MERSCORP, Inc. (“MERS”) has been under fire for years. We wrote about it a while back when residential mortgage borrowers challenged the ability of MERS to foreclose on mortgages it held on the theory that MERS, as a mere nominee to the lender, was not a real party in interest.  More recently, local recording offices have filed class action suits against MERS arguing that the MERS system prevented them from collecting fees supposedly required under state law.  Now there’s a sympathetic plaintiff!  In the past month, the Third Circuit and Fifth Circuit both rejected these arguments.

MERS runs an electronic registry that tracks beneficial ownership interests in loans secured by residential and commercial real estate.  Lenders cause MERS to be recorded as the lien holder on the land records while the MERS system records the lender’s beneficial ownership interest in the loans. DTC for real estate!  Lenders can then transfer their interests to other users of the MERS system without any need to record releases and new assignment documents.  Easy and efficient.  As this is so obviously and demonstratably good technology, it was preordained to be attacked by the governmental equivalent of the Buggy Makers Guild.

In the Fifth Circuit case, Dallas County, Texas, et al. v MERSCORP, Inc., et al., the local recording offices, as plaintiffs, alleged that MERS violated Texas Local Government Code Section 192.700 by failing to record deed of trust assignments. The plaintiffs also claimed the MERS engaged fraudulent misrepresentation and unjust enrichment (putting the technicalities of the law aside, isn’t this like a horse dealer suing Ford for making cars?).  The Texas counties argued that MERS must record assignments every time the promissory note is transferred or negotiated and that naming MERS as the beneficiary on a security instrument was a false representation.  The Fifth Circuit held that the statute did not contain “an affirmative mandate to the public that deed-of-trust beneficiaries must record assignments of either the deed of trust or the related promissory note.” Since Texas law does not establish a duty to record assignments of a deed of trust or its related promissory note, the court reasoned that the county did not suffer any injury as a result of the MERS assignments.  Further, designating MERS as the “beneficiary” of the deeds of trust was not a false representation because “[a]s a matter of basic contract law, MERS is a beneficiary” (such a crafty argument!).

In the Third Circuit case, Montgomery County v. MERSCORP, Inc., et al., the plaintiff brought claims that MERS failed to record assignments in violation of 21 Pa. Cons. Stat. Ann. § 351 (Pennsylvania’s assignments law), civil conspiracy to violate § 351 and unjust enrichment by consciously avoiding paying local recording fees.  The local recording offices argued that there was a duty to record assignments of mortgages under § 351 because the statute says that “[a]ll deeds, conveyances, contracts, and other instruments of writing . . . shall be recorded in the office for the recording of deeds in the county where such lands . . . are situate.”  The court here read the “shall be recorded” language as related to preserving a holder’s rights against a subsequent bona fide purchaser and not as establishing a duty to record; the consequence for failure to record under § 351 is that a subsequent bona fide purchaser can invalidate the holder’s interests.  The court also drew support from the other Circuit Court decisions, including the Fifth Circuit case mentioned above.  Finding no duty to record assignments, the court threw out the plaintiffs other claims.

We here at Dechert will continue to monitor the travails of MERS and keep you up to date on any new developments. MERS has previously defeated several claims on this recording issue in the Sixth Circuit, Seventh Circuit and Eighth Circuit as wells as claims in multiple state supreme courts. This Luddite-inspired effort to roll back the march of progress will eventually expire under the weight of its own absurdity, but we do expect more challenges and ultimately, more court victories for MERS.