage acting on behalf of the entity which held the Note at the time of the assignment, this Court finds that MERS did not have authority, as “nominee” or agent, to assign the Mortgage absent a showing that it was given specific written directions by its principal.” [Italics mine. – PCQ]
- Can MERS act as Agent for Undisclosed Principals? “This Court finds that MERS’s theory that it can act as a “common agent” for undisclosed principals is not support by the law. The relationship between MERS and its lenders and its distortion of its alleged “nominee” status was appropriately described by the Supreme Court of Kansas as follows: “The parties appear to have defined the word [nominee] in much the same way that blind men of Indian legend described an elephant – their description depended on which part they were touching at any given time.” Landmark Nat’l Bank v. Kesler, 216 P.3d 158, 166-67 (Kan. 2010).”
- Bank Standing to Seek Relief From Automatic Stay. Thus, by joining a fight that the Bank needed no help to win, MERS brought upon itself a devastating result. The final words of Judge Grossman serve as an unequivocal warning: “[I]n all future cases which involve MERS, the moving party must show that it validly holds both the mortgage and the underlying note in order to prove standing before this Court.” [Italics mine. – PCQ]
It is true, to an extent, that the Agard case is merely dicta – that is, a judge’s opinion that is not a legal finding and is unnecessary to resolve a particular case. Dicta is generally not regarded as binding precedent, although the concepts can certainly be repeated and followed, thus becoming precedent. In other words, the legal holding in Agard can probably be said to be limited to the ruling on res judicata. However, Judge Grossman, in the final words of his Memorandum Opinion, clearly elevated his findings far above non-binding dicta. He essentially laid down the law for all future lift-stay proceedings in his Court. His detailed and logical examination of the party’s arguments, documents, and the applicable law, will undoubtedly be followed elsewhere as state and federal courts across the country continue to deal with MERS’ “form over substance” business model.
In the first two months of 2011, Mr. Hultman, the MERS Secretary Treasurer, referred to above, and R.K. Arnold, the MERS CEO, have both recently departed the company, which appears to be doing some internal housecleaning. No word yet on whether any of the remaining 20,000+ Vice Presidents and Certifying Officers will apply for the new openings….
On February 16, 2011 MERS issued an announcement implementing and updating their practices, especially those for its “Certifying Officers.” The reason: “….to strengthen business practices, and minimize reputation, legal and compliance risk to MERS and its Members.”Posted in Foreclosure, Lenders, Miscellany, Real Estate General | Tagged Bankruptcy, Banks, Foreclosure, Mortgages, Promissory Notes, Real Estate, Trust Deeds