Here
it is. On August 28, 2009 the Supreme Court of the State of Kansas
rendered an opinion based calmly on existing law and relentlessly
applying it to the chagrin of all participants in the securitization
scheme. MERS was the appellant seeking to invoke due process rights
which it said were violated when they failed to get notice of the fact
that their “interest” was being wiped out. The Court said simply that
MERS — or any nominee” didn’t have any interest and proves its point by
reference to simple statements in the documents and the simplest of
laws and interpretation of the role of MERS and the requirements of
recordation. The splitting of the note and mortgage creates an
immediate and fatal flaw in title.
Title carriers take notice — all previous foreclosures
falling within the scope of this opinion are subject to either
compensation to the homeowner or reinstatement of the homeowner as
possessor and owner of the home, or both. The implications of this
ruling cannot be overstated — but neither should it be overused.
This is one state, but it is likely to serve as the basis
for most appellate opinions rendered on securitized loans. The tide has
turned. The moral of the story is that those encumbrances (mortgages)
don’t exist in most cases, the foreclosures were all fatally flawed,
the people who have been chased out of their homes, still own those
homes, and the parties seeking to enforce the note can do so only as
unsecured creditors and only if they prove that they lent the money
that funded the loan and only if they are willing to be subject to
counterclaims, cross claims, affirmative defenses and defenses of the
borrower relating to predatory lending, appraisal fraud, securities
fraud, rescission under all available theories of law, damages, treble
damages, punitive damages, exemplary damages and consequential economic
damages.
This is the start of what will be a long line of cases
running through state courts and Federal Courts finding that MERS, the
whole “Nominee” business plan, assignments from those without power to
assign, splitting the note and mortgage making the mortgage
unenforceable, necessary and indispensable parties, vacating judgments
procured by fraud, and all the other basic black letter law flaws in
the securitization of loans are exposed for what they are — a scheme
that would and did wreak havoc on the notice and recording requirements
of each and every state, a scheme whose execution created fatal flaws
in title, and the intent to buy-pass the basic requirements of law in
effect since at least the 17th century.
This case must be read multiple times and very carefully as
it contains a succinct discussion of the decisions in other states. I
will be referring to this case and analyzing it in the days ahead for
our blog readers and for my clients who have retained me as an expert
witness. I agree with every word in this opinion — a rarity and I am
relying on it as corroboration for all my prior writing and expert
opinions rendered in all cases across the country.
Kansas Opinions | Finding Aids: Case Name » Supreme Court or Court of Appeals | Docket Number | Release Date |
IN THE SUPREME COURT OF THE STATE OF KANSAS
No. 98,489
LANDMARK NATIONAL BANK,
Plaintiff/Appellee,
v.
BOYD A. KESLER
Appellee/Cross-appellant
MILLENNIA MORTGAGE CORPORATION,
Defendant,
(MORTGAGE ELECTRONIC REGISTRATION
SYSTEMS, INC. AND SOVEREIGN BANK),
Appellants/Cross-appellees,
and
DENNIS BRISTOW AND TONY WOYDZIAK,
Intervenors/Appellees.
SYLLABUS BY THE COURT
1. Denial of a motion to set aside default judgment is subject to
review under a standard of abuse of discretion. A district court
decision that denies a motion to join a party as a necessary party
under K.S.A. 60-219(a) is also subject to an abuse of discretion
standard of review.
2. Whether the evidence demonstrates that the statutory requirements
for joinder have been met is a mixed question of fact and law. When
reviewing a mixed question of fact and law, an appellate court reviews
the district court’s factual findings for substantial competent
evidence and reviews de novo the district court’s legal conclusions.
3. Intervention as a matter of right is subject to the same mixed
determination of law and fact as is joinder. Permissive intervention
lies within the discretion of the district court.
4. Judicial discretion is abused when no reasonable person would
take the view adopted by the trial court. Review for abuse of
discretion includes review to determine whether erroneous legal
conclusions guided the exercise of discretion.
5. K.S.A. 60-255(b) does not require that the party moving for relief from default judgment be a party to the action.
6. It is appropriate for a trial court to consider evidence beyond the
bare pleadings to determine whether it should set aside a default
judgment. In a motion to set aside default, a trial court should
consider a variety of factors to determine whether the defendant or
would-be defendant had a meritorious defense, and the burden of
establishing a meritorious defense rests with the moving party.
7. Relief under K.S.A. 60-255(b) is appropriate only upon a showing
that if relief is granted the outcome of the suit may be different than
if the entry of default or the default judgment is allowed to stand;
the showing should underscore the potential injustice of allowing the
case to be disposed of by default. In most cases the court will require
the party in default to demonstrate a meritorious defense to the action
as a prerequisite to vacating the default entry or judgment. The nature
and extent of the showing that will be necessary lie within the trial
court’s discretion.
8. The law relating to a contingently necessary party closely resembles
the law relating to vacating default judgment, in that both require the
party asserting the interest to demonstrate a meritorious defense or an
interest that may be impaired.
9. The word “nominee” is subject to more than one interpretation. The
legal significance of the word depends on the context in which it is
used. The word encompasses a range of meanings from a straw man or
limited agent to a representative enjoying the same legal rights as the
party that acts as the nominator.
