A key piece of case law supporting defaulted borrowers' fight against Mortgage Electronic Registration Systems Inc. was vacated Wednesday, after a federal judge ruled that a New York-based bankruptcy judge overstepped his authority when he issued a scathing opinion of the private loan registry.
Joanna Seybert, a federal district judge for the Eastern District of New York, granted an appeal by MERS Inc. to throw out U.S. bankruptcy Judge Robert Grossman's Feb. 2011 opinion on the grounds that it addressed a hypothetical scenario that had no effect on the parties or bankruptcy case before him.
In a press statement, Reston, Va.-based MERS heralded Seybert's ruling as far-reaching for both its mortgage industry members and legal challengers.
“Any future challenges to MERS' business model will have to be done without citing to Judge Grossman's now vacated opinion, and users of the MERS System can be assured that MERS' authority as mortgagee remains valid throughout the United States,” said Janis Smith, spokesperson for Merscorp Holdings Inc., the parent company of MERS and its related products, which was recently renamed from Merscorp Inc. on Feb. 27
In the case,
Grossman wrote that he lacked the jurisdiction to overturn a state court's previous ruling that Select Portfolio Servicing was a secured creditor and ordered the bankruptcy stay lifted, which allowed the foreclosure sale to continue.
But the ruling also included an additional legal opinion offering guidance on how he would have ruled absent the state court's ruling, on the basis that “this analysis is necessary for the precedential effect it will have on other cases pending before this Court,” Grossman's ruling read.
In the opinion, Grossman found that U.S. Bank did not hold the mortgage's promissory note, MERS could not assign the loan's mortgage to Select Portfolio Servicing and that U.S. Bank would not have had standing as a secured creditor.
The ruling focused on Grossman's interpretation of New York agency law. He wrote that neither the mortgage document nor the MERS membership agreement it has with members contain the word "agency," and they do not expressly spell out in writing that the arrangement is an "agency relationship," which Grossman called critical tenets of New York law.
"MERS would have this Court cobble together the documents and draw inferences from the words contained in those documents," Grossman wrote. "However, the fact that MERS is named 'nominee' in the Mortgage is not dispositive of the existence of an agency relationship and does not, in and of itself, give MERS any 'authority to act.'"
"MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process," the ruling adds. "This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law."
Grossman declared that MERS-member servicers seeking to lift an automatic stay of foreclosure in the New York court must now show that the trustee it represents validly holds both the mortgage and the underlying note in order to prove standing.
In its appeal, MERS argued Grossman's ruling was unconstitutional because he lacked jurisdiction to address the mortgage assignment issue already resolved by the state court. Seybert agreed, and ruled that Grossman's acknowledgement that he couldn't overturn the state court's ruling showed he recognized the bankruptcy court lacked subject matter jurisdiction over the dispute.
“In other words, there was no longer a live case or controversy. Judge Grossman's discussion and analysis addressed a now-hypothetical issue: whether Select/U.S. Bank would have had standing absent the Judgment of Foreclosure…And Judge Grossman's conclusion—that MERS did not have authority to assign the Mortgage—had no effect on the parties or the bankruptcy,” Seybert's ruling read.
In addition, the MERS appeal also argued that even if Grossman had jurisdiction, there were additional errors of law and fact in the court's analysis and decision, but those issues were not addressed in Seybert's ruling.
