NEW YORK BANKRUPTCY COURT RULES MERS’S BUSINESS MODEL IS QUESTIONABLE

Published on: March 15, 2011

United States Bankruptcy (NY) Judge Robert Grossman has ruled that MERS’s business practices regarding assignments and foreclosure of loans and mortgages are unlawful. He explicitly acknowledged that this ruling sets a precedent that has far-reaching implications for half of the mortgages  in this country.  The Decision is in some respects similar to the Ibanez decision which was decided by the Massachusetts Supreme Judicial Court, U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637 (2011) and which was discussed in our February, 2011, newsletter.

At each transfer, the note and mortgage are supposed to be “assigned” to the new owner prior to any foreclosure.  MERS claimed that because it was the “mortgagee of record” and the “nominee” of both parties to every transaction, there was no need to assign the “mortgage” prior to the foreclosure. And it argued that since the old adage is that the “mortgage follows the note” and that both parties intended to assign the notes (even if they did not get around to doing it), then the Bankruptcy Court should rule that the assignments did take place in some sort of “virtual reality” so that there is a clear chain of title that allows the servicers to foreclose.

The Judge rejected every aspect of MERS’s argument. The Court rejected the claim that MERS could be both holder of the mortgage as well as nominee of the “true” owner. It also found that “mortgagee of record” is a vague term that does not give one legal standing as mortgagee.  The Judge wrote:

“According to MERS, the principal/agent relationship among itself and its members is created by the MERS rules of membership and terms and conditions, as well as the Mortgage itself. However, none of the documents expressly creates an agency relationship or even mentions the word “agency.” MERS would have this Court cobble together the documents and draw inferences from the words contained in those documents.”  For a copy of the Decision [click here].

If you would like further information please contact Ed Allcock at eallcock@meeb.com or at 781-843-5000 (150).