10. The law generally understands that a mortgagee is not distinct from
a lender: a mortgagee is a party to whom property is mortgaged, which
is to say, a mortgage creditor or lender. A mortgagee and a lender have
intertwined rights that defy a clear separation of interests.
11. Parties are bound by the formal admissions of their counsel in an action.
12. The Due Process Clause does not protect entitlements where the
identity of the alleged entitlement is vague. A protected property
right must have some ascertainable monetary value. An entitlement to a
procedure does not constitute a protected property interest.
Review of the judgment of the Court of Appeals in 40 Kan. App. 2d 325,
192 P.3d 177 (2008). Appeal from Ford District Court; E. LEIGH HOOD,
judge. Judgment of the Court of Appeals affirming the district court is
affirmed. Judgment of the district court is affirmed. Opinion filed
August 28, 2009.
Tyson C. Langhofer and Court T. Kennedy, of Stinson Morrison Hecker, L.L.P., of Wichita, for appellants/cross-appellees.
Ted E. Knopp, of Ted E. Knopp, Chartered, of Wichita, for appellee Boyd A. Kesler.
David A. Schatz, of Husch Blackwell Sanders L.L.P., of Kansas City, Missouri, for amicus curiae American Land Title Association.
The opinion of the court was delivered by
ROSEN, J.: Mortgage Electronic Registration Systems, Inc. (MERS) and
Sovereign Bank seek review of an opinion by our Court of Appeals
holding that a nonlender is not a contingently necessary party in a
mortgage foreclosure action and that due process does not require that
a nonlender be allowed to intervene in a mortgage foreclosure action.
The facts underlying this appeal are not in dispute. On March 19, 2004,
Boyd Kesler secured a loan of $50,000 from Landmark National Bank
(Landmark) with a mortgage registered in Ford County, Kansas. On March
15, 2005, he secured an additional loan of $93,100 from Millennia
Mortgage Corp. (Millennia) through a second mortgage registered in Ford
County. Both mortgages were secured by the same real property located
in Ford County.
The second mortgage lies at the core of this appeal. That mortgage
document stated that the mortgage was made between Kesler–the
“Mortgagor” and “Borrower”–and MERS, which was acting “solely as
nominee for Lender, as hereinafter defined, and Lender’s successors and
assigns.” The document then identified Millennia as the “Lender.” At
some subsequent time, the mortgage may have been assigned to Sovereign
and Sovereign may have taken physical possession of the note, but that
assignment was not registered in Ford County.
On April 13, 2006, Kesler filed for bankruptcy in the United States
Bankruptcy Court for the District of Kansas, Wichita Division. He named
Sovereign as a creditor; although he claimed the secured property as
exempt, he filed an intention to surrender the property. The bankruptcy
court discharged his personal liability on November 16, 2006. The
record contains little documentation or evidence explaining the
interplay of the bankruptcy and the foreclosure action, except to
suggest that the bankruptcy action may have given Sovereign
constructive notice of a possible default on payments.
On July 27, 2006, Landmark filed a petition to foreclose on its
mortgage, serving and naming as defendants Kesler and Millennia. It did
not serve notice of the litigation on MERS or Sovereign. In the absence
of answers from either defendant, the trial court entered default
judgment against Kesler and Millennia on September 6, 2006. The trial
court then filed an order of sale on September 29, 2006. Notice of the
sale was initially published in the Dodge City Daily Globe on October
4, 2006. On October 26, 2006, Dennis Bristow and Tony Woydziak
purchased the secured property at a sheriff’s sale for $87,000, and on
November 14, 2006, Landmark filed a motion to confirm sale of the
secured property.
Also on November 14, 2006, Sovereign filed an answer to the foreclosure
petition, asserting an interest in the real property as the successor
in interest to Millennia’s second mortgage. A week later, on November
21, 2006, Sovereign filed a motion to set aside or vacate the default
judgment and an objection to confirmation of sale. The motion asserted
that MERS was a K.S.A. 60-219(a) contingently necessary party and,
because Landmark failed to name MERS as a defendant, Sovereign did not
receive notice of the proceedings. The motion asked the court to vacate
the default judgment under K.S.A. 60-260(b). The motion further asked
the court to set aside the surplus from the sale, holding it to later
to be paid to Sovereign if the court elected not to grant the motion to
vacate.
On November 27, 2006, Kesler filed a motion seeking distribution of
surplus funds from the sheriff’s sale, and on January 3, 2007, Kesler
filed a motion joining Landmark’s earlier motion to confirm the
sheriff’s sale. The trial court conducted a hearing on the various
motions on January 8, 2007, at which counsel for Landmark, Kesler,
Sovereign, and Bristow appeared and presented their cases. The trial
court deferred judgment pending review of the pleadings.
On January 16, 2007, MERS filed a motion joining Sovereign’s motion to
vacate the journal entry of default judgment and objecting to
confirmation of the sheriff’s sale, followed on January 18, 2007, by a
motion to intervene under K.S.A. 60-224. MERS proffered an answer and a
cross-claim to the original foreclosure petition.
