Atlanta, GA
If the Agard case [1] migrates from the Empire State [2] to the Empire State of the South [3], some of our clients may win on their Georgia MERS [4] arguments and change Georgia law.
Currently, the scant Georgia caselaw that exists concerning MERS and its designation as “nominee,” agent, grantee, etc., with regard to Georgia Security Deeds, would indicate that MERS may hold, assign, and foreclose (after default of the borrower) at will. The one Georgia case on point, holds that MERS has standing to maintain a Georgia foreclosure even as nominee. That the Court found nothing wrong with the splitting of the Note from the Security Deed. [5] “However, the nominee of the lender has the ability to foreclose on a debtor's property even if such nominee does not have a beneficial interest in the note secured by the mortgage.” Nicholson, at 9.
In an Opinion that runs completely counter to the bits of law in Georgia and follows the Anti-MERS holdings of the Kansas Supreme Court and the Nebraska Supreme Court, the Bankruptcy Court for the Eastern District of New York in the Agard Case, found for MERS, but cautioned future filings by MERS, writing:
This Court finds that MERS’s theory that it can act as a “common agent” for undisclosed principals is not support by the law. The relationship between MERS and its lenders and its distortion of its alleged “nominee” status was appropriately described by the Supreme Court of Kansas [6] as follows: “The parties appear to have defined the word [nominee] in much the same way that the blind men of Indian legend described an elephant – their description depended on which part they were touching at any given time.” [ * * * ] Conclusion. For all of the foregoing reasons, the Court finds that the Motion in this case should be granted. However, in all future cases which involve MERS, the moving party must show that it validly holds both the mortgage and the underlying note in order to prove standing before this Court. Agard, at 37.
Our firm currently has cases pending in Georgia that raise the exact same issue reviewed in the Agard opinion.
In the types of arguments that we have made in Georgia, we have asserted, vis a vis MERS documents, as follows:
[Second Lender] First American is Not in Privity Because
All the Conveyances Were With MERS
All of the conveyances associated with these transactions contain MERS as the Grantee and the “mere nominee,” for [ ORIGINAL LENDER ] or [ ASSIGNED LENDER ]. SUMF ¶¶s XX to XX. Even though, MERS is listed as Grantee on the [ ORIGINAL LENDER ] and [ ASSIGNED LENDER ] Security Deed, it, MERS, later goes to lengths to document its existence as “mere nominee.” “MERS, Mortgage Electronic Registration Systems, Inc., a separate corporation that is acting solely as a nominee for the Lender and Lender’s successors and assigns…” SUMF at ¶ XX.
The Security Deed in question reads in pertinent part:
Security deed dated May xx, 20xx. This security instrument is granted between [ REDACTED ], borrower, grantor to MERS. MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for lender and lender's successors and assigns. MERS is the grantee under the security instrument. MERS is organized and existing under the laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, Michigan 48501 2026, Telephone No. (888) 697 MERS. The lender in this instrument is [ ASSIGNED LENDER ]. Note means that promissory note dated May XX, 20XX in the amount of $1,XX0,000.00. [ * * * ] At Page XXX MERS further defines itself as "to have and to hold this property unto MERS (solely as nominee for lender and lender's successors and assigns) and to the successors and assigns of MERS, forever, together with all the improvements now or hereafter erected on the property, and all easements, appurtenances, fixtures now or hereafter a part of the property. All replacements and additions shall also be covered by this security instrument. All of the foregoing is referred to in this security instrument as "property." Borrower understands and agrees that MERS holds only legal title to the interest granted by borrower in the security instrument, but, if necessary to comply with law or custom, MERS (as nominee for lender and lender's successors and assigns) has the right: to: to exercise any and all of those interests, including, but not limited to, the right to foreclose and sell the property; and to take any action required of lender including, but not limited to, releasing and canceling the security instrument. This security deed was recorded on Fulton County records on July XX, 20XX at Deed Book 4XXXX, Page XXX. SUMF at ¶ XX,
Georgia has never construed the meaning of conveyances to MERS, as a Grantee, where MERS further limits its involvement on the instrument to that of mere nominee. Only one case in Georgia, Taylor, Bean & Whitaker Mortgage Corporation Et Al. v. Brown, 276 Ga. 848, 583 S.E.2d 844 (2003), defines MERS in a footnote [fn. 1.],. That case does not specify the meaning of Grantee vs. Mere Nominee in Georgia,
Two states, Kansas and Nebraska, have found that MERS acting as “mere nominee,” does not allow MERS to also act as “naked Grantee.” That is, notwithstanding MERS statement in its Security Deed’s that is a Grantee, other Courts have found that the language of “mere nominee,” defeats MERS self serving statement of “Grantee.”
Kansas weighted in on this issue in Landmark National Bank v. Kesler, 40 Kan.App.2d 325, 192 P.3d 177 (2008). It wrote:
Landmark National Bank brought a suit to foreclose its mortgage against Boyd Kesler and joined Millennia Mortgage Corp. as a defendant because a second mortgage had been filed of record for a loan between Kesler and Millennia. In a foreclosure suit, it is normal practice to name as defendants all parties who may claim a lien against the property. When neither Kesler nor Millennia responded to the suit, the district court gave Landmark a default judgment, entered a journal entry foreclosing Landmark's [40 Kan.App.2d 326] mortgage, and ordered the property sold so that sale proceeds could be applied to pay Landmark's mortgage.
But Millennia apparently had sold its mortgage to another party and no longer had interest in the property by this time. Sovereign Bank filed a motion to set aside the judgment and asserted that it now held the title to Kesler's obligation to pay the debt to Millennia. And another party, Mortgage Electronic Registration Systems, Inc. (" MERS" ), also filed a motion to set aside the judgment and asserted that it held legal title to the mortgage, originally on behalf of Millennia and later on behalf of Sovereign. Both Sovereign and MERS claim that MERS was a necessary party to the foreclosure lawsuit and that the judgment must be set aside because MERS wasn't included on the foreclosure suit as a defendant.
[ * * * ]
A mortgage grants a title or lien against a property as security for the payment of a debt or the performance of a duty. The " mortgagor" is the borrower who grants a mortgage in exchange for a loan; the " mortgagee" is the lender who gives the loan secured by the mortgage. See Black's Law Dictionary 1031, 1034 (8th ed.2004). The mortgagee is so well understood as the lender that Black's Law Dictionary defines a " foreclosure" as an action brought by the lender/mortgagee: a foreclosure is a " legal proceeding to terminate a mortgagor's interest in property, instituted by the lender (the mortgagee) either to gain title or to force a sale in order to satisfy the unpaid debt secured by the property." Black's Law [40 Kan.App.2d 327] Dictionary 674. Similarly, the tie between a mortgage and an underlying debt is so intrinsic that Kansas law provides that " [t]he assignment of any mortgage ... shall carry with it the debt thereby secured." K.S.A. 58-2323. Indeed, an assignment of a mortgage without the debt transfers nothing. 55 Am.Jur.2d, Mortgages § 1002. Thus, the mortgagee, who must have an interest in the debt, is the lender in a typical home mortgage.
But for reasons thought beneficial by a group of lenders who trade mortgages, the form of mortgage used in this case designates an entity that is not the lender as the mortgagee. See MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 96, 828 N.Y.S.2d 266, 861 N.E.2d 81 (2006) (MERS was established by large lenders to allow easy electronic trading and tracking of mortgages). Specifically, the mortgage says that the mortgagee is MERS, though " solely as nominee for Lender." Does this mean that MERS really was the mortgagee, even though it didn't lend money or have any rights to loan repayments? Assuming so, MERS argues that it was a necessary party to the foreclosure and that the foreclosure must be set aside. But the premise upon which MERS bases this argument is flawed.
What is MERS' interest? MERS claims that it holds the title to the second mortgage, not the real estate. So it does, but only as a nominee. In terms of the roles that we've discussed in the mortgage business, MERS holds the mortgage but without rights to the debt. The district court found that MERS was merely an agent for the principal player, Millennia. While MERS objects to its characterization as an agent, it's a fair one.
MERS had no right to the underlying debt repayment secured by the mortgage; MERS did not even act as the servicing agent to receive the payments and remit them to the lender. MERS' right to act to enforce the mortgage was strictly limited: if " necessary to comply with law or custom," MERS could foreclose the mortgage or enter a release of the mortgage. MERS certainly could not act at odds to its principal, the lender. Its role fits the classic definition of an agent: one " ' authorized by another to act for him, or entrusted with another's business.' " In re Tax Appeal of Scholastic Book Clubs, Inc., 260 Kan. 528, 534, 920 P.2d 947 (1996) (quoting Black's Law Dictionary 85 [4th ed.1968] ).
[ * * * ]
But whatever authority the nominee may have comes from the delegation of that authority by the principal. In its ordinary meaning, a nominee represents the principal in only a " nominal capacity" and does not receive any property or ownership rights of the person represented. See, e.g., Cisco v. Van Lew, 60 Cal.App.2d 575, 583-84, 141 P.2d 433 (1943); see also Applebaum v. Avaya, Inc., 812 A.2d 880, 889 (Del.2002) (referring to nominees " as agents of the beneficial owners" ). The Millennia mortgage does not purport to give MERS any greater rights than normally given a nominee. The mortgage says that MERS acts " solely as nominee for Lender." There is no express grant of any right to MERS to transfer or sell the mortgage or even to assign its duties as nominee. Nor does MERS obtain any right to the borrower's payments or even a role in receiving payments.
In Mortgage Electronic Registration Systems, Inc., Appellant, v. Nebraska Department Of Banking And Finance, Appellee, 270 Neb. 529, 704 N.W.2d 784 (2005), MERS successfully overturned a finding by the Nebraska Department of Banking and Finance that it was a Mortgage Banker and required to register in Nebraska as such.
The Nebraska Supreme Court struggled with MERS odd existence in the world of mortgages and wrote:
The MERS system was created to facilitate the transfer of ownership interests and servicing rights in mortgage loans. Under the System, MERS serves as mortgagee of record for participating members through assignment of the members' interests to MERS. Mortgage lenders participate in the MERS System as members upon completion of a membership application. The district court went on to discuss the elements of the contract between MERS and its members, referring specifically to a document entitled, "Terms and Conditions," that states, in part: The Member, at its own expense, shall promptly, or as soon as practicable, cause MERS to appear in the appropriate public records as the mortgagee of record with respect to each mortgage loan that the Member registers on the MERS' System. MERS shall serve as mortgagee of record with respect to all such mortgage loans solely as a nominee, in an administrative capacity, for the beneficial owner or owners thereof from time to time. MERS shall have no rights whatsoever to any payments made on account of such mortgage loans, to any servicing rights related to such mortgage loans, or to any mortgaged properties securing such mortgage loans. MERS agrees not to assert any rights (other than rights specified in the Governing Documents) with respect to such mortgage loans or mortgaged.
[ * * * ]
MERS argues that it does not acquire mortgage loans and is therefore not a mortgage banker under § 45-702(6) because it only holds legal title to members' mortgages in a nominee capacity and is contractually prohibited from exercising any rights with respect to the mortgages (i.e., foreclosure) without the authorization of the members. Further, MERS argues that it does not own the promissory notes secured by the mortgages and has no right to payments made on the notes. MERS explains that it merely "immobilizes the mortgage lien while transfers of the promissory notes and servicing rights continue to occur." Brief for appellant at 12.
[ * * * ]
To execute a MERS Mortgage, the borrower conveys the mortgage to MERS, who is acting as a contractual nominee. MERS becomes the recorded grantee, however, the lender retains the note and servicing right.
[ * * * ]
Although we agree with the district court's characterization of the services provided by MERS and its contractual relationship with its members, we conclude that such services are not equivalent to acquiring mortgage loans, as defined by the Act. In other words, through its services to its members as characterized by the district court, MERS does not acquire "any loan or extension of credit secured by a lien on real property." MERS does not itself extend credit or acquire rights to receive payments on mortgage loans. Rather, the lenders retain the promissory notes and servicing rights to the mortgage, while MERS acquires legal title to the mortgage for recordation purposes.
MERS serves as legal title holder in a nominee capacity, permitting lenders to sell their interests in the notes and servicing rights to investors without recording each transaction. But, simply stated, MERS has no independent right to collect on any debt because MERS itself has not extended credit, and none of the mortgage debtors owe MERS any money. Based on the foregoing, we conclude that MERS does not acquire mortgage loans, as defined in § 45-702(8), and therefore, MERS is not subject to the requirements of the Act.
Both Kansas and Nebraska found that MERS as a mere “Nominee,” was not empowered to buy and sell the Notes and Mortgages that were the subject matter of Landmark, supra, and MERS v. Nebraska Banking, supra. MERS is conducting its operations in Georgia in the exact manner as it conducts business in Kansas and Nebraska. In fact, the language in the Security Deeds in this case is exactly the same language used in Kansas and Nebraska. Both states found that MERS conveyances were deficient when conveyed in its own name, the name of MERS. Since the relevant conveyances in this case were conveyed in the name of MERS, this Court should find those conveyances to be deficient for the same reasoning applied by the Courts in Landmark, supra, and MERS v. Nebraska Banking, supra.
While there is no law on point in Georgia on this issue [ DEFENDANT / APPELLANT ] hereby moves this Court to establish the holdings in Landmark, supra, as the law to be applied in MERS situations in Georgia. If such law is applied, [ ASSIGNED LENDER ] then holds nothing with which to pursue [ DEFENDANT / APPELLANT ] and [ ASSIGNED LENDER’S ] claims, obtained by transfer from MERS should be dismissed. [This was taken from a Brief and the actual names were redacted.]
We have made this similar argument in a number of cases pending in Georgia. Whether any of them will make it to the Supreme Court of Georgia, remains to be seen. Only the Supreme Court (and perhaps the General Assembly – but given its Chamber of Commerce bend, I have grave doubts that any Bill on this issue would even make it out of Committee).
While we are writing in a parallel universe and one that does not meet the other – our arguments here in Georgia and the Agard holding in New York, supra, are highly similar.
In Georgia, we assert that the following clauses are fatal to MERS standing and assignment:
Security deed dated May xx, 20xx. This security instrument is granted between [ REDACTED ], borrower, grantor to MERS. MERS is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for lender and lender's successors and assigns. MERS is the grantee under the security instrument. MERS is organized and existing under the laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, Michigan 48501 2026, Telephone No. (888) 697 MERS. The lender in this instrument is [ ASSIGNED LENDER ]. Note means that promissory note dated May XX, 20XX in the amount of $1,XX0,000.00. [ * * * ] At Page XXX MERS further defines itself as "to have and to hold this property unto MERS (solely as nominee for lender and lender's successors and assigns) and to the successors and assigns of MERS, forever, together with all the improvements now or hereafter erected on the property, and all easements, appurtenances, fixtures now or hereafter a part of the property. All replacements and additions shall also be covered by this security instrument. All of the foregoing is referred to in this security instrument as "property." Borrower understands and agrees that MERS holds only legal title to the interest granted by borrower in the security instrument, but, if necessary to comply with law or custom, MERS (as nominee for lender and lender's successors and assigns) has the right: to: to exercise any and all of those interests, including, but not limited to, the right to foreclose and sell the property; and to take any action required of lender including, but not limited to, releasing and canceling the security instrument. This security deed was recorded on Fulton County records on July XX, 20XX at Deed Book 4XXXX, Page XXX. SUMF at ¶ XX.
In New York in Agard, supra, the Court reviews the EXACT SAME LANGUAGE and finds it deficient. In New York the MERS language at issue is:
The Mortgage
First Franklin is the “Lender” named in the Mortgage. With reference to MERS’s role in the transaction, the Mortgage states:
MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is organized and existing under the laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, MI 48501-2026, tel. (888) 679 MERS. FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.
(Mortgage at 1 (emphasis added by the Court)).The Mortgage also purports to contain a transfer to MERS of the Borrower’s (i.e., the
Page 27 of 37) Case 8-10-77338-reg Doc 41 Filed 02/10/11 Entered 02/10/11 14:13:10/Debtor’s) rights in the subject Property as follows:
BORROWER’S TRANSFER TO LENDER OF RIGHTS IN THE PROPERTY
[The Borrower] mortgage[s], grant[s] and convey[s] the Property to MERS (solely as nominee for Lender and Lender’s successors in interest) and its successors in interest subject to the terms of this Security Instrument. This means that, by signing this Security Instrument, [the Borrower is] giving Lender those rights that are stated in this Security Instrument and also those rights that Applicable Law gives to lenders who hold mortgage on real property. [The Borrower is] giving Lender these rights to protect Lender from possible losses that might result if [the Borrower] fail[s] to [comply with certain obligations under the Security Instrument and accompanying Note.]
[The Borrower] understand[s] and agree[s] that MERS holds only legal title to the rights granted by [the Borrower] in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lenders’s successors and assigns) has the right: (A) to exercise any or all those rights, including, but not limited to, the right to foreclose and sell the Property; and (B) to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.
[The Borrower gives] MERS (solely as nominee for Lender and Lender’s successors in interest), rights in the Property . . .
(Mortgage at 3) (emphasis added).
The Assignment of Mortgage references the Mortgage and defines the “Assignor” as “‘Mers’ Mortgage Electronic Registration Systems, Inc., 2150 North First Street, San Jose, California 95131, as nominee for First Franklin, a division of National City Bank of IN, 2150 North First Street San Jose, California 95153. ” (Emphasis added by the Court). The “Assignee” is U.S. Bank. Agard, supra, at 28.
We have moved the Georgia Courts, on behalf of our clients to adopt the holdings in the Landmark National Bank (Kansas) case, supra. However, to date no Georgia Court has been interested in taking up the issue.
The New York Court in Agard, supra, adopts our theoretical Georgia argument lock, stock and barrel. In finding MERS will have in future New York cases filed in Bankruptcy, “no standing,” and no ability to foreclose unless it can show that it holds both the Note and Mortgage (New York uses Mortgages and is a judicial foreclosure state; by contrast, Georgia is primarily a non-judicial foreclosure state), it cannot foreclose. It wrote:
The Assignment of Mortgage references the Mortgage and defines the “Assignor” as “‘Mers’ Mortgage Electronic Registration Systems, Inc., 2150 North First Street, San Jose, California 95131, as nominee for First Franklin, a division of National City Bank of IN, 2150 North First Street San Jose, California 95153. ” (Emphasis added by the Court). The “Assignee” is U.S. Bank.
