The following is a New York Bankruptcy motion for relief from stay ruling from February 10th, 2011
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
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In re:
Case No. 810-77338-reg
FERREL L. AGARD,
Chapter 7
Debtor.
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MEMORANDUM DECISION
Before the Court is a motion (the “Motion”) seeking relief from the automatic stay
pursuant to 11 U.S.C. § 362(d)(1) and (2), to foreclose on a secured interest in the Debtor’s real
property located in Westbury, New York (the “Property”). The movant is Select Portfolio
Servicing, Inc. (“Select Portfolio” or “Movant”), as servicer for U.S. Bank National Association,
as Trustee for First Franklin Mortgage Loan Trust 2006-FF12, Mortgage Pass-Through
Certificates, Series 2006-FF12 (“U.S. Bank”). The Debtor filed limited opposition to the Motion
contesting the Movant’s standing to seek relief from stay. The Debtor argues that the only
interest U.S. Bank holds in the underlying mortgage was received by way of an assignment from
the Mortgage Electronic Registration System a/k/a MERS, as a “nominee” for the original
lender. The Debtor’s argument raises a fundamental question as to whether MERS had the legal
authority to assign a valid and enforceable interest in the subject mortgage. Because U.S. Bank’s
rights can be no greater than the rights as transferred by its assignor – MERS – the Debtor argues
that the Movant, acting on behalf of U.S. Bank, has failed to establish that it holds an
enforceable right against the Property.1 The Movant’s initial response to the Debtor’s opposition was that
MERS’s authority to assign the mortgage to U.S. Bank is derived from the mortgage itself which
allegedly grants to MERS its status as both “nominee” of the mortgagee and “mortgagee of
record.” The Movant later supplemented its papers taking the position that U.S. Bank is a
creditor with standing to seek relief from stay by virtue of a judgment of foreclosure and sale
entered in its favor by the state court prior to the filing of the bankruptcy. The Movant argues
that the judgment of foreclosure is a final adjudication as to U.S. Bank’s status as a secured
creditor and therefore the Rooker-Feldman doctrine prohibits this Court from looking behind the
judgment and questioning whether U.S. Bank has proper standing before this Court by virtue of a
valid assignment of the mortgage from MERS.
The Court received extensive briefing and oral argument from MERS, as an intervenor in
these proceedings which go beyond the arguments presented by the Movant. In addition to the
rights created by the mortgage documents themselves, MERS argues that the terms of its
membership agreement with the original lender and its successors in interest, as well as New
York state agency laws, give MERS the authority to assign the mortgage. MERS argues that it
holds legal title to mortgages for its member/lenders as both “nominee” and “mortgagee of
record.” As such, it argues that any member/lender which holds a note secured by real property,
that assigns that note to another member by way of entry into the MERS database, need not also
assign the mortgage because legal title to the mortgage remains in the name of MERS, as agent
for any member/lender which holds the corresponding note. MERS’s position is that if a MERS
member directs it to provide a written assignment of the mortgage, MERS has the legal
authority, as an agent for each of its members, to assign mortgages to the member/lender
currently holding the note as reflected in the MERS database.
For the reasons that follow, the Debtor’s objection to the Motion is overruled and the
Motion is granted. The Debtor’s objection is overruled by application of either the Rooker-
Feldman doctrine, or res judicata. Under those doctrines, this Court must accept the state court
judgment of foreclosure as evidence of U.S. Bank’s status as a creditor secured by the Property.
Such status is sufficient to establish the Movant’s standing to seek relief from the automatic stay.
The Motion is granted on the merits because the Movant has shown, and the Debtor has not
disputed, sufficient basis to lift the stay under Section 362(d).
Although the Court is constrained in this case to give full force and effect to the state
court judgment of foreclosure, there are numerous other cases before this Court which present
identical issues with respect to MERS and in which there have been no prior dispositive state
court decisions. This Court has deferred rulings on dozens of other motions for relief from stay
pending the resolution of the issue of whether an entity which acquires its interests in a mortgage
by way of assignment from MERS, as nominee, is a valid secured creditor with standing to seek
relief from the automatic stay. It is for this reason that the Court’s decision in this matter will
address the issue of whether the Movant has established standing in this case notwithstanding the
existence of the foreclosure judgment. The Court believes this analysis is necessary for the
precedential effect it will have on other cases pending before this Court.
The Court recognizes that an adverse ruling regarding MERS’s authority to assign
mortgages or act on behalf of its member/lenders could have a significant impact on MERS and
upon the lenders which do business with MERS throughout the United States. However, the
Court must resolve the instant matter by applying the laws as they exist today. It is up to the
legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite
authority to assign mortgages under its current business practices. MERS and its partners made
the decision to create and operate under a business model that was designed in large part to avoid
the requirements of the traditional mortgage recording process. This Court does not accept the
argument that because MERS may be involved with 50% of all residential mortgages in the
country, that is reason enough for this Court to turn a blind eye to the fact that this process does
not comply with the law.
Facts
Procedural Background
On September 20, 2010, the Debtor filed for relief under Chapter 7 of the Bankruptcy
Code. In Schedule A to the petition, the Debtor lists a joint ownership interest in the Property
described as follows:
A “[s]ingle family home owned with son, deed in son’s name since 2007; used as
primary residence . . .. Debtor was on original deed and is liable on the mortgage,
therefore has equitable title. Debtor is in default of the mortgage with a principal
balance of over $450,000.00. The house is worth approximately $350,000. A
foreclosure sale was scheduled 9/21/10.”
According to Schedule D, the Property is valued at $350,000 and is encumbered by a mortgage
in the amount of $536,920.67 held by “SPS Select Portfolio Servicing.”
On October 14, 2010, the Movant filed the Motion seeking relief from the automatic stay
pursuant to 11 U.S.C. §362(d) to foreclose on the Property. The Motion does not state that a
foreclosure proceeding had been commenced or that a judgment of foreclosure was granted prior
to the filing of the bankruptcy petition. Nor does it mention that the Debtor holds only equitable
title and does not hold legal title to the Property. Instead, Movant alleges that U.S. Bank is the
“holder” of the Mortgage; that the last mortgage payment it received from the Debtor was
applied to the July, 2008 payment; and that the Debtor has failed to make any post-petition
payments to the Movant. Movant also asserts that as of September 24, 2010, the total
indebtedness on the Note and Mortgage was $542,902.33 and the Debtor lists the value of the
Property at $350,000 in its schedules. On that basis, Movant seeks entry of an order vacating the
stay pursuant to 11 U.S.C. § 362(d)(1) and (d)(2).
Annexed to the Motion are copies of the following documents:
• Adjustable Rate Note, dated June 9, 2006, executed by the Debtor as borrower and listing
First Franklin a Division of Na. City Bank of In. (“First Franklin”) as the lender
(“Note”);
• Balloon Note Addendum to the Note, dated June 9, 2006;
• Mortgage, dated June 9, 2006 executed by the Debtor and listing First Franklin as lender,
and MERS as nominee for First Franklin and First Franklin’s successors and assigns
(“Mortgage”);
• Adjustable Rate and Balloon Rider, dated June 9, 2006;
• Addendum to Promissory Note and Security Agreement executed by the Debtor; and
• Assignment of Mortgage, dated February 1, 2008, listing MERS as nominee for First
Franklin as assignor, and the Movant, U.S. Bank National Association, as Trustee for
First Franklin Mortgage Loan Trust 2006- FF12, Mortgage Pass-through Certificates,
Series 2006-FF12, as assignee (“Assignment of Mortgage”).
The Arguments of the Parties
On October 27, 2010, the Debtor filed “limited opposition” to the Motion, alleging that
the Movant lacks standing to seek the relief requested because MERS, the purported assignor to
the Movant, did not have authority to assign the Mortgage and therefore the Movant cannot
establish that it is a bona fide holder of a valid secured interest in the Property.
The Movant responded to the Debtor’s limited opposition regarding MERS’s authority to
assign by referring to the provisions of the Mortgage which purport to create a “nominee”
relationship between MERS and First Franklin. In conclusory fashion, the Movant states that it
therefore follows that MERS’s standing to assign is based upon its nominee status.
