Tuesday, August 30, 2011

Federal Appellate Court Sanctions Lender's Attorney for Inaccurate Foreclosure Information

The United States Court of Appeals for the 3rd Circuit upheld a Bankruptcy Court’s imposition of Rule 11 [actually R. Bank. P. 9011] sanctions against high-volume lenders attorneys who filed pleadings in Bankruptcy Court with no review of the accuracy of the information listed in the pleadings.  It sanctions the attorneys, in part, because the attorneys had no real ability to determine the accuracy of the information in the pleadings.

The law firm sanctioned and it signatory managing attorney represented lender HSBC.  Lender forwarded all data to the law firm via a third party vendor LPS.  The information conduit owned and run by vendor LPS was known as NewTrak. The computer system (NewTrak) funneled information on borrowers, in this case debtors in bankruptcy, concerning their arrearages and their default – which would lead to a Lift the Stay Motion and Foreclosure by the HSBC. 

When the Bankruptcy Court became concerned that the lender’s filings were significantly inaccurate (and in fairness, the debtor’s information was inaccurate) the bankruptcy court scheduled a hearing requiring the lender law firm to show how it arrived at the information in the HSBC pleadings.   The associate for the law firm appeared and indicated the he could not even reach a human being at HSBC despite numerous attempts and he had no further information other than the NewTrak data.

When the lender firm could not substantiate the HSBC information, the bankruptcy court scheduled a Rule 9011 [similar to Rule 11] hearing to determine whether to sanction the firm and the attorneys.  When the attorneys presented no further information from HSBC at the sanctions hearing, other than the information received from NewTrak which was inaccurate, the Court sanctioned the law firm and attorneys for failing to conduct even a minimal investigation prior to filing factual pleadings with the Court.  The Court was particularly concerned with the fact that once HSBC loaded inaccurate information into the computer pipeline there became no easy way for anyone (actually there was no way) to confirm or deny the accuracy of the information.  Thereafter, the Court found that each level beyond the loading of the information – including the attorneys – either denied actual knowledge of the factual basis of the information or simply blamed the inaccuracies on the technology of the information pipeline.  The Court was particularly concerning that no human being at the law firm interfaced with the lender, HSBC.

The District Court reversed the Bankruptcy Court; however, the 3rd Circuit reversed the District Court and reinstated the Rule 11 sanctions against the law firm and managing attorney.  HSBC was sanctioned and failed to appeal.

The Scribd to the case is listed below and the text of the opinion is listed in the footnotes.



Hugh Wood
Atlanta, GA

Wood & Meredith, LLP
3756 LaVista Road
Suite 250
Atlanta (Tucker), GA 30084

twitter: USALawyer_
Phone: 404-633-4100
Fax: 404-633-0068





No. 10-2154



ROBERTA A. DEANGELIS, Acting United States Trustee,


On Appeal from the District Court

for the Eastern District of Pennsylvania

(No. 09-cv-02479, 07-cv-15385 (bankruptcy))

District Judge: Honorable John P. Fullam

Argued March 22, 2011


Circuit Judges

(Opinion Filed: August 24, 2011)

Frederic J. Baker, Esq.

Robert J. Schneider, Esq.

George M. Conway, Esq.

United States Department of Justice Office of the United States Trustee 833 Chestnut St., Suite 500

Philadelphia, PA 19107

Ramona Elliott, Esq.

P. Matthew Sutko, Es.q

John P. Sheahan, Esq. (argued)

United States Department of Justice

Executive Office for United States Trustees

20 Massachusetts Ave. NW, Suite 8100

Washington, DC 20530

Attorneys for Appellant

Jonathan J. Bart, Esq. (argued)

Wilentz Goldman & Spitzer, P.A.

Two Penn Center Plaza, Suite 910

Philadelphia, PA 19102

Attorney for Appellees


Fuentes, Circuit Judge

The United States Trustee, Region 3 (“Trustee”),5HJLRQ ^ ^ ^ ^ 37UXVW1= appeals the reversal by the District Court of sanctions

originally imposed in the bankruptcy court on attorneys Mark


J. Udren and Lorraine Doyle, the Udren Law Firm, and HSBC for violations of Federal Rule of Bankruptcy Procedure 9011. For the reasons given below, we will reverse the District Court and affirm the bankruptcy court^s¶V ^ imposition of sanctions with respect to Lorraine Doyle, the Udren Law Firm, and HSBC.1 However, we will affirm the District Court^ s reversal of the bankruptcy court^s sanctions with respect to Mark J. Udren.


A. Background

This case is an unfortunate example of the ways in which overreliance on computerized processes in a high-volume practice, as well as a failure on the part of clients and lawyers alike to take responsibility for accurate knowledge of a case, can lead to attorney misconduct before a court. It arises from the bankruptcy proceeding of Mr. and Ms. Niles C. and Angela J. Taylor. The Taylors filed for a Chapter 13 bankruptcy in September 2007. In the Taylors^ bankruptcy petition, they listed the bank HSBC, which held the mortgage on their house, as a creditor. In turn, HSBC filed a proof of claim in October 2007 with the bankruptcy court.

We are primarily concerned with two pleadings that HSBC^s attorneys filed in the bankruptcy court²(1) the request for relief from the automatic stay which would have permitted HSBC to pursue foreclosure proceedings despite the Taylors^ bankruptcy filing and (2) the response to the

1 Although HSBC was sanctioned by the bankruptcy court, it did not participate in this appeal.


Taylors^ objection to HSBC^ s  proof  of+ claim. W e ar e also1 ^ FODLP concerned with the attorneys^ conduct in court in connection FRXUW ^ LQ ^ FR with those pleadings. We draw our facts from the findings of

the bankruptcy court.

1.             The proof of claim (Moss Codilis law firm)

To preserve its interest in a debtor^s estate in aDWH ^ LQ ^ D

personal bankruptcy case, a creditor must file with the court a proof of claim, which includes a statement of the claim and of its amount and supporting documentation. Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 447 (2004); Fed. R. Bank. P. 3001; Official Bankruptcy Form 10. In October 2007, HSBC filed such a proof of claim with respect to the Taylors^ mortgage. To do so, it used the law firm Moss Codilis.2 Moss retrieved the information on which the claim

was based from HSBC ^s computerized mortgage servicing PRUWJDJH ^ VHUYLFLQ database. No employee of HSBC reviewed the claim before filing.

This proof of claim contained several errors: the amount of the Taylors^ monthly payment was incorrectly stated, the wrong mortgage note was attached, and the value

2 Moss Codilis is not involved in the present appeal. However, it is worth noting that the firm has come under serious judicial criticism for its lax practices in bankruptcy

proceedings. “In total, 3[th e court knows] of 23 instances in ^ NQRZV@ ^ RI ^ ^ ^ ^ L which [Moss Codilis] has violated [court rules] in this District alone.” Ini re Greco, 405 B.R. 393, 394 (Bankr. S.D. Fla. 2009); see also In re Waring, 401 B.R. 906 (Bankr. N.D. Ohio 2009).


of the home was understated by about $100,000. It is not

clear whether the errors originated in HSBC^s database or LQ ^ +6%&¶V ^ GDWDE whether they were introduced in Moss Codilis^s filing.3LQJ

2.             The motion for relief from stay

At the time of the bankruptcy proceeding, the Taylors were also involved in a payment dispute with HSBC. HSBC believed the Taylors^ home to be in a flood zone and had

obtained “forced insurance” for the property,  the cost of^ SURSHUW\^ ^ WKH ^ which (approximately $180/month) it passed on to the Taylors. The Taylors disputed HSBC^s position and continued to pay their regular mortgage payment, without the additional insurance costs.4 HSBC failed to acknowledge that the Taylors were making their regular payments and instead treated each payment as a partial payment, so that, in its records, the Taylors were becoming more delinquent each month.

Ordinarily, the filing of a bankruptcy petition imposes an automatic stay on all debt collection activities, including

foreclosures. McCartney v. Integra ,Nat’l Bank North, 106P/oDQN^ IRUWK

F.3d 506, 509 (3d Cir. 1997). However, pursuant to 11 U.S.C. § 362(d)(1), a secured creditor may file for relief from the stay  “for cause, including the lack of adequate protection of an interest in property” of the creditor, in order to permit it to commence or continue foreclosure proceedings. Because

3 HSBC ultimately corrected these errors in an amended court filing.

4 This dispute has now been resolved in favor of the Taylors. (App. 199.)


of the Taylors^ withheld insurance payments, HSBC^s records ^ ^ +6%&¶V ^ UHFRUGV indicated that they were delinquent. Thus, in January 2008,

HSBC retained the Udren Firm to seek relief from the stay.

Mr. Udren is the only partner of the Udren Firm; Ms. Doyle, who appeared for the Udren Firm in the Taylors^ case,¶ is a managing attorney at the firm, with twenty-seven years of experience. HSBC does not deign to communicate directly with the firms it employs in its high-volume foreclosure work; rather, it uses a computerized system called NewTrak (provided by a third party, LPS) to assign individual firms discrete assignments and provide the limited data the system deems relevant to each assignment.5 The firms are selected and the instructions generated without any direct human involvement. The firms so chosen generally do not have the capacity to check the data (such as the amount of mortgage payment or time in arrears) provided to them by NewTrak and are not expected to communicate with other firms that may have done related work on the matter. Although it is technically possible for a firm hired through NewTrak to contact HSBC to discuss the matter on which it has been retained, it is clear from the record that this was discouraged

5 LPS is also not involved in the present appeal, as the bankruptcy court found that it had not engaged in wrongdoing in this case. However, both the accuracy of its data and the ethics of its practices have been repeatedly called into question elsewhere. See, e.g., In re Wilson, 2011 WL 1337240 at *9 (Bankr. E.D.La. Apr. 7, 2011) (imposing

sanctions after finding that LPS had issued “sham”/ affidavits ^ LVVXHG ^ 3VKDP' ^ DI and perpetrated fraud on the court); In re Thorne, 2011 WL 2470114 (Bankr. N.D. Miss. June 16, 2011); In re Doble, 2011 WL 1465559 (Bankr. S.D. Cal. Apr. 14, 2011).


and that some attorneys, including at least one Udren Firm attorney, did not believe it to be permitted.

In the Taylors^ case,  NewTrak provided the Udren Firm with only the loan number, the T aylors^ name and address, payment amounts, late fees, and amounts past due. It did not provide any correspondence with the Taylors concerning the flood insurance dispute.

