mers blasted in this amicus brief residential funding, bank of new york trust

8/3/2019 MERS BLASTED IN THIS AMICUS BRIEF Residential Funding, Bank of New York Trust

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Plaintiff - Appellant, Supreme Court No. 143178

STATE OF MICHIGANIN THE SUPREME COURT

RESIDENTIAL FUNDING COMPANY, LLC,fi'k/a RESIDENTIAL FUNDING CORPORATION,

Court of Appeals No. 290248v

Kent Circuit CourtLower Court No. 08-11138-AV

GERALD SAURMAN,62-A District Court No. 08-0692-LT

Defendant - Appellee.

BANK OF NEW YORK TRUST COMPANY,Plaintiff - Appellant Supreme Court No. 143179

Court of Appeals No. 291443v . Jackson Circuit Court

Lower Court No. 08-003406-A VCOREY MESSNER,

1ih District Court No. 08-0937-LTDefendant - Appellee.

----------------------------------------------------------~/AMICI CURIAE LAW PROFESSORSBy: Prof. John A.B. Pottow P74675University of Michigan Law School625 S. State StreetAnn Arbor, Michigan 48109(734) [email protected] for Amici Curiae

BRIEF OF AMICI CURIAE LAW PROFESSORS IN SUPPORT OF APPELLEESSAURMAN AND MESSNER ARGUING IN OPPOSITION TO APPELLANTS'

APPLICATION FOR LEAVE TO APPEAL AND FOR AFFIRMANCE OF COURT OFAPPEALS'DECISION
mailto:[email protected]:[email protected]


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TABLE OF CONTENTS

INDEX OF AUTHORIT IES 1- , 1

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STATEMENT IDENTIFYING ORDER APPEALED FROM AND RELIEF SOUGHT 2

STATEMENT OF QUESTION PRESENTED 3

STATEMENT OF INTERST OF AMICI CURIAE LAW PROFESSORS .4

STATEMENT OF FACTS 5

SUMMARY OF ARGUMENT 6

ARGUMENT 6INTRODUCTION

I. THE CLEAR TEXT OF THE STATUTE MEANS WHAT IT SAYSII. THE CLEAR TEXT SUPPORTS SOUND POLICY

A. You Need Skin in the Game.

B. The Sky Won't Fall

SUMIvIARY AND RELIEF


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Cases:Bank of New York v.Alderazzi, 900 N.Y.S.2d 821 (NY Sup. Ct. 2010) 6Bellistri v. Ocwen Loan Servicing, LLe, 284 SW3d 619 (Mo. App. 2009) 9Carpenter v. Longan, 83 U.S. 271, 274 (1872 6

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Davenport v. HSBC Bank, 275 Mich App 344, 346-48, 739 NW.2d 383 (2007) 4Horton v. Country Mortgage Services, 2010 WL 1555902 (ND Ill. Jan 4,2010) : 4In re Goss, 413 B.R. 843,848 (Bankr. Or. 2009) 5King v. Ocwen, 2008 WL 2063553 (E.D. Mich. Apr. 14,2008) 4Landmark Nat 'IBankv. Kesler, 289 Kan. 528, 216 P.3d 158 (2009) 9MERS, Inc. v. Southwest Homes of Arkansas, 2009 Ark. 152, 301 SW3d 1 (2009) 9Mortgage Electronic Registration Sys. Inc. v. Saunders, 2010 ME 79, 2 A.3d 289, 297 (Me.

2010) 6,9Mortgage Electronic Registration Systems, Inc. v. Nebraska Dept. of Banking and Fin., 270 Neb.