On November 15, 2010, a hearing was held and the Court gave both the Debtor and
Movant the opportunity to file supplemental briefs on the issues raised by the Debtor’s limited
opposition.
On December 8, 2010, the Movant filed a memorandum of law in support of the Motion
arguing that this Court lacks jurisdiction to adjudicate the issue of whether MERS had authority
to assign the Mortgage, and even assuming the Court did have jurisdiction to decide this issue,
under New York law the MERS assignment was valid. In support of its jurisdictional argument,
the Movant advises the Court (for the first time) that a Judgement of Foreclosure and Sale
(“Judgment of Foreclosure”) was entered by the state court in favor of the Movant on November
24, 2008, and any judicial review of the Judgment of Foreclosure is barred by the doctrines of
res judicata, Rooker-Feldman, and judicial estoppel.2 The Movant argues that the Debtor had a
full and fair opportunity to litigate these issues in state court, but chose to default, and cannot
now challenge the state court’s adjudication as to the Movant’s status as a secured creditor or
holder of the Note and Mortgage, or its standing to seek relief from the automatic stay in this
Court. The Movant also notes that the Debtor admits in her petition and schedules that she is
liable on the Mortgage, that it was in default and the subject of a foreclosure sale, and thus
judicial estoppel bars her arguments to the contrary.
In addition to its preclusion arguments, on the underlying merits of its position the
Movant cites to caselaw holding that MERS assignments similar to the assignment in this case,
are valid and enforceable. See U.S. Bank, N.A. v. Flynn, 897 N.Y.S. 2d 855, 858 (N.Y. Sup. Ct.
2010); Kiah v. Aurora Loan Services, LLC, 2010 U.S. Dist. LEXIS 121252, at *1 (D. Mass. Nov.
16, 2010); Perry v. Nat’l Default Servicing Corp., 2010 U.S. Dist. LEXIS 92907, at *1 (Dist.
N.D. Cal. Aug. 20, 2010). It is the Movant’s position that the provisions of the Mortgage grant
to MERS the right to assign the Mortgage as “nominee,” or agent, on behalf of the lender, First
Franklin. Specifically, Movant relies on the recitations of the Mortgage pursuant to which the
“Borrower” acknowledges that MERS holds bare legal title to the Mortgage, but has the right
“(A) to exercise any or all those rights, including, but not limited to, the right to foreclose and
sell the Property; and (B) to take any action required of Lender including, but not limited to,
releasing and canceling [the Mortgage].” In addition, the Movant argues that MERS’s status as a
“mortgagee” and thus its authority to assign the Mortgage is supported by the New York Real
Property Actions and Proceedings Law (“RPAPL”) and New York Real Property Law (“RPL”).
Movant cites to RPAPL § 1921-a which allows a “mortgagee” to execute and deliver partial
releases of lien, and argues that MERS falls within the definition of “mortgagee” which includes
the “current holder of the mortgage of record . . . or . . . their . . . agents, successors or assigns.”
N.Y. Real Prop. Acts. Law § 1921(9)(a) (McKinney 2011). Although the definition of
“mortgagee” cited to by the Movant only applies to RPAPL § 1921, Movant argues that it is a
“mortgagee” vested with the authority to execute and deliver a loan payoff statement; execute
and deliver a discharge of mortgage and assign a mortgage pursuant to RPL §§ 274 and 275.
In addition to its status as “mortgagee,” Movant also argues that the assignment is valid
because MERS is an “agent” of each of its member banks under the general laws of agency in
New York, see N.Y. Gen. Oblig. Law § 5-1501(1) (McKinney 2011),3 and public policy requires
the liberal interpretation and judicial recognition of the principal-agent relationship. See Arens v.
Shainswitt, 37 A.D.2d 274 (N.Y. App. Div. 1971), aff’d 29 N.Y.2d 663 (1971). In the instant
case, Movant argues, the Mortgage appoints MERS as “nominee,” read “agent,” for the original
lender and the original lender’s successors and assigns. As nominee/agent for the lender, and as
mortgagee of record, Movant argues MERS had the authority to assign the Mortgage to the
Movant, U.S. Bank, “in accordance with the principal’s instruction to its nominee MERS, to
assign the mortgage lien to U.S. Bank . . . .”
Finally, Movant argues that even absent a legally enforceable assignment of the
Mortgage, it is entitled to enforce the lien because U.S. Bank holds the Note. The Movant
argues that if it can establish that U.S. Bank is the legal holder the Note, the Mortgage by
operation of law passes to the Movant because the Note and the Mortgage are deemed to be
inseparable. See In re Conde-Dedonato, 391 B.R. 247 (Bankr. E.D.N.Y. 2008). The Movant
represents, but has not proven, that U.S. Bank is the rightful holder of the Note, and further
argues that the assignment of the Note has to this point not been contested in this proceeding.
MERS moved to intervene in this matter pursuant to Fed. R. Bankr. P. 7024 because:
12. The Court’s determination of the MERS Issue directly affects the
business model of MERS. Additionally, approximately 50% of all consumer
mortgages in the United States are held in the name of MERS, as the mortgagee
of record.
13. The Court’s determination of the MERS Issue will have a
significant impact on MERS as well as the mortgage industry in New York and
the United States.
14. MERS has a direct financial stake in the outcome of this contested
matter, and any determination of the MERS Issue has a direct impact on MERS.
(Motion to Intervene, ¶¶12-14).
Permission to intervene was granted at a hearing held on December 13, 2010.
In addition to adopting the arguments asserted by the Movant, MERS strenuously
defends its authority to act as mortgagee pursuant to the procedures for processing this and other
mortgages under the MERS “system.” First, MERS points out that the Mortgage itself
designates MERS as the “nominee” for the original lender, First Franklin, and its successors and
assigns. In addition, the lender designates, and the Debtor agrees to recognize, MERS “as the
mortgagee of record and as nominee for ‘Lender and Lender’s successors and assigns’” and as
such the Debtor “expressly agreed without qualification that MERS had the right to foreclose
upon the premises as well as exercise any and all rights as nominee for the Lender.” (MERS
Memorandum of Law at 7). These designations as “nominee,” and “mortgagee of record,” and
the Debtor’s recognition thereof, it argues, leads to the conclusion that MERS was authorized as
a matter of law to assign the Mortgage to U.S. Bank.
Although MERS believes that the mortgage documents alone provide it with authority to
effectuate the assignment at issue, they also urge the Court to broaden its analysis and read the
documents in the context of the overall “MERS System.” According to MERS, each
participating bank/lender agrees to be bound by the terms of a membership agreement pursuant
to which the member appoints MERS to act as its authorized agent with authority to, among
other things, hold legal title to mortgages and as a result, MERS is empowered to execute
assignments of mortgage on behalf of all its member banks. In this particular case, MERS
maintains that as a member of MERS and pursuant to the MERS membership agreement, the
loan originator in this case, First Franklin, appointed MERS “to act as its agent to hold the
Mortgage as nominee on First Franklin’s behalf, and on behalf of First Franklin’s successors and
assigns.” MERS explains that subsequent to the mortgage’s inception, First Franklin assigned
the Note to Aurora Bank FSB f/k/a Lehman Brothers Bank (“Aurora”), another MERS member.
According to MERS, note assignments among MERS members are tracked via self-effectuated
and self-monitored computer entries into the MERS database. As a MERS member, by
operation of the MERS membership rules, Aurora is deemed to have appointed MERS to act as
its agent to hold the Mortgage as nominee. Aurora subsequently assigned the Note to U.S. Bank,
also a MERS member. By operation of the MERS membership agreement, U.S. Bank is deemed
to have appointed MERS to act as its agent to hold the Mortgage as nominee. Then, according to
MERS, “U.S. Bank, as the holder of the note, under the MERS Membership Rules, chose to
instruct MERS to assign the Mortgage to U.S. Bank prior to commencing the foreclosure
proceedings by U.S. Bank.” (Affirmation of William C. Hultman, ¶12).
