January 5, 2016
by Jerry Morgan
Wilson & Associates, P.L.L.C. – USFN Member (Arkansas, Tennessee)
Tennessee has now joined a list of states whose highest courts have held that the failure to provide MERS with independent notice of sales that might eliminate its interest in real property is not a violation of due process. In the recent case, the context was a tax sale. [Mortgage Electronic Registration Systems, Inc. v. Ditto, 2015 Tenn. LEXIS 100 (Tenn. Dec. 11, 2015)].
MERS brought suit to set aside a 2010 tax sale of real property. MERS contended that the county’s failure to provide it with notice of the tax sale violated its rights under the Due Process Clause of the U.S. Constitution.
The purchaser of the property at the tax sale moved for judgment on the pleadings based on two arguments. The first theory was a procedural hurdle, in that MERS did not tender payment of the sale price plus accrued taxes before filing suit. The Supreme Court rejected that argument. The second assertion (and the one at issue for purposes of this article) is that MERS did not have an interest in the property that was subject to protection under the Due Process Clause. The trial court granted judgment for the purchaser, determining that MERS did not have an independent interest in the property entitled to protection. The Court of Appeals affirmed, based on MERS’s lack of standing to file suit.
The Supreme Court rejected the lack of standing basis, holding that where a plaintiff claiming a protected interest in real property files suit to have a tax sale declared void for lack of notice, he is not required to tender payment of the sale price plus taxes prior to filing suit. Nonetheless, the Supreme Court affirmed the Court of Appeals, opining that MERS had acquired no protected interest in the subject property either through the deed of trust designation of MERS as “beneficiary solely as nominee for the lender …” or its reference to MERS having “legal title” to the subject property for the purpose of enforcing the lender’s rights. Without a protected interest in the subject property, the Supreme Court held that MERS’s due process rights were not violated by the county’s failure to provide it with notice of the tax sale.
The Supreme Court spent a great deal of time discussing the history and purpose of MERS. The Court observed that MERS “performs a service for lenders by purporting to function as the mortgagee of record and nominee for the beneficial owner of the mortgage loan.” The Court also noted that “no mortgage rights are transferred on the MERS® system. The MERS® system only tracks the changes in servicing rights and beneficial ownership interests.”
While the Supreme Court recognized that the MERS system of registering and tracking mortgages over the life of the loans “sought to address problems that arose from mortgage securitization,” the Court nevertheless was troubled by the language in deeds of trust whereby MERS is appointed “beneficiary” while at the same time it “acts solely as the nominee for the lender and its successors or assigns.” The Court found such language “opaque” and “notable in its lack of clarity.”
Conflicting Decisions Reviewed
The Supreme Court of Tennessee specifically found that the issue in the case “is better framed as whether MERS has a property interest that is protected under the Due Process Clause. This is an issue of first impression in this Court.”
After discussing general principles regarding the Due Process Clause, the Court looked to other states for guidance. The majority of cases involving MERS have addressed MERS’s appointment as beneficiary “solely as nominee” for the lender. Many cases have upheld such appointment. Thompson v. Bank of America, N.A., 773 F.3d 741 (6th Cir. 2014). Thus, according to those courts, MERS has the authority to act on behalf of a valid note holder, so MERS is able to validly assign a deed of trust or enforce a note on behalf of the lender.
Other courts, however, have held that MERS’s designation as beneficiary as nominee for the lender does not give it the power to assign a deed of trust. The typical reasoning is that because the note and security instrument cannot be “split,” and MERS never held authority to assign the promissory note that evidences the actual debt, MERS would likewise have no authority to assign the deed of trust. Summers v. PennyMac Corp., 2012 WL 5944943, at *5 (N.D. Tex. Nov. 28, 2012); McCarthy v. Bank of America, NA, No. 4:11-CV-356-A, 2011 WL 6754064, at *4 (N.D. Tex. 2011); Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623-24 (Mo. Ct. App. 2009).
The Court noted in Ditto that most of the cited cases did address whether MERS has the power to assign a note and deed of trust, foreclose on a note, or to otherwise exercise the interests of the lender. However, they did not address the specific issue presented in Ditto, namely whether or not MERS itself had an interest in the relevant property that would be subject to protection under the Due Process Clause.
While addressing that specific question in Ditto, the Court found the relevant decisions divided. Some of the decisions have held that the appointment of MERS as beneficiary nominee for the lender did not grant MERS a protected interest in the property. Ditto relied heavily on Landmark National Bank v. Kesler, 216 P.3d 158 (Kan. 2009) to explain those decisions. In Landmark, the borrower had two loans on the same property. The first mortgage was with Landmark National Bank and the second was with Millenia Mortgage Corporation. The second mortgage utilized MERS as a “nominee” and “beneficiary,” and MERS thereafter assigned the second mortgage to Sovereign Bank. When Landmark filed a foreclosure petition, it named the mortgagor and Millenia; it did not notify Sovereign or MERS, even though the documents identifying MERS as the mortgagee as nominee for Millenia and Millenia’s successors were available. Because no answer was filed, the court entered a default judgment, and the property was sold.