Premised on the foregoing documentation, MERS argues that it had full authority to validly execute the Assignment of Mortgage to U.S. Bank on February 1, 2008, and that as of the date the foreclosure proceeding was commenced U. S. Bank held both the Note and the Mortgage. However, without more, this Court finds that MERS’s “nominee” status and the rights bestowed upon MERS within the Mortgage itself, are insufficient to empower MERS to effectuate a valid assignment of mortgage.
There are several published New York state trial level decisions holding that the status of “nominee” or “mortgagee of record” bestowed upon MERS in the mortgage documents, by itself, does not empower MERS to effectuate an assignment of the mortgage. These cases hold that MERS may not validly assign a mortgage based on its nominee status, absent some evidence of specific authority to assign the mortgage. See Bank of New York v. Mulligan, No. 29399/07, 2010 WL 3339452, at *7 (N.Y. Sup. Ct. Aug. 25, 2010); One West Bank, F.S.B. v. Drayton, 910 N.Y.S.2d 857, 871 (N.Y. Sup. Ct. 2010); Bank of New York v. Alderazi, 900 N.Y.S.2d 821, 824 (N.Y. Sup. Ct. 2010) (the “party who claims to be the agent of another bears the burden of proving the agency relationship by a preponderance of the evidence”); HSBC Bank USA v. Yeasmin, No. 34142/07, 2010 WL 2089273, at *3 (N.Y. Sup. Ct. May 24, 2010); HSBC Bank USA v. Vasquez, No. 37410/07, 2009 WL 2581672, at *3 (N.Y. Sup. Ct. Aug. 21, 2010); LaSalle Bank N.A. v. Lamy, 824 N.Y.S.2d 769, 2006 WL 2251721, at *2 (N.Y. Sup. Ct. Aug. 7, 2006) (“A nominee of the owner of a note and mortgage may not effectively assign the note and mortgage to another for want of an ownership interest in said note and mortgage by the nominee.”). See also MERS v. Saunders, 2 A.3d 289, 295 (Me. 2010) (“MERS’s only right is to record the mortgage. Its designation as the ‘mortgagee of record’ in the document does not change or expand that right…”). But see US Bank, N.A. v. Flynn, 897 N.Y. S.2d 855 (N.Y. Sup. Ct. 2010) (finding that MERS’s “nominee” status and the mortgage documents give MERS authority to assign); Crum v. LaSalle Bank, N.A., No. 2080110, 2009 WL 2986655, at *3 (Ala. Civ. App., Sept. 18, 2009) (finding MERS validly assigned its and the lender’s rights to assignee); Blau v. America’s Servicing Company, et al., No. CV-08-773-PHX-MHM, 2009 WL 3174823, at *8 (D. Ariz. Sept. 29, 2009) (finding that assignee of MERS had standing to foreclose).
In LaSalle Bank, N.A. v. Bouloute, No. 41583/07, 2010 WL 3359552, at *2 (N.Y. Sup. Aug. 26, 2010), the court analyzed the relationship between MERS and the original lender and concluded that a nominee possesses few or no legally enforceable rights beyond those of a principal whom the nominee serves. The court stated:
MERS . . . recorded the subject mortgage as “nominee” for FFFC. The word “nominee” is defined as “[a] person designated to act in place of another, usu. In a very limited way ” or “[a] party who holds bare legal title for the benefit of others.” (Black’s Law Dictionary 1076 [8th ed 2004] ). “This definition suggests that a nominee possesses few or no legally enforceable rights beyond those of a principal whom the nominee serves.” (Landmark National Bank v. Kesler, 289 Kan 528, 538 [2009] ). The Supreme Court of Kansas, in Landmark National Bank, 289 Kan at 539, observed that:
The legal status of a nominee, then, depends on the context of the relationship of the nominee to its principal. Various courts have interpreted the relationship of MERS and the lender as an agency relationship. See In re Sheridan, 2009 WL631355, at *4 (Bankr. D. Idaho, March 12, 2009) (MERS “acts not on its own account. Its capacity is representative.”); Mortgage Elec. Registrations Systems, Inc. v. Southwest, 2009 Ark. 152 ----, 301 SW3d 1, 2009 WL 723182 (March 19, 2009) (“MERS, by the terms of the deed of trust, and its own stated purposes, was the lender’s agent”); La Salle Nat. Bank v. Lamy, 12 Misc.3d 1191 [A], at *2 [Sup Ct, Suffolk County 2006] ) … (“A nominee of the owner of a note and mortgage may not effectively assign the note and mortgage to another for want of an ownership interest in said note and mortgage by the nominee.”).
LaSalle Bank, N.A. v. Bouloute, No. 41583/07, 2010 WL 3359552, at *2; see also Bank of New York v. Alderazi, 900 N.Y.S.2d 821, 823 (N.Y. Sup. Ct. 2010) (nominee is “‘[a] person designated to act in place of another, usually in a very limited way.’”) (quoting Black’s Law Dictionary)).
In LaSalle Bank, N.A. v. Bouloute the court concluded that MERS must have some evidence of authority to assign the mortgage in order for an assignment of a mortgage by MERS to be effective. Evidence of MERS’s authority to assign could be by way of a power of attorney or some other document executed by the original lender. See Bouloute, 2010 WL 3359552, at *1; Alderazi, 900 N.Y.S.2d at 823 (“‘To have a proper assignment of a mortgage by an authorized agent, a power of attorney is necessary to demonstrate how the agent is vested with the authority to assign the mortgage.’”) (quoting HSBC Bank USA, NA v. Yeasmin, 866 N.Y. S.2d 92 (N.Y. Sup. Ct. 2008)).
Other than naming MERS as “nominee”, the Mortgage also provides that the Borrower transfers legal title to the subject property to MERS, as the Lender’s nominee, and acknowledges MERS’s rights to exercise certain of the Lender’s rights under state law. This too, is insufficient to bestow any authority upon MERS to assign the mortgage. In Bank of New York v. Alderazi, the court found “[t]he fact that the borrower acknowledged and consented to MERS acting as nominee of the lender has no bearing on what specific powers and authority the lender granted MERS. ” Alderazi, 900 N.Y.S.2d at 824. Even if it did bestow some authority upon MERS, the court in Alderazi found that the mortgage did not convey the specific right to assign the mortgage.
The Court agrees with the reasoning and the analysis in Bouloute and Alderazi, and the other cases cited herein and finds that the Mortgage, by naming MERS a “nominee,” and/or “mortgagee of record” did not bestow authority upon MERS to assign the Mortgage.
If this holding were to become law in Georgia, it would knock out MERS ability to foreclose in Georgia. While it is unclear whether any Georgia Superior Court and/or the Georgia Supreme Court will take up this issue, if they do Agard may become the “roadmap” for resolution in Georgia.
It might happen. We raise this issue in all appropriate MERS foreclosure cases. Stay tuned.
Hugh Wood, Esq.
Wood & Meredith, LLP
3756 LaVista Road
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hwood@woodandmeredith.com
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Endnotes
[1] In Re: Ferrell A. Agard, Debtor, United States Bankruptcy Court for the Eastern District of New York, Case No. 8-10-77338-reg, February 10, 2011 (Opinion by Hon. Robert E. Grossman.).
[2] Nickname of the State of New York.
[3]
One of the two nicknames for Georgia: The Peach State and The Empire State of the South.
[4]
MERS: Mortgage Electronic Registration Systems, Inc. MERS is organized and existing under the laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, Michigan 48501 2026.
[5]
Barbara Ann Nicholson, Plaintiff v. Onewest Bank, Defendant, In The United States District Court For The Northern District Of Georgia Atlanta Division, Civil Action File No. 1:10-Cv-0795-Jec/Ajb (Hon. Assigned to: Judge Julie E. Carnes; Report and Recommendation by Hon. Alan J. Baverman). See, Order For Service Of Report And Recommendation, being Case 1:10-cv-00795-Jec Document 13 Filed 04/20/10 Page 1 Of 19, at 9.
[6]
Landmark Nat’l Bank v. Kesler, 216 P.3d 158, 166-67 (Kan. 2010).
THE FULL OPINIONS
AGARD CASE
Case 8-10-77338-reg Doc 41 Filed 02/10/11 Entered 02/10/11 14:13:10
UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK
x
In re:
Case No. 810-77338-reg FERREL L. AGARD,
Chapter 7
Debtor.
-----------------------------------------------------------------x
MEMORANDUM DECISION
Before the Court is a motion (the “Motion”) seeking relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(1) and (2), to foreclose on a secured interest in the Debtor’s real property located in Westbury, New York (the “Property”). The movant is Select Portfolio Servicing, Inc. (“Select Portfolio” or “Movant”), as servicer for U. S. Bank National Association, as Trustee for First Franklin Mortgage Loan Trust 2006-FF12, Mortgage Pass-Through Certificates, Series 2006-FF12 (“U.S. Bank”). The Debtor filed limited opposition to the Motion contesting the Movant’s standing to seek relief from stay. The Debtor argues that the only interest U.S. Bank holds in the underlying mortgage was received by way of an assignment from the Mortgage Electronic Registration System a/k/a MERS, as a “nominee” for the original lender. The Debtor’s argument raises a fundamental question as to whether MERS had the legal authority to assign a valid and enforceable interest in the subject mortgage. Because U.S. Bank’s rights can be no greater than the rights as transferred by its assignor – MERS – the Debtor argues that the Movant, acting on behalf of U. S. Bank, has failed to establish that it holds an enforceable
Case 8-10-77338-reg Doc 41 Filed 02/10/11 Entered 02/10/11 14:13:10
right against the Property.1 The Movant’s initial response to the Debtor’s opposition was that MERS’s authority to assign the mortgage to U.S. Bank is derived from the mortgage itself which allegedly grants to MERS its status as both “nominee” of the mortgagee and “mortgagee of record.” The Movant later supplemented its papers taking the position that U.S. Bank is a creditor with standing to seek relief from stay by virtue of a judgment of foreclosure and sale entered in its favor by the state court prior to the filing of the bankruptcy. The Movant argues that the judgment of foreclosure is a final adjudication as to U.S. Bank’s status as a secured creditor and therefore the Rooker-Feldman doctrine prohibits this Court from looking behind the judgment and questioning whether U.S. Bank has proper standing before this Court by virtue of a valid assignment of the mortgage from MERS.
The Court received extensive briefing and oral argument from MERS, as an intervenor in these proceedings which go beyond the arguments presented by the Movant. In addition to the rights created by the mortgage documents themselves, MERS argues that the terms of its membership agreement with the original lender and its successors in interest, as well as New York state agency laws, give MERS the authority to assign the mortgage. MERS argues that it holds legal title to mortgages for its member/lenders as both “nominee” and “mortgagee of
The Debtor also questions whether Select Portfolio has the authority and the standing to seek relief from the automatic stay. The Movant argues that Select Portfolio has standing to bring the Motion based upon its status as “servicer” of the Mortgage, and attaches an affidavit of a vice president of Select Portfolio attesting to that servicing relationship. Caselaw has established that a mortgage servicer has standing to seek relief from the automatic stay as a party in interest. See, e.g., Greer v. O'Dell, 305 F.3d 1297 (11th Cir. 2002); In re Woodberry, 383 B.R. 373 (Bankr. D.S.C. 2008). This presumes, however, that the lender for whom the servicer acts validly holds the subject note and mortgage. Thus, this Decision will focus on whether U.S. Bank validly holds the subject note and mortgage.
1
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record.” As such, it argues that any member/lender which holds a note secured by real property, that assigns that note to another member by way of entry into the MERS database, need not also assign the mortgage because legal title to the mortgage remains in the name of MERS, as agent for any member/lender which holds the corresponding note. MERS’s position is that if a MERS member directs it to provide a written assignment of the mortgage, MERS has the legal authority, as an agent for each of its members, to assign mortgages to the member/lender currently holding the note as reflected in the MERS database.
For the reasons that follow, the Debtor’s objection to the Motion is overruled and the Motion is granted. The Debtor’s objection is overruled by application of either the Rooker-Feldman doctrine, or res judicata. Under those doctrines, this Court must accept the state court judgment of foreclosure as evidence of U. S. Bank’s status as a creditor secured by the Property. Such status is sufficient to establish the Movant’s standing to seek relief from the automatic stay. The Motion is granted on the merits because the Movant has shown, and the Debtor has not disputed, sufficient basis to lift the stay under Section 362(d).
Although the Court is constrained in this case to give full force and effect to the state court judgment of foreclosure, there are numerous other cases before this Court which present identical issues with respect to MERS and in which there have been no prior dispositive state court decisions. This Court has deferred rulings on dozens of other motions for relief from stay pending the resolution of the issue of whether an entity which acquires its interests in a mortgage by way of assignment from MERS, as nominee, is a valid secured creditor with standing to seek relief from the automatic stay. It is for this reason that the Court’s decision in this matter will address the issue of whether the Movant has established standing in this case notwithstanding the
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existence of the foreclosure judgment. The Court believes this analysis is necessary for the precedential effect it will have on other cases pending before this Court.
The Court recognizes that an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States. However, the Court must resolve the instant matter by applying the laws as they exist today. It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices. MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law.
Facts
Procedural Background
On September 20, 2010, the Debtor filed for relief under Chapter 7 of the Bankruptcy Code. In Schedule A to the petition, the Debtor lists a joint ownership interest in the Property described as follows:
A “[s]ingle family home owned with son, deed in son’s name since 2007; used as primary residence . . .. Debtor was on original deed and is liable on the mortgage, therefore has equitable title. Debtor is in default of the mortgage with a principal balance of over $450,000.00. The house is worth approximately $350,000. A
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foreclosure sale was scheduled 9/21/10.
According to Schedule D, the Property is valued at $350,000 and is encumbered by a mortgage in the amount of $536,920.67 held by “SPS Select Portfolio Servicing.”
On October 14, 2010, the Movant filed the Motion seeking relief from the automatic stay pursuant to 11 U.S.C. §362(d) to foreclose on the Property. The Motion does not state that a foreclosure proceeding had been commenced or that a judgment of foreclosure was granted prior to the filing of the bankruptcy petition. Nor does it mention that the Debtor holds only equitable title and does not hold legal title to the Property. Instead, Movant alleges that U.S. Bank is the “holder” of the Mortgage; that the last mortgage payment it received from the Debtor was applied to the July, 2008 payment; and that the Debtor has failed to make any post-petition payments to the Movant. Movant also asserts that as of September 24, 2010, the total indebtedness on the Note and Mortgage was $542,902.33 and the Debtor lists the value of the Property at $350,000 in its schedules. On that basis, Movant seeks entry of an order vacating the stay pursuant to 11 U.S.C. § 362(d)(1) and (d)(2).
Annexed to the Motion are copies of the following documents:
Adjustable Rate Note, dated June 9, 2006, executed by the Debtor as borrower and listing First Franklin a Division of Na. City Bank of In. (“First Franklin”) as the lender (“Note”);
• Balloon Note Addendum to the Note, dated June 9, 2006;
• Mortgage, dated June 9, 2006 executed by the Debtor and listing First Franklin as lender, and MERS as nominee for First Franklin and First Franklin’s successors and assigns (“Mortgage”);
• Adjustable Rate and Balloon Rider, dated June 9, 2006;
• Addendum to Promissory Note and Security Agreement executed by the Debtor; and Page 5 of 37
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Assignment of Mortgage, dated February 1, 2008, listing MERS as nominee for First Franklin as assignor, and the Movant, U.S. Bank National Association, as Trustee for First Franklin Mortgage Loan Trust 2006- FF12, Mortgage Pass-through Certificates, Series 2006-FF12, as assignee (“Assignment of Mortgage”).
The Arguments of the Parties
On October 27, 2010, the Debtor filed “limited opposition” to the Motion, alleging that the Movant lacks standing to seek the relief requested because MERS, the purported assignor to the Movant, did not have authority to assign the Mortgage and therefore the Movant cannot establish that it is a bona fide holder of a valid secured interest in the Property.
The Movant responded to the Debtor’s limited opposition regarding MERS’s authority to assign by referring to the provisions of the Mortgage which purport to create a “nominee” relationship between MERS and First Franklin. In conclusory fashion, the Movant states that it therefore follows that MERS’s standing to assign is based upon its nominee status.
On November 15, 2010, a hearing was held and the Court gave both the Debtor and Movant the opportunity to file supplemental briefs on the issues raised by the Debtor’s limited opposition.
On December 8, 2010, the Movant filed a memorandum of law in support of the Motion arguing that this Court lacks jurisdiction to adjudicate the issue of whether MERS had authority to assign the Mortgage, and even assuming the Court did have jurisdiction to decide this issue, under New York law the MERS assignment was valid. In support of its jurisdictional argument, the Movant advises the Court (for the first time) that a Judgement of Foreclosure and Sale (“Judgment of Foreclosure”) was entered by the state court in favor of the Movant on November 24, 2008, and any judicial review of the Judgment of Foreclosure is barred by the doctrines of
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res judicata, Rooker-Feldman, and judicial estoppel.2 The Movant argues that the Debtor had a full and fair opportunity to litigate these issues in state court, but chose to default, and cannot now challenge the state court’s adjudication as to the Movant’s status as a secured creditor or holder of the Note and Mortgage, or its standing to seek relief from the automatic stay in this Court. The Movant also notes that the Debtor admits in her petition and schedules that she is liable on the Mortgage, that it was in default and the subject of a foreclosure sale, and thus judicial estoppel bars her arguments to the contrary.
