Fifth Circuit Court of Appeals Reaffirms MERS System Under Texas Law

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The United States Court of Appeals for the 5th Circuit has held that recording Mortgage Electronic Registration Systems, Inc. (“MERS”) as the holder or beneficiary of a mortgage comports with Texas law. Harris County Texas, et al. v. MERSCORP Inc., et al., No. 14-10392, 2015 WL 3937927 (5th Cir. June 26, 2015). This adds to the Court’s prior holding in Welborn v. Bank of N.Y. Mellon Corp., 557 Fed.Appx. 383 (5th Cir. 2014), treated in this blog on April 11, 2014, that certain government entities could not recover from MERS on the basis of federal RICO statutes.

MERS is an organization that allows for the transfer of 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 that the given mortgage secures.

Three Texas counties sued MERSCORP, Inc., MERS’s parent company, on the basis that the MERS system violated the relevant Texas recording statutes, as well as for unjust enrichment, fraudulent misrepresentation, and civil conspiracy. In 2013, the United States District Court for the Northern District of Texas granted summary judgment in favor of MERS on the common law counts, finding no reliance by or damages to the counties, and no unjust benefit to MERSCORP through recording mortgages in MERS’s name. Dallas County, Texas et al. v. MERSCORP, Inc. et al., 2013 WL 5903300 (N.D. Tex. Nov. 4, 2013). The District Court reserved judgment on the claim for violation of the recording statutes, and in 2014 held that the counties had no private right of action under the relevant statutes and that the statutes contained no requirement for recording of interim instruments. Dallas County, Texas et al. v. MERSCORP, Inc. et al., 2 F.Supp.3d 938 (N.D. Tex. 2014). Following these decisions, the counties appealed to the Fifth Circuit.

The Fifth Circuit affirmed the District Court, rejecting the counties’ claims that they held a private right of action under the relevant statutes and the claim that an affirmative duty to record assignments exists under Texas law. The Court further rejected the contention that the MERS system impermissibly split the underlying promissory note from the mortgage securing the debt. Finally, the Court adopted the District Court’s analysis of the common law claims, finding no false representations, no reliance, no injury, and no unjust benefit to MERSCORP.

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