529, 532-33, 704 NW.2d 784 (2005) 4Nickell v. Lambrecht, 29 Mich App 191, 196-97, 185 N.W.2d 155 (1970) 7Prime Financial Servo LLCv. Vinton, 279 MichApp 245, 263, 761 N.W.2d 694 (2008) 6Residential Funding Co., LLC v. Saurman, 2011 WL 1516819 * (Mich App 2011) 6,7u.s . Nat 'IBank Ass'n v. Ibanez, 458 Mass. 637, 941 NE2d 40 (2011) 5

RULES AND STATUTES:

MCL 600.3204 11,12Mortgage Servicing Transfers, 24 C.F.R. 3500.21 (2009) 14


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Other Authorities:Petersen, Two Faces: Demystifying the Mortgage Electronic Registration System's Land TitleTheory, SS-049 ALI-ABA 259, 272. .. 6

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Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic RegistrationSys., 78 U. Cin. L. Rev. 1359 (2010) 10Nick Timiraos, et. al., Big Banks Face Fines on Role of Servicers, WALL ST. J., Feb. 17,2011, at

C1 15Robbie Whelan, Foreclosure Global Finance: Probe Sought in Virginia, WALL ST.i,Nov. 2,

2010, at C3 15


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STATEMENT IDENTIFYING ORDER APPEALED FROM AND RELIEF SOUGHT

Amici Curiae Law Professors adopt the Statement hereon of Appellees Gerald Saurmanand Corey Messner ("Appellees").

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STATEMENT OF QUESTION PRESENTEDSHOULD THE COURT DENY APPELLANTS' APPLICATION FOR LEAVE TO APPEALAND HENCE AFFIRM THE COURT OF APPEALS' DECISION WHEN:

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1) The Court of Appeals followed statutory text in correctly holding that Michigan'sforeclosure by advertisement statute, MCL 600.3204(1)(d), does not permit MortgageElectronic Registration Systems, Inc. ("MERS") to foreclose under its provisions; and

2) Sound public policy supports the statutory text followed by the Court of Appeals?

Appellees answer Yes.Appellants answer No.The District Court would answer No.The Circuit Court would answer No.The Court of Appeals would answer Yes.Amici Curiae answer Yes.


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STATEMENT OF INTEREST OF AMICI CURIAE LAW PROFESSORS

Amici Curiae Law Professors ("Amici"), Profs. Jean Braucher of Rogers College of Law,University of Arizona, Katherine Engel of Suffolk University Law School, Robert Lawless,University of Illinois College of Law, Adam J. Levitin of Georgetown University Law Center,Anglea Littwin of University of Texas School of Law , Nathalie Martin of University of NewMexico School of Law, Christopher Peterson of University of Utah College of Law: JohnA.E.Pottow of the University of Michigan Law School, Elizabeth Renault from Albany Law School,and Rebecca Tushnet of Georgetown University Law Center are collectively internationallyrecognized experts in the fields of commercial and consumer law whose writings include studiesof mortgages and foreclosures. Most recently, many of them filed a brief with other lawprofessors setting forth a position just adopted by the Supreme Judicial Court of Massachusettsin Bevilacqua v. Rodriguez, _ N.E.2d _,2011 WL 4908845 (Oct. 18,2011). They have nodirect connection with the case and seek only to provide assistance to the Court as disinterestedscholars. They have sought leave to file this brief.


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STATEMENT OF FACTS

Amici adopt the Statement hereon of Appellees.

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SUMMARY OF ARGUMENT

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Under Michigan law ~ or any law ~ Mortgage Electronic Registration Systems, Inc.("MERS") is not an owner, in whole or in part, of the mortgage debt. As such, it cannotforeclose by advertisement. Nothing prevents MERS, if ever inclined, from buying thesemortgages ~ and hence assuming the risk of non-payment ~ should it ever desire to foreclose byadvertisement. Unless and until it takes that risk, however, MERS may not enjoy the fruits ofexpedited foreclosure through advertisement; that process is reserved for lenders (or their

servicing agents). Sound policy supports the clear language of the statute, and enforcement ofthe law as written yields no dire consequences. The only reason this Court should grant leave toappeal should be to affirm the correctly reasoned Court of Appeals decision for reason of greatercertainty. If its docket is otherwise busy, it should not grant leave.

