Three separate waves of Kentucky litigants have attacked MERS in federal court; all three have lost. In the latest decision, Higgins v. BAC Home Loans Servicing, a panel of three judges firmly debunked the attackers’ central claim: that Kentucky law requires lenders to record assignments of promissory notes. Only mortgage assignments need be recorded, the court held. The ruling is a huge relief for MERS, allowing the company to continue its note-swapping system without having to pay huge recording fees.
The plaintiffs in Higgins were Kentucky landowners who borrowed money and gave their lenders mortgages to secure the debts. The lenders were MERS members, and, as a result, that company was listed as the mortgagee of record. Later, the lenders sold the loans to other MERS members and, in the process, assigned to them the underlying promissory notes. In an earlier post, I explained how MERS works.
The landowners argued that those transfers qualified as mortgage assignments, which by law must be recorded. Central to that argument was the notion—which no one disputed—that the transfers vested the acquiring lenders with equitable interests in the mortgages. Nevertheless, the lenders moved to dismiss the lawsuit, but the trial court sided with the landowners and denied the motion. Ironically, the same day of that ruling, a different federal court in Kentucky reached exactly the opposite conclusion.
Accepting the Higgins decision on discretionary appeal, the United States Court of Appeals for the Sixth Circuit reversed the lower court’s decision. The three-judge panel unanimously found that the structure of the Kentucky statutes at issue made clear that the state legislature intended to treat mortgage assignments differently than note assignments. And so the requirement to record mortgage assignments did not apply to note transfers, the appellate court held.
In two earlier opinions, the Sixth Circuit rebuffed lawsuits brought by a smattering of county clerks and county prosecutors in Kentucky. Those individuals, the court ruled, did not have standing to enforce alleged violations of the state’s recording laws.
At this point, MERS appears to have definitively vanquished its foes in Kentucky. The disgruntled counties, which object to the loss of revenue from note assignments, must now try to persuade the state legislature to change existing laws. (State-court lawsuits are supposedly not an option because MERS, an out-of-state company, will remove each one to federal court. But I question whether the plaintiffs could take advantage of one or more of the local-controversy exceptions in CAFA to keep the lawsuits in state court.) In any event, given the massive show of force that MERS mustered for this round, I’m sure the company won’t hesitate to throw its weight around among elected legislators. Put a fork in this one, folks.