Robertson v. Merscorp, Inc. (In re Merscorp, Inc.)

• Decision Date: 20 September 2013
• Docket Number: 1111370 and 1111567.
• Citation: 141 So.3d 984
• Parties: Ex parte MERSCORP, INC., and Mortgage Electronic Registration Systems, Inc. (In re Nancy O. Robertson, in her official capacity as Probate Judge of Barbour County, on behalf of herself and all others similarly situated v. MERSCORP, Inc., and Mortgage Electronic Registration Systems, Inc.) Ex parte U.S. Bank National Association (In re Walker County, on behalf of itself and all other similarly situated Alabama counties, and Rick Allison, Walker County Probate Judge v. U.S. Bank National Association).
• Court: Alabama Supreme Court

141 So.3d 984

Ex parte MERSCORP, INC., and Mortgage Electronic Registration Systems, Inc.

(In re Nancy O. Robertson, in her official capacity as Probate Judge of Barbour County, on behalf of herself and all others similarly situated

v.MERSCORP, Inc., and Mortgage Electronic Registration Systems, Inc.)

Ex parte U.S. Bank National Association

(In re Walker County, on behalf of itself and all other similarly situated Alabama counties, and Rick Allison, Walker County Probate Judge

v.U.S. Bank National Association).

1111370 and 1111567.

Supreme Court of Alabama.

Sept. 20, 2013.

Barry A. Ragsdale and R. Ryan Daugherty of Sirote & Permutt, P.C., Birmingham; and Courtney R. Potthoff and Joel P. Smith, Jr., of Williams, Potthoff, Williams & Smith, LLC, Eufaula, for petitioners MERSCORP, Inc., and Mortgage Electronic Registration Systems, Inc.

Larry B. Childs of Waller Lansden Dortch & Davis, LLP, Birmingham; and Henry F. Reichner of Reed Smith LLP, Philadelphia, Pennsylvania, for petitioner U.S. Bank National Association.

W. Lewis Garrison, Jr., and Christopher B. Hood of Heninger Garrison Davis, LLP, Birmingham, for respondent Probate Judge Nancy O. Robertson.

James C. King, Henry C. Wiley, Jr., Franklin G. Williams, and Keith McKerall of King, Wiley & Williams, Jasper; Richard Frankowski of Burke, Harvey & Frankowski, Birmingham; and Debra Brewer Hayes of Reich & Binstock, Houston, Texas, for respondent Walker County, on behalf of other similarly situated Alabama counties.

MURDOCK, Justice.

Before us are two petitions for a writ of mandamus seeking review of orders denying motions to dismiss the actions based on the alleged lack of standing by the plaintiffs and, in turn, the alleged lack of subject-matter jurisdiction of the trial courts and seeking an order requiring the trial courts to grant the motions to dismiss. We have consolidated the petitions for the purpose of issuing one opinion, because the issues raised in the two petitions are identical.

In case no. 1111567, U.S. Bank National Association (“U.S. Bank”), the defendant below, petitions this Court for a writ of mandamus requiring the Walker Circuit Court to dismiss an action filed by Walker County (“the County”) on behalf of a putative class of all Alabama counties similarly situated to Walker County in relation to U.S. Bank and seeking declaratory, injunctive, and monetary relief. In case no. 1111370, MERSCORP, Inc. (“MERSCORP”), and Mortgage Electronic Registration Systems, Inc. (“MERS”) (hereinafter referred to collectively as “the MERS defendants”), petition this Court for a writ of mandamus requiring the Barbour Circuit Court to dismiss an action filed by Barbour Probate Judge Nancy O. Robertson, in her official capacity, on behalf of a putative class of all probate judges in Alabama, also seeking declaratory, injunctive, and monetary relief. We deny the petitions.

I. Facts and Procedural History

The general factual background required to understand the nature of the actions brought by the County and by Judge Robertson is the same. At issue is a particular aspect of the mortgage-securitization process. The process begins when a borrower secures a note to pay a lender by executing a mortgage on the real property the borrower, or mortgagor, purchases with the loan from the lender, or mortgagee. The mortgage is recorded in the probate office of the county in which the property is located. See §§ 35–4–50, 35–4–51, 35–4–62, 35–4–90, Ala.Code 1975 (“the recording statutes”).¹ Loans between borrowers and lenders compose the primary mortgage market.

The note associated with the mortgage is a negotiable instrument, however, under Article 3 of the Uniform Commercial Code, and as such it can be bought and sold. When loans between borrowers and lenders are pooled and sold on the secondary mortgage market, investors benefit by receiving a low-risk investment and borrowers benefit by receiving loans at lower interest rates. Such is the process of securitization.

