The mortgage beat has been quiet of late, but I must confess to being remiss in writing up two recent losses suffered by MERS. One of the big reasons that MERS has taken comparatively few losses in court is that it has often settled cases where it looked like it might lose.
Today, we’ll deal with the higher-profile one, that of a filing by the Montgomery County recorder in Pennsylvania, Nancy Becker, for herself and on behalf of all county recorders, against MERS, in Federal court. The basis of the suit was that MERS had violated a state law that required that conveyances of real property be recorded in county recorder of deeds’ offices. Becker argues, in effect, that the mortgage (the lien against the property) and the note (the borrower IOU) were inseparable, and that trying to treat the note as separate and exempt from the recording requirement was a “willful and negligent” violation of statute. She sought, among other things, that MERS be required to record mortgage transfers and that it be found to have engaged in unjust enrichment.
MERS has won suits filed by recorders in other states, but the flip side is that MERS suffered a major loss in Oregon, which has a state recording statute.
Even though the court accepted the premise that notes could be transferred readily, which was one of the legs of the argument MERS advanced as to why it did not need to record mortgages, it rejected the notion that it meant mortgages weren’t subject to the state recording law. The judge cited decisions from 1848 and 1850 and pointed out:
These holdings remain undisturbed despite the passage of more than 150 years and thus the underlying purpose behind the Pennsylvania recording acts remains clear – to provide notice to the public of the identities of those who hold an interest in real estate as well as notice of the true nature of the transaction on record…And in 1852, it was determined that the assignment of mortgages also fell within the recording acts…in 1863, the Pennsylvania legislature first decreed that such recording be mandatory.
The judge pointed out that there were nevertheless competing legal theories and decisions on both sides until a Pennsylvania Supreme Court case in 2004, Pines v. Farrell, which focuses on the issue of whether a mortgage constituted a property transfer. Here is the key section:
The judge also found MERS could be held responsible for damages:
We likewise reject the proposition that MERS is not subject to liability because it is only an agent for its member-lenders. Indeed, as a general matter, an “agent” is a “person authorized by another (principal) to act for or in place of him; one intrusted with another’s business.
As Georgetown law professor, Adam Levitin, said succinctly by e-mail, “MERS hasn’t lost a case like this before.” Damages are to be awarded in a jury trial. Note that this case did not decide the validity of mortgages in the MERS system, but you can be sure that borrower attorneys are planning to file a boatload of cases on the back of this decision.
This case is certain to be appealed. Not only is MERS facing a possibility of a very costly award, but this also increases the odds of suits in state where title does not pass to the borrower until the mortgage is paid off in full (aka “title theory states“) and state law requires that property transfers be recorded. While this decision seems promising, and is carefully argued, Tom Cox, the Maine attorney who made robosigining a national issue, thought that the appeals court would be likely to certify the MERS question to the Pennsylvania Supreme Court, which could very well reverse the district court decision. So keep the champagne on ice for now.