In January 2008, Doyle filed the motion for relief from the stay. This motion was prepared by non-attorney employees of the Udren Firm, relying exclusively on the information provided by NewTrak. The motion said that the debtor “has failed to discharge arrearages on said mortgage or has failed to make the current monthly payments on said

mortgage since” the filing of theI bankruptcy petition. (App.XSWF\^ SHWLWLRQ C 65. ) I t identified “the failure t o3 make  . . . post-petition ^ PDNH monthly payments” as stretching  from November 1,f  2007 to1 January 15, 2008, with an “amount per month”  of $1455 (a RI F] ^ ^ ^ ^ ^ monthly payment higher than that identified on the proof of claim filed earlier in the case by the Moss firm) and a total in arrears of $4367. (App. 66.) (It did note a “suspenseHQVH^ balance” of $1 040, which it subtracted from the ultimate total sought from the Taylors, but with no further explanation.) It stated that the Taylors had “inconsequential or no equity” inU ^ QR ^ HTXLW\' ^ LQ ^ the property.6 Id. The motion never mentioned the flood insurance dispute.

6 The U. S. Trustee now points out that the motion also claimed that the Taylors were not making payments to other creditors under their bankruptcy plan and argues that this claim was false as well. Since the bankruptcy court did not


Doyle did nothing to verify the information in the

motion for relief from stay besides check it against “screenJDLQVW ^ 3VFUHHQ ^ prints” of the  NewTrak information. She did not even access^ 6KH ^ GLG ^ QRW ^ HYJ NewTrak herself. In effect, she simply proofread the document. It does not appear that NewTrak provided the Udren Firm with any information concerning the Taylors^RUV¶ ^ equity in their home, so Doyle could not have verified her statement in the motion concerning the lack of equity in any way, even against a “screen print.”3VFUHHQ^SULQW

At the same time as it filed for relief from the stay, the Udren Firm also served the Taylors with a set of requests for admission (pursuant to Federal Rule of Bankruptcy Procedure 7036, incorporating Federal Rule of Civil Procedure 36) (“ RFAs” ). The RFAs sought formal and binding admissions that the Taylors had made no mortgage payments from November 2007 to January 2008 and that they had no equity in their home.

In February 2008, the Taylors filed a response to the motion for relief from stay, denying that they had failed to make payments and attaching copies of six checks tendered to HSBC during the relevant period. Four of them had already been cashed by HSBC.7

make any findings with respect to this issue, we will not consider it.

7 It is not clear from the briefing whether the last two checks, for February and March 2008, had actually been submitted to HSBC at the time the motion was filed; appellees deny that they were. However, appellees do not dispute that checks for


3.             The claim objection and the response to the claim objection

In March 2008, the Taylors also filed an objection to

HSBC^s proof of claim.  The objection stated that HSBC had ^ VWDWHG ^ WKDW ^ + misstated the payment due on the mortgage and pointed out the dispute over the flood insurance. However, the Taylors did not respond to HSBC^s RFAs. Unless a party responds properly to a request for admission within 30 days, the “matter is [deemed] admitted.” Fed. R. Civ. P. 36(a)(3).

In the same month, Doyle filed a response to the objection to the proof of claim. The response did not discuss

the flood insurance issue at all. However, i t  stated that “[a]l l^ +RZHYHU ^ ^ LW ^ VW figures contained in the proof of claim accurately reflect actual sums expended . . . by Mortgagee . . . and/or charges to which Mortgagee is contractually entitled and which the Debtors are  contractually obligated to pay.”^ (App. 91.) This WR^ SD\^ ' ^ ^

was indisputably incorrect, because the proof of claim listed an inaccurate monthly mortgage payment (which was also a different figure from the payment listed in Doyle^s  ownZQ motion for relief from stay).

4.             The claim hearings

In May 2008, the bankruptcy court held a hearing on both the motion for relief and the claim objection. HSBC was represented at the hearing by a junior associate at the Udren Firm, Mr. Fitzgibbon. At that hearing, Fitzgibbon ultimately

October and November 2007 and January 2008 had been cashed.


admitted that, at the time the motion for relief from the stay was filed, HSBC had received a mortgage payment for November 2007, even though both the motion for stay and the

response to th e Taylo rs^ objection to the proof of claim statedVR ^ WKH ^ SUR otherwise.8 Despite this, Fitzgibbon urged the court to grant the relief from stay, because the Taylors had not responded to

HSBC^s  RFAs (which included the “admission” that 3th erPLVVLRQ' ^ WKDW ^ Taylors had not made payments from November 2007 to January 2008). It appears from the record that Fitzgibbon initially sought to have the RFAs admitted as evidence even though he knew they contained falsehoods. (App. 101-102.)9

8 Appellees concede that, by the time the May hearing was held, HSBC had received all of the relevant checks.

9 Appellees now  claim that  “[i]t is clear from th e record, that Mr. Fitzgibbon honestly disclosed to the Court that these checks had just been received by [the] Udren [Firm] and that

the only issue was that o f flood insurance.” (App^ee Br. 16.)VXUDQF1HIH M ^ However, this disclosure did not occur until after Fitzgibbon had attempted to enter the RFAs, which made contrary

claims, as evidence, lan d debto r^s counsel raised the issue. AsDLVHG ^ WKH ^ LVVXH the bankruptcy court described it, “[Fitzgibbon] first argued that I should rule in HSBC^s favor . . . On probing b y the court, he acknowledged that as of the date of the continued hearing, he had learned that [the Taylors] had made every payment.” (App. 196, emphasis added.) In a Rule 9011/11 proceeding such as the present one, one would expect the challenged parties to be scrupulously careful in their representations to the court.


The bankruptcy court denied the request to enter the

RFAs as evidence, noting that the  firm “closed their eyes to ^ WKHLU ^ H\HV ^ WR the fact that there was evidence that . . . conflicted with the very admissions that they asked me [to deem admitted]. They . . . had that evidence [that the assertions in its motion were not accurate] in [their] possession and [they] went ahead like [they] never saw it.” (App. 108-109.) The court noted:

Maybe they have somebody there churning out

these motions that doesn^t talk to  the peopleW ^ WDON ^ WR ^ WKH ^ SHR that²you know, you never see the records, do you? Somebody sends it to you that sent it from somebody else.

(App. 109. )^ “ I really find this  motion to be in questionable7 W good faith,” the court concluded. (App. 112.)

After the hearing, the bankruptcy court directed the Udren Firm to obtain an accounting from HSBC of the Taylors^ prepetition payments so that the arrearage on the mortgage could be determined correctly. At the next hearing, in June 2008, Fitzgibbon stated that he could not obtain an accounting from HSBC, though he had repeatedly placed requests via NewTrak. He told the court that he was literally unable to contact HSBC²his firm^s client²directly to verify information which his firm had already represented to the court that it believed to be true.

At the end of the June 2008 hearing, the court told Fitzgibbon: “I^m 3issuing an order to show cause on your firm, too, for filing these things . . . without having any knowledge.

And  filing answers . . . without any^  knowledge.” (App. 1 19.)\^ NQRZOHGJH ^ ' ^ ^ ^ $ Thereafter, the court entered an order sua sponte dated June


9, 2008, directing Fitzgibbon, Doyle, Udren, and others to appear and give testimony concerning the possibility of sanctions.

5.             The sanctions hearings

The order stated that the purpose of the hearing

included “to investigate the practices employed in  this case byLFHV ^ HPSOR\HG ^ LQ ^ V HSBC and its attorneys and agents and consider whether sanctions should issue against HSBC, its attorneys and agents.” (App 96-98.) Among those practices were “pressingZHUH ^ 3SUHVVLQJ ^

a relief motion on admissions that were known to be untrue, and signing and filing pleadings without knowledge or

inquiry regarding the matters pled therein.” Id. The order WKHUHLQ ^ ' ^ ^

noted that  “[t]he details are identified on the record of theHQWLILHG ^ RQ ^ WKH [ hearings which are incorporated  herein.” Id. In orderingJHLQ ^ ' ^ ^ Doyle to appear, the order noted that “the motion for relief,KDW^ 3WKH^ PRWLRQ the admissions and the reply to the objection were prepared over D oyle^s name  and signature.”  Id. However, this order was no t formally identified as “an order to show cause.” ^ RUGHU ^ WR^ VKRZ ^ FDX'

The bankruptcy court held four hearings over several days, making in-depth inquiries into the communications between HSBC and its lawyers in this case, as well as the general capabilities and limitations of a system like NewTrak. Ultimately, it found that the following had violated Rule 9011: Fitzgibbon, for pressing the motion for relief based on claims he knew to be untrue; Doyle, for failing to make reasonable inquiry concerning the representations she made in the motion for relief from stay and the response to the claim objection; Udren and the Udren Firm itself, for the conduct of its attorneys; and HSBC, for practices which caused the failure to adhere to Rule 9011.


Because of his inexperience, the court did not sanction Fitzgibbon. However, it required Doyle to take 3 CLE credits in professional responsibility; Udren himself to be trained in the use of NewTrak and to spend a day observing his employees handling NewTrak; and both Doyle and Udren to

conduct a training session for the firm^s relevant lawyers in^ ILUPTV ^ UHOHYDQW [ the requirements of Rule 9011 and procedures for escalating inquiries on NewTrak. The court also required HSBC to send a copy of its opinion to all the law firms it uses in bankruptcy proceedings, along with a letter explaining that direct contact with HSBC concerning matters relating to H SBC^s case wasWR^ +6%&¶V ^ FDVH ^ permissible.10

B.            The District Court’s DecisionW¶V ^'HFLVLRQ

Udren, Doyle, and the Udren Firm (but not HSBC) appealed the sanctions order to the District Court, which

ultimately overturned the order. The District Court^s decisionHFLVLRQ ^ was based on three considerations: that the confusion in the case was attributable at least as much to the actions of

10 Taylor^s counsel was also Zultimately sanctioned andWHO\^ VDQFWLRQH removed from the case.   Counsel did not perform competently, as is evidenced by the Taylors^ failure to contest HSBC^s  RFAs. Sh e also made a number of inaccurate statements in her representations to the court. However, it is clear that her conduct did not induce the misrepresentations by HSBC or its attorneys. As the bankruptcy court correctly noted, “the process  employed by  a  mortgagee and its counselWJDJHH must be fair and transparent without regard to the quality of

debtor^s counsel since many debtors are unrepresented and ^ DUH ^ XQUHSUHVHQ cannot rely on counsel to protect them.”  (App. 214.)HFW ^ WKHP ^ ' ^ ^ ^


Taylor^s counsel as to Doyle, Udren, and the Udren Firm; thatDQG ^ WKH ^ 8GUHQ ^ )L the bankruptcy court seemed more concerned with “sending aGLQJ ^ D ^ message” 'to the bar concerning the use of computerized systems than with the conduct in the particular case; and that, since Udren himself did not sign any of the filings containing misrepresentations, he could not be sanctioned under Rule 9011. Although HSBC had not appealed, the District Court overturned the order with respect to HSBC, as well.