On that same date, the trial court filed an order finding that MERS was
not a real party in interest and Landmark was not required to name it
as a party to the foreclosure action. The court found that MERS served
only as an agent or representative for Millennia. The court also found
that Sovereign’s failure to register its interest with the Ford County
Register of Deeds precluded it from asserting rights to the mortgage
after judgment had been entered. The court denied the motions to set
aside judgment and to intervene and granted the motions to confirm the
sale and to distribute the surplus.
On February 1, 2007, MERS and Sovereign filed motions to reconsider.
The trial court conducted a hearing on those motions, at which counsel
for Kesler, Sovereign, and MERS appeared and argued. The trial court
subsequently entered an order denying the motions to reconsider. MERS
and Sovereign filed timely notices of appeal.
Prior to the appellants submitting their briefs, the purchasers Bristow
and Woydziak filed a motion with the Court of Appeals seeking leave to
intervene in the appeal. The Court of Appeals granted the motion.
Bristow and Woydziak then filed a motion to compel the office of the
Clerk of the Appellate Courts to docket their cross-appeal, which the
Court of Appeals denied. The Court of Appeals affirmed the district
court in Landmark National Bank v. Kesler, 40 Kan. App. 2d 325, 192
P.3d 177 (2008). This court granted the appellants’ petition for review.
I. Did The District Court Abuse Its Discretion In Denying MERS’s Motion
To Set Aside Default Judgment And Motion To Intervene As A Contingently
Necessary Party?
A. Standard of Review
Denial of a motion to set aside a default judgment is subject to review
under a standard of abuse of discretion. See Canaan v. Bartee, 272 Kan.
720, Syl. ¶ 9, 35 P.3d 841 (2001). A district court decision that
denies a motion to join a party as a necessary party under K.S.A.
60-219(a) is also subject to an abuse of discretion standard of review.
State ex rel. Graeber v. Marion County Landfill, Inc., 276 Kan. 328,
352, 76 P.3d 1000 (2003). Whether the evidence demonstrates that the
statutory requirements for joinder have been met is a mixed question of
fact and law. When reviewing a mixed question of fact and law, an
appellate court reviews the district court’s factual findings for
substantial competent evidence and reviews de novo the district court’s
legal conclusions. State v. Fisher, 283 Kan. 272, 286, 154 P.3d 455
(2007).
Intervention as a matter of right is subject to the same mixed
determination of law and fact as is joinder. K.S.A. 60-224(a).
Permissive intervention lies within the discretion of the district
court. K.S.A. 60-224(b); see Stringfellow v. Concerned Neighbors in
Action, 480 U.S. 370, 382 n.1, 94 L. Ed. 2d 389, 107 S. Ct. 1177 (1987)
(Brennan, J., concurring) (discussing the different standards applied
to Federal Rule of Civil Procedure 24[a] and [b]).
Judicial discretion is abused when no reasonable person would take the
view adopted by the trial court. Harsch v. Miller, 288 Kan. 280, 293,
200 P.3d 467 (2009). Review for abuse of discretion includes review to
determine whether erroneous legal conclusions guided the exercise of
discretion. State v. Skolaut, 286 Kan. 219, Syl. ¶ 3, 182 P.3d 1231
(2008).
To the extent that this appeal requires interpretation of statutory
mandates, this court exercises unlimited review. See Genesis Health
Club, Inc. v. City of Wichita, 285 Kan. 1021, 1031, 181 P.3d 549 (2008).
B. Analysis
While this is a matter of first impression in Kansas, other
jurisdictions have issued opinions on similar and related issues, and,
while we do not consider those opinions binding in the current
litigation, we find them to be useful guideposts in our analysis of the
issues before us.
At the heart of this issue is whether the district court abused its
discretion in refusing to set aside the default judgment and in
refusing to join MERS as a contingently necessary party.
The statutory provision for setting aside a default judgment is K.S.A.
60-255(b), which refers to K.S.A. 60-260(b), relating to relief from
judgment, in a manner similar to the correlation between the
corresponding federal rules, Fed. R. Civ. Proc. 55(c) and 60(b). K.S.A.
60-260(b) allows relief from a judgment based on mistake, inadvertence,
surprise, or excusable neglect; newly discovered evidence that could
not have been timely discovered with due diligence; fraud or
misrepresentation; a void judgment; a judgment that has been satisfied,
released, discharged, or is no longer equitable; or any other reason
justifying relief from the operation of the judgment. K.S.A. 60-260(b)
requires that the motion be made by a party or by a representative who
is in privity with a party, thus precluding a nonparty of standing to
file such a motion. K.S.A. 60-255(b) does not, however, require that
the movant be a party to the action. See 11 Wright, Miller & Kane,
Federal Practice & Procedure: Civil 2d § 2865 (1995).
It is appropriate–and probably necessary–for a trial court to consider
evidence beyond the bare pleadings to determine whether it should set
aside a default judgment. In a motion to set aside default, a trial
court should consider a variety of factors to determine whether the
defendant (or would-be defendant) had a meritorious defense, and the
burden of establishing a meritorious defense rests with the moving
party. See Canaan v. Bartee, 272 Kan. 720, 731, 35 P.3d 841 (2001).
