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Massachusetts Appeals Court Upholds MERS Mortgage System

The Massachusetts Appeals Court has joined the U.S. Court of Appeals for the First Circuit in upholding the Mortgage Electronic Registration Systems, Inc. ("MERS") business model under Massachusetts law.  Explicitly referencing the First Circuit's decision in Culhane v. Aurora Loan Services of Nebraska, 708 F.3d 282 (1st Cir. 2013), the Appeals Court in Sullivan v. Kondaur Capital Corp., 85 Mass.App.Ct. 202 (2014), held that mortgagors have standing to challenge an assignment of their mortgages, but only to the extent that such assignment is void, not merely voidable.  Further, the Appeals Court found that the MERS system of mortgage assignments fully comports with Massachusetts law.

MERS is an organization that allows for the transfer or mortgages among its member banks without the need for a new recording in the applicable registry of deeds for each transfer.  MERS appoints employees of its member banks as officers or secretaries of MERS, who then have the power to assign mortgages to other members, or from other members to themselves.  Throughout any transfer, MERS remains the mortgagee of record for the benefit of the member bank currently holding the note.

In Sullivan, the plaintiffs argued both that the separation of the note and the mortgage was inherently invalid, and that MERS could not assign the mortgage once the noteholder, for whom MERS was the nominee mortgageholder, had assigned its interest.  The Appeals Court rejected both arguments.  As noted by the Appeals Court, the Supreme Judicial Court's decision in Eaton v. Federal Natl. Mort. Assn., 462 Mass. 569 (2012) recognized that the legal interest in a mortgage may be separated from the equitable interest in the debt it secures.  "Accordingly, the Sullivans' challenge is without merit to the extent that it suggests that MERS's interest in the mortgage was inherently invalid because it was separated from ownership of the underlying debt."  Sullivan, 85 Mass.App.Ct. at 210.  Further, the holder of the mortgage at time of foreclosure need only demonstrate that it holds the note or is acting as the agent of the holder  "[N]othing in Massachusetts law requires a foreclosing mortgagee to demonstrate that prior holders of the record legal interest in the mortgage also held the note at the time each assigned its interest in the mortgage to the next holder in the chain."  Id.

While the Appeals Court has now endorsed the standing of mortgagors to challenge mortgage assignments in Massachusetts state courts, that standing comes with limitations.  Challenges are limited to void transfers, and challenges based on any alleged invalidity of the MERS model itself have been effectively eliminated.

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