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Clerks Revenge

Clerks Revenge

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Published by Foreclosure Fraud

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Published by: Foreclosure Fraud on Mar 22, 2013
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Electronic copy available at: http://ssrn.com/abstract=2227789
Volume 32 • Number 1 • January 2013
Banking & Financial Services Policy Report •
ike a movie that refuses to end, MortgageElectronic Registration Systems, Inc. (MERS)has continued to generate controversy and litiga-tion long after its beginning. This previously obscuremortgage registry tracks the ownership of over half of the nation’s home loans and has become notorioussince the housing crisis began.
Homeowners beganthe legal assault on MERS by challenging its right toinitiate foreclosure proceedings. Now, MERS facesanother wave of legal challenges: county clerks andprivate
qui tam
actions assert that MERS has cheatedcounty recorders out of millions of dollars in record-ing fees. This latest chapter in the tortuous chroniclesof MERS represents yet another opportunity for homeowners, litigators, and legislators to consider the direction of recording practices nationwide.Before MERS was created, transfers in the ownershipof home loans had to be recorded at county registrars,clerks, and recorders’ offices. This process was costly interms of fees, wasted time, and accuracy. To bypass thisprocess, the nation’s largest lenders and the governmentsponsored entities created MERS—an electronic registrydesigned to track transfers in ownership of home loans.MERS is now listed on millions of home loans aseither the mortgagee or as the beneficiary on deeds of trust. At the same time, mortgage language lists MERS’interest as existing solely as nominee for the true or “beneficial” owner of the loan. In practical terms, thismeans that MERS remains listed as the mortgagee inthe public records regardless of whether the underlyinginterest in the amount owed has been transferred.MERS continues to act as nominee for subsequentowners of the home loan, as long as those transfereesare members of MERS, and any such transfers aretracked in MERS’ private computerized database. Theend result is that MERS eliminated the necessity for lenders to create and record assignments of mortageswhich would have previously been generated upon saleof a home loan. Instead, assignments are only producedwhen the loan is transferred to a non-MERS member bank or investor, or when an assignment is necessary toinitiate foreclosure proceedings.The time and cost savings were partly designed toease the process of securitizing home loans. Ordinarily,the securitization process would have required severalassignments to be produced and recorded. Lendershave now eliminated the resource drain those assign-ments represented. For its part, MERS generates a feeeach time a lender registers a loan on its system, andclaims that the cost savings from not having to recordeach assignment results in savings for homeowners. Yetonce the housing collapse began, MERS was forced toconfront legal challenges.
Homeowner Challenges inForeclosure Litigation
MERS first gained infamy on the national stagewhen foreclosure numbers exploded during the hous-ing crisis. Many foreclosures were initiated in thename of MERS, resulting in puzzled homeowners andattorneys asking basic questions about the companyand mounting legal challenges. Homeowners and their attorneys propounded a wide variety of legal argumentschallenging MERS’ right to foreclose.Ultimately, most jurisdictions have recognizedMERS’ ability to foreclose on behalf of the beneficialowner of a loan.
This is presumably due to the var-ied language used by MERS in mortgages and deedsof trust. In courts of various jurisdictions, MERS hassuccessfully argued that it is either mortgagee, ben-eficiary, nominee, agent, holder, or even the owner of home loans. Thus, most homeowners’ advocates fight-ing MERS-initiated foreclosures have played a game of legal “whack-a-mole,” whereby an argument that, say,
Dustin A. Zacks is a founding member of King, Nieves & Zacks inWest Palm Beach, where his practice concentrates on real estatelitigation.
Revenge of the Clerks: MERS Confronts CountyClerk and
Qui Tam
By Dustin A. Zacks
Electronic copy available at: http://ssrn.com/abstract=2227789
• Banking & Financial Services Policy Report
Volume 32 • Number 1 • January 2013
MERS cannot foreclose because it is not a true mort-gagee, is disregarded because a court finds that MERScan represent the true owner as an agent.Furthermore, even when homeowners have mountedsuccessful challenges to MERS-intitiated foreclosures,banks and MERS simply changed tactics. After los-ing some notable cases in 2011, for example, MERSannounced that it will cease foreclosing in its ownname.