This conclusion is consistent with the construction of the parallel federal rules:
“Generally, a federal court will grant a motion under Rule 55(c) only
after some showing is made that if relief is granted the outcome of the
suit may be different than if the entry of default or the default
judgment is allowed to stand; the showing should underscore the
potential injustice of allowing the case to be disposed of by default.
In most cases, therefore, the court will require the party in default
to demonstrate a meritorious defense to the action as a prerequisite to
vacating the default entry or judgment. . . .
“A majority of the courts . . . have insisted upon a presentation of
some factual basis for the supposedly meritorious defense. . . .
“The demonstration of a meritorious defense is not expressly called for
by the federal rules and, therefore, the nature and extent of the
showing that will be necessary is a matter that lies within the court’s
discretion. . . . The underlying concern is to determine whether there
is some possibility that the outcome of the suit after a full trial
will be contrary to the result achieved by the default.” (Emphasis
added.) 10A Wright, Miller & Kane, Federal Practice &
Procedure: Civil 3d § 2697 (1998).
We accordingly find that it was incumbent on the trial court, when
ruling on the motion to set aside default judgment, to consider whether
MERS would have had a meritorious defense if it had been named as a
defendant and whether there was some reasonable possibility MERS would
have enjoyed a different outcome from the trial if its participation
had precluded default judgment.
In determining whether MERS was a contingently necessary party that was
entitled to relief from judgment, the trial court was required to
consider the factors of K.S.A. 60-219(a) in addition to those of K.S.A.
60-260(b).
K.S.A. 60-219(a) defines which parties are to be joined in an action as necessary for just adjudication:
“A person is contingently necessary if (1) complete relief cannot be
accorded in his absence among those already parties, or (2) he claims
an interest relating to the property or transaction which is the
subject of the action and he is so situated that the disposition of the
action in his absence may (i) as a practical matter substantially
impair or impede his ability to protect that interest or (ii) leave any
of the persons already parties subject to a substantial risk of
incurring double, multiple, or otherwise inconsistent obligations by
reason of his claimed interest.”
The law relating to a contingently necessary party closely resembles
the law relating to vacating a default judgment, in that both require
the party asserting the interest to demonstrate a meritorious defense
or an interest that may be impaired. In order to prevail on appeal,
MERS must demonstrate that the trial court abused its discretion when
it found, based on the testimony, evidence, and pleadings before the
court at the time when it considered the motion to set aside default
judgment, that MERS lacked a meritorious defense to the foreclosure
proceeding or had an interest that could be impaired. We will
accordingly examine the nature of the interest in the mortgage that
MERS has demonstrated.
Sovereign is a financial institution that putatively purchased the
Kesler mortgage from Millennia but did not register the transaction in
Ford County. The relationship of MERS to the transaction is not subject
to an easy description. One court has described MERS as follows:
“MERS is a private corporation that administers the MERS System, a
national electronic registry that tracks the transfer of ownership
interests and servicing rights in mortgage loans. Through the MERS
System, MERS becomes the mortgagee of record for participating members
through assignment of the members’ interests to MERS. MERS is listed as
the grantee in the official records maintained at county register of
deeds offices. The lenders retain the promissory notes, as well as the
servicing rights to the mortgages. The lenders can then sell these
interests to investors without having to record the transaction in the
public record. MERS is compensated for its services through fees
charged to participating MERS members.” Mortgage Elec. Reg. Sys., Inc.
v. Nebraska Depart. of Banking, 270 Neb. 529, 530, 704 N.W.2d 784
(2005).
The second mortgage designated the relationships of Kesler, MERS, and
Millennia and established payment and notice obligations. That document
purported to define the role played by MERS in the transaction and the
contractual rights of the parties.
The document began by identifying the parties:
“THIS MORTGAGE is made this 15th day of March 2005, between the
Mortgagor, BOYD A. KESLER, (herein ‘Borrower’), and the Mortgagee,
Mortgage Electronic Registration Systems, Inc. (’MERS’), (solely as
nominee for Lender, as hereinafter defined, and Lender’s successors and
assigns). MERS is organized and existing under the laws of Delaware,
and has an address and telephone number of P.O. Box 2026, Flint, MI
48501-2026, tel. (888) 679-MERS. MILLENNIA MORTGAGE CORP., A CALIFORNIA
CORPORATION is organized and existing under the laws of CALIFORNIA and
has an address of 23046 AVENIDA DE LA CARLOTA #100, LAGUNA HILLS,
CALIFORNIA 92653 (herein ‘Lender’).”
The third paragraph of the first page of the mortgage document conveyed a security interest in real estate:
“TO SECURE to Lender the repayment of the indebtedness evidenced by the
Note, with interest thereon; the payment of all other sums, with
interest thereon, advanced in accordance herewith to protect the
security of this Mortgage; and the performance of the covenants and
agreements of Borrower herein contained, Borrower does hereby mortgage,
grant and convey to MERS (solely as nominee for Lender and Lender’s
successors and assigns) and to the successors and assigns of MERS the
following described property located in the County of FORD, State of
Kansas.”
