MERS – "The Wikipedia of Land Registration Systems"?
Blayne V. Scofield | Bloomberg Law
Massachusetts federal Judge William Young’s November 28, 2011 opinion in Culhane v. Aurora Loan Services of Nebraska is notable for several reasons. First, Judge Young concludes that an assignment executed by a dual employee of the Mortgage Electronic Registration System (MERS) and the assignee is effective under Massachusetts law. Second, Judge Young devotes a substantial portion of the decision (which includes a footnote spanning six pages) to reflecting on the role of MERS in the foreclosure process. Third, this marks the second recent opinion from Judge Young that aggressively challenges foreclosure practices under Massachusetts law.
MERS and Dual Employees
MERS is an electronic registry that facilitates securitizations by minimizing the paperwork needed to transfer a residential mortgage loan. In a typical MERS transaction, the lender funds the loan and holds the note. MERS holds the mortgage as the lender’s (and its successors’) nominee and is identified as the mortgagee in the applicable public records. MERS tracks ownership of (but does not hold) the note. If the original lender sells the note to another MERS member, the note is typically endorsed and physically provided to the purchaser. MERS continues to hold the mortgage and tracks the sale in its internal records. Because MERS remains the mortgage holder, no public filings or assignments of the mortgage are necessary.
In certain cases, however, the noteholder may seek to withdraw the mortgage from MERS. This may arise when, for example, the noteholder sells the note to a party that is not a member of MERS or if a noteholder seeks to conduct a foreclosure itself or through its servicer rather than via MERS. In these situations, a formal assignment must be executed.
MERS relies on a system of dual employees to carry out assignments. MERS requires that each of its members designate at least one employee to act as an MERS officer (usually a vice president or assistant secretary). The appointment is formal rather than substantive—the employee is provided with a corporate resolution from MERS authorizing them to (among other things) execute documents as a “certifying officer” on MERS’s behalf, but does not receive a salary from MERS or work in a MERS facility. When a MERS member seeks to withdraw a mortgage from MERS, its designated dual employee executes the assignment that reflects the withdrawal and transfer. This allows MERS to minimize the number of full-time, paid employees that it needs to carry out its operations.
Assignment Executed by Dual Employee Was Valid under Massachusetts Law
In 2006, Oratai Culhane obtained a mortgage loan from Preferred Financial Group, Inc. (Preferred). MERS held the mortgage as Preferred’s nominee. Preferred transferred the note to Deutsche Bank Trust Company Americas (Deutsche Bank), the trustee for a mortgage securitization. In 2009, Culhane defaulted and Deutsche Bank instructed MERS to assign the mortgage to its servicer, Aurora Loan Services of Nebraska (Aurora), so that Aurora could conduct the foreclosure. The assignment was executed by a dual employee of Aurora and MERS. After the assignment was executed, Aurora initiated foreclosure.
Culhane challenged the foreclosure. The endorsement on the note purportedly transferring it from Preferred to Deutsche Bank was undated. Culhane argued that this prevented Aurora from establishing that Deutsche Bank was the noteholder on the date foreclosure was initiated as required by Massachusetts law. The court denied this argument. It noted that Massachusetts allows servicers to foreclose on behalf of noteholders. Further, it found that even though the endorsement was undated it was undisputed that Aurora was servicing the loan for Deutsche Bank at the time of the foreclosure. Thus, Aurora was a proper foreclosing party.
Culhane also claimed that the assignment from MERS to Aurora was invalid. The court again disagreed. It noted that Massachusetts law requires only that an assignment be executed by an appropriate officer of the assignor. Here, it found that the dual employee who signed the assignment was a duly appointed assistant secretary of MERS and that the assignment was executed before Aurora initiated foreclosure. Thus, the court granted summary judgment for Aurora and allowed the foreclosure to proceed.
In the course of reaching its opinion, the court took the opportunity to weigh in on MERS’s ability to initiate nonjudicial foreclosures in Massachusetts. It held that a mortgagee must hold the note to use nonjudicial foreclosure under Massachusetts law. After a lengthy examination of MERS’s role in mortgage transactions and a careful parsing of the powers granted to MERS in the mortgage instrument, the court concluded that MERS “cannot exercise the power of sale, regardless of the language in the mortgage contract giving it this power.” The power of sale in the mortgage instrument is the means by which foreclosing parties conduct nonjudicial foreclosures. The court took the position that MERS may not use nonjudicial foreclosure in Massachusetts. However, this finding was not necessary for the court’s decision and should be regarded merely as dicta at this point.
The court cites a single, non-Massachusetts case to support this proposition: Residential Funding Co., LLC v. Saurman, 2011 BL 107887 (Mich. Ct. App. 2011). The Supreme Court of Michigan reversed this decision on November 16, 2011, Residential Funding Co. v. Saurman, 2011 BL 295470 (Mich. 2011), nearly ten days prior to the court’s decision here in Culhane. While the court relies on other arguments to support its position, this may ultimately weaken the persuasiveness of the court’s position.
Judge Young’s View of MERS
The court was generally skeptical of MERS’s business methods. Although the court stated that “it appears that MERS works rather well as a land registration system,” it found that MERS did so by “the thinnest possible veneer of formality and legality” and characterized MERS as “the Wikipedia of land registration systems.”
The court was particularly unimpressed with MERS’s dual employee approach to assignments. The court equated a MERS dual employee to an “Admiral in the Georgia navy or a Kentucky Colonel with benefits” rather than “any genuine financial officer.” Although the arrangement satisfied that letter of the law, the court was “deeply troubled that, with little to no oversight, individuals without any tie to or knowledge of the company on whose behalf they are acting may assign mortgages—that is, they may transfer legal title to someone else’s home.”
Other Challenges to Dual Employee Structure
Culhane stands in contrast to Bank of New York v. Alderazi, 2011 BL 95832 (N.Y. Sup. Ct. 2011), in which a New York Superior Court dismissed sua spontea bank’s foreclosure action under similar facts. In Alderazi, the court determined that a dual employee’s signature on an assignment was insufficient because MERS (as nominee) could act only on the lender’s instruction and the dual employee’s signature on behalf of MERS provided “no evidence that the [lender] in fact approved or authorized the assignment.” For more information, see New York Court Dismisses Foreclosure and Finds MERS Did Not Have Authority to Assign Countrywide Mortgage, Bloomberg Law Reports®—Banking & Finance (April 19, 2011).
Judge Young and Massachusetts Foreclosure Law
This is the second recent foreclosure-related decision in which Judge Young has tested the frontiers of Massachusetts law. In July, he authored an opinion inDixon v. Wells Fargo Bank, N.A., 2011 BL 191469 (D. Mass. 2011), that allowed a challenge to a foreclosure action to proceed to trial. In Dixon, the borrower sought to compel the foreclosing lender to participate in loan modification negotiations.
In siding with the borrower, Judge Young accepted a minority theory of promissory estoppel that “[a]dmittedly, the courts of Massachusetts have yet to formally embrace” and that had been rejected by 31 of the 34 other courts that had considered it under similar factual circumstances. Judge Young himself acknowledged that the only three courts that had accepted the borrowers’ theory were other Massachusetts federal district courts. Nonetheless, Judge Young found the result necessary in view of the “devastating and nationwide foreclosure crisis that is crippling entire communities.” For more information aboutDixon, see Sonia Persaud, Massachusetts District Court Upholds Foreclosure Injunction, Allows Promissory Estoppel Claims to Proceed, Bloomberg Law Reports®—Banking & Finance (Aug. 3, 2011).
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