Mikael Judah and Laura Judah v. EMC Mortgage Corporation

ACCEPTED 03-14-00304-CV

5460354 THIRD COURT OF APPEALS

AUSTIN, TEXAS 5/28/2015 4:49:18 PM

JEFFREY D. KYLE

CLERK

No. 03-14-00304-CV

FILED IN In the Third Court of Appeals 3rd COURT OF APPEALS

AUSTIN, TEXAS 5/28/2015 4:49:18 PM

Austin, Texas

JEFFREY D. KYLE

Clerk

MIKAEL AND LAURA JUDAH, APPELLANTS v.

EMC MORTGAGE CORPORATION, APPELLEE APPEAL FROM CAUSE NO. D-1-GN-11-003275

345TH DISTRICT COURT OF TRAVIS COUNTY, TEXAS

HON. JON WISSER PRESIDING OPPOSED MOTION FOR LEAVE TO FILE NOTICE

Stephen Casey Texas Bar No. 24065015

ORAL CASEY LAW OFFICE, P.C. ARGUMENT 595 Round Rock West Drive REQUESTED Suite 102 Round Rock, Texas 78681 Telephone: 512-257-1324 Fax: 512-853-4098 [email protected] Counsel for Appellants Mikael and Laura Judah

Grounds

1. Pursuant to Texas Rules of Appellate Procedure 38.7 and Local Rule 58,

Appellants file this motion for leave to file notice of additional authority. 2. The request is opposed.

3. This notice was originally filed prematurely in Envelope # 5395094 without the necessary motion for leave.

4. The motion was returned needing corrections. The entire motion and accompanying letter with attachments is being refiled to correct the deficiencies.

Prayer

Appellant prays this Court grant this motion.

/s/ Stephen Casey Stephen Casey Texas Bar No. 24065015 Casey Law Office, P.C.

595 Round Rock West Drive Suite 102 Round Rock, Texas 78681 Telephone: 512-257-1324 Fax: 512-853-4098 [email protected]

CERTIFICATE OF CONFERENCE

I hereby certify that on May 22, 2015, I conferenced with opposing counsel who is opposed to this motion.

/s/ Stephen Casey CERTIFICATE OF SERVICE

I hereby certify that a true and correct copy of the foregoing motion and accompanying letter with attachments was served upon counsel for Appellee on Thursday, May 28, 2015, via electronic transmission:

Marcie Schout Quilling, Selander, Lownds, Winslett & Moser 2001 Bryan Street, Suite 1800 Dallas, TX 75201 Phone: (214) 871-2100 Fax: (214) 871-2111 [email protected] Counsel for Appellee

/s/ Stephen Casey Micah 6:8

Corporation.

To the Honorable Justices of the Third Court of Appeals,

This notice letter and accompanying attachments directly relate to a critical underlying question in the appeal pending before this Court, No. 03-14-00304-CV, Mikael and Laura Judah v. EMC Mortgage Corporation, as well as other cases pending, such as No. 03-14-00135-CV, Burge v. Ocwen Loan Servicing; No. 03-14-00376-CV, and Stanley v. W.R. Starkey Mortgage, LLC.

Within Appellants’ principal and reply briefs in Judah, the system by which Mortgage Electronic Registration System (“MERS”) operates, which admittedly has zero ownership interest in any of the mortgage (i.e., no “stick” in the bundle), is directly challenged with the claim that it runs contrary to standing law in Texas for more than 160 years and all three editions of TEXAS JURISPRUDENCE.

Cited to specifically within the reply brief is the case of Montgomery County v. Merscorp, Inc., No. 11-CV-6968, 2014 U.S. Dist. LEXIS 89222 (E.D. Penn Jul. 1, 2014). The district court decision in that case found that the entire concept of MERS ran contrary to the historical, and well-settled, understandings of property law theory that have existed for decades. See id. (esp. at 554). A courtesy copy of that opinion is attached. That case was appealed by MERS on interlocutory appeal to the federal Court of Appeals for the Third Circuit.

Important to this appeal, a critical amicus brief was filed by several parties: 1) Law professors:

a. Joseph William Singer, the Bussey Professor of Law at Harvard Law School; b. David Reiss, Professor of Law and Research Director at the Center for Urban

Business Entrepreneurship at Brooklyn Law School; c. Rebecca Tushnet, Professor of Law at Georgetown Law School; and d. Melanie Leslie, Vice Dean and Professor of Law at Benjamin N. Cardozo School of Law at Yeshiva University.

And;

2) The Harvard Law School Legal Services Center.

CASEY LAW OFFICE, P.C. ! 595 Round Rock West Drive, Suite 102 ! Round Rock, Texas 78681

512-257-1324 (phone) ! (512) 853-4098 (fax)

Transforming Lives Through Justice These professors and this organization are requesting that the Third Circuit completely uphold the district court’s decision against MERS based, in large part, that the entire concept of MERS has turned property law on its head and created a fountainhead of disaster for property owners. It is alleged in Appellants’ case, and associated cases, that this turn of events has transpired in Texas, too.

A copy of the amicus brief is attached and this Court is urged to review it as it applies to critical questions in the case at bar.

A copy of this letter, the Pennsylvania opinion, and the amicus brief, have been sent certified mail, return receipt requested, to opposing counsel.

Respectfully submitted, /s/ Stephen Casey

Enclosures:

1) District Court opinion: Montgomery County v. Merscorp, Inc., No. NO. 11-CV-6968, 2014 U.S. Dist. LEXIS 89222 (E.D. Penn Jul. 1, 2014) 2) Amicus Brief in the United States Court of Appeals for the Third Circuit: No. 14-4315, Montgomery County v. Merscorp, Inc., BRIEF OF AMICUS CURIAE THE LEGAL SERVICES CENTER OF HARVARD LAW SCHOOL AND LAW PROFESSORS IN SUPPORT OF THE APPELLEE.

Copy to:

Marcie Schout, Quilling, Selander, Lownds, Winslett & Moser, P.C.

2001 Bryan Street Suite 1800 Dallas, TX 75201 via certified mail, return receipt requested

Montgomery County v. Merscorp, Inc. United States District Court for the Eastern District of Pennsylvania

June 30, 2014, Decided; July 1, 2014, Filed

CIVIL ACTION NO. 11-CV-6968 Reporter 16 F. Supp. 3d 542; 2014 U.S. Dist. LEXIS 89222; 2014 WL 2957494 MONTGOMERY COUNTY, PENNSYLVANIA, ATTORNEY, MORGAN, LEWIS AND BOCKIUS, Miami RECORDER OF DEEDS, by and through Nancy J. Becker , FL; ANDREW C. WHITNEY, FRANCO A. CORRADO, in her official capacity as Recorder of Deeds of Montgomery KRISTOFOR T. HENNING, NICHOLAS C. VANCE, County, on its own behalf and on behalf of all others MORGAN LEWIS & BOCKIUS LLP, [**2] Philadelphia , similarly situated, Plaintiff, v. MERSCORP, INC., and PA; BRIAN M. ERCOLE, MORGAN LEWIS, Miami , FL. MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC., Defendants.

For Community Legal Services, Pennsylvania Legal Aid Network, Housing Alliance of Pennsylvania, Movants:

Subsequent History: Amended by, Motion granted by, in

JENNIFER R. CLARKE, PUBLIC INTEREST LAW part, Motion denied by, in part Montgomery County v.

CENTER OF PHILADELPHIA, Philadelphia , PA. Merscorp, Inc., 2014 U.S. Dist. LEXIS 129096 (E.D. Pa., Sept. 8, 2014)

Judges: J. CURTIS JOYNER, J. Prior History: Montgomery County v. Merscorp, Inc., 904 F. Supp. 2d 436, 2012 U.S. Dist. LEXIS 151598 (E.D. Pa., Opinion by: J. CURTIS JOYNER 2012)

Opinion Counsel: [**1] For Montgomery County, Pennsylvania, Recorder of Deeds, BY AND THROUGH NANCY J.

