Merscorp Holdings, Inc. v. Malloy

• Decision Date: 23 February 2016
• Docket Number: No. 19376.,19376.
• Citation: 131 A.3d 220,320 Conn. 448
• Parties: MERSCORP HOLDINGS, INC., et al. v. Dannel P. MALLOY et al.
• Court: Connecticut Supreme Court

320 Conn. 448

131 A.3d 220

MERSCORP HOLDINGS, INC., et al.

v.Dannel P. MALLOY et al.

No. 19376.

Supreme Court of Connecticut.

Argued Oct. 14, 2015.

Decided Feb. 23, 2016.

Linda L. Morkan, with whom were Benjamin C. Jensen and, on the brief, James A. Wade and Norman H. Roos, Hartford, for the appellants(plaintiffs).

Matthew J. Budzik, assistant attorney general, with whom were Heather J. Wilson, assistant attorney general, and, on the brief, George Jepsen, attorney general, for the appellees(defendants).

Ryan P. Barry and Michael J. Dyer, Manchester, filed a brief for the Connecticut Bankers Association et al. as amici curiae.

J.L. Pottenger, Jr., Jeffrey Gentes, and Aurelia Chaudhury, Nicholas Gerschman and Marian Messing, law student interns, filed a brief for the Jerome N. Frank Legal Services Organization and the Connecticut Fair Housing Center as amici curiae.

PALMER, ZARELLA, EVELEIGH, ESPINOSA and ROBINSON, Js.

PALMER, J.

In 2013, the legislature amended the statutes governing Connecticut's public land records system to create a two tiered system in which a mortgage nominee operating a national electronic database to track residential mortgage loans must pay recording fees approximately three times higher than do other mortgagees.The plaintiffs, MERSCORP Holdings, Inc., and Mortgage Electronic Registration Systems, Inc., who are currently the only entities required to pay the increased recording fees, commenced the present action against the defendants, Governor Dannel P. Malloy, Attorney GeneralGeorge Jepsen, Treasurer Denise L. Nappier, Kendall F. Wiggin, the state librarian, and LeAnne R. Power, the state public records administrator,¹ seeking, inter alia, injunctive relief and a judgment declaring that this two tiered fee structure violates various provisions of the federal and state constitutions.Specifically, the plaintiffs alleged that General Statutes §§ 7–34a (a)(2)and49–10(h), as amended, violate the equal protection, due process, and takings provisions of the federal and state constitutions, the federal dormant commerce clause, and the federal prohibition against bills of attainder.The plaintiffs further alleged that enforcement of the statutes violates 42 U.S.C. § 1983.The parties filed motions for summary judgment, and the trial court granted the state's motion for summary judgment on all counts and rendered judgment thereon.This appeal followed.²We affirm the judgment of the trial court.

I

This case concerns the filing fees that the parties to a residential mortgage loan must pay to record mortgage documents in the public land records in Connecticut.Because the plaintiffs raise both federal and state constitutional issues of first impression, it will be helpful before considering the plaintiffs' claims to briefly review the traditional procedure for recording residential mortgage documents, certain relatively recent changes to that system, and the novel response of the Connecticut legislature to those changes.

Under the traditional residential mortgage model, a person seeking to finance the purchase of a residential property obtains a loan from a lender, typically a bank, in exchange for a promissory note committing the borrower to repay the loan.To secure the loan, the borrower provides the lender a mortgage on the property.Although, in Connecticut, there is no legal requirement that the lender record the mortgage in the public land records, mortgages typically are recorded—via the clerk of the town in which the property is situated—in order (1) to perfect the lender's security interest by giving public notice thereof, and (2) to maintain a complete public chain of title.

Under the traditional model, the bank or other lender maintains the loan on its books and continues to service the loan until it is repaid.At that point, the parties typically record a release of the mortgage in the land records.At a minimum, then, the life of a residential mortgage loan may involve only two recordable events, although other events—for example, a transfer of the mortgage loan to another lender, or the creation or subordination of a home equity credit line—also may arise under the traditional model.

