MERS – Contrasting Bankruptcy Court Decisions in New York (Agard) and Kansas (Martinez)

The legal foundation on which MERS (Mortgage Electronic Registration System) is based looks increasingly rickety, with two U.S. Bankruptcy Courts issuing contrasting decisions last week.

First out of the box on February 10 was a much remarked on decision issued by Bankruptcy Judge Robert E. Grossman of the U.S. Bankruptcy Court for the Eastern District of New York. The debtor, Ferrel L. Agard, argued that U.S. Bank and its servicer, Select Portfolio Servicing, lacked standing to seek relief from the automatic stay in order to proceed with the foreclosure process on Agard's house "owned with son." Agard lost, because the Court decided it could not overturn a New York State court decision granting U.S. Bank the right to proceed with foreclosure. Nevertheless, the bulk of the opinion, which lawyers would classify as "dicta," is devoted to detailing why the Court does not agree with the state courts. Essentially, the judge does not believe that the MERS system works as a legal matter. The problem is that the note and the mortgage do not travel together; while the note is transferred among MERS members, MERS continues to hold the mortgage in its name, and there is no documentation supporting its argument that it is an "agent" of each holder of the note. The judge further opines that MERS does not have the right to assign the mortgage based on its nominee status because it has no ownership interest in the note. Grossman dismisses with less than hidden disdain MERS' argument that its status as the "mortgagee of record" gives it the right to assign the mortgage: "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." The judge concludes that "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."

The next day, February 11, Bankruptcy Judge Janice Miller Kaplan of the U.S. Bankruptcy Court for the District of Kansas, issued a very different opinion in the case of David Martinez (deceased) and his common law wife, Michelle Graham. The Court decided to grant MERS and Countrywide relief from the automatic stay in order to proceed with foreclosure. MERS had initially commenced the foreclosure action in its name. The Court reasoned that MERS is in fact an agent of Countrywide. This case differs from the Agard case since Countrywide was the original lender and kept the note. Naturally MERS is pointing to this case to justify its legal basis and to argue that the New York case is an outlier. However, it is not clear where this leaves the foreclosure issue. While Countrywide and MERS were granted relief from the automatic stay, the Court of Appeals of the State of Kansas decided in an April 2010 opinion that "MERS lacks standing to bring a foreclosure action." Perhaps this is being appealed to the Kansas Supreme Court or perhaps Countrywide has or will commence foreclosure action using its own name. (Maybe a reader of this blog knows and could post a comment or send me an email.)

Meanwhile, MERS issued a press release on February 16 announcing its intent to propose an amendment to its membership rules prohibiting members from foreclosing in MERS' name.