A Review Of The Kansas Supreme Court’s Decision In Landmark National Bank vs. Kesler
by Larry R. Rothenberg
The Problem with Assignments of Mortgages
As the secondary mortgage market evolved beginning in the 1990’s and large pools of mortgage loans were sold and resold in rapid succession, the cumbersome tasks for the seller to execute and deliver an assignment of each mortgage to the buyer, and the buyer to file each assignment for record in the county where the mortgage was recorded, became overwhelming.
Mortgage lenders and servicers who handled high volumes found it virtually impossible to keep up with the assignment process. Parties attempting to refinance a loan or sell the property struggled to identify the current mortgage holder in order to request a payoff figure. In addition, in foreclosure actions filed by other creditors, summons were served on the last holder of the mortgage as shown in the county records. If the loan had been sold but the assignment was not yet recorded, the lender who had sold the loan and received service of the summons had little or no incentive to respond, resulting in a default judgment and forfeiture of the mortgage.
The MERS Solution
Mortgage Electronic Registration Systems, Inc. (MERS) was created by the mortgage banking industry to streamline the process and resolve the problem. MERS acts as nominee for the lender. When a mortgage is executed or assigned to MERS as nominee for the lender and the mortgage is registered on the MERS system, the burdensome process of executing assignments from the seller to the buyer of the mortgage upon each sale of a loan, became unnecessary. MERS could be accessed or served with a summons, and it would direct the inquiry or the summons to the current owner of the loan for handling.
Challenge in Kansas
Over the years, Court challenges were raised as to the efficacy of the MERS concept. MERS was successful in validating its system in such cases in many states. However, on August 28, 2009, the Kansas Supreme Court, in Landmark National Bank v. Kesler, case no. 98,489, dealt a blow to the MERS concept.
Landmark, the plaintiff in the case, held the first mortgage and filed the foreclosure. The second mortgage was to “MERS as nominee for Millennia Mortgage Corp.” According to the Court’s decision, the second mortgage was apparently assigned and the original note was delivered to the buyer, Sovereign, but no assignment of the mortgage was filed for record.
Landmark’s foreclosure complaint named the borrower and Millennia as defendants. When neither filed an answer, a default judgment was rendered against them. The property was sold at a sheriff’s sale to a third-party purchaser for an amount in excess of the amount due on Landmark’s mortgage. Landmark filed a motion to confirm the sale and on the same day, Sovereign filed an answer, a motion to set aside or vacate the default judgment, and an objection to confirmation of the sale, arguing that MERS rather than Millennia should have been named as a party and Sovereign had not received notice of the proceedings. MERS subsequently filed a motion to intervene and a motion joining Sovereign’s motion to vacate the default judgment and objection to confirmation of the sheriff’s sale. The Trial Court denied both Sovereign’s and MERS’ motions and the Court of Appeals affirmed the decision. Sovereign and MERS then appealed the case to the Kansas Supreme Court.
The Kansas Supreme Court’s Holding
The Kansas Supreme Court’s holding rested on its analysis of whether MERS had a meritorious claim or defense to present if it had been named as a defendant. The Court focused on the meaning of “nominee for the lender” as used in the mortgage. Because MERS had not lent the money to the borrower and was not a party entitled to collect under the note or to receive the proceeds of a sheriff’s sale, nor did it demonstrate that it had a tangible interest in the mortgage, the Court found that MERS did not have an interest in the property that was impaired by the default judgment. Hence, according to the Court, the outcome of the case would have been no different if MERS had been named as a party, and therefore, there was no reason to grant its motion.
The American Land Title Association filed an Amicus Brief, explaining that MERS provides a cost-efficient method of tracking mortgage transactions without the complications of county-by-county registration and title searches, thus modernizing an archaic system. However, the Court stated that while this may be true, the MERS system introduces its own problems and complications such as obscuring the identity of the current owner of the note and mortgage, after the loan has been sold.
The Kansas Supreme Court’s ruling against the MERS concept is obviously problematic for mortgages in Kansas, where the mortgagee or assignee is named as “MERS as nominee for the lender.” A motion for “rehearing/modification” was filed on September 17, 2009, and remains pending. It remains to be seen whether other states will adopt the Kansas Supreme Court’s reasoning.
We will keep you advised of further developments with regard to this issue. For a complete copy of the Court’s decision, go here.
If you have any questions on this information, please contact Mr. Larry R. Rothenberg, Esq. Larry is the partner-in-charge of the Cleveland real estate and foreclosure department of Weltman, Weinberg & Reis Co., L.P.A. He is the author of the Ohio Jurisdictional Section contained within the treatise, “The Law of Distressed Real Estate”, published by The West Group. The firm handles foreclosures and related litigation throughout Ohio, Kentucky, Indiana, Illinois, Pennsylvania and Michigan. Larry can be reached at (216) 685-1135 or via e-mail at email@example.com.