ARGUMENT

In tr od u c tio n

Depending on one's perspective, MERS is either a brilliant innovation of real estatefinancing that speeds the securitization of mortgages through ready transferability, or it is a legaldummy corporation created to evade and avoid county recording fees and taxes. (Or both.) Seegenerally Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage ElectronicRegistration Sys., 78 U. Cin. L. Rev. 1359 (2010) (offering seminal scholarly analysis ofMERS). Regardless of one's position on MERS, it is most clearly not the owner of all or evenpart of indebtednesses. Infact, by design it is the contrary: MERS conspicuously disavowsownership of the loans for which it holds the mortgages as (at best) a nominee, presumably


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preferring to avoid the legal obligations that come with such ownership. See, e.g., Defendant'sMotion to Dismiss at 3, King v. Ocwen, 2008 WL 2063553 (E.D. Mich. Apr. 14,2008) (arguingthat MERS could not be liable for Fair Debt Collection Practices Act violations). As such, itcannot avail itself to foreclosure by advertisement under MCL 600.3204(1)(d), which is reservedfor owners and their mortgage servicing agents.

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I. THE CLEAR TEXT OF THE STATUTE MEANS WHAT IT SAYS

At the risk of repetition, Amici remind the Court that MCL 600.3204(1)(d) only allowsthree categories of actors to foreclose by advertisement: [I] the note owner, [2] its mortgage'sservicing agent, or [3] the owner of an interest in the note. See MCL 600.3204; see alsoDavenport v.HSBC Bank, 275 Mich App 344, 346-48, 739 NW.2d 383 (2007) (discussing thoseentitled to act to foreclose by advertisement under MCL 600.3204(1)(d). MERS concedes it isnot the first. See, e.g., Mortgage Electronic Registration Systems, Inc. v.Nebraska Dept. ofBanking and Fin., 270 Neb. 529,532-33, 704 NW.2d 784 (2005) (discussing MERS' self-avowed role as nominee to members' mortgages and not as owner of promissory notes); Hortonv Country Mortgage Services, 2010 WL 1555902, at * 3 (N.D. Ill. Jan 4, 2010) (granting MERS'motion to dismiss as defendant on borrower's Truth in Lending claims). It also concedes it is notthe second. See, e.g., Nebraska Dept. of Banking and Fin., 704 N.W.2d at 787-88 (clarifyingMERS does not service loans). It hangs its hat on the third possibility, striving to show that itowns an amorphous "interest" in the note. Its linguistic gymnastics do not survive seriousscrutiny.

Before even getting to MERS' argument of what it "owns," however, Amici feel it mayhelp the Court to understand better the third category ofMCL 600.3204(1)( d). What is owningan "interest" in the note? This an unremarkable catch-all inserted in many laws in many contexts


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to stand for nothing more than the banal proposition of co-ownership. See, e.g., In re Goss, 413B.R. 843, 848 (Bankr. Or. 2009 (spouse's inchoate interest in marital property was considered aspecies of co-ownership).

Anexample helps illustrate. If Smith Bank holds a mortgage on Blackacre (moreprecisely, holds apromissory note (an "indebtedness") from Debtor and Debtor's grant ofamortgage on Blackacre (a "pledge" or "security"), it holds two distinct documents. If SmithBank sells half its interest in the note to Jones Bank, both Smith and Jones Banks become partialowners of the note. The Michigan statute's use of the definite article, referring to "the" owner ofthe indebtedness as the first allowed class of persons entitled to foreclose by advertisement,implies there can only be one such owner: the owner, who holds the full bundle of sticks. But assoon as the bundle can be untied and parceled out to multiple co-owners, such as with Smith andJones Banks' co-venture, a situation arises where there is no single owner of the instrument,rendering the first class of eligible foreclosers under the statute inapplicable. There is no longer"the" owner of the note, only two owners of an "interest" in the note (here, a 50% stake). Theseinterest owners certainly own real and valuable property rights in the note, but neither is "the"owner ofthe note. MeL 600.3204(1)(d) provides for this situation of fractured ownership byallowing any owner of an interest in the note ~ here, either party of the Smith-Jones syndicate ~to foreclose by advertisement in the event of default. This makes sense, as they each have astake in, ifnot full and exclusive ownership of, the debt.

