United States: Sixth Circuit Court Of Appeal Affirms MERS System, Rejects Class Action Challenge

In the decision authored by Judge Rogers rendered last Thursday, the Sixth Circuit Court of Appeals rejected a challenge to the MERS system and the assertion that it's operation violated Kentucky law with respect to recording mortgage assignments. The Sixth Circuit held that, while the assignment of a mortgage may, under Kentucky law, be required to be of record with the county clerk, there is no parallel requirement for recording assignments of the related promissory notes. Higgins v. BAC Home Loan Servicing, LP, __F.3d __, 2015 WL 4289804 (6th Cir. July 16, 2015).

Under the MERS system, when a home is financed through a note and mortgage, the lender on the note is identified as the issuing bank. In turn, the mortgagee is identified as MERS, as nominee of the mortgagee and its successors. When in turn the note and the related mortgage are sold or resold, such as takes place during securitization, no further recordation is made with the county clerk. Rather, the note is transferred to the purchaser thereof, and assuming they are a member of the MERS system the related interest in the mortgage is assigned to the acquirers benefit.

Or at least that is how it was intended to operate. The plaintiffs in this case alleged that the MERS system was improper in that it violated KRS § 382.360(3) which requires that "When a mortgage is assigned to another person, the assignation will file the assignment for recording with the county clerk within thirty (30) days of the assignment." Certain penalties are imposed upon an assignee who fails to make this required recording. In that the assignment in the MERS system of the promissory notes carried with it an interest in the related mortgage, the plaintiffs posited that damages were owing because the transfers of those interests in the mortgages were never recorded with the county clerk.

The trial court denied the motion for summary judgment filed by the banks and other lending institutions named as defendants, finding, inter alia, that the transfer of the notes which were secured by the mortgages in effect constituted an assignment of the underlying mortgage, and that assignment required a filing with the County Clerk. The Sixth Circuit granted an interlocutory appeal to that determination.

Coincidentally, the same day that the District Court (Judge Caldwell) denied the motion for summary judgment, a near identical challenge to the MERS system was considered and rejected in Ellington v. Federal Home Loan Mortgage Corporation, 13 F.Supp.3d 723 (W. D. Ky. 2014) (Judge McKinley). Much of the Sixth Circuit's analysis in this case would "piggyback" on the Ellington decision.

The question came down to one of statutory interpretation. Parsing the statute, the Sixth Circuit focused upon statutory distinctions between the treatment of mortgage instruments and promissory notes, particularly focusing on the fact that while assignment of the former must be recorded, recordation of assignments of the latter are merely permissive. Further:

Adopting plaintiffs' interpretation of the recording statutes would also render the statutory scheme somewhat incoherent. Plaintiffs concede that their interpretation would mandate recording of note assignments. But Kentucky's recording statutes pointedly distinguish between mortgage assignments - which must be recorded, see KRS 382.360(3) - and note transfers - for which recording is optional, see KRS 382.290(2). If every note transfer operated as a mortgage assignment, and every mortgage assignment must be recorded, then every note transfer would have to be recorded, albeit as a mortgage assignment. It would be strange for Kentucky's legislature to require recording of note transfers as mortgage assignments while elsewhere in the same statutes providing the note transfers need not be recorded. 2015 WL 4289804,*4.

Ultimately:

In sum, KRS 382.360(3) applies to those instances in which a transferee fails to record a transfer of a mortgage deed. It does not require recording of transfers of promissory notes. Because it is undisputed that defendants transferred only promissory notes and did not fail to record any transfers of mortgage deeds, defendants did not violate KRS 382.360(3) and the district court should have dismissed plaintiffs' action on that basis.

Originally published on Kentucky Business Entity Law

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