November 13, 2013
Kansas Appellate Court Holds that MERS Does Not Have Standing to Initiate Foreclosure Against Homeowners
The Kansas state Court of Appeals in Mortgage Electronic Registration Systems, Inc. v. Graham, 44 Kan.App.2d 547 (KS Ct. App. 2010) held that MERS did not have standing to start a foreclosure action against two Kansas homeowners because the entity is only an agent for the holder of the actual mortgage, Countrywide Home Loans Inc., in this case.
In August 2002, Michelle Graham (“Graham”) bought a house for $140,000 and entered a mortgage with Countrywide Home Loans Inc. and MERS held the actual mortgage. Graham was the sole signatory on the mortgage but lived with David Martinez (“Martinez”), her common law spouse. Graham stopped making monthly mortgage payments in June 2004 and later filed for Chapter 13 bankruptcy in August 2004. MERS initiated a foreclosure action in September 2004 and named both Graham and Martinez as defendants in the action. The district court dismissed the action without prejudice because it learned of Graham’s bankruptcy filing. The bankruptcy was later dismissed in February 2005 for lack of feasibility and Graham, Martinez filed for another bankruptcy in May 2005, and MERS filed a motion for relief from the bankruptcy.
During the second bankruptcy, MERS hired the Georgia law firm McCalla, Raymer, Padrick, Cobb, Nichols & Clark, LLC (“McCalla”) to identify borrowers eligible for loan modification and the firm contacted Graham in October 2005 stating that Graham had been pre-approved for a loan modification if two conditions were met: 1) approval of MERS’ motion for relief from the bankruptcy and 2) dismissal of the bankruptcy. The letter requested Graham and Martinez to contact the firm about the modification, but neither Graham nor Martinez contacted McCalla. On November 9, 2005, Graham lifted the automatic stay on MERS’s foreclosure action and McCalla sent a letter to Graham on November 14 requesting a response to the modification proposal by November 21 or McCalla would close the file. On January 18, 2006, MERS filed a second petition to foreclose the property after the district court had dismissed the second bankruptcy due to Graham’s lack of payment. Graham and Martinez filed counterclaims against MERS and cross-claims against Countrywide alleging that both had committed fraudulent statements in the October letter under the Kansas Consumer Protection Act (KCPA). In February 2008, the district court granted summary judgment for MERS and Countrywide and dismissed Graham’s claims because they failed to provide supporting evidence.
The Court decided two separate issues: the foreclosure action started by MERS and Graham’s fraud claims.
MERS’ Foreclosure Action
The Kansas Court of Appeals reversed the district court’s summary judgment ruling for MERS and dismissed the foreclosure action. The court held that MERS did not have standing to bring the original foreclosure action against Graham. The court found that MERS did not have standing because it was solely a nominee or agent for Countrywide, the holder of the promissory note, and did not suffer any injury since only Countrywide could have collected the mortgage and suffered the harm when Graham did not pay the mortgage.
Graham’s Fraud Claims under KCPA
The Court affirmed the district court’s dismissal of Graham’s fraud claims because Graham and Martinez “simply failed to present any evidence that MERS and Countrywide, through McCalla Raymer’s October 26 letter, engaged in any unconscionable acts as described in” the fraud statute.
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