U.S. District Court for the Eastern District of New York Rules That a Party Perfects its Security Interests in Disputed Loans by Taking Possession of the Notes as Opposed to Recording the Mortgage Assignments, Pursuant to UCC Article 9

In Provident Bank v. Community Home Mortgage Corp., 498 F.Supp.2d 558, 558 (E.D.N.Y. 2007) the U.S. District Court for the Eastern District of New York ruled in favor of intervenor-plaintiff NetBank, granting its cross motion for summary judgment against intervenor-plaintiff, Southwest Securities Bank (herein described as Southwest) in a dispute regarding conflicting recorded mortgage assignments for nine loans. The court stated that “where parties assert competing interests in mortgage assignments,” under Article 9, “possession of the note perfects the assignee’s security interest regardless of whether any mortgage securing the note has been properly recorded.” It concluded that NetBank perfected its interest in eight of the nine disputed loans and took possession of them before Southwest, giving it a superior interest in those loans.

Confusion over who possessed the loans started when Defendant Community, a mortgage banker, entered into agreements with two banks, Southwest and RBMG (NetBank’s successor in interest), to fund a portion of its mortgage loans. Community entered Mortgage Purchase Agreements with both banks and engaged in a scheme known as “double booking,” where it “obtained duplicate funding for one loan from two different lenders and retained the entire value of the loan.” Essentially, “Community created two original notes and mortgages for each of the disputed loans.” Because of Community’s fraud “only one of the lenders would be paid in full,” and each bank claimed a priority interest in the nine loans that Community sold to it. Southwest recorded its assignments of the mortgages before RBMG for five of the loans, but RBMG received the original notes and assignments for eight of the loans before Southwest.

In determining which of the loans belonged to Southwest or NetBank and which of the mortgages were valid, the court had to decide “whether Article 9 or state real property law governs the security interests in mortgages.”  Under Article 9, a party perfects it security interest in a note by taking possession of it. Alternatively, under “race-notice statutes in state real property law,” a party perfects its security interest in a mortgage by recording the assignment. Southwest argued that the court should follow New York’s race-notice statute, whereas RBMG argued that Article 9 should govern.

Before reaching its decision, the court examined the New York Real Property Law Section 291, which states that a “bona fide purchaser for value, without notice of a junior mortgage, who records his assignment is entitled to priority over a prior unrecorded mortgage of which his assignor has full knowledge.” It explained that previous decisions applying the statute did not address instances where the “first party to record a mortgage assignment [had] a prior interest over another party who first takes possession of the note securing the mortgage.”  The court stated that in this case, the question depended on the “supremacy of perfecting the security interest in the note [as opposed to previous cases which regarded] perfecting the security interest in the mortgage.”

According to the statute’s language and precedent decisions regarding the same issue, Southwest would have a priority interest in five of the loans that it recorded before RMGA. Instead, the court applied Article 3 and Article 9 of the UCC in reaching its conclusions. It stated that “NetBank perfected its security interest in the loans and Southwest,” did not. The court agreed with previous cases in the Circuit which held that, “perfection of a security interest in the note (by taking possession under Article 9) should carry over to the mortgage incidental to it.” It explained that in New York, assignment of a note creates a security interest in the note, but a party perfects its security interest in the note by possessing it. From this reasoning, the court determined Southwest was not the first party to perfect its security interest in the loans, as it merely recorded its mortgage assignments but never possessed them. Therefore, the court denied Southwest’s motion for summary judgment requesting possession over the disputed loans.

Instead, the court granted NetBank’s motion for summary judgment, pursuant to Article 9, as it possessed eight of the disputed loans before Southwest. It also held that under UCC Article 3, NetBank qualified as a holder in due course (defined as a holder of a negotiable instrument who takes it for value, in good faith, and without notice that it is overdue or has been dishonored) in regards to seven of the loans, entitling it to those loans independent of its possession under Article 9.

U.S. District Court for the Eastern District of Texas Rules in Favor of MERS in Foreclosure Proceeding, Upholding its Power of Sale Over the Plaintiff’s Property

In Richardson v. Citimortgage, No. 6:10cv119, 2010 WL 4818556, at 1-6 (E.D. Tex. November 22, 2010) the U.S. District Court for the Eastern District of Texas, Tyler Division, granted the Defendants’, Citimortgage and MERS, motion for summary judgment against the Plaintiff, Richardson, in a foreclosure proceeding. The Court reiterated MERS’s power of sale and its role as an “electronic registration system and clearinghouse that tracks beneficial ownerships in mortgage loans.”

Plaintiff purchased his home from Southside Bank with a Note. As the Lender, Southside Bank could transfer the Note and it, or any transferee, could collect payments as the Note Holder. In the agreement, Plaintiff acknowledged that Citimortgage, the loan servicer, could also receive payments. A Deed of Trust secured the Note by a lien payable to the Lender.