In addition to its preclusion arguments, on the underlying merits of its position the Movant cites to caselaw holding that MERS assignments similar to the assignment in this case, are valid and enforceable. See U.S. Bank, N.A. v. Flynn, 897 N.Y.S. 2d 855, 858 (N.Y. Sup. Ct. 2010); Kiah v. Aurora Loan Services, LLC, 2010 U. S. Dist. LEXIS 121252, at *1 (D. Mass. Nov. 16, 2010); Perry v. Nat’l Default Servicing Corp., 2010 U. S. Dist. LEXIS 92907, at *1 (Dist. N.D. Cal. Aug. 20, 2010). It is the Movant’s position that the provisions of the Mortgage grant to MERS the right to assign the Mortgage as “nominee,” or agent, on behalf of the lender, First Franklin. Specifically, Movant relies on the recitations of the Mortgage pursuant to which the “Borrower” acknowledges that MERS holds bare legal title to the Mortgage, but has the right “(A) to exercise any or all those rights, including, but not limited to, the right to foreclose and
2
The Judgment of Foreclosure names the Debtor and an individual, Shelly English, as defendants. Shelly English is the Debtor’s daughter-in-law. At a hearing held on December 13, 2010, the Debtor’s counsel stated that he “believed” the Debtor transferred title to the Property to her son, Leroy English, in 2007. This is consistent with information provided by the Debtor in her petition and schedules. Leroy English, however, was not named in the foreclosure action. No one in this case has addressed the issue of whether the proper parties were named in the foreclosure action. However, absent an argument to the contrary, this Court can only presume that the Judgment of Foreclosure is a binding final judgment by a court of competent jurisdiction.
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sell the Property; and (B) to take any action required of Lender including, but not limited to, releasing and canceling [the Mortgage].” In addition, the Movant argues that MERS’s status as a “mortgagee” and thus its authority to assign the Mortgage is supported by the New York Real Property Actions and Proceedings Law (“RPAPL”) and New York Real Property Law (“RPL”). Movant cites to RPAPL § 1921-a which allows a “mortgagee” to execute and deliver partial releases of lien, and argues that MERS falls within the definition of “mortgagee” which includes the “current holder of the mortgage of record . . . or . . . their . . . agents, successors or assigns.” N.Y. Real Prop. Acts. Law § 1921(9)(a) (McKinney 2011). Although the definition of “mortgagee” cited to by the Movant only applies to RPAPL § 1921, Movant argues that it is a “mortgagee” vested with the authority to execute and deliver a loan payoff statement; execute and deliver a discharge of mortgage and assign a mortgage pursuant to RPL §§ 274 and 275.
In addition to its status as “mortgagee,” Movant also argues that the assignment is valid because MERS is an “agent” of each of its member banks under the general laws of agency in New York, see N.Y. Gen. Oblig. Law § 5-1501(1) (McKinney 2011),3 and public policy requires the liberal interpretation and judicial recognition of the principal-agent relationship. See Arens v. Shainswitt, 37 A.D.2d 274 (N.Y. App. Div. 1971), aff’d 29 N.Y.2d 663 (1971). In the instant case, Movant argues, the Mortgage appoints MERS as “nominee,” read “agent,” for the original
3 Movant cites to New York General Obligations Law for the proposition that “an agency agreement may take any form ‘desired by the parties concerned.’” The direct quote “desired by the parties concerned” seems to be attributed to the General Obligations Law citation, however, the Court could find no such language in the current version of § 5- 1501(1). That provision, rather, defines an agent as “a person granted authority to act as attorney-in-fact for the principal under a power of attorney, and includes the original agent and any co-agent or successor agent. Unless the context indicates otherwise, an ‘agent’ designated in a power of attorney shall mean ‘attorney-in-fact’ for the purposes of this title. An agent acting under a power of attorney has a fiduciary relationship with the principal.” N.Y. Gen. Oblig. Law § 5-1501(1) (McKinney 2011) (emphasis added).
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lender and the original lender’s successors and assigns. As nominee/agent for the lender, and as mortgagee of record, Movant argues MERS had the authority to assign the Mortgage to the Movant, U.S. Bank, “in accordance with the principal’s instruction to its nominee MERS, to assign the mortgage lien to U.S. Bank . . . .”
Finally, Movant argues that even absent a legally enforceable assignment of the Mortgage, it is entitled to enforce the lien because U. S. Bank holds the Note. The Movant argues that if it can establish that U.S. Bank is the legal holder the Note, the Mortgage by operation of law passes to the Movant because the Note and the Mortgage are deemed to be inseparable. See In re Conde-Dedonato, 391 B.R. 247 (Bankr. E.D.N.Y. 2008). The Movant represents, but has not proven, that U.S. Bank is the rightful holder of the Note, and further argues that the assignment of the Note has to this point not been contested in this proceeding.
MERS moved to intervene in this matter pursuant to Fed. R. Bankr. P. 7024 because:
12. The Court’s determination of the MERS Issue directly affects the business model of MERS. Additionally, approximately 50% of all consumer mortgages in the United States are held in the name of MERS, as the mortgagee of record.
13. The Court’s determination of the MERS Issue will have a significant impact on MERS as well as the mortgage industry in New York and the United States.
14. MERS has a direct financial stake in the outcome of this contested matter, and any determination of the MERS Issue has a direct impact on MERS.
(Motion to Intervene, ¶¶12-14).
Permission to intervene was granted at a hearing held on December 13, 2010.
In addition to adopting the arguments asserted by the Movant, MERS strenuously defends its authority to act as mortgagee pursuant to the procedures for processing this and other mortgages under the MERS “system.” First, MERS points out that the Mortgage itself
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designates MERS as the “nominee” for the original lender, First Franklin, and its successors and assigns. In addition, the lender designates, and the Debtor agrees to recognize, MERS “as the mortgagee of record and as nominee for ‘Lender and Lender’s successors and assigns’” and as such the Debtor “expressly agreed without qualification that MERS had the right to foreclose upon the premises as well as exercise any and all rights as nominee for the Lender.” (MERS Memorandum of Law at 7). These designations as “nominee,” and “mortgagee of record,” and the Debtor’s recognition thereof, it argues, leads to the conclusion that MERS was authorized as a matter of law to assign the Mortgage to U.S. Bank.
Although MERS believes that the mortgage documents alone provide it with authority to effectuate the assignment at issue, they also urge the Court to broaden its analysis and read the documents in the context of the overall “MERS System.” According to MERS, each participating bank/lender agrees to be bound by the terms of a membership agreement pursuant to which the member appoints MERS to act as its authorized agent with authority to, among other things, hold legal title to mortgages and as a result, MERS is empowered to execute assignments of mortgage on behalf of all its member banks. In this particular case, MERS maintains that as a member of MERS and pursuant to the MERS membership agreement, the loan originator in this case, First Franklin, appointed MERS “to act as its agent to hold the Mortgage as nominee on First Franklin’s behalf, and on behalf of First Franklin’s successors and assigns.” MERS explains that subsequent to the mortgage’s inception, First Franklin assigned the Note to Aurora Bank FSB f/k/a Lehman Brothers Bank (“Aurora”), another MERS member. According to MERS, note assignments among MERS members are tracked via self-effectuated and self-monitored computer entries into the MERS database. As a MERS member, by
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operation of the MERS membership rules, Aurora is deemed to have appointed MERS to act as its agent to hold the Mortgage as nominee. Aurora subsequently assigned the Note to U.S. Bank, also a MERS member. By operation of the MERS membership agreement, U.S. Bank is deemed to have appointed MERS to act as its agent to hold the Mortgage as nominee. Then, according to MERS, “U.S. Bank, as the holder of the note, under the MERS Membership Rules, chose to instruct MERS to assign the Mortgage to U.S. Bank prior to commencing the foreclosure proceedings by U.S. Bank.” (Affirmation of William C. Hultman, ¶12).
MERS argues that the express terms of the mortgage coupled with the provisions of the MERS membership agreement, is “more than sufficient to create an agency relationship between MERS and lender and the lender’s successors in interest” under New York law and as a result establish MERS’s authority to assign the Mortgage. (MERS Memorandum of Law at 7).
On December 20, 2010, the Debtor filed supplemental opposition to the Motion. The Debtor argues that the Rooker-Feldman doctrine should not preclude judicial review in this case because the Debtor’s objection to the Motion raises issues that could not have been raised in the state court foreclosure action, namely the validity of the assignment and standing to lift the stay. The Debtor also argues that the Rooker-Feldman doctrine does not apply because the Judgment of Foreclosure was entered by default. Finally, she also argues that the bankruptcy court can review matters “which are void or fraudulent on its face.” See In re Ward, 423 B.R. 22 (Bankr. E.D.N.Y. 2010). The Debtor says that she is “alleging questionable, even possibly fraudulent conduct by MERS in regards to transferring notes and lifting the stay.” (Debtor’s Supplemental Opposition at 3).
The Movant filed supplemental papers on December 23, 2010 arguing that the Motion is
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moot because the Property is no longer an asset of the estate as a result of the Chapter 7 Trustee’s “report of no distribution,” and as such, the Section 362(a) automatic stay was dissolved upon the entry of a discharge on December 14, 2010. See Brooks v. Bank of New York Mellon, No. DKC 09-1408, 2009 WL 3379928, at *2 (D. Md. Oct. 16, 2009); Riggs Nat’l Bank of Washington, D. C. v. Perry, 729 F.2d 982, 986 (4th Cir. 1984).
The Movant also maintains that Rooker-Feldman does apply to default judgments because that doctrine does not require that the prior judgment be a judgment “on the merits.” Charchenko v. City of Stillwater, 47 F.3d 981, 983 n.1 (8th Cir. 1995); see also Kafele v. Lerner, Sampson & Rothfuss, L.P.A., No. 04-3659, 2005 WL 3528921, at *2-3 (6th Cir. Dec. 22, 2005); In re Dahlgren, No. 09-18982, 2010 WL 5287400, at *1 (D.N.J. Dec. 17, 2010). The Movant points out that the Debtor seems to be confusing the Rooker-Feldman doctrine with issue and claim preclusion and that the Debtor has misapplied Chief Judge Craig’s ruling in In re Ward.
Discussion
As a threshold matter, this Court will address the Movant’s argument that this Motion has been mooted by the entry of the discharge order.
Effect of the Chapter 7 discharge on the automatic stay
Section 362(c) provides that:
Except as provided in subsections (d), (e), (f), and (h) of this section--
(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;
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(2) the stay of any other act under subsection (a) of this section continues until the earliest of--
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied;
11 U.S.C. § 362(c) (emphasis added).
Pursuant to Section 362(c)(1), the automatic stay which protects “property of the estate,” as opposed to property of the debtor, continues until the property is no longer property of the estate regardless of the entry of the discharge. The provision of the statute relied upon by the Movant for the proposition that the automatic stay terminates upon the entry of a discharge, relates only to the stay of “any other act under subsection(a),”, i.e., an act against property that is not property of the estate, i.e., is property “of the debtor.” The relationship between property of the estate and property of the debtor is succinctly stated as follows:
Property of the estate consists of all property of the debtor as of the date of the filing of the petition. 11 U.S.C. § 541. It remains property of the estate until it has been exempted by the debtor under § 522, abandoned by the trustee under § 554(a), or sold by the trustee under § 363. If property of the estate is not claimed exempt, sold, or abandoned by the trustee, it is abandoned to the debtor at the time the case is closed if the property was scheduled under § 521(1). If the property is not scheduled by the debtor and is not otherwise administered, it remains property of the estate even after the case has been closed.
If the property in question is property of the estate, it remains subject to the automatic stay until it becomes property of the debtor and until the earlier of the time the case was closed, the case is dismissed, or a discharge is granted or denied in a chapter 7 case.
In re Pullman, 319 B.R. 443, 445 (Bankr. E.D. Va. 2004).
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Movant’s position seems to be that the Chapter 7 Trustee’s filing of a “report of no distribution,” otherwise known as a “no asset report,” effectuated an abandonment of the real property at issue in this case, and therefore the Property has reverted back to the Debtor. However, Movant fails to cite the relevant statute. Section 554(c) provides that “[u]nless the court orders otherwise, any property scheduled under section 521(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title.” 11 U.S.C. § 554(c) (emphasis added); Fed. R. Bankr. P. 6007. Cases interpreting Section 554(c) hold that the filing of a report of no distribution does not effectuate an abandonment of estate property. See, e.g., In re Israel, 112 B.R. 481, 482 n.3 (Bankr. D. Conn. 1990) (“The filing of a no-asset report does not close a case and therefore does not constitute an abandonment of property of the estate.”) (citing e.g., Zlogar v. Internal Revenue Serv. (In re Zlogar), 101 B.R. 1, 3 n.3 (Bankr. N.D. Ill. 1989); Schwaber v. Reed (In re Reed), 89 B.R. 100, 104 (Bankr. C.D. Cal. 1988); 11 U.S.C. § 554(c)).
Because the real property at issue in this case has not been abandoned it remains property of the estate subject to Section 362(a) unless and until relief is granted under Section 362(d).
Rooker-Feldman and res judicata4
The Movant argues that U.S. Bank’s status as a secured creditor, which is the basis for its standing in this case, already has been determined by the state court and that determination cannot be revisited here. The Movant relies on both the Rooker-Feldman doctrine and res
4 Because the Debtor’s objection is overruled under Rooker-Feldman and res judicata, the Court will not address the merits of the Movant’s judicial estoppel arguments.
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judicata principles to support this position.
The Rooker-Feldman doctrine is derived from two Supreme Court cases, Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923), and D. C. Court of Appeals v. Feldman, 460 U.S. 462 (1983), which together stand for the proposition that lower federal courts lack subject matter jurisdiction to sit in direct appellate review of state court judgments. The Rooker-Feldman doctrine is a narrow jurisdictional doctrine which is distinct from federal preclusion doctrines. See McKithen v. Brown, 481 F.3d 89, 96-97 (2d Cir. 2007) (citing Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U. S. 280, 284 (2005), and Hoblock v. Albany County Board of Elections, 422 F.3d 77, 85 (2d Cir. 2005)). In essence, the doctrine bars “cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments. Rooker-Feldman does not otherwise override or supplant preclusion doctrine or augment the circumscribed doctrines that allow federal courts to stay or dismiss proceedings in deference to state-court actions.” Exxon Mobil, 544 U.S. at 283.
The Second Circuit has delineated four elements that must be satisfied in order for Rooker-Feldman to apply:
First, the federal-court plaintiff must have lost in state court. Second, the plaintiff must “complain [ ] of injuries caused by [a] state-court judgment[.]” Third, the plaintiff must “invit[e] district court review and rejection of [that] judgment [ ].” Fourth, the state-court judgment must have been “rendered before the district court proceedings commenced”-i.e., Rooker-Feldman has no application to federal-court suits proceeding in parallel with ongoing state-court litigation. The first and fourth of these requirements may be loosely termed procedural; the second and third may be termed substantive.
McKithen, 481 F.3d at 97 (internal citation omitted and alteration in original) (quoting Hoblock,
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422 F.3d at 85).
In a case with facts similar to the instant case, Chief Judge Craig applied the Rooker-Feldman doctrine to overrule a debtor’s objection to a motion for relief from the automatic stay. See In re Ward, 423 B.R. 22 (Bankr. E.D.N.Y. 2010). In In re Ward, a foreclosure sale was conducted prior to the filing of the bankruptcy petition. When the successful purchaser sought relief from stay in the bankruptcy case to proceed to evict the debtor, the debtor opposed the motion. The debtor argued that the foreclosure judgment was flawed because “no original note was produced”, “the mortgage was rescinded”, “the plaintiff in the action doesn’t exist” or “was not a proper party to the foreclosure action”, and that “everything was done irregularly and underneath [the] table.” In re Ward, 423 B.R. at 27. Chief Judge Craig overruled the debtor’s opposition and found that each of the elements of the Rooker-Feldman doctrine were satisfied:
The Rooker-Feldman doctrine applies in this case because the Debtor lost in the state court foreclosure action, the Foreclosure Judgment was rendered before the Debtor commenced this case, and the Debtor seeks this Court's review of the Foreclosure Judgment in the context of her opposition to the Purchaser's motion for relief from the automatic stay. The injury complained of, i.e., the foreclosure sale to the Purchaser, was “caused by ” the Foreclosure Judgment because “the foreclosure [sale] would not have occurred but-for” the Foreclosure Judgment. Accordingly, the Rooker-Feldman doctrine does not permit this Court to disregard the Foreclosure Judgment.
In re Ward, 423 B.R. at 28 (citations omitted and alteration in original).
In the instant case, the Debtor argues that the Rooker-Feldman doctrine does not apply because the Judgment of Foreclosure was entered on default, not on the merits. She also argues that Rooker-Feldman should not apply because she is alleging that the Judgment of Foreclosure was procured by fraud in that the MERS system of mortgage assignments was fraudulent in nature or void. However, this Court is not aware of any exception to the Rooker-Feldman
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doctrine for default judgments, or judgments procured by fraud and the Court will not read those exceptions into the rule. See Salem v. Paroli, 260 B.R. 246, 254 (S.D.N.Y. 2001) (applying Rooker-Feldman to preclude review of state court default judgment); see also Lombard v. Lombard, No. 00-CIV-6703 (SAS), 2001 WL 548725, at *3-4 (S.D.N.Y. May 23, 2001) (applying Rooker-Feldman to preclude review of stipulation of settlement executed in connection with state court proceeding even though applicant argued that the stipulation should be declared null and void because he was under duress at the time it was executed).
The Debtor also argues that Rooker-Feldman does not apply in this case because she is not asking this Court to set aside the Judgment of Foreclosure, but rather is asking this Court to make a determination as to the Movant’s standing to seek relief from stay. The Debtor argues that notwithstanding the Rooker-Feldman doctrine, the bankruptcy court must have the ability to determine the standing of the parties before it.
Although the Debtor says she is not seeking affirmative relief from this Court, the net effect of upholding the Debtor’s jurisdictional objection in this case would be to deny U.S. Bank rights that were lawfully granted to U. S. Bank by the state court. This would be tantamount to a reversal which is prohibited by Rooker-Feldman.
Even if Rooker-Feldman were found not to apply to this determination, the Court still would find that the Debtor is precluded from questioning U.S. Bank’s standing as a secured creditor under the doctrine of res judicata. The state court already has determined that U.S. Bank is a secured creditor with standing to foreclose and this Court cannot alter that determination in order to deny U. S. Bank standing to seek relief from the automatic stay.