The United States trustee then appealed the District Court^s decision to this court.11


Rule 9011 of the Federal Rules of Bankruptcy Procedure, the equivalent of Rule 11 of the Federal Rules of Civil Procedure, requires that parties making representations

to the  court  certify that “the allegations and other factualOHJDWLRQV ^ DQG ^ contentions have evidentiary support or, if specifically so

identified, are likely to have evidentiary support.” Fed. R.HQWLDU\^ VXSSRUW Bank. P. 901 1(b)(3). 12 A party must reach this conclusion based on   “inquiry3 reasonable under the circumstances.” Fed.PVWDQFHV ^ '

R. Bank. P. 9011(b). The concern of Rule 9011 is not the truth or falsity of the representation in itself, but rather whether the party making the representation reasonably

11 The bankruptcy court had jurisdiction under 28 U.S.C. § 157(a). The District Court had jurisdiction under 28 U.S.C. § 158(a)(1), except as discussed below. We have jurisdiction under 28 U.S.C. § 158(d).

12 “[C]ases decided pursuant to [Fed. R. Civ. P. 11 ] apply to Rule 9011.” In re Gioioso, 979 F.2d 956, 960 (3d Cir. 1992).


believed it at the time to have evidentiary support. In determining whether a party has violated Rule 9011, the court need not find that a party who makes a false representation to

the court acted in bad faith. “ The imposition   3of Rule  11SRVLWLRQ ^ RI F] 5XOH sanctions . . . requires only a showing of objectively unreasonable conduct.” Fellheimer, Eichen & Braverman, P.C. v. Charter Tech., Inc., 57 F.3d 1215, 1225 (3d Cir. 1995). We apply an abuse of discretion standard in reviewing the decision of the bankruptcy court. See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990). However, we review its factual findings for clear error. Stern v. Marshall, - -- U. S. ---, 131 S. Ct. 2594, 2627 (2011) (Breyer, J., dissenting).

In this opinion, we focus on several statements by appellees: (1) in the motion for relief from stay, the statements suggesting that the Taylors had failed to make payments on their mortgage since the filing of their bankruptcy petition and the identification of the months in which and the amount by which they were supposedly delinquent; (2) in the motion for relief from stay, the statement that the Taylors had no or inconsequential equity in the property; (3) in the response to the claim objection, the statement that the figures in the proof of claim were accurate; and, (4) at the first hearing, the attempt to have the requests for admission concerning the lack of mortgage payments deemed admitted. As discussed above, all of these statements involved false or misleading representations to the court. 13

13 Appellees expend great energy in questioning the factual findings of the bankruptcy court, but we, like the District Court before us, see no error.


A. Alleged literal truth

As an initial matter, the appellees^ insistence thatQFH^ WKDW^

Doyle^s  and Fitzgibbon^s statements were “literally true”ZHUH ^ 3OLWHUDOOT should not exculpate them from Rule 9011 sanctions. First, it should be noted that several of these claims were not, in fact, accurate. There was no literal truth to the statement in the request for relief from stay that the Taylors had no equity in their home. Doyle admitted that she made that statement simply as “part 3of the form pleading,” and “acknowledged' ^ DQG ^ having no knowledge of the value of the property and having made no inquiry on this subject.” (App. 215.) Similarly, the statement in the claim objection response that the figures in the original proof of claim were correct was false.

Just as importantly, appellees cite no authority, and we are aware of none, which permits statements under Rule 9011 that are literally true but actually misleading.     If the

reasonably foreseeable effect of Doyle^s or Fitzgibbon^sLW]JLEERQ¶V ^ representations to the bankruptcy court was to mislead the court, they cannot be said to have complied with Rule 9011. See Williamson v. Recovery Ltd. P’ship, 542 F.3d 43, 51 (2d

Cir. 2008) ( a party violates Rule 11 “by making false,H ^ ^ ^ ^ 3E\^ PDNLQJ C misleading, improper, or frivolous representations to the court”) (emphasis added).

In particular, even assuming that Doyle^s andQG ^ Fitzgibbon^s statements as to the payments made by the Taylors were literally accurate, they were misleading. In attempting to evaluate whether HSBC was justified in seeking a relief from the stay on foreclosure, the court needed to know that at least partial payments had been made and that the failure to make some of the rest of the payments was due


to a bona fide dispute over the amount due, not simple default. Instead, the court was told only that the Taylors had “failed to make regular mortgage payments” from November 1, 2007 to January 15, 2008, with a mysterious notation concerning a “suspense balance” following. (App. 214-15.)ZLQJ^ ^ ^ A court could only reasonably interpret this to mean that the Taylors simply had not made payments for the period

specified. As the bankruptcy court found, “[f]or at best aG ^ ^ 3>I@RU ^ DW ^ EH' $540 dispute, the Udren Firm mechanically prosecuted a motion averring a $4,367[] post-petition obligation, the aim of which was to allow HSBC  to foreclose on [the Taylors^]^ RQ ^ >WKH ^ 7D\ORUV house.” (App. 215.) Therefore, Do yle^ s' and Fitzgibbon ^s )LW] JLEERQ¶V ^ statements in question were either false or misleading.

B.            Reasonable inquiry

We must, therefore, determine the reasonableness of the appellees^ inquiry before they made their false

representations. Reasonableness has been  defined as “an GHILQHG ^ DV F] 3 D ^ objective knowledge or belief at the time of the filing of a challenged paper that the claim was well-grounded in law and

fact.” ^Ford Motor Co. v. Summit Motor Prods., Inc., 930

F.2d 277, 289 (3d Cir. 1991) (internal quotations omitted). The requirement of reasonable inquiry protects not merely the court and adverse parties, but also the client. The client is not expected to know the technical details of the law and ought to be able to rely on his attorney to elicit from him the information necessary to handle his case in the most effective, yet legally appropriate, manner.

In determining reasonableness, we have sometimes

looked at several factors: “the amount of time available to theQWEIRIEIWLPHEI

signer for conducting the factual and legal investigation; the


necessity for reliance on a client for the underlying factual information; the plausibility of the legal position advocated; . . . whether the case was referred to the signer by another member of the Bar . . . [; and] the complexity of the legal and factual issues implicated.”  Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90, 95 (3d Cir. 1988). However, it does not appear that the court must work mechanically through these factors when it considers whether to impose sanctions. Rather, it should consider the reasonableness of the inquiry under all the material circumstances. “ [T]he applicable standard is one of reasonableness under the circumstances.” Bus. Guides, Inc. v. Chromatic Commc’ns Ents., Inc.,  498 U.S. 533, 551 (1991); accord Garr v. U.S. Healthcare, Inc., 22 F.3d 1274, 1279 (3d Cir. 1994).

Central to this case, then, is the degree to which an attorney may reasonably rely on representations from her

client. An attorney certainly “is not always foreclosed fromFORVHG ^ IURP ^ relying on  information from other persons.” Garr, 2 2 F.3 dRQV ^ ' ^ ^ 1278. In making statements to the court, lawyers constantly and appropriately rely on information provided by their clients, especially when the facts are contained in a client^sW¶V ^ computerized records. It is difficult to imagine how attorneys might function were they required to conduct an independent investigation of every factual representation made by a client before it could be included in a court filing. While Rule 9011

“does not  recognize a „pure heart an d gempty h ead^ defense,”G ^ HPSW\^ KHDG¶ ^ GI In re Cendant Corp. Derivative Action Litig., 96 F. Supp. 2d 403, 405 (D.N.J. 2000), a lawyer need not routinely assume the duplicity or gross incompetence of her client in order to meet the requirements of Rule 9011. It is therefore usually reasonable for a lawyer to rely on information provided by a client, especially where that information is superficially


plausible and the client provides its own records which appear to confirm the information.

However, Do yle^s behavior was unreasonable, both as a matter of her general practice and in ways specific to this

case. First, reasonable reliance on a  client^s representations ^ FOLHQW¶V ^ UHSUH` assumes a reasonable attempt at eliciting them by the attorney. That is, an attorney must, in her independent professional judgment, make a reasonable effort to determine what facts are likely to be relevant to a particular court filing and to seek those facts from the client. She cannot simply settle for the information her client determines in advance²2 by means of an automated system, no less²that she should be provided with.

Yet that is precisely what happened here. “[I]tW r]

appears,” the ' bankruptcy  court observed, “that Doyle,^ theOH ^ ^ WKH ^ manager of the Udren Firm bankruptcy department, had no relationship with the  client, HSBC.” (App. 202. ) By working ' ^ ^ solely with NewTrak, a system which no one at the Udren Firm seems to have understood, much less had any influence over, Doyle permitted HSBC to define²perilously

narrowly²the information she had about the  Taylors^ matter. ^ WKH ^ 7D\ORUV¶ ^ PI That HSBC was not providing her with adequate information through NewTrak should have been evident to Doyle from the face of the NewTrak file. She did not have any information concerningJ the Taylors^ equity in the home, though she madeRPH ^ ^ WKRXJK ^ VKH C a statement specifically denying that they had any.

More generally, a reasonable attorney would not file a motion for relief from stay for cause without inquiring of the client whether it had any information relevant to the alleged

cause, that is, the debtor^s failure to make payments. Had ^ SD\PHQWV ^


Doyle made even that most minimal of inquiries, HSBC presumably would have provided her with the information in its files concerning the flood insurance dispute, and Doyle could have included that information in her motion for relief from stay²or, perhaps, advised the client that seeking such a motion would be inappropriate under the circumstances.

With respect to the Taylors^ case in 7particular, DoyleVH ^ LQ ^ SDUWLFXODL ignored clear warning signs as to the accuracy of the data that she did receive. In responding to the motion for relief from stay, the Taylors submitted documentation indicating that they had already made at least partial payments for some of the months in question. In objecting to the proof of claim, the Taylors pointed out the inaccuracy of the mortgage payment listed and explained the circumstances surrounding the flood insurance dispute. Although Doyle certainly was not obliged to accept the Taylors^ claims at face value, they indisputably put her on notice that the matter was not as simple as it might have appeared from the NewTrak file. At that point, any reasonable attorney would have sought clarification and further documentation from her client, in order to correct any prior inadvertent misstatements to the court and to avoid any further errors. Instead, Doyle mechanically affirmed facts (the monthly mortgage payment) that her own prior filing with the court had already contradicted.

Doyle^s reliance on HSBC was particularly problematic because she was not, in fact, relying directly on HSBC. Instead, she relied on a computer system run by a third-party vendor. She did not know where the data provided by NewTrak came from. She had no capacity to check the data against the original documents if any of it seemed implausible. And she effectively could not question


the data with HSBC. In her relationship with HSBC, Doyle essentially abdicated her professional judgment to a black box.

None of the other factors discussed in the Mary Ann Pensiero case which are applicable here affect our analysis of

the reasonableness of appellees^ actions. This was no t a^ 7KLV ^ ZDV ^ QRW ^ matter of extreme complexity, nor of extraordinary deadline pressure. Although the initial data the Udren Firm received was not, in itself, wildly implausible, it was facially

inadequate. ,In short, then,  w e find that Doyle^s inquiryKDW ^ 'R\OH¶V ^ LQTX before making her representations to the bankruptcy court was unreasonable.