[*544] MEMORANDUM AND ORDER BECKER, IN HER OFFICIAL CAPACITY AS THE RECORDER OF DEEDS OF MONTGOMERY COUNTY, JOYNER, J. PENNSYLVANIA, ON ITS OWN BEHALF AND ON BEHALF OF ALL OTHERS SIMILIARLY SITUATED,

This civil action is once again before the Court on Plaintiff: CHARLES JOSEPH LADUCA, LEAD cross-motions of Defendants [*545] Merscorp, Inc. and ATTORNEY, PRO HAC VICE, CUNEO GILBERT &

Mortgage Electronic Registration Systems, Inc. (″the MERS LADUCA LLP, Bethesda , MD; CRAIG W. HILLWIG,

Defendants″ or ″MERS″) and Plaintiff for summary JOSEPH C. KOHN LEAD ATTORNEYS, ROBERT J. judgment and partial summary judgment, respectively (Doc. LAROCCA, WILLIAM E. HOESE, KOHN SWIFT & GRAF, P.C., Philadelphia , PA; GARY E. MASON, LEAD Nos. 67 and 80). For the reasons set forth below, Plaintiff’s ATTORNEY, JASON S. RATHOD, LEAD ATTORNEY, motion shall be granted in part and Defendants’ motion PRO HAC VICE, WHITFIELD BRYSON & MASON LLP, denied in its entirety. Washington , DC; JENNIFER E. KELLY, LEAD ATTORNEY, PRO HAC VICE, JONATHAN W. CUNEO, Factual Background LEAD ATTORNEY, CUNEO GILBERT & LADUCA LLP Washington , DC; JAMES C. SARGENT , JR., LAW As outlined in our previous Memoranda adjudicating the OFFICES OF LAMB & McERLANE, P.C., West Chester , various motions filed earlier in this matter, Plaintiff, Nancy PA; MAUREEN M. MCBRIDE, LAW OFFICES OF Becker, is the Recorder of Deeds in and for Montgomery WINDLE & McERLANE, P.C., West Chester , PA; County, Pennsylvania. She filed this lawsuit on behalf of WILLIAM H. LAMB, LAMB MCERLANE, P.C., West herself and all other Pennsylvania Recorders of Deeds Chester , PA. alleging that by creating and maintaining a private, members-only registry for recording and tracking For Merscorp, Inc., Mortgage Electronic Registration conveyances of interests in real property, the MERS Systems, Inc., Defendants: ROBERT M. BROCHIN, LEAD

16 F. Supp. 3d 542, *545; 2014 U.S. Dist. LEXIS 89222, **5 Defendants have violated 21 P.S. §351 [**3] 1 which material fact and the movant is entitled to judgment as requires that such conveyances be publicly recorded in the a matter of law... county recorder of deeds offices. Specifically, Plaintiff is challenging the practice by which MERS serves as the In reviewing the record before it for purposes of assessing mortgagee of record in the public land records as the the propriety of entering summary judgment, the court ″nominee″ for a lender who holds the mortgage note and its should view the facts in the light most favorable to the successors and assigns and thereby circumvents the need to non-moving party and draw all reasonable inferences in that record the transfer of the note each time it is sold. party’s favor. Ma v. Westinghouse Electric Co., No. 13-2433,

559 Fed. Appx. 165, 2014 U.S. App. LEXIS 5049, *9 As a result of what Plaintiff contends are Defendants’ (March 18, 2014); Burton v. Teleflex, Inc., 707 F.3d 417, negligent and willful violations of the foregoing statute, 425 (3d Cir. 2013). The initial burden is on the party seeking Plaintiff seeks both monetary and equitable relief in the summary judgment to point to the evidence ″which it form of a declaration and/or permanent injunction directing believes demonstrate the absence of a genuine issue of Defendants to record mortgage assignments as well as an material fact.″ United States v. Donovan, 661 F.3d 174, 185 order quieting title and finding that Defendants were unjustly (3d Cir. 2011)(quoting [**6] Celotex Corp. v. Catrett, 477 enriched. By the motions which are now before us, the U.S. 317, 323, 106 S. Ct. 2548, 91 L. Ed.2d 265 (1986)). An parties ask this Court to enter judgment and partial judgment issue is genuine only if there is a sufficient evidentiary basis in their favor as a matter of law, asserting that the dispute on which a reasonable jury could find for the non-moving between them is primarily legal in nature and that there are party, and a factual dispute is material only if it might affect no material facts in dispute. (See, e.g., MERS Defendants’ the outcome of the suit under governing law. Kaucher v. Memorandum of Law [**5] in Support of Motion for County of Bucks, 455 F.3d 418, 423 (3d Cir. 2006)(citing Summary Judgment, p. 8). Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed.2d 202 (1986)). Standards For Adjudicating Summary Judgment Motions However, to survive summary judgment, the non-moving party must present more than a mere scintilla of evidence; It is Fed. R. Civ. P. 56 which outlines the standards to be there must be evidence on which the jury could reasonably employed by the federal courts in considering motions for find for the non-movant. Jakimas v. Hoffmann-LaRoche, summary judgment. Subsection(a) of that rule provides the Inc., 485 F.3d 770, 777 (3d Cir. 2007). And, ″if there is a following in relevant part: chance that a reasonable juror would not accept a moving party’s necessary propositions of fact,″ summary judgment A party may move for summary judgment, identifying is inappropriate.″ Burton, supra, (quoting El v. SEPTA, 479 each claim or defense - or the part of each claim or F. 3d 232, 238 (3d Cir. 2007)). defense - on which summary judgment is [*546] sought. The court shall grant summary judgment if the The rule is no different where there are cross-motions for movant shows that there is no genuine dispute as to any summary judgment. As the Third Circuit Court of Appeals

16 F. Supp. 3d 542, *546; 2014 U.S. Dist. LEXIS 89222, **6 has observed: ″cross-motions are no more than a claim by (4) if Section 351 requires the documenting and each side that it alone is entitled to summary judgment, recording of transfers of secured debt and the [**7] and the making of such inherently contradictory MERS Defendants are the proper defendants, but claims does not constitute an agreement that if one is Section 351 creates no private cause of action on rejected the other is necessarily justified or that the losing behalf of the County Recorder, whether the statute party waives judicial consideration and determination can be enforced by the Recorder of Deeds by whether genuine issues of material fact exist.″ Lawrence v. bringing claims for quiet title and unjust enrichment City of Philadelphia, 527 F.3d 299, 310 (3d Cir. as a means to enforce the statutory requirements 2008)(quoting Rains v. Cascade Industries, Inc., 402 F.2d contained in Section 351; and lastly, 241, 245 (3d Cir. 1968)). And, the mere fact that ″both

(5) if summary judgment is not granted on any of parties seek summary judgment does not constitute a waiver the previous four issues, whether Plaintiff has of a full trial or the right to have the case presented to a presented the necessary proof to establish the jury.″ Facenda v. N.F.L. Films, Inc., 542 F.3d 1007, 1023 elements [**9] of her claims for unjust enrichment (3d Cir. 2008)(quoting 10A Charles Alan Wright, Arthur R. and to quiet title to land.″ Miller & Mary Kay Kane, Federal Practice and Procedure §2720 (3d ed. 1998), at 330-331).

(Defendants’ Memorandum of Law in Support of Motion for Summary Judgment, p. 9).

Discussion According to the MERS Defendants, By her response in opposition and cross-motion for partial summary judgment, Plaintiff rejoins that the entry of an ″[t]he following five legal questions and issues are Order of Declaratory Judgment finding that Defendants presented to the Court in this summary judgment have violated and are currently violating 21 P.S. §351 with motion: the result that they have been unjustly enriched at the

(1) whether Plaintiff has shown that the MERS expense of all of the county recorders of deeds in Defendants have any mortgage assignments to land Pennsylvania is appropriate. More particularly, Plaintiff in Montgomery County, Pennsylvania that have submits that because the promissory note and mortgage are not been recorded pursuant to the mandate in inseparable and an assignment of mortgage constitutes a Section 351 (as interpreted by this Court) requiring recordable conveyance of title in land, this Court should the recording of all conveyances of land; reject MERS’ argument that its system is lawful because there is no legal requirement to publicly record promissory (2) [**8] whether, in the absence of any such notes. written mortgage assignments, Section 351 requires the transfer of secured debt to first be documented

We begin by noting that Defendants’ Question 4 has already in a form suitable for recording and then recorded been effectively answered by our Memorandum of October in the land records because it creates in the

19, 2012 wherein we found no need to reach the question of transferee an equitable interest in the mortgage; whether Section 351 bestowed a private right of action [*547] (3) if transfers of secured debt must first be because Pa. R. C. P. No. 1061(b)(3) permitted Plaintiff to documented and then recorded under Section 351, pursue an action to quiet title.2 Thus, inasmuch as this whether the MERS Defendants have been the finding established the [**10] law of the case, we see no transferor or transferee of any such secured debt need to discuss it further.3 To appropriately address and and, if they have not, whether, the MERS answer Defendants’ other questions and the arguments Defendants are the proper parties who are liable for advanced by Plaintiff, we must confront head-on the model and subject to the ″mandates contained in Section upon which Defendants’ entire business is built and in so 351; doing determine whether the ″splitting″ of a promissory

16 F. Supp. 3d 542, *547; 2014 U.S. Dist. LEXIS 89222, **14 note from the mortgage lien that secures it obviates the As generally described above, the ordinary mortgage consists recording requirements imposed [*548] under the of two instruments - the note or bond 5 and the mortgage Pennsylvania statute.4 Underscoring this inquiry are the instrument itself. The mortgage is simply security for the threshold questions of what is a mortgage under payment of the note, with a right of a lien on the mortgage Pennsylvania law and what are the purposes of the premises to enforce payment. Philadelphia Federal Credit Pennsylvania recording laws? Union v. Ankrah, Civ. A. No. 13-3040, 2014 U.S. Dist.

LEXIS 21095 at *8 (E.D. Pa. Jan. 30, 2014). [**14] ″A A. What is a Mortgage? mortgage, unless it contain some express covenant to that effect, is not of itself an [*549] instrument which imports any personal liability for the money it secures.″ Baum v.

949 (3d Cir. 2012). The law of the case rules have developed to maintain consistency and avoid reconsideration of matters once decided during the course of a single continuing lawsuit. Pharmacy Benefit Manages Antitrust Litigation, 582 F.3d 432, 439 (3d Cir. 2009).