The most significant factor in the decline of the traditional residential mortgage model has been the development and evolution of the secondary mortgage market.A secondary market is created when the initial lender sells the mortgage loan to outside investors.Doing so provides local lenders with greater liquidity, which facilitates additional home buying, and also allows large outside investors to pool—and thus to minimize—the risk that any particular loan will go into default.Although the modern secondary mortgage market had its genesis in the creation of the Federal Housing Authority and associated government sponsored financing corporations such as Fannie Mae in the 1930s, it expanded dramatically in the 1980s with the advent of new types of mortgage backed securities for sale in the private equity markets.

For mortgage loans sold in the secondary market, the investor typically engages a third party to perform servicing functions such as payment collection and file maintenance.Both the loan itself and the servicing rights may be sold or transferred multiple times over the life of a loan.Under the common-law rule, as codified in many states, the mortgage follows the note, so that an investor who acquires a residential note automatically obtains the attached security interest as well.

Although the development of a robust and sophisticated secondary market has had a dramatic impact on the liquidity and, with some notable exceptions, the stability of the residential mortgage loan market, it also has created challenges for the public land record system.Because the ownership and servicing rights to a loan may be transferred multiple times over the life of a loan, the mortgagee of record, which may be either the note holder or the servicer as nominee, will frequently change.This means that each subsequent holder must choose either (1) to undertake the costly and time-consuming process of recording each of the numerous mortgages that it may briefly hold, subject to the varying costs and requirements of each state's county or, as in Connecticut, each town clerk, or (2) to decline to record its interest, which may result in potential problems and costs resulting from an incomplete public chain of title.

To address these problems, in the 1990s, the major public financial service corporations, in collaboration with various private interests, developed the national Mortgage Electronic Registration Systems (MERS) system.There are two primary components to the MERS model.³First, MERS operates a national electronic registration system that tracks any changes in the ownership and servicing rights of MERS-registered loans between MERS members, who include in-state and out-of-state mortgage lenders, servicers and subservicers, and public finance institutions.In this sense, MERS operates as a centralized, virtual alternative to the hundreds of traditional county or town land recording systems throughout the country.Second, because MERS members cannot completely eschew the use of the public land records, MERS becomes the mortgage nominee on any loans held by MERS members, and is identified as such when the mortgage is initially recorded in the land records.Recording a mortgage with MERS as a mortgage nominee essentially creates a placeholder for the electronic MERS system in the public records, allowing the two systems to interoperate.That is to say, if a party searching the chain of title on a property comes upon a recorded mortgage to MERS, the party is thereby notified that the MERS database may be consulted to determine the present beneficial owner of the mortgage and loan, as well as any related servicing rights or subordinate security interests.MERS remains the mortgagee of record in the public records until the mortgage either is released or assigned to a nonmember of MERS.

One potential advantage of the MERS system is that it eliminates the costs, in both time and fees, associated with recording each subsequent mortgage assignment in the public land records.Although the plaintiffs in the present case do not concede that any such savings have been realized in Connecticut, the parties do agree that, as of 2013, approximately 65 percent of mortgage loans nationally and in Connecticut originated with MERS acting as the mortgagee.The plaintiffs' principal place of business is in Virginia.

Turning our attention to the legislation that led to the present action, we note that, prior to July 15, 2013, § 7–34a required that all filers pay the town clerk $10 for the first page of each document filed in the land records, plus $5 for each subsequent page.General Statutes(Rev. to 2013)§ 7–34a (a).Section 7–34a imposed additional fees of $3 and $40 per filing;General Statutes(Rev. to 2013)§ 7–34a (d) and (e); and an additional fee of $2 per assignment after the first two assignments.General Statutes(Rev. to 2013)§ 7–34a (a).

In 2013, General Statutes(Rev. to 2013)§ 7–34a was amended by Public Acts, No. 13–184, § 98(P.A. 13–184), and Public Acts, No. 13–247, § 82(P.A. 13–247).As amended, § 7–34a defines a "nominee of a mortgagee" as "any person who (i) serves as mortgagee in the land records for a mortgage loan registered on a national electronic database that tracks changes in mortgage servicing and beneficial ownership interests in residential mortgage loans on behalf of its members, and (ii) is a nominee or agent for the owner of the promissory note or the subsequent buyer, transferee or beneficial owner of such note."General Statutes § 7–34a (a)(2)(C).The parties agree that MERS is presently the only entity that qualifies as a nominee of a mortgagee, as so defined, and that the legislature crafted the statutory language with MERS specifically in mind.

Section 7–34a, as amended, further provides that,...