Mortg. Elec. Registration Sys., Inc. v. Ditto
Decision Date | 11 December 2015 |
Citation | 488 S.W.3d 265 |
Parties | Mortgage Electronic Registration Systems, Inc. v. Carlton J. Ditto et al. |
Court | Tennessee Supreme Court |
Caroline B. Stefaniak, Chattanooga, Tennessee, and JoAnn T. Sandifer, St. Louis, Missouri, pro hac vice, for the appellant, Mortgage Electronic Registration Systems, Inc.
Carlton J. Ditto, Chattanooga, Tennessee, Pro Se.
William M. Barker, Chattanooga, Tennessee, for the Amici Curiae, American Land Title Association, The Tennessee Mortgage Bankers Association, and The Tennessee Bankers Association.
Deanna Lee Fankhauser and Robyn Beale Williams, Nashville, Tennessee for the Amicus Curiae, Tennessee Municipal League Risk Management Pool.
Holly Kirby delivered the opinion of the Court, in which Sharon G. Lee, C.J., and Cornelia A. Clark, Gary R. Wade, and Jeffrey S. Bivins, JJ., joined.
Petitioner Mortgage Electronic Registration Systems, Inc. (MERS) brought this action to set aside a tax sale of real property. MERS argues that the county's failure to provide it with notice of the tax sale violated its rights under the Due Process Clause of the federal Constitution. The defendant purchaser of the real property filed a motion for judgment on the pleadings; he argued that MERS did not tender payment of the sale price plus the accrued taxes before bringing suit, as is required by statute in a suit challenging the validity of a tax sale. The defendant purchaser also argued that MERS did not have an interest in the subject property that is protected under the Due Process Clause. The trial court granted the defendant's motion for judgment on the pleadings, holding that MERS did not have an interest in the property. The Court of Appeals affirmed, though based on MERS's lack of standing to file suit. We hold that when a plaintiff who claims a protected interest in real property files suit to have a tax sale declared void for lack of notice, the pre-suit tender requirement in Tennessee Code Annotated section 67–52504(c) does not apply, so MERS was not required to tender payment before filing this lawsuit. We further conclude that MERS acquired no protected interest in the subject property through either the deed of trust's designation of MERS as the beneficiary solely as nominee for the lender and its assigns or its reference to MERS having “legal title” to the subject property for the purpose of enforcing the lender's rights. Because MERS had no protected interest in the subject property, its due process rights were not violated by the county's failure to notify it of the tax foreclosure proceedings or the tax sale. Accordingly, we affirm the grant of judgment on the pleadings in favor of the tax sale purchaser, albeit on a different basis from the Court of Appeals' decision.
In March 2005, Joseph L. Dossett and Gerald Dossett (collectively, “the Dossetts”) purchased property located at 5518 Oakdale Avenue in Chattanooga, Hamilton County, Tennessee (“the property” or “the subject property”), as joint tenants with the right of survivorship. The warranty deed for the property was recorded in the Register's Office for Hamilton County, Tennessee.
In July 2006, the Dossetts and their wives borrowed about $60,000 from Choice Capital Funding, Inc. (“Choice Capital”), which was secured by the subject property. As is typical in such transactions, the parties executed two documents: (1) a promissory note (a negotiable instrument) evidencing the borrowers' promise to repay the loan, and (2) a deed of trust (“DOT”)1 securing the repayment of the loan by transferring title to the property to the trustee and the lender.2
The DOT executed in connection with the loan contains defined terms. The term “Borrower” refers to the Dossetts and their wives. The term “Lender” refers to Choice Capital. The “Trustee” in the DOT is listed as Robbie McLean, an attorney.
Pertinent to this appeal, the DOT describes Plaintiff/Appellant Mortgage Electronic Registration System (MERS) as “a separate corporation that is acting solely as nominee for [Choice Capital] and [Choice Capital's] successors and assigns.” The DOT states that MERS is “the beneficiary under this Security Instrument,” and it includes the full address and telephone number for MERS. The DOT for this transaction was recorded with the Register of Deeds in Hamilton County, Tennessee.