The first paragraph of the second page of the mortgage document
contains the following language that apparently both limits and expands
MERS’s rights:
“Borrower understands and agrees that MERS holds only legal title to
the interests granted by Borrower in this Mortgage; but, if necessary
to comply with law or custom, MERS, (as nominee for Lender and Lender’s
successors and assigns), has the right: to exercise any and all of
those interests, including, but not limited to, the right to foreclose
and sell the Property; and to take any action required of Lender
including, but not limited to, releasing or cancelling this Mortgage.”
Paragraph 7 of the mortgage document provides the lender with the right to protect the security:
“If Borrower fails to perform the covenants and agreements contained in
this Mortgage, or if any action or proceeding is commenced which
materially affects Lender’s interest in the Property, then Lender, at
Lender’s option, upon notice to Borrower, may make such appearances,
disburse such sums, including reasonable attorneys’ fees, and take such
action as is necessary to protect Lender’s interest.”
Paragraph 9 of the mortgage document provides the lender with rights in the event of a condemnation:
“Condemnation. The proceeds of any award or claim for damages, direct
or consequential, in connection with any condemnation or other taking
of the Property, or part thereof, or for conveyance in lieu of
condemnation, are hereby assigned and shall be paid to Lender, subject
to the terms of any mortgage, deed of trust or other security agreement
with a lien which has priority over this mortgage.”
Paragraph 12 of the mortgage document addresses notice:
“Notice. Except for any notice required under applicable law to be
given in another manner, (a) any notice to Borrower provided for in
this Mortgage shall be given by delivering it or by mailing such notice
by certified mail addressed to Borrower at the Property Address or at
such other address as Borrower may designate by notice to Lender as
provided herein, and (b) any notice to Lender shall be given by
certified mail to Lender’s address stated herein or to such other
address as Lender may designate by notice to Borrower as provided
herein. Any notice provided for in this Mortgage shall be deemed to
have been given to Borrower or Lender when given in the manner
designated herein.” (Emphasis added.)
The signature page of the mortgage document contains language relating to notice in the event of default:
“Borrower and Lender request the holder of any mortgage, deed of trust
or other encumbrance with a lien which has priority over this Mortgage
to give Notice to Lender, at Lender’s address set forth on page one of
this Mortgage, of any default under the superior encumbrance and of any
sale or other foreclosure action.” (Emphasis added.)
The mortgage instrument states that MERS functions “solely as nominee”
for the lender and lender’s successors and assigns. The word “nominee”
is defined nowhere in the mortgage document, and the functional
relationship between MERS and the lender is likewise not defined. In
the absence of a contractual definition, the parties leave the
definition to judicial interpretation.
What meaning is this court to attach to MERS’s designation as nominee
for Millennia? The parties appear to have defined the word in much the
same way that the blind men of Indian legend described an
elephant–their description depended on which part they were touching at
any given time. Counsel for Sovereign stated to the trial court that
MERS holds the mortgage “in street name, if you will, and our client
the bank and other banks transfer these mortgages and rely on MERS to
provide them with notice of foreclosures and what not.” He later stated
that the nominee “is the mortgagee and is holding that mortgage for
somebody else.” At another time he declared on the record that the
nominee
“is more like a trustee or more like a corporation, a trustee that has
multiple beneficiaries. Now a nominee’s relationship is not a trust but
if you have multiple beneficiaries you don’t serve one of the
beneficiaries you serve the trustee of the trust. You serve the agent
of the corporation.”
Counsel for the auction property purchasers stated that a nominee is
“one designated to act for another as his representative in a rather
limited sense.” He later deemed a nominee to be “like a power of
attorney.”
Black’s Law Dictionary defines a nominee as “[a] person designated to
act in place of another, usu. in a very limited way” and as “[a] party
who holds bare legal title for the benefit of others or who receives
and distributes funds for the benefit of others.” Black’s Law
Dictionary 1076 (8th ed. 2004). This definition suggests that a nominee
possesses few or no legally enforceable rights beyond those of a
principal whom the nominee serves.
In its opinion below, the Court of Appeals cited Thompson v. Meyers,
211 Kan. 26, 30, 505 P.2d 680 (1973), which provides the only
discussion in Kansas of the legal significance of a nominee:
“In common parlance the word ‘nominee’ has more than one meaning. Much
depends on the frame of reference in which it is used. In Webster’s
Third New International Dictionary, unabridged, one of the definitions
given is ‘a person named as the recipient in an annuity or grant.’ We
view a ‘nominee’, as the term was used by the parties here, not simply
in the sense of a straw man or limited agent. . . , but in the larger
sense of a person designated by them to purchase the real estate, who
would possess all the rights given a buyer . . . .”
The legal status of a nominee, then, depends on the context of the
relationship of the nominee to its principal. Various courts have
interpreted the relationship of MERS and the lender as an agency
relationship. See In re Sheridan, ___ B.R. ___, 2009 WL 631355, at *4
(Bankr. D. Idaho March 12, 2009) (MERS “acts not on its own account.
