MinnLawyer Blog

A Minnesota Supreme Court decision issued this morning is a blow to efforts to stem the tide of foreclosures that has swept the state, but also ensures the flow of oxygen continues to a financial-services sector still reeling from last fall’s meltdown.

The plaintiffs — homeowners who face foreclosure – essentially challenged one of the engines that helped contribute the rise to the mortgage-crisis – the Mortgage Electronic Registration System (or MERS).

The MERS system is a little complicated, but what it boils down to is a mechanism for the transferring of debt obligations secured by mortgages without recording the transfers. MERS — an incorporated entity with creditors as “members” — takes legal title while allowing the creditors to transfer and retransfer the debt obligations without publicly recording the transfers. (MERS keeps internal records of the transfers.) The plaintiffs argued that the underlying mortgages could not be foreclosed upon because Minnesota law requires that all mortgage assignments be recorded.

In a 6-1 opinion answering a certified question from the U.S. District Court, the Minnesota Supreme Court disagreed, holding that transfers of the underlying indebtedness do not have to be recorded to foreclose a mortgage by advertisement under Minn. Stat. secs. 580.02 and 580.04. The opinion is Jackson, et al. v. Mortgage Electronic Registration Systems.

The court rebuffed all of the plaintiffs’ legal and equitable arguments. The court found that MERS, the nominal mortgagee of record, retained legal title the whole time. Transfers that did not include the legal title did not have to be recorded for purposes of a foreclosure by advertisement, the court said.

However, Justice Alan Page said in his dissent that the majority’s decision is at odds with the plain statutory language requiring all mortgage assignments to be recorded. The Legislature could not have been more clear, he said.

Pointing to recent turmoil in the financial world, Page also said that that the majority’s decision promotes bad policy.

“[I]t is apparent with the benefit of hindsight that the ability of lenders to freely and anonymously transfer notes among themselves facilitated, if not created, the financial and banking crisis in which our country currently finds itself,” Page wrote.

Page also pointed out that allowing transfers between MERS members without recording could hurt lenders as well as borrowers.

“For example, a lender who holds a promissory note that has become worthless may have an interest in knowing the hands through which that note passed,” Page said. “Under the MERS system, however, the identity of those previous holders is as shielded from the lender’s view as it is from the borrower’s. … [N]either borrowers nor lenders will ever be able to hold anyone in the chain of transfers accountable. That is not sound policy.”

The plaintiffs in the litigation were represented by several private lawyers as well as lawyers from the Legal Aid Society of Minnesota and the Washington, D.C.-based Center for Responsible Lending. Amicus Curiae included the ACORN Housing project.

It was a bold argument that would have had potentially staggering effects on the Wall Street establishment had the court gone the other way. A valuable enforcement tool for many mortgages, putting the value of those instruments into further jeopardy. Lest we forget, post-bailout the United States government has a major interest in the enforcement of many of those mortgages.