16 F. Supp. 3d 542, *549; 2014 U.S. Dist. LEXIS 89222, **14 Tomkin, 110 Pa. 569, 572, 1 A. 535, 536, 17 Week. Notes sure, by having a loan secured by both a mortgage and a Cas. 535, 43 Legal Int. 262, 33 Pitts. Leg. J. 200 (1885). In bond or note, a mortgagee has a choice of remedies - one Pennsylvania, against [**17] the mortgaged property, the other against the mortgagor personally. See, Ladner, at §22.05(b). See also, [a] mortgage may be created as well without as with an Easton Theatres, Inc. v. Wells Fargo Land & Mortgage Co., accompanying personal obligation of the mortgagor to 498 Pa. 557, 565, 449 A.2d 1372, 1376 (1982)(Dissenting pay the debt secured, or attempted to be secured Opinion, Flaherty, J.)(″The effect of executing a bond or thereby. In the one case the property alone is charged note secured by a mortgage, unless recourse on the bond is with the lien - is looked to solely by the mortgagee out specifically limited, is to subject all of the real and personal of which to make his lien; in the other, he has the property of the obligor to execution in the event of default.″). additional security of the personal obligation of the While these remedies may be pursued concurrently or mortgagor. A debt chargeable only against certain consecutively, the mortgage may have only one satisfaction. property is, in effect, simply a debt with limited means Schuylkill Trust Co. v. Sobolewski, 325 Pa. 422, 426-427, of satisfaction or enforcement; the value of the property 190 A. 919, 922 (1937); Elmwood Federal Savings Bank v. charged with the indebtedness is the measure of the Parker, 446 Pa. Super. 254, [*550] 666 A.2d 721, 724, n.6 security afforded. (1995).

Hartje’s Estate, 345 Pa. 570, 574, 28 A.2d 908, 910 (1942). Further, inasmuch as an action in mortgage foreclosure is Accordingly, under Pennsylvania state law, a valid mortgage strictly an in rem proceeding the sole purpose of which is to can be created without requiring the mortgagor to assume effect a judicial sale of the mortgaged real estate, it may not personal liability under a note. In re Farris, 194 B.R. 931, include an in personam action to enforce personal liability, 940 (Bankr. E.D. Pa. 1996).6 unless the mortgagor waives any objection to the inclusion of the breach of contract action for a personal judgment in Typically, a mortgagor’s failure to pay the amounts due and the mortgage foreclosure suit. Newtown Village Partnership owing under the note constitutes an event of default v. Kimmel, 424 Pa. Super. 53, 55, 621 A.2d 1036, 1037 following which the holder may proceed to enforce the (1993); [**18] Insilco Corp. v. Rayburn, 374 Pa. Super. 362, terms of the mortgage either through in rem foreclosure 368, 543 A.2d 120, 123 (1988)(citing Pa. R. C. P. 1141 and proceedings or by obtaining an in personam judgment on Meco Realty Company v. Burns, 414 Pa. 495, 200 A.2d 869 the note and seeking to execute. Amerco Real Estate Co. v. (1964) and First Seneca Bank v. Greenville Distributing Appalachian Self Storage, LLC, Civ. A. No. 3:11-CV-1166, Company, 367 Pa. Super. 558, 533 A.2d 157 (1987)). To 2012 U.S. Dist. LEXIS 116997 at *21 (M.D. Pa. Aug. 20, pursue both of these remedies, however, the creditor/ 2012)(citing Wilson v. Parisi, 549 F. Supp. 2d 637, 655 mortgagee must possess both the note and the mortgage. (M.D. Pa. 2008)). See also, PFCU v. Ankrah, supra, (″The See, e.g., U.S. Bank v. Montalvo, Civ. A. No. 3:08-CV-1504, holder of a bond and mortgage can proceed in rem or in 2013 U.S. Dist. LEXIS 162595 at *8 (M.D. Pa. Nov. 14, personam to enforce his claim; he may proceed by an action 2013)(where defendant mortgagee signatory to mortgage of mortgage foreclosure or by an action on the bond which only and not note, plaintiff could not have brought in the mortgage secures.″ (citing U.S. Bank, N.A. v. Mallory, personam action against him based on any alleged failures 2009 PA Super. 182, 982 A.2d 986, 992 n.3 (Pa. Super. Ct. to pay obligations due under note). 2009); Levitt v. Patrick, 2009 PA Super. 117, 976 A.2d 581(2009) and Bank of Pennsylvania v. G/N Enterprises, Additionally, notes secured by mortgages have been Inc., 316 Pa. Super. 367, 371, 463 A.2d 4, 6 (1983)). To be determined to be negotiable instruments under the

16 F. Supp. 3d 542, *550; 2014 U.S. Dist. LEXIS 89222, **19 Pennsylvania Uniform Commercial Code,7 such that the resolve this question, we turn now to an examination of the holder of such an instrument may be entitled to the purposes and intentions behind the Pennsylvania Recording protections afforded thereunder to a holder in due course. JP statutes. Morgan Chase Bank, N.A. v. Murray, 2013 PA Super. 55, 63 A.3d 1258, 1265 (2013); In re Walker, 466 B.R. 271, 282 B. Pennsylvania Recording Law (Bankr. E.D. Pa. 2012); Deutsche Bank Nat’l Trust Company v. Carmichael, 448 B.R. 690, 694 (Bankr. E.D. Pa. 2011). Generally speaking, the primary purpose behind enactment Under the [**19] Code, a note may be negotiated from one of the Pennsylvania statutes governing recording of property person to another by mere transfer of possession. See, 13 Pa. conveyances was the provision of notice of the identities of C. S. §§3201, 3203 (governing ″Negotiation,″ and ″Transfer those who held an interest in the real estate at issue, of instrument; rights acquired by transfer″). From all of this, primarily to protect subsequent bona fide purchasers from we conclude that Defendants are correct in their assertion injuries caused by secret pledges of property. 6 Summ. Pa. that Pennsylvania law does indeed recognize a clear legal Jur. 2d Property §§8:112, 9:17 (2d ed.)(2012).8 Indeed as distinction between a promissory note and a mortgage and early as 1848, the Pennsylvania Supreme Court noted that: that promissory notes may generally be freely transferred without the requirement of recording. ″The intention of the acts requiring deeds to be recorded was to secure subsequent purchasers and mortgagees This does not end the matter, however. Again, it is the against prior secret conveyances and fraudulent Defendants’ premise that because the debt transfers at issue encumbrances; and therefore when a person has notice occur by mere delivery of promissory notes, they are not of a prior conveyance, it is not a secret conveyance by ″written instruments″ subject to [*551] the recording which he can be prejudiced... requirement of Section 351. Accordingly, the question which this case presents and with which we are here Mott v. Clark, 9 Pa. 399, 405 (1848). [**22] And, just two confronted is whether a promissory note that is secured by years later, the Court observed: a mortgage also falls within the purview and meaning of a ″conveyance,″ ″contract,″ or ″other instrument of writing″ ″The principle runs through the whole system of our ″wherein it shall be the intention of the parties executing the recording acts, that the object is to give public notice in same to grant, bargain, sell and convey any lands, tenements whom the title resides; so that no one may be defrauded or hereditaments [**21] situate in th[e] Commonwealth [of by deceptious appearance of title. ... The recording Pennsylvania].″ 21 P.S. §351. If so, then the mandate of laws, like all other public laws are intended for the Section 351 is clear: it ″shall be recorded in the office for benefit and security of the people generally.″ the recording of deeds in the county where such lands, tenements and hereditaments are situate.″ Id. In an effort to Salter v. Reed, 15 Pa. 260, 263-264 (1850). These holdings

16 F. Supp. 3d 542, *551; 2014 U.S. Dist. LEXIS 89222, **24 remain undisturbed despite the passage of more than 150 [**24] actually recorded, all the incidents and force of years and thus the underlying purpose behind the a public record attach to that record. It is an early and Pennsylvania recording acts remains clear - to provide well recognized principle that one great object in notice to the public of the identities of those who hold an spreading an instrument of writing on a public record is interest in real estate as well as notice of the true nature of to give constructive notice of its contents to all the transaction on record. See, e.g., U.S. Bank, N.A. v. mankind.″ Mallory, 2009 PA Super 182, 982 A.2d 986, 994, n.6 (2009)(″Mortgages are recorded to provide notice to the Pepper’s Appeal, supra. world as to whose interest encumbers title.″); Weik v. Estate

Thus, the benefits of recording an interest in land have long of Brown, 2002 PA Super. 63, 794 A.2d 907, 911 (Pa. Super. been recognized in Pennsylvania and in 1863, the Ct. 2002); Roberts v. Estate of Pursley, 718 A.2d 837, 841

Pennsylvania legislature first decreed that such recording (Pa. Super. Ct. 1998); Mancine v. Concord-Liberty Savings should be mandatory.9 & Loan Ass’n., 299 Pa. Super. 260, 445 A.2d 744 (1982); Reiter v. Kille, 143 F. Supp. 590, 592-593 (E.D. Pa.