Its capacity is representative.”); Mortgage Elec. Registration System,
Inc. v. Southwest, ___ Ark. ___, ___, ___ S.W.3d ___, 2009 WL 723182
(March 19, 2009) (”MERS, by the terms of the deed of trust, and its own
stated purposes, was the lender’s agent”); LaSalle Bank Nat. Ass’n v.
Lamy, 2006 WL 2251721, at *2 (N.Y. Sup. 2006) (unpublished opinion) (”A
nominee of the owner of a note and mortgage may not effectively assign
the note and mortgage to another for want of an ownership interest in
said note and mortgage by the nominee.”)
The relationship that MERS has to Sovereign is more akin to that of a
straw man than to a party possessing all the rights given a buyer. A
mortgagee and a lender have intertwined rights that defy a clear
separation of interests, especially when such a purported separation
relies on ambiguous contractual language. The law generally understands
that a mortgagee is not distinct from a lender: a mortgagee is “[o]ne
to whom property is mortgaged: the mortgage creditor, or lender.”
Black’s Law Dictionary 1034 (8th ed. 2004). By statute, assignment of
the mortgage carries with it the assignment of the debt. K.S.A.
58-2323. Although MERS asserts that, under some situations, the
mortgage document purports to give it the same rights as the lender,
the document consistently refers only to rights of the lender,
including rights to receive notice of litigation, to collect payments,
and to enforce the debt obligation. The document consistently limits
MERS to acting “solely” as the nominee of the lender.
Indeed, in the event that a mortgage loan somehow separates interests
of the note and the deed of trust, with the deed of trust lying with
some independent entity, the mortgage may become unenforceable.
“The practical effect of splitting the deed of trust from the
promissory note is to make it impossible for the holder of the note to
foreclose, unless the holder of the deed of trust is the agent of the
holder of the note. [Citation omitted.] Without the agency
relationship, the person holding only the note lacks the power to
foreclose in the event of default. The person holding only the deed of
trust will never experience default because only the holder of the note
is entitled to payment of the underlying obligation. [Citation
omitted.] The mortgage loan becomes ineffectual when the note holder
did not also hold the deed of trust.” Bellistri v. Ocwen Loan
Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009).
The Missouri court found that, because MERS was not the original holder
of the promissory note and because the record contained no evidence
that the original holder of the note authorized MERS to transfer the
note, the language of the assignment purporting to transfer the
promissory note was ineffective. “MERS never held the promissory note,
thus its assignment of the deed of trust to Ocwen separate from the
note had no force.” 284 S.W.3d at 624; see also In re Wilhelm, 407 B.R.
392 (Bankr. D. Idaho 2009) (standard mortgage note language does not
expressly or implicitly authorize MERS to transfer the note); In re
Vargas, 396 B.R. 511, 517 (Bankr. C.D. Cal. 2008) (”[I]f FHM has
transferred the note, MERS is no longer an authorized agent of the
holder unless it has a separate agency contract with the new
undisclosed principal. MERS presents no evidence as to who owns the
note, or of any authorization to act on behalf of the present owner.”);
Saxon Mortgage Services, Inc. v. Hillery, 2008 WL 5170180 (N.D. Cal.
2008) (unpublished opinion) (”[F]or there to be a valid assignment,
there must be more than just assignment of the deed alone; the note
must also be assigned. . . . MERS purportedly assigned both the deed of
trust and the promissory note. . . . However, there is no evidence of
record that establishes that MERS either held the promissory note or
was given the authority . . . to assign the note.”).
What stake in the outcome of an independent action for foreclosure
could MERS have? It did not lend the money to Kesler or to anyone else
involved in this case. Neither Kesler nor anyone else involved in the
case was required by statute or contract to pay money to MERS on the
mortgage. See Sheridan, ___ B.R. at ___ (”MERS is not an economic
‘beneficiary’ under the Deed of Trust. It is owed and will collect no
money from Debtors under the Note, nor will it realize the value of the
Property through foreclosure of the Deed of Trust in the event the Note
is not paid.”). If MERS is only the mortgagee, without ownership of the
mortgage instrument, it does not have an enforceable right. See Vargas,
396 B.R. 517 (”[w]hile the note is ‘essential,’ the mortgage is only
‘an incident’ to the note” [quoting Carpenter v. Longan, 16 Wall. 271,
83 U.S. 271, 275, 21 L. Ed 313 (1872)]).
When it found that MERS did not have an interest in the property that
was impaired by the default judgment, the trial court properly
considered four factors: (1) that the written pleadings and oral
arguments by MERS and Sovereign identified MERS as acting only as a
digital mortgage tracking service; (2) that counsel for MERS insisted
that no evidence of a financial or property interest was necessary and
its argument rested solely on its identity as the mortgagee on the
mortgage document, when counsel was directly challenged to produce
evidence of a financial or property interest; (3) that evidence showed
that Sovereign was on notice that Landmark had leave of the bankruptcy
court to proceed with foreclosure and that MERS did not attempt to
intervene in the action until after its alleged principal, Sovereign,
had already had its motion to intervene and to set aside judgment
denied; and (4) that the case law submitted by the parties weighed more
in favor of denying the motion. These factors were properly before the
trial court and were consistent with the evidence and supported the
court’s legal reasoning.