MERS' insistence (as championed by the dissent below) that it somehow owns "part" ofthe note is unpersuasive. As an initial matter, it is hornbook commercial law that theindebtedness (the note) is distinct from the mortgage (the security agreement). See, e.g. U.S.Nat'l Bank Ass'n v. Ibanez, 458 Mass. 637, 941 NE2d 40 (2011) (holding that mere possessor of

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note, but not of the mortgage, could not prosecute foreclosure in setting where these twodocuments became decoupled); see also, e.g., Prime Financial ServoLLC V. Vinton, 279 MichApp 245, 263, 761 N.W.2d 694 (2008) (finding that assignment of mortgages did not effecttransfer of an ownership in the notes). While it is perhaps unwise, these documents can bedecoupled. MERS indeed permits this decoupling, separating the mortgage from the borrower'spromissory note by granting or assigning the mortgage in MERS' name but leaving thepromissory note payable to the originating lender. See Petersen, Two Faces: Demystifying theMortgage Electronic Registration System's Land Title Theory, SS-049 ALI-ABA 259,272.MERS thus bears only a nominal relation to the (decoupled) mortgage - a tenuous andcontroversial one at that. See Mortgage Electronic Registration Sys. Inc. V. Saunders, 2010 ME79,2 A.3d 289,297 (Me. 2010) ("MERS is not a mortgagee ... because it has no enforceableright in the debt obligation securing the mortgage."); Bank of New Yorkv. Alderazzi, 900N.Y.S.2d 821 (NY Sup. Ct. 2010) (finding that MERS, acting as mere nominee, lacked certainrights to assign mortgages). Ithas nothing to do with the note. (While there are variousintriguing doctrines of commercial law that sometimes link these documents together, such as"the mortgage follows the note," see Carpenter V. Longan, 83 U.S. 271, 274 (1872), they haveno bearing on the instant case.)

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The MERS position embraced by the dissent below is that MERS' arguable ownershipright in the mortgage (or at least nominal right in the mortgage through legal title) somehowtranslates - apparently as a matter of law - into a partial ownership right in the note. Any ownerof the mortgage, under its view, automatically owns "an interest" in the note. See ResidentialFunding Co., LLC V. Saurman, 2011 WL 1516819 * (Mich App 2011) (in dissent). It is abaffling stance, unsupported by any basis in commercial law of which Amici are aware. It is also


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inconsistent with MERS' assiduous insistence that it in no way whatsoever owns the notes withwhich its mortgages are affiliated. A seeming justification for this bootstrapping is that MERShas "contractual" obligations (and rights) under the mortgage. See In re Saurman, 2011 WL1516819 * (in dissent, stating that "MERS' interest in the indebtedness is derived from the factthat its contractual obligations as mortgagee were dependent upon whether the mortgagor metthe obligation to pay the indebtedness which the mortgage secured.").

Leaving aside the aforementioned conflation of ownership ofthe mortgage andownership of the note, this position compounds the confusion by mixing up contract andproperty rights. If you hire a painter to paint your house, she does not have an ownership interestin your house. This is so even if you have a contract. Nor would any contractual rights to seekpayment ~ even the right to file a lien against your house in the event of non-payment ~transform her into an owner of an "interest" in the house. (Assuming she is eligible, if she everfiles an artisan's lien for unpaid services, she may then well own an "interest" (the lien) in your

house, see Nickell v. Lambrecht, 29 Mich App 191, 196-97, 185 N.W.2d 155 (1970) (quotingBrown, Law of Personal Property (2d ed), s 107, p. 511), but no-one would seriously contendthat her contractual rights to payment under a painting contract constitute a property right,however slender, in the house.)

Amici offer one further note of clarification. MERS may be an "agent" of the lender insome sense, as it styles itself a nominee of the mortgagee, but that characterization is irrelevantto the Legislature's clear text. That text specifies only servicing agents, not garden-varietyagents created by contract, may foreclose. Such is the Legislature'S prerogative. TheLegislature's textual choice also makes sound policy sense. Servicing agents are required byfederallaw to be disclosed to the mortgagor, see Mortgage Servicing Transfers, 24 C.F.R.

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3500.21 (2009), so borrowers know who they can negotiate with to compromise mortgages onbehalf of their lenders.

