Sunday, October 14, 2018

FYI: 5th Cir Confirms MERS Assignment Not Defective Due to Dissolution of Originating Lender

The U.S. Court of Appeals for the Fifth Circuit recently held that a purported defect in the assignment of a security instrument — that it was executed solely as "nominee," and not as beneficiary – did not affect the rights of the beneficiary and its successors and assigns to foreclose the subject property, and entered judgment in favor of the mortgagee.


A copy of the opinion is available at:  Link to Opinion


In May 2007, a lender ("Lender") extended a mortgage loan, evidenced by a promissory note executed by the borrower and secured by a Texas Home Equity Security Instrument ("Deed of Trust") to the borrower and his wife's ("Borrowers") property.  Mortgage Electronic Registration Systems, Inc. ("MERS") was the named beneficiary in the Deed of Trust.


The Lender later was dissolved and its assets were transferred to a related entity ("Lender's Successor"), and eventually placed in receivership by the FDIC, who sold substantially all of its assets to another bank in the spring of 2009.  Borrowers made their loan payments until December 2009, when their last attempted payment was returned.


In January 2011, MERS assigned the Deed of Trust to a different entity ("Trustee").  The next month, the mortgage servicer for the Trustee ("Servicer") notified Borrowers that the mortgage loan was being accelerated for failing to cure the default.  Borrowers still did not make any payments.


In April 2011 the Trustee filed a declaratory action in federal district court seeking authorization to conduct a non-judicial foreclosure sale of the Borrower's property pursuant to Texas law.  Following a bench trial, the presiding magistrate judge concluded that the assignment was void and invalid, and the Trustee as assignee did not possess the right to foreclose the Deed of Trust.


On appeal by the Trustee, the Fifth Circuit concluded that the magistrate incorrectly concluded that when MERS' assignment of the Deed of Trust to the Trustee as 'nominee for [Lender],' did not provide authorization for it to assign the Deed of Trust. 


To the contrary, the Fifth Circuit held that, under Texas law and federal precedent, because MERS was named beneficiary on the original Deed of Trust, it had the authority to transfer its right to bring a foreclosure action to a new mortgagee by valid assignment, and did so in this instance.  Deutsche Bank Nat'l Tr. Co. v. Burke, 655 F. App'x 251, 252 (5th Cir. 2016). 


Importantly, the Appellate Court further explained that merely because "the assignment did not state that MERS was acting in its capacity as beneficiary does not change our analysis," and it had "not found a single case from any Texas state court that has made this distinction." Id. at 254, n.1.  Accordingly, the final judgment in Borrower's favor was vacated and remanded with instructions to determine whether the Mortgagee met the remaining requirements to foreclose under Texas law.  Id.


On remand, while acknowledging that the Borrowers' remaining challenges to foreclosure lacked merit, the trial court magistrate judge defied the mandate and contravened the law of the case doctrine by concluding that the Fifth Circuit committed error in its prior opinion, and that failure to correct the error would result in manifest injustice. 


Specifically, the trial court determined that the Fifth Circuit "clearly erred" in concluding that MERS assigned the Deed of Trust because it executed the assignment as "nominee," suggesting it was acting only in an agency capacity for a principal, rather than its capacity as beneficiary.  Because the Lender's Successor was placed in receivership prior to assignment and the Trustee failed to show that the FDIC, as receiver, sold the loan to another bank, the magistrate further concluded that there was no existing successor. 


Thus, the magistrate judge concluded that no existing principal existed capable of assigning a right to foreclosure, and MERS' purported assignment of such right as "nominee" was "void and absolutely invalid."  The Trustee timely appealed.


On the instant appeal, review of the magistrate judge's interpretation of the prior remand order was de novo, including whether the law-of-the-case doctrine or mandate rule (requiring a trial court to effect the appellate mandate) determined any of the lower court's actions on remand. Gen. Universal Sys., Inc. v. HAL, Inc., 500 F.3d 444, 453 (5th Cir. 2007) (quoting United States v. Elizondo, 475 F.3d 692, 695 (5th Cir. 2007)).  The instant second panel explained that it would only "reexamine issues of law addressed by a prior panel opinion in a subsequent appeal of the same case" if "(i) the evidence on a subsequent trial was substantially different, (ii) controlling authority has since made a contrary decision on the law applicable to such issues, or (iii) the decision was clearly erroneous and would work a manifest injustice," noting that the third exception has rarely been employed.  Hopwood v. Texas, 236 F.3d 256, 272 (5th Cir. 2000).


Here, the trial magistrate judge construed this third exception to the law of case doctrine as a license to disagree with the Fifth Circuit if it was "clearly erroneous" and would "work a manifest injustice" if not overruled.  However, the Fifth Circuit reasoned that such conduct "would lead to chaos if routinely done," and that even if the trial court had the authority to overrule the very legal point previously decided on appeal, absence intervening law or new facts, this case did not represent such extraordinary circumstances.  Id. at 272-273.


The Appellate Court noted that MERS indisputably had authority to assign its beneficiary rights under the Deed of Trust to the Bank under its permissible role as beneficiary and nominee thereunder, and validly did so despite its description as "nominee" on the assignment.  Harris Cty. V. MERSCORP Inc., 791 F.3d 545, 558-59 (5th Cir. 2015). 


Even if acting only as nominee, it was still not erroneous to conclude that MERS validly assigned the Deed of Trust on behalf of an existing successor of Lender's Successor (as the trial court purported), because the FDIC necessarily had power to assign the rights under the note, including foreclosure rights.  12 U.S.C. § 192; Concierge Nursing Ctrs., Inc. v. Antex Roofing, Inc., 433 S.W.3d 37, 45 (Tex. App.—Houston [1st Dist.] 2013, pet. denied) ("The word 'assign' or 'assignment' in its most general sense means the transfer of property or some right or interest from one person to another.").


Lastly, the Fifth Circuit held that even if its prior opinion were "dead wrong," no manifest injustice would result from following the mandate — to the contrary, the Appellate Court noted, the Borrowers continued to live in the home without making payments since December 2009.  


Because it was undisputed that MERS as beneficiary under the Deed of Trust had the right to initiate foreclosure proceedings and transfer that right via valid assignment, the purported defect in the assignment as declared by the magistrate judge did not change the fact that MERS and its successors and assigns were entitled to foreclose Borrower's property, and no injustice would occur in allowing the foreclosure to proceed.


Accordingly, the Fifth Circuit reversed and rendered judgment in favor of the Trustee.




Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874


Admitted to practice law in Illinois




Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC



NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:


Financial Services Law Updates




The Consumer Financial Services Blog








California Finance Law Developments