Blockbuster Decision: MERS Does Not Comply with Law

In a tour de force of dicta, a Long Island bankruptcy judge telegraphed the intention to rule against MERS in a whole bunch of pending motions.

The Court recognizes that an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States. However, the Court must resolve the instant matter by applying the laws as they exist today. It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices. MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law.

[Source: In re: Ferrel L. Agard Case 8-10-77338-reg in the Bankruptcy Court in the Eastern District of New York.]

The results in this case are sadly ironic since the court finds that because there was an state court foreclosure judgment issued in favor of the bank BEFORE the debtor filed in bankruptcy court, the bankruptcy court is precluded by res judicata and by the Rooker-Feldman Doctrine (which says trial level federal courts cannot act as quasi appellate courts over state court decisions) from helping this homeowner.

So everything the court says about MERS in the largest part of the opinion has no binding effect on the immediate case before it involving Ms. Agard.  . . .

The court says it has a backlog of cases where there is no preclusive state court decision and there has been an issue in the court’s mind about standing based on the MERS issue. MERS intervened in Agard and has had a fair opportunity to state its case about standing. The court finds its arguments unpersuasive and goes on at great length about why MERS created a model that ruins the banks standing as a secured creditor. Basically, the court adopts the theory I advanced so long ago that fractionalization — the process of separating ownership of the Promissory Note from ownership of the Mortgage Deed — ends the security interest. The debt still exists, but the house is no longer collateral for the debt.

The Movant’s failure to show that U.S. Bank holds the Note should be fatal to the Movant’s standing. However, even if the Movant could show that U.S. Bank is the holder of the Note, it still would have to establish that it holds the Mortgage in order to prove that it is a secured creditor with standing to bring this Motion before this Court. The Movant urges the Court to adhere to the adage that a mortgage necessarily follows the same path as the note for which it stands as collateral. See Wells Fargo Bank, N.A. v. Perry, 875 N.Y.S.2d 853, 856 (N.Y. Sup. Ct. 2009). In simple terms the Movant relies on the argument that a note and mortgage are inseparable. See Carpenter v. Longan, 83 U.S. 271, 274 (1872). While it is generally true that a mortgage travels a parallel path with its corresponding debt obligation, the parties in this case have adopted a process which by its very terms alters this practice where mortgages are held by MERS as “mortgagee of record.” By MERS’s own account, the Note in this case was transferred among its members, while the Mortgage remained in MERS’s name. MERS admits that the very foundation of its business model as described herein requires that the Note and Mortgage travel on divergent paths. Because the Note and Mortgage did not travel together, Movant must prove not only that it is acting on behalf of a valid assignee of the Note, but also that it is acting on behalf of the valid assignee of the Mortgage.

The court does not find that the mere fact of MERS involvement automatically terminates the security interest in the property; it leaves open the possibility that a note and mortgage could serendipitously travel together through the MERS system with all of correct parties giving the correct instructions in a valid way. However, the burden will be on the bank to prove that every step was completed correctly.

Now that MERS has had its chance to explain itself, there apparently are plans to clear up that backlog of undecided motions, based upon its analysis of MERS suckitude (sorry, I know that’s not a very professional sounding term, but it REALLY is apt).

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