Counsel for MERS explicitly declined to demonstrate to the trial court
a tangible interest in the mortgage. Parties are bound by the formal
admissions of their counsel in an action. Dick v. Drainage District No.
2, 187 Kan. 520, 525, 358 P.2d 744 (1961). Counsel for MERS made no
attempt to show any injury to MERS resulting from the lack of service;
in fact, counsel insisted that it did not have to show a financial or
property interest.
MERS argued in another forum that it is not authorized to engage in the
practices that would make it a party to either the enforcement of
mortgages or the transfer of mortgages. In Mortgage Elec. Reg. Sys. v.
Nebraska Dept. of Banking, 270 Neb. 529, 704 N.W.2d 784 (2005), MERS
challenged an administrative finding that it was a mortgage banker
subject to license and registration requirements.
The Nebraska Supreme Court found in favor of MERS, noting that “MERS
has no independent right to collect on any debt because MERS itself has
not extended credit, and none of the mortgage debtors owe MERS any
money.” 270 Neb. at 535. The Nebraska court reached this conclusion
based on the submissions by counsel for MERS that
“MERS does not take applications, underwrite loans, make decisions on
whether to extend credit, collect mortgage payments, hold escrows for
taxes and insurance, or provide any loan servicing functions
whatsoever. MERS merely tracks the ownership of the lien and is paid
for its services through membership fees charged to its members. MERS
does not receive compensation from consumers.” 270 Neb. at 534.
Even if MERS was technically entitled to notice and service in the
initial foreclosure action–an issue that we do not decide at this
time–we are not compelled to conclude that the trial court abused its
discretion in denying the motions to vacate default judgment and
require joinder of MERS and Sovereign. The record lacks evidence
supporting a claim that MERS suffered prejudice and would have had a
meritorious defense had it been joined as a defendant to the
foreclosure action. We find that the trial court did not abuse its
discretion and did not commit reversible error in ruling on the
postdefault motions.
We note that various arguments were presented suggesting that economic
policy provides independent grounds for reversing the trial court. MERS
and the amicus curiae American Land Title Association argue that MERS
provides a cost-efficient method of tracking mortgage transactions
without the complications of county-by-county registration and title
searches. The amicus suggests the statutory recording system is
grounded in seventeenth-century property law that is entirely unsuited
to twentieth-century financial transactions. While this may be true,
the MERS system introduces its own problems and complications.
One such problem is that having a single front man, or nominee, for
various financial institutions makes it difficult for mortgagors and
other institutions to determine the identity of the current note holder.
“[I]t is not uncommon for notes and mortgages to be assigned, often
more than once. When the role of a servicing agent acting on behalf of
a mortgagee is thrown into the mix, it is no wonder that it is often
difficult for unsophisticated borrowers to be certain of the identity
of their lenders and mortgagees.” In re Schwartz, 366 B.R. 265, 266
(Bankr. D. Mass. 2007).
“[T]he practices of the various MERS members, including both [the
original lender] and [the mortgage purchaser], in obscuring from the
public the actual ownership of a mortgage, thereby creating the
opportunity for substantial abuses and prejudice to mortgagors . . . ,
should not be permitted to insulate [the mortgage purchaser] from the
consequences of its actions in accepting a mortgage from [the original
lender] that was already the subject of litigation in which [the
original lender] erroneously represented that it had authority to act
as mortgagee.” Johnson, 2008 WL 4182397, at *4.
The amicus argues that “[a] critical function performed by MERS as the
mortgagee is the receipt of service of all legal process related to the
property.” The amicus makes this argument despite the mortgage clause
that specifically calls for notice to be given to the lender, not the
putative mortgagee. In attempting to circumvent the statutory
registration requirement for notice, MERS creates a system in which the
public has no notice of who holds the obligation on a mortgage.
The Arkansas Supreme Court has noted:
“The only recorded document provides notice that [the original lender]
is the lender and, therefore, MERS’s principal. MERS asserts [the
original lender] is not its principal. Yet no other lender recorded its
interest as an assignee of [the original lender]. Permitting an agent
such as MERS purports to be to step in and act without a recorded
lender directing its action would wreak havoc on notice in this state.”
Southwest Homes, ___ Ark. at ___.
In any event, the legislature has established a registration
requirement for parties that desire service of notice of litigation
involving real property interests. It is not the duty of this court to
criticize the legislature or to substitute its view on economic or
social policy. Samsel v. Wheeler Transport Services, Inc., 246 Kan.
336, 348, 789 P.2d 541 (1990).
II. Did The Trial Court’s Refusal To Join MERS As A Party Violate MERS’s Right To Due Process?
MERS contends that the Fourteenth Amendment and §18 of the Kansas
Constitution Bill of Rights guarantees of due process were violated
when the foreclosure action was consummated without MERS receiving
notice of the proceeding and without MERS having the opportunity to
intervene in the action.
Although joinder is evaluated under an abuse of discretion standard, if
a constitutional right is involved the trial judge’s exercise of
discretion is limited. Discretion must be exercised not in opposition
to, but in accordance with, established principles of law. It is not an
arbitrary power. In re Adoption of B.G.J., 281 Kan. 552, 563, 133 P.3d
1 (2006).
