Tag Archives: assignment

U.S. District Court for the District of Arizona Found the Mere Use of MERS Nid Not Constitute Common Law Fraud

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The U.S. District Court for the District of Arizona, in Cervantes v. Countrywide Home Loans, Inc., et al., No. 09-cv-00517 (D.Ariz. 2009), dismissed all state and federal claims brought by all three of the borrowers. The borrowers filed a complaint against MERS as well as a group of other defendants

After considering the borrowers’ arguments, the court found the mere use of MERS did not constitute common law fraud on the borrowers. The court found that the plaintiffs had failed to allege what effect, if any, listing the MERS system as a ‘sham’ beneficiary on the deed of trust had upon their obligations as borrowers.

Subsequently, the United States Court of Appeals for the Ninth Circuit affirmed the trial court’s judgment in favor of MERS. Accordingly, the Court held that a borrower lacked the basis to challenge the standing of an entity such as MERS. Further, the court, however, drew attention to a legal reference that such a borrower still had legal recourse by bringing an action to have the trustee’s sale set aside.

Homeowner Can Challenge Mortgage Assignment

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Judge Kennelly has ruled that a homeowner can challenge a mortgage assignment under Illinois law in Elesh v. MERS et al., No. 12 C 10355 (N.D. Ill. Aug. 16, 2013). The Court stated that

Defendants argue that Elesh is not a party to the assignment and thus lacks standing to challenge it. Only one of the cases upon which defendants rely, however, is an Illinois case, and that case makes it clear that this supposed “rule” has exceptions. See Bank of America Nat’l Ass’n v. Bassman FBT, LLC, No. 2-11-0729, 2012 IL App (2d) 110729, 981 N.E.2d 1, 6-11 (2012). The basic requirements of standing are that the plaintiff suffered an injury to a legally cognizable interest and is asserting his own legal rights rather than those of a third party. See id. at 6. Elesh unquestionably meets the first requirement; the recorded assignment constitutes a cloud on his title, and Deutsche Bank recently relied on the assignment to prosecute a foreclosure action against him. Elesh also has a viable argument that in challenging the validity of the assignment, he is asserting his own rights and not someone else’s rights. For example, given Deutsche Bank’s apparent lack of possession of the original note, Elesh is put at risk of multiple liability as long as Deutsche Bank claims to hold the mortgage. See id. at 7-8 (citing cases indicating that an obligor has an interest in ensuring that he will not have to pay the same claim twice). In any event, Illinois law, to the extent there is much of it on this point, appears to recognize an obligor’s right to attack an assignment as void or invalid under certain circumstances. (3)

This is a pretty significant case, at least in Illinois, as it provides homeowners with a way to defend against a foreclosure action that does not rely upon whether the loan is in default or not. The Court takes seriously the possibility that the homeowner could otherwise be liable for the same debt twice.  Commentators and courts have downplayed that risk, so it is notable that this Court has taken this position. Time will tell if other courts do so as well.

 

 

 

 

[HT April Charney]

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

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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.

Alabama Court Rules That Demonstration of Note Ownership is Not Needed

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The court in Farkas v. SunTrust Mortgage, Inc, et al., 447 F. App’x 972 (11th Cir. 2011) found that Alabama is a non-judicial foreclosure state and that the party seeking foreclosure was not required to demonstrate ownership of the promissory note before taking action on the corresponding mortgage. This action involved MERS as the foreclosing mortgagee.

The debtor claimed that Article 3 of the Uniform Commercial Code (UCC) required that the party seeking foreclosure had to prove an interest in the note. However, the court reasoned that the UCC was not relevant to non-judicial foreclosure proceedings.

Pennsylvania Appellate Court Affirms MERS’ Standing to Foreclose

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The Pennsylvania appellate court in MERS v. Estate of Harriet L. Watson, et al., Superior Court of Pennsylvania # 637 WDA (2006), affirmed the standing of MERS to foreclose.

The case involved counter-claims as well as affirmative defenses filed by the estate of a deceased borrower in response to a foreclosure suit brought by MERS in 2003. The estate’s defenses and counter-claims included the theory that MERS, in someway, lacked standing because it was not the “real party-in-interest.” Moreover, MERS could not bring a foreclosure suit in Pennsylvania since it did not register as a foreign corporation doing business in Pennsylvania.

After consideration of the estate’s claims, the appellate court disregarded the estate’s challenges to MERS standing to foreclose due to the clear language of the mortgage itself. The court then held that MERS was not required to register as a foreign corporation because the act of acquiring, recording, or enforcing a mortgage lien constituted a specific exception under 15 Pa.C.S.A. § 4122 to the general requirement that companies “doing business” in Pennsylvania must obtain a certificate of authority in order to file suit in Pennsylvania. Such actions, by statutory definition, do not constitute “doing business.”

Illinois Federal Appellate Court Rules That MERS Had Sufficient Authority to Commence Foreclosure Proceeding in its Capacity as an Agent

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The federal appellate court in MERS v. Estrella, 390 F.3d 522 [7th Cir. 2004] ruled that MERS had a sufficient authority to commence a foreclosure proceeding, in its capacity as an agent on behalf of its principal.

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At issue in this case was an application to confirm a sale. On appeal, the court dismissed the appeal based upon well-established law that Court orders denying confirmation to judicial sales are not final decisions, and thus are not appealable.

Additionally, implicit in the court’s holding was recognition that MERS has standing to commence a foreclosure proceeding as agent on behalf of its principal. Indeed, the Estrella Court did not dismiss the proceeding in its entirety for lack of standing by the agent, rather cited to Indiana Gas Co. v. Home Insurance Co., 141 F.3d 314, 319 [7th Cir. 1998] which recognized the capacity of an agent to commence a proceeding “[w]hen the principal’s interests are affected by the litigation, the principal’s citizenship counts even if the agent is the sole litigant.”

The federal appellate court did not issue a blanket ban to suits commenced by MERS as an agent on behalf of its principals. Instead, in suits brought by agents, it directs federal district courts to ascertain the citizenship of the principal of the plaintiff to determine whether federal diversity jurisdiction exists.

MERS’ Assignments are Recognized as Valid as New York Appellate Court Overturns ‘N.Y. v. Alderazi’ & ‘LaSalle v. Lamy’

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In the case of Bank of New York v. Eddie Sachar, et al., 95 A.D.3d 695 (2012), the court found the Bank of New York Mellon had standing to foreclose based on a MERS assignment and the delivery of the note.

The court’s ruling granted the plaintiff’s [Bank of New York Mellon] motion for summary judgment on its complaint against defendant [Sachar]. The plaintiff-bank proved its standing to commence the foreclosure action by demonstrating that it was both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action was commenced.

Although the defendant correctly alleged that, although Mortgage Electronic Registration System [MERS] validly assigned the mortgage to plaintiff, and the assignment was properly recorded in the public records, MERS had not been given any interest in the underlying note by the lender (see Bank of N.Y. v Silverberg, 86 AD3d 274, 283 [2011]).

However, the complaint and the documents annexed to plaintiff’s motion establish that an assignment of the note had been effectuated by physical delivery of the note before the current action was commenced.