Federal Court in Texas Deals a Potentially Serious Blow to MERS

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Texas is not exactly a consumer-friendly state, so the Federal court ruling in the Eastern District of Texas against MERS has the potential to have broad ramifications (note a Federal court in Texas will still have to look to Texas law and precedents on real estate matters). Oddly, even though this decision took place last month, it seems to have escaped the notice of most real-estate oriented sites until now. Hat tip to April Charney for highlighting it (literally and figuratively, she marked the filing that I’ve posted below):

Kingman Holdings v. CitiMortgage & MERS April 21, 2011 US Dist. LEXIS Ct ED Tex. April.21

The borrower challenged an assignment from Citimortgage to MERS based on a pretty simple basis: MERS was not authorized to do so and on top of that violated its own procedures:

Plaintiff alleges that the assignment by MERS to CitiMortgage is void for the following reasons: (1) Blackstun was not appointed as vice president by MERS’ board of directors; and (2) MERS was without authority to transfer the Note. Plaintiff claims that the Deed of Trust is a cloud on its title and sues to quiet title in the Property and claims the assignment violates Chapiter 12 of the Texas Civil Practices and Remedies Code. Alternatively, Plaintiff sues to enforce its equity [*3] in re-demption.

The court found that the mechanism used by MERS, of having MERS’ corporate secretary (Hultman) appointment various MERS signing officers was invalid because the appointment has not been approved by MERS’ board of directors, as required by MERS’ by-laws. That means that when the signing officer executed the assignment, it resulted in MERS filing a fraudulent document in the deed records.

Per April Charney: “The Court found that MERS failed to address the issue of the legal effect of an assignment executed by an unauthorized signer.”

The court also rebuked MERS, noting that the signing officer “had no such authority, MERS would know that fact. It appears to be more than mere negligence by MERS.”

Given the large number of signing officers that MERS has (over 20,000, with a lot of churn among them) which would seem to make it impractical for the board to have authorized them individually as required, and the fact that in past cases Hultman appears to have provided the MERS authorization for signing officers, MERS appears to have more than a wee problem if other courts follow this Federal court ruling.

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  1. txchick57(?)

    Nice. I worked on cases like this for two years in the DFW area. It was very difficult to get any judge around here to even consider this theory. Eastern District in Sherman? Would never have guessed that would be the one to finally do it.

    1. Francois T

      “It was very difficult to get any judge around here to even consider this theory.”

      Judges consider that line of reasoning a “theory”??

      It is a simple set of facts that simple logic force to conclude like the Texas court decided.

      Is they judges all challenged around DFW?

  2. anon

    Alternatively, Plaintiff sues to enforce its equity [*3] in re-demption.

    me not being an attorney, I need help with this passage here. Does this imply that the plaintiff is awarded a monetary claim to provide for the legal cost to make the mortgage transaction good, or does the entire mortgage become void and the the plaintiff must now move out of the home immediately?

    1. Pepe

      Generally speaking, courts sit in both law and equity (think fairness, or the vague concept of “justice”).

      What they are likely arguing is that if the court finds that the plaintiffs are correct, and the assignment of the note/mortgage was invalid, then the court should, in “fairness”, find that there is an “equitable mortgage” on the property.

      1. Transor Z

        As a technical matter, what the mortgagee does is “foreclose the mortgagor’s [borrower’s] equity of redemption.” It’s inaccurate to say you foreclose on a house; you foreclose the equity of redemption.

        1. Pepe

          I read it too quickly, and gave a confused response.

          The plaintiff/mortgagor plead in the alternative to ask that in the event that they are wrong about the cloud on title, that they still had an equitable remedy, and should be able to cure any default by paying any deficiency, etc.

          Note to self: post only after coffee, and read what you’re posting about, and not just the highlighted bits

  3. jake chase

    I wouldn’t start cheering before the ruling is confirmed on appeal. It doesn’t so much matter what the decision says as who the judges are and who appointed them.

  4. indio007

    I don’t know why people are confused by all this MERS stuff.
    It’ simple. Transfers of an interest in real property must be in writing. If done by an agent, proof of agency to transfer the land must be in writing.

    MERS doesn’t have proof of authority. The Deed of Trust is executed by the borrower not the lender. MERS can’t use it as proof of agency. MERS attempts to get around this by using it’s membership agreement. but.. If you read the In re Agard case the membership agreement is not sufficient and doesn’t even mention the word agent. MERS simply needs proof it was given the authority by the Note holder to make the assignment of a particular property at a particular time to a particular party.

    They can’t do it.

    1. psychohistorian

      You are assuming consistent application of rule of law that recent evidence would question. If it becomes more of an issue their Congress will fix things for them.

  5. Jim Haygood

    ‘Texas is not exactly a consumer-friendly state, so the Federal court ruling in the Eastern District of Texas against MERS has the potential to have broad ramifications.’

    Not sure that ‘consumer friendly’ has much to do with it. I seem to recall that venue-shopping attorneys liked to file class action suits in the Eastern District of Texas because of the tendency of populist juries to whack corporate offenders with treble damages.

    Some of the early asbestos cases, involving shipyard workers in the Beaumont/Port Arthur area of the Gulf Coast, were litigated in the Eastern District if memory serves.

    1. Pepe

      They are arguing a question of law, not fact (to a judge, not a jury). This motion has nothing to do with class actions.