MERS argues that the express terms of the mortgage coupled with the provisions of the
MERS membership agreement, is “more than sufficient to create an agency relationship between
MERS and lender and the lender’s successors in interest” under New York law and as a result
establish MERS’s authority to assign the Mortgage. (MERS Memorandum of Law at 7).
On December 20, 2010, the Debtor filed supplemental opposition to the Motion. The
Debtor argues that the Rooker-Feldman doctrine should not preclude judicial review in this case
because the Debtor’s objection to the Motion raises issues that could not have been raised in the
state court foreclosure action, namely the validity of the assignment and standing to lift the stay.
The Debtor also argues that the Rooker-Feldman doctrine does not apply because the Judgment
of Foreclosure was entered by default. Finally, she also argues that the bankruptcy court can
review matters “which are void or fraudulent on its face.” See In re Ward, 423 B.R. 22 (Bankr.
E.D.N.Y. 2010). The Debtor says that she is “alleging questionable, even possibly fraudulent
conduct by MERS in regards to transferring notes and lifting the stay.” (Debtor’s Supplemental
Opposition at 3).
The Movant filed supplemental papers on December 23, 2010 arguing that the Motion is
moot because the Property is no longer an asset of the estate as a result of the Chapter 7
Trustee’s “report of no distribution,” and as such, the Section 362(a) automatic stay was
dissolved upon the entry of a discharge on December 14, 2010. See Brooks v. Bank of New York
Mellon, No. DKC 09-1408, 2009 WL 3379928, at *2 (D. Md. Oct. 16, 2009); Riggs Nat’l Bank
of Washington, D.C. v. Perry, 729 F.2d 982, 986 (4th Cir. 1984).
The Movant also maintains that Rooker-Feldman does apply to default judgments
because that doctrine does not require that the prior judgment be a judgment “on the merits.”
Charchenko v. City of Stillwater, 47 F.3d 981, 983 n.1 (8th Cir. 1995); see also Kafele v. Lerner,
Sampson & Rothfuss, L.P.A., No. 04-3659, 2005 WL 3528921, at *2-3 (6th Cir. Dec. 22, 2005);
In re Dahlgren, No. 09-18982, 2010 WL 5287400, at *1 (D.N.J. Dec. 17, 2010). The Movant
points out that the Debtor seems to be confusing the Rooker-Feldman doctrine with issue and
claim preclusion and that the Debtor has misapplied Chief Judge Craig’s ruling in In re Ward.
Discussion
As a threshold matter, this Court will address the Movant’s argument that this Motion has
been mooted by the entry of the discharge order.
Effect of the Chapter 7 discharge on the automatic stay
Section 362(c) provides that:
Except as provided in subsections (d), (e), (f), and (h) of this section–
(1) the stay of an act against property of the estate under subsection (a) of this
section continues until such property is no longer property of the estate;
(2) the stay of any other act under subsection (a) of this section continues until the
earliest of–
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C) if the case is a case under chapter 7 of this title concerning an individual or a case
under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied;
11 U.S.C. § 362(c) (emphasis added).
Pursuant to Section 362(c)(1), the automatic stay which protects “property of the estate,”
as opposed to property of the debtor, continues until the property is no longer property of the
estate regardless of the entry of the discharge. The provision of the statute relied upon by the
Movant for the proposition that the automatic stay terminates upon the entry of a discharge,
relates only to the stay of “any other act under subsection(a),”, i.e., an act against property that is
not property of the estate, i.e., is property “of the debtor.” The relationship between property of
the estate and property of the debtor is succinctly stated as follows:
Property of the estate consists of all property of the debtor as of the date of the
filing of the petition. 11 U.S.C. § 541. It remains property of the estate until it has
been exempted by the debtor under § 522, abandoned by the trustee under §
554(a), or sold by the trustee under § 363. If property of the estate is not claimed
exempt, sold, or abandoned by the trustee, it is abandoned to the debtor at the
time the case is closed if the property was scheduled under § 521(1). If the
property is not scheduled by the debtor and is not otherwise administered, it
remains property of the estate even after the case has been closed.
If the property in question is property of the estate, it remains subject to the
automatic stay until it becomes property of the debtor and until the earlier of the
time the case was closed, the case is dismissed, or a discharge is granted or denied
in a chapter 7 case.
In re Pullman, 319 B.R. 443, 445 (Bankr. E.D. Va. 2004).
Movant’s position seems to be that the Chapter 7 Trustee’s filing of a “report of no
distribution,” otherwise known as a “no asset report,” effectuated an abandonment of the real
property at issue in this case, and therefore the Property has reverted back to the Debtor.
However, Movant fails to cite the relevant statute. Section 554(c) provides that “[u]nless the
court orders otherwise, any property scheduled under section 521(1) of this title not otherwise
administered at the time of the closing of a case is abandoned to the debtor and administered for
purposes of section 350 of this title.” 11 U.S.C. § 554(c) (emphasis added); Fed. R. Bankr. P.
6007. Cases interpreting Section 554(c) hold that the filing of a report of no distribution does
not effectuate an abandonment of estate property. See, e.g., In re Israel, 112 B.R. 481, 482 n.3
(Bankr. D. Conn. 1990) (“The filing of a no-asset report does not close a case and therefore does
not constitute an abandonment of property of the estate.”) (citing e.g., Zlogar v. Internal Revenue
Serv. (In re Zlogar), 101 B.R. 1, 3 n.3 (Bankr. N.D. Ill. 1989); Schwaber v. Reed (In re Reed), 89
B.R. 100, 104 (Bankr. C.D. Cal. 1988); 11 U.S.C. § 554(c)).
Because the real property at issue in this case has not been abandoned it remains property
of the estate subject to Section 362(a) unless and until relief is granted under Section 362(d).
Rooker-Feldman and res judicata4
The Movant argues that U.S. Bank’s status as a secured creditor, which is the basis for its
standing in this case, already has been determined by the state court and that determination
cannot be revisited here. The Movant relies on both the Rooker-Feldman doctrine and res
judicata principles to support this position.
The Rooker-Feldman doctrine is derived from two Supreme Court cases, Rooker v.
Fidelity Trust Co., 263 U.S. 413 (1923), and D.C. Court of Appeals v. Feldman, 460 U.S. 462
(1983), which together stand for the proposition that lower federal courts lack subject matter
jurisdiction to sit in direct appellate review of state court judgments. The Rooker-Feldman
doctrine is a narrow jurisdictional doctrine which is distinct from federal preclusion doctrines.
See McKithen v. Brown, 481 F.3d 89, 96-97 (2d Cir. 2007) (citing Exxon Mobil Corp. v. Saudi
Basic Indus. Corp., 544 U.S. 280, 284 (2005), and Hoblock v. Albany County Board of Elections,
422 F.3d 77, 85 (2d Cir. 2005)). In essence, the doctrine bars “cases brought by state-court
losers complaining of injuries caused by state-court judgments rendered before the district court
proceedings commenced and inviting district court review and rejection of those judgments.
Rooker-Feldman does not otherwise override or supplant preclusion doctrine or augment the
circumscribed doctrines that allow federal courts to stay or dismiss proceedings in deference to
state-court actions.” Exxon Mobil, 544 U.S. at 283.
The Second Circuit has delineated four elements that must be satisfied in order for
Rooker-Feldman to apply:
First, the federal-court plaintiff must have lost in state court. Second, the plaintiff
must “complain [ ] of injuries caused by [a] state-court judgment[.]” Third, the
plaintiff must “invit[e] district court review and rejection of [that] judgment [ ].”
Fourth, the state-court judgment must have been “rendered before the district
court proceedings commenced”-i.e., Rooker-Feldman has no application to
federal-court suits proceeding in parallel with ongoing state-court litigation. The
first and fourth of these requirements may be loosely termed procedural; the
second and third may be termed substantive.