“The process of ‘securitization’ can be described as the process of distributing risk by aggregating debt instruments in a pool, then issuing new securities backed by the entire pool. This reduces the risk of investors' loss from default on any one debt instrument. For mortgage loans, investment banks take pools of real property loans and then use the cash flows from the loan payments to pay the bondholders secured by the underlyingmortgage loans. In the residential context, the process of securitization can be boiled down to the pooling of various residential mortgage loans and issuing securities backed by the mortgage loans.

“The general process of creating a residential mortgage-backed securitization (RMBS) is to first have a lender or lenders originate various mortgage loans to borrowers. Next, the originating lenders transfer these loans to a free-standing entity, known generally as a SPV, specifically created for the securitization. As an independent entity, the SPV is protected from any bankruptcy or insolvency proceedings of the originating lender. The SPV aggregates the mortgage loans into pools and issues securities to investors, with the proceeds from the securities being used to pay the originating lender for selling the loans. Thereafter, the investors of these securities receive the proceeds from, and the credit risks of, the mortgage loans in the underlying pool. In many cases, the originating lender will continue to collect the loan payments from the borrowers as they become due and will simply pass the collected monies onto the investors. The investors are protected, by the laws governing assignments, from certain origination and servicing risks assumed by the originating lenders and servicers, and therefore the investors can accept a lower interest rate and yield on the loans.”

Derrick M. Land, Residential Mortgage Securitization and Consumer Welfare, 61 Consumer Fin. L.Q. Rep. 208, 209 (2007) (footnotes omitted).

The rights and obligations of the parties in the above-described securitization process typically are set forth in a pooling and servicing agreement (“PSA”). The PSA also explains the role of the trustee that holds the residential mortgage-backed securities (“RMBS”). U.S. Bank is a trustee for certain RMBS trusts that hold, among others, loans on the secondary mortgage market secured by mortgages on real property in the County.

Although the development of the secondary mortgage market benefited both investors and mortgagors, the “recording process became cumbersome to the mortgage industry, particularly as the trading of loans increased.” Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1039 (9th Cir.2011). This is where MERSCORP and MERS entered the process. MERS was created to streamline the mortgage process through the use of electronic documentation. “MERS is a private electronic database, operated by MERSCORP, Inc., that tracks the transfer of the ‘beneficial interest’ in home loans, as well as any changes in loan servicers.” Cervantes, 656 F.3d at 1038. “Officially launched in 1997, [MERS] is a corporation owned by its members who are typically also users of the MERS system. It is funded by membership and transaction fees that members pay for use of the system.” Robert E. Dordan, Mortgage Electronic Registration Systems (MERS), Its Recent Legal Battles, and the Chance for A Peaceful Existence, 12 Loy. J. Pub. Int. L. 177, 181 (2010). “MERS does not solicit, fund, service, or actually own any mortgage loans.” Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L.Rev. 1359, 1361 (2010). Instead, when a mortgage is executed, the borrower and the lender designate MERS as mortgagee “acting solely as nominee for the Lender and Lender's successors and assigns.” “The loan is then assigned to a seller for repackaging through securitization for investors. Instead of recording the assignment to the seller or the trust that will ultimately own the loan, however, the originator pays MERS a fee to record an assignment to MERS in the county records.” Peterson, 78 U. Cin. L.Rev. at 1370.² “The benefit of naming MERS as the nominal mortgagee of record is that when the member transfers an interest in a mortgage loan to another MERS member, MERS privately tracks the assignment within its system but remains the mortgagee of record.” Jackson v. Mortgage Elec. Registration Sys., Inc., 770 N.W.2d 487, 490 (Minn.2009). Thus, “[t]he MERS system is designed to allow its members, which include originators, lenders, servicers, and investors, to assign home mortgage loans [on the secondary market] without having to record each transfer in the local land recording offices where the real estate securing the mortgage is located.” Id.

Judge Robertson filed her action in her official capacity as probate judge on November 22, 2011, in the Barbour Circuit Court against MERSCORP and MERS. The complaint sought class-action status on behalf of “all Probate Judges of the State of Alabama” because the MERS defendants allegedly “systematically obstruct Ala.Code §§ 35–4–50, 35–4–51, and 35–4–62,” and allegedly interfere with the duty of all probate judges to keep records of “conveyances of real property” as required by § 12–13–43, Ala.Code 1975. The complaint alleges that “[t]he [MERS] Defendants, to profit their shareholders and customers, operate to circumvent the laws of Alabama which prescribe the recording of interests in real estate inclusive of conveyances and grants of such interests. The circumvention obstructs such laws, preventing their fulfillment.” Judge Robertson sought a judgment declaring that the MERS defendants' conduct is “an obstruction to Alabama law,” a permanent injunction prohibiting the MERS defendants from engaging in their allegedly illegal conduct and requiring them to comply with Alabama's recording statutes, “a thorough and fully accurate accounting to [Judge Robertson] and Class of all...