Sunday, February 24, 2013

FYI: 1st Cir Holds Borrower May Challenge Assignment of Mortgage, But That MERS System Complied with MA Law

The U.S. Court of Appeals for the First Circuit recently ruled that, although a borrower had standing to challenge the validity of a mortgage assignment from MERS to a loan servicer, the assignment was valid under Massachusetts law and the foreclosure of borrower's property was thus proper. 


In so ruling, the Court concluded that the MERS system of holding and transferring mortgages is consistent with principles of Massachusetts mortgage law, whereby the legal interest in the mortgage and the beneficial interest in the promissory note may be held by separate entities prior to non-judicial foreclosure.


A copy of the opinion is available at:


Plaintiff-borrower ("Borrower") refinanced her residential mortgage loan through a mortgage lender ("Lender").  To secure the loan, Borrower executed a mortgage in favor of Mortgage Electronic Registration Systems, Inc. ("MERS") as "nominee for [Lender] and [Lender's] successors and assigns."   The mortgage was recorded in the county recorder's office.  Shortly after the loan transaction, Lender transferred Borrower's promissory note to another MERS member, a trust consisting of a pool of securitized mortgages, for which the defendant loan servicer ("Servicer") serviced the loan. 


Borrower eventually defaulted on her loan and MERS assigned the mortgage to Servicer, which initiated foreclosure proceedings against Borrower.   Shortly before the scheduled foreclosure, Borrower filed a complaint in state court to challenge the foreclosure, seeking both damages and injunctive relief.  


Servicer removed to federal court, moving for summary judgment.  The lower court granted summary judgment in favor of Servicer, ruling that Servicer had authority to foreclose.  Plaintiff appealed, challenging the validity of MERS's assignment of the mortgage to Servicer on grounds that MERS never held a valid and enforceable interest in the mortgage.  The First Circuit affirmed, ruling that MERS's assignment of the mortgage was valid and that the foreclosure was thus proper.


As you may recall, Massachusetts law permits non-judicial foreclosure if a mortgage contains a power of sale.  See Mass. Gen. Laws ch. 183, § 21.  In addition, a mortgagor is permitted to ensure that any attempted foreclosure on a home is conducted lawfully.  See Mass. Gen. Laws ch. 244, § 14.


Providing an overview of MERS, the Court explained that under the MERS system, MERS holds legal title to the mortgage as the mortgagee of record, but that it does not have any beneficial interest in the loan.  The First Circuit also reiterated that, according to recent precedent, a foreclosing mortgagee must both control the note and hold the mortgage in order for a foreclosure to be valid.  See Eaton v. Fed. Nat'l Mortg. Ass'n., 969 N.E.2d 1118, 1127 (Mass. 2012). 


Next, addressing Servicer's contention that Borrower lacked standing to challenge the validity of the assignment of mortgage, because she was neither a party nor a third-party beneficiary of the assignment, the First Circuit concluded that a nonparty mortgagor such as Borrower may challenge the assignment of her mortgage under certain circumstances.  In so doing, the Court noted that Borrower satisfied the test for standing in that: (1) she suffered a concrete and particularized injury in the form of foreclosure of her home; (2) there was a direct causal connection between the challenged action – the right to foreclose -- and the identified harm; and (3) the claimed injury would be redressed through the payment of damages if the court determined that Servicer lacked the authority to foreclose.  See Katz v. Pershing, LLC, 672 F.3d 64, 71 (1st Cir. 2012); Plains Commerce Bank v. Long Family Land & Cattle Co., 554 U.S. 316, 327 (2008).


The First Circuit also pointed out that, because Massachusetts permits non-judicial foreclosure where the mortgagee has power of sale under the terms of the mortgage, a determination that a mortgagor lacked standing to challenge a mortgage assignment in such circumstances would effectively deprive Borrower of legal protection.   The Court therefore stressed that under Massachusetts law, Borrower had standing to challenge MERS's assignment of the mortgage only to the extent such challenge was necessary to contest the foreclosing entity's authority to foreclose. 


Turning specifically to the question of the assignment's validity in this case, and thus by extension to the validity and legal effect of the foreclosure, the First Circuit noted that Borrower's challenge to the MERS assignment was premised on the assertion that MERS purportedly never properly held the mortgage and thus had no interest to assign, which, according to the Court, would render the foreclosure completely void.      


Highlighting the distinction between the legal interest in a mortgage and the beneficial interest in the underlying debt, and further recognizing the longstanding common-law principles governing mortgages, the First Circuit rejected Borrower's argument that MERS never owned the "'beneficial half' of the legal interest" in the mortgage.  In so doing, the Court concluded that there was "no reason to doubt the legitimacy of the common arrangement whereby MERS [held] bare legal title as mortgagee of record and the noteholder alone enjoy[ed] the beneficial interest in the loan."  See Eaton, 969 N.E.2d at 1124 (noting that in a title-theory state such as Massachusetts, legal title to the mortgaged property transfers to mortgagee until mortgagor repays the loan and that note and mortgage need not be held by the same entity prior to foreclosure).   This framework, the Court reasoned, established an equitable trust whereby MERS acted as trustee for the owner of the loan on whose behalf Servicer serviced the loan.  See U.S. Bank, N.A. v. Ibanez, 941 N.E.2d 40, 53-54 (Mass. 2011). 


In addition to MERS's status as equitable trustee, the First Circuit also found MERS's authority to assign the mortgage to Servicer in the language of the mortgage itself.   As the Court explained, given that the mortgage denominated MERS as "mortgagee 'solely as nominee for [Lender] and [Lender's] successors and assigns," MERS held title for the owner of the beneficial interest, that is, the owner of the loan. 


The First Circuit likewise dismissed as "wishful thinking" Borrower's contention that the assignment failed to comply with statutory requirements related to an assignor's execution and notarization of assignments.    See Mass. Gen. Laws ch. 183, § 54B .


Accordingly, the First Circuit affirmed the lower court's grant of summary judgment in favor of Servicer.




Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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