Under a provision in the deed, Southside Bank secured repayment of the Loan and Plaintiff irrevocably granted and conveyed the power of sale over the property. The Deed of Trust also explained MERS’s role as its beneficiary, acting as nominee for the Lender and Lender’s and MERS’s successors and assigns. MERS “[held] only legal title to the interests granted by the Borrower but, if necessary to comply with law or custom, [had] the right to exercise any and all of the interests [of the Lender and its successors and assigns], including the right to foreclose and sell the property.”

Plaintiff signed the Deed of Trust but eventually stopped making mortgage payments to CitiMortgage and filed for bankruptcy protection. As a result, “MERS assigned the beneficial interest in the Deed of Trust to Citimortgage.” Citimortgage posted the property for foreclosure after receiving authorization from the United States Bankruptcy Court. Plaintiff brought suit, seeking declaratory and injunctive relief and challenging Citimortgage’s authority to foreclose on the property.

In granting Citimortgage and MERS’s motion for summary judgment, the court explained that Citimortgage could enforce the loan agreements, including the power of foreclosure, after it received the Note from Southside Bank. Furthermore, under the doctrine of judicial estoppel, Plaintiff could not challenge Citimortgage’s right to enforce the Note after he “represented that it was [his] intention to surrender [the] property to Citimortgage,” in bankruptcy court. Citimortgage subsequently acquired a “valid, undisputed lien on the property for the remaining balance of the Note.”

Plaintiff also challenged MERS’s role with “respect to the enforcement of the Note and Deed of Trust.” In response, the court explained that “[u]nder Texas law, where a deed of trust expressly provides for MERS to have the power of sale, as here, MERS has the power of sale,” and that the Plaintiff’s argument lacked merit.

The court described MERS as a “[book entry system] designed to track transfers and avoid recording and other transfer fees that are otherwise associated with,” property sales. It concluded that MERS’s role in the instant foreclosure “was consistent with the Note and the Deed of Trust,” and that Citimortgage had the right to sell the Plaintiff’s property and schedule another foreclosure.

U.S. District Court for Hawaii Rules in Favor of MERS in Non-Judicial Foreclosure Proceeding, Validating its Right to Transfer, Foreclose, and Sell Property as the Lender’s Nominee

In Pascual v. Aurora Loan Services, No. 10–00759 JMS–KSC, 2012 WL 2355531, at 1-18 (D. Haw. June 18, 2012), the court explained the role of MERS in mortgage transfers and granted Defendant Aurora Loan Services’s motion to dismiss the Plaintiff Pascual’s claim that the non-judicial foreclosure executed by Defendant was void as a result of MERS’s invalid assignment of the mortgage.

Under the language of the mortgage, MERS held the power of sale of the subject property and “the right to foreclose and sell the property and to take action required of the Lender.” The mortgage also notified the Plaintiffs that the “Note [could] be sold without prior notice.” MERS, acting as a nominee for the lender, Lehman Brothers, assigned the mortgage to the Defendant after Lehman Brothers filed for voluntary Chapter 11 bankruptcy. Shortly after the assignment, the Plaintiffs defaulted on their loan. Defendants subsequently filed a Notice of Mortgagee’s Intention to Foreclosure Under Power of Sale. It held a public auction, and as the highest bidder, recorded a Mortgagee’s Affidavit of Foreclosure Sale under Power of Sale.

Under HRS §677-5, the “mortgagee, mortgagee’s successor in interest, or any person authorized by the power to act,” can foreclose under power of sale upon breach of a condition in the mortgage. Plaintiffs argued that because MERS did not match the description of one these parties, it did not have authority to assign the mortgage to the Defendant, thereby making the transfer invalid. In response, the Court denied the Plaintiff’s assertions and explained the role of MERS, citing Cervantes v. Countrywide Home Loans, 656 F. 3d 1034 (9th Cir. 2011). It described MERS as a “private electronic database that tracks the transfer of the beneficial interest in home loans as well as any changes in loan servicers.” It further stated that “at the origination of the loan, MERS is designated in the deed of trust as a nominee for the lender and the lender’s ‘successor’s and assigns,’ and as the deed’s ‘beneficiary’ which holds legal title to the security interest conveyed.” The court elaborated that under Cervantes, “claims attacking the MERS recording system as fraud fail, given that mortgages generally disclose MERS’[s] role as acting ‘solely as nominee for Lender and Lender’s successors and assigns,’” and that “MERS has the right to foreclose and sell the property.”

Applying the holding to the present case, the court concluded that the mortgage expressly notified the Plaintiffs of MERS’s role as the “nominee for the ‘Lender and Lender’s successors and assigns,’” which had the power of sale of the subject property without giving notice to the Borrower. For these reasons, the court concluded that the transfer from MERS to the Defendant was valid. As a result, it dismissed the Plaintiff’s claim for a violation of HRS § 667-5.

The Court also dismissed Plaintiff’s motion to amend their claim. Contrary to Plaintiff’s assertions, it concluded that there was not a statutory requirement for the Defendants to provide affirmative evidence that its assignment of the subject property was valid. It also denied Plaintiff’s claim that Lehman Brothers’ entrance into Chapter 11 bankruptcy proceedings precluded it from validly transferring the mortgage to the Defendant.