The doctrine of res judicata is grounded in the Full Faith and Credit Clause of the United
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States Constitution. U.S. Const. art. IV, § 1. It prevents a party from re-litigating any issue or defense that was decided by a court of competent jurisdiction and which could have been raised or decided in the prior action. See Burgos v. Hopkins, 14 F.3d 787, 789 (2d Cir. 1994) (applying New York preclusion rules); Swiatkowski v. Citibank, No. 10-CV-114, 2010 WL 3951212, at *14 (E.D.N.Y. Oct. 7, 2010) (citing Waldman v. Vill. of Kiryas Joel, 39 F.Supp.2d 370, 377 (S.D.N.Y. 1999)). Res judicata applies to judgments that were obtained by default, see Kelleran v. Andrijevic, 825 F.2d 692, 694-95 (2d Cir. 1987), but it may not apply if the judgment was obtained by extrinsic fraud or collusion. “Extrinsic fraud involves the parties’ ‘opportunity to have a full and fair hearing,’ while intrinsic fraud, on the other hand, involves the ‘underlying issue in the original lawsuit.’” In re Ward, 423 B.R. at 29. The Debtor’s assertions that the MERS system of assignments may have been fraudulent is more appropriately deemed an intrinsic fraud argument. The Debtor has not alleged any extrinsic fraud in the procurement of the Judgment of Foreclosure which prevented a full and fair hearing before the state court.
As a result, the Court finds that the Judgment of Foreclosure alone is sufficient evidence of the Movant’s status as a secured creditor and therefore its standing to seek relief from the automatic stay. On that basis, and because the Movant has established grounds for relief from stay under Section 362(d), the Motion will be granted.
MERS
Because of the broad applicability of the issues raised in this case the Court believes that it is appropriate to set forth its analysis on the issue of whether the Movant, absent the Judgment of Foreclosure, would have standing to bring the instant motion. Specifically MERS’s role in
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the ownership and transfer of real property notes and mortgages is at issue in dozens of cases before this Court. As a result, the Court has deferred ruling on motions for relief from stay where the movants’ standing may be affected by MERS’s participation in the transfer of the real property notes and mortgages. In the instant case, the issues were resolved under the Rooker-Feldman doctrine and the application of res judicata. Most, if not all, of the remainder of the “MERS cases” before the Court cannot be resolved on the same basis. For that reason, and because MERS has intervened in this proceeding arguing that the validity of MERS assignments directly affects its business model and will have a significant impact on the national mortgage industry, this Court will give a reasoned opinion as to the Movant’s standing to seek relief from the stay and how that standing is affected by the fact that U.S. Bank acquired its rights in the Mortgage by way of assignment from MERS.
Standing to seek relief from the automatic stay
The Debtor has challenged the Movant’s standing to seek relief from the automatic stay. Standing is a threshold issue for a court to resolve. Section 362(d) states that relief from stay may be granted “[o]n request of a party in interest and after notice and a hearing.” 11 U.S.C. § 362(d). The term “party in interest” is not defined in the Bankruptcy Code, however the Court of Appeals for the Second Circuit has stated that “[g]enerally the ‘real party in interest’ is the one who, under the applicable substantive law, has the legal right which is sought to be enforced or is the party entitled to bring suit.” See Roslyn Savings Bank v. Comcoach (In re Comcoach), 698 F.2d 571, 573 (2d Cir. 1983). The legislative history of Section 362 “suggests that, notwithstanding the use of the term ‘party in interest’, it is only creditors who may obtain relief
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from the automatic stay.” Id. at 573-74. (citing H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 175, reprinted in 1978 U.S.Code Cong. & Ad. News 5787, 6136); see also Greg Restaurant Equip. And Supplies v. Toar Train P’ship (In re Toar Train P’ship), 15 B.R. 401, 402 (Bankr. D. Vt. 1981) (finding that a judgment creditor of the debtor was not a “party in interest” because the judgment creditor was not itself a direct creditor of the bankrupt).
Using the standard established by the Second Circuit, this Court must determine whether the Movant is the “one who, under applicable substantive law, has the legal right” to enforce the subject Note and Mortgage, and is therefore a “creditor” of this Debtor. See In re Toar, 15 B.R. at 402; see also In re Mims, 438 B.R. 52, 55 (Bankr. S.D.N.Y. 2010). The Bankruptcy Code
defines a “creditor” as an “entity that has a claim against the debtor that arose at the time of or before the order for relief . . . . ” 11 U.S.C. § 101(10). “Claim” is defined as the “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured . . . . ” 11 U.S.C. § 101(5)(A). In the context of a lift stay motion where the movant is seeking to commence or continue with an action to foreclose a mortgage against real property, the movant must show that it is a “party in interest” by showing that it is a creditor with a security interest in the subject real property. See Mims, 438 B.R. at 57 (finding that as movant “failed to prove it owns the Note, it has failed to establish that it has standing to pursue its state law remedies with regard to the Mortgage and Property”). Cf. Brown Bark I L.P. v. Ebersole (In re Ebersole), 440 B.R. 690, 694 (Bankr. W.D. Va. 2010) (finding that movant seeking relief from stay must prove that it is the holder of the subject note in order to establish a ‘colorable claim’ which would establish standing to seek relief from stay).
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Noteholder status
In the Motion, the Movant asserts U.S. Bank’s status as the “holder” of the Mortgage. However, in order to have standing to seek relief from stay, Movant, which acts as the representative of U.S. Bank, must show that U.S. Bank holds both the Mortgage and the Note. Mims, 438 B.R. at 56. Although the Motion does not explicitly state that U.S. Bank is the holder of the Note, it is implicit in the Motion and the arguments presented by the Movant at the hearing. However, the record demonstrates that the Movant has produced no evidence, documentary or otherwise, that U. S. Bank is the rightful holder of the Note. Movant’s reliance on the fact that U.S. Bank’s noteholder status has not been challenged thus far does not alter or diminish the Movant’s burden to show that it is the holder of the Note as well as the Mortgage.
Under New York law, Movant can prove that U. S. Bank is the holder of the Note by providing the Court with proof of a written assignment of the Note, or by demonstrating that U.S. Bank has physical possession of the Note endorsed over to it. See, eg., LaSalle Bank N.A. v. Lamy, 824 N.Y. S.2d 769, 2006 WL 2251721, at * 1 (N.Y. Sup. Ct. Aug. 7, 2006). The only written assignment presented to the Court is not an assignment of the Note but rather an “Assignment of Mortgage” which contains a vague reference to the Note. Tagged to the end of the provisions which purport to assign the Mortgage, there is language in the Assignment stating “To Have and to Hold the said Mortgage and Note, and also the said property until the said Assignee forever, subject to the terms contained in said Mortgage and Note.” (Assignment of Mortgage (emphasis added)). Not only is the language vague and insufficient to prove an intent to assign the Note, but MERS is not a party to the Note and the record is barren of any representation that MERS, the purported assignee, had any authority to take any action with
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respect to the Note. Therefore, the Court finds that the Assignment of Mortgage is not sufficient to establish an effective assignment of the Note.
By MERS’s own account, it took no part in the assignment of the Note in this case, but merely provided a database which allowed its members to electronically self-report transfers of the Note. MERS does not confirm that the Note was properly transferred or in fact whether anyone including agents of MERS had or have physical possession of the Note. What remains undisputed is that MERS did not have any rights with respect to the Note and other than as described above, MERS played no role in the transfer of the Note.
Absent a showing of a valid assignment of the Note, Movant can demonstrate that U.S. Bank is the holder of the Note if it can show that U.S. Bank has physical possession of the Note endorsed to its name. See In re Mims, 423 B.R. at 56-57. According to the evidence presented in this matter the manner in which the MERS system is structured provides that, “[w]hen the beneficial interest in a loan is sold, the promissory note is [] transferred by an endorsement and delivery from the buyer to the seller [sic], but MERS Members are obligated to update the MERS® System to reflect the change in ownership of the promissory note. . . . ” (MERS Supplemental Memorandum of Law at 6). However, there is nothing in the record to prove that the Note in this case was transferred according to the processes described above other than MERS’s representation that its computer database reflects that the Note was transferred to U. S. Bank. The Court has no evidentiary basis to find that the Note was endorsed to U.S. Bank or that U.S. Bank has physical possession of the Note. Therefore, the Court finds that Movant has not satisfied its burden of showing that U. S. Bank, the party on whose behalf Movant seeks relief from stay, is the holder of the Note.
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Mortgagee status
The Movant’s failure to show that U. S. Bank holds the Note should be fatal to the Movant’s standing. However, even if the Movant could show that U.S. Bank is the holder of the Note, it still would have to establish that it holds the Mortgage in order to prove that it is a secured creditor with standing to bring this Motion before this Court. The Movant urges the Court to adhere to the adage that a mortgage necessarily follows the same path as the note for which it stands as collateral. See Wells Fargo Bank, N.A. v. Perry, 875 N.Y.S.2d 853, 856 (N.Y. Sup. Ct. 2009). In simple terms the Movant relies on the argument that a note and mortgage are inseparable. See Carpenter v. Longan, 83 U.S. 271, 274 (1872). While it is generally true that a mortgage travels a parallel path with its corresponding debt obligation, the parties in this case have adopted a process which by its very terms alters this practice where mortgages are held by MERS as “mortgagee of record.” By MERS’s own account, the Note in this case was transferred among its members, while the Mortgage remained in MERS’s name. MERS admits that the very foundation of its business model as described herein requires that the Note and Mortgage travel on divergent paths. Because the Note and Mortgage did not travel together, Movant must prove not only that it is acting on behalf of a valid assignee of the Note, but also that it is acting on behalf of the valid assignee of the Mortgage.5
5 MERS argues that notes and mortgages processed through the MERS System are never “separated” because beneficial ownership of the notes and mortgages are always held by the same entity. The Court will not address that issue in this Decision, but leaves open the issue as to whether mortgages processed through the MERS system are properly perfected and valid liens. See Carpenter v. Longan, 83 U.S. at 274 (finding that an assignment of the mortgage without the note is a nullity); Landmark Nat’l Bank v. Kesler, 216 P.3d 158, 166-67 (Kan. 2009) (“[I]n the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable”).
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MERS asserts that its right to assign the Mortgage to U.S. Bank in this case, and in what it estimates to be literally millions of other cases, stems from three sources: the Mortgage documents; the MERS membership agreement; and state law. In order to provide some context to this discussion, the Court will begin its analysis with an overview of mortgage and loan processing within the MERS network of lenders as set forth in the record of this case.
In the most common residential lending scenario, there are two parties to a real property mortgage – a mortgagee, i.e., a lender, and a mortgagor, i.e., a borrower. With some nuances and allowances for the needs of modern finance this model has been followed for hundreds of years. The MERS business plan, as envisioned and implemented by lenders and others involved in what has become known as the mortgage finance industry, is based in large part on amending this traditional model and introducing a third party into the equation. MERS is, in fact, neither a borrower nor a lender, but rather purports to be both “mortgagee of record” and a “nominee” for the mortgagee. MERS was created to alleviate problems created by, what was determined by the financial community to be, slow and burdensome recording processes adopted by virtually every state and locality. In effect the MERS system was designed to circumvent these procedures. MERS, as envisioned by its originators, operates as a replacement for our traditional system of public recordation of mortgages.
Caselaw and commentary addressing MERS’s role in the mortgage recording and foreclosure process abound. See Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L. Rev. 1359 (2010). In a 2006 published opinion, the New York Court of Appeals described MERS system as follows:
In 1993, the MERS system was created by several large participants in the real estate mortgage industry to track ownership interests in residential mortgages.
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Mortgage lenders and other entities, known as MERS members, subscribe to the MERS system and pay annual fees for the electronic processing and tracking of ownership and transfers of mortgages. Members contractually agree to appoint MERS to act as their common agent on all mortgages they register in the MERS system.
The initial MERS mortgage is recorded in the County Clerk's office with ‘Mortgage Electronic Registration Systems, Inc.’ named as the lender's nominee or mortgagee of record on the instrument. During the lifetime of the mortgage, the beneficial ownership interest or servicing rights may be transferred among MERS members (MERS assignments), but these assignments are not publicly recorded; instead they are tracked electronically in MERS's private system. In the MERS system, the mortgagor is notified of transfers of servicing rights pursuant to the Truth in Lending Act, but not necessarily of assignments of the beneficial interest in the mortgage.
Merscorp, Inc., v. Romaine, 8 N.Y.3d 90 (N.Y. 2006) (footnotes omitted).
In the words of MERS’s legal counsel, “[t]he essence of MERS’ business is to hold legal title to beneficial interests under mortgages and deeds of trust in the land records. The MERS® System is designed to allow its members, which include originators, lenders, servicers, and investors, to accurately and efficiently track transfers of servicing rights and beneficial ownership.” (MERS Memorandum of Law at 5). The MERS® System “. . . eliminate[s] the need for frequent, recorded assignments of subsequent transfers.” (MERS Supplemental Memorandum of Law at 4). “Prior to MERS, every time a loan secured by a mortgage was sold, the assignee would need to record the assignment to protect the security interest. If a servicing company serviced the loan and the servicing rights were sold, – an event that could occur multiple times during the life of a single mortgage loan – multiple assignments were recorded to ensure that the proper servicer appeared in the land records in the County Clerk’s office.” (MERS Supplemental Memorandum of Law at 4-5).
“When the beneficial interest in a loan is sold, the promissory note is still transferred by
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an endorsement and delivery from the buyer to the seller, but MERS Members are obligated to update the MERS® System to reflect the change in ownership of the promissory note. . . . So long as the sale of the note involves a MERS Member, MERS remains the named mortgagee of record, and continues to act as the mortgagee, as the nominee for the new beneficial owner of the note (and MERS’ Member). The seller of the note does not and need not assign the mortgage because under the terms of that security instrument, MERS remains the holder of title to the mortgage, that is, the mortgagee, as the nominee for the purchaser of the note, who is then the lender’s successor and/or assign.” (MERS Supplemental Memorandum of Law at 6). “At all times during this process, the original mortgage or an assignment of the mortgage to MERS remains of record in the public land records where the security real estate is located, providing notice of MERS’s disclosed role as the agent for the MERS Member lender and the lender’s successors and assigns.” (Declaration of William C. Hultman, ¶9).
MERS asserts that it has authority to act as agent for each and every MERS member which claims ownership of a note and mortgage registered in its system. This authority is based not in the statutes or caselaw, but rather derives from the terms and conditions of a MERS membership agreement. Those terms and conditions provide that “MERS shall serve as mortgagee of record with respect to all such mortgage loans solely as a nominee, in an administrative capacity, for the beneficial owner or owners thereof from time to time.” (Declaration of William C. Hultman, ¶5). MERS “holds the legal title to the mortgage and acts as the agent or nominee for the MERS Member lender, or owner of the mortgage loan.” (Declaration of William C. Hultman, ¶6). According to MERS, it is the “intent of the parties . . . for MERS to serve as the common nominee or agent for MERS Member lenders and their
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successors and assigns.” (MERS Supplemental Memorandum of Law at 19) (emphasis added by the Court). “Because MERS holds the mortgage lien for the lender who may freely transfer its interest in the note, without the need for a recorded assignment document in the land records, MERS holds the mortgage lien for any intended transferee of the note.” (MERS Supplemental Memorandum of Law at 15) (emphasis added by the Court). If a MERS member subsequently assigns the note to a non-MERS member, or if the MERS member which holds the note decides to foreclose, only then is an assignment of the mortgage from MERS to the noteholder documented and recorded in the public land records where the property is located. (Declaration of William C. Hultman, ¶12).
Before commenting on the legal effect of the MERS membership rules or the alleged “common agency” agreement created among MERS members, the Court will review the relevant portions of the documents presented in this case to evaluate whether the documentation, on its face, is sufficient to prove a valid assignment of the Mortgage to U.S. Bank.
The Mortgage
First Franklin is the “Lender” named in the Mortgage. With reference to MERS’s role in the transaction, the Mortgage states:
MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is organized and existing under the laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, MI 48501-2026, tel. (888) 679 MERS. FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.
(Mortgage at 1 (emphasis added by the Court)).
The Mortgage also purports to contain a transfer to MERS of the Borrower’s (i.e., the
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Debtor’s) rights in the subject Property as follows:
BORROWER’S TRANSFER TO LENDER OF RIGHTS IN THE PROPERTY
[The Borrower] mortgage[s], grant[s] and convey[s] the Property to MERS (solely as nominee for Lender and Lender’s successors in interest) and its successors in interest subject to the terms of this Security Instrument. This means that, by signing this Security Instrument, [the Borrower is] giving Lender those rights that are stated in this Security Instrument and also those rights that Applicable Law gives to lenders who hold mortgage on real property. [The Borrower is] giving Lender these rights to protect Lender from possible losses that might result if [the Borrower] fail[s] to [comply with certain obligations under the Security Instrument and accompanying Note.]
[The Borrower] understand[s] and agree[s] that MERS holds only legal title to the rights granted by [the Borrower] in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lenders’s successors and assigns) has the right: (A) to exercise any or all those rights, including, but not limited to, the right to foreclose and sell the Property; and (B) to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.
[The Borrower gives] MERS (solely as nominee for Lender and Lender’s successors in interest), rights in the Property . . .
(Mortgage at 3) (emphasis added).
The Assignment of Mortgage references the Mortgage and defines the “Assignor” as “‘Mers’ Mortgage Electronic Registration Systems, Inc., 2150 North First Street, San Jose, California 95131, as nominee for First Franklin, a division of National City Bank of IN, 2150 North First Street San Jose, California 95153. ” (Emphasis added by the Court). The “Assignee” is U.S. Bank.
Premised on the foregoing documentation, MERS argues that it had full authority to validly execute the Assignment of Mortgage to U.S. Bank on February 1, 2008, and that as of the date the foreclosure proceeding was commenced U. S. Bank held both the Note and the Mortgage. However, without more, this Court finds that MERS’s “nominee” status and the
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rights bestowed upon MERS within the Mortgage itself, are insufficient to empower MERS to effectuate a valid assignment of mortgage.