In making this finding, we, of course, do not mean to suggest that the use of computerized databases is inherently inappropriate. However, the NewTrak system, as it was being used at the time of this case, permits parties at every level of the filing process to disclaim responsibility for inaccuracies. HSBC has handed off responsibility to a third-party maintainer, LPS, which, judging from the results in this case, has not generated particularly accurate records. LPS apparently regards itself as a mere conduit of information. Appellees, the attorneys and final link in the chain of transmission of this information to the court, claim reliance

on NewTrak^s records. Who, precisely, ca n be heldVHO\^ ^ FDQ ^ EH ^ IC accountable if HSBC^s records are  inadequately maintained,DGHTXDWHO\^ PDLQ` LPS transfers those records inaccurately into NewTrak, or a law firm relies on the NewTrak data without further investigation, thus leading to material misrepresentations to the court? It cannot be that all the parties involved can insulate themselves from responsibility by the use of such a system. In the end, we must hold responsible the attorneys


who have certified to the court that the representations they are making are “well-grounded in law and fact.”

C.            Notice

Doyle, Udren, and the Udren Firm also argue on appeal that they had insufficient notice that they were in

danger of sanctions.14 Rule 9011 directs that a court  “[o]n itsW ^ D ^ FRXUW ^ 3>R@Q [ own initiative . . . may enter an order describing the specific conduct that appears to violate [the rule] and directing an attorney . . . to show cause why it has not violated [the rule].”H ^ UXOH@ ^ ' ^ ^

Fed. R. Bank. P. 9011(c)(1)(B). Due process in the

imposition of Rule I9011 sanctions requires “particularizedUHTXLUHV ^ 3SDUWLF. notice.” Jones v.  Pittsburgh Nat’l Corp., 899 F.2d 1350,^ 135 7  (3 d Cir.  1990). The meaning   of “particularized notice” RI ^ 3SDUWLFXODUL]H has not been rigorously defined in this circuit. In Fellheimer, we noted that this requirement was met where the sanctioned party “was 3 provided with sufficient, advance notice of exactlyDGYDQFH ^ QRWLFH ^ R which conduct was alleged to be sanctionable.” Fellheimer,FWLRQDEOH ^ ' ^ ^

57 F.3d at 1225. In Simmerman v. Corino, 27 F.3d 58, 64 (3d

Cir. 1994),1 Fwe held that “the party sought to be 3sanctioned isW\^ VRXJKW ^ WR ^ EH C entitled to particularized notice including, at a minimum, 1) the fact that Rule 11 sanctions are under consideration, 2) the reasons why sanctions are under consideration . . . .”

The bankruptcy court^s June order ^ was clearly inHU ^ ZDV ^ FOHDUOT substance an order to show cause, even if it was not

14 Any claim regarding a due process right to notification of the form of sanctions being considered has been waived by appellees, as it was not raised in their papers, either here or in the district court. United States v. Pelullo, 399 F.3d 197, 222 (3d Cir. 2005).


specifically captioned as such. The more difficult question is

whether the court adequately described “the specific  conductLEHG^ 3WKH^ VSHFLIL that appear[ed] to violate” Rule 9011, so as to give sufficient^ ^ ^ ^ ^ VR^ DV ^ WR^ J notice of “exactly3 which conduct was Falleged to beDV^ DOOHJHG^ WRC sanctionable.” As mentioned  above, the court^s June order ^ WKH ^ FRXUW¶V ^ -X identified “pressing a relief motion o n admissions that were RQ ^ DGPLVVLRQV ^ -0 known to be untrue, and signing and filing pleadings without

knowledge or inquiry regarding th e matters pled therein”   asDWWHUV ^ SOHG ^ WK] the conduct the court wished to investigate. (App. 119) The

judge also  told Fitzgibbon, “I^m issuing an  order  to  showXLQJ ^ DQ ^ RUGHU ^ W cause on your firm, too, for filing these things . . . without

having any knowledge. And filing answers . . . without any

knowledge.” Id. The June order also made specific reference

to “the 3 motion  for relief, the admissions and the reply  to theVVLRQV ^ DQG ^ WKH C objection.”LRQ ^ ' ^ ^

In these particular circumstances, the notice given to appellees was sufficient to put them on notice as to which aspects of their conduct were considered sanctionable. At that point in the case, the Udren Firm lawyers had only filed three substantive papers with the court²totaling six (substantive) pages²and the court found all of them

problematic. Appe llees ^ claim that they believed  that the^ WKH\^ EHOLHYHGF only issue at the time of the hearing w as Fitzgibb on^sHDULQJ ^ ZDV ^ )LW]J: inability to contact HSBC is simply not plausible in light of the language of the June order and the bankruptcy co urt^sNUXSWF\^ FRXUW¶V C statements at the hearing, which were incorporated by reference into the June order. In a case in which more extensive docket activity had taken place, the bankruptcy court^s order might no t have been sufficient to informQEI VXIILFLHQW ^ WR [ appellees as to which of their filings were sanctionable, but, given the unusual circumstances here, it was. But see Martens v. Thomann, 273 F.3d 159, 178 (2d Cir. 2001)


(requiring specific identification of individual challenged statements to uphold imposition of sanctions).

D. The Udren Firm and Udren’ s individual ^ LQGLYLGXDO ^ liability

We also find that it was appropriate to extend sanctions to the Udren Firm itself. Rule 11 explicitly allows the imposition of sanctions against law firms. Fellheimer, 57 F.3d 1215 at 1223 n.5. In this instance, the bankruptcy court found that the misrepresentations in the case arose not simply from the irresponsibility of individual attorneys, but from the system put in place at the Udren Firm, which emphasized high-volume, high-speed processing of foreclosures to such an extent that it led to violations of Rule 9011.

However, we do not find that responsibility for these failures extends specifically to Udren, whose involvement in this matter was limited to his role as sole shareholder of the firm.

E.            The District Court’s reversal of sanctions against HSBC

Ordinarily, of course, a party which does not appeal a decision by a district court cannot receive relief with respect to that decision. “[T]he mere fact that a [party] may wind up with a judgment against one [party] that is not logically consistent with an unappealed judgment against another is not alone sufficient to justify taking away the unappealed

judgment in favor of a party not before the court.” Repola v.RUH ^ WKH ^ FRXUW ^ ' [ Morbark Indus., Inc., 980 F.2d 938, 942 (3d Cir. 1992). However,  “where the disposition as to one party  isV F1 WR ^ RQH ^ SDU


inextricably intertwined with the interests of a non-appealing

party,” it 'may be “impossible 3to grant relief to  one partyQW ^ UHOLHI ^ WR^ R without granting relief to the other.” United States v. Tabor Court Realty Corp., 943 F.2d 335, 344 (3d Cir. 1991). In Tabor Court Realty, a contract dispute, the assignee of a property had failed to appeal a decision, while the assignor had (and had ultimately prevailed). Given that the dispute was over the disposition of the property, it was impossible to grant relief to the assignor without also granting relief to the assignee.

In this instance, whether the lawyers at the Udren Firm violated Rule 9011 is a question analytically distinct from whether HSBC was responsible for any violations of Rule 9011. A court might find that HSBC was responsible for violations, whereas, say, Udren himself was not. It was entirely possible for HSBC to comply with the sanctions ordered (a letter to its firms informing them that they are permitted to consult with HSBC) without affecting the interests of the lawyers at the Udren Firm. Therefore, the interests of the lawyers at the Udren Firm and HSBC were not “ineHIicabl intertwined” and the Disthbt Qflrt lacked jurisdiction to reverse the sanctions against HSBC.

F.             Alternative basis for the District Court’s¶V ^ decision

,In reversing the bankruptcy court^s decision,^ theXUW¶V ^ GHFLVLRQ ^ District Court focused on that court^s apparent attention to theWWHQWLRQ ^ WR ^ WK broader problems of high-volume bankruptcy practice in imposing sanctions. It is true that the bankruptcy judge noted that appellees were not the first attorneys to run into these sorts of difficulties in her court. But she nonetheless made


individualized findings of wrong-doing after four days of hearings and issued sanctions thoughtfully chosen to prevent the recurrence of problems at the Udren Firm based on what she had learned of practices there. Insofar as she considered the effect of the sanctions on the future conduct of other attorneys appearing before her, such considerations were

permissible. After all,  “the prime  goal [of Rule 1 1  sanctions] JRDO ^ >RI ^ 5XOH ^ ^ ^ C should be deterrence of repetition o f improper conduct.”Q ^ RI E] LPSURSHU ^ FR Waltz v. County of Lycoming, 974 F.2d 387, 390 (3d Cir. 1992).

G.            Conclusion

We appreciate that the use of technology can save both litigants and attorneys time and money, and we do not, of course, mean to suggest that the use of databases or even certain automated communications between counsel and client are presumptively unreasonable. However, Rule 11 requires more than a rubber-stamping of the results of an automated process by a person who happens to be a lawyer. Where a lawyer systematically fails to take any responsibility for seeking adequate information from her client, makes representations without any factual basis because they are included in a  “form pleading” she has been trained to fill out, and ignores obvious indications that her information may be incorrect, she cannot be said to have made reasonable inquiry. Therefore, we find that the bankruptcy court did not abuse its discretion in imposing sanctions on Doyle or the Udren Firm itself. However, it did abuse its discretion in imposing sanctions on Udren individually.



For the foregoing reasons, we will reverse the District Court with respect to Doyle and the Udren Firm, affirming

the bankruptcy court^s imposition of sanctions. With respectE] VDQFWLRQV ^ ^ ^ :LVA to HSBC, as discussed previously, the District Court lacked jurisdiction to reverse the sanctions, as do we; therefore, we vacate the District Court^s order with respect to that party, leaving the sanctions imposed by the bankruptcy court in place. We will affirm the District Court with respect to Udren individually, reversing the bankruptcy^s courtRXUW ^ imposition of sanctions.



Monday, August 29, 2011

More Bumpy Rides for MERS: Failure to Hold the Promissory Note Voids Foreclosure

The Court of Appeals of Michigan has found in yet another case, Aaron Richard v. Schneiderman & Sherman, PC., et al., Court of Appeals Michigan, Appeal No. 10-000273-CZ, (August 11, 2011), [1] that the Mortgage Electronic Registration System, Inc. (MERS) could not conduct a non-judicial foreclosure – because it was a mere “nominee.”    Michigan Statute MCL 600.3204(1)(d) [2] states that to conduct a non-judicial foreclosure in Michigan the Advertising Lender must either hold the Promissory Note or be the authorized “servicer.”   Because MERS neither held (nor owned) the Promissory Note concerning the debt, nor was an active servicer, the non-judicial foreclosure it conducted in Richard, supra was void ab initio.