Sovereign, the assignee to the second mortgage, moved to set aside the default judgment and objected to the confirmation of the sale. Sovereign asserted that MERS was a “contingent necessary party,” and because they were not named, Sovereign did not receive proper notice of the foreclosure proceedings. MERS also filed a motion to intervene and a motion to join Sovereign’s motion to set aside the default. The trial court denied those motions, finding that MERS was not a real party in interest and that Landmark therefore was not required to name MERS as a party in the foreclosure action.
The Supreme Court of Kansas looked to the language of MERS being appointed a “nominee,” and stated that the relationship that MERS had with Sovereign “is more akin to that of a straw man than to a party possessing all the rights given a buyer ….” The Kansas Court ultimately held that “[t]he Due Process Clause does not protect entitlements where the identity of the alleged entitlement is vague. A protected property right must have some ascertainable monetary value.” The Court concluded that MERS did not demonstrate “that it possessed any tangible interest in the mortgage beyond a nominal designation as the mortgag[ee]. It lent no money and received no payments from the borrower. It suffered no direct, ascertainable monetary loss as a consequence of the litigation.”
In Ditto, the Court also looked to Weingartner v. Chase Home Finance, LLC, 702 F. Supp. 2d 1276 (D. Nev. 2010), for a discussion of MERS’s role and usage of the term “beneficiary.” Weingartner found that MERS was not a true beneficiary “in any ordinary sense of the word. Calling MERS a beneficiary is what cause[d] much of the confusion. To a large extent, defendants in these actions have brought this mass of litigation upon themselves by this confusing, unorthodox, and usually unnecessary use of the word ‘beneficiary’….”
Summarizing the decisions consistent with Landmark and Weingartner, Ditto states: “[t]hese courts held that MERS was not the beneficiary under the deed of trust and, as nominee, was simply an agent or ‘straw man’ for the lender. As a result, these courts held that MERS did not have its own protected interest in the subject property.”
Other courts, however, have held that MERS’s status as beneficiary as nominee constitutes a protected property right. For example, in Mortgage Electronic Registration Systems, Inc. v. Bellistri, No. 4:09-CV-731, 2010 WL 2720802 (E.D. Mo. 2010), a county failed to give MERS notice of a tax sale, while the Missouri statute required notice to any person “who holds a publicly recorded deed of trust, mortgage, lease, lien or claim upon that real estate.” Bellistri, 2010 WL 2720802, at *10. The court held that a “publicly recorded” claim in the property included MERS’s appointment as beneficiary as nominee. Thus, it had a due process right to notice.
Having looked at the conflicting decisions, Ditto squarely addressed whether the simple appointment of MERS as nominee as beneficiary on behalf of the lender was sufficient to trigger Due Process Clause protections.
On the one hand, MERS argued that various Tennessee courts had upheld its role as nominee and its ability to foreclose on secured property. Ditto did not question MERS’s authority to act as agent for the lender or successor lenders; “[h]owever, the lender’s agreement to appoint MERS as its agent does not endow MERS with the lender’s property interest or for that matter any independent property interest whatsoever. The note owner is the actual beneficiary, i.e., the party that benefits from the security instrument by its entitlement to payments on the promissory note, secured by the deed of trust.”
In Ditto, the Court agreed with those courts holding that despite the label of “beneficiary” in the deed of trust, MERS is not a true beneficiary. The Court noted that MERS “receives nothing from the [deed of trust] itself.” As the language in the deed of trust specifically qualified the term “beneficiary” by noting that MERS was a beneficiary “solely as nominee” for the lender, MERS was able to act only as an agent for the lender, not for its own interests.
Finally, the Court observed in Ditto that the notice provisions in the deed of trust itself only addressed required notices between the borrower and the lender. The deed of trust did not require any notice to be given to MERS in connection with the obligations between the borrower and the lender.
Because MERS was never given an independent interest in the property, the Court held that MERS had no interest in the property that is protected under the Due Process Clause. Accordingly, the county was not required to provide MERS with notice of the tax sale, and MERS was unable to set it aside.
The practical effect of the Ditto case within Tennessee will likely be minimal. As Ditto itself stated, the Tennessee statute requiring notice of tax sales to “interested persons” was revised effective July 1, 2015. Tenn. Code Ann. § 67-5-2502(c)(1)(B) now defines “interested persons” to include “a person or entity named as nominee or agent of the owner of the obligation that is secured by the deed or a deed of trust and that is identifiable from information provided in the deed or a deed of trust ….” Thus, the Tennessee legislature has already acted to provide MERS a specific protection without the need to resort to Due Process arguments.
Even so, the findings of Ditto may be far-reaching, as it is likely that other courts struggling to define the role of MERS and its true interest in mortgages or real property will find Ditto’s logic compelling.
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