There are several published New York state trial level decisions holding that the status of “nominee” or “mortgagee of record” bestowed upon MERS in the mortgage documents, by itself, does not empower MERS to effectuate an assignment of the mortgage. These cases hold that MERS may not validly assign a mortgage based on its nominee status, absent some evidence of specific authority to assign the mortgage. See Bank of New York v. Mulligan, No. 29399/07, 2010 WL 3339452, at *7 (N.Y. Sup. Ct. Aug. 25, 2010); One West Bank, F.S.B. v. Drayton, 910 N.Y.S.2d 857, 871 (N.Y. Sup. Ct. 2010); Bank of New York v. Alderazi, 900 N.Y.S.2d 821, 824 (N.Y. Sup. Ct. 2010) (the “party who claims to be the agent of another bears the burden of proving the agency relationship by a preponderance of the evidence”); HSBC Bank USA v. Yeasmin, No. 34142/07, 2010 WL 2089273, at *3 (N.Y. Sup. Ct. May 24, 2010); HSBC Bank USA v. Vasquez, No. 37410/07, 2009 WL 2581672, at *3 (N.Y. Sup. Ct. Aug. 21, 2010); LaSalle Bank N.A. v. Lamy, 824 N.Y.S.2d 769, 2006 WL 2251721, at *2 (N.Y. Sup. Ct. Aug. 7, 2006) (“A nominee of the owner of a note and mortgage may not effectively assign the note and mortgage to another for want of an ownership interest in said note and mortgage by the nominee.”). See also MERS v. Saunders, 2 A.3d 289, 295 (Me. 2010) (“MERS’s only right is to record the mortgage. Its designation as the ‘mortgagee of record’ in the document does not change or expand that right...”). But see US Bank, N.A. v. Flynn, 897 N.Y. S.2d 855 (N.Y. Sup. Ct. 2010) (finding that MERS’s “nominee” status and the mortgage documents give MERS authority to assign); Crum v. LaSalle Bank, N.A., No. 2080110, 2009 WL 2986655, at *3 (Ala. Civ. App., Sept. 18, 2009) (finding MERS validly assigned its and the lender’s rights to
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assignee); Blau v. America’s Servicing Company, et al., No. CV-08-773-PHX-MHM, 2009 WL 3174823, at *8 (D. Ariz. Sept. 29, 2009) (finding that assignee of MERS had standing to foreclose).
In LaSalle Bank, N.A. v. Bouloute, No. 41583/07, 2010 WL 3359552, at *2 (N.Y. Sup. Aug. 26, 2010), the court analyzed the relationship between MERS and the original lender and concluded that a nominee possesses few or no legally enforceable rights beyond those of a principal whom the nominee serves. The court stated:
MERS . . . recorded the subject mortgage as “nominee” for FFFC. The word “nominee” is defined as “[a] person designated to act in place of another, usu. in a very limited way ” or “[a] party who holds bare legal title for the benefit of others.” (Black's Law Dictionary 1076 [8th ed 2004] ). “This definition suggests that a nominee possesses few or no legally enforceable rights beyond those of a principal whom the nominee serves.” (Landmark National Bank v. Kesler, 289 Kan 528, 538 [2009] ). The Supreme Court of Kansas, in Landmark National Bank, 289 Kan at 539, observed that:
The legal status of a nominee, then, depends on the context of the relationship of the nominee to its principal. Various courts have interpreted the relationship of MERS and the lender as an agency relationship. See In re Sheridan, 2009 WL631355, at *4 (Bankr. D. Idaho, March 12, 2009) (MERS “acts not on its own account. Its capacity is representative.”); Mortgage Elec. Registrations Systems, Inc. v. Southwest, 2009 Ark. 152 ----, 301 SW3d 1, 2009 WL 723182 (March 19, 2009) (“MERS, by the terms of the deed of trust, and its own stated purposes, was the lender's agent”); La Salle Nat. Bank v. Lamy, 12 Misc.3d 1191 [A], at *2 [Sup Ct, Suffolk County 2006] ) ... (“A nominee of the owner of a note and mortgage may not effectively assign the note and mortgage to another for want of an ownership interest in said note and mortgage by the nominee.”).
LaSalle Bank, N.A. v. Bouloute, No. 41583/07, 2010 WL 3359552, at *2; see also Bank of New York v. Alderazi, 900 N.Y.S.2d 821, 823 (N.Y. Sup. Ct. 2010) (nominee is “‘[a] person designated to act in place of another, usually in a very limited way.’”) (quoting Black’s Law
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Dictionary)).
In LaSalle Bank, N.A. v. Bouloute the court concluded that MERS must have some evidence of authority to assign the mortgage in order for an assignment of a mortgage by MERS to be effective. Evidence of MERS’s authority to assign could be by way of a power of attorney or some other document executed by the original lender. See Bouloute, 2010 WL 3359552, at *1; Alderazi, 900 N.Y.S.2d at 823 (“‘To have a proper assignment of a mortgage by an authorized agent, a power of attorney is necessary to demonstrate how the agent is vested with the authority to assign the mortgage.’”) (quoting HSBC Bank USA, NA v. Yeasmin, 866 N.Y. S.2d 92 (N.Y. Sup. Ct. 2008)).
Other than naming MERS as “nominee”, the Mortgage also provides that the Borrower transfers legal title to the subject property to MERS, as the Lender’s nominee, and acknowledges MERS’s rights to exercise certain of the Lender’s rights under state law. This too, is insufficient to bestow any authority upon MERS to assign the mortgage. In Bank of New York v. Alderazi, the court found “[t]he fact that the borrower acknowledged and consented to MERS acting as nominee of the lender has no bearing on what specific powers and authority the lender granted MERS. ” Alderazi, 900 N.Y.S.2d at 824. Even if it did bestow some authority upon MERS, the court in Alderazi found that the mortgage did not convey the specific right to assign the mortgage.
The Court agrees with the reasoning and the analysis in Bouloute and Alderazi, and the other cases cited herein and finds that the Mortgage, by naming MERS a “nominee,” and/or “mortgagee of record” did not bestow authority upon MERS to assign the Mortgage.
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The MERS membership rules
According to MERS, in addition to the alleged authority granted to it in the Mortgage itself, the documentation of the Assignment of Mortgage comports with all the legal requirements of agency when read in conjunction with the overall MERS System. MERS’s argument requires that this Court disregard the specific words of the Assignment of Mortgage or, at the very least, interpret the Assignment in light of the overall MERS System of tracking the beneficial interests in mortgage securities. MERS urges the Court to look beyond the four corners of the Mortgage and take into consideration the agency relationship created by the agreements entered into by the lenders participating in the MERS System, including their agreement to be bound by the terms and conditions of membership.
MERS has asserted that each of its member/lenders agrees to appoint MERS to act as its agent. In this particular case, the Treasurer of MERS, William C. Hultman, declared under penalty of perjury that “pursuant to the MERS’s Rules of Membership, Rule 2, Section 5. . . First Franklin appointed MERS to act as its agent to hold the Mortgage as nominee on First Franklin’s behalf, and on behalf of First Franklin’s successors and assigns.” (Affirmation of William C. Hultman, ¶7). However, Section 5 of Rule 2, which was attached to the Hultman Affirmation as an exhibit, contains no explicit reference to the creation of an agency or nominee relationship. Consistent with this failure to explicitly refer to the creation of an agency agreement, the rules of membership do not grant any clear authority to MERS to take any action with respect to the mortgages held by MERS members, including but not limited to executing assignments. The rules of membership do require that MERS members name MERS as “mortgagee of record” and that MERS appears in the public land records as such. Section 6 of Rule 2 states that “MERS
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shall at all times comply with the instructions of the holder of mortgage loan promissory notes, but this does not confer any specific power or authority to MERS.
State law
Under New York agency laws, an agency relationship can be created by a “manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and the consent by the other to act. ” Meisel v. Grunberg, 651 F.Supp.2d 98, 110 (S.D.N.Y. 2009) (citing N.Y. Marine & Gen. Ins. Co. v. Tradeline, L.L.C., 266 F.3d 112, 122 (2d Cir.2001)).
‘Such authority to act for a principal may be actual or apparent.’ . . . Actual authority arises from a direct manifestation of consent from the principal to the agent The existence of actual authority ‘depends upon the actual interaction between the putative principal and agent, not on any perception a third party may have of the relationship.’
Meisel v. Grunberg, 651 F. Supp.2d at 110 (citations omitted).
Because MERS’s members, the beneficial noteholders, purported to bestow upon MERS interests in real property sufficient to authorize the assignments of mortgage, the alleged agency relationship must be committed to writing by application of the statute of frauds. Section 5- 703(2) of the New York General Obligations Law states that:
An estate or interest in real property, other than a lease for a term not exceeding one year, or any trust or power, over or concerning real property, or in any manner relating thereto, cannot be created, granted, assigned, surrendered or declared, unless by act or operation of law, or by a deed or conveyance in writing, subscribed by the person creating, granting, assigning, surrendering or declaring the same, or by his lawful agent, thereunto authorized by writing.
See N.Y. Gen. Oblig. Law § 5-703(1) (McKinney 2011); Republic of Benin v. Mezei, No. 06 Civ.
870 (JGK), 2010 WL 3564270, at *3 (S.D.N.Y. Sept. 9, 2010); Urgo v. Patel, 746 N.Y.S.2d 733
Page 33 of 37
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(N.Y. App. Div. 2002) (finding that unwritten apparent authority is insufficient to satisfy the statute of frauds) (citing Diocese of Buffalo v. McCarthy, 91 A.D.2d 1210 (4th Dept. 1983)); see also N.Y. Gen. Oblig. Law § 5-1501 (McKinney 2011) (“‘agent’ means a person granted authority to act as attorney-in-fact for the principal under a power of attorney. . .”). MERS asks this Court to liberally interpret the laws of agency and find that an agency agreement may take any form “desired by the parties concerned.” However, this does not free MERS from the constraints of applicable agency laws.
The Court finds that the record of this case is insufficient to prove that an agency relationship exists under the laws of the state of New York between MERS and its members. 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 example, MERS argues that its agent status can be found in the Mortgage which states that MERS is a “nominee” and a “mortgagee of record.” However, the fact that MERS is named “nominee” in the Mortgage is not dispositive of the existence of an agency relationship and does not, in and of itself, give MERS any “authority to act. ” See Steinbeck v. Steinbeck Heritage Foundation, No. 09-18360cv, 2010 WL 3995982, at *2 (2d Cir. Oct. 13, 2010) (finding that use of the words “attorney in fact” in documents can constitute evidence of agency but finding that such labels are not dispositive); MERS v. Saunders, 2 A.3d 289, 295 (Me. 2010) (designation as the ‘mortgagee of record’ does not qualify MERS as a “mortgagee”). MERS also relies on its rules of membership as evidence
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of the agency relationship. However, the rules lack any specific mention of an agency relationship, and do not bestow upon MERS any authority to act. Rather, the rules are ambiguous as to MERS’s authority to take affirmative actions with respect to mortgages registered on its system.
In addition to casting itself as nominee/agent, MERS seems to argue that its role as “mortgagee of record” gives it the rights of a mortgagee in its own right. MERS relies on the definition of “mortgagee” in the New York Real Property Actions and Proceedings Law Section 1921 which states that a “mortgagee” when used in the context of Section 1921, means the “current holder of the mortgage of record . . . or their agents, successors or assigns.” N.Y. Real Prop. Acts. L. § 1921 (McKinney 2011). The provisions of Section 1921 relate solely to the discharge of mortgages and the Court will not apply that definition beyond the provisions of that section in order to find that MERS is a “mortgagee” with full authority to perform the duties of mortgagee in its own right. Aside from the inappropriate reliance upon the statutory definition of “mortgagee,” MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.
Adding to this absurdity, it is notable in this case that the Assignment of Mortgage was by MERS, as nominee for First Franklin, the original lender. By the Movant’s and MERS’s own admission, at the time the assignment was effectuated, First Franklin no longer held any interest in the Note. Both the Movant and MERS have represented to the Court that subsequent to the origination of the loan, the Note was assigned, through the MERS tracking system, from First Franklin to Aurora, and then from Aurora to U.S. Bank. Accordingly, at the time that MERS, as nominee of First Franklin, assigned the interest in the Mortgage to U.S. Bank, U.S.
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Bank allegedly already held the Note and it was at U.S. Bank’s direction, not First Franklin’s, that the Mortgage was assigned to U.S. Bank. Said another way, when MERS assigned the Mortgage to U.S. Bank on First Franklin’s behalf, it took its direction from U.S. Bank, not First Franklin, to provide documentation of an assignment from an entity that no longer had any rights to the Note or the Mortgage. The documentation provided to the Court in this case (and the Court has no reason to believe that any further documentation exists), is stunningly inconsistent with what the parties define as the facts of this case.
However, even if MERS had assigned the Mortgage acting on behalf of the entity which held the Note at the time of the assignment, this Court finds that MERS did not have authority, as “nominee” or agent, to assign the Mortgage absent a showing that it was given specific written directions by its principal.
This Court finds that MERS’s theory that it can act as a “common agent” for undisclosed principals is not support by the law. The relationship between MERS and its lenders and its distortion of its alleged “nominee” status was appropriately described by the Supreme Court of Kansas as follows: “The parties appear to have defined the word [nominee] in much the same way that the blind men of Indian legend described an elephant – their description depended on which part they were touching at any given time.” Landmark Nat’l Bank v. Kesler, 216 P.3d 158, 166-67 (Kan. 2010).
Conclusion
For all of the foregoing reasons, the Court finds that the Motion in this case should be granted. However, in all future cases which involve MERS, the moving party must show that it
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validly holds both the mortgage and the underlying note in order to prove standing before this Court.
Dated: Central Islip, New York
February 10, 2011 /s/ Robert E. Grossman Hon. Robert E. Grossman
United States Bankruptcy Judge
Page 37 of 37
& & &
NICHOLSON CASE
Case 1:10-cv-00795-JEC Document 13 Filed 04/20/10 Page 1 of 19
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
BARBARA ANN NICHOLSON,
Plaintiff, CIVIL ACTION FILE NO. 1:10-CV-0795-JEC/AJB v.
ONEWEST BANK, Defendant.
ORDER FOR SERVICE OF
REPORT AND RECOMMENDATION
Attached is the Report and Recommendation of the United States Magistrate Judge made in accordance
with 28 U.S.C. § 636(b)(1), FED. R. Civ. P. 72(b), N.D. Ga. R. 72.1(B), (D), and Standing Order
08-01 (N.D. Ga. June 12, 2008). Let the same be filed and a copy, with a copy of this order, be
served upon counsel for the parties or, if a party is not represented, upon that party directly.
Pursuant to 28 U.S.C. § 636(b)(1), each party may file written objections, if any, to the Report
and Recommendation within fourteen (14) days of service of this Order. However, at the hearing on
Plaintiff's motion for a TRO, the Court indicated that due to the impending foreclosure sale, the
Court would shorten the time for objections to be filed. Although the parties did not expressly
consent to this
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statement, compare United States v. Nuyens, 17 F. Supp. 2d 1303, 1311
(M.D. Fla. 1998) (where parties agreed to a shortened period of time to file
objections to the R&R), THE PARTIES SHALL HAVE UNTIL 5:00 PM ON
APRIL 28, 2010, IN WHICH TO FILE OBJECTIONS, SO THAT THE
DISTRICT COURT MAY HAVE SUFFICIENT TIME TO RULE ON ANY OBJECTIONS. Should objections be filed, they
shall specify with particularity the alleged error(s) made (including reference by page number to
any transcripts if applicable) and shall be served upon the opposing party. The party filing
objections will be responsible for obtaining and filing the transcript of any evidentiary hearing
for review by the District Court. If no objections are filed, the Report and Recommendation may be
adopted as the opinion and order of the District Court and any appellate review of factual findings
will be limited to a plain error review. United States v. Slay, 714 F.2d 1093 (11th Cir. 1983).
The Clerk is directed to submit the Report and Recommendation with objections, if any, to the
District Court after expiration of the above time period.
IT IS SO ORDERED and DIRECTED, this 20th day of April , 2010.
ALAN J. BAV r AN
UNITED STA ES MAGISTRATE JUDGE
2
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Case 1:10-cv-00795-JEC Document 13 Filed 04/20/10 Page 3 of 19
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
BARBARA ANN NICHOLSON,
Plaintiff, CIVIL ACTION FILE NO.
v. 1:10-CV-0795-JEC/AJB
ONEWEST BANK,
Defendant.
UNITED STATES MAGISTRATE JUDGE'S
ORDER AND NON-FINAL REPORT AND RECOMMENDATION
Before the Court are Plaintiffs Motion and Amended Motion for Temporary Restraining Order and
Motion for Preliminary Injunction, [Docs. 6 and 7], and Motion to Allow Filing of Affidavit. [Doc.
8]. For the reasons discussed below, the Court RECOMMENDS that Plaintiffs motion and amended motion
for a temporary restraining order be DENIED. Plaintiffs motion to allow filing of affidavit is
GRANTED.
Introduction
On March 19, 2010, Plaintiff filed, inter alia, a motion for temporary restraining order ("TRO") in
the above-captioned case to prevent Defendant from foreclosing on her property located at 1879
Tobey Road, Atlanta, Ga. 30341 ("the Tobey Road
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property"), on May 4, 2010. [Doc. 4]. Thereafter, Plaintiff withdrew her motion for a TRO. [Doc.
5]. Approximately ten days later, on April 6, 2010, Plaintiff filed a motion for a TRO and
preliminary injunction, which she amended on April 13, 2010. [Does. 6 and 7]. Also on April 13,
2010, Plaintiff filed a Motion to Allow for the Filing of an Affidavit. [Doc. 8]. The Court
scheduled a hearing on Plaintiff's motion for a TRO for April 19, 2010. [Doc. 10]. It does not
appear that Defendant has been served in the present action. [See Dkt.]. The Court notified counsel
for the Defendant of the April 19 hearing. [Doc. 10].
Discussion
A. Plaintiff's Motion to Allow Filing of Affidavit, [Doc. 8]
Plaintiff argues that she should be allowed to file an her affidavit which supports her motion for
a TRO. [Doc. 8 at 2]. The affidavit Plaintiff wishes to submit states that she is over the age of
18 that she verifies that the facts presented in her motion for a TRO are true and correct to the
best of her knowledge. [Doc.8-21. Plaintiff's motion is GRANTED. The Clerk is DIRECTED to file
Plaintiff's affidavit in support of her motion for a TRO, [Doc. 8-2], as a separate document in
this case.
All document and page references are to the CM/ECF document and page numbers appearing at the
header of each page as filed with the Clerk's Office.
