Sunday, October 20, 2013

FYI: 1st Cir Rejects Borrower's Challenge to Assignment of Mortgage, But Holds Borrower Had Standing to Raise Challenges

Affirming the lower court's dismissal of the borrower's action, the U.S. Court of Appeals for the First Circuit recently rejected a borrower's assertion that MERS could not validly assign her mortgage, although the Court did rule that the borrower had standing to challenge the assignment. 


A copy of the opinion is available at:


A borrower ("borrower") took out a loan secured by a mortgage on her home.  That mortgage indicated that Mortgage Electronic Registration Systems ("MERS") was the lender's nominee, and the mortgagee of record.  The lender had previously reached a consent agreement with the State of Massachusetts, whereby it agreed to notify the Attorney General prior to initiating a foreclosure in that state (the "consent agreement"). 


MERS assigned the borrower's mortgage and note to a bank, which filed a notice of its intended foreclosure.  Shortly thereafter, the mortgage was again assigned, this time to a securitized trust.  The trustee of that trust notified the borrower that it intended to foreclose.  The borrower filed a complaint, making various allegations in connection with her claim that MERS did not possess a legally transferable interest in her mortgage, and therefore could not assign the mortgage. 


The trustee removed the case to federal court, and filed a motion to dismiss for failure to state a claim.  The district court granted the trustee's motion, and the borrower appealed. 


On appeal, the First Circuit noted that although the borrower's arguments were "not always clear," it read her brief as pressing the following claims, among others: (1) that the borrower had standing to challenge the assignments of her mortgage; (2) that the assignments were void, and accordingly that the attempted foreclosure was illegal; (3) the trust did not possess both the note and mortgage at the time of attempted foreclosure; and (4) the attempted foreclosure violated the terms of the lender's consent agreement. 


The First Circuit considered each argument in turn, beginning with the borrower's standing to challenge the assignments of the mortgage and note.  The Court observed that although the lower court had determined that the borrower did not have standing -- inasmuch as she was not a party to the trust agreement -- a recent First Circuit case held that a standing may be appropriate even where a mortgagor is not a party to, nor beneficiary of, the challenged assignments.  Culhane v. Aurora Loan Servs. of Neb., 708 F.3d 282, 290 (1st Cir. 2013). 


More specifically, the First Circuit noted that under Culhane, "claims that merely assert procedural infirmities in the assignment of a mortgage...are barred for lack of standing," whereas "standing exists for challenges that contend that the assignment party never possessed legal title..."  Id. at 291. 


The First Circuit applied that framework to the matter at hand, and determined that because the borrower appeared to contend that MERS never had legal title to her mortgage, she had standing to challenge "whether the assignments of her mortgage were legally valid." 


Next, the Court turned to the merits of the borrower's claims as to MERS -- specifically, her claim that MERS runs counter to the "title theory nature" of Massachusetts law.  The First Circuit found little merit in this argument, noting that it had previous been "resoundingly rejected by this court." 


The First Circuit did acknowledge that the borrower was correct that in Massachusetts, "an entity that holds a mortgage but not the associated promissory note holds that mortgage in an equitable trust for the benefit of the noteholder."  However, the Court explained that "MERS's status as an equitable trustee does not circumscribe the transferability of its legal interest." 


Finally, the First Circuit considered and rejected the borrower's contentions concerning the lender's consent agreement.  It noted that the trust did notify the Attorney General of its foreclosure, as required.  Although the borrower argued that the foreclosure could not proceed without return correspondence from the Attorney General, the First Circuit was not convinced.  Specifically, the Court held that the consent decree "unambiguously requires return correspondence only if the Attorney General wishes to preclude foreclosure."  The Court also emphasized that "nothing in the consent agreement appears to create a private right of action..." 


Accordingly, the First Circuit affirmed the lower court's dismissal of the borrower's complaint.   




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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