Henceforth, homeowners facing foreclosurewill have to find other ways to challenge MERS-relatedforeclosures, such as questioning the validity of MERSassignments.These challenges in the midst of foreclosure liti-gation are not going away. The long delay homeforeclosures face in resource-strapped jurisdictionsmeans that MERS may have innumerable foreclosuresin its own name still pending in courts around thecountry. Furthermore, MERS continues to appear ondocuments, such as assignments, that are routinely sub-mitted as evidence in foreclosure litigation, meaningthat MERS will continue to face questions about itsrole in evicting homeowners. Given that many home-owners and judges are still relatively uninformed aboutMERS, it behooves litigators to avail themselves of both sides of the legal arguments surrounding MERSin foreclosures.
The New Challenge to MERS:County Clerk Lawsuits
 Just when the controversy regarding MERS largelyseemed to recede, county clerks have dragged it backonto the national stage. Now, rather than facing its mostimportant hurdles in foreclosure litigation, it appearsthat the most imminent legal threat to MERS is thespate of lawsuits filed by county clerks. All across thenation, county clerks and recorders are suing MERSfor large sums, sometimes seeking class-action status,to seek money the clerks claim has been wrongfullywithheld.At their core, these lawsuits reflect a most basic,even elemental, conflict between MERS and countyrecorders: on one hand, MERS was created specificallyto avoid having to pay clerks’ fees for assignments, andMERS does not believe it is required to record anyassignment between MERS members. On the other hand, clerks assert that MERS has effectively usurpedthe public recorders offices and is required to record— and pay for—all the assignments it avoided recordingin past years. Each of the arguments against MERS inthese clerks’ lawsuits will be examined in turn.
Claim One: State Laws Required AllAssignments to be Recorded
Common to most clerk lawsuits is their assertionthat all changes in beneficial ownership of home loansare required to be recorded in the public records.
Thispoint necessitates some explanation. As briefly men-tioned above, MERS was expressly created to avoidrecording every single change in ownership. Thus,before the onset of MERS, a sale of a mortgage loanwould result in production of an assignment of mort-gage that would typically need to be recorded for a fee.In a mortgage listing MERS as the mortgagee (deemeda MERS Originated Mortgage, or a “MOM”), by con-trast, MERS will remain listed in the public recordsno matter how many times the underlying interest inthe loan is transferred. Thus, in the case of a mortgage-backed securitization, the fact that the actual owner of the right to enforce the loan might have changed handsseveral times as part of the process of pooling loanstogether is irrelevant for recording purposes. In MOMloans, MERS is listed as nominee to the lender and itssuccessors, so MERS continues to act at the behest of whoever the owner might be, and the public recordsremain unchanged.Clerks and recorders assert that MERS violated statelaws that require recording of all such transfers, andthat failure to record resulted in a decrease in revenuefor their offices. For example, the Dallas County TexasComplaint cites a Texas statute stating that “[t]o release,transfer, assign, or take another action relating to aninstrument that is filed, registered, or recorded in theoffice of the county clerk, a person must file, register, or record another instrument relating to the action in thesame manner as the original instrument was requiredto be filed, registered, or recorded.
Similar statutes arecited by other clerks around the nation.
By failing torecord as required by statute, the clerks argue, MERSdeprived the clerks of revenue lawfully due.MERS for its part, argues that clerks are not duemoney for assignments that were rendered superflu-ous by the creation of the MERS system.
In plainEnglish, MERS will usually argue that the clerks do not
Volume 32 • Number 1 • January 2013
Banking & Financial Services Policy Report •
deserve money for assignments unrecorded. As will beexplained,
 , courts have not been especially recep-tive to clerks’ arguments, even in the face of statutorylanguage which appears to mandate recording transfersof interest.
