New York Bankruptcy Court Strikes at the Heart of MERS

In a decision issued on February 10, 2011 on a loan servicer’s motion for relief from the stay in a chapter 7 bankruptcy case entitled “In Re: Agard,” a judge of the United States Bankruptcy Court for the Eastern District of New York rigorously challenged the fundamental business model of Mortgage Electronic Registration Systems, Inc. (“MERS”).

The note was payable to the original lender, and the mortgagee shown on the mortgage was MERS as nominee for the lender, as is the case on millions of mortgages throughout the United States. The court questioned whether the movant was the “real party in interest” with the legal right to enforce the note and mortgage, and therefore, whether it had standing to seek relief from the bankruptcy stay.  Fortunately for the movant, a judgment of foreclosure had previously been granted by the state court.  Therefore, the bankruptcy court held that the issue had already been decided and consequently, the movant’s standing had been established for this particular case.  As a result, the bankruptcy court granted the motion for relief from the stay. 

However, after elucidating on the MERS concept at length, the court raised serious doubt on the validity of the standard assignment of a mortgage by MERS, stating 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.

The court recognized that an adverse ruling regarding MERS’ authority to assign mortgages or to act on behalf of its members/lenders could have a significant impact on MERS and on the lenders which do business with MERS throughout the United States.  However, the court rejected the notion that because MERS may be involved in approximately half of all residential mortgages in the country, that is reason enough for the court not to challenge MERS’ business practices.  The court insisted on affecting that the laws must be applied as they exist, and that it is up to the legislature, if it chooses, to enact legislation to confer upon MERS the requisite authority to assign mortgages under its current business practices.

In the closing sentence of the decision, after stating that the motion for relief from the stay would be granted in this particular case, the court pointedly stated: “However, in all future cases which involve MERS, the moving party must show that it validly holds the mortgage and the underlying note in order to prove standing before this Court.”

This case will undoubtedly lead to similar challenges in litigation involving MERS mortgages throughout the country, which could undermine the processing of mortgage loans, their sale on the secondary market, and the flow of foreclosures on defaulted loans.