Aaron Richard v. Schneiderman & Sherman, PC., et al., Court of Appeals Michigan, Appeal No. 10-000273-CZ, (August 11, 2011), reads as follows:

AARON RICHARD, Plaintiff-Appellant,
FOR PUBLICATION August 11, 2011
9:00 a.m.
No. 297353
Wayne Circuit Court LC No. 10-000273-CZ
Before: BORRELLO, P.J., and METER and SHAPIRO, JJ.
Plaintiff, Aaron Richard, appeals as of right an order granting summary disposition in favor of defendants, Schneiderman & Sherman, P.C. (Schneiderman), GMAC Mortgage (GMAC), and Mortgage Electronic Registration Systems, Inc. (MERS). We reverse the trial court's grant of summary disposition, vacate the foreclosure proceeding, and remand further proceedings consistent with this opinion.
This case arises from plaintiff's attempts to challenge the foreclosure and sale of property he owned located at 19952 Hubbell in Detroit. Plaintiff purchased the property in part through a $50,000 loan, executed on May 4, 2006, from Homecomings Financial Network, Inc. The loan was secured by a May 4, 2006, mortgage with MERS, as the nominee of Homecomings.
It is not clear from the record when plaintiff fell behind on his mortgage payments. However, on October 9, 2009, Schneiderman, acting as GMAC's agent, mailed plaintiff a notice stating that his mortgage was in default and informing him of his rights, including to request mediation. The outstanding debt owed to GMAC was listed as $50,267.78. Ultimately, MERS began non-judicial foreclosure by advertisement under MCL 600.3201, et seq., and purchased the property at the subsequent sheriff's sale.
Plaintiff filed suit, in pro per, during the redemption period, alleging that the sheriff's sale was "flawed" on numerous grounds and asserted that MERS did not hold any rights to the debt. Defendants filed for summary disposition, asserting, among other things, that the sheriff's sale was "not only legal, but also valid, as all required procedures were followed." The trial court granted summary disposition in favor of defendants and dismissed plaintiff's claim.
Although many of plaintiff's claims are without merit, it is clear that the sheriff's sale was invalid because, although MERS was only a mortgagee, MERS foreclosed on plaintiff's property utilizing non-judicial foreclosure by advertisement. This Court has held that MERS is not entitled to utilize foreclosure by advertisement where it does not own the underlying note. Residential Funding Co, Inc v Saurman,     Mich App        NW2d  (Docket Nos. 290248, 291443; April 21, 2011), slip op at 11. Under such circumstances, "MERS' inability to comply with the statutory requirements rendered the foreclosure proceedings . . . void ab initio." Id. Because the application of Saurman is dispositive, we must determine whether Saurman is retroactive and, if so, whether to assign it full or limited retroactivity.
"[T]he general rule is that judicial decisions are to be given complete retroactive effect." Hyde v Univ of Mich Bd of Regents, 426 Mich 223, 240; 393 NW2d 847 (1986). "Complete prospective application has generally been limited to decisions which overrule clear and uncontradicted case law." Id.
Rules determined in opinions that apply retroactively apply to all cases "still open on direct review and as to all events, regardless of whether such events predate or postdate our announcement of the rule[s]." Harper v Virginia Dep't of Taxation, 509 US 86, 97, 113 S Ct 2510, 125 L Ed 2d 74 (1993). Rules determined in opinions that apply prospectively only, on the other hand, not only do not apply to cases still open on direct review, but do not even apply to the parties in the cases in which the rules are declared. See Pohutski v City of Allen Park, 465 Mich 675, 699, 641 NW2d 219 (2002). [McNeel v Farm Bureau Ins, 289 Mich App 76, 94; 795 NW2d 205 (2010).]
Given that this Court applied its holding to the cases in Saurman, it is clear that the holding in Saurman has been afforded at least limited retroactivity. [1] However, cases given limited retroactivity apply "in pending cases where the issue had been raised and preserved," Stein v Southeastern Mich Family Planning Project, Inc, 432 Mich 198, 201; 438 NW2d 876 (1989), while cases with full retroactivity apply to all cases then pending. This distinction makes a difference because, although plaintiff contested the foreclosure, he did not specifically raise and preserve the issue of whether MERS has the authority to foreclose by advertisement. Thus, Saurman is only applicable to this case if it is granted full retroactivity.
"The threshold question is whether 'the decision clearly established a new principle of law."' Rowland v Washtenaw Co Rd Comm, 477 Mich 197, 220; 731 NW2d 41 (2007) (citation omitted). Our Supreme Court has held that cases that properly interpret statutes, even if prior caselaw has held differently, "restore[] legitimacy to the law" and, thus, are "not a declaration of
a new rule, but . . . a vindication of controlling legal authority." Id. at 222 (quotation marks and citation omitted). In Saurman, this Court interpreted MCL 600.3204(1)(d). There was no existing caselaw and, therefore, it did not overrule any law or reconstrue a statute. See Hyde, 426 Mich at 240. Consequently, this Court's decision in Saurman was not "tantamount to a new rule of law," see Rowland, 477 Mich at 222 n 17, and, therefore should be given full retroactive effect. [2]  Hence, Saurman is applicable to the instant case, rendering the foreclosure proceedings void ab initio. Saurman,      Mich App at , slip op at 11.
Accordingly, we reverse the trial court's grant of summary disposition, vacate the foreclosure proceeding, and remand for further proceedings consistent with this opinion. We do not retain jurisdiction.

/s/ Stephen L. Borrello
/s/ Patrick M. Meter
/s/ Douglas B. Shapiro



In addition, "there is a serious question as to whether it is constitutionally legitimate for this Court to render purely prospective opinions, as such ruling are, in essence, advisory opinions." Rowland v Washtenaw Co Rd Comm, 477 Mich 197, 221; 731 NW2d 41 (2007), quoting Wayne Co v Hathcock, 471 Mich 445, 485 n 98; 684 NW2d 765 (2004).
We reiterate the general rule that a retroactive decision cannot serve to reopen those cases that are already closed. Thus, where the time to oppose the foreclosure by advertisement, the time to oppose the resulting eviction, and the time to appeal from those actions have run, a party may not rely on Saurman in an attempt to reopen those cases to recover possession or ownership.
Hugh Wood, Esq.
Wood & Meredith, LLP
3756 LaVista Road
Suite 250
Atlanta (Tucker), GA 30084

twitter: USALawyer_
Phone: 404-633-4100
Fax: 404-633-0068




GERALD SAURMAN, Defendant-Appellant.
COREY MESSNER, Defendant-Appellant.
Nos. 290248, 291443
Court of Appeals of Michigan
April 21, 2011

         Kent Circuit Court LC No. 08-011138-AV, Jackson Circuit Court LC No. 08-003406-AV

          Before: Wilder, P.J., and Servitto and Shapiro, JJ.

          Shapiro, J.

         These consolidated cases each involve a foreclosure instituted by Mortgage Electronic Registration System (MERS), the mortgagee in both cases. The sole question presented is whether MERS is an entity that qualifies under MCL 600.3204(1)(d) to foreclose by advertisement on the subject properties, or if it must instead seek to foreclose by judicial process. We hold that MERS does not meet the requirements of MCL 600.3204(1)(d) and, therefore, may not foreclose by advertisement.


         In these cases, each defendant purchased property and obtained financing for their respective properties from a financial institution. The financing transactions involved loan documentation ("the note") and a mortgage security instrument (the "mortgage instrument"). The original lender in both cases was Homecoming Financial, LLC.

          Each note provided for the amount of the loan, the interest rate, methods and requirements of repayment, the identity of the lender and borrower and the like. The mortgage instrument provided for rights of foreclosure of the property by the mortgagee in the event of default on the loan. The lender, though named as the lender in the mortgage security instrument, was not designated therein as the mortgagee. Instead, the mortgage stated that the Mortgage Electronic Registration Systems, Inc ("MERS") "is the mortgagee under this Security Instrument" and it contained several provisions addressing the relationship between MERS and the lender including:

"MERS" is Mortgage Electronic Registration Systems Inc. MERS is a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns. MERS is the mortgagee under this Security Instrument.
* * *
This Security Instrument secures to Lender: (i) the repayment of the Loan, and all renewals, extensions and modifications of the Note; and (ii) the performance of Borrower's covenants and agreements under this Security Instrument and the Note. For this purpose, Borrower does hereby mortgage, warrant, grant and convey to MERS (solely as nominee for Lender and Lender's successors and assigns) and to the successors and assigns of MERS, with the power of sale, the following described property . . . . Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this 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 exercise any or 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 this Security Instrument.
         Defendants defaulted on their respective notes. Thereafter, MERS began non-judicial foreclosures by advertisement as permitted under MCL 600.3201, et seq., purchased the property at the subsequent sheriff's sales and then quit-claimed the property to plaintiffs as respective successor lenders. When plaintiffs subsequently began eviction actions, defendants challenged the respective foreclosures as invalid, asserting, inter alia, that MERS did not have authority under MCL 600.3204(1)(d) to foreclose by advertisement because it did not fall within any of the three categories of mortgagees permitted to do so under that statute. The district courts denied defendants' assertions that MERS lacked authority to foreclose by statute and their conclusions were affirmed by the respective circuit courts on appeal. We granted leave to appeal in both cases.[1]

          II. ANALYSIS


         We review de novo decisions made on motions for summary disposition, [2] Coblentz v Novi, 475 Mich. 558, 567; 719 N.W.2d 73 (2006), as well as a circuit court's affirmance of a district court's decision on a motion for summary disposition. First of America Bank v Thompson, 217 Mich.App. 581, 583; 552 N.W.2d 516 (1996). We review all affidavits, pleadings, depositions, admissions and other evidence submitted by the parties in the light most favorable to the party opposing the motion, in this case, defendants. Coblentz, 475 Mich. at 567-568.

         We also review de novo questions of statutory interpretation and application. Id. at 567.

The primary goal of statutory interpretation is to give effect to the intent of the Legislature. This determination is accomplished by examining the plain language of the statute. Although a statute may contain separate provisions, it should be read as a consistent whole, if possible, with effect given to each provision. If the statutory language is unambiguous, appellate courts presume that the Legislature intended the meaning plainly expressed and further judicial construction is neither permitted nor required. Statutory language should be reasonably construed, keeping in mind the purpose of the statute. If reasonable minds could differ regarding the meaning of a statute, judicial construction is appropriate. When construing a statute, a court must look at the object of the statute in light of the harm it is designed to remedy and apply a reasonable construction that will best accomplish the purpose of the Legislature. [ISB Sales Co v Dave's Cakes, 258 Mich.App. 520, 526-527; 672 N.W.2d 181 (2003) (citations omitted).]

         The parties, in their briefs and at oral argument, explained that MERS was developed as a mechanism to provide for the faster and lower cost buying and selling of mortgage debt. Apparently, over the last two decades, the buying and selling of loans backed by mortgages after their initial issuance had accelerated to the point that those operating in that market concluded that the statutory requirement that mortgage transfers be recorded was interfering with their ability to conduct sales as rapidly as the market demanded. By operating through MERS, these financial entities could buy and sell loans without having to record a mortgage transfer for each transaction because the named mortgagee would never change; it would always be MERS even though the loans were changing hands. MERS would purportedly track the mortgage sales internally so as to know for which entity it was holding the mortgage at any given time and, if foreclosure was necessary, after foreclosing on the property, would quit claim the property to whatever lender owned the loan at the time of foreclosure.

