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 Foreclosure - Its About the Note

Competition Realty

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.


Patrick A. Randolph

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, supra. .


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 requirements.



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