September 9, 2013
by Nikolaus S. Schuttauf
Brennan, Recupero, Cascione, Scungio & McAllister, LLP – USFN Member (Rhode Island)
Since 2011, banks, mortgage companies, and mortgage servicers (MERS Members) doing business in Rhode Island have been under attack on all fronts. Already embroiled in Fryzel v. Mortgage Elec. Registration Sys., 2013 U.S. App. LEXIS 12068 (see accompanying USFN e-Update article here, Sept. 2013 ed.), a lengthy conflict with residential borrowers that has put over 800 foreclosures on hold since 2011, MERS Members were forced to fend off a suit brought by the town of Johnston, which alleged that the MERS Members1 owed Johnston thousands of dollars in recording fees for failing to record mortgages and subsequent assignments as required by Rhode Island law. Town of Johnston v. MERSCORP, Inc., 2013 U.S. Dist. LEXIS 87826. Although the MERS Members won the battle against Johnston, they may ultimately lose the war when a third, far more formidable foe enters the fray — the Rhode Island General Assembly.
Johnston alleged that Title 34 of the Rhode Island General Laws, the statutory scheme controlling real property, imposes a mandatory requirement that all mortgages and mortgage assignments be recorded. Johnston claimed that it “was damaged because it was entitled to a recording fee for each mortgage or mortgage assignment that should have been recorded.” Because Johnston brought suit on its own behalf and on behalf of similarly-situated cities and towns in Rhode Island, an adverse ruling would have forced the MERS Members to pay hundreds of thousands of dollars in past-due recording fees, as each city and town in Rhode Island could have claimed it was damaged.
The Case & The Court’s Analysis
On June 21, 2013, the U.S. District Court for the District of Rhode Island held that Rhode Island law does not require mortgages and mortgage assignments be recorded. The court rejected Johnston’s position based on a plain reading of the three applicable statutes, R.I.G.L. §§ 34-11-1, 34-11-4, and 34-13-1, noting: “none of the statutes [Johnston] relies on requires a party assigning a mortgage or receiving an assignment on a mortgage to record that assignment, but rather dictates the consequences of not recording.”
First, the court held that R.I.G.L. § 34-11-1 has never been interpreted as requiring mortgages and mortgage assignments be recorded. Additionally, that statute provides that unrecorded transfers of interests in land are binding and valid to parties having knowledge of the conveyance. Second, the court held that R.I.G.L. § 34-11-4 plainly supports the conclusion that mortgages and mortgage assignments need not be recorded to be valid. R.I.G.L. § 34-11-4 states: “[a]ny form of conveyance in writing, duly signed and delivered” is sufficient to convey title, and “if also duly acknowledged and recorded shall be operative as against third parties.” Accordingly, while the act of recording perfects a mortgagee’s or assignee’s interest as to claims made by third parties, recording is not required to make a mortgage or mortgage assignment valid.
Finally, the court noted that R.I.G.L. § 34-13-1, titled “Instruments eligible for recording,” only defines the documents a town clerk must accept for recording, and does not impose a recording requirement: “The ‘town clerk or recorder of deeds’ is required to record such instruments ‘on request of any person and on payment of the lawful fees therefor,’ but that is not tantamount to a mandate to mortgagees or assignees.”
Consequently, because there is no statutory duty to record, Johnston could not claim it was entitled to damages for previously unpaid recording fees.
The Footnote and the Future of Rhode Island Law
It was not a clean victory for the MERS Members, however. In a footnote, the court observed that there are identically-titled bills pending before the Rhode Island House of Representatives and Senate: “An Act Relating to Property — Forms and Effect of Conveyances” (Act). See H.B. 5512 SUB A, 2013 Gen. Assembly, Jan. Sess. (R.I. 2013); S.B. 547, 2013 Gen. Assembly, Jan. Sess. (R.I. 2013). The Act would require that all mortgages and mortgage assignments be recorded. The Act does not stop at imposing a recording requirement. It would make several other amendments and additions to Rhode Island law that appear designed to ultimately prevent MERS from servicing any loans in the state.
The Act provides that “[a] mortgage naming a third party as the mortgagee who is not the named payee or lender on the underlying promissory note ... shall be invalid for recording, and shall not be enforceable as a mortgage lien.” Accordingly, if the Act passes, lenders who participate in MERS would no longer be able to name MERS as their nominee, and freely sell promissory notes to fellow participants. The Act would therefore reverse current Rhode Island law, which recognizes MERS as a valid system for the sale and transfer of ownership of residential loans. Earlier this year, the Rhode Island Supreme Court held that “[i]t is only when a loan is transferred to a nonmember that an assignment of the mortgage must be executed and recorded.” Bucci v. Lehman Bros. Bank, FSB, No. 2010-146, 2013 R.I. LEXIS 52.
The Act further provides that “any transfer of the ownership of the beneficial interest in, or the right to enforce, a promissory note ... secured by a mortgage must be accompanied by an assignment of the mortgage that is presented for recording with the applicable recording fee within thirty (30) days of the transfer.” The Act imposes heavy penalties on any assignee that fails to comply with the recording requirements: “[t]he failure to present the mortgage assignment for recording within the time limits stated herein shall render the mortgage void, but shall not nullify the underlying indebtedness.” Therefore, an assignee that fails to record a mortgage assignment within 30 days could find itself the holder of an unsecured obligation.
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1 The defendants in this action were: MERSCORP, Inc.; Mortgage Electronic Registration Systems, Inc. (MERS); Bank of America, N.A.; Citibank, N.A.; CitiMortgage, Inc.; JP Morgan Chase Bank, N.A.; Wells Fargo Bank, N.A.; Deutsche Bank National Trust Company; Goldman Sachs Mortgage Company; GS Mortgage Securities Corp.; and U.S. Bank, N.A.