C. How Pennsylvania Law Treats Mortgages 1956)(holding [**23] that inasmuch as recording is obligatory in Pennsylvania so as to give public notice in Over the years, however, there was some confusion over whom title resides, federal tax lien premised on unrecorded how a mortgage should be viewed by the Pennsylvania deed ineffective as against subsequent purchaser for value); courts - was it a conveyance of title, a lien or cloud on the Capital Center Equities v. Estate of Gordon, 137 B.R. 600, title of the real estate, or merely security for the payment of 611 (Bankr. E.D. Pa. 1992)(quoting Jaques v. Weeks, 7 money or performance of some other collateral contract? Watts 261 (Pa. 1838)). In accord, 1 West’s Pa. Prac. See, e.g., Wilson v. Shoenberger’s Executors, 31 Pa. 295, §803(14)-1 (3d ed.)(2012): (″The purpose of [the] statutes 299 (1858)(″It is the settled law of the Pennsylvania [providing for the recording of deeds and mortgages] mortgage, that though in form a conveyance of title, it is in [*552] is to give notice of who holds interests in the reality, both at law and equity, only a security for the property, to provide evidence of title in case the original payment of money, or performance of other collateral documents are lost or unavailable, and to protect the interest contract.″); McIntyre v. Velte, 153 Pa. 350, 25 A. 739 holders from the claims of others.″). And in 1852, it was (1893)(″The mortgage is but a security for the payment of determined that assignments of mortgages also fell within money with a right of lien upon the mortgaged premises to the recording acts. Pepper’s Appeal, 77 Pa. 373, 377, 1 enforce payment.″); Bulger v. Wilderman, 101 Pa. Super. Week. Notes Cas. 437, 7 Legal Gaz. 205, 32 Legal Int. 321, 168 (1931)(″In [**26] form, a mortgage is certainly a 22 Pitts. Leg. J. 182 (1875); Philips v. Bank of Lewistown, conveyance; but it is unquestionably treated at law here, in 18 Pa. 394, 402 (1852). the way it is treated in equity elsewhere, as a bare incumbrance, and the accessory of a debt. As between the While the earlier versions of the recording statutes did not parties it is a conveyance, so far as is necessary to enforce make recording mandatory, nevertheless, it as a security: as regards third persons, the mortgagor is the ″[w]hen the election [to record] is made and an owner, even of the legal estate...″)(quoting Presbyterian instrument authorized by law to be recorded, is Corporation v. Wallace, 3 Rawle 109 (Pa. 1831)).

16 F. Supp. 3d 542, *552; 2014 U.S. Dist. LEXIS 89222, **27 In 2004, the Pennsylvania Supreme Court decided Pines v. Pennsylvania who were charged with the duty of collecting Farrell, 577 Pa. 564, 848 A.2d 94 (2004). Specifically the fees in connection with such transfers. Indeed, the Court [*553] issue presented in that case was whether certain reasoned: financial regulations which had been promulgated by the Court Administrator of Pennsylvania interpreting the What definitively tips the balance in this Court’s view, definition of ″property transfer″ in 42 Pa. C. S. is that, although a mortgage can be considered both a §3733(a.1)(1)(v)10 to include mortgage ssignments, mortgage conveyance in form as well as a security interest, for releases, and mortgage satisfactions were valid and purposes of actions involving recording acts, mortgages enforceable. The Pines Court began its analysis with this traditionally have been treated as conveyances. ″In all observation: questions upon the recording acts, the mortgage is spoken of as a conveyance of land.″ ... Thus, for ″Proper resolution of this question first requires an purposes of determining whether mortgage assignments, examination of the legal definition of a mortgage; i.e., mortgage satisfactions and mortgage releases are if a mortgage represents a property transfer, it logically property transfers, we begin with the premise that a follows that transactions involving mortgages are also mortgage conveys the property subject to the mortgage property transfers. The ″title theory [**27] of mortgages to the mortgagee until the obligations under [**28] the deems a mortgage to be a conveyance, while a mortgage are fulfilled. competing theory, the ″lien theory, suggests that a mortgage merely represents a security interest.″ Id. at 100 (quoting In re Long’s Appeal, 77 Pa. 151 (1874).

From there, the Court further opined: Id., 848 A.2d at 99. Recognizing that there was ample authority for both theories under Pennsylvania common law, Given our conclusion that a mortgage conditionally the Supreme Court nevertheless found that such actions conveys the subject property, it logically follows that an were ″property transfers″ which bound the recorders of assignment of the mortgagee’s rights likewise effects a deeds, clerks of courts and equivalent officials throughout conditional transfer of the subject [*554] property to

16 F. Supp. 3d 542, *554; 2014 U.S. Dist. LEXIS 89222, **28 the assignee. Additionally, even accepting respondent’s The mortgage can have no separate existence. When the argument that an assignee’s rights cannot exceed those note is paid the mortgage expires.″ Id. 83 U.S. at 275, 21 L. of the assignor, a property transfer still exists because Ed at 315. See also, National Live Stock Bank of Chicago the assignee will receive the rights held by the assignor, v. First National Bank of Geneseo, 203 U.S. 296, 306, 27 S. i.e., the conveyance of the property subject to the terms Ct. 79, 81, 51 L. Ed. 192 (1906)(same). of the mortgage. ... Thus, the Court Administrator These principles remain viable and are likewise embodied correctly defined property transfer to include mortgage in the Restatement (Third) of Property: Mortgages, §5.4 assignments. (1997), which reads as follows:

Id. at 100-101 (citation omitted). The Court reached the §5.4 Transfer of Mortgages [**32] and Obligations same conclusion with respect to mortgage satisfactions and

Secured by Mortgages releases. That is, the effect of both a mortgage satisfaction and a mortgage release was to discharge the lien and release (a) A transfer of an obligation secured by a mortgage the mortgagor from the obligations under the mortgage and also transfers the mortgage unless the parties to the to ″reconvey″ the property to the mortgagor. Pines, 848 transfer agree otherwise. A.2d at 101, 102. See also, First Citizens National Bank v. (b) Except as otherwise required by the Uniform Sherwood, 583 Pa. 466, 879 A. 2d 178, 180, n.2 (2005)(″A Commercial Code, a transfer of a mortgage also transfers [**29] transfer of title is no insubstantial thing, but rather the obligation the mortgage secures unless the parties to resembles a right or privilege which is permanent in nature. the transfer agree otherwise. The fact that at one point, the mortgagor may fulfill the [*555] (c) A mortgage may be enforced only by, or in obligations of the mortgage, and thereby receive title to the behalf of, a person who is entitled to enforce the mortgaged property, does not negate the fact that mortgaging obligation the mortgage secures. the property transfers the title to the mortgagee.″).

Pennsylvania law was and is in accord. See, e.g., In re North While Pines may not be on all fours with the case at hand City Trust Co., 327 Pa. 356, 361, 194 A. 395, 398 (1937) inasmuch as we are charged here with interpreting a (″[C]ollateral for a debt follows the obligation into the different statute, it nonetheless represents a clear statement hands of the assignee thereof.″); Beaver Trust Co. v. of Pennsylvania law which is equally applicable in this case Morgan, 259 Pa. 567, 103 A. 367, 369 (1918)(″A purchase particularly in view of its specific reference to the recording of a debt is a purchase of all the securities for it, whether acts. Hence, inasmuch as ″conveyance″ is defined, inter named or not at the time of the assignment, unless expressly alia, as ″a. Transfer of title to property from one person to agreed at the time they shall not pass.″); Moore v. Cornell, another. b. The document by which this transfer is 68 Pa. 320, 322 (1871)(″A [**33] mortgage is discharged by effected,″11 we likewise find that a mortgage assignment is payment, and an assignment of the debt transfers the right to a ″conveyance″ subject to the recording mandate of §351. the mortgage itself; for whatever will give the money secured by the mortgage, will carry the mortgaged premises D. Severability of Notes and Mortgages along with it.″); 13 Pa. C. S. §9203(g)(″The attachment of a security interest in a right to payment or performance In view of this finding, we next consider whether a note secured by a security interest or other lien on personal or memorializing debt that is secured by a mortgage stands real property is also attachment of a security interest in the alone such that it may be freely transferred by change in security interest, mortgage or other lien.″). See also, Russell’s possession or whether it too must be recorded.