McKithen, 481 F.3d at 97 (internal citation omitted and alteration in original) (quoting Hoblock,
422 F.3d at 85).
In a case with facts similar to the instant case, Chief Judge Craig applied the Rooker-
Feldman doctrine to overrule a debtor’s objection to a motion for relief from the automatic stay.
See In re Ward, 423 B.R. 22 (Bankr. E.D.N.Y. 2010). In In re Ward, a foreclosure sale was
conducted prior to the filing of the bankruptcy petition. When the successful purchaser sought
relief from stay in the bankruptcy case to proceed to evict the debtor, the debtor opposed the
motion. The debtor argued that the foreclosure judgment was flawed because “no original note
was produced”, “the mortgage was rescinded”, “the plaintiff in the action doesn’t exist” or “was
not a proper party to the foreclosure action”, and that “everything was done irregularly and
underneath [the] table.” In re Ward, 423 B.R. at 27. Chief Judge Craig overruled the debtor’s
opposition and found that each of the elements of the Rooker-Feldman doctrine were satisfied:
The Rooker-Feldman doctrine applies in this case because the Debtor lost in the
state court foreclosure action, the Foreclosure Judgment was rendered before the
Debtor commenced this case, and the Debtor seeks this Court’s review of the
Foreclosure Judgment in the context of her opposition to the Purchaser’s motion
for relief from the automatic stay. The injury complained of, i.e., the foreclosure
sale to the Purchaser, was “caused by” the Foreclosure Judgment because “the
foreclosure [sale] would not have occurred but-for” the Foreclosure Judgment.
Accordingly, the Rooker-Feldman doctrine does not permit this Court to
disregard the Foreclosure Judgment.
In re Ward, 423 B.R. at 28 (citations omitted and alteration in original).
In the instant case, the Debtor argues that the Rooker-Feldman doctrine does not apply
because the Judgment of Foreclosure was entered on default, not on the merits. She also argues
that Rooker-Feldman should not apply because she is alleging that the Judgment of Foreclosure
was procured by fraud in that the MERS system of mortgage assignments was fraudulent in
nature or void. However, this Court is not aware of any exception to the Rooker-Feldman
doctrine for default judgments, or judgments procured by fraud and the Court will not read those
exceptions into the rule. See Salem v. Paroli, 260 B.R. 246, 254 (S.D.N.Y. 2001) (applying
Rooker-Feldman to preclude review of state court default judgment); see also Lombard v.
Lombard, No. 00-CIV-6703 (SAS), 2001 WL 548725, at *3-4 (S.D.N.Y. May 23, 2001)
(applying Rooker-Feldman to preclude review of stipulation of settlement executed in
connection with state court proceeding even though applicant argued that the stipulation should
be declared null and void because he was under duress at the time it was executed).
The Debtor also argues that Rooker-Feldman does not apply in this case because she is
not asking this Court to set aside the Judgment of Foreclosure, but rather is asking this Court to
make a determination as to the Movant’s standing to seek relief from stay. The Debtor argues
that notwithstanding the Rooker-Feldman doctrine, the bankruptcy court must have the ability to
determine the standing of the parties before it.
Although the Debtor says she is not seeking affirmative relief from this Court, the net
effect of upholding the Debtor’s jurisdictional objection in this case would be to deny U.S. Bank
rights that were lawfully granted to U.S. Bank by the state court. This would be tantamount to a
reversal which is prohibited by Rooker-Feldman.
Even if Rooker-Feldman were found not to apply to this determination, the Court still
would find that the Debtor is precluded from questioning U.S. Bank’s standing as a secured
creditor under the doctrine of res judicata. The state court already has determined that U.S.
Bank is a secured creditor with standing to foreclose and this Court cannot alter that
determination in order to deny U.S. Bank standing to seek relief from the automatic stay.
The doctrine of res judicata is grounded in the Full Faith and Credit Clause of the United
States Constitution. U.S. Const. art. IV, § 1. It prevents a party from re-litigating any issue or
defense that was decided by a court of competent jurisdiction and which could have been raised
or decided in the prior action. See Burgos v. Hopkins, 14 F.3d 787, 789 (2d Cir. 1994) (applying
New York preclusion rules); Swiatkowski v. Citibank, No. 10-CV-114, 2010 WL 3951212, at
*14 (E.D.N.Y. Oct. 7, 2010) (citing Waldman v. Vill. of Kiryas Joel, 39 F.Supp.2d 370, 377
(S.D.N.Y. 1999)). Res judicata applies to judgments that were obtained by default, see Kelleran
v. Andrijevic, 825 F.2d 692, 694-95 (2d Cir. 1987), but it may not apply if the judgment was
obtained by extrinsic fraud or collusion. “Extrinsic fraud involves the parties’ ‘opportunity to
have a full and fair hearing,’ while intrinsic fraud, on the other hand, involves the ‘underlying
issue in the original lawsuit.’” In re Ward, 423 B.R. at 29. The Debtor’s assertions that the
MERS system of assignments may have been fraudulent is more appropriately deemed an
intrinsic fraud argument. The Debtor has not alleged any extrinsic fraud in the procurement of
the Judgment of Foreclosure which prevented a full and fair hearing before the state court.
As a result, the Court finds that the Judgment of Foreclosure alone is sufficient evidence
of the Movant’s status as a secured creditor and therefore its standing to seek relief from the
automatic stay. On that basis, and because the Movant has established grounds for relief from
stay under Section 362(d), the Motion will be granted.
MERS
Because of the broad applicability of the issues raised in this case the Court believes that
it is appropriate to set forth its analysis on the issue of whether the Movant, absent the Judgment
of Foreclosure, would have standing to bring the instant motion. Specifically MERS’s role in
the ownership and transfer of real property notes and mortgages is at issue in dozens of cases
before this Court. As a result, the Court has deferred ruling on motions for relief from stay
where the movants’ standing may be affected by MERS’s participation in the transfer of the real
property notes and mortgages. In the instant case, the issues were resolved under the Rooker-
Feldman doctrine and the application of res judicata. Most, if not all, of the remainder of the
“MERS cases” before the Court cannot be resolved on the same basis. For that reason, and
because MERS has intervened in this proceeding arguing that the validity of MERS assignments
directly affects its business model and will have a significant impact on the national mortgage
industry, this Court will give a reasoned opinion as to the Movant’s standing to seek relief from
the stay and how that standing is affected by the fact that U.S. Bank acquired its rights in the
Mortgage by way of assignment from MERS.
Standing to seek relief from the automatic stay
The Debtor has challenged the Movant’s standing to seek relief from the automatic stay.
Standing is a threshold issue for a court to resolve. Section 362(d) states that relief from stay
may be granted “[o]n request of a party in interest and after notice and a hearing.” 11 U.S.C. §
362(d). The term “party in interest” is not defined in the Bankruptcy Code, however the Court
of Appeals for the Second Circuit has stated that “[g]enerally the ‘real party in interest’ is the
one who, under the applicable substantive law, has the legal right which is sought to be enforced
or is the party entitled to bring suit.” See Roslyn Savings Bank v. Comcoach (In re Comcoach),
698 F.2d 571, 573 (2d Cir. 1983). The legislative history of Section 362 “suggests that,
notwithstanding the use of the term ‘party in interest’, it is only creditors who may obtain relief
from the automatic stay.” Id. at 573-74. (citing H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 175,
reprinted in 1978 U.S.Code Cong. & Ad. News 5787, 6136); see also Greg Restaurant Equip.
And Supplies v. Toar Train P’ship (In re Toar Train P’ship), 15 B.R. 401, 402 (Bankr. D.
Vt.1981) (finding that a judgment creditor of the debtor was not a “party in interest” because the
judgment creditor was not itself a direct creditor of the bankrupt).
Using the standard established by the Second Circuit, this Court must determine whether
the Movant is the “one who, under applicable substantive law, has the legal right” to enforce the
subject Note and Mortgage, and is therefore a “creditor” of this Debtor. See In re Toar, 15 B.R.
at 402; see also In re Mims, 438 B.R. 52, 55 (Bankr. S.D.N.Y. 2010). The Bankruptcy Code
defines a “creditor” as an “entity that has a claim against the debtor that arose at the time of or
before the order for relief . . . .” 11 U.S.C. § 101(10). “Claim” is defined as the “right to
payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured . . .
.” 11 U.S.C. § 101(5)(A). In the context of a lift stay motion where the movant is seeking to
commence or continue with an action to foreclose a mortgage against real property, the movant
must show that it is a “party in interest” by showing that it is a creditor with a security interest in
the subject real property. See Mims, 438 B.R. at 57 (finding that as movant “failed to prove it
owns the Note, it has failed to establish that it has standing to pursue its state law remedies with
regard to the Mortgage and Property”). Cf. Brown Bark I L.P. v. Ebersole (In re Ebersole), 440
B.R. 690, 694 (Bankr. W.D. Va. 2010) (finding that movant seeking relief from stay must prove
that it is the holder of the subject note in order to establish a ‘colorable claim’ which would
establish standing to seek relief from stay).
Noteholder status
In the Motion, the Movant asserts U.S. Bank’s status as the “holder” of the Mortgage.
However, in order to have standing to seek relief from stay, Movant, which acts as the
representative of U.S. Bank, must show that U.S. Bank holds both the Mortgage and the Note.
Mims, 438 B.R. at 56. Although the Motion does not explicitly state that U.S. Bank is the holder
of the Note, it is implicit in the Motion and the arguments presented by the Movant at the
hearing. However, the record demonstrates that the Movant has produced no evidence,
documentary or otherwise, that U.S. Bank is the rightful holder of the Note. Movant’s reliance
on the fact that U.S. Bank’s noteholder status has not been challenged thus far does not alter or
diminish the Movant’s burden to show that it is the holder of the Note as well as the Mortgage.
Under New York law, Movant can prove that U.S. Bank is the holder of the Note by
providing the Court with proof of a written assignment of the Note, or by demonstrating that
U.S. Bank has physical possession of the Note endorsed over to it. See, eg., LaSalle Bank N.A. v.
Lamy, 824 N.Y.S.2d 769, 2006 WL 2251721, at *1 (N.Y. Sup. Ct. Aug. 7, 2006). The only
written assignment presented to the Court is not an assignment of the Note but rather an
“Assignment of Mortgage” which contains a vague reference to the Note. Tagged to the end of
the provisions which purport to assign the Mortgage, there is language in the Assignment stating
“To Have and to Hold the said Mortgage and Note, and also the said property until the said
Assignee forever, subject to the terms contained in said Mortgage and Note.” (Assignment of
Mortgage (emphasis added)). Not only is the language vague and insufficient to prove an intent
to assign the Note, but MERS is not a party to the Note and the record is barren of any
representation that MERS, the purported assignee, had any authority to take any action with
respect to the Note. Therefore, the Court finds that the Assignment of Mortgage is not sufficient
to establish an effective assignment of the Note.
By MERS’s own account, it took no part in the assignment of the Note in this case, but
merely provided a database which allowed its members to electronically self-report transfers of
the Note. MERS does not confirm that the Note was properly transferred or in fact whether
anyone including agents of MERS had or have physical possession of the Note. What remains
undisputed is that MERS did not have any rights with respect to the Note and other than as
described above, MERS played no role in the transfer of the Note.
Absent a showing of a valid assignment of the Note, Movant can demonstrate that U.S.
Bank is the holder of the Note if it can show that U.S. Bank has physical possession of the Note
endorsed to its name. See In re Mims, 423 B.R. at 56-57. According to the evidence presented
in this matter the manner in which the MERS system is structured provides that, “[w]hen the
beneficial interest in a loan is sold, the promissory note is [] transferred by an endorsement and
delivery from the buyer to the seller [sic], but MERS Members are obligated to update the
MERS® System to reflect the change in ownership of the promissory note. . . .” (MERS
Supplemental Memorandum of Law at 6). However, there is nothing in the record to prove that
the Note in this case was transferred according to the processes described above other than
MERS’s representation that its computer database reflects that the Note was transferred to U.S.
Bank. The Court has no evidentiary basis to find that the Note was endorsed to U.S. Bank or
that U.S. Bank has physical possession of the Note. Therefore, the Court finds that Movant has
not satisfied its burden of showing that U.S. Bank, the party on whose behalf Movant seeks relief
from stay, is the holder of the Note.
Mortgagee status
The Movant’s failure to show that U.S. Bank holds the Note should be fatal to the
Movant’s standing. However, even if the Movant could show that U.S. Bank is the holder of the
Note, it still would have to establish that it holds the Mortgage in order to prove that it is a
secured creditor with standing to bring this Motion before this Court. The Movant urges the
Court to adhere to the adage that a mortgage necessarily follows the same path as the note for
which it stands as collateral. See Wells Fargo Bank, N.A. v. Perry, 875 N.Y.S.2d 853, 856 (N.Y.
Sup. Ct. 2009). In simple terms the Movant relies on the argument that a note and mortgage are
inseparable. See Carpenter v. Longan, 83 U.S. 271, 274 (1872). While it is generally true that a
mortgage travels a parallel path with its corresponding debt obligation, the parties in this case
have adopted a process which by its very terms alters this practice where mortgages are held by
MERS as “mortgagee of record.” By MERS’s own account, the Note in this case was
transferred among its members, while the Mortgage remained in MERS’s name. MERS admits
that the very foundation of its business model as described herein requires that the Note and
Mortgage travel on divergent paths. Because the Note and Mortgage did not travel together,
Movant must prove not only that it is acting on behalf of a valid assignee of the Note, but also
that it is acting on behalf of the valid assignee of the Mortgage.5
MERS asserts that its right to assign the Mortgage to U.S. Bank in this case, and in what
it estimates to be literally millions of other cases, stems from three sources: the Mortgage
documents; the MERS membership agreement; and state law. In order to provide some context
to this discussion, the Court will begin its analysis with an overview of mortgage and loan
processing within the MERS network of lenders as set forth in the record of this case.
In the most common residential lending scenario, there are two parties to a real property
mortgage – a mortgagee, i.e., a lender, and a mortgagor, i.e., a borrower. With some nuances
and allowances for the needs of modern finance this model has been followed for hundreds of
years. The MERS business plan, as envisioned and implemented by lenders and others involved
in what has become known as the mortgage finance industry, is based in large part on amending
this traditional model and introducing a third party into the equation. MERS is, in fact, neither a
borrower nor a lender, but rather purports to be both “mortgagee of record” and a “nominee” for
the mortgagee. MERS was created to alleviate problems created by, what was determined by the
financial community to be, slow and burdensome recording processes adopted by virtually every
state and locality. In effect the MERS system was designed to circumvent these procedures.
MERS, as envisioned by its originators, operates as a replacement for our traditional system of
public recordation of mortgages.
Caselaw and commentary addressing MERS’s role in the mortgage recording and
foreclosure process abound. See Christopher L. Peterson, Foreclosure, Subprime Mortgage
Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L. Rev. 1359 (2010). In a
2006 published opinion, the New York Court of Appeals described MERS system as follows:
In 1993, the MERS system was created by several large participants in the real
estate mortgage industry to track ownership interests in residential mortgages.
Mortgage lenders and other entities, known as MERS members, subscribe to the
MERS system and pay annual fees for the electronic processing and tracking of
ownership and transfers of mortgages. Members contractually agree to appoint
MERS to act as their common agent on all mortgages they register in the MERS
system.
The initial MERS mortgage is recorded in the County Clerk’s office with
‘Mortgage Electronic Registration Systems, Inc.’ named as the lender’s nominee
or mortgagee of record on the instrument. During the lifetime of the mortgage,
the beneficial ownership interest or servicing rights may be transferred among
MERS members (MERS assignments), but these assignments are not publicly
recorded; instead they are tracked electronically in MERS’s private system. In the
MERS system, the mortgagor is notified of transfers of servicing rights pursuant
to the Truth in Lending Act, but not necessarily of assignments of the beneficial
interest in the mortgage.
Merscorp, Inc., v. Romaine, 8 N.Y.3d 90 (N.Y. 2006) (footnotes omitted).