    2. Brent

      @ Jim

      you are making a very general statement about Consumer laws in Texas. Our Conumer laws kept this state from being another Nevada, CA, Florida, and AZ due to our strict Mortgage Lending laws in Texas, that dealt with Home Equity

    3. dw

      think you are correct. we used to be a more balanced state (not overly pro business or consumer), but no more.
      the only reason we didn’t go over board like other states is because we aren’t exactly real estate poor, and we don’t exactly have a lot of income (we are among the low income states).

  6. Thisson

    “Plaintiff sues to enforce its equity in re-demption”

    I seem to recall that this has to do with the plaintiff being able to redeem the property by paying the outstanding amount owed.

    As for transfers being required to be in writing, it’s *more* than that. They must also be recorded in the County Clerk’s office, which is exactly what MERS is designed to circumvent (in order to avoid paying the recording fees).

    1. mannfm11

      There is no requirement o record a deed in Texas. The real reason is to not have to draft all the assignments and have them effectively executed over and over again. Fees are $10 per page, less than 1 days interest. I happen to be in Collin County where the 180th court is.

      1. real estate attorney in tx

        Actually, there is a requirement to record property transfers in Texas. If you intend to win the Trespass to Try Title suit, or if you intend to have Title Insurance, or if you plan on defending against an Adverse Possession claim, or if you intend to exercise your rights as a Trustee or Substitute Trustee under a Deed of Trust. In other words, there is no situation where failure to record a deed makes any sense. And, if you intend to PERFECT your secured interest in the property as a lienholder, and you fail to RECORD the document, then you fail to PERFECT your lien. Simple UCC concepts, applied in the same way to real property. There are mechanics liens, tax liens, and other liens that can attach to real property. And if you fail to record, you fail to gain priority over other lienholders.

  7. kares

    Note to Yves: God, I can’t believe that you can create the time to go through all this and lead a sane life. Thank you and good luck.

    1. JDNMEsq.

      I concur as to the this case being a “nothing” case as regards the rampant mortgage fraud out there. A decision on a motion to dismiss is hardly binding precedent on anyone except the litigants in that action. And the case was read and analyzed incorrectly (unfortunately).

  8. mark

    I think you, the highlighter and the commenters are not reading this clearly. First, the judge dismisses – does not uphold, but dismisses – the claims against MERS and Citi related to ownership of the real estate. Read the first sentence after the bold “RECOMMENDATIONS” to confirm that, and, for the reasoning, read page 3 of the opinion, which is not highlighted. The court says (1) the validity of the mortgage and the debt are separate from the validity of the assignment and (2) a borrower must tender full repayment of the loan in cash to redeem the property.

    The only thing it preserves is the claim for a fine, if you will, for MERS’s potentially fraudulent statements about its authority regarding the lien. The fine is $10,000 or actual damages, whichever is greater. But it appears solely to relate to MERS’s conduct, not the lender. There might be an indemnification of MERS by the lender but it does not likely cover fraud. If MERS is a shell, the remedy is hollow.

    Second, when you write “the court found that the mechanism used by MERS … was invalid….” that is wrong. The court said no such thing. It says, if you read it clearly, that the invalidity is “alleged” and since the defendant did not respond to that allegation, the court will let that part of the litigation proceed to discovery. That is not a finding of anything other than the claim is “plausible”.

    1. JDNMEsq.

      I concur as to the this case being a “nothing” case as regards the rampant mortgage fraud out there. A decision on a motion to dismiss is hardly binding precedent on anyone except the litigants in that action. And the case was read and analyzed incorrectly (unfortunately).

    2. Yves Smith Post author

      Per both other depositions by MERS officers and the way MERS is structured, the signing officers were not authorized by the board as required but by MERS executives. This allegation is almost certain to be factually accurate and apply to pretty much all MERS signing officers. That’s why this is meaningful (and I pointed out MERS practice in the post).

  9. greggp

    The 4/21/11 document was the Magistrate’s opinion. The District Judge adopted the Magistrate’s opinion on May 17. That’s why it didn’t hit the news until now.

  10. mannfm11

    Did you people read this? The plaintiff lost. Read the ruling of the Magistrate. It is a recommendation. No quiet title. Plaintiff has suit possibly for filing the documents, but not for title. The last paragraph is the opportunity to appeal the dismissed case

    Based on the foregoing, the Court recommends that CitiMortgage, Inc. and Mortgage ElectronicRegistration Systems, Inc.’s Motion to Dismiss for Failure to [*15] State a Claim (Dkt. #10) should be GRANTED in part and Plaintiffs quiet title and equity of redemption claims should beDISMISSED with prejudice. Plaintiffs claim for violation of the Civil Practices and Remedies Code
    ß 12.002 should remain at this time.

    Within fourteen (14) days after service of the magistrate judge’s report, any party may serve andfile written objections to the findings and recommendations of the magistrate judge. 28 U.S.C. ß636(b)(1)(C).

    Failure to file written objections to the proposed findings and recommendations contained inthis report within fourteen days after service shall bar an aggrieved party from
    de novo review by the district court of the proposed findings and recommendations and from appellate review of factual findings accepted or adopted by the district court except on grounds of plain error or manifest injustice.
    Thomas v. Arn, 474 U.S. 140, 148 (1985)
    Rodriguez v. Bowen, 857 F.2d 27

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