 The U.S. Supreme Court recently issued what is, for those operating and interested in the banking industry, a landmark holding in the matter of Cuomo v. Clearing House Ass'n, L.L.C. (June 29, 2009), on appeal from the Second Circuit in a matter that originated in New York.
In the opinion, authored by Justice Scalia and joined by, perhaps unexpectedly, Justices Stevens, Souter, Ginsberg and Breyer, the Court held that a state attorney general bringing suit against a nationally chartered bank is not necessarily a prohibited exercise of “visitorial powers” over the banks. With regard to federal banks, such powers – including, per the majority opinion, “administrative oversight that allows a sovereign to inspect books and records on demand, even if the process is mediated by a court through prerogative writs or similar means” – are reserved exclusively to the federal government by operation of the National Bank Act.
Rather, the Court held such a state action does not reflect the attorney general “acting in the role of sovereign-as-supervisor, but rather in the role of sovereign-as-law-enforcer.” According to the majority, such action thus is not a prohibited exercise of “visitorial powers” under the Act, and prior attempts to prohibit such action as being federally preempted were incorrect.
Assuming Congress takes no action to reverse course, this opinion is pivotally important both to federally chartered banks and to those interested in their oversight. In the wake of the recent crises facing the nation’s financial industry, it will be very interesting to see how the states begin to align in terms of their banking enforcement activity. |
The Supreme Court of Kansas, in the recent decision Landmark National Bank v. Kesler, (--- P.3d ----, 2009 WL 2633640), has called into question the validity of MERS, the mortgage tracking system that currently services an estimated 60 million loans. MERS, (Mortgage Electronic Registration System), was established by Fannie Mae, Freddie Mac, and the mortgage industry in 1997 to record loan assignments electronically. The stated purpose of MERS is to reduce the costs associated with the mortgage banking industry by avoiding the costly statutory requirements of recording each mortgage note transaction in the county land record. It purports to do this by registering MERS as the nominee of the lender and servicer in the county land records, thereby allowing the note to be traded behind the scenes without the need to register each transaction.
The Kansas case involves Boyd Kesler, a borrower who, in 2004, secured a loan from Landmark National Bank (Landmark) with a mortgage on the property in Ford County, Kansas that Landmark subsequently registered with the Ford County Clerk. In March of 2005, Mr. Kesler took out a second mortgage on the same property from Millennia Mortgage Corp (Millennia). The mortgage document on this second loan listed MERS as the mortgagee, acting “solely as a nominee for Lender, as hereinafter defined, and Lender’s successors and assigns.” The document identified Millennia as the “Lender.” Sometime later, Millennia assigned the second mortgage to Sovereign Bank (Sovereign). Relying on the framework of MERS for protection, Sovereign chose not to record the transaction in the Ford County register.
In 2006 Mr. Kesler filed for bankruptcy, prompting Landmark to file a petition to foreclose on its mortgage. Landmark, relying on the Ford County records, served both Kesler and the original note holder on the second mortgage, Millennia, in the foreclosure action. Neither Kesler nor Millennia answered the petition, and the trial court issued a default judgment. As a result, Landmark received the full amount owed on the first mortgage, Kesler received the balance from the foreclosure sale with nothing left to Sovereign.
Upon learning of the default judgment, MERS, as the mortgagee of record, filed a motion to vacate but was confronted with an unsympathetic trial court. The court found that MERS was not a real party in interest and that Landmark was not required to name it as a party to the foreclosure. Applying an abuse of discretion standard, the Kansas Supreme Court analyzed the content of the mortgage document along with other opinions on related matters to conclude that MERS is functionally a straw man with no stake in the outcome of the foreclosure.
It is the Court’s ruling that MERS has no interest in the underlying loan transaction that could prove problematic to the mortgage industry. If MERS is deemed not to have any ownership interest in loans recorded in their name, lien priority issues arise for those mortgages that subsequently were sold in the mortgage instrument market. The practical effect of this decision is that second mortgage holders utilizing the MERS system will have to scramble to re-record their mortgages in order to protect themselves from suffering the same fate as Sovereign.
Given the trend of the nation’s courts to closely scrutinize the transactions underlying the foreclosures plaguing the country as a result of unscrupulous lending practices, it is possible that the Kesler case may prove to be a harbinger of more decisions hostile to MERS in the future. Mortgage lenders and purchasers should keep the decision in mind when drafting or revising their policies regarding recordation and perfection of their interests. |