Despite its participation in the Mortgage Electronic Registration Systems Inc. registry, a second mortgage holder in Kansas was not notified about a foreclosure action by a first mortgage holder — leaving excess sale proceeds going to the bankrupt borrower. The subordinate lender unsuccessfully tried to have the action reversed — highlighting flaws in the widely used MERS system.
The case revolves around a second mortgage taken out by Kansas borrower Boyd A. Kesler with Millennia Mortgage Corp., according to a case summary prepared by Patton Boggs LLP attorneys Patrick McManemin and Eric White.
The junior lien was taken out a year after Kesler obtained a first mortgage from Landmark National Bank.
The second mortgage showed Millennia as the lender and MERS as the mortgagee — though “solely as nominee for lender … and lender’s successors and assigns.”
The second lien was subsequently assigned to Sovereign Bank, which registered it in the MERS registry.
Kesler filed for bankruptcy a year after the second mortgage was made and surrendered the property to creditors. Landmark, the first mortgage holder, then filed a petition to foreclose on its loan and named Kesler and Millennia as defendants.
Not named, however, were MERS and Sovereign. In addition, the two entities never received notice of the foreclosure and never responded to the action.
Landmark obtained a default judgment and subsequently sold the property for more than was owed on the first mortgage. Kesler was given the excess proceeds.
Once Sovereign learned of the sale, it attempted to have the judgment vacated and overturn the sheriff’s sale. At a minimum, the bank wanted the excess proceeds that were given to the bankrupt borrower.
MERS subsequently joined Sovereign in the action.
But the Landmark court, after analyzing MERS’ role as nominee of the lender, determined that MERS did not satisfy the standard to overturn the default judgment, which requires “judicial abuse of discretion where no reasonable person would take the view adopted by the trial court,” Patton Boggs said.
The court concluded MERS no contractual rights under the second mortgage nor other substantive legal rights that could be impaired by the default judgment because it only was the placeholder for the mortgage holders.
“MERS was not a necessary party to the foreclosure suit, thus no judicial abuse of discretion occurred,” McManemin and White wrote. “This conclusion also sank MERS’ contention that its federal constitutional right to due process was violated.”
The case summary indicated that the “procedural posture” led to a relatively narrow holding by the Landmark court which didn’t explicitly address whether MERS or Sovereign were improperly excluded from the foreclosure suit.
While MERS’ internal foreclosure policy is not known and court documents were not reviewed, Patton Boggs noted that MERS was not designed to handle the current volume of foreclosures and is not a fool-proof method for protecting non-originating mortgage holders.
“When a mortgage loan goes into default, you will want to take all necessary steps to make sure that your mortgagee status is properly recorded by local counsel,” Patton Boggs explained.
The Washington, D.C.-based law firm said MERS needs structural changes to work with the increasingly high volume of bankruptcies. While the MERS electronic registration system works well among its members, non-members like Landmark can disrupt the system.
“The MERS electronic registration system is clashing with state laws requiring recordation of mortgages,” the case summary said. “As currently constituted, even with MERS receiving foreclosure notices — it may already be too late for a subsequent purchaser of mortgages if the mortgagor goes bankrupt.”
Patton Boggs recommended that MERS either quickly file the necessary documentation at the local level and actually foreclose on the mortgaged properties or amend all registered loans and advise servicers to take the steps necessary to protect the ultimate mortgage-holders’ interests.
“Each step requires increased time, effort and expense, but is ultimately necessary for the MERS system to be a reliable protector of your investments,” according to the summary.
Landmark National Bank v. Kesler.
(Kansas Supreme Court)