General agents mayor may not have such authority to compromise - and mayor may noteven be known to the debtor. Imagine, for example, a purported agent, Stranger, initiating aforeclosure against Debtor, insisting that he was doing so as an (unknown) agent for Bank, themortgage lender. Debtor would contest this alleged agency, and may well be right that thepurported agent is unauthorized. Itmakes perfect sense that in cases where an agency disputemight arise, the Legislature chose to withhold the expedited procedure of foreclosure byadvertisement, reserving such fast-tracking home divestiture for cases in which only the noteowner (or part-owner, or legally designated servicing agent), is conducting the sale.

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II. THE CLEAR TEXT SUPPORTS SOUND POLICY

Michigan's position denying companies such as MERS the right to foreclose byadvertisement makes eminent sense and will not result in dire consequences.

A. You Need Skin in the Game.

Ownership of an indebtedness means, colloquially, you have "skin in the game."Ifyour debtor defaults, you lose money. If you renegotiate with a debtor, you may ultimatelymake money (or at least lose less money). The point is that in Michigan foreclosure byadvertisement is reserved for those who have skin in the game. The final decision to pull theplug on the borrower under this expedited procedure must be made by the party who has the bestaligned economic incentives to make that call: the owner (or part-owners) of the debt. MERShas no skin in the game. To allow it the opportunity to instigate foreclosure, yet at the same timeimmunize it from any loss, leaves the decision to foreclose in the wrong hands.


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B. The Sky Won't Fall.

Finally, MERS and their amici curiae warn the sky will fall if the text of the statute is

followed. Itwon't. We know this, because courts in numerous other jurisdictions haveforbidden MERS relief in related foreclosure contexts. In those states, mortgage lending (andforeclosure) have apparently continued apace with the sky remaining aloft. See, e.g., MERS, Inc.v. Southwest Homes of Arkansas, 2009 Ark. 152, 301 SW3d 1 (2009); Landmark Nat 'IBank v.Kesler, 289 Kan. 528,216 P.3d 158 (2009); MERS, Inc. v. Saunders, 2 A.3d 289; Bellistri v.Ocwen Loan Servicing. LLC, 284 SW3d 619 (Mo. App. 2009). This is difficult to reconcile withalarmist predictions of doom. Indeed, it is not even clear how much longer MERS will bearound. See Robbie Whelan, Foreclosure Global Finance: Probe Sought in Virginia, WALL ST. J.,Nov. 2, 2010, at C3; see also Nick Timiraos, et. al., Big Banks Face Fines on Role of Servicers,WALL ST. J., Feb. 17,2011, at Cl. Ifthe Court of Appeals ruling is upheld, all that will berequired for the noteholder to avail itself of Michigan 's foreclosure by advertisement procedureis for the noteholder to direct MERS-its (non-servicing) agent-to transfer the mortgage backto the noteholder. Itbears particular emphasis that this is not an additional cost for thenoteholder. Once the property is foreclosed upon, MERS will return the mortgage to thenoteholder anyway. Thus, insisting that the foreclosure by advertisement statute be followed aswritten will not impose any additional costs on mortgage lenders. Itwill merely fulfill thelegislative prohibition on non-servicing agents like MERS acting as "beards" for noteholders andfrustrating homeowners in mortgage disputes from identifying the real parties in interest.

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The lobbyist-amici troubled by enforcing the law as written would be well counseled todevote their considerable resources to persuading the Legislature to change that law rather thanexhorting this Court to do so judicially.


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SUMMARY AND RELIEF

Dated: 1 . 1 &d. 2!J11

Because no absurdity has been pointed to with enforcement of the foreclosure byadvertisement statute as written, because the clear text of that statute is supported by soundpolicy, and because no dire consequences will stem from following the language of the law, thisCourt should deny Appellants' Application for Leave to Appeal, thus affirming the decision ofthe Court of Appeals.

Respectfully submitted,

ICI CURIAE LAW PROFESSORSBy: Prof. John AE. PottowUniversity of Michigan Law School625 South State StreetAnn Arbor, MI 48109(734) [email protected] for Amici Curiae

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mers blasted in this amicus brief residential funding, bank of new york trust

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