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KS: Alarming Supreme Court Decision re MERS

by Robert Lastelic
South & Associates, P.C. – USFN Member (KS, MO)

The Kansas Supreme Court has placed the use of Mortgage Electronic Registration Systems, Inc. (MERS) in doubt in this state because of a recent opinion, which was released on August 28, 2009, entitled Landmark National Bank v. Kesler, 2009 WL 2633640 (Kan.).

The case involved a mortgage foreclosure action brought by the senior lienholder, Landmark National Bank. Millenia Mortgage Corporation was the lender named in the second mortgage and MERS was the mortgagee, as nominee for Millenia, its successors, and assigns. MERS was not named as a party, nor was it given notice of the proceedings. Millenia was named as a party and given notice of the action, but had previously sold its interest to Sovereign Bank. When Millenia defaulted by failing to answer, Landmark obtained a judgment for foreclosure, and the property was sold at sheriff’s sale to a third party.

Subsequently, Sovereign and MERS learned of the judgment and sale, and filed a motion to vacate the judgment. The trial court denied the motion and that ruling was upheld by the Kansas Court of Appeals. On review, the Kansas Supreme Court held that MERS was not a “contingently necessary party” and that it functions solely as a nominee, the relationship being akin to that of a straw man.

In affirming, the Kansas Supreme Court found that MERS was not a real party in interest, but served only as an agent or representative for Millenia, and that Sovereign Bank failed to register its interest with the register of deeds, thus precluding it from asserting its interest. The court also held that MERS failed to demonstrate a meritorious defense, or that it had an interest that may be impaired. Finally, the court held that failure to join MERS as a party did not violate the right of MERS to due process because it did not possess any tangible interest in the mortgage and suffered no direct, ascertainable monetary loss.

Due to the Kesler decision, it appears that lenders can no longer rely on the MERS system in Kansas to obtain notice of actions initiated by others relating to particular real estate. Thus, the actual assignee or holder of the note and mortgage is in jeopardy of losing its interest without notice of any legal action, absent a recorded assignment.

Furthermore, it is unclear how the title insurance industry will view this case. For example, it appears that if MERS was joined as a party defendant by virtue of a junior mortgage, but the lender named in the mortgage was not named or joined as a party, that underwriters may not allow a title insurance policy to be issued following the foreclosure. Other consequences may occur even where MERS is the mortgagee in a first mortgage. For example, in the situation where an alleged mechanic’s lien claimant asserts that it has a first lien despite the fact that the MERS mortgage appears to be first, serving only the lender named in the MERS mortgage may cause the party who actually has the authority to enforce the note secured by that mortgage to lose its lien altogether.

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