2
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B. Motion and Amended Motion for a TRO, [Does. 6 and 7]
1. Contentions of the parties
Plaintiff argues that Defendant OneWest Bank ("OneWest") is not entitled to foreclose on her
property because there has been no assignment of the original note from American Mortgage Express
Corporation ("American Mortgage") to any other party. [Doc. 7 at 2-3]. Plaintiff does acknowledge
that Mortgage Electronic Registration Systems, Inc ("MERS") "purported" to make an assignment of
the security deed to IndyMac Federal Bank FSB, but argues that there is no other transfer of
record. [Id. at 3]. Second, Plaintiff argues that the splitting of the mortgage and the note
rendered the mortgage a nullity. [Id. at 4-8]. Third, Plaintiff argues that she is entitled to a
TRO because there is a substantial likelihood that she will prevail on the merits and that because
the property is unique, she will be irreparably damaged if the foreclosure occurs. [Id. at 10].
In addition, at the TRO hearing, Plaintiff argued that the FDIC did not assign the security deed to
OneWest until March 16, 2010, and therefore any notice of foreclosure received before that date was
in violation of O.C.G.A. § 44-14-162.2. Finally, Plaintiff argued that Fannie Mae's website shows
that it is the true holder of the note, and therefore, Defendant cannot foreclose on Plaintiff's
property.
3
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At the hearing, Defendant responded that a TRO should not issue because Plaintiff has put forth no
security and never tendered the money to bring the note current. Defendant also argued that
O.C.G.A. § 44-14-162(b) does not require the assignment of the note to be conveyed at the time of
the notice of the sale, but merely when the sale occurs. Next, Defendant argued that Plaintiff was
collaterally estopped from attacking its right to foreclose because Plaintiff did not object to the
Bankruptcy Court modifying the automatic stay to allow Defendant to foreclose on the property.
Finally, Defendant argued its documents show that the note and the mortgage are both held by
OneWest, and therefore, it is entitled to foreclose on Plaintiff's property.
2. Standard for granting injunctive relief
A plaintiff seeking a temporary restraining order under FED. R. Civ. P. 65(b) must establish: "(1)
a substantial likelihood of success on the merits; (2) that irreparable injury will be suffered if
relief is not granted; (3) that the threatened injury outweighs any harm relief would inflict on
the non-movant; and (4) that entry of relief would serve the public interest." Schiavo ex rel.
Schindler v. Schiavo, 403 F.3d 1223,1225-26 (11' Cir. 2005). The same factors are considered
whether deciding a temporary restraining order or a preliminary injunction. Schiavo, 403 F.3d at
1225. Preliminary injunctive relief is a drastic and extraordinary remedy which should not be
granted
4
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unless the movant can clearly establish each of the four elements. Four Seasons Hotels and Resorts
v. Consorcio Barr, S.A., 320 F.3d 1205, 1210 (11' Cir. 2003); see also Suntrust Bank v. Houghton
Mifflin Co., 252 F.3d 1165, 1166 (11th Cir. 2001).
3. Discussion
As Plaintiff conceded at the hearing, her FDCPA claim affords her no right to injunctive relief.
Sibley v. Fulton DeKalb Collection Serv., 677 F.2d 830, 834 (11th Cir. 1982) (holding that
"equitable relief is not available to an individual under the civil liability section of the
[FDCPA]"). Accordingly, Plaintiff is entitled to a TRO, if at all, on her state law claim of
attempted wrongful foreclosure. See Sale City Peanut & Mill. Co. v. Planters & Citizens Bank, 130
S.E.2d 518, 520, 107 Ga. App. 463, 465 (1963) (recognizing attempted foreclosure cause of action).
Although no Georgia cases explicitly set out the elements of an attempted wrongful foreclosure, and
Plaintiff has not illuminated the Court as to what those elements are, Georgia law requires a
plaintiff asserting a claim of wrongful foreclosure to establish a legal duty owed to it by the
foreclosing party, a breach of that duty, a causal connection between the breach of that duty and
the injury it sustained, and damages. All Fleet Refinishing, Inc. v. West Georgia Nat. Bank, 634
S.E.2d 802, 807, 280 Ga. App. 676, 681 (2006); Heritage Creek Dev. Corp. v. Colonial Bank,
5
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601 S.E.2d 842, 844, 268 Ga. App. 369, 371 & n.4 (2004) (citing Calhoun First Nat. Bank v. Dickens,
443 S.E.2d 837, 264 Ga. 285, 286 (1994)). " 'A claim for wrongful exercise of a power of sale under
O.C.G.A. § 23-2-114 can arise when the creditor has no legal right to foreclose.' " DeGoyler v.
Green Tree Servicing, LLC, 662 S.E.2d 141, 147, 291 Ga. App. 444, 448 (2008) (quoting Brown v.
Freedman, 474 S.E.2d 73, 222 Ga. App. 213, 214 (1996)). The Court therefore assumes that a party
states a claim of attempted wrongful foreclosure under Georgia law where a creditor attempts to
foreclose when it has no legal right to foreclose.
The gist of Plaintiffs argument in favor of enjoining the scheduled foreclosure is that OneWest is
not the holder of the note originally executed by her in favor of American Mortgage and is not owed
any money by Plaintiff Therefore, she argues, OneWest's attempted foreclosure is unlawful.
The Court rejects Plaintiffs arguments. The evidence before the Court demonstrates that on February
23, 2007, Plaintiff granted American Mortgage a security deed ("the Security Deed") in the Tobey
Road property in order to secure an interest-only period fixed rate note in the amount of $172,000
("the Note"). (Security Deed attached to Doc. 1-2 at 7-16; Note attached at Doc. 9-3 at 5-6). The
Security Deed secured to the lender (American Mortgage) the repayment of the Note and the
6
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performance of all of the borrower's (Nicholson's) covenants and agreements under the Security
Deed. Security Deed in Doc. 1-2 at 8. Under the Security Deed, Nicholson "grant[ed] and convey[ed]
to MERS (solely as nominee of Lender and Lender's successors and assigns) and the successors and
assigns of MERS, with power of sale," the Tobey Road property. Id. On May 13, 2009, MERS, in a
document entitled "Assignment of Note and Security Deed," conveyed to IndyMac Federal Bank FSB
("IndyMac") the Security Deed and the Note. [See Doc. 1-2 at 20-21]
On March 16, 2010, the FDIC, as receiver for IndyMac,2 in an Assignment of Security Deed, assigned
to OneWest
that certain Security Deed or Deed to Secure Debt executed by Barbara A. Nicholson to Mortgage
Electronic Registration Systems, Inc. and dated February 23, 2007, . . . together with the real
property therein described; and also the indebtedness described in said Deed and secured thereby,
having this day been transferred and assigned to the said assignee together with all of the
Assignor's right, title and interest in and to the said Deed, the property therein described and
the indebtedness secured; . . . .
2 On July 11, 2008, IndyMac was closed by the Office of Thrift Supervision (OTS) and the FDIC was
named Conservator. On March 19, 2009, the FDIC completed the sale of IndyMac to OneWest, a newly
formed federal savings
bank organized by IMB HoldCo LLC. All deposits of IndyMac
were transferred to OneWest. FDIC Failed Bank Information,
http://www.fdic.gov/bank/individual/failed/IndyMac.html (last visited Apr. 20, 2010).
7
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[Doc. 9-3 at 11-12 (emphasis supplied)]. The instrument was filed in the DeKalb County Superior
Court Clerk's Office on March 29, 2010. [Id at 9]. This document demonstrates strong evidence that
OneWest holds both the Security Deed under which it may exercise the power of sale and the Note
which Plaintiff does not contest that she has not paid and is in default. See p. 13 infra.
Plaintiff makes two arguments why this instrument does not grant OneWest the right to foreclose on
her property. First, she argues that Fannie Mae actually is the holder of the note because its
website, under the heading "Does Fannie Mae Own Your Mortgage?" indicates "Match Found" as to
Plaintiff's residence. [See Doc. 9-2]. Even assuming that the printout from Fannie Mae's website is
admissible, the Court concludes that such evidence does not meet Plaintiff's high burden of
persuasion in establishing her entitlement to immediate injunctive relief While the printout does
show that Fannie Mae may at one time have had some sort of interest in Plaintiff's mortgage, the
information on the website also states as follows:
The Fannie Mae Loan Lookup is provided as a convenience for borrowers. Fannie Mae makes no
representation or completeness of the results. . . You should contact your mortgage lender to
verify these results.
[Id. (emphasis added)]. Therefore, such evidence is insufficient to overcome
Defendant's showing that it holds both the note and security deed to Plaintiff's
8
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Case 1:10-cv-00795-JEC Document 13 Filed 04/20/10 Page 11 of 19
property, which has been recorded in the Superior Court of DeKalb County, [Doc. 9-3], and is
therefore entitled to proceed with the May 4 foreclosure sale.
Second, Plaintiff contends that the "splitting" of the mortgage and the note rendered the mortgage
a nullity. In her brief, Plaintiff argues that the mortgage and the note are inseparable and must
be transferred together. Essentially, Plaintiff is arguing that American Mortgage rendered
Plaintiff's mortgage unenforceable when it initially transferred the security deed, but not the
mortgage to MERS. However, the nominee of the lender has the ability to foreclose on a debtor's
property even if such nominee does not have a beneficial interest in the note secured by the
mortgage. Morgera v. Countrywide Home Loans, Inc, No. 2:09-cv-1476-MCE-GGH, 2010 WL 160348, *8
(E.D. Cal. Jan 11, 2010) (citing Trent v. Mortgage Elec. Registration Sys., Inc., 288 Fed. Appx.
571 (11`'' Cir. 2008)). Here, assuming that the Security Deed and the Note were separated initially
when American Mortgage transferred the Security Deed to MERS, Defendant now retains possession of
both instruments. [Doc. 9-3 at 9-10].3'4
3 In fact, it appears it appears that MERS was the holder of both the security deed and the note
when it assigned both to IndyMac. [Doc. 9-3 at 11].
4 Also, it appears from the hearing that OneWest, through its counsel, holds the Note. The Note is
a bearer obligation. [See Doc. 9-3 at 5].
9
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Thus, to the extent there was any problem regarding the separation of the Security Deed from the
Note, such defect has been cured by Defendant.'
Therefore, the Court finds that OneWest is lawfully entitled to foreclose on Plaintiff's property.
That is the sole argument Plaintiff makes in support of her claim that OneWest's scheduled
foreclosure is contrary to law. Since she has not
5 The Court notes that the case law cited by Plaintiff to support her position that the splitting
of the security deed and the note rendered the security deed a nullity are inapplicable to the
present case. First, the Court notes that Plaintiff has merely listed a long list of string
citations without any explanation as to why these cases are applicable to the present case. Second,
although not obligated to do so, the Court's review of these cases shows that Carpenter v. Logan,
83 U.S. 271 (1872), concerns a loan that had not yet matured and not a home mortgage in default as
in the present case.
Next, In re Vargas, 396 B.R. 511 (Bankr. C.D. Cal. 2008); In re Leisure Time Sports, Inc., 194 B.R.
859 (9th Cir. 1996); Merritt v. Bartholick, 36 N.Y. 44 (1867); Honore v. Wilshire, 1884 WL 9777
(Ill. 1884); Ellison v. Daniels, 11 N.H. 274 (1840); Pope & Slocum v. Jacobus, 10 Iowa 262 (1859);
Hough v. Osborne, 7 Ind. 140 (1855); U.S. Bank N.A. v. Collymore, 890 N.Y.S.2d. 578 (N.Y.A.D. 2009);
Northstream Investments Inc. V. 1804 Country Store Co., 697 N.W. 2d 762 (S.D. 2005); Andrews v.
Commissioner ofInternal Revenue, 38 F.2d 55 (2d Cir. 1930); In re Brager, 39 B.R. 441 (Bankr. Pa.
1984); Bellistri v. Ocwen Loan Servicing LLC, 284 S.W.3d 619 (Mo. App. 2009); Landmark Nat. Bank v.
Kesler, 289 Kan. 528, 216 P.3d 158 (2009); In re Wilhelm, 407 B.R. 392 (Bankr. D. Idaho 2009);
Jackson v. MERS, 770 N.W.2d 487 (Minn. 2009); Columbus Investments v. Lewis, 48 P.3d 1222 (Colo.
2002); In re Bird, No, 03-52010-JS, 2007 WL 26284265 (Bankr. D. Md. Sept. 7, 2007); Prime Financial
Services, LLC v. Vinson, 761 N.W.2d 694 (Mich. App. 2008); and UMLIC VP, LLC v. Matthias, 234 F.
Supp. 2d 520 (D.V.I. 2002), all concern questions of state law in other jurisdictions besides
Georgia. The D.B. Steeman, 48 F. 580 (E.D. Va. 1880), concerns whether there was a maritime lien on
a shipping vessel. As a result the Court fails to see the relevance or these cases to the present
controversy.
10
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demonstrated that OneWest is not entitled to foreclose, she has not clearly shown a substantial
likelihood of success on the merits, and therefore is not entitled to injunctive relief.'
Similarly, Plaintiff has not made the requisite showing as to the other factors for entry of a TRO.
The Court is not unmindful that the impending loss of Plaintiff's home is a serious injury, and
that once it is foreclosed upon, there is a strong likelihood that Plaintiff will be dispossessed.
In the event the Court is wrong in its conclusions, the "bell cannot be unrung." However, the Court
finds that her potential injury under these circumstances does not constitute irreparable injury,
because Plaintiff has not been paying the amount due on her mortgage to anyone, whether it be
Fannie Mae (which she contends is the rightful creditor) or OneWest. See p. 13 infra. She has not
protected herself by tendering the amount in default to the Clerk of Court. Therefore, any injury
she suffers, if she ultimately were to prevail on her contention that OneWest is not the proper
party to foreclose upon her residence, can adequately be compensated with damages for being
dispossessed from a home in which she has in effect been
6 To the extent that Plaintiff argues that OneWest could not seek to foreclose prior to receiving
the assignment on March 16, 2010, and filing it on March 29, 2010, none of her papers or arguments
at the hearing reflects if OneWest advertised the foreclosure or gave notice to her of the
impending sale in violation of O.C.G.A. § 4414-162.2.
11
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living rent-free. See eBay v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006) (holding that in order
to warrant injunctive relief, a party must show that remedies available at law, such as monetary
damages, are inadequate to compensate for that injury). As a result, any threatened injury does not
outweigh any harm relief would inflict on OneWest, since it has the right to foreclose on the
property under the Security Deed and the payments under the Note according to the documents on file
with the DeKalb County Superior Court Clerk. Finally, Plaintiff has not made any argument, much
less presented any evidence, admissible on a merits hearing or otherwise, that entry ofrelief would
serve the public interest. To the extent that she argues that there are many properties where the
financial institution is not entitled to foreclose since it does not possess the note underlying
the security deed, Plaintiff's has made an inadequate evidentiary showing to support such a
contention.
The Court also concludes that three other grounds cast serious doubt on the Plaintiff's ability to
contest the scheduled foreclosure in this case. First, Plaintiff cannot enjoin the upcoming May
foreclosure sale because she has not paid the full amount due to bring the Note current. Under
Georgia law, "[a] borrower who has executed a deed to secure debt is not entitled to enjoin a
foreclosure sale unless he first pays or tenders to the lender the amount admittedly due." Mickel
v. Pickett, 247 S.E.2d
12
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82, 87, 241 Ga. 528, 535 (1978) (citing Cochran v. Teasley, 236 S.E.2d 635, 239 Ga. 289 (1977));
see also Taylor v. Wachovia Mortgage Corp., Civil Action File No. 1:07- CV-2671-TWT, 2009 WL 249353,
*5 n.6 (N.D. Ga. Jan. 30, 2009) (Thrash, J., adopting R&R of Vineyard, M.J.). According to
Defendant, Plaintiff owes approximately $29,450.00 to bring her loan current. Plaintiff does not
dispute that she owes this amount and that she has not been making her payments. Instead, she
argues that no money is due to OneWest because it does not hold the Note. Because Plaintiff admits
that she has not tendered the money to bring her loan current, she cannot enjoin Defendant from
foreclosing on her property.
Second, Plaintiff is prevented from contesting the foreclosure proceeding due to collateral
estoppel. The doctrine of collateral estoppel applies under federal law if the following four
factors are met:
(1) the issue at stake must be identical to the one involved in the prior litigation; (2) the issue
must have been actually litigated in the prior suit; (3) the determination of the issue in the
prior litigation must have been a critical and necessary part of the judgment in that action; and
(4) the party against whom the earlier decision is asserted must have had a full and fair
opportunity to litigate the issue in the earlier proceeding.
In re Bush, 232 Fed. Appx. 852, 855 (11th Cir. 2007) (citing CSX Transp., Inc. v. Bhd.
of Maint. of Way Employees, 327 F.3d 1309, 1317 (11th Cir. 2003) (citation and
13
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Case 1:10-cv-00795-JEC Document 13 Filed 04/20/10 Page 16 of 19
quotation marks omitted)). These criteria are met in the present case because the same parties are
involved and the same issue was before the Bankruptcy Court when that Court was determining whether
to lift the automatic stay to allow the foreclosure to proceed. Here, the Bankruptcy Court provided
relief from the automatic stay specifically to allow Defendant to proceed with the foreclosure.
[See Doc. 22 in In re Nicholson, No. 09-89061 (Bankr. N.D. Ga. Jan. 28, 2010)]. Plaintiff did not
object to the relief sought. [Id.].
Instead, Plaintiff now argues that the Court should not find that she is estopped from contesting
OneWest's foreclosure because she did not have all of the facts that would have allowed her to
object to the lifting of the automatic stay. Specifically, Plaintiff argues that she was unaware
that Fannie Mae owned Plaintiff's loan. The Court finds such arguments to be without merit.
Plaintiff has failed to come forward with any reason as to why (1) she could not have raised this
argument in the Bankruptcy Court, and (2) this issue was not fully litigated there. Plaintiff
admitted at the hearing before the undersigned that during the pendency of her bankruptcy petition,
there were various issues as to who held the Note. Since Plaintiff was aware of her contentions
that OneWest allegedly was not actual Note holder at the time the automatic stay was lifted, her
arguments that Defendant is the improper party to
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proceed with the foreclosure should have been made before the Bankruptcy Court. The Bankruptcy
Court's Order was not a generic one merely allowing Plaintiffs residence to be foreclosed upon; it
specifically granted OneWest the right to "to proceed to obtain possession and foreclose the
Property." [Id. at 1]. Thus, Plaintiff is estopped from seeking to enjoin the foreclosure in this
Court.'
