Friday, September 21, 2012

FYI: Ark Fed Ct Dismisses Putative Class Action Against MERS by County Clerk for Recording Fees and Alleged UDAP Violations

Dismissing a putative class action law suit to collect county recording fees, the U.S. District Court for the Western District of Arkansas recently held that MERS and its members had no duty under Arkansas law to record mortgage assignments and that the plaintiff lacked standing to enforce any alleged legal obligation to record mortgages truthfully.  A copy of the opinion is attached.
An Arkansas circuit clerk filed a class-action lawsuit in Arkansas state court on behalf of all Arkansas circuit clerks to collect mortgage recording fees from Mortgage Electronic Registration System, Inc. ("MERS") and other mortgage-related defendants (collectively, "Defendants"). 
Claiming that Defendants had breached their duty under Arkansas law to record every mortgage transfer, and that Defendants were using the MERS mortgage registration system as a means to avoid the payment of recording fees, the complaint alleged that Defendants improperly deprived Arkansas counties of recording fees and thus were unjustly enriched and violated the Arkansas Deceptive Trade Practices Act ("ADTPA").   The complaint also alleged that the failure to pay recording fees constituted an illegal exaction under the Arkansas Constitution and that Defendants' mortgage recordings were untruthful in that MERS could not legally serve as beneficiary for Defendants' mortgages.
Defendants removed the case to federal court and moved to dismiss.  The federal District Court dismissed the complaint with prejudice.
Describing the streamlined process of transferring mortgages under the MERS registration system, and noting that the purpose of mortgage recording is to give constructive notice to subsequent purchasers, the District Court ruled that Plaintiff's ADTPA and unjust enrichment claims failed, because Arkansas law did not impose a duty to record mortgage assignments.  See Ark. Code Ann.  § 14-15-404(a)(2012).  As the court explained, "a mortgage's legal efficacy as to the original parties is not diminished if the mortgage goes unrecorded."  See, e.g., Bryan v. Easton Tire Co., 262 Ark. 731, 733, 561 S.W.2d 79, 80 (Ark. 1978)(no statutory duty to record assignments); Judkins v. State, 123 Ark. 28, 184 S.W. 407, 408 (Ark. 1916) ("an unrecorded mortgage is good between the parties thereto, and constitutes a lien which may be enforced as against the mortgagor").
The Court also rejected Plaintiff's arguments that Defendants had a contractual duty to record mortgages whenever the underlying debt is sold to a non-MERS purchaser and that as the third-party beneficiary of those contracts, Plaintiff had the right to enforce them.  
Noting the presumption in Arkansas that "parties contract only for themselves" and the absence of "substantial evidence of a clear intention to benefit" Plaintiff, the Court ruled that Plaintiff was not the third-party beneficiary of Defendants' contracts with MERS and thus lacked standing to  enforce any alleged recording duty contained in them.  See, e.g., Elsner v. Farmers  Ins. Group, 364 Ark. 393, 395, 220 S.W.3d 633, 635 (Ark. 2005).   The Court stated, "if Defendants contracted in the first place to avoid recording fees, it seems unlikely that they would contract to require recording in narrow circumstances to benefit circuit clerks."
In addition, the Court also ruled that because Defendants had no duty to record their mortgages, they also had no duty to record them truthfully or accurately.  In so ruling, the Court noted that because they record for their own benefit, Defendants bear any harm caused by inaccurate disclosure in the recording.   The Court further concluded that "even if untruthful recording causes a specific harm to third-parties rather than to the false recorder itself, Plaintiff has not shown that she [. . .] suffered that specific harm, and so she lacks standing to sue on that theory."
Finally, the Court also dismissed Plaintiff's illegal exaction claim, ruling that, unlike in this case where the Plaintiff, a "tax receiver," sued a private entity for its allegedly illegal withholding, an illegal exaction claim is properly brought by a taxpayer to protect against the government's enforcement of an illegal exaction.  See Ark. Const. Art. XVI, § 13.
The Court thus concluded that because Defendants had no duty to record their mortgages, they did not deprive Plaintiff or the putative class of anything to which they were entitled.  Accordingly, the District Court dismissed the complaint with prejudice.

Ralph T. Wutscher
McGinnis Wutscher LLP
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