Editor: David Reiss
Brooklyn Law School

February 22, 2013

U.S. Bankruptcy Court in Kentucky Holds MERS Valid Nominee of Mortgage, Had Authority to Assign Mortgage, and Lender Properly Assigned Note to Citi

By Max Feder

In In re Jessup, 2010 WL 2926050, the U.S. Bankruptcy Court for the Eastern District of Kentucky (“Court”) denied the bankruptcy trustee’s (“Trustee”) motion for summary judgment in a suit to set aside Defendants’ mortgage lien against the bankruptcy debtors’ (“Debtors”) property.

In February 2007, Debtors executed a note to Homeland Capital Mortgage (“Lender”), and granted a mortgage to Defendant MERS as nominee for Lender.  The mortgage identifies the mortgagee as MERS as nominee for Lender.  In March 2007, the mortgage was duly recorded, and the note with “blank indorsement” was transferred to Defendant CitiMortgage, Inc. (“Citi”).  In January 2008, MERS assigned the mortgage to Citi.  In February 2008, the assignment of mortgage was duly recorded.

In March 2009, Debtors filed for Chapter 7 bankruptcy relief.  In September 2009, the Trustee filed a complaint to “Determine Validity, Extent and Priority of Liens and for Sale of Real Property,” and the parties cross-moved for summary judgment.  In essence, the Trustee seeks to set aside Citi’s mortgage lien as invalid pursuant to the Trustee’s “strong-arm power” under Section 544 of the U. S. Bankruptcy Code.

The Trustee set forth three bases for his contention:

First, the Trustee argued there was no evidence Lender appointed MERS as nominee, and therefore, no valid mortgagee was named in the mortgage.  The Trustee argued Lender failed to provide a written nomination of MERS to act as mortgagee.  The Court rejected this argument, however, and held the language in the mortgage itself was sufficient to identify MERS as nominee.

Second, the Trustee argued MERS lacked authority to assign the mortgage to Citi.  The Trustee argued MERS failed to provide evidence that it nominated an “Authorized Signator” to execute the assignment.  In fact, the person who executed the assignment was an employee of an entity authorized to execute MERS documents, but was inadvertently left off the list of officers authorized to execute MERS documents.  Defendants submitted an affidavit of the Secretary of MERS, which stated the assignment was executed with MERS’s authority an consent.  The Court held the ratification in the affidavit was sufficient to establish MERS’s authority to execute the assignment to Citi.

Finally, the Trustee argued Citi was not holder of the note.  Under Kentucky Law, a note is negotiated by “special indorsement” from one creditor to another, or by “blank indorsement.”  Blank indorsement converts the note into bearer paper that may be negotiated by transfer of possession alone.  The Court held Lender transferred the note with blank indorsement to Citi, and since Citi had physical possession of the note payable to bearer, it is the holder entitled to enforce it.

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