The Fourteenth Amendment to the United States Constitution provides:
“No State shall make or enforce any law which shall abridge the
privileges or immunities of citizens of the United States; nor shall
any State deprive any person of life, liberty, or property, without due
process of law.”
Section 18 of the Kansas Constitution Bill of Rights provides: “All
persons, for injuries suffered in person, reputation or property, shall
have remedy by due course of law, and justice administered without
delay.”
Due process provides any interested party with the elementary and
fundamental right to notice of the pendency of an action and the
opportunity to present its objections in any proceeding that is to be
accorded finality. Alliance Mortgage Co. v. Pastine, 281 Kan. 1266,
1275, 136 P.3d 457 (2006) (citing Mullane v. Central Hanover Tr. Co.,
339 U.S. 306, 314, 94 L. Ed. 865, 70 S. Ct. 652 [1950]). In the absence
of a protected property or liberty interest, there can be no due
process violation. State ex rel. Tomasic v. Unified Gov’t of Wyandotte
County/Kansas City, 265 Kan. 779, 809, 962 P.2d 543 (1998).
The Due Process Clause does not protect entitlements where the identity
of the alleged entitlement is vague. Castle Rock v. Gonzales, 545 U.S.
748, 763, 162 L. Ed. 2d 658, 125 S. Ct. 2796 (2005). A protected
property right must have some ascertainable monetary value. 545 U.S. at
766. Indirect monetary benefits do not establish protection under the
Fourteenth Amendment. 545 U.S. at 767. An entitlement to a procedure
does not constitute a protected property interest. 545 U.S. at 764.
MERS’s contention that it was deprived of due process in violation of
constitutional protections runs aground in the shallows of its property
interest. As noted in the discussion of the first issue above, MERS did
not demonstrate, in fact, did not attempt to demonstrate, that it
possessed any tangible interest in the mortgage beyond a nominal
designation as the mortgagor. It lent no money and received no payments
from the borrower. It suffered no direct, ascertainable monetary loss
as a consequence of the litigation. Having suffered no injury, it does
not qualify for protection under the Due Process Clause of either the
United States or the Kansas Constitutions.
Furthermore, MERS received the full opportunity to present arguments
and evidence to the trial court. Only after Sovereign clearly had
notice of the litigation, had filed a motion to intervene, and had
participated in a hearing on the motion did MERS–Sovereign’s
nominee–elect to file for joinder. Despite its late decision to enter
an appearance in the case, the trial court allowed MERS the opportunity
to present arguments and evidence. It cannot be said that MERS was
prejudicially denied notice and the opportunity to be heard.
We find that the district court did not abuse its discretion in denying
the motions to vacate and for joinder and in holding that MERS was not
denied due process. We accordingly affirm the district court and the
Court of Appeals.
END
A loan mod? who’s better off with a loan mod? where they take you out of a situation where they can’t foreclose, and put you in a proper one that they can.
I am glad she got one instead of fighting the fraud filled one’s that she had, she rolled over for them X multple.
Don’t worry banks will get em. Daniel Sadik who run Quick Loan Funding into the ground got a loan mod too. I guess he knows where the bodies are buried.
this straight out of her “oficial” website, will make you go Hmmmmmm, twice!!
“Welcome to the official website of the 37th Congressional District of California! Since being elected to Congress, I have committed myself to working for you and responding to your needs and the needs of our community. As your Representative in Congress, I will fight everyday to improve our nation’s transportation systems and infrastructure, provide economic opportunities, increase our commitment to law enforcement, strengthen our educational system, and promote access to health care for each of our citizens.
On this website, you will find contact information for our Washington, D.C., and California offices. In addition, my legislative priorities, constituent services, and details about my ongoing district and congressional projects are available.
It is an honor to serve you.”
Hmmmmmmmmmmmmmm…..maybe we should all write to her and ask the secrets to succesfully get a Loan Mod so fast, furthermore why don’t we ask her to get it done for us, there yaaa goooo! that’ll be even better! , but wait, why don’t we ask her to help stop or reverse our foreclosures just like she did with hers??? after reading the introduction at her website, i have ZERO doubt that she’ll refuse to help us all to get our homes back!!
Hmmmmmmmmm.
What a shocker!!! i have not ever seen anything like this neither have i ever heard politicians getting preferential treatment!!! this simply proves ‘AGAIN” what we americans already know and have known forever, politicians do not work for us “the people” they work for themselves and will always. America, we need to unite and fight as a whole this crazy evil machine, I don’t see any other way to defeat it, one at the time will not make the cut. How much longer will we take it?
I would then tend to believe that she would vote for the lenders in any legislation that may come across her desk.
I though we were all equal under the law. Well that is when I was naive, now I understand that one has to fight and keep on fighting until the end. And then start again. These congress peole and senators live in a different world under different rules and with all the privilege their positions makes them see their surroundings and the pleas from those who like us are troubled, just a nuisance.
Would you vote for HER?
I will not, she is as I see it tainted.