In the words of MERS’s legal counsel, “[t]he essence of MERS’ business is to hold legal
title to beneficial interests under mortgages and deeds of trust in the land records. The MERS®
System is designed to allow its members, which include originators, lenders, servicers, and
investors, to accurately and efficiently track transfers of servicing rights and beneficial
ownership.” (MERS Memorandum of Law at 5). The MERS® System “. . . eliminate[s] the
need for frequent, recorded assignments of subsequent transfers.” (MERS Supplemental
Memorandum of Law at 4). “Prior to MERS, every time a loan secured by a mortgage was sold,
the assignee would need to record the assignment to protect the security interest. If a servicing
company serviced the loan and the servicing rights were sold, – an event that could occur
multiple times during the life of a single mortgage loan – multiple assignments were recorded to
ensure that the proper servicer appeared in the land records in the County Clerk’s office.”
(MERS Supplemental Memorandum of Law at 4-5).
“When the beneficial interest in a loan is sold, the promissory note is still transferred by
an endorsement and delivery from the buyer to the seller, but MERS Members are obligated to
update the MERS® System to reflect the change in ownership of the promissory note. . . . So
long as the sale of the note involves a MERS Member, MERS remains the named mortgagee of
record, and continues to act as the mortgagee, as the nominee for the new beneficial owner of the
note (and MERS’ Member). The seller of the note does not and need not assign the mortgage
because under the terms of that security instrument, MERS remains the holder of title to the
mortgage, that is, the mortgagee, as the nominee for the purchaser of the note, who is then the
lender’s successor and/or assign.” (MERS Supplemental Memorandum of Law at 6). “At all
times during this process, the original mortgage or an assignment of the mortgage to MERS
remains of record in the public land records where the security real estate is located, providing
notice of MERS’s disclosed role as the agent for the MERS Member lender and the lender’s
successors and assigns.” (Declaration of William C. Hultman, ¶9).
MERS asserts that it has authority to act as agent for each and every MERS member
which claims ownership of a note and mortgage registered in its system. This authority is based
not in the statutes or caselaw, but rather derives from the terms and conditions of a MERS
membership agreement. Those terms and conditions provide that “MERS shall serve as
mortgagee of record with respect to all such mortgage loans solely as a nominee, in an
administrative capacity, for the beneficial owner or owners thereof from time to time.”
(Declaration of William C. Hultman, ¶5). MERS “holds the legal title to the mortgage and acts
as the agent or nominee for the MERS Member lender, or owner of the mortgage loan.”
(Declaration of William C. Hultman, ¶6). According to MERS, it is the “intent of the parties . . .
for MERS to serve as the common nominee or agent for MERS Member lenders and their
successors and assigns.” (MERS Supplemental Memorandum of Law at 19) (emphasis added by
the Court). “Because MERS holds the mortgage lien for the lender who may freely transfer its
interest in the note, without the need for a recorded assignment document in the land records,
MERS holds the mortgage lien for any intended transferee of the note.” (MERS Supplemental
Memorandum of Law at 15) (emphasis added by the Court). If a MERS member subsequently
assigns the note to a non-MERS member, or if the MERS member which holds the note decides
to foreclose, only then is an assignment of the mortgage from MERS to the noteholder
documented and recorded in the public land records where the property is located. (Declaration
of William C. Hultman, ¶12).
Before commenting on the legal effect of the MERS membership rules or the alleged
“common agency” agreement created among MERS members, the Court will review the relevant
portions of the documents presented in this case to evaluate whether the documentation, on its
face, is sufficient to prove a valid assignment of the Mortgage to U.S. Bank.
The Mortgage
First Franklin is the “Lender” named in the Mortgage. With reference to MERS’s role in
the transaction, the Mortgage states:
MERS is a separate corporation that is acting solely as a nominee for Lender and
Lender’s successors and assigns. MERS is organized and existing under the laws
of Delaware, and has an address and telephone number of P.O. Box 2026, Flint,
MI 48501-2026, tel. (888) 679 MERS. FOR PURPOSES OF RECORDING
THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.
(Mortgage at 1 (emphasis added by the Court)).
The Mortgage also purports to contain a transfer to MERS of the Borrower’s (i.e., the
Debtor’s) rights in the subject Property as follows:
BORROWER’S TRANSFER TO LENDER OF RIGHTS IN THE PROPERTY
[The Borrower] mortgage[s], grant[s] and convey[s] the Property to MERS
(solely as nominee for Lender and Lender’s successors in interest) and its
successors in interest subject to the terms of this Security Instrument. This means
that, by signing this Security Instrument, [the Borrower is] giving Lender those
rights that are stated in this Security Instrument and also those rights that
Applicable Law gives to lenders who hold mortgage on real property. [The
Borrower is] giving Lender these rights to protect Lender from possible losses
that might result if [the Borrower] fail[s] to [comply with certain obligations
under the Security Instrument and accompanying Note.]
[The Borrower] understand[s] and agree[s] that MERS holds only legal title to the
rights granted by [the Borrower] in this Security Instrument, but, if necessary to
comply with law or custom, MERS (as nominee for Lender and Lenders’s
successors and assigns) has the right: (A) to exercise any or all those rights,
including, but not limited to, the right to foreclose and sell the Property; and (B)
to take any action required of Lender including, but not limited to, releasing and
canceling this Security Instrument.
[The Borrower gives] MERS (solely as nominee for Lender and Lender’s
successors in interest), rights in the Property . . .
(Mortgage at 3) (emphasis added).
The Assignment of Mortgage references the Mortgage and defines the “Assignor” as
“‘Mers’ Mortgage Electronic Registration Systems, Inc., 2150 North First Street, San Jose,
California 95131, as nominee for First Franklin, a division of National City Bank of IN, 2150
North First Street San Jose, California 95153.” (Emphasis added by the Court). The “Assignee”
is U.S. Bank.
Premised on the foregoing documentation, MERS argues that it had full authority to
validly execute the Assignment of Mortgage to U.S. Bank on February 1, 2008, and that as of the
date the foreclosure proceeding was commenced U.S. Bank held both the Note and the
Mortgage. However, without more, this Court finds that MERS’s “nominee” status and the
rights bestowed upon MERS within the Mortgage itself, are insufficient to empower MERS to
effectuate a valid assignment of mortgage.
There are several published New York state trial level decisions holding that the status of
“nominee” or “mortgagee of record” bestowed upon MERS in the mortgage documents, by
itself, does not empower MERS to effectuate an assignment of the mortgage. These cases hold
that MERS may not validly assign a mortgage based on its nominee status, absent some evidence
of specific authority to assign the mortgage. See Bank of New York v. Mulligan, No. 29399/07,
2010 WL 3339452, at *7 (N.Y. Sup. Ct. Aug. 25, 2010); One West Bank, F.S.B. v. Drayton, 910
N.Y.S.2d 857, 871 (N.Y. Sup. Ct. 2010); Bank of New York v. Alderazi, 900 N.Y.S.2d 821, 824
(N.Y. Sup. Ct. 2010) (the “party who claims to be the agent of another bears the burden of
proving the agency relationship by a preponderance of the evidence”); HSBC Bank USA v.
Yeasmin, No. 34142/07, 2010 WL 2089273, at *3 (N.Y. Sup. Ct. May 24, 2010); HSBC Bank
USA v. Vasquez, No. 37410/07, 2009 WL 2581672, at *3 (N.Y. Sup. Ct. Aug. 21, 2010); LaSalle
Bank N.A. v. Lamy, 824 N.Y.S.2d 769, 2006 WL 2251721, at *2 (N.Y. Sup. Ct. Aug. 7, 2006)
(“A nominee of the owner of a note and mortgage may not effectively assign the note and
mortgage to another for want of an ownership interest in said note and mortgage by the
nominee.”). See also MERS v. Saunders, 2 A.3d 289, 295 (Me. 2010) (“MERS’s only right is to
record the mortgage. Its designation as the ‘mortgagee of record’ in the document does not
change or expand that right…”). But see US Bank, N.A. v. Flynn, 897 N.Y.S.2d 855 (N.Y. Sup.
