Editor: David Reiss
Brooklyn Law School

March 27, 2013

Georgia Bankruptcy Court Holds that Security Deed Creates an Agency Relationship Between Lender and MERS

By Gloria Liu

In Drake v. Citizens Bank of Effingham, et. al., AP No. 10-4033 (Bankr. S.D. Ga. Feb. 28, 2011), the court held that the security deed granted to MERS satisfied the requirements of Georgia law and the language of the security deed created an agency relationship between the lender and MERS.  The debtors purchased real property and to complete the transaction, they borrowed the purchase money from Citizen’s Bank of Effingham, executed a promissory note for the borrowed amount, and executed a deed to secure debt as security for that loan. The security deed named MERS as grantee and nominee for Citizen’s Bank and its successors. The note was transferred multiple times, with different entities taking possession, ownership, and servicing rights at different times. Ownership and possession of the security deed were transferred at least once. When Debtors filed Chapter 7, the Trustee commenced an adversary proceeding to determine the extent, validity, and priority of the security deed, asserting that the mortgage note was unsecured.

The court found that  there “was no split of the Note and Security Deed as a matter of contract by any transfer of the Note, because the Security Deed expressly contemplate[d] that the Note [could] be transferred from the original Lender, and that MERS’ role as nominee for the Lender extend[ed] to each successive assignee.” It also held that “the note and the deed must (and do) retain a legal nexus except on the rare occasions when a mortgagee will wish to disassociate the obligation and the mortgage, but that result should follow only upon evidence that the parties to the transfer so agreed.”

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