7 Following the hearing, Plaintiff submitted a brief in which she argued that there was no
preclusive effect as a result of an order of a stay from bankruptcy. [Doc. 11 at 1]. The Court
finds the cases cited by Plaintiff to be distinguishable from the present case. In Grella v. Salem
Five Cent Saving Bank, 4 F.3d 26 (1St Cir. 1994), the issue before the court did not involve the
Trustee's counterclaims when bankruptcy court decided to lift the automatic stay. Thus, there was
no preclusive effect on these claims as a result of the automatic stay being lifted. Id. at 35. In
the present case, the same cannot be said as the automatic stay was specifically lifted in order
for OneWest to go forward with a foreclosure sale. Therefore, Plaintiff should have raised her
arguments about Plaintiff being the improper party to proceed with the foreclosure sale at the
hearing to lift the automatic stay.
The Court also finds that D-1 Enterprises, Inc. v. Commercial State Bank, 864 F.2d 36 (5th Cir.
1989); In re Torco Equipment Co., 65 B.R. 353 (Bankr. W.D. Ky. 1986); In re Suggs, 377 B.R. 198
(Bankr. Mo. 2007); In re Ken Carpenter RV, Inc., 177 B.R. 754 (Bankr. D. N.H. 1995); and In re
Hurst, 409 B.R. 79 (Bankr. D. Md. 2009), are inapplicable to the present case for the same reasons,
i.e. the hearing on the automatic stay concerned matters unrelated to the lifting if the automatic
stay.
Finally, the Court concludes that In re Martin, No. 05-14587, 2006 WL 3086361 (Bankr. E.D. Va. Jan.
18, 2006), is distinguishable from the present case because a third party was asserting defenses to
the foreclosure. Because neither the debtor nor the bankruptcy estate had an interest in the
property, the bankruptcy court determined that relief from the automatic stay was appropriate. Id.
at *2. Here, such is not the case as Plaintiff does have an interest in the property and the stay
was lifted in order for the
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Case 1:10-cv-00795-JEC Document 13 Filed 04/20/10 Page 18 of 19
Finally, under FED. R. CIV. P. 65, the Court may not issue a preliminary injunction or a TRO unless
"the movant gives security in an amount that the court considers proper to pay the costs and
damages sustained by any party found to have been wrongfully enjoined or restrained." FED. R. Civ.
P. 65(c). Here, Plaintiff has not offered to tender any amount as security for an injunction.
Instead, she argues that the Court may elect not to set a bond at all, citing Corrigan Dispatch Co.
v. Casa Guzman, 569 F.2d 300 (5th Cir. 1978), and City of Atltanta v. MARTA, 636 F.2d 1084 (5th
Cir. 1981). Although the cases cited by Plaintiff do state that a court, in its discretion, may
elect to require no security at all before issuing a TRO, Plaintiff has failed to come forward with
any evidence to show why security is unnecessary, or what the appropriate amount of security is,
since in the present case TRO Plaintiff seeks does not seek to protect the public interest, as, for
example, in City of Atlanta, 636 F.2d 1084.
As a result, the Court concludes that Plaintiff has failed to meet the requirements for the
issuance of a TRO in this matter.
Conclusion
For the reasons discussed above, the undersigned RECOMMENDS that Plaintiff's Motion and Amended Motion For A Temporary Restraining Order,
foreclosure to proceed.
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AO 72A (Rev.8/8 2)
Case 1:10-cv-00795-JEC Document 13 Filed 04/20/10 Page 19 of 19
[Docs. 6 and 7], be DENIED. Plaintiff's Motion to Allow Filing of Affidavit, [Doc. 8], is GRANTED.
To the extent counsel for Defendant has not entered his appearance, the Clerk is DIRECTED to serve
a copy of this Order on counsel for Defendant whose name and address is:
John D. Andrle
McCurdy & Candler, LLC
Suite 600
250 E. Ponce De Leon Avenue
Decatur, Georgia 30030
IT IS SO RECOMMENDED, ORDERED, and DIRECTED, this the 20th day of April, 2010.
ALAN J. B VERMAN
UNITED STATES MAGISTRATE JUDGE
17
AO 72A (Rev.8/8 2)
& & &
LANDMARK NATIONAL BANK CASE
216 P.3d 158 (Kan. 2009)
LANDMARK NATIONAL BANK, Plaintiff/Appellee,
v.
Boyd A. KESLER Appellee/Cross-appellant
Millennia Mortgage Corporation, Defendant,
(Mortgage Electronic Registration Systems, Inc. and Sovereign Bank), Appellants/Cross-appellees,
and
Dennis Bristow and Tony Woydziak, Intervenors/Appellees.
No. 98,489.
Supreme Court of Kansas.
August 28, 2009
Page 159
[Copyrighted Material Omitted]
Page 160
Syllabus by the Court
1. Denial of a motion to set aside default judgment is subject to review under a standard of abuse of discretion. A district court decision that denies a motion to join a party as a necessary party under K.S.A. 60-219(a) is also subject to an abuse of discretion standard of review.
2. Whether the evidence demonstrates that the statutory requirements for joinder have been met is a mixed question of fact and law. When reviewing a mixed question of fact and law, an appellate court reviews the district court's factual findings for substantial competent evidence and reviews de novo the district court's legal conclusions.
3. Intervention as a matter of right is subject to the same mixed determination of law and fact as is joinder. Permissive intervention lies within the discretion of the district court.
4. Judicial discretion is abused when no reasonable person would take the view adopted by the trial court. Review for abuse of discretion includes review to determine whether erroneous legal conclusions guided the exercise of discretion.
5. K.S.A. 60-255(b) does not require that the party moving for relief from default judgment be a party to the action.
6. It is appropriate for a trial court to consider evidence beyond the bare pleadings to determine whether it should set aside a default judgment. In a motion to set aside default, a trial court should consider a variety of factors to determine whether the defendant or would-be defendant had a meritorious defense, and the burden of establishing a meritorious defense rests with the moving party.
7. Relief under K.S.A. 60-255(b) is appropriate only upon a showing that if relief is granted the outcome of the suit may be different than if the entry of default or the default judgment is allowed to stand; the showing should underscore the potential injustice of allowing the case to be disposed of by default. In most cases the court will require the party in default to demonstrate a meritorious defense to the action as a prerequisite to vacating the default entry or judgment. The nature and extent of the showing that will be necessary lie within the trial court's discretion.
8. The law relating to a contingently necessary party closely resembles the law relating to vacating default judgment, in that both require the party asserting the interest to demonstrate a meritorious defense or an interest that may be impaired.
9. The word " nominee" is subject to more than one interpretation. The legal significance of the word depends on the context in which it is used. The word encompasses a range of meanings from a straw man or limited agent to a representative enjoying
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the same legal rights as the party that acts as the nominator.
10. The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is a party to whom property is mortgaged, which is to say, a mortgage creditor or lender. A mortgagee and a lender have intertwined rights that defy a clear separation of interests.
11. Parties are bound by the formal admissions of their counsel in an action.
12. The 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. An entitlement to a procedure does not constitute a protected property interest.
Tyson C. Langhofer and Court T. Kennedy, of Stinson Morrison Hecker, L.L.P., of Wichita, for appellants/cross-appellees.
Ted E. Knopp, of Ted E. Knopp, Chartered, of Wichita, for appellee Boyd A. Kesler.
David A. Schatz, of Husch Blackwell Sanders L.L.P., of Kansas City, Missouri, for amicus curiae American Land Title Association.
OPINION
ROSEN, J.:
Mortgage Electronic Registration Systems, Inc. (MERS) and Sovereign Bank seek review of an opinion by our Court of Appeals holding that a nonlender is not a contingently necessary party in a mortgage foreclosure action and that due process does not require that a nonlender be allowed to intervene in a mortgage foreclosure action.
The facts underlying this appeal are not in dispute. On March 19, 2004, Boyd Kesler secured a loan of $50,000 from Landmark National Bank (Landmark) with a mortgage registered in Ford County, Kansas. On March 15, 2005, he secured an additional loan of $93,100 from Millennia Mortgage Corp. (Millennia) through a second mortgage registered in Ford County. Both mortgages were secured by the same real property located in Ford County.
The second mortgage lies at the core of this appeal. That mortgage document stated that the mortgage was made between Kesler-the " Mortgagor" and " Borrower" -and MERS, which was acting " solely as nominee for Lender, as hereinafter defined, and Lender's successors and assigns." The document then identified Millennia as the " Lender." At some subsequent time, the mortgage may have been assigned to Sovereign and Sovereign may have taken physical possession of the note, but that assignment was not registered in Ford County.
On April 13, 2006, Kesler filed for bankruptcy in the United States Bankruptcy Court for the District of Kansas, Wichita Division. He named Sovereign as a creditor; although he claimed the secured property as exempt, he filed an intention to surrender the property. The bankruptcy court discharged his personal liability on November 16, 2006. The record contains little documentation or evidence explaining the interplay of the bankruptcy and the foreclosure action, except to suggest that the bankruptcy action may have given Sovereign constructive notice of a possible default on payments.
On July 27, 2006, Landmark filed a petition to foreclose on its mortgage, serving and naming as defendants Kesler and Millennia. It did not serve notice of the litigation on MERS or Sovereign. In the absence of answers from either defendant, the trial court entered default judgment against Kesler and Millennia on September 6, 2006. The trial court then filed an order of sale on September 29, 2006. Notice of the sale was initially published in the Dodge City Daily Globe on October 4, 2006. On October 26, 2006, Dennis Bristow and Tony Woydziak purchased the secured property at a sheriff's sale for $87,000, and on November 14, 2006, Landmark filed a motion to confirm sale of the secured property.
Also on November 14, 2006, Sovereign filed an answer to the foreclosure petition, asserting an interest in the real property as the successor in interest to Millennia's second mortgage. A week later, on November 21, 2006, Sovereign filed a motion to set aside
Page 162
or vacate the default judgment and an objection to confirmation of sale. The motion asserted that MERS was a K.S.A. 60-219(a) contingently necessary party and, because Landmark failed to name MERS as a defendant, Sovereign did not receive notice of the proceedings. The motion asked the court to vacate the default judgment under K.S.A. 60-260(b). The motion further asked the court to set aside the surplus from the sale, holding it to later to be paid to Sovereign if the court elected not to grant the motion to vacate.
On November 27, 2006, Kesler filed a motion seeking distribution of surplus funds from the sheriff's sale, and on January 3, 2007, Kesler filed a motion joining Landmark's earlier motion to confirm the sheriff's sale. The trial court conducted a hearing on the various motions on January 8, 2007, at which counsel for Landmark, Kesler, Sovereign, and Bristow appeared and presented their cases. The trial court deferred judgment pending review of the pleadings.
On January 16, 2007, MERS filed a motion joining Sovereign's motion to vacate the journal entry of default judgment and objecting to confirmation of the sheriff's sale, followed on January 18, 2007, by a motion to intervene under K.S.A. 60-224. MERS proffered an answer and a cross-claim to the original foreclosure petition.
On that same date, the trial court filed an order finding that MERS was not a real party in interest and Landmark was not required to name it as a party to the foreclosure action. The court found that MERS served only as an agent or representative for Millennia. The court also found that Sovereign's failure to register its interest with the Ford County Register of Deeds precluded it from asserting rights to the mortgage after judgment had been entered. The court denied the motions to set aside judgment and to intervene and granted the motions to confirm the sale and to distribute the surplus.
On February 1, 2007, MERS and Sovereign filed motions to reconsider. The trial court conducted a hearing on those motions, at which counsel for Kesler, Sovereign, and MERS appeared and argued. The trial court subsequently entered an order denying the motions to reconsider. MERS and Sovereign filed timely notices of appeal.
Prior to the appellants submitting their briefs, the purchasers Bristow and Woydziak filed a motion with the Court of Appeals seeking leave to intervene in the appeal. The Court of Appeals granted the motion. Bristow and Woydziak then filed a motion to compel the office of the Clerk of the Appellate Courts to docket their cross-appeal, which the Court of Appeals denied. The Court of Appeals affirmed the district court in Landmark National Bank v. Kesler, 40 Kan.App.2d 325, 192 P.3d 177 (2008). This court granted the appellants' petition for review.
I. Did The District Court Abuse Its Discretion In Denying MERS's Motion To Set Aside Default Judgment And Motion To Intervene As A Contingently Necessary Party?
A. Standard of Review
Denial of a motion to set aside a default judgment is subject to review under a standard of abuse of discretion. See Canaan v. Bartee, 272 Kan. 720, Syl. ¶ 9, 35 P.3d 841 (2001). A district court decision that denies a motion to join a party as a necessary party under K.S.A. 60-219(a) is also subject to an abuse of discretion standard of review. State ex rel. Graeber v. Marion County Landfill, Inc., 276 Kan. 328, 352, 76 P.3d 1000 (2003). Whether the evidence demonstrates that the statutory requirements for joinder have been met is a mixed question of fact and law. When reviewing a mixed question of fact and law, an appellate court reviews the district court's factual findings for substantial competent evidence and reviews de novo the district court's legal conclusions. State v. Fisher, 283 Kan. 272, 286, 154 P.3d 455 (2007).
Intervention as a matter of right is subject to the same mixed determination of law and fact as is joinder. K.S.A. 60-224(a). Permissive intervention lies within the discretion of the district court. K.S.A. 60-224(b); see Stringfellow v. Concerned Neighbors in Action, 480 U.S. 370, 382 n. 1, 107 S.Ct. 1177, 94 L.Ed.2d 389 (1987) (Brennan, J., concurring) (discussing the different standards
Page 163
applied to Federal Rule of Civil Procedure 24[a] and [b] ).
Judicial discretion is abused when no reasonable person would take the view adopted by the trial court. Harsch v. Miller, 288 Kan. 280, 293, 200 P.3d 467 (2009). Review for abuse of discretion includes review to determine whether erroneous legal conclusions guided the exercise of discretion. State v. Skolaut, 286 Kan. 219, Syl. ¶ 3, 182 P.3d 1231 (2008).
To the extent that this appeal requires interpretation of statutory mandates, this court exercises unlimited review. See Genesis Health Club, Inc. v. City of Wichita, 285 Kan. 1021, 1031, 181 P.3d 549 (2008).
B. Analysis
While this is a matter of first impression in Kansas, other jurisdictions have issued opinions on similar and related issues, and, while we do not consider those opinions binding in the current litigation, we find them to be useful guideposts in our analysis of the issues before us.
At the heart of this issue is whether the district court abused its discretion in refusing to set aside the default judgment and in refusing to join MERS as a contingently necessary party.
The statutory provision for setting aside a default judgment is K.S.A. 60-255(b), which refers to K.S.A. 60-260(b), relating to relief from judgment, in a manner similar to the correlation between the corresponding federal rules, Fed. R. Civ. Proc. 55(c) and 60(b). K.S.A. 60-260(b) allows relief from a judgment based on mistake, inadvertence, surprise, or excusable neglect; newly discovered evidence that could not have been timely discovered with due diligence; fraud or misrepresentation; a void judgment; a judgment that has been satisfied, released, discharged, or is no longer equitable; or any other reason justifying relief from the operation of the judgment. K.S.A. 60-260(b) requires that the motion be made by a party or by a representative who is in privity with a party, thus precluding a nonparty of standing to file such a motion. K.S.A. 60-255(b) does not, however, require that the movant be a party to the action. See 11 Wright, Miller & Kane, Federal Practice & Procedure: Civil 2d § 2865 (1995).
It is appropriate-and probably necessary-for a trial court to consider evidence beyond the bare pleadings to determine whether it should set aside a default judgment. In a motion to set aside default, a trial court should consider a variety of factors to determine whether the defendant (or would-be defendant) had a meritorious defense, and the burden of establishing a meritorious defense rests with the moving party. See Canaan v. Bartee, 272 Kan. 720, 731, 35 P.3d 841 (2001).
This conclusion is consistent with the construction of the parallel federal rules:
" Generally, a federal court will grant a motion under Rule 55(c) only after some showing is made that if relief is granted the outcome of the suit may be different than if the entry of default or the default judgment is allowed to stand; the showing should underscore the potential injustice of allowing the case to be disposed of by default. In most cases, therefore, the court will require the party in default to demonstrate a meritorious defense to the action as a prerequisite to vacating the default entry or judgment. ...
" A majority of the courts ... have insisted upon a presentation of some factual basis for the supposedly meritorious defense....
" The demonstration of a meritorious defense is not expressly called for by the federal rules and, therefore, the nature and extent of the showing that will be necessary is a matter that lies within the court's discretion. ... The underlying concern is to determine whether there is some possibility that the outcome of the suit after a full trial will be contrary to the result achieved by the default. " (Emphasis added.) 10A Wright, Miller & Kane, Federal Practice & Procedure: Civil 3d § 2697 (1998).
We accordingly find that it was incumbent on the trial court, when ruling on the motion to set aside default judgment, to consider
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whether MERS would have had a meritorious defense if it had been named as a defendant and whether there was some reasonable possibility MERS would have enjoyed a different outcome from the trial if its participation had precluded default judgment.
In determining whether MERS was a contingently necessary party that was entitled to relief from judgment, the trial court was required to consider the factors of K.S.A. 60-219(a) in addition to those of K.S.A. 60-260(b).
K.S.A. 60-219(a) defines which parties are to be joined in an action as necessary for just adjudication:
" A person is contingently necessary if (1) complete relief cannot be accorded in his absence among those already parties, or (2) he claims an interest relating to the property or transaction which is the subject of the action and he is so situated that the disposition of the action in his absence may (i) as a practical matter substantially impair or impede his ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of his claimed interest."
The law relating to a contingently necessary party closely resembles the law relating to vacating a default judgment, in that both require the party asserting the interest to demonstrate a meritorious defense or an interest that may be impaired. In order to prevail on appeal, MERS must demonstrate that the trial court abused its discretion when it found, based on the testimony, evidence, and pleadings before the court at the time when it considered the motion to set aside default judgment, that MERS lacked a meritorious defense to the foreclosure proceeding or had an interest that could be impaired. We will accordingly examine the nature of the interest in the mortgage that MERS has demonstrated.
