2009 Comm. Fin. News. 59
Commercial Finance Newsletter
Professor Dan Schechtera
Assignees of Mortgages Cannot Enforce Unendorsed Notes in Their Possession Because MERS Documentation Does Not Expressly Authorize Assignment of Notes [In re Wilhelm (Bankr. D. Idaho)]
A bankruptcy court in Idaho has held that the assignees of pooled mortgages cannot enforce unendorsed promissory notes in their possession, because the controlling MERS documentation does not expressly authorize MERS to assign the notes. [In re Wilhelm, 2009 WL 1988812 (Bankr. D. Idaho 2009).]
A group of financial institutions filed motions in separate consumer bankruptcy cases, seeking relief from the automatic stay in order to enforce the borrowers’ promissory notes and to foreclose. Each of the deeds of trust named Mortgage Electronic Registration Systems, Inc. (MERS) as the nominal beneficiary, but the trust deeds did not state that MERS was authorized to transfer the underlying notes. On its own motion, the court questioned the lenders’ standing to enforce the promissory notes.
The court first noted that all of the lenders were assignees, rather than the original holders of the notes. The court then held that since none of the notes was endorsed to the assignees, the assignees bore the burden under state law of showing possession of the notes, which they failed to do in an evidentiary-competent manner.
Most importantly, the court held that even if the lenders were in possession, they could not enforce the notes because they had not adequately documented the authority of MERS to assign the notes:
[The lenders] apparently rely upon an assignment document to show that the notes were transferred to them. The signature block in these assignments typically indicate that MERS executed the assignments on behalf of the original lender and that lender’s successors and assigns. [The lenders] seem to presume that the assignments, standing alone, entitle them to enforce the underlying notes. Such a presumption is unfounded, however, because [the lenders] have not established MERS’s authority to transfer the notes at issue…. [T]he relevant deeds of trust name MERS as the “nominal beneficiary” for the lender. Further, MERS is granted authority to foreclose if required by “custom or law.” But what this language does not do–either expressly or by implication–is authorize MERS to transfer the promissory notes at issue. [Citations omitted.]
This opinion calls to mind an ancient joke: “They said cheer up, things could be worse. So I cheered up, and sure enough, things got worse.” Just recently, a few bankruptcy courts have held that the failure of the originating lender to endorse the notes to the assignee meant that the assignee lacked standing to enforce the notes; see, e.g., 2009 Comm. Fin. News. 57, Assignee in Possession of Mortgage Note May Not Enforce It Because Note Is Not Endorsed to Assignee. I thought that was alarming enough, since it is so difficult to obtain those endorsements after the fact.
This latest case goes much further, however: even if the assignee is physically in possession of the note, the assignee may not have standing to enforce it because MERS, the original beneficiary, had no authority to assign it in the first place. That problem cannot be solved by ex post facto redocumentation.
This seeming lack of authority is particularly alarming because the apparent defect in the MERS documentation is system-wide. There are millions of mortgages, originated during the last several years, that use MERS as the nominal beneficiary. If MERS has no authority to assign the mortgages, then all of those mortgage pools holding “infected mortgages” will have no way to enforce them.
Although this decision may be technically (even hypertechnically) correct, I predict reversal, probably by the Ninth Circuit or the Ninth Circuit BAP. The consequences of stripping the mortgage pools of their ability to foreclose are too severe. My guess is that a reviewing court will find, by implication, that if MERS has the power to foreclose, it also has the power to assign. There is no express prohibition on assignment contained in the documentation, and virtually all contractual rights can be assigned, unless there is some supervening reason to forbid assignment (such as, for example, in the case of personal services contracts). Therefore, the power to assign is inherent in the status of MERS as the original beneficiary, even if that power is not expressly contained in the documents.
Copyright Thomson Reuters
These materials were written by Dan Schechter, Professor of Law at Loyola Law School, Los Angeles, California. The opinions expressed herein are solely those of Professor Schechter.
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