Claim Two: MERS Uses DeceptiveLanguage to Avoid Recording
Clerks have also alleged that MERS uses deceptiveterms in its mortgage documents for the purpose of avoiding recording requirements and fees. This pointcan take several different angles: in the Dallas County,Texas lawsuit, for example, the clerk argued that MERSfalsely described itself as a beneficiary on deeds of trustin order to get the clerk to accept those documents for recording.
This can result in an asserted cause of actionfor misrepresentation, whether fraudulent or negligent.The argument that MERS cannot be a mortgageewhile simultaneously describing itself as merely anominee has already been discussed extensively. Theclerks who assert this idea largely parrot the argumentsof Professor Christopher Peterson, who cites to vari-ous anti-MERS decisions holding that MERS is not atraditional mortgagee or beneficiary.
Peterson and theclerks argue that it is improper for MERS to list itself asa mortgagee because “[i]t causes county recorders thatmaintain grantor-grantee indexes to list MERS in thechain of title for the land” and “creates a false lead inthe true chain of title defeating an essential purpose of recording mortgages and deeds of trust.”
 In the context of foreclosure litigation, such argu-ments have not fared well in the majority of cases. AsI have discussed elsewhere, many courts have ruledthat MERS has standing to bring foreclosure actions,regardless of whether it is a true or traditional mort-gagee.
MERS can be deemed an agent, a nominee, or any number of other such statuses giving it standing tobring foreclosure. In clerks’ lawsuits, however, it was notso clear from the outset that this type of attack againstMERS would fail. For the time being, the argument hasnot resonated with courts in the arena of clerks’ lawsuitseither, as will be examined,
 Essentially, this argument is another pathway thatclerks travel upon to arrive at the same place as in their initial claim: MERS engaged in wrongful conductresulting in economic harm to clerks. In a fraudulent or negligent misrepresentation through falsely stating it isthe mortgagee, MERS undertakes its wrongful conductby commission. In failure to record claims, its allegedharm is perpetrated through omission. In either case,the wrongs result in fewer recordings and less revenuegenerated for clerks.
Claims Three, Four and Five: UnjustEnrichment, MERS is Evil, and Other Such Arguments
As a corollary to the first two claims typically madeby clerks in lawsuits against MERS, such lawsuits fre-quently contain a claim for unjust enrichment.
Theseclaims are natural extensions of the first two claimsabove. The core idea remains the same: MERS allegedlydiverts money from county clerks in an improper man-ner by failing to record assignments.Aside from the most common claims and the unjustenrichment theory discussed above, clerks also haveattacked MERS on various other grounds. One tactic,taken by the Dallas County Clerk’s lawsuit, is to paint apicture of MERS as a primary cause of the economicbubble and collapse.
This line of argument asserts that,but for MERS’ easing of the assignment process, secu-ritization of residential mortgages would never havereached the heights achieved during the housing bub-ble. Thus, such an argument essentially accuses MERSof causing the current economic crisis. Although it isbeyond the scope of this Article to assess the extent of the validity of this claim, it is undisputed that MERS’easing of the assignment process did facilitate the secu-ritization of home mortgage loans. It is not clear thatany clerks are attempting to fashion this argument intoa legal claim for relief, but it is nonetheless noteworthyfor its attempt to produce judicial skepticism towardsthe MERS system.Another anti-MERS argument produced in thecontext of these newly burgeoning clerks lawsuits isthat MERS has effectively usurped the public functionof clerks and has created a private recording system.Florida’s Duval County Clerk propounded this argu-ment in its lawsuit against MERS by including a novelcount for a writ of 
quo warranto
 , which sought to pre-vent MERS from acting as a private recording systemand to force MERS to record every future transfer in the public records.
These claims were echoed bythe Dallas County Clerk, who claimed that MERS

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