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MERS Chalks Up Another Win

Mortgage Electronic Registration Systems, Inc., more commonly known as MERS, has yet again has it practice of declining to record assignments of notes among banking institutions in local registries of deeds upheld by a court.

The Montgomery County, Pennsylvania, Recorder of Deeds brought suit against MERS alleging that MERS’ failure to record each and every transfer of mortgage notes among its members in the local registry office.  This is the common practice of MERS:

“MERS is a national electronic loan registry system that permits its members to freely transfer, among themselves, the promissory notes associated with mortgages, while MERS remains the mortgagee of record in public land records as nominee for the note holder and its successors and assigns. MERS facilitates the secondary market for mortgages by permitting its members to transfer the beneficial interest associated with a mortgage—that is, the right to repayment pursuant to the terms of the promissory note—to one another, recording such transfers in the MERS database to notify one another and establish priority, instead of recording such transfers as mortgage assignments in local land recording offices. It was created, in part, to reduce costs associated with the transfer of notes secured by mortgages by permitting note holders to avoid recording fees.”

The Recorder alleged that this practice violated Pennsylvania law, 21 Pa. Cons. Stat. Ann. § 351, which states:

“All deeds, conveyances, contracts, and other instruments of writing wherein it shall be the intention of the parties executing the same to grant, bargain, sell, and convey any lands, tenements, or hereditaments situate in this Commonwealth, upon being acknowledged by the parties executing the same or proved in the manner provided by the laws of this Commonwealth, shall be recorded in the office for the recording of deeds in the county where such lands, tenements, and hereditaments are situate. Every such deed, conveyance, contract, or other instrument of writing which shall not be acknowledged or proved and recorded, as aforesaid, shall be adjudged fraudulent and void as to any subsequent bona fide purchaser . . . .”

The Federal District Court granted summary judgment in favor of the Recorder, relying primarily on the plain language and title of the statute, declaring “that Defendants’ failure to create and record documents evincing the transfers of promissory notes secured by mortgages on real estate in the Commonwealth of Pennsylvania is, was and will in the future be, in violation of the Pennsylvania Recording law – most particularly 21 P.S. § 351.”  Montgomery Cnty., Pa. v. MERSCORP, Inc., 16 F. Supp. 3d 542, 565 (E.D. Pa. 2014).  The Supreme Court of Pennsylvania has not considered the issue, so there was little state law to provide direction.

The 3rd Circuit Court of Appeals accepted MERS’ appeal of the District Court decision, and reversed.  The Court acknowledged that no Pennsylvania court had considered the question of whether § 351 creates a duty to record all land conveyances, but determined that the answer was “so clear” that certification of the question to the Supreme Court of Pennsylvania was unnecessary.

The 3rd Circuit reasoned that, because the purpose of the recording requirement is to provide public notice, and that an unrecorded conveyance is not necessarily invalid, the proper interpretation of the status requires recording only where a party wishes to secure against the risk of losing its interest in the party to a bona fide purchaser.  § 351 does not impose an absolute duty to record, and therefore MERS was not in violation of the statute.  This holding is consistent with recent decisions considering the issue in other jurisdictions, including Texas, Harris Cnty., Tex. v. MERSCORP, Inc., F.3d, Case No. 14-10392, *5-8 (5th Cir. June 26, 2015), Iowa, Plymouth Cnty., Iowa v. MERSCORP, Inc., 774 F.3d 1155, 1159 (8th Cir. 2014), Arkansas, Brown v. MERS, Inc., 738 F.3d 926, 934 (8th Cir. 2013), and Missouri.  Jackson Cnty., Mo. ex rel. Nixon v. MERSCORP, Inc., 915 F. Supp. 2d 1064, 1070 (W.D. Mo. 2013).

We note that the Recorder’s action was brought seeking to recover the allegedly unpaid fees; the Recorder appears less concerned with any notice issues stemming from the unrecorded transfers than the effect on its pocketbook.  This decision deprives the Recorder of a potentially substantial amount of revenue.  It also relieves MERS, a national corporation, of the obligation of arranging for recording of all transfers in the appropriate local registry, a task which would involve significant resources were it required.

While Massachusetts does not have a statute which exactly mirrors the Pennsylvania statute, there remains the possibility that a similar case could be brought in the Commonwealth, as the MERS system is used to avoid the payment of local registry fees in Massachusetts as well.  It is impossible to predict the outcome should such a case be brought here, but the winds are certainly in MERS’ favor at this point.

For the full decision, see here.