         As described by the Court of Appeals of New York, in MERSCORP, Inc v Romaine, 8 N.Y.3d 90, 96; 861 N.E.2d 81(2006):

In 1993, the MERS system was created by several large participants in the real estate mortgage industry to track ownership interests in residential mortgages. 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. [Footnotes omitted.]
         The sole issue in this case is whether MERS, as mortgagee, but not noteholder, could exercise its contractual right to foreclose by means of advertisement.

         C. MCL 600.3204(1)(d)

         Foreclosure by advertisement is governed by MCL 600.3204(1)(d), which provides, in pertinent part:

[A] party may foreclose a mortgage by advertisement if all of the following circumstances exist:
* * *
(d) The party foreclosing the mortgage is either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage.
The parties agree that MERS is neither the owner of the indebtedness, nor the servicing agent of the mortgage. Therefore, MERS lacked the authority to foreclose by advertisement on defendants' properties unless it was "the owner . . . of an interest in the indebtedness secured by the mortgage." MCL 600.3204(1)(d).

         The question, then, is what being the "owner . . . of an interest in the indebtedness secured by the mortgage" requires. According to Black's Law Dictionary, to "own" means "[t]o have good legal title; to hold as property; to have a legal or rightful title to." Black's Law Dictionary (6th ed). That text defines an "interest" as "the most general term that can be employed to denote a right, claim, title or legal share in something". "Indebtedness" is defined as "[t]he state of being in debt . . . the owing of a sum of money upon a certain and express agreement."

         In these cases, a promissory note was exchanged for loans of $229, 950 and $207, 575, respectively. Thus, reasonably construing the statute according to its common legal meaning, ISB Sales Co, 258 Mich.App. at 526-527, the defendants' indebtedness is solely based upon the notes because defendants owed monies pursuant to the terms of the notes. Consequently, in order for a party to own an interest in the indebtedness, it must have a legal share, title, or right in the note.

         Plaintiffs' suggestion that an "interest in the mortgage" is sufficient under MCL 600.3204(d)(1) is without merit. This is necessarily so, as the indebtedness, i.e., the note, and the mortgage are two different legal transactions providing two different sets of rights, even though they are typically employed together. A "mortgage" is "[a] conveyance of title to property that is given as security for the payment of a debt or the performance of a duty and that will become void upon payment or performance according to the stipulated terms." The mortgagee has an interest in the property. See Citizens Mtg Corp v Mich. Basic Prop Ins Assoc, 111 Mich.App. 393, 397; 314 N.W.2d 635 (1981) (referencing the "mortgagee's interests in the property"). The mortgagor covenants, pursuant to the mortgage, that if the money borrowed under the note is not repaid, the mortgagee will retain an interest in the property. Thus, unlike a note, which evidences a debt and represents the obligation to repay, a mortgage represents an interest in real property contingent on the failure of the borrower to repay the lender. The indebtedness, i.e., the note, and the mortgage are two different things.

         Applying these considerations to the present case, it becomes obvious that MERS did not have the authority to foreclose by advertisement on defendants' properties. Pursuant to the mortgages, defendants were the mortgagors and MERS was the mortgagee. However, it was the plaintiff lenders that lent defendants money pursuant to the terms of the notes. MERS, as mortgagee, only held an interest in the property as security for the note, not an interest in the note itself. MERS could not attempt to enforce the notes nor could it obtain any payment on the loans on its own behalf or on behalf of the lender. Moreover, the mortgage specifically clarified that, although MERS was the mortgagee, MERS held "only legal title to the interest granted" by defendants in the mortgage.[3] Consequently, the interest in the mortgage represented, at most, an interest in defendants' properties. MERS was not referred to in any way in the notes and only Homecomings held the notes. The record evidence establishes that MERS owned neither the notes, nor an interest, legal share, or right in the notes. The only interest MERS possessed was in the properties through the mortgages. Given that the notes and mortgages are separate documents, evidencing separate obligations and interests, MERS' interest in the mortgage did not give it an interest in the debt.

         Moreover, plaintiffs' analysis ignores the fact that the statute does not merely require an "interest" in the debt, but rather that the foreclosing party own that interest. As noted above, to own means "to have good legal title; to hold as property; to have a legal or rightful title to." None of these terms describes MERS' relationship to the note. Plaintiffs' claim that MERS was a contractual owner of an interest in the notes based on the agreement between MERS and the lenders misstates the interests created by that agreement. Although MERS stood to benefit if the debt was not paid—it stood to become the owner of the property—it received no benefit if the debt was paid. MERS had no right to possess the debt, or the money paid on it. Likewise, it had no right to use or convey the note. Its only "right to possess" was to possess the property if and when foreclosure occurred. Had the lender decided to forgive the debt in the note, MERS would have had no recourse; it could not have sued the lender for some financial loss. Accordingly, it owned no financial interest in the notes. Indeed, it is uncontested that MERS is wholly without legal or rightful title to the debt and that there are no circumstances under which it is entitled to receive any payments on the notes.

         The dissent relies on the language in the mortgage instrument to suggest a contractual basis to find that MERS has an ownership interest in the loan. However, the fact that Homecomings gave MERS authority to take "any action required of the Lender" did not transform MERS into an owner of an interest in the notes. Trustees have the authority to take action on behalf of a trust; they can even be authorized to take "any" action. Nevertheless, such authority does not give them an ownership interest in the trust. Moreover, the provision on which the dissent relies (but does not fully quote) contains language limiting MERS to taking action on behalf of the lender's equitable interest in the mortgage instrument.[4] The relevant language provides that the borrower "understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument" (emphasis added) and gives MERS "the right: to exercise any or all of those interests . . . and to take any action required of the Lender including, but not limited to, releasing and canceling this Security Instrument . . . ." (emphasis added). Thus, the contract language expressly limits the interests MERS owns to those granted in the mortgage instrument and limits MERS' right to take action to those actions related to the mortgage instrument. Nothing in this language permits MERS to take any action with respect to the debt, or provides it any interest therein.

         Finally, even assuming that the contract language did create such a right, Homecomings cannot grant MERS the authority to take action where the statute prohibits it. Regardless of whether Homecomings would like MERS to be able to take such action, it can only grant MERS the authority to take actions that our Legislature has statutorily permitted. Where the Legislature has limited the availability to take action to a specified group of individuals, parties cannot grant an entity that falls outside that group the authority to take such actions. Here, the Legislature specifically requires ownership of an interest in the note before permitting foreclosure by advertisement.

         The contention that the contract between MERS and Homecomings provided MERS with an ownership interest in the note stretches the concept of legal ownership past the breaking point. While the term may be used very loosely in some popular contexts, such as the expression to "own a feeling, " such use refers to some subjective quality or experience. We are confident that such a loose and uncertain meaning is not what the Legislature intended. Rather, the Legislature used the word "owner" because it meant to invoke a legal or equitable right of ownership. Viewed in that context, although MERS owns the mortgage, it owns neither the debt nor an interest in any portion of the debt, and is not a secondary beneficiary of the payment of the debt.[5]

         The dissent's conclusion, that MERS owns an interest in the note because whether it ultimately receives the property depends on whether the note is paid, similarly distorts the term "interest" from a legal term of art to a generalized popular understanding of the word. It may be that MERS is concerned with (i.e., interested in) whether the loans are paid because that will define its actions vis-à-vis the properties, but being concerned about whether someone pays his loan is not the same as having a legal right, or even a contingent legal right, to those payments.

         Plaintiffs are mistaken in their suggestion that our conclusion that MERS does not have "an interest in the indebtedness" renders that category in the statute nugatory. We need not determine the precise scope of that category, but, by way of example, any party to whom the note has been pledged as security by the lender has "an interest in the indebtedness" because, under appropriate circumstances, it owns the right to the repayment of that loan.

         Plaintiffs also argue that MERS had the authority to foreclose by advertisement as the agent or nominee for Homecomings, who held the note and an equitable interest in the mortgage. However, this argument must also fail under the statute because the statute explicitly requires that, in order to foreclose by advertisement, the foreclosing party must possess an interest in the indebtedness. MCL 600.3204(1)(d). It simply does not permit foreclosure in the name of an agent or a nominee. If the Legislature intended to permit such actions, it could have easily included "agents or nominees of the noteholder" as parties that could foreclose by advertisement. Indeed, had the Legislature intended the result suggested by plaintiffs, it would have merely had to delete the word "servicing." The law is clear that this Court must "avoid construction that would render any part of the statute surplusage or nugatory." Wickens v Oakwood Healthcare Sys, 465 Mich. 53, 60; 631 N.W.2d 686 (2001). Thus, the Legislature's choice to permit only servicing agents and not all agents to foreclose by advertisement must be given effect.

         Similarly, we reject plaintiffs' reliance on Jackson v Mortgage Electronic Registration Sys, Inc, 770 N.W.2d 487 (Minn, 2009). Jackson, a Minnesota case, is inapplicable because it interprets a statute that is substantially different from MCL 600.3204. The statute at issue in Jackson specifically permits foreclosure by advertisement if "a mortgage is granted to a mortgagee as nominee or agent for a third party identified in the mortgage, and the third party's successors and assigns." Id. at 491. Thus, the Minnesota statute specifically provides for foreclosure by advertisement by entities that stand in the exact position that MERS does here. Indeed, the Minnesota statute is "frequently called 'the MERS statute.'" Id. at 491. Our statute, MCL 600.3204(1)(d) makes no references to nominees or agents. Rather, it requires that the party foreclosing be either the mortgage servicer or have an ownership interest in the indebtedness. The Jackson statute also revolves around the mortgage, unlike MCL 600.3204(1)(d), which uses the term indebtedness, which, as discussed previously, is a reference to the note, not the mortgage. Thus, Jackson has no application to the case at bar. Moreover, the Minnesota statute demonstrates that if our Legislature had intended to allow MERS to foreclose by advertisement, they could readily have passed a statute including language like that included in Minnesota.


         Plaintiffs suggest that, despite the plain language of the statute, the Legislature did not create three discrete categories of entities that could foreclose by advertisement. Instead, plaintiffs assert that the Legislature envisioned a continuum of entities: those that actually own the loan, those that service the loan, and some ill-defined category which might be called "everything in between." However, courts may not "rewrite the plain statutory language and substitute our own policy decisions for those already made by the Legislature." DiBenedetto v West Shore Hosp, 461 Mich. 394, 405; 605 N.W.2d 300 (2000). Thus, without any language in the statute providing for a "continuum, " let alone an analysis of what it constitutes, we find no merit in this position.

