Wednesday, December 30, 2009

Judges Examine the Murky Standing of MERS

This year we have learned a lot about the mortgage industry. We have learned about mortgage securitization trusts who couldn't find the note. There have been more cases about debtors emerging from chapter 13 only to be hit with years of undisclosed fees and charges. Earlier this year, I wrote about the problems faced by a firm who claimed that their legal technology system would not let them speak directly to their client. However, one of the big trends this year was courts asking "Who is MERS and why are they filing motions for relief from the automatic stay?"

During 2009, I was able to find at least five opinions from across the country holding that MERS lacked standing to file a motion for relief from automatic stay. In re Wilhelm, 407 B.R. 392 (Bankr. D. Ida. 7/7/09); In re Fitch, 2009 Bankr. LEXIS 1375 (Bankr. N.D. Ohio 5/28/09); In re Mitchell, 2009 Bankr. LEXIS 876 (Bankr. D. Nev. 3/31/09), aff'd sub. nom., Mortgage Electronic Registration Systems, Inc. v. Atkerson, No. 2:09-CV-00673 (D. Nev. 12/8/09); In re Sheridan, 2009 Bankr. LEXIS 552 (Bankr. D. Ida. 3/12/09); In re Jacobsen, 402 B.R. 359 (Bankr. W.D. Wash. 3/6/09).

That raises the question:

Who is MERS?

According to the MERS website:

MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. Our mission is to register every mortgage loan in the United States on the MERS® System.

Beneficiaries of MERS include mortgage originators, servicers, warehouse lenders, wholesale lenders, retail lenders, document custodians, settlement agents, title companies, insurers, investors, county recorders and consumers.

MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.

The concept of MERS is simple. Lenders designate MERS as the mortgagee of record. MERS keeps track of who holds the mortgage. So long as mortgages are assigned to another MERS member, there is no need to file an assignment of mortgage. This eliminates the risk that a subsequent holder will fail to record a document in the county deed records. It also means that the real party in interest does not appear in the public record. Essentially MERS serves the function of outsourcing the assignment of mortgages.

The Problem

The difficulty arises when a borrower files bankruptcy and the lender needs to file a motion for relief from automatic stay. The file is sent to an attorney. It includes a promissory note payable to an entity long out of the picture,a mortgage in favor or MERS as nominee and a pay history provided by a servicer. Which of these three parties is the proper party to request relief from the stay? Some attorneys have chosen MERS as the movant. According to the courts who addressed the issue during 2009, that was the wrong answer.

The problem arises because MERS is the holder of the mortgage. However, a mortgage is merely collateral for a debt. It is not the debt itself. MERS acts as nominee for the mortgagee. However, it does not act as holder of the note, or even as servicer of the note. Thus, several courts have concluded that MERS lacks standing to seek relief from the stay.

The Latest Word

The District Court of Nevada recently considered 18 cases in which MERS had filed a motion for relief from stay, but was found not to be the real party in interest. The District Court upheld this ruling stating:

A motion for relief from stay is a contested matter under the Bankruptcy Code. (citation omitted). Bankruptcy Rule 7017 applies in contested matters. Rule 7017incorporates Federal Rule of Civil Procedure 17(a)(1), which requires that "[a]n action must be prosecuted in the name of hte real party in interest." (citation omitted).

Since MERS admits that it had no beneficial interest in the note in this case at the time the motion was filed, but was moving "Solely as Nominee," MERS must at least provide evidence of its alleged agency relationship. (citation omitted). An agent for the purpose of bringing suit is "viewed as a nominal rather than a real party in interest and will be rquired to litigate in the name of his principal rather than his own name." (citation omitted). This is particularly important in the District of Nevada where the Local Rules of Bankruptcy Practice require parties to communicate in good faith regarding resolution of a motion for relief from stay before it is filed. (citation omitted). The parties cannot come to a resolution if those with a beneficial interest in the note have not been identified and engaged in conversation.

In the context of a motion for relief from stay, the movant, MERS, in this case bears the burden of providing that it is a real party in interest. (citation omitted). Initially, a movant seeking relief from stay may rely upon its motion. However, if a trustee or debtor objects based upon standing, the movant must come forward with evidence of standing. (citation omitted).

The only evidence presented to the Bankruptcy Court that it acted on behalf of the current owner(s) of the beneficial interest in the note was MERS' assertion that the current note holder is a MERS member, because "the loan at issue is regiatered to a MERS member. (citation omitted). MERS asserts that if the loan is sold to a party to that is not a member of MERS then the loan is "deactivated from the MERS system." (citation omitted). MERS thus argued to the Bankruptcy Court that since a loan has not been deactivated, it must remain in the hands of a MERS member that it has agency to act for. However, given the admitted failure of MERS to follow its policies in the cases that were withdrawn, relying heavily on its policy of deactivating loans now in the hands of non-members to establish agency carries little weight.

The only direct documentary evidence provided by MERS in the present case was the deed of trust indicating that MERS had been identified as "beneficiary" and that it had been named nominee for the original lender. (citation omitted). Since MERS provided no evidence that it was the agent or nominee for the current owner of the beneficial interest in the note, other than the fact that the loan had not been deactivated from the MERS system, it has failed to meet its burden of establishing that it is a real party in interest with standing. Accordingly, the order of the Bankruptcy Court must be affirmed.

This holding is limited to the specific facts and procedural posture of the instant case. Since the Bankruptcy Court denied the Motion without prejudice, nothing prevents Appellant from refiling the Motion in the Bankruptcy Court and providing the evidence that it admits should be readily available in its system. The Court makes no finding that MERS would not be able to establish itself as a real party in interest had it identified the holder of the note or provided sufficient evidence of the source of its authority.
Mortgage Electronic Registration Systems, Inc. v. Atkerson, supra, Order, pp. 4-5.

What It Means

This particular ruling is very narrow. MERS failed to demonstrate that was a real party in interest under Rule 7017. While the court stated that MERS could establish that it was a real party in interest if it identified the current holder of the note and provided sufficient evidence of authority. However, since MERS acts solely as nominee for the holder of the mortgage, it might not be able to meet the required burden of proof, since it does not act as agent for the holder of the note. The better practice seems to be for the holder of the note to file the motion. However, in doing so, it must prove that MERS is its nominee. Thus, it is possible that the attempt to simplify has actually served to complicate.

1 comment:

Anonymous said...

What can you say about MERS substituting a trustee to foreclose, even though it states in the DOT that only the 'lender' can substitute a trustee.

Would the Deed of Trust rule and this substitution by MERS be invalid?
thank you

I am in California