Appeal, 15 Pa. 319, 321, 322 (1950)(″Even, although a Under well-settled, long-held American law, where conveyance be absolute in its terms, if it is intended by the ″mortgaged premises are pledged as security for debt,″... parties to be a mere security for the payment of a debt, it is ″the note and mortgage are inseparable. ...″ Carpenter v. a mortgage. ... An article of agreement for the sale of land, Longan, 83 U.S. 271, 274, 16 Wall. 271, 21 L. Ed. 313, 315 accompanied by delivery of possession and payment of part (1872). Thus, ″[a]n assignment of the note carries the of the purchase-money, is much more than a chose in action; mortgage with it, while an assignment of the latter alone is it is an abiding interest in the land itself.″). a nullity.″ Id. Indeed, ″[a]ll the authorities agree that the This notion that notes and mortgages are legally inter-woven debt is the principal thing and the mortgage an accessory. ... is further supported by the language employed by the

16 F. Supp. 3d 542, *555; 2014 U.S. Dist. LEXIS 89222, **33 Multistate Fixed Rate Uniform Instrument Note and successors and assigns) and to the successors and Pennsylvania Mortgage forms 12 which appear to be currently assigns of MERS, the following described property utilized in most loan settlement transactions in which located in this (County) of which currently has the MERS is designated [**34] as the mortgagee. Beginning address of (Street), (City), Pennsylvania (Zip with the Note form, at paragraph 10, the following verbiage Code) (″Property Address″) ... appears:

TOGETHER WITH all the improvements now or hereafter erected on the property, and all easements, ... In addition to the protections given to the Note appurtenances, and fixtures now or hereafter a part of Holder under this Note, a Mortgage, Deed of Trust, or the property. All replacements and additions shall also Security Deed (the ″Security Instrument″), dated the be covered by this Security Instrument. All of [**36] the same date as this Note, protects the Note Holder from foregoing is referred to in this Security Instrument as possible losses which might result if I do not keep the the ″Property.″ Borrower understands and agrees that promises which I make in this Note. That Security

MERS holds only legal title to the interests granted by Instrument describes how and under what conditions I the Borrower in this Security Instrument, but if may be required to make immediate payment in full of necessary to comply with law or custom, MERS (as all amounts I owe under this Note. ... nominee for Lender and Lender’s successors and The Mortgage, in turn, includes the following language in assigns) has the right: to exercise any or all of those excerpted relevant parts: interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action Definitions required of Lender including, but not limited to, releasing and canceling this Security Instrument. (C) ″MERS″ is Mortgage Electronic Registration ... Systems, Inc. MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s UNIFORM COVENANTS. Borrower and Lender successors and assigns. MERS is the mortgagee covenant and agree as follows: [**35] under this Security Instrument. ...

... ...

9. Protection of Lender’s Interest in the Property (E) ″Note″ means the promissory note signed by and Rights Under this Security Instrument. Borrower and dated . ...

If (a) Borrower fails to perform the covenants and ... agreements contained in this Security Instrument, (b) (G) ″Loan″ means the debt evidenced by the Note, plus there is a legal proceeding that might significantly interest, any prepayment charges and late charges due affect Lender’s interest in the Property and/or rights under [*556] the Note, and all sums due under this under this Security Instrument (such as a proceeding in Security Instrument, plus interest. bankruptcy, probate, for condemnation or forfeiture, for enforcement of a lien which may attain priority over ... this Security Instrument or to enforce laws or regulations), or (c) Borrower [**37] has abandoned the

Transfer of Rights in the Property

Property, then Lender may do and pay for whatever is This Security Instrument secures to Lender: (i) the reasonable or appropriate to protect Lender’s interest in repayment of the Loan, and all renewals, extensions the Property and rights under this Security Instrument, and modifications of the Note; and (ii) the performance including protecting and/or assessing the value of the of Borrower’s covenants and agreements under this Property, and securing and/or repairing the Property. Security Instrument and the Note. For this purpose, Lender’s actions can include, but are not limited to: (a) Borrower does hereby mortgage, grant and convey to paying any sums secured by a lien which has priority MERS (solely as nominee for Lender and Lender’s over this Security Instrument; (b) appearing in court;

16 F. Supp. 3d 542, *556; 2014 U.S. Dist. LEXIS 89222, **37 and (c) paying reasonable attorneys’ fees to protect its successor Loan Servicer and are not assumed by the interest in the Property and/or rights under this Security Note purchaser unless otherwise provided by the Note Instrument, including its secured position in a purchaser. bankruptcy proceeding. ... ... ... (Emphasis in original) 20. Sale of Note; Change of Loan Servicer; Notice of It therefore appears obvious from all of the foregoing, that Grievance. The Note or a partial interest in the Note whether effectuated via a writing or a mere ″transfer of (together with this Security Instrument) can be sold one possession″ of a note, the result is the same by operation of or more times without prior notice to Borrower. A sale law - an interest in and/or title to the property which secures might result in a change in the entity (known as the it has been assigned and conveyed from one party to another ″Loan Servicer″) that collects Periodic Payments due under Pennsylvania law.13 As to the requirement of a under the Note and this Security Instrument and writing, 21 P.S. §623-1 14 is crystal clear: ″Hereafter no performs [*557] other mortgage loan servicing assignment of any mortgage shall be entered of record in obligations under the Note, this Security Instrument, any county of the second class, unless [**39] such and Applicable Law. There also might be one or more assignment shall be in writing, and acknowledged by the changes of the Loan Servicer [**38] unrelated to a sale assignor or assignors before an officer or person duly of the Note. If there is a change of the Loan Servicer, authorized to take such acknowledgments.″ Accordingly, in Borrower will be given written notice of the change answer to Defendants’ question No. 2 as formulated in its which will state the name and address of the new Loan motion papers, we now hereby find that the Pennsylvania Servicer, the address to which payments should be Recording Act does in fact require the transfer of secured made and any other information RESPA requires in debt to first be documented in a form suitable for recording connection with a notice of transfer of servicing. If the and then recorded in the land records because it creates in Note is sold and thereafter the Loan is serviced by a the transferee an equitable interest in the mortgage.15 Loan Servicer other than the purchaser of the Note, the mortgage loan servicing obligations to Borrower will [*558] We endeavor now to answer Defendants’ first and remain with the Loan Servicer or be transferred to a third questions and to confront what is perhaps the most

16 F. Supp. 3d 542, *558; 2014 U.S. Dist. LEXIS 89222, **39 challenging issue in this case: whether the MERS Defendants subsidiary of MERSCORP. MERSCORP operates the have been the transferor or transferee of unrecorded secured MERS ® system and membership in the MERS ® debt and if not, whether they are the proper parties who are System and members are governed by the MERS ® subject to the mandates contained in the recording System Rules of Membership. It is MERS that serves [**42] statutes. as the mortgagee of record in the public land records as the ″nominee″ for a lender (noteholder) E. MERS as ″Nominee″ and its successors and assigns. (Emphasis added)

And, under MERS Rule 8, Section 2(a),16 The MERS Defendants have repeatedly taken the position that, in commencing the instant action, Plaintiffs sued the [*559] If a Member chooses to conduct foreclosures in wrong parties because ″MERS has not and does not the name of Mortgage Electronic Registration Systems, negotiate or transfer promissory notes secured by mortgages Inc., the note must be endorsed in blank and in recorded in Montgomery County, Pennsylvania.″ (MERS’ possession of one of the Member’s MERS certifying Memorandum of Law in Support of Their Motion for officers. If the investor so allows, then MERS can be Summary Judgment, at p. 44). More particularly, MERS designated as the note-holder. argues:

Thus, in apparent contradiction to its argument, MERS at But there is no circumstance and no amount of wild least initially acknowledges that it in fact is ″involved with speculation that could lead the Court to conclude that the transfer of the note″ by virtue of its service as the Section 351 mandates that a person or entity who did mortgagee of record as the nominee for a lender/noteholder not buy the note, did not sell the note, and was not in and its successors and assigns and that when required to any way involved with the transfer of the note, either as facilitate a foreclosure, MERS itself can become a an assignor or as an assignee, is the person or entity that ″note-holder.″ Section 351 mandates is responsible for documenting and then recording note transfers or other changes in The relationship between the MERS Defendants (″MERS″) ownership of debt. and its members is more particularly described by William

C. Hultman, the Vice President of [**45] Legislative Affairs (MERS’ Memo of Law in Support of Motion for Summary for MERSCORP and a former officer of MERS, in his Judgment at p. 45). Declaration which is attached to Defendants’ Memorandum of Law in Support of Motion for Summary Judgment as At first blush, this argument appears compelling. However, Exhibit ″A.″ According to Mr. Hultman, now that it is clear that transfer of the note by operation of law also transfers the mortgage, the argument loses much of 6. In regard to the mortgage or security instrument, the its original luster. What’s more, as recited in the MERS borrower and lender contractually agree to designate Defendants’ Memorandum [**43] of Law in Support of MERS as the mortgagee (as the nominee for the lender Their Motion for Summary Judgment at page 10: and the lender’s successors and assigns) such that legal title to the lender’s (and its successors and assigns) Defendants are MERSCORP Holdings, Inc. secured interests in the property are held by MERS on (″MERSCORP″) and Mortgage Electronic Registration behalf of subsequent transferees of the promissory note. Systems, Inc. (″MERS″). MERS is a wholly owned MERS serves as the mortgagee of record on a mortgage,

16 F. Supp. 3d 542, *559; 2014 U.S. Dist. LEXIS 89222, **45 as the nominee (i.e., agent) for the lender and for the We likewise reject the proposition that MERS is not subject lender’s successors and assigns, who are members of to liability because it is only an agent for its member-lenders. the MERS ® System. Indeed, as a general matter, an ″agent″ is a ″person authorized by another (principal) to act for or in place of ... him; one intrusted with another’s business.″ BLACK’S 9. From time to time, MERS assigns the MERS LAW DICTIONARY 63 (6th ed. 1990). An agent holds the Mortgages. In such instances, MERS is the assignor of power to alter the legal relations between the principal and the MERS Mortgage, and it is a MERS Signing Officer third persons. Tribune-Review Publishing Co. v. who signs the assignment of the MERS Mortgage Westmoreland County Housing Authority, 574 Pa. 661, 675, (″MERS Assignment of Mortgage″). Once the MERS 833 A.2d 112, 120 (2003). An agency relationship arises Assignment of Mortgage is duly executed and delivered, when the following basic elements coalesce: there is a the MERS Assignment of Mortgage is, as required by manifestation by the principal that the agent shall act for the MERS ® System rules, recorded in the public, local him, the agent accepts the undertaking, and the parties land records, [**46] and any fees imposed for recording understand that the principal [**48] is to be in control of the the MERS Assignment of Mortgage are paid. undertaking. V-Tech Services, Inc. v. Street, 2013 PA Super.

