May 7, 2013
by Charles A. Lovell & David J. Pellegrino
Partridge Snow & Hahn, LLP – USFN Member (Massachusetts)
Act I, Scene I
Since early 2009, Rhode Island courts have been overrun with hundreds of cases challenging Mortgage Electronic Registration Systems, Inc. (MERS). The MERS system was analyzed and definitively upheld by the Rhode Island Superior Court in late 2009 in Bucci v. Lehman Bros. Bank, 2009 R.I. Super. LEXIS 110, C.A. No. PC 09-3888 (R.I. Super. Ct. Aug. 25, 2009), joining the majority of jurisdictions throughout the country. In Bucci, the superior court found that MERS, as mortgagee and nominee for the lender, had the contractual and statutory authority to foreclose in Rhode Island. Although Rhode Island courts were silent through 2010, in 2011 and into 2012, decisions began to roll out of the Rhode Island superior courts following Bucci, beginning with Porter v. First NLC Financial Services, LLC, 2011 WL 1251246, C.A. No. PC10-2526 (R.I. Super. Ct. Mar. 31, 2011).
Act I, Scene II
But with the Rhode Island Supreme Court having yet to speak on the “MERS issue,” new arguments arose from the consumer bar challenging, among other things, MERS’s authority to assign mortgages. With the change in argument, so too came a change in setting as the venue shifted from state court to federal court. In federal court, the new arguments were initially found to be a distinction without a difference. A U.S. District Court Magistrate for the District of Rhode Island issued a Report and Recommendations in two cases, Cosajay v. Mortgage Electronic Registration Systems, Inc., C.A. No. 10-442-M (D.R.I. June 23, 2011) and Fryzel v. Mortgage Electronic Registration Systems, Inc., C.A. No. 10-352M (D.R.I. June 10, 2011), finding that, under Rhode Island law, a mortgagor lacks standing to challenge assignments of mortgages because the mortgagors are not parties to the underlying contract and their obligations under the mortgage are not affected by the transfer.
Soon thereafter, the Rhode Island Superior Court began to follow suit. Citing to the magistrate’s reports and recommendations, supra, the Rhode Island Superior Court found that borrowers do not have standing to challenge assignments of mortgage because “an assignment generally requires neither the knowledge nor the assent of the obligor[.]” Id. (citing 6 Am. Jur. 2d Assignments § 2); also citing, Brough v. Foley, 525 A.2d 919 (R.I. 1987); Fryzel, supra, (holding that property owner lacked standing to challenge assignment of his mortgage to a subsequent entity); Livonia Prop. Holdings, LLC v. 12840 Farmington Rd. Holdings LLC, 717 F. Supp. 2d 724 (E.D. Mich. 2010) (holding that property owner lacked standing to challenge assignment of his mortgage to a subsequent entity).
The U.S. District Court for the District of Rhode Island took the referenced reports and recommendations under full review and, concurrently, consolidated and “stayed” the few dozen mortgage foreclosure cases it had before it at the time in In re Mortgage Foreclosure Cases, Misc. No. 11-mc-88-M-LDA. Then, on January 5, 2012, rather than approving its own magistrate judge’s reports and recommendations, or looking to Rhode Island state law and deciding the issue accordingly, the U.S. District Court issued an order appointing a special master, instructing her to oversee “all possibilities for the potential settlement of these claims[.]” The special master then created a massive mandatory mediation program in which she issued directives “highly encouraging” (by way of sanctions threats) write-downs of mortgages to no more than 120 percent of value.
Also included in the district court’s order was a bar to the filing of any and all pleadings in these cases, except for entries of appearance. In other words, once a complaint is filed, defendants are barred from answering the complaint or otherwise responding thereto. Certain of the defendants appealed to the First Circuit Court of Appeals, what is in essence an injunction of the defendants’ abilities to enforce their contractual rights against defaulted borrowers, and a denial of due process to allow litigation of their claims. On February 5, 2013, oral argument took place before the First Circuit panel, which included former U.S. Supreme Court Justice Souter, and its decision is pending. Two days later, oral argument was heard on the appeal of Bucci in the Rhode Island Supreme Court.
Act I, Scene III
Despite Rhode Island statutory and common law on the “MERS issue,” certain stakeholders, such as the special master and the consumer bar, seemingly began to take misplaced comfort in rulings specific to other states, such as Culhane v. Aurora Loan Services of Nebraska, 708 F.3d 282, 293 (1st Cir. 2013) (“MERS had the authority twice over to assign the mortgage to Aurora. This authority derived both from MERS’s status as equitable trustee and from the terms of the mortgage contract.”). In expressly limiting its decision to the law of Massachusetts, the Culhane court determined that in Massachusetts a mortgagor has standing to contest an assignment of mortgage in narrow circumstances. Misconstruing the holding of Culhane, the consumer bar took satisfaction that, if a Massachusetts mortgagor has standing to challenge an assignment of mortgage, so must a Rhode Island mortgagor. However, on April 12, 2013, the Rhode Island Supreme Court took center stage.
Tracking the analysis of the Bucci trial court, the Rhode Island Supreme Court conclusively decided that MERS had the statutory and contractual authority as mortgagee and agent for the beneficial owner of the note to enforce the statutory power of sale in the mortgage. More specifically, in answering the question as to “whether MERS, acting in a nominee capacity for the owner of the note, can be a mortgagee” under Rhode Island statute, the Supreme Court irrefutably answered “in the affirmative.”
The court held that “the right to exercise the power of sale in the mortgage is derived from contract, not statute.” Id. (citing Thurber v. Carpenter, 18 R.I. 782, 784, 31 A. 5, 6 (1895)). As such, “competent persons shall have the utmost liberty of contracting and that their agreements voluntarily and fairly made shall be held valid and enforced in the courts unless a violation of the law or public policy is clear and certain.” Id. (quoting Gorman v. St. Raphael Academy, 853 A.2d 28, 38 (R.I. 2004)) (quoting Wechsler v. Hunt Health Systems, Ltd., 216 F. Supp. 2d 347, 354-55 (S.D.N.Y. 2002)). Accordingly, there being no clear and certain violation of Rhode Island statute, “MERS’s designation as nominee under the mortgage, albeit as the holder of legal title only, does not proscribe its authority to exercise the power of sale under the provisions” of the Rhode Island statute. Id.
The court went on to analyze whether the mortgagee and the note owner must be the same entity. Outright rejecting plaintiffs’ contentions otherwise and following cases in which plaintiffs mistakenly sought refuge (e.g., Eaton v. Federal Nat’l Mortg. Association, 462 Mass. 569 (2012) (the court found that one who acts as the authorized agent of the note holder may stand ‘in the shoes’ of the mortgagee, but the case was remanded for further factual findings as to whether the foreclosing entity was acting on the note holder’s behalf) and Culhane, supra), the Rhode Island Supreme Court found that “[b]ecause the lender retained equitable title to the mortgage and passed that equitable title to each of its successors and assigns, including the current owner, the mortgage and note have never been separated as plaintiffs contend” and, therefore, the mortgage followed the note. Id.
The Rhode Island Supreme Court has clarified Rhode Island MERS law and has kept the state from becoming an outlier among the other states. However, with now well over 800 borrower cases “stayed” in the U.S. District Court of Rhode Island, the First Circuit is poised to speak on the propriety of the district court’s stay. With other MERS challenges moving through the Rhode Island state courts and anti-MERS legislation being prepared in the General Assembly, the saga is far from over.
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