Vermont Judge Sua Sponte Knocks Down MERS on Standing

“Plaintiff Mortgage Electronic Registration Systems, Inc.’s foreclosure action is DISMISSED for lack of standing. Accordingly, the Court’s Order, issued August 27, 2009, granting plaintiff’s Motion for Default Judgment against the defendants Frank and Ellen Johnston is VACATED. The dismissal of the foreclosure action is without prejudice as to allow the proper plaintiff to come forward.”

see MERS-v -Johnston-October-2009-Vermont-Case

Because the transferee’s rights are derivative of the transferor’s rights, those rights must be proved. Because the transferee is not a holder, there is no presumption under Section 3-308 that the transferee, by producing the instrument, is entitled to payment. The instrument, by its terms, is not payable to the transferee and the transferee must account for possession of the unindorsed instrument by proving the transaction through which the transferee acquired it.

Significant provisions of Decision:

Note was secured by a Mortgage Deed dated April 27, 2005, from the Johnstons to Mortgage Electronic Registration Systems, Inc. (“MERS”), as nominee for WMC Mortgage Corp. (“WMC”). The Mortgage Deed also listed MERS as the mortgagee.

The mortgage deed consistently referred to MERS “solely as a nominee” and that
it holds “only legal title,” but it then purported to expand the authority of MERS as a
“nominee” to act as in essence as an agent or as a power-of-attorney to carry out the
rights of the Lender, including foreclosure and the sale of property. However, this
purported expansion of authority was restricted to that “necessary to comply with law or custom.” Importantly, the MERS and the lender WMC purposely chose to use the
specific legal term “nominee,” and not “agent” or “power-of-attorney.” MERS also chose
not to define the term “nominee.” Furthermore, the mortgage deed consistently referred
to the Lender’s rights in the property, and not MERS’s.

a mortgage may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures. Restatement (Third) of Property, Mortgages § 5.4(c). In general, a mortgage is unenforceable if it is held by one who has no right to enforce the secured obligation. Id.

To be a “holder” of an instrument, 9A V.S.A. § 3-301(i), one must posses the note
and the note must be payable to the person in possession of the note, or to bearer. 9A
V.S.A. § 1-201(b)(21)(A) (emphasis added). Here, the “holder” option is not available to
MERS because the note is not payable to MERS, nor has it been indorsed, either
specifically to MERS or in blank. See Id.; 9A V.S.A. § 3-205(b) (blank indorsement
becomes payable to bearer). Also, 9A V.S.A. § 3-301(iii) is not applicable, as it does not
appear that plaintiff is entitled to enforce the instrument pursuant to either section 3-309 or 3-418(d).

Because the transferee’s rights are derivative of the transferor’s rights, those rights must be proved. Because the transferee is not a holder, there is no presumption under Section 3-308 that the transferee, by producing the instrument, is entitled to payment. The instrument, by its terms, is not payable to the transferee and the transferee must account for possession of the unindorsed instrument by proving the transaction through which the transferee acquired it.

If MERS were able to bring the instant foreclosure action, the result would be incongruous in two ways. First, that a clearinghouse or exchange for mortgages would become an active entity in the transactions it oversees. Second, that MERS, an entity that by its own terms in the mortgage deed holds only bare legal title, and as it argued to the Nebraska Supreme Court does not acquire or service mortgage loans, would, upon foreclosing in its own name as “nominee,” be able hold title to the property.

Plaintiff Mortgage Electronic Registration Systems, Inc.’s foreclosure action is DISMISSED for lack of standing. Accordingly, the Court’s Order, issued August 27, 2009, granting plaintiff’s Motion for Default Judgment against the defendants Frank and Ellen Johnston is VACATED. The dismissal of the foreclosure action is without prejudice as to allow the proper plaintiff to come forward.

Tags: 3-205(b), 3-301, 3-308, 3-309, 3-418, bare legal title, BURDEN OF PROOF, HOLDER, indorsement in blank, MERS, nominee, proper plaintiff, standing, transferee, transferor
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