166, 72 A.3d 270, 278 (2013)(quoting Walton v. Robert ... Wood Johnson University Hospital, 2013 PA Super 108, 66 11. ... MERS’s only role is and was to serve as the A.3d 782 (2013)). The party asserting the existence of an mortgagee on the mortgage - as the nominee (or in the agency relationship bears the burden of proving it by a fair stead) of the lender and the lender’s successors and preponderance of the evidence. Id. (quoting Id.). assigns, who are members of the MERS ® System. It is a basic tenet of agency law that an individual acting as an agent for a disclosed principal is not personally liable on ... a contract between the principal and a third party unless the agent specifically agrees to assume liability. 14. When the transfer or sale of the debt or promissory

Azarchi-Steinhauser v. Protective Life Insurance Co., 629 F. note involves a MERS ® System member, MERS

Supp. 2d 495, 499-500 (E.D. Pa. 2009)(quoting Vernon D. remains as the mortgagee of record and continues to act

Cox & Co. v. Giles, 267 Pa. Super. 411, 406 A.2d 1107, as the mortgagee as the nominee for the purchaser (who

1110 (1979). Instead, the principal is liable for and bound by is the beneficial owner of the debt or note), who is then any acts that the agent performs with actual or implied the lender’s successor or assign. The MERS Mortgage authority from the principal that are within the scope of the is not assigned because MERS remains the mortgagee agent’s employment. Id. However, an authorized agent who as the nominee for purchaser. enters into a contract on behalf of a principal without (Hultman Declaration, Exhibit ″A,″ at pp. 3-4, 5). See also, disclosing that it is acting for the principal, is personally Deposition of William C. Hultman of October 18, 2013, at liable on the contract. Burton v. Boland, 339 Pa. Super. 444, p. 65-66, annexed to Plaintiff’s Memorandum of Law in 446, 489 A.2d 243, 245 (1985)(citing [**49] Revere Press, Opposition to Defendants’ Motion for Summary Judgment Inc. v. Blumberg, 431 Pa. 370, 246 A.2d 407 (1968) and and in Support of Cross-Motion for Summary Judgment as Dwyer v. Rothman, 288 Pa. Super. 256, 431 A.2d 1035 Exhibit ″A13″). (1981)). See also, Strawbridge & Clothier v. Garment

Manufacturers, Inc., 189 Pa. Super. 43, 46, 149 A.2d 471, [*560] Therefore according also to Mr. Hultman, MERS is 472 (1959)(″An agent for undisclosed principals bears the both named as the mortgagee and acts as agent for the legal consequences of assuming liability for those lenders - not only the lender which originates the loan to the undertakings which his principals would have undertaken, borrower, but also those lenders to whom the note is had he made a disclosure.″); Pennsylvania Railway Co. v. [**47] ultimately sold and transferred. It is MERS that Rothstein, 116 Pa. Super. 156, 161, 176 A. 861 (1935)(″It is ″from time to time″ will assign and record the mortgages an elemental principle of agency that to relieve himself from over which it has charge in the public local land records and liability, an agent in dealing with a third party must not only ensure that any associated fees therefor are paid. See also, disclose the fact of the agency, but also the name of his Plaintiff’s Exhibit ″A10,″ MERS’ System Rules of principal.″). Membership, Section 10, p. 45). Clearly then, MERS is As per Mr. Hultman, involved with the transfer of the note and mortgage and we 3. MERSCORP maintains a database of the loans find, is an appropriate party to this action. registered on the MERS ® System. The information on

16 F. Supp. 3d 542, *560; 2014 U.S. Dist. LEXIS 89222, **49 the database tracks the beneficial interests in, and the responsible as an undisclosed agent of the lenders for whom servicing rights to, the loans registered on and by the it was acting as ″nominee.″ Accordingly, we now hold that members of the [*561] MERS ® System. It is the the MERS Defendants are proper parties who may be liable MERS ® System members who are responsible for and for and subject to the mandates of the Pennsylvania who report the transactions regarding the registered Recording Statutes in general and Section 351 in particular. loans by inputting the data regarding the beneficial Defendants’ motion for summary judgment is therefore interests in, and servicing rights to, the members’ denied as to Count I of the Complaint. particular [**50] loans registered on the MERS ® System. For example, if there is a transfer of the F. Plaintiff’s Claims for Unjust Enrichment and Quiet Title beneficial interests of a loan as a result of a promissory note being transferred, it is the MERS ® System Defendants also move for summary judgment in their favor member (or the MERS ® System member who is the on Plaintiff’s [**52] causes of action for unjust enrichment servicer of the loan for the transferee of those beneficial and to quiet title,17 asserting as the reasons therefor that interests) that reports the transfer of beneficial interests Plaintiff has failed to prove the essential elements of each. by inputting the data reflecting the transfer onto the We note at the outset that to survive a summary judgment MERS ® System database. motion, the non-moving party is not required to prove its Neither MERS nor MERSCORP is involved in any way case, although it must present sufficient evidence on which in the transfer, sale, or purchase of any promissory a jury could reasonably find in its favor. See, e.g., Jakimas, notes, and neither MERS nor MERSCORP is involved and Kaucher, both supra. [*562] After reviewing the in reporting the transfer, sale, or purchase of any evidentiary materials in the record of this matter in the light promissory notes by a MERS ® System member to most favorable to the plaintiff, we find that it has indeed another MERS ® System member, or by a MERS ® mustered sufficient evidence to proceed to trial. System member to one who is not a MERS ® System

Pursuant to Pa. R. C. P. 1061(b)(3), an action to quiet title member. may be brought to compel an adverse party to file, record, cancel, surrender or satisfy [**53] of record, or admit the

(Hultman Declaration, at pp. 3-4). validity, invalidity or discharge of, any document, obligation Hence as Mr. Hultman’s declaration attests, the identities of or deed affecting any right, lien, title or interest in land. the lenders for whom MERS is acting as agent are only Kean v. Forman, 2000 PA Super. 141, 752 A.2d 906, 908 revealed to other MERS members by MERS members, as (2000), appeal denied, 564 Pa. 712, 764 A.2d 1070 (2000). ″neither MERS nor MERSCORP is involved in reporting Rule 1061 was intended to be liberally construed. Brennan the transfer, sale or purchase of any promissory notes″ by v. Shore Brothers, Inc., 380 Pa. 283, 286, 110 A.2d 401, 402 one member to another nor to anyone who is not a member. (1955). (See also, Exhibit ″A20″ to Plaintiff’s Memorandum [**51] of Law in Opposition to Defendant’s Motion for In our Memorandum Opinion of October 19, 2012, we held Summary Judgment and in Support of Cross Motion for that Plaintiff had sufficiently pled a quiet title claim by Summary Judgment, Deposition Testimony of R.K. Arnold alleging that she was a ″party in any manner interested in in Henderson v. MERS, Case No. CV 2008-900805 in the the assignment - i.e. conveyance of mortgages recorded in Circuit Court of Montgomery County, AL, dated 9/25/09, at the name of MERS as nominee,″ and that she had pled ″a p. 112, lines 10-12: ″The members utilize the [MERS] pecuniary interest which is affected by whether the mortgage system to track the note.″). That the identities of the assignments which MERS tracks are recorded.″ See, 904 F. lenders/note holders for whom MERS is ostensibly acting as Supp. 2d at 451. The evidentiary materials produced by agent are likewise inaccessible to licensed title agents and Plaintiff in opposition to Defendants’ Motion for Summary consumers has also been attested. (See, Plaintiff’s Exhibits Judgment include, among other things, a statewide summary ″B,″ p.5, ″G,″ pp. 6-7 and ″H,″ p. 6). from the Pennsylvania Department of Revenue showing the From this we conclude that ample evidence exists to support total number of instruments (deeds, mortgages and other the argument that MERS may alternatively be held writs) recorded in each county Recorder of Deeds office and