Ct. 2010) (finding that MERS’s “nominee” status and the mortgage documents give MERS
authority to assign); Crum v. LaSalle Bank, N.A., No. 2080110, 2009 WL 2986655, at *3 (Ala.
Civ. App., Sept. 18, 2009) (finding MERS validly assigned its and the lender’s rights to
assignee); Blau v. America’s Servicing Company, et al., No. CV-08-773-PHX-MHM, 2009 WL
3174823, at *8 (D. Ariz. Sept. 29, 2009) (finding that assignee of MERS had standing to
foreclose).
In LaSalle Bank, N.A. v. Bouloute, No. 41583/07, 2010 WL 3359552, at *2 (N.Y. Sup.
Aug. 26, 2010), the court analyzed the relationship between MERS and the original lender and
concluded that a nominee possesses few or no legally enforceable rights beyond those of a
principal whom the nominee serves. The court stated:
MERS . . . recorded the subject mortgage as “nominee” for FFFC. The word
“nominee” is defined as “[a] person designated to act in place of another, usu. in a
very limited way” or “[a] party who holds bare legal title for the benefit of
others.” (Black’s Law Dictionary 1076 [8th ed 2004] ). “This definition suggests
that a nominee possesses few or no legally enforceable rights beyond those of a
principal whom the nominee serves.” (Landmark National Bank v. Kesler, 289
Kan 528, 538 [2009] ). The Supreme Court of Kansas, in Landmark National
Bank, 289 Kan at 539, observed that:
The legal status of a nominee, then, depends on the context of the
relationship of the nominee to its principal. Various courts have
interpreted the relationship of MERS and the lender as an agency
relationship. See In re Sheridan, 2009 WL631355, at *4 (Bankr. D. Idaho,
March 12, 2009) (MERS “acts not on its own account. Its capacity is
representative.”); Mortgage Elec. Registrations Systems, Inc. v. Southwest,
2009 Ark. 152 —-, 301 SW3d 1, 2009 WL 723182 (March 19, 2009)
(“MERS, by the terms of the deed of trust, and its own stated purposes,
was the lender’s agent”); La Salle Nat. Bank v. Lamy, 12 Misc.3d 1191[A],
at *2 [Sup Ct, Suffolk County 2006] ) … (“A nominee of the owner of a
note and mortgage may not effectively assign the note and mortgage to
another for want of an ownership interest in said note and mortgage by the
nominee.”).
LaSalle Bank, N.A. v. Bouloute, No. 41583/07, 2010 WL 3359552, at *2; see also Bank of New
York v. Alderazi, 900 N.Y.S.2d 821, 823 (N.Y. Sup. Ct. 2010) (nominee is “‘[a] person
designated to act in place of another, usually in a very limited way.’”) (quoting Black’s Law
Dictionary)).
In LaSalle Bank, N.A. v. Bouloute the court concluded that MERS must have some
evidence of authority to assign the mortgage in order for an assignment of a mortgage by MERS
to be effective. Evidence of MERS’s authority to assign could be by way of a power of attorney
or some other document executed by the original lender. See Bouloute, 2010 WL 3359552, at
*1; Alderazi, 900 N.Y.S.2d at 823 (“‘To have a proper assignment of a mortgage by an
authorized agent, a power of attorney is necessary to demonstrate how the agent is vested with
the authority to assign the mortgage.’”) (quoting HSBC Bank USA, NA v. Yeasmin, 866 N.Y.S.2d
92 (N.Y. Sup. Ct. 2008)).
Other than naming MERS as “nominee”, the Mortgage also provides that the Borrower
transfers legal title to the subject property to MERS, as the Lender’s nominee, and acknowledges
MERS’s rights to exercise certain of the Lender’s rights under state law. This too, is insufficient
to bestow any authority upon MERS to assign the mortgage. In Bank of New York v. Alderazi,
the court found “[t]he fact that the borrower acknowledged and consented to MERS acting as
nominee of the lender has no bearing on what specific powers and authority the lender granted
MERS.” Alderazi, 900 N.Y.S.2d at 824. Even if it did bestow some authority upon MERS, the
court in Alderazi found that the mortgage did not convey the specific right to assign the
mortgage.
The Court agrees with the reasoning and the analysis in Bouloute and Alderazi, and the
other cases cited herein and finds that the Mortgage, by naming MERS a “nominee,” and/or
“mortgagee of record” did not bestow authority upon MERS to assign the Mortgage.
The MERS membership rules
According to MERS, in addition to the alleged authority granted to it in the Mortgage
itself, the documentation of the Assignment of Mortgage comports with all the legal
requirements of agency when read in conjunction with the overall MERS System. MERS’s
argument requires that this Court disregard the specific words of the Assignment of Mortgage or,
at the very least, interpret the Assignment in light of the overall MERS System of tracking the
beneficial interests in mortgage securities. MERS urges the Court to look beyond the four
corners of the Mortgage and take into consideration the agency relationship created by the
agreements entered into by the lenders participating in the MERS System, including their
agreement to be bound by the terms and conditions of membership.
MERS has asserted that each of its member/lenders agrees to appoint MERS to act as its
agent. In this particular case, the Treasurer of MERS, William C. Hultman, declared under
penalty of perjury that “pursuant to the MERS’s Rules of Membership, Rule 2, Section 5. . . First
Franklin appointed MERS to act as its agent to hold the Mortgage as nominee on First Franklin’s
behalf, and on behalf of First Franklin’s successors and assigns.” (Affirmation of William C.
Hultman, ¶7). However, Section 5 of Rule 2, which was attached to the Hultman Affirmation as
an exhibit, contains no explicit reference to the creation of an agency or nominee relationship.
Consistent with this failure to explicitly refer to the creation of an agency agreement, the rules of
membership do not grant any clear authority to MERS to take any action with respect to the
mortgages held by MERS members, including but not limited to executing assignments. The
rules of membership do require that MERS members name MERS as “mortgagee of record” and
that MERS appears in the public land records as such. Section 6 of Rule 2 states that “MERS
shall at all times comply with the instructions of the holder of mortgage loan promissory notes,”
but this does not confer any specific power or authority to MERS.
State law
Under New York agency laws, an agency relationship can be created by a “manifestation
of consent by one person to another that the other shall act on his behalf and subject to his
control, and the consent by the other to act.” Meisel v. Grunberg, 651 F.Supp.2d 98, 110
(S.D.N.Y. 2009) (citing N.Y. Marine & Gen. Ins. Co. v. Tradeline, L.L.C., 266 F.3d 112, 122 (2d
Cir.2001)).
‘Such authority to act for a principal may be actual or apparent.’ . . . Actual
authority arises from a direct manifestation of consent from the principal to the
agent. . . . . The existence of actual authority ‘depends upon the actual interaction
between the putative principal and agent, not on any perception a third party may
have of the relationship.’
Meisel v. Grunberg, 651 F.Supp.2d at 110 (citations omitted).
Because MERS’s members, the beneficial noteholders, purported to bestow upon MERS
interests in real property sufficient to authorize the assignments of mortgage, the alleged agency
relationship must be committed to writing by application of the statute of frauds. Section 5-
703(2) of the New York General Obligations Law states that:
An estate or interest in real property, other than a lease for a term not exceeding
one year, or any trust or power, over or concerning real property, or in any
manner relating thereto, cannot be created, granted, assigned, surrendered or
declared, unless by act or operation of law, or by a deed or conveyance in writing,
subscribed by the person creating, granting, assigning, surrendering or declaring
the same, or by his lawful agent, thereunto authorized by writing.
See N.Y. Gen. Oblig. Law § 5-703(1) (McKinney 2011); Republic of Benin v. Mezei, No. 06 Civ.
870 (JGK), 2010 WL 3564270, at *3 (S.D.N.Y. Sept. 9, 2010); Urgo v. Patel, 746 N.Y.S.2d 733
(N.Y. App. Div. 2002) (finding that unwritten apparent authority is insufficient to satisfy the
statute of frauds) (citing Diocese of Buffalo v. McCarthy, 91 A.D.2d 1210 (4th Dept. 1983)); see
also N.Y. Gen. Oblig. Law § 5-1501 (McKinney 2011) (“‘agent’ means a person granted
authority to act as attorney-in-fact for the principal under a power of attorney. . .”). MERS asks
this Court to liberally interpret the laws of agency and find that an agency agreement may take
any form “desired by the parties concerned.” However, this does not free MERS from the
constraints of applicable agency laws.
The Court finds that the record of this case is insufficient to prove that an agency
relationship exists under the laws of the state of New York between MERS and its members.
According to MERS, the principal/agent relationship among itself and its members is created by
the MERS rules of membership and terms and conditions, as well as the Mortgage itself.
However, none of the documents expressly creates an agency relationship or even mentions the
word “agency.” MERS would have this Court cobble together the documents and draw
inferences from the words contained in those documents. For example, MERS argues that its
agent status can be found in the Mortgage which states that MERS is a “nominee” and a
“mortgagee of record.” However, the fact that MERS is named “nominee” in the Mortgage is
not dispositive of the existence of an agency relationship and does not, in and of itself, give
MERS any “authority to act.” See Steinbeck v. Steinbeck Heritage Foundation, No. 09-18360cv,
2010 WL 3995982, at *2 (2d Cir. Oct. 13, 2010) (finding that use of the words “attorney in fact”
in documents can constitute evidence of agency but finding that such labels are not dispositive);
MERS v. Saunders, 2 A.3d 289, 295 (Me. 2010) (designation as the ‘mortgagee of record’ does
not qualify MERS as a “mortgagee”). MERS also relies on its rules of membership as evidence
of the agency relationship. However, the rules lack any specific mention of an agency
relationship, and do not bestow upon MERS any authority to act. Rather, the rules are
ambiguous as to MERS’s authority to take affirmative actions with respect to mortgages
registered on its system.
In addition to casting itself as nominee/agent, MERS seems to argue that its role as
“mortgagee of record” gives it the rights of a mortgagee in its own right. MERS relies on the
definition of “mortgagee” in the New York Real Property Actions and Proceedings Law Section
1921 which states that a “mortgagee” when used in the context of Section 1921, means the
“current holder of the mortgage of record . . . or their agents, successors or assigns.” N.Y. Real
Prop. Acts. L. § 1921 (McKinney 2011). The provisions of Section 1921 relate solely to the
discharge of mortgages and the Court will not apply that definition beyond the provisions of that
section in order to find that MERS is a “mortgagee” with full authority to perform the duties of
mortgagee in its own right. Aside from the inappropriate reliance upon the statutory definition
of “mortgagee,” MERS’s position that it can be both the mortgagee and an agent of the
mortgagee is absurd, at best.
Adding to this absurdity, it is notable in this case that the Assignment of Mortgage was
by MERS, as nominee for First Franklin, the original lender. By the Movant’s and MERS’s
own admission, at the time the assignment was effectuated, First Franklin no longer held any
interest in the Note. Both the Movant and MERS have represented to the Court that subsequent
to the origination of the loan, the Note was assigned, through the MERS tracking system, from
First Franklin to Aurora, and then from Aurora to U.S. Bank. Accordingly, at the time that
MERS, as nominee of First Franklin, assigned the interest in the Mortgage to U.S. Bank, U.S.
Bank allegedly already held the Note and it was at U.S. Bank’s direction, not First Franklin’s,
that the Mortgage was assigned to U.S. Bank. Said another way, when MERS assigned the
Mortgage to U.S. Bank on First Franklin’s behalf, it took its direction from U.S. Bank, not First
Franklin, to provide documentation of an assignment from an entity that no longer had any rights
to the Note or the Mortgage. The documentation provided to the Court in this case (and the
Court has no reason to believe that any further documentation exists), is stunningly inconsistent
with what the parties define as the facts of this case.
However, even if MERS had assigned the Mortgage acting on behalf of the entity which
held the Note at the time of the assignment, this Court finds that MERS did not have authority,
as “nominee” or agent, to assign the Mortgage absent a showing that it was given specific
written directions by its principal.
This Court finds that MERS’s theory that it can act as a “common agent” for undisclosed
principals is not support by the law. The relationship between MERS and its lenders and its
distortion of its alleged “nominee” status was appropriately described by the Supreme Court of
Kansas as follows: “The parties appear to have defined the word [nominee] in much the same
way that the blind men of Indian legend described an elephant – their description depended on
which part they were touching at any given time.” Landmark Nat’l Bank v. Kesler, 216 P.3d
158, 166-67 (Kan. 2010).
Conclusion
For all of the foregoing reasons, the Court finds that the Motion in this case should be
granted. However, in all future cases which involve MERS, the moving party must show that it
validly holds both the mortgage and the underlying note in order to prove standing before this
Court.
Dated: Central Islip, New York
February 10, 2011 /s/ Robert E. Grossman
Hon. Robert E. Grossman
United States Bankruptcy Judge
1 The Debtor also questions whether Select Portfolio has the authority and the standing to
seek relief from the automatic stay. The Movant argues that Select Portfolio has standing
to bring the Motion based upon its status as “servicer” of the Mortgage, and attaches an
affidavit of a vice president of Select Portfolio attesting to that servicing relationship.
Caselaw has established that a mortgage servicer has standing to seek relief from the
automatic stay as a party in interest. See, e.g., Greer v. O’Dell, 305 F.3d 1297
(11th Cir. 2002); In re Woodberry, 383 B.R. 373 (Bankr. D.S.C. 2008). This presumes,
however, that the lender for whom the servicer acts validly holds the subject note and
mortgage. Thus, this Decision will focus on whether U.S. Bank validly holds the subject
note and mortgage.
2 The Judgment of Foreclosure names the Debtor and an individual, Shelly English, as
defendants. Shelly English is the Debtor’s daughter-in-law. At a hearing held on
December 13, 2010, the Debtor’s counsel stated that he “believed” the Debtor transferred
title to the Property to her son, Leroy English, in 2007. This is consistent with
information provided by the Debtor in her petition and schedules. Leroy English,
however, was not named in the foreclosure action. No one in this case has addressed the
issue of whether the proper parties were named in the foreclosure action. However,
absent an argument to the contrary, this Court can only presume that the Judgment of
Foreclosure is a binding final judgment by a court of competent jurisdiction.
3 Movant cites to New York General Obligations Law for the proposition that “an agency
agreement may take any form ‘desired by the parties concerned.’” The direct quote
“desired by the parties concerned” seems to be attributed to the General Obligations Law
citation, however, the Court could find no such language in the current version of § 5-
1501(1). That provision, rather, defines an agent as “a person granted authority to act as
attorney-in-fact for the principal under a power of attorney, and includes the original
agent and any co-agent or successor agent. Unless the context indicates otherwise, an
‘agent’ designated in a power of attorney shall mean ‘attorney-in-fact’ for the purposes of
this title. An agent acting under a power of attorney has a fiduciary relationship with the
principal.” N.Y. Gen. Oblig. Law § 5-1501(1) (McKinney 2011) (emphasis added).
4 Because the Debtor’s objection is overruled under Rooker-Feldman and res judicata, the
Court will not address the merits of the Movant’s judicial estoppel arguments.
5 MERS argues that notes and mortgages processed through the MERS System are never
“separated” because beneficial ownership of the notes and mortgages are always held by
the same entity. The Court will not address that issue in this Decision, but leaves open
the issue as to whether mortgages processed through the MERS system are properly
perfected and valid liens. See Carpenter v. Longan, 83 U.S. at 274 (finding that an
assignment of the mortgage without the note is a nullity); Landmark Nat’l Bank v. Kesler,
216 P.3d 158, 166-67 (Kan. 2009) (“[I]n the event that a mortgage loan somehow
separates interests of the note and the deed of trust, with the deed of trust lying with some
independent entity, the mortgage may become unenforceable”).