         Plaintiffs also raise a straw man argument by citing this Court's decision in Davenport v HSBC Bank USA, 275 Mich.App. 344; 739 N.W.2d 383 (2007) where we observed that "[o]ur Supreme Court has explicitly held that '[o]nly the record holder of the mortgage has the power to foreclose' under MCL 600.3204." Davenport, 275 Mich.App. at 347, quoting Arnold v DMR Financial Services, Inc (After Remand), 448 Mich. 671, 678; 532 N.W.2d 852 (1995). However, the facts in Davenport do not reflect that the party who held the note was a different party than the party who was the mortgagee. Davenport, 275 Mich.App. at 345. Indeed, the fact that the Court used the term "mortgage" interchangeably with "indebtedness, " id. at 345-347, rather than distinguishing the two terms, indicates that the same party held both the note and the mortgage. Because the instant cases involve a situation where the noteholder and mortgage holder are separate entities, the general proposition set forth in Davenport does not apply. There is nothing in Davenport holding that a party that owns only the mortgage and not the note has an ownership interest in the debt. [6]

         We also note that Arnold, the Supreme Court case relied upon in Davenport, was interpreting a previous version of MCL 600.3204, which was substantially revised when the Legislature adopted the version we must apply in this case. The statute as it existed when Arnold was decided included a provision stating:

To entitle any party to give a notice as hereinafter prescribed, and to make such a foreclosure, it shall be requisite:
* * *
(3) That the mortgage containing such power of sale has been duly recorded; and if it shall have been assigned that all the assignments thereof shall have been recorded. [Arnold, 448 Mich. at 676.]
This requirement, that a noteholder could only foreclose by advertisement if the mortgage they hold is duly recorded, is no longer part of the statute and does not apply in this case. The version of the statute interpreted in Arnold also lacked the language, later adopted, and operative in this case, specifically permitting foreclosure by advertisement of the owner of the note. Moreover, the language the Legislature chose to adopt in the amended language appears to reflect an intent to protect borrowers from having their mortgages foreclosed upon by advertisement by those who did not own the note because it would put them at risk of being foreclosed but still owing the noteholder the full amount of the loan.

         Under MCL 440.3602, an instrument is only discharged when payment is made "to a person entitled to enforce the instrument." Those parties listed in MCL 600.3204(1)(d)—the servicer, the owner of the debt, or someone owning an interest in the debt—would all be persons entitled to enforce the instrument that reflects the indebtedness. As previously noted, MERS is not entitled to enforce the note. Thus, if MERS were permitted to foreclose on the properties, the borrowers obligated under the note would potentially be subject to double-exposure for the debt. That is, having lost their property to MERS, they could still be sued by the noteholder for the amount of the debt because MERS does not have the authority to discharge the note. MERS members may agree to relinquish the right of collection once foreclosure occurs, but even if they were to do so within MERS, that would not necessarily protect the borrower in the event a lender violated that policy or the note was subsequently transferred to someone other than the lender.[7]

          These risks are, however, not present in a judicial foreclosure. MCL 600.3105(2) provides:

After a complaint has been filed to foreclose a mortgage on real estate or land contract, while it is pending and after a judgment has been rendered upon it, no separate proceeding shall be had for the recovery of the debt secured by the mortgage, or any part of it, unless authorized by the court.
Thus, once a judicial foreclosure proceeding on the mortgage has begun, a subsequent action on the note is prohibited, absent court authorization, thereby protecting the mortgagor from double recovery. See Church & Church Inc v A-1 Carpentry, 281 Mich.App. 330, 341-342; 766 N.W.2d 30 (2008), aff'd in part, vacated in part, and aff'd on other grounds in part, 483 Mich. 885 (2009); United States v Leslie, 421 F.2d 763, 766 (CA6, 1970) ("[I]t is the purpose of the statute to force an election of remedies which if not made would create the possibility that the mortgagee could foreclose the mortgage and at the same time hold the maker of the note personally liable for the debt.").

         Given that this risk of double-exposure only occurs where the mortgage holder and the noteholder are separate, the Legislature limited foreclosure by advertisement to those parties that were entitled to enforce the debt instrument, resulting in an automatic credit toward payment on the instrument in the event of foreclosure.[8]

         While MERS seeks to blur the lines between itself and the lenders in this case in order to position itself as a party that may take advantage of the restricted tool of foreclosure by advertisement, it has, in other cases, sought to clearly define those lines in order to avoid the responsibilities that come with being a lender. For example, in MERS v Neb Dep't of Banking and Fin, 270 Neb 529; 704 N.W.2d 784 (2005), the Nebraska Department of Banking and Finance asserted that MERS was a mortgage banker and, therefore, subject to licensing and registration requirements. Id. at 530. MERS successfully maintained that it had nothing to do with the loans and did not even have an equitable interest in the property, holding only "legal title to the interests granted by Borrower." Id. at 534. The court accepted MERS argument that it is not a lender, but merely a shell designed to make buying and selling of loans easier and faster by disconnecting the mortgage from the loan. Id. at 535. Having separated the mortgage from the loan, and disclaimed any interest in the loan in order to avoid the legal responsibilities of a lender, MERS nevertheless claims in the instant case that it can employ the rights of a lender by foreclosing in a manner that the statute affords only to those mortgagees who also own an interest in the loan. But as the Nebraska court stated in adopting MERS argument, "MERS has no independent right to collect on any debt because MERS itself has not extended any credit, and none of the mortgage debtors owe MERS any money." Id. at 535

         The separation of the note from the mortgage in order to speed the sale of mortgage debt without having to deal with all the "paper work" of mortgage transfers appears to be the sole reason for MERS' existence. The flip side of separating the note from the mortgage is that it can slow the mechanism of foreclosure by requiring judicial action rather than allowing foreclosure by advertisement. To the degree there were expediencies and potential economic benefits in separating the mortgagee from the noteholder so as to speed the sale of mortgage-based debt, those lenders that participated were entitled to reap those benefits. However, it is no less true that, to the degree that this separation created risks and potential costs, those same lenders must be responsible for absorbing the costs.


         Defendants were entitled to judgment as a matter of law because, pursuant to MCL 600.3204(1)(d), MERS did not own the indebtedness, own an interest in the indebtedness secured by the mortgage, or service the mortgage. MERS' inability to comply with the statutory requirements rendered the foreclosure proceedings in both cases void ab initio. Thus, the circuit courts improperly affirmed the district courts' decisions to proceed with eviction based upon the foreclosures of defendants' properties.

         In both Docket No. 290248 and 291443, we reverse the circuit court's affirmance of the district court's orders, vacate the foreclosure proceedings, and remand for further proceedings consistent with this opinion. We do not retain jurisdiction. Defendants, as the prevailing parties, may tax costs. MCR 7.219(A).

          Wilder, J. (dissenting).

         Because I conclude that, pursuant to MCL 600.3204(1)(d), Mortgage Electronic Registration System (MERS) was "the owner . . . of an interest in the indebtedness secured by the mortgage" at issue in each of these consolidated cases, I respectfully dissent.


         Defendant Gerald Saurman (Saurman) and defendant Corey Messner (Messner) executed promissory notes in exchange for loans from Homecomings Financial Network (Homecomings). To secure the repayment of the loans, Saurman and Messner executed mortgage agreements that encumbered the properties purchased with the money loaned to them by Homecomings. The mortgage agreements provided that MERS, "solely as the nominee for [Homecomings], its successors and assigns, " was the mortgagee under each Security Instrument, and held the legal interests to the properties, and that MERS' interests under each Security Instrument, as nominee for Homecomings, included the right to foreclose and sell the properties. The mortgage agreements also provided that MERS had the obligation "to take any action required of

          [Homecomings], including, but not limited to, releasing and canceling" the Security Instruments. Though it was not the mortgagee, as the Lender, Homecomings retained an equitable interest in the mortgages.

         Both Saurman and Messner defaulted on their payments, and MERS initiated non-judicial foreclosure by advertisement under MCL 600.3201 et seq. MERS purchased the properties in sheriffs' sales, and subsequently, quitclaimed Saurman's property to Residential Funding Co, LLC (RFC), and Messner's property to Bank of New York Trust Co (BNYT). After the redemption periods expired, RFC and BNYT each sought to obtain possession of the respective properties. During eviction proceedings, Saurman and Messner challenged the foreclosure by MERS, asserting that MERS was not the servicing agent, did not own the indebtedness secured by the mortgage, and did not own an interest in the indebtedness secured by the mortgage as required by MCL 600.3204(1)(d). These arguments were rejected by both the district courts and the circuit courts, and this Court granted leave to appeal.


         This Court reviews de novo a summary disposition ruling and a circuit court's affirmance of a district court's ruling on a motion for summary disposition. Thorn v Mercy Mem Hosp Corp, 281 Mich.App. 644, 647; 761 N.W.2d 414 (2008); First of America Bank v Thompson, 217 Mich.App. 581, 583; 552 N.W.2d 516 (1996). Issues of statutory construction are questions of law, which this Court reviews de novo on appeal. Washington v Sinai Hosp of Greater Detroit, 478 Mich. 412, 417; 733 N.W.2d 755 (2007). Statutory construction discerns and gives effect to the Legislature's intent. Potter v McLeary, 484 Mich. 397, 410; 774 N.W.2d 1 (2009). In determining that intent, the court first looks to the language of the statute. Id. The interpretation of the language must accord with the legislative intent. Bush v Shabahang, 484 Mich. 156, 167; 772 N.W.2d 272 (2009). As far as possible, the court gives effect to every phrase, clause, and word in the statute. Id. "The statutory language must be read and understood in its grammatical context, unless it is clear that something different was intended." Id. (quotation marks and citations omitted). Courts read a statute as a whole, and individual words and phrases, while important, are read in the context of the entire legislative scheme. Id.

         "The interpretation of a contract is also a question of law this Court reviews de novo . . . ." DaimlerChrysler Corp v G Tech Professional Staffing, Inc, 260 Mich.App. 183, 184-185; 678 N.W.2d 647 (2003). A contract must be interpreted according to its plain and ordinary meaning. Holmes v Holmes, 281 Mich.App. 575, 593; 760 N.W.2d 300 (2008).

Under ordinary contract principles if contractual language is clear, construction of the contract is a question of law for the court. If the contract is subject to two reasonable interpretations [or the provisions irreconcilably conflict with each other], factual development is necessary to determine the intent of the parties and summary disposition is therefore inappropriate. If the contract, although in artfully worded or clumsily arranged, fairly admits of but one interpretation, it is not ambiguous. Meagher v Wayne State Univ, 222 Mich.App. 700, 721-722; 565 N.W.2d 401 (1997); see also Shaw v City of Ecorse, 283 Mich.App. 1, 22; 770 N.W.2d 31 (2009).
A court may not rewrite clear and unambiguous language under the guise of interpretation. Woodington v Shokoohi, 288 Mich.App. 352, 374; 792 N.W.2d 63 (2010). Rather, "courts must . . . give effect to every word, phrase, and clause in a contract and avoid an interpretation that would render any part of the contract surplusage or nugatory." Klapp v United Ins Group Agency, Inc, 468 Mich. 459, 468; 663 N.W.2d 447 (2003).


