BANKRUPTCY; AUTOMATIC STAY; LEAVE TO FORECLOSE; MERS: Noteworthy
bankruptcy decision clarifies the rules about foreclosure of MERS related
mortgages. It's all about the note.
In re Tucker, Case No. 10-61004 (W.D. Bkrtcy 9/20/10)
The case law throughout the country recently has exhibited
great uncertainty as to the role and authority of MERS in foreclosures. Many of
these cases have been complicated by the language of statutes in judicial
foreclosure jurisdictions that may impose greater burdens on mortgagees than
might exist elsewhere. In addition, there has been some authority that
tangentially discusses the role of MERS with respect to other issues, and these
cases may have further muddied the waters. An important course of this nature
has been the Bekistri case, decided by the Missouri Court of Appeals (284
S.W.3d 619 (Mol App. 2009) and regularly appearing in briefs and discussions
around the country. Another important decision - also a non-foreclosure
decision, has been the Landmork case in the Kansas Supreme court. Both
cases have given some support to the notion that a recordation of a mortgage
with MERS is a mullity in cases in which the lender does not also give MERS the
note, creating some question as to whether the mortgage can be foreclosed to
collect the unpaid debt.
Elmer F. Pierson Professorship and Professor of Law; B.A. (Yale
University); J.D. (University of California, Berkeley)
There has been a growing consesus among courts not bound by particular
statutory language that the important question is whether the party seeking
relief from foreclosure has possession or control of the promissory note.
Now we have a clear, thoughtful, and well written decision from a bankruptcy
court finding that, whatever Ocewn meant on the facts of that case, it
did not mean that an assignment of the note without a concomitant assignment of
the recorded mortgage [a deed of trust in this case] terminated the debt or the
ability of the holder of the note to rely on the mortgage to foreclose.
The facts of Tucker, the instant case, are consistent, as the court
notes with the vast majority of MERS related foreclosures nationwide. When the
original lender made the loan, it took a note and the deed of trust securing the
note was given to MERS, as nominee of the lender, which recorded. Subsequently,
the note was assigned a number of times, and possession of the note passed, but
there was no recorded of the MERS held mortgage. Each of the assignees of the
note was a participant in the MERS related system and agreed by master agreement
that MERS served as their nominee in holding the mortgage. When the borrower
defaulted, the mortgagee's servicer foreclosed. When the borrower sought
bankruptcy protection, the mortgagee sought relief from the stay. Mortgagee had
physical possession of the note and an assignment of the mortgage from MERS.
Borrower argued that the mortgagee lacked standing for this purpose, citing Bellistri,
In Bellestri, a Missouri court of appeals had refused to permit a loan
servicer, Ocwen, from challenging what Ocwen regarded as an improper tax lien
foreclosure ot property in which Ocwen (and MERS, its nominee) had a junior
position. The court's rationale was that Ocwen itself was not a recorded owner
of an interest in the property and that the MERS interest was a mullity, because
the note and mortgage had been "severed" when MERS took the mortgage
without the note. Neither Ocwen, nor MERS, nor the owner of the note had been
given notice of the proceeding or the right of redemption, although the original
lender had been notified -and did nothing. MERS was not a party to that
litigation and has since successfully challenged the outcome as to MERS in
federal court. MERS v. Bellistri, 2010 Westlaw 272 0802 (E.D. Mo. 7/1/10)
(holding that MERS constitutional rights would be violated if it failed to
receive notice of redemption.)
But there is difficult language in Bellistri that has been picked up
in a number of foreclosure cases.
"[When a mortgage loan is made . . . t]ypically, the same person
holds both the noted and the deed of trust. In the event that the note and
the deed of trust are split, the note, as a a practical matter becomes
unsecured. [U]nless the holder of the deed of trust is the agent of the
holder of the note . . . the person holding only the note lacks the power to
foreclose [and] the person holding only the deed of trust will never
experience default. . . The mortgage loan became ineffectual l when the note
holder did not also hold the deed of trust. "
This language, and other language in Bellistri, appeared to say that
the whole MERS apparatus was ineffectual because of the court's characterization
that the arrangement at the outset of the loan "split" the mortgage
and the note.
Judge Federman, in deciding the current Tucker case, noted that the Bellestri
court was not, directly or indirectly, making any determination with respect
to MERS rights in the deed of trust in that case, but only as to the rights of a
servicer that had been unable to convince the court of its ownership of the
note. The servicer, Ocwen, argued that MERS had assigned the note to it, and
indeed there was language in the assignment agreement that purported to do so.
But the court ruled, correctly, that MERS didn't have the note and couldn't
assign it. It did not rule on the ability of MERS or anyone else to foreclose
the deed of trust.
Here, Judge Federman rule, MERS had assigned the deed of trust to the
servicer, and the servicer had actual possession of the note. He effectively
dismissed the dicta in Bellistri by stating that "in
Missouri, . . . the holder of the note, whoever it is, would be entitled to
foreclose, even if the deed of trust had not been assigned to it." Where
MERS is the original recorded of the deed of trust, as a
"placeholder," the agent of the noteholder for purposes of holding the
mortgage. The judge specifically discussed and dismissed any argument that the
characterization of MERS as a "nominee" instead of "agent"
undercuts it limited agency for purposes of dealing with the deed of trust at
the direction of the note holder.
The judge further ruled that the assignment, in this case, of the deed of
trust to the servicer following the inception of bankruptcy did not violate the
automatic stay. The assignment was not an action against the debtor's property,
because the deed of trust and note were already in existence.
Comment: Judge Federman had elected to try and deal comprehensively and
clearly with the questions about MERS related foreclosures in bankruptcy.
Remember that only a short time before he had denied standing to a MERS related
lender that could not show possession of the note. This opinion, where the note
was indisputably in the hands of the servicer, gave the judge the opportunity to
deal with the arguments based upon the Bellistri dicta and put to rest
much of the confusion in the litigation.
This case will be of extreme benefit to those involved in both the
mortgagee's and mortgagor's side in future bankruptcy disputes, since the rules
are clear and consistent with those that the editor has espoused (at least he
thinks so) since the beginning. The opinion should also be useful in state
courts where statutes or court rules do not provide a different set of