Sunday, October 14, 2012

FYI: Kansas App Ct Rejects MERS Challenge to Foreclosure

The Kansas Court of Appeals recently held that formal assignment of a mortgage from MERS to the non-originator holder of the underlying promissory note was not necessary to vest the note holder with a beneficial interest in the mortgage and to give it standing to foreclose.  A copy of the opinion is attached.
Rejecting the "split note" theory, the Court ruled that, because the beneficial interest in the mortgage always was vested in the original lender and the lender's successors and assigns, MERS merely acted as the agent of the lender and the successor note holder, and the assignment of the mortgage simply served as recorded notice of a formal transfer of title to the promissory note as required by recording statutes.    
Defendants borrowers ("Borrowers") obtained a loan from a mortgage lender ("Lender") and secured the loan with a mortgage on their property.  Among other things, the mortgage identified Mortgage Electronic Registration Systems, Inc. ("MERS") as the mortgagee and provided that MERS acted "solely as nominee for the Lender and the Lender's successors and assigns."   After being indorsed and transferred a number of times, the note was ultimately transferred to plaintiff (the "Loan Owner"). 
Borrowers eventually defaulted on the loan and MERS, "solely as nominee for [Lender]," then assigned the mortgage to Loan Owner.   Loan Owner filed a foreclosure action against Borrowers. 
The parties each filed motions for summary judgment.  In their motion, Borrowers challenged Loan Owner's standing to foreclose, arguing that the Note and Mortgage had been "irreparably split" when the Note was indorsed over to other entities while the mortgage remained with MERS.    In response, Loan Owner argued that it had standing to foreclose simply based on its holding of the note and mortgage at the time of the foreclosure action, regardless of any alleged prior split between the two instruments.   
Granting Loan Owner's motion for summary judgment, the lower court ruled in part that both the note and mortgage had come under Loan Owner's common control and that any prior split was thus "cured" upon MERS's assignment of the mortgage to Loan Owner.  Borrowers unsuccessfully sought reconsideration and appealed.
The Kansas Court of Appeals affirmed the grant of summary judgment, but on different grounds.  Providing an overview of the MERS system of tracking ownership interests and servicing rights in mortgage loans, the Court noted that in the absence of an agency relationship between the holder of the mortgage and the holder of the promissory note, the note holder may lack the power to foreclose in the event of a default.  See, e.g., Landmark Nat'l Bank v Kesler, 289 Kan. 528, 540 216 P.3d 158 (2009)(ruling that absent an agency relationship between holder of note and holder of mortgage, a mortgage may become unenforceable when it is not held by the same entity that holds the promissory note).
Notably, however, the Appellate Court ruled that in this case the note and mortgage were never split, because MERS acted throughout as an agent under the terms of the mortgage instrument.  See U.S. Bank v. Howie, 47 Kan. App. 2d 690, 280 P.3d 225 (2012)("Howie")(plain language of the mortgage provided sufficient and undisputed evidence that MERS was acting as the agent of lender at all relevant times). 
Recognizing that in this case, Loan Owner was not the original lender as in Howie, the Court looked to the language of the mortgage itself to determine whether there was an agency relationship between MERS, Lender, and Lender's assignees.  In addressing this question, the Court applied the rules of contract construction and found no ambiguity in either the note or the mortgage, pointing out that the mortgage clearly stated that Borrowers mortgaged their property "to MERS (solely as nominee for Lender and Lender's successor's and assigns)."    
The Court further noted that the plain language of both the note and mortgage reflected the parties' intent to keep both instruments together as part of one transaction, observing that the mortgage and note expressly cross-referenced each other and that the mortgage provided that the Note, together with the mortgage could be sold one or more times. 
Rejecting Borrowers' argument that because MERS never held the note and because the assignment of the mortgage from MERS to Loan Owner specified that MERS assigned the Note and mortgage to Loan Owner "solely as nominee for [Lender]" (rather than "as nominee for [Lender] and its successors and assigns"), the Court ruled that Lender's rights in the mortgage never transferred to MERS.  In so ruling, the Court stressed that as nominee, or agent, MERS had no legally enforceable rights beyond those of the Lender and, further, that the beneficial interest in both the mortgage and note remained vested in Lender and its successors and assigns in accordance with the language of the note and mortgage. 
Accordingly, the Court ruled that, even if the wording of the assignment was "somehow faulty," as an assignee of the note, Loan Owner did not need the assignment in order to vest it with a beneficial interest in the mortgage and that, as the valid holder of the Note, it already had such a beneficial interest sufficient to give it standing to foreclose. 
Pointing out that its interpretation was consistent with Kansas mortgage law under which the transfer of a debt secured by a mortgage generally transfers the mortgage as well, the Court noted that the "assignment of the mortgage was merely recorded notice of a formal transfer of the title to the instrument as required by recording statutes, which are primarily designed to protect the mortagee against other creditors of the mortgagor for lien-priority purposes, not to establish the rights of the mortgagee vis-à-vis the mortgagor."  See, e.g., Army Nat'l Bank v. Equity Developers, Inc. 245 Kan. 3, Syl. ¶ 6, 17, 774 P.2d 919 (1989)(mortgage follows note); K.S.A. 58-2323 (assignment of mortgage carries the debt thereby secured).
The Court thus concluded that Loan Owner was entitled to summary judgment on the foreclosure action.

Ralph T. Wutscher
McGinnis Wutscher LLP
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