A brief description of MERS's role in the mortgage industry is helpful to an understanding of the issues in this case. Created in 1993, the MERS® System is wholly-owned and operated by MERSCORP, Inc. (“MERSCORP”). Sharon M. Horstkamp, MERS Caselaw Overview, 64 Consumer Fin. L.Q. Rep. 458, 458 (Winter 2010) (author is Vice President and General Counsel for MERSCORP). The MERS® System has been described as “a national electronic registry system that tracks the changes in servicing rights and beneficial ownership interests in mortgage loans that are registered on the registry.” Id. MERS performs a service for lenders by purporting to function as “the mortgagee of record and nominee for the beneficial owner of the mortgage loan.” Id.; see Thompson v. Bank of Am., N.A., 773 F.3d 741, 748 (6th Cir. 2014) (). Horstkamp, 64 Consumer Fin. L.Q. Rep. at 458. Thus, in essence, MERS tracks the transfer of residential mortgages within the MERS® System.3
The genesis for MERS is the evolution of the residential mortgage industry. Traditionally, there was little need for a registration system such as MERS; a mortgage was a two-party transaction in which a prospective homeowner borrowed money from a lender, typically a bank that loaned the monies from its customers' deposits. Citimortgage, Inc. v. Barabas, 975 N.E.2d 805, 808 (Ind. 2012). The lender recorded the transaction in the county's land records in accordance with state real property laws and usually retained the loan until it was repaid. Ellen Harnick, The Crisis in Housing and Housing Finance: What Caused It? What Didn't? What's Next?, 31 W. New Eng. L.Rev. 625, 626–27 (2009).
By the beginning of the twenty-first century, mortgage lenders included not only actual banks but also companies that raise funds to lend by borrowing money from financial institutions and then repaying the financial institutions “by selling to investors the right to share in the proceeds of the mortgage payments received from borrowers.” Id. This process is generally known as “securitization.” Id. It is now commonplace for institutional investors to bundle and sell (i.e., securitize) residential loans and sell shares of the resulting mortgaged-backed securities.4 Bucci v. Lehman Bros. Bank, FSB, 68 A.3d 1069, 1072–73 (R.I. 2013). Thus, with securitization, a single residential loan may be transferred many, many times before it is repaid. Meanwhile, state real property laws remain more consistent with traditional mortgages; they typically require each assignment of a mortgage to be recorded in the county land records, with the concomitant recording fee. Id.
MERS's system of registering and tracking mortgages over the life of the loans sought to address problems that arose from mortgage securitization. Id. at 1072–73 ; see Citimortgage, 975 N.E.2d at 808–09 ( ). The Supreme Court of Rhode Island explained:
According to MERS, prior to the creation of its registration system, the constant buying and selling of mortgage-backed loans became costly and time-consuming, because each transfer required that an assignment of the mortgage be recorded in the local land evidence records. It also became difficult to determine what entity owned the beneficial interests in these loans at any given time, because those interests were bought and sold with such frequency, often leading to recording errors. The MERS® System was developed to bring efficiency and order to this increasingly complex industry.
Bucci , 68 A.3d at 1072–73 (internal citations omitted); see also MERSCORP, Inc. v. Romaine , 8 N.Y.3d 90, 828 N.Y.S.2d 266, 861 N.E.2d 81, 83 (2006). Put another way, the MERS® System was created to enable lenders “[t]o avoid the hassle and expense of paying county recording fees.” Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic Registration System's Land Title Theory, 53 Wm. & Mary L.Rev. 111, 116 (Oct.2011) ; see Robinson v. American Home Mortg. Servicing, Inc . (In re Mortg. Elec. Registration Sys., Inc. ), 754 F.3d 772, 777 (9th Cir. 2014) (“Robinson ”) (); Christopher L. Peterson, Fore closure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L.Rev. 1359, 1369–70 (2010) ().
In order for a lender to benefit from the MERS tracking system, it must become a MERSCORP member. To do so, the lender subscribes to the MERS® System by paying a periodic (usually annual) membership fee or a per-transaction fee. Peterson, 53 Wm. & Mary L.Rev. at 117. In return, MERS and the member lender enter into an agreement for MERS to provide certain services.5 Romaine, 828 N.Y.S.2d 266, 861 N.E.2d at 83 ; see Mortgage Elec. Registration Sys. v. Bellistri, No. 4:09–CV–731, 2010 WL 2720802, at *6 (E.D. Mo. July 1, 2010) ; Bank of N.Y. v. Silverberg, 86 A.D.3d 274, 278–79, 926...
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