MCL 600.3204 provides, in relevant part:
(1) . . . a party may foreclose a mortgage by advertisement if all of the following circumstances exist:
(a)A default in a condition of the mortgage has occurred, by which the power to sell became operative.
(b) An action or proceeding has not been instituted, at law, to recover the debt secured by the mortgage or any part of the mortgage; or, if an action or proceeding has been instituted, the action or proceeding has been discontinued; or an execution on a judgment rendered in an action or proceeding has been returned unsatisfied, in whole or in part.
(c) The mortgage containing the power of sale has been properly recorded.
(d) The party foreclosing the mortgage is either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage.
         There are three categories of parties who may foreclose by advertisement under MCL 600.3204(1)(d): (1) the owner of the indebtedness secured by the mortgage; (2) the servicing agent of the mortgage; and (3) the owner of an interest in the indebtedness secured by the mortgage. Because we must give meaning to each of these phrases and each word in the phrases in order to give effect to the Legislature's intent, Bush v Shabahang, 484 Mich. at 167, it is clear that, the owner of an interest in the indebtedness secured by the mortgage, while accorded the same right to foreclose by advertisement, is a different person or entity, than either the owner of the indebtedness secured by the mortgage or the servicing agent of the mortgage. To "own" means "[t]o have good legal title; to hold as property; to have a legal or rightful title to." Black's Law Dictionary (6th ed), p 1105. "Owner" is defined as, "[the] person in whom is vested the ownership, dominion or title of property; proprietor. He who has dominion as a thing, real or personal, corporeal or incorporeal, which he has a right to enjoy and do with as he pleases, even to spoil or destroy it, as far as the law permits, unless he be prevented by some agreement or covenant which restrains his right." Id. Indebtedness is defined as "[t]he state of being in debt" or "the owing of a sum of money upon a certain and express agreement." Id. at 768. The indebtedness secured by the mortgages are, in these cases, the promissory notes signed by Saurman and Messner. Thus, the owner of the indebtedness secured by the mortgage owns the debt or the notes. In these cases, the owner of the indebtedness is Homecomings.

          The signature questions presented in these cases are what it means to own "an interest" in the indebtedness secured by the mortgage, i.e., to own an interest in the debt or the note, as opposed to owning the debt or the note, and what entity or person the Legislature meant to refer to when it permitted "the owner of an interest in the indebtedness secured by the mortgage" to have the same ability as the owner of the debt and the servicer of the mortgage to foreclose by advertisement. In general,

The right to foreclosure by advertisement is statutory. Calaveras Timber Co v Michigan Trust Co, 278 Mich. 445, 450; 270 N.W. 743 (1936). Such foreclosures are a matter of contract, authorized by the mortgagor, and ought not to be hampered by an unreasonably strict construction of the law. Cramer v Metropolitan Sav and Loan Ass'n, 401 Mich. 252, 261; 258 N.W.2d 20 (1977). Harsh results may and often do occur because of mortgage foreclosure sales, "but we have never held that because thereof, such sale should be enjoined, when no showing of fraud or irregularity is made." Calaveras Timber Co, [278 Mich] at 454. [Church & Church Inc v A-1 Carpentry, 281 Mich.App. 330, 339-340 (2008), aff'd in part and vacated in part on other grounds, 483 Mich. 885 (2009).]
         "Interest" is defined in part as "the most general term that can be employed to denote a right, claim, title or legal share in something. . . .The word 'interest' is used in the Restatement of Property both generically to include varying aggregates of rights, privileges, powers and immunities and distributively to mean any one of them." Black's Law Dictionary (6th ed), p 812. Mortgage is defined as "an interest in land created by a written instrument providing security for the performance of a duty or the payment of a debt." Id., p 1009. Notably, the mortgage operates as a conveyance of the legal title to the mortgagee, but such title is subject to defeasance on payment of the debt or performance of the duty by the mortgagor. Id at 1010. In other words, the mortgagee's title is defeated when the debt is paid.

         I would conclude that, as mortgagee, MERS owned a contractual interest in the indebtednesss. If the indebtedness is paid in conjunction with the note, MERS has the contractual obligation to cancel the security agreement because its title is defeated. If the indebtedness is not paid, however, MERS has the contractual right and obligation, to exercise the rights granted to it by the mortgagors, including the right to foreclose by advertisement under the statute. In other words, MERS interest in the indebtedness is derived from the fact that its contractual obligations as mortgagee were dependent upon whether the mortgagor met the obligation to pay the indebtedness which the mortgage secured.

         According to the Security Instruments, MERS was the nominee of Homecomings, and held its status as mortgagee only in that capacity. "Nominee" is defined as "[a] person designated to act in place of another, usu. in a very limited way . . . [a] party who holds bare legal title for the benefit of others." Black's Law Dictionary, p 1149 (9th ed). Although Saurman and Messner agreed that MERS held "only legal title to the interest granted" in the Security Instruments, the security interest was specifically created to secure performance by Saurman and Messner of the obligation they undertook in the note, namely, to repay the debt. In other words, the security interest created was specifically linked to the debt and specifically created to ensure payment of the debt. Saurman and Messner agreed that "if necessary to comply with law or custom, MERS (as nominee for [Homecomings] . . . ha[d] the right to take any action required of [Homecomings], including, but not limited to, releasing and canceling" the Security Instruments.

         By conveying the right to take any action required of it, Homecomings gave, and MERS received, a greater interest than just an interest in the property as security for the note, namely the contractual right to act for the benefit of Homecomings. MERS's interest in the debt reflected by the note is inextricably linked to its obligations under the mortgage. For example, if Saurman or Messner had satisfied their notes, MERS would have been obligated to cancel the Security Instruments on behalf of Homecomings. Alternatively, if Saurman and Messner had elected to sell their properties without Homecomings' prior written consent, MERS would have had the right to exercise the option to require immediate payment in full of all sums secured by the Security Instruments on behalf of Homecomings. Failure to pay in full would have then given MERS the right to invoke remedies such as foreclosure of the properties, as provided in the Security Instruments. In short, MERS was the contractual owner of an interest in the notes, which were secured by the mortgages.

         There is no dispute that, had Homecomings retained its status as mortgagee, it would have been entitled to foreclose by advertisement upon the defaults by Saurman and Messner. Nothing in MCL 600.3204 precludes a noteholder-mortgagee from delegating, by contract, some of its rights and responsibilities under the statute and the mortgage, to a nominee which, while not the owner of the note, and therefore, not holding the identical interest in the note as the noteholder, nevertheless, clearly has an interest in whether the note is paid or defaulted upon.[1]

         Finally, it bears noting that, contrary to the majority's contention that permitting MERS to foreclose by advertisement could potentially subject the mortgagors to a double-exposure for the same debt, MCL 600.3105(2) forces and election of remedies, such that Homecomings would be precluded from recovery of any debt secured by the mortgage if a foreclosure proceeding had already been initiated by MERS.

          I would conclude that MERS did have the authority to foreclose on defendants' properties by advertisement. I would affirm in each case.



[1] Residential Funding Co, LLC v Saurman, unpublished order of the Court of Appeals, entered May 15, 2009 (Docket No. 290248); Bank of New York Trust Co v Messner, unpublished order of the Court of Appeals, entered July 29, 2009 (Docket No. 291443).

[2] In Docket No. 290248, the district court granted summary disposition under MCR 2.116(C)(10). In Docket No. 291443, the district court granted summary disposition under MCR 2.116(I)(2) ("If it appears to the court that the opposing party, rather than the moving party, is entitled to judgment, the court may render judgment in favor of the opposing party.").

[3] We note that, in these cases, MERS disclaims any interest in the properties other than the legal right to foreclose and immediately quitclaim the properties to the true owner, i.e., the lender.

[4] Though the lenders do not hold legal title to the mortgage instrument, they do have an equitable interest therein. See Alton v Slater, 298 Mich. 469, 480; 299 N.W. 149 (1941); Atwood v Schlee, 269 Mich. 322; 257 N.W. 712 (1934). The lender's equitable interest in the mortgage does not, however, translate into an equitable interest for MERS in the loan.

[5] The dissent's analogy between MERS' ability to "own an interest" in the note and an easement-holder's ownership of an interest in land without owning the land is unavailing. An easement holder owns rights to the land that even the landholder cannot infringe upon or divest him of, see Dobie v Morrison, 227 Mich.App. 536, 541; 575 N.W.2d 817 (1998) (noting that a fee owner cannot use the burdened land in any manner that would interfere with the easement holders' rights), while the interest the dissent contends MERS "owns" would be equal to or less than that of the noteholder and the noteholder could completely divest MERS of the alleged interest by forgiving the note without MERS having any recourse. Accordingly, the analogy fails.

[6] In addition, while we reject plaintiffs' overly broad reading of Davenport for the reasons just stated, we note that even under that reading, plaintiffs would merely have to obtain assignment of the mortgage from MERS prior to initiating foreclosure proceedings.

[7] The dissent's observation that, had Homecomings remained the mortgagee, it would have had the right to foreclose by advertisement does not change the outcome because the statutory language provides that it is Homecomings' additional status as the noteholder that would give it that right. The question before us is whether a mortgagee that is not a noteholder has the right to foreclose by advertisement.

[8] The dissent's assertion that MCL 600.3105(2) provides for an election of remedies that prevents this double recovery is erroneous, because that statute governs only judicial foreclosures, not foreclosures by advertisement. MCL 600.3105(2) requires the filing of a complaint, something that does not occur in foreclosure by advertisement. Absent the complaint, there is no time during which a complaint would be "pending" or any judgment that could be "rendered upon it" that would prohibit the filing of any "separate proceeding . . . for the recovery of the debt secured by the mortgage." See also Cheff v Edwards, 203 Mich.App. 557, 560; 513 N.W.2d 439 (1994) (holding that "foreclosure by advertisement is not a judicial action"). Consequently, the prohibitions expressed in MCL 600.3105(2) would not apply to foreclosure by advertisement and, therefore, would not protect borrowers from double recovery is MERS were permitted to foreclose by advertisement.

[1] In this regard, MERS' interest in the indebtedness is similar to the interest held by one who possesses an easement right. "[A]n easement is a not a possessory right. Terlecki v Stewart, 278 Mich.App. 644, 659-660; 754 N.W.2d 899 (2008). Rather, "[a]n easement is, by nature, a limited property interest. It is a right to use the land burdened by the easement rather than a right to occupy and possess the land as does an estate owner." Mich Dep't of Natural Res v Carmody-Lahti Real Estate, Inc, 472 Mich. 359, 378-379; 699 N.W.2d 272 (2005) (internal citations and punctuation omitted)(emphasis added). As one can "own" an easement right and have an interest in land without owning the land, so, too, can MERS "own" an interest in the note held by Homecomings without actually owning the note.