16 F. Supp. 3d 542, *562; 2014 U.S. Dist. LEXIS 89222, **53 the amounts collected in recording fees for the 2011 Plaintiff Becker herself also testified that it is the obligation calendar [**54] year and a survey prepared by the of the Recorders of Deeds to make sure that the chain of title Philadelphia Department of Records for the period between of properties in their county is clear and complete. (See, 2000 and 2012 of the number of MERS and non-MERS Plaintiff’s Exhibit ″A9,″ Deposition of Nancy Becker dated recorded documents, as well as a number of Affidavits from July 17, 2013, p. 48). Indeed, the Pennsylvania Superior attorneys and former attorneys from Community Legal Court has found that ″the primary duty of the recorder of Services, the Pennsylvania Legal Aid Network, and the deeds is to serve the public by receiving and duly recording Housing Alliance of Pennsylvania. (See, Plaintiff’s Exhibits any recordable instruments as to serve the future necessities ″B,″ ″C,″ ″D,″ ″E″ and ″F″). As these Exhibits demonstrate, of the law,″ and that ″as the custodian of the county deed over the last twelve years, the number of documents books, the recorder of deeds is obligated to protect the recorded by MERS has steadily increased, while the number public in preserving the integrity of the official records of of documents recorded by others has steadily decreased. his or her office.″ Schaeffer v. Frey, 403 Pa. Super. 560, There has, in turn, been a corresponding decrease in the 567-568, 589 A.2d 752, 756 (1991)(internal citations amount of recording fees collected by the county Recorders omitted). However, over the past several years, a number of of Deeds. Inasmuch as Community Legal Services, the residents who were facing foreclosure didn’t know who Legal Aid Network and the Housing Alliance receive much owned their mortgage or to whom they should be making of their funding and financial support from the collection of, their [**57] mortgage payments. (Id., 66). Plaintiff attributes inter alia, fees paid to the Recorders of Deeds offices, they this to the fact that MERS is not recording all of the note too have suffered monetary injury. assignments with the result that not only is there a loss in revenue, but also the land title records are incomplete to the In addition, Plaintiff has produced reports from two of its public. (Id., 65-68, 176-177). proposed expert witnesses with experience in forensic

Finally, Plaintiff also testified that based on a forensic audit analysis of chain of title issues and real estate law - Marie which revealed that a MERS-affiliated mortgage was T. McDonnell and Charles W. Proctor, III. Ms. McDonnell transferred on average between 4 and 12 times, she [**55] reported on her analysis of a MERS mortgage for a conservatively estimates that Montgomery County alone residential property in Montgomery County which was has lost $15.7 million in recording fees. (Id., 178-180). originated with Countrywide Home Loans, Inc. in June,

Because we find that all of this evidence is sufficient to 2005, was securitized in late August, 2005, sold at least demonstrate that a genuine issue of material fact exists with three times and foreclosed in March, 2013. (See, Plaintiff’s respect to Plaintiff’s entitlement to quiet title relief, Exhibit ″G,″ pp. 3-5). Throughout the process, Ms.

Defendants’ motion for the entry of judgment in their favor McDonnell found that there were five missing assignments as a matter of law on this claim is also denied. that should have been recorded with the Montgomery

We reach the same conclusion with regard to Plaintiff’s County Recorder of Deeds, that the MERS Milestones data was incomplete and in contradiction to the securitization unjust enrichment claim. A cause of action for unjust deal documents, and that title to the property had been enrichment is a claim by which the plaintiff seeks restitution corrupted by MERS’ failure to record a complete chain of for benefits conferred on and retained by a defendant who title. (Exhibit ″G,″ p.7). offered no compensation in circumstances where compensation was reasonably expected. White v. Conestoga In his Declaration, Mr. Proctor attests that licensed title Title Insurance Co., 617 Pa. 498, 504, 53 A.3d 720, 723 agents have no access to the information in the bar codes (2012). [**58] A showing of unjust enrichment requires a which MERS adds to every document that it records or to demonstration that: (1) a benefit was conferred on the the MERS data base of exchanges, sales and assignments defendant; (2) appreciation of such benefits by defendant; that [*563] MERS facilitates for the benefit of its and (3) acceptance and retention of such benefits under customers/members. This means that title searchers and circumstances that it would be inequitable for defendant to consumers are denied the ability to ascertain who currently retain the benefit without payment to the plaintiff. EBC, Inc. owns the note secured by a MERS mortgage and that neither v. Clark Building Systems, Inc., 618 F.3d 253, 273 (3d Cir. the mortgagor nor the courts can ascertain the chain of 2010); Durst v. Milroy General Contracting, 2012 PA Super. events or [**56] the validity of a transaction. This results, 179, 52 A.3d 357, 360 (2012). Here, Plaintiff proffers the according to Mr. Proctor, in an erosion of Pennsylvania’s videotaped deposition testimony of its former President and land records and the inability to evaluate the marketability CEO, R.K. Arnold in Henderson v. Merscorp, Inc., et. al., a of title and credit worthiness of the consumer. (See, similar action before the Circuit Court for Montgomery Plaintiff’s Exhibit ″H,″ pp. 6-7). County, Alabama:

16 F. Supp. 3d 542, *563; 2014 U.S. Dist. LEXIS 89222, **58 Q. ... Is it your company’s intention to supplement or declaration, whether or not further relief is or could be assist the public land records of the several states with sought. Any such declaration shall have the force and the MERS system to make it more clear about who effect of a final judgment or decree and shall be owns what? reviewable as such. A. No.

This language has been said to ″place a remedial arrow in [*564] Q. Is it your company’s intent to supplant the the district court’s quiver,″ and to confer ″a unique and mortgage land records of various states with its system? substantial discretion on federal courts to determine whether to declare litigants’ rights.″ Reifer v. Westport Insurance A. No. We layer it on top is the way to think of it.

Corp., No. 13-2880, 751 F.3d 129, 2014 U.S. App. LEXIS Q. When you say layer it on top, explain that, please. 8014 *24 (3d Cir. Apr. 29, 2014) (quoting Wilton v. Seven

Falls Co., 515 U.S. 277, 286, 288, 115 S. Ct. 2137, 132 L. A. Well, the MERS system couldn’t exist if the recording Ed. 2d 214 (1995)). Generally, the judgment in a suit for system didn’t exist. declaratory judgment must be responsive to the pleadings Q. But the recording system can exist [**59] without and issues presented. Westport Insurance Corp. v. Bayer, MERS? 284 F.3d 489, 499 (3d Cir. 2002). [**61] Indeed, ″[w]hen all is said and done,″ the Supreme Court has concluded, ″the A. Certainly. So we are the mortgagee of record, and propriety of declaratory relief in a particular case will there has to be a place for us to establish that. And then depend upon a circumspect sense of its fitness informed by we track the servicer. the teachings and experience concerning the functions and extent of federal judicial power.″ Wilton, 515 U.S. at 287, (See, Plaintiff’s Exhibit ″A20,″ 111-112). This testimony is, 115 S. Ct. at 2143. A declaratory judgment action is we find, essentially tantamount to an admission that by appropriate when the declaration will settle the question maintaining the recording system in Pennsylvania, the presented and terminate the entire controversy - courts are county recorders of deeds confer a benefit upon defendants to avoid using declaratory judgment to make abstract which is in fact appreciated by defendants. Because determinations or to try the controversy in piecemeal Defendants do not pay any fees when a note is transferred fashion. Pennsylvania Video Operators v. United States, 731 between its membership fee-paying members, we find that F. Supp. 717, 719 (W.D. Pa. 1990), aff’d w/o opinion, a genuine issue of material fact exists as to whether it would [*565] 919 F.2d 136 (3d Cir. 1990)(citing Maryland be unjust to allow Defendants to retain the benefits conferred Casualty Co. v. Rosen, 445 F.2d 1012 (2d Cir. 1971) and on them without paying Plaintiff and the class whom she Rowland v. Tarr, 378 F. Supp. 766, 769 (E.D. Pa. 1974)). represents therefor. Consequently, Defendants’ motion for summary judgment as to Count III of the Complaint is also Over the years, the Third Circuit has enumerated the denied. following factors for district courts to consider when exercising Declaratory Judgment Act discretion. These are: G. Plaintiff’s Cross Motion for Partial Summary Judgment

(1) the likelihood that a federal court declaration will In addition to opposing Defendants’ Motion for Summary resolve the uncertainty of obligation which gave rise to Judgment, Plaintiff also seeks the entry of partial judgment the controversy; in her favor as a matter of law pursuant to Count IV of her Complaint and asserts that this Court should now enter an (2) the convenience of the parties; order declaring that Defendants’ past and present failures to

(3) the [**62] public interest in settlement of the [**60] record note assignments among its members uncertainty of the obligation; and constitutes a violation of Section 351 and that Defendants have been unjustly enriched by their actions. (4) the availability and relative convenience of other remedies. Under the Declaratory Judgment Act, 28 U.S.C. §2201,

Reifer v. Westport Insurance Co., 2014 U.S. App. LEXIS at (a) In a case of actual controversy within its jurisdiction, *28 (citing United States v. Pa. Dep’t of Envtl. Res., 923 ... any court of the United States, upon the filing of an F.2d 1071, 1075 (3d Cir. 1991), Terra Nova Ins. Co. v. 900 appropriate pleading, may declare the rights and other Bar, Inc., 887 F.2d 1213, 1224 (3d Cir. 1989) and Bituminous legal relations of any interested party seeking such Coal Operators’ Assoc. v. Int’l Union, United Mine Workers

16 F. Supp. 3d 542, *565; 2014 U.S. Dist. LEXIS 89222, **62 of America, 585 F.2d 586, 596 (3d Cir. 1975), abrogated on entirety and the Plaintiff’s Cross-Motion for Partial Summary other grounds by Carbon Fuel Co. v. United Mine Workers Judgment shall be granted in part. An appropriate order of Am., 444 U.S. 212, 100 S. Ct. 410, 62 L. Ed. 2d 394 follows. (1979)).

ORDER In this matter and in light of the rationale outlined in the preceding sections of this opinion, we must concur with AND NOW, this 30th Day of June, 2014, upon Plaintiff’s assertion that declaratory judgment is now [**65] consideration of the Motion for Summary Judgment properly entered in her favor with regard to Count I of the of Defendants, Merscorp, Inc. and Mortgage Electronic Complaint such that we now formally declare that the Registration Systems, Inc. (collectively ″MERS Defendants″) assignment or transfer of a promissory note secured by a (Doc. No. 66) and Plaintiff’s Cross-Motion for Partial mortgage on real estate is, in Pennsylvania, equivalent to a Summary Judgment (Doc. No. 80) and the parties’ further mortgage assignment. We further declare that Defendants’ Memoranda of Law in Support and in Opposition, it is failure to create and record documents evincing the transfers hereby ORDERED that Defendants’ Motion is DENIED in of promissory notes secured by mortgages on real estate in its entirety and Plaintiff’s Motion is GRANTED IN PART the Commonwealth [**63] of Pennsylvania is, was and will as outlined in the preceding Memorandum Opinion. in the future be, in violation of the Pennsylvania Recording law - most particularly 21 P.S. §§351.18 Plaintiff’s motion IT IS FURTHER ORDERED that Declaratory Judgment is for partial summary judgment is therefore granted as to hereby entered in favor of Plaintiff and against Defendants Defendants’ liability under Count I with the issue of the such that Defendants’ are declared to be obligated to create extent of the damages as a consequence of these violations and record written documents memorializing the transfers to be addressed at the trial of this matter. of debt/promissory notes which are secured by real estate mortgages in the Commonwealth of Pennsylvania for all We must decline to enter summary judgment in Plaintiff’s such debt transfers past, present and future in the Office for favor as to Count III however. To be sure, while there the Recording of Deeds in the County where such property clearly is evidence that Defendants may have been unjustly is situate. enriched as a result of the conduct complained of, we do not find the record to have been sufficiently developed on this IT IS STILL FURTHER ORDERED AND DECLARED claim to allow the entry of judgment as a matter of law or that inasmuch as such debt/mortgage note transfers are to make an award of damages at this time. Therefore, we conveyances within the meaning of Pennsylvania law, the leave this claim to be further and finally thrashed out at trial. failure to so document and record is violative of the So saying, Plaintiff’s motion for partial summary judgment Pennsylvania Recording Statute(s). shall be granted in part.19

BY THE [**66] COURT: Conclusion /s/ J. Curtis Joyner For all of the reasons set forth above, the Defendants’ J. CURTIS JOYNER, J. Motion for Summary [*566] Judgment shall be denied in its

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT _________________________________________ No. 14-4315

_________________________________________ MONTGOMERY COUNTY, PENNSYLVANIA, RECORDER OF DEEDS, by and through NANCY J. BECKER, in her official capacity as the Recorder of

Deeds of Montgomery County, Pennsylvania,

Plaintiff-Appellee, v.

MERSCORP, INC., and MORTGAGE ELECTRONIC

REGISTRATION SYSTEMS, INC.

Defendants-Appellants.

_________________________________________

Appeal from the July 11, 2014 decision of the United States District Court for the Eastern District of Pennsylvania Civil Action No. 11-CV-06968

(Honorable Curtis Joyner) certified for interlocutory appeal on

September 8, 2014

_________________________________________

BRIEF OF AMICUS CURIAE THE LEGAL SERVICES CENTER

OF HARVARD LAW SCHOOL AND LAW PROFESSORS

IN SUPPORT OF THE APPELLEE _________________________________________

MAX WEINSTEIN CHARLES CARRIERE K-SUE PARK LEGAL SERVICES CENTER OF HARVARD LAW SCHOOL 120 Boylston Street Jamaica Plain, MA (617) 390-2694

March 16, 2015 i CORPORATE DISCLOSURE STATEMENT

The Legal Services Center is a program of Harvard Law School at Harvard University, a 501(c)(3) non-profit organization. No party, party’s counsel, nor any person other than the amicus curiae authored any part of the brief, nor contributed money intended to fund preparing or submitting the brief. ii

TABLE OF CONTENTS

STATEMENT OF INTEREST………………………………………………........... 1 ISSUE TO BE ADDRESSED………………………………………………………. 1 SUMMARY OF ARGUMENT…………………………………………………….. 1 ARGUMENT………………………………………………...................................... 4

I. MERS is a departure from and disruption of the traditional recording practices, upon which it relies…………………………............................. 4 A. Prior to MERS, records of real property interests were public, transparent, and provided a secure foundation upon which the American economy could grow……………………………………. 4

B. MERS was created to reduce costs for sellers of mortgage-backed securities (MBS)………………………………………................... 6 C. The MERS structure substitutes the MERS name for that of the mortgage lender in the county registry……………………............. 8 D. MERS privatized and made the documentation of transfers of mortgage notes optional, discouraging the mortgage industry from maintaining complete records of actual holders of interests in real property……………………………………….................................. 10

E. MERS interferes with Pennsylvania’s requirement that purported assignees prove their relationship to the original lender in order to foreclose……………………………………………………………. 12

F. MERS lacks legal authority and public accountability…................. 12 G. MERS acts as a placeholder in the traditional recording system, and cannot function without that system ……………………......... 17 II. MERS helped precipitate the foreclosure crisis and left homeowners without recourse to protect their property rights……………………………... 18

A. MERS facilitated the securitization of subprime loans……………..18 B. MERS increased the costs of enforcing property rights and left homeowners without recourse to challenge wrongful foreclosures....................................................................................... 21 C. Surveys, audits and public media have exposed the inaccuracy of records in the MERS database……………………………………... 22 D. Court proceedings and federal agency investigations have exposed the inaccuracy of records in the MERS database………..………….24 E. MERS’s inaccuracy affects not only the properties for which it is named as mortgagee, but all properties adjoining those properties……………………………………………………………26 iii CONCLUSION……………………………………………………………………... 26 CERTIFICATES ………………………………………………………………........ 28 iv TABLE OF AUTHORITIES

Scholarly Authorities Page(s) Ann M. Burkhart, Lenders and Land, 64 Mo. L. Rev. 249 (1999)……………….. 7 M. Mark Heekin, Modernizing Mortgage Foreclosure Law: A Call for Transparency and an End to the Payment Rule, 33 Quinnipiac L. Rev. 165 (2014)………………………………………. 5-6, 21-22 Adam J. Levitin, The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title, 63 Duke L.J. 637 (2013)………………………………………………..... 14, 15, 21 Gloria J. Liddell and Pearson Liddell, Jr., Robo Signers: The Legal Quagmire of Invalid Residential Foreclosure Proceedings and the Resultant Potential Impact Upon Stakeholders, 16 Chap. L. Rev. 367 (2012) ……...……………………….. 21 Tanya Marsh, Foreclosures and the Failure of the American Land Title Recording System, 111 Colum. L. Rev. 19 (Sidebar) (2011)……… ………………………. 21 Grant S. Nelson and Dale A. Whitman, Real Estate Finance Law (5th ed. 2007)………………………………………………………………………………. 5 Joyce D. Patton and Carroll G. Palomar, Patton and Palomar on Land Titles (3d ed. 2003)………………………………………………………...…………………….. 6 Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic System’s Land Title Theory, 53 Wm. & Mary L. Rev. 111 (2011)…………………….…………9, 11, 18, 24, 26 Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L. Rev. 1359 (2010)……………………………………..4, 5-6, 8, 17-21 Powell on Real Property (Michael Allen Wolf ed., 2007)…………………………5 Joseph Singer, Foreclosure and the Failures of Formality, 46 Conn .L. Rev. 497 (2013)……………………………………………………...14 v Laura A. Steven, MERS and the Mortgage Crisis: Obfuscating Loan Ownership and the Need for Clarity, 7 Brook. J. Corp. Fin. & Com. L. 251 (2012)………... 15 Joseph Story, Commentaries on the Constitution of the United States (1833)……………………………………………………………………………… 4 Herbert T. Tiffany and Basil Jones, Tiffany on Real Property (1939)........................................................................................................................ 5 Alan M. White, Losing the Paper- Mortgage Assignments, Note Transfers and Consumer Protection, 24 Loy. Consumer L. Rev. 468 (2012)……………………………………........... 23 David Woolley and Lisa Herzog, MERS: The Unreported Effects of Lost Chain of Title on Real Property Owners, 8 Hastings Bus. L J. 365 (2012)……………………………………………… 26-27 Caryl A. Yzenbaard, Residential Real Estate Transactions (1991). ……………………………………………..……………………………… 5 Public Media and Industry Literature R.K. Arnold, Yes, There is Life on MERS, 11-Aug. Prob. & Prop. 32 (1997). …………………