Sovereign is a financial institution that putatively purchased the Kesler mortgage from Millennia but did not register the transaction in Ford County. The relationship of MERS to the transaction is not subject to an easy description. One court has described MERS as follows:
" MERS is a private corporation that administers the MERS System, a national electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans. Through the MERS System, MERS becomes the mortgagee of record for participating members through assignment of the members' interests to MERS. MERS is listed as the grantee in the official records maintained at county register of deeds offices. The lenders retain the promissory notes, as well as the servicing rights to the mortgages. The lenders can then sell these interests to investors without having to record the transaction in the public record. MERS is compensated for its services through fees charged to participating MERS members." Mortgage Elec. Reg. Sys., Inc. v. Nebraska Depart. of Banking, 270 Neb. 529, 530, 704 N.W.2d 784 (2005).
The second mortgage designated the relationships of Kesler, MERS, and Millennia and established payment and notice obligations. That document purported to define the role played by MERS in the transaction and the contractual rights of the parties.
The document began by identifying the parties:
" THIS MORTGAGE is made this 15th day of March 2005, between the Mortgagor, BOYD A. KESLER, (herein ‘ Borrower’ ), and the Mortgagee, Mortgage Electronic Registration Systems, Inc. (‘ MERS'), (solely as nominee for Lender, as hereinafter defined, and Lender's successors and assigns). MERS is organized and existing under the laws of Delaware, and has an address and telephone number of P.O. Box 2026, Flint, MI 48501-2026, tel. (888) 679-MERS. MILLENNIA MORTGAGE CORP., A CALIFORNIA CORPORATION is organized and existing under the laws of CALIFORNIA and has an address of 23046 AVENIDA DE LA CARLOTA # 100, LAGUNA HILLS, CALIFORNIA 92653 (herein ‘ Lender’ )."
The third paragraph of the first page of the mortgage document conveyed a security interest in real estate:
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" TO SECURE to Lender the repayment of the indebtedness evidenced by the Note, with interest thereon; the payment of all other sums, with interest thereon, advanced in accordance herewith to protect the security of this Mortgage; and the performance of the covenants and agreements of Borrower herein contained, Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender's successors and assigns) and to the successors and assigns of MERS the following described property located in the County of FORD, State of Kansas."
The first paragraph of the second page of the mortgage document contains the following language that apparently both limits and expands MERS's rights:
" Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Mortgage; but, if necessary to comply with law or custom, MERS, (as nominee for Lender and Lender's successors and assigns), has the right: to exercise any and all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing or cancelling this Mortgage."
Paragraph 7 of the mortgage document provides the lender with the right to protect the security:
" If Borrower fails to perform the covenants and agreements contained in this Mortgage, or if any action or proceeding is commenced which materially affects Lender's interest in the Property, then Lender, at Lender's option, upon notice to Borrower, may make such appearances, disburse such sums, including reasonable attorneys' fees, and take such action as is necessary to protect Lender's interest."
Paragraph 9 of the mortgage document provides the lender with rights in the event of a condemnation:
" Condemnation. The proceeds of any award or claim for damages, direct or consequential, in connection with any condemnation or other taking of the Property, or part thereof, or for conveyance in lieu of condemnation, are hereby assigned and shall be paid to Lender, subject to the terms of any mortgage, deed of trust or other security agreement with a lien which has priority over this mortgage."
Paragraph 12 of the mortgage document addresses notice:
" Notice. Except for any notice required under applicable law to be given in another manner, (a) any notice to Borrower provided for in this Mortgage shall be given by delivering it or by mailing such notice by certified mail addressed to Borrower at the Property Address or at such other address as Borrower may designate by notice to Lender as provided herein, and (b) any notice to Lender shall be given by certified mail to Lender's address stated herein or to such other address as Lender may designate by notice to Borrower as provided herein. Any notice provided for in this Mortgage shall be deemed to have been given to Borrower or Lender when given in the manner designated herein." (Emphasis added.)
The signature page of the mortgage document contains language relating to notice in the event of default:
" Borrower and Lender request the holder of any mortgage, deed of trust or other encumbrance with a lien which has priority over this Mortgage to give Notice to Lender, at Lender's address set forth on page one of this Mortgage, of any default under the superior encumbrance and of any sale or other foreclosure action." (Emphasis added.)
The mortgage instrument states that MERS functions " solely as nominee" for the lender and lender's successors and assigns. The word " nominee" is defined nowhere in the mortgage document, and the functional relationship between MERS and the lender is likewise not defined. In the absence of a contractual definition, the parties leave the definition to judicial interpretation.
What meaning is this court to attach to MERS's designation as nominee for Millennia? The parties appear to have defined the word in much the same way that the blind men of Indian legend described an elephant
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-their description depended on which part they were touching at any given time. Counsel for Sovereign stated to the trial court that MERS holds the mortgage " in street name, if you will, and our client the bank and other banks transfer these mortgages and rely on MERS to provide them with notice of foreclosures and what not." He later stated that the nominee " is the mortgagee and is holding that mortgage for somebody else." At another time he declared on the record that the nominee
" is more like a trustee or more like a corporation, a trustee that has multiple beneficiaries. Now a nominee's relationship is not a trust but if you have multiple beneficiaries you don't serve one of the beneficiaries you serve the trustee of the trust. You serve the agent of the corporation."
Counsel for the auction property purchasers stated that a nominee is " one designated to act for another as his representative in a rather limited sense." He later deemed a nominee to be " like a power of attorney."
Black's Law Dictionary defines a nominee as " [a] person designated to act in place of another, usu. in a very limited way" and as " [a] party who holds bare legal title for the benefit of others or who receives and distributes funds for the benefit of others." Black's Law Dictionary 1076 (8th ed.2004). This definition suggests that a nominee possesses few or no legally enforceable rights beyond those of a principal whom the nominee serves.
In its opinion below, the Court of Appeals cited Thompson v. Meyers, 211 Kan. 26, 30, 505 P.2d 680 (1973), which provides the only discussion in Kansas of the legal significance of a nominee:
" In common parlance the word ‘ nominee’ has more than one meaning. Much depends on the frame of reference in which it is used. In Webster's Third New International Dictionary, unabridged, one of the definitions given is ‘ a person named as the recipient in an annuity or grant.’ We view a ‘ nominee’ , as the term was used by the parties here, not simply in the sense of a straw man or limited agent ..., but in the larger sense of a person designated by them to purchase the real estate, who would possess all the rights given a buyer...."
The legal status of a nominee, then, depends on the context of the relationship of the nominee to its principal. Various courts have interpreted the relationship of MERS and the lender as an agency relationship. See In re Sheridan, 2009 WL 631355, at *4 (Bankr.D.Idaho March 12, 2009) (MERS " acts not on its own account. Its capacity is representative." ); Mortgage Elec. Registration System, Inc. v. Southwest, 2009 Ark. 152, __, __ S.W.3d __, 2009 WL 723182 (March 19, 2009) (" MERS, by the terms of the deed of trust, and its own stated purposes, was the lender's agent" ); LaSalle Bank Nat. Ass'n v. Lamy, 12 Misc.3d 1191, 824 N.Y.S.2d 769, 2006 WL 2251721, at *2 (Sup.2006) (unpublished opinion) (" A nominee of the owner of a note and mortgage may not effectively assign the note and mortgage to another for want of an ownership interest in said note and mortgage by the nominee." )
The relationship that MERS has to Sovereign is more akin to that of a straw man than to a party possessing all the rights given a buyer. A mortgagee and a lender have intertwined rights that defy a clear separation of interests, especially when such a purported separation relies on ambiguous contractual language. The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is " [o]ne to whom property is mortgaged: the mortgage creditor, or lender." Black's Law Dictionary 1034 (8th ed.2004). By statute, assignment of the mortgage carries with it the assignment of the debt. K.S.A. 58-2323. Although MERS asserts that, under some situations, the mortgage document purports to give it the same rights as the lender, the document consistently refers only to rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. The document consistently limits MERS to acting " solely" as the nominee of the lender.
Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying
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with some independent entity, the mortgage may become unenforceable.
" The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. [Citation omitted.] Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. [Citation omitted.] The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust." Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo.App.2009).
The Missouri court found that, because MERS was not the original holder of the promissory note and because the record contained no evidence that the original holder of the note authorized MERS to transfer the note, the language of the assignment purporting to transfer the promissory note was ineffective. " MERS never held the promissory note, thus its assignment of the deed of trust to Ocwen separate from the note had no force." 284 S.W.3d at 624; see also In re Wilhelm, 407 B.R. 392 (Bankr.D.Idaho 2009) (standard mortgage note language does not expressly or implicitly authorize MERS to transfer the note); In re Vargas, 396 B.R. 511, 517 (Bankr.C.D.Cal.2008) (" [I]f FHM has transferred the note, MERS is no longer an authorized agent of the holder unless it has a separate agency contract with the new undisclosed principal. MERS presents no evidence as to who owns the note, or of any authorization to act on behalf of the present owner." ); Saxon Mortgage Services, Inc. v. Hillery, 2008 WL 5170180 (N.D.Cal.2008) (unpublished opinion) (" [F]or there to be a valid assignment, there must be more than just assignment of the deed alone; the note must also be assigned.... MERS purportedly assigned both the deed of trust and the promissory note.... However, there is no evidence of record that establishes that MERS either held the promissory note or was given the authority ... to assign the note." ).
What stake in the outcome of an independent action for foreclosure could MERS have? It did not lend the money to Kesler or to anyone else involved in this case. Neither Kesler nor anyone else involved in the case was required by statute or contract to pay money to MERS on the mortgage. See Sheridan, 2009 WL 631355, at *4 (" MERS is not an economic ‘ beneficiary’ under the Deed of Trust. It is owed and will collect no money from Debtors under the Note, nor will it realize the value of the Property through foreclosure of the Deed of Trust in the event the Note is not paid." ). If MERS is only the mortgagee, without ownership of the mortgage instrument, it does not have an enforceable right. See Vargas, 396 B.R. at 517 (" [w]hile the note is ‘ essential,’ the mortgage is only ‘ an incident’ to the note" [quoting Carpenter v. Longan, 16 Wall. 271, 83 U.S. 271, 275, 21 L.Ed. 313 (1872) ] ).
When it found that MERS did not have an interest in the property that was impaired by the default judgment, the trial court properly considered four factors: (1) that the written pleadings and oral arguments by MERS and Sovereign identified MERS as acting only as a digital mortgage tracking service; (2) that counsel for MERS insisted that no evidence of a financial or property interest was necessary and its argument rested solely on its identity as the mortgagee on the mortgage document, when counsel was directly challenged to produce evidence of a financial or property interest; (3) that evidence showed that Sovereign was on notice that Landmark had leave of the bankruptcy court to proceed with foreclosure and that MERS did not attempt to intervene in the action until after its alleged principal, Sovereign, had already had its motion to intervene and to set aside judgment denied; and (4) that the case law submitted by the parties weighed more in favor of denying the motion. These factors were properly before the trial court and were consistent with the evidence and supported the court's legal reasoning.
Counsel for MERS explicitly declined to demonstrate to the trial court a tangible interest in the mortgage. Parties
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are bound by the formal admissions of their counsel in an action. Dick v. Drainage District No. 2, 187 Kan. 520, 525, 358 P.2d 744 (1961). Counsel for MERS made no attempt to show any injury to MERS resulting from the lack of service; in fact, counsel insisted that it did not have to show a financial or property interest.
MERS argued in another forum that it is not authorized to engage in the practices that would make it a party to either the enforcement of mortgages or the transfer of mortgages. In Mortgage Elec. Reg. Sys. v. Nebraska Dept. of Banking, 270 Neb. 529, 704 N.W.2d 784 (2005), MERS challenged an administrative finding that it was a mortgage banker subject to license and registration requirements.
The Nebraska Supreme Court found in favor of MERS, noting that " MERS has no independent right to collect on any debt because MERS itself has not extended credit, and none of the mortgage debtors owe MERS any money." 270 Neb. at 535, 704 N.W.2d 784. The Nebraska court reached this conclusion based on the submissions by counsel for MERS that
" MERS does not take applications, underwrite loans, make decisions on whether to extend credit, collect mortgage payments, hold escrows for taxes and insurance, or provide any loan servicing functions whatsoever. MERS merely tracks the ownership of the lien and is paid for its services through membership fees charged to its members. MERS does not receive compensation from consumers." 270 Neb. at 534, 704 N.W.2d 784.
Even if MERS was technically entitled to notice and service in the initial foreclosure action-an issue that we do not decide at this time-we are not compelled to conclude that the trial court abused its discretion in denying the motions to vacate default judgment and require joinder of MERS and Sovereign. The record lacks evidence supporting a claim that MERS suffered prejudice and would have had a meritorious defense had it been joined as a defendant to the foreclosure action. We find that the trial court did not abuse its discretion and did not commit reversible error in ruling on the post default motions.
We note that various arguments were presented suggesting that economic policy provides independent grounds for reversing the trial court. MERS and the amicus curiae American Land Title Association argue that MERS provides a cost-efficient method of tracking mortgage transactions without the complications of county-by-county registration and title searches. The amicus suggests the statutory recording system is grounded in seventeenth-century property law that is entirely unsuited to twentieth-century financial transactions. While this may be true, the MERS system introduces its own problems and complications.
One such problem is that having a single front man, or nominee, for various financial institutions makes it difficult for mortgagors and other institutions to determine the identity of the current note holder.
" [I]t is not uncommon for notes and mortgages to be assigned, often more than once. When the role of a servicing agent acting on behalf of a mortgagee is thrown into the mix, it is no wonder that it is often difficult for unsophisticated borrowers to be certain of the identity of their lenders and mortgagees." In re Schwartz, 366 B.R. 265, 266 (Bankr.D.Mass.2007).
" [T]he practices of the various MERS members, including both [the original lender] and [the mortgage purchaser], in obscuring from the public the actual ownership of a mortgage, thereby creating the opportunity for substantial abuses and prejudice to mortgagors ..., should not be permitted to insulate [the mortgage purchaser] from the consequences of its actions in accepting a mortgage from [the original lender] that was already the subject of litigation in which [the original lender] erroneously represented that it had authority to act as mortgagee." Johnson v. Melnikoff, 20 Misc.3d 1142, 873 N.Y.S.2d 234, 2008 WL 4182397, at *4 (Sup.1008).
The amicus argues that " [a] critical function performed by MERS as the mortgagee is the receipt of service of all legal process related to the property." The amicus makes this argument despite the mortgage clause
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that specifically calls for notice to be given to the lender, not the putative mortgagee. In attempting to circumvent the statutory registration requirement for notice, MERS creates a system in which the public has no notice of who holds the obligation on a mortgage.
The Arkansas Supreme Court has noted:
" The only recorded document provides notice that [the original lender] is the lender and, therefore, MERS's principal. MERS asserts [the original lender] is not its principal. Yet no other lender recorded its interest as an assignee of [the original lender]. Permitting an agent such as MERS purports to be to step in and act without a recorded lender directing its action would wreak havoc on notice in this state." Southwest Homes v. Carmen Price, __ Ark. at __.
In any event, the legislature has established a registration requirement for parties that desire service of notice of litigation involving real property interests. It is not the duty of this court to criticize the legislature or to substitute its view on economic or social policy. Samsel v. Wheeler Transport Services, Inc., 246 Kan. 336, 348, 789 P.2d 541 (1990).
II. Did The Trial Court's Refusal To Join MERS As A Party Violate MERS's Right To Due Process?
MERS contends that the Fourteenth Amendment and § 18 of the Kansas Constitution Bill of Rights guarantees of due process were violated when the foreclosure action was consummated without MERS receiving notice of the proceeding and without MERS having the opportunity to intervene in the action.
Although joinder is evaluated under an abuse of discretion standard, if a constitutional right is involved the trial judge's exercise of discretion is limited. Discretion must be exercised not in opposition to, but in accordance with, established principles of law. It is not an arbitrary power. In re Adoption of B.G.J., 281 Kan. 552, 563, 133 P.3d 1 (2006).
The Fourteenth Amendment to the United States Constitution provides: " No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law."
Section 18 of the Kansas Constitution Bill of Rights provides: " All persons, for injuries suffered in person, reputation or property, shall have remedy by due course of law, and justice administered without delay."
Due process provides any interested party with the elementary and fundamental right to notice of the pendency of an action and the opportunity to present its objections in any proceeding that is to be accorded finality. Alliance Mortgage Co. v. Pastine, 281 Kan. 1266, 1275, 136 P.3d 457 (2006) (citing Mullane v. Central Hanover Bank & Tr. Co., 339 U.S. 306, 314, 94 L.Ed. 865, 70 S.Ct. 652 [1950] ). In the absence of a protected property or liberty interest, there can be no due process violation. State ex rel. Tomasic v. Unified Gov't of Wyandotte County/Kansas City, 265 Kan. 779, 809, 962 P.2d 543 (1998).
The Due Process Clause does not protect entitlements where the identity of the alleged entitlement is vague. Castle Rock v. Gonzales, 545 U.S. 748, 763, 125 S.Ct. 2796, 162 L.Ed.2d 658 (2005). A protected property right must have some ascertainable monetary value. 545 U.S. at 766, 125 S.Ct. 2796. Indirect monetary benefits do not establish protection under the Fourteenth Amendment. 545 U.S. at 767, 125 S.Ct. 2796. An entitlement to a procedure does not constitute a protected property interest. 545 U.S. at 764, 125 S.Ct. 2796.
MERS's contention that it was deprived of due process in violation of constitutional protections runs aground in the shallows of its property interest. As noted in the discussion of the first issue above, MERS did not demonstrate, in fact, did not attempt to demonstrate, that it possessed any tangible interest in the mortgage beyond a nominal designation as the mortgagor. It lent no money and received no payments from the borrower. It suffered no direct, ascertainable monetary
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loss as a consequence of the litigation. Having suffered no injury, it does not qualify for protection under the Due Process Clause of either the United States or the Kansas Constitutions.
Furthermore, MERS received the full opportunity to present arguments and evidence to the trial court. Only after Sovereign clearly had notice of the litigation, had filed a motion to intervene, and had participated in a hearing on the motion did MERS-Sovereign's nominee-elect to file for joinder. Despite its late decision to enter an appearance in the case, the trial court allowed MERS the opportunity to present arguments and evidence. It cannot be said that MERS was prejudicially denied notice and the opportunity to be heard.
We find that the district court did not abuse its discretion in denying the motions to vacate and for joinder and in holding that MERS was not denied due process. We accordingly affirm the district court and the Court of Appeals.
END
