Saturday, April 20, 2013

FYI: RI Sup Ct Rejects Borrower's MERS Challenge

The Rhode Island Supreme Court recently held that MERS had both contractual and statutory authority to foreclose on behalf of the owner of a home mortgage loan, reasoning that the express language in the mortgage agreement and Rhode Island's non-judicial foreclosure law allowed MERS to serve as the lender's nominee and as "mortgagee" with the power of sale. 


The Court further ruled that Rhode Island law did not require MERS to physically possess both the mortgage and the underlying note in order to have standing to foreclose, as long as an agency relationship existed between MERS and the owner of the loan such that the beneficial and legal interests remained unified. 


A copy of the opinion is attached.


Plaintiffs borrowers ("Borrowers") obtained a loan from defendant bank ("Bank") that was secured by a mortgage on Borrowers' property.    The mortgage named Mortgage Electronic Registration Systems, Inc. ("MERS") as "nominee for [Bank] and [Bank's] successors and assigns," and expressly stated that "MERS is the mortgagee under this Security Instrument."    The mortgage further stated "[b]orrower understands and agrees that MERS holds only legal title to the interests granted . . .  in this Security Instrument, but  . . .  MERS . . . has the right to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the property, and to take any action required of [Bank] . . . ." 


The mortgage also provided that the promissory note and security instrument could be sold without notice to Borrowers, and that such sale might result in a change in the loan servicer entitled to collect payments on the debt.   Finally, the mortgage stated in part that "[Bank] at its option may . . . invoke the statutory power of sale and any other remedies permitted by Applicable Law."


Borrowers defaulted on the loan, and MERS initiated foreclosure proceedings as the mortgage holder and named mortgagee under the mortgage, and as nominee for Bank.  The day before the scheduled foreclosure sale, Borrowers filed a lawsuit against Bank and MERS (collectively "Defendants"), seeking declaratory and injunctive relief to prevent MERS from exercising the power of sale contained in the mortgage.  The lower court denied Borrowers' request for relief and entered judgment on behalf of the Defendants.  Borrowers appealed to the Rhode Island Supreme Court, arguing that MERS lacked both the contractual and statutory authority to foreclose.  The Rhode Island Supreme Court affirmed.


As you may recall, Rhode Island law allows the "statutory power of sale" to be incorporated into any mortgage by reference and provides that in the event of default, a mortgagee, or the mortgagee's successors or assigns, may sell the property secured by the mortgage.  R.I.G.L. § 34-11-22. 


Providing an overview of the MERS system of mortgage registration and explaining the role of a "nominee," the Rhode Island Supreme Court first addressed Borrowers' assertion that MERS lacked the contractual authority to exercise the power of sale, noting the express provisions in the mortgage granting MERS the power of sale and laying out the capacity in which MERS held title.  As the Court explained, "[t]hese [mortgage] provisions are clear and leave no room for interpretation."   The Court thus ruled that MERS had the contractual right to foreclose and the authority to exercise that right.  


In so ruling, the Court also concluded that a provision in the mortgage referencing Bank's authority to invoke the power of sale did not negate previous language granting MERS the right to foreclose and sell the property.  The Court further noted that by accepting the statements of fact in an affidavit that MERS was Bank's agent and nominee, Borrowers had waived their argument that MERS was not authorized to act on Bank's behalf because Bank never actually signed the mortgage.   


Turning to Borrowers' assertions that MERS lacked the statutory power of sale, the Rhode Island Supreme Court pointed out that Section 34-11-22 established a uniform power of sale provision that contracting parties were free to include in their mortgage agreements if they so chose, but that the provision did not specify whom parties could name as mortgagee.   Accordingly, the Rhode Island Supreme Court agreed with the lower court that MERS was the "mortgagee" under the mortgage, first, because the mortgage agreement Borrowers executed expressly so provided and, further, because as the Bank's nominee, MERS was the mortgagee with authority to foreclose.  The Court thus concluded that as nominee under the mortgage, MERS had power of sale under Section 34-11-22 absent a "clear and certain" violation of the law or public policy, which was not present in this case.  See Gorman v. St. Raphael Academy, 853 A.2d 28, 38 (R.I. 2004).


Finally, with respect to Borrowers' argument that Rhode Island's non-judicial foreclosure scheme implicitly required the same entity to both own and hold the note in order to allow that entity to foreclose, the Rhode Island Supreme Court, citing a recent Massachusetts decision, concluded that, because Rhode Island did not explicitly preclude foreclosures by entities acting as agents on behalf of the note owner, MERS was not statutorily prohibited from foreclosing under the mortgage.  See Eaton v. Federal National Mortgage Assoc., 969 N.E.2d 1118, 1129-31 (Mass. 2012)(concluding that a foreclosing mortgagee need not have physical possession of the note to foreclose where it acts as the authorized agent of the note holder).  Pointing out in part the difference between legal and equitable title, the Court explained, "any of the obligations placed upon a 'mortgagee' may be fulfilled by either the mortgage holder or the owner of the note, provided that an agency relationship exists between the two."   See Culhane v. Aurora Loan Services of Nebraska, No. 12-1285, 2013 WL 563374 (1st Cir. Feb. 15, 2013).


Accordingly, the Rhode Island Supreme Court affirmed the lower court's denial of declaratory and injunctive relief. 





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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