Restructuring

Contributed by Lee Jason Goldberg
As we mentioned in our previous post on this topic, today we discuss the Agard case from the bankruptcy court for the Eastern District of New York.  In In re Agard, the servicer for the debtor’s mortgage sought relief from the automatic stay to execute on a state court default judgment of foreclosure.  The servicer collected payments for the trustee of a securitization trust, which held the note following a series of transfers from the original lender.  MERS was named as the “nominee” in the mortgage and purportedly assigned it to the trustee, uniting it with the note and enabling the servicer, as agent for the trustee, to enforce the note as a secured obligation and foreclose on the mortgage.  The debtor objected to the motion on the basis that the servicer lacked standing as a “party in interest” to seek stay relief because MERS did not have authority to assign the mortgage and the servicer, therefore, could not establish that it was a bona fide holder of a valid security interest in the underlying property.
Although the court overruled the debtor’s objection based on application of either the Rooker-Feldman doctrine or res judicata to the state court judgment of foreclosure, the court nevertheless stated that the debtor’s argument raised a “fundamental question as to whether MERS ha[d] the legal authority to assign a valid and enforceable interest in the subject mortgage.”  Thus, because of numerous other cases pending before the court which presented identical issues as to MERS, the court addressed the standing issue for its precedential effect notwithstanding the state court judgment of foreclosure.
As a threshold matter, citing In re Mims, which we have discussed previously, the court held that in order to have standing to seek relief from the stay as a secured creditor, the servicer had to show that the trustee (i.e., the purported assignee) held both the mortgage and the note.  For the note’s enforcement under New York law, the servicer had to show that the trustee had a written assignment of the note or physical possession of the note endorsed to it, but the servicer could show neither.
The servicer produced merely an “assignment of mortgage,” containing a vague reference to the note, which the court held to be insufficient to prove an intent to assign the note.  Moreover, MERS was not a party to the note, and there was no representation in the record showing that MERS had any authority to any action as to the note.  Rather, MERS maintained a database allowing its members to electronically self-report note transfers.  The court held that this database did not confirm that the note was properly transferred or indicate who, in fact, had physical possession of the note, depriving the court of an evidentiary basis to find that the note was endorsed to the trustee or that the trustee had physical possession of it.
Even if the servicer could show that the trustee was the holder of the note, however, it still would have to establish that the trustee held the mortgage in order to confer on it standing to bring the lift stay motion.  After noting the “adage that a mortgage necessarily follows the same path as the note for which it stands as collateral,” the court observed that the parties in this case had adopted a process “which by its very terms alters this practice where mortgages are held by MERS as ‘mortgagee of record’” while the notes are transferred among MERS’s members.
Because the court found that in naming MERS as the “nominee” or “mortgagee of record,” the note and the mortgage were separated ab initio, the critical issue before the court was whether MERS had authority to assign the mortgage to the trustee.  The court, therefore, scrutinized the three sources of MERS’s alleged authority to assign the mortgage.
First, the court examined the mortgage itself and found, based on New York case law, that the status of “nominee” or “mortgagee of record” bestowed on MERS in the mortgage, by itself, did not empower MERS to effectuate an assignment of the mortgage.  The court read these cases to hold that MERS could not make such assignment based on its nominee status absent some evidence of specific authority to assign the mortgage.  Even if the mortgage bestowed some authority on MERS, the mortgage did not convey the specific right to assign the mortgage, which could have been conveyed by a power of attorney or some other document executed by the original lender.
Second, the court reviewed the MERS agreements, specifically the MERS membership rules, and found that those agreements contained no explicit reference to the creation of an agency or nominee relationship.  The court held that the MERS membership rules granted no clear authority to MERS to any action with respect to the mortgages held by MERS members, including but not limited to executing assignments.  Although the rules required MERS to be named as “mortgagee of record” and comply with the instructions of the holder of the note, the court held that these rules did not confer any specific power or authority on MERS.
Third, the court looked to New York state real property and agency law, holding that under those laws, MERS did not have an agency relationship with its members.  The court found that, as MERS’s members purported to convey to MERS interests in real property, the agency relationship had to be committed to writing.  None of the documents in evidence expressly created an agency relationship or even mentioned the word “agency.”  The court instead observed that MERS urged the court to “cobble together” the documents and draw an inference as to the creation of an agency relationship.  Based on its conclusions as to the language in the mortgage itself and the MERS agreements, however, the court refused to do so.  The court also found that MERS’s position that, based on certain New York statutory provisions (which the court found inapplicable in any event), it was the “mortgagee” with full authority to perform the duties of a mortgagee in its own right to be “absurd” because MERS was in effect arguing that it was both the mortgagee and an agent of the mortgagee.
Finally, the court noted that in the “assignment of mortgage,” MERS identified itself as the nominee for the original lender, but at the time of assignment, the note had already been transferred to another entity and then transferred again to the trustee (to whom MERS purported to make the assignment).  Thus, MERS was taking direction from the trustee, not the lender for which it purportedly served as nominee, to assign the mortgage.  The court held this action to be unauthorized absent specific written directions by MERS’s principal and concluded that MERS’s theory that “it can act as a ‘common agent’ for undisclosed principals is not supported by law.”
The court granted the servicer’s lift stay motion based on the application of the Rooker-Feldman doctrine, which the court found did not contain a default judgment exception, and res judicata, notwithstanding the debtor’s argument that she was seeking a determination of the servicer’s standing to bring the lift stay motion and not set aside the state court judgment of foreclosure.  The court rejected the debtor’s argument on the basis that the net effect of upholding the debtor’s standing argument would be to deny the trustee the rights it was lawfully granted in state court, which would be tantamount to a reversal and prohibited by the Rooker-Feldman doctrine.  Further, the court rejected the debtor’s standing argument on the basis of res judicata because the state court had already decided that the trustee was a secured creditor with standing to foreclose.
The court nevertheless held that in all future cases involving MERS, the moving party must show that it validly holds both the mortgage and the underlying note in order to prove standing.  While the court’s decision as to MERS in this case is dictum, debtors in the Eastern District of New York and elsewhere whose cases rest on similar facts (excluding the state court judgment of foreclosure) will undoubtedly seek to use this decision as a basis for their opposition to MERS or its purported assignees, including in motions to dismiss and for summary judgment.  We will discuss the In re Martinez decision from the bankruptcy court for the District of Kansas, which came to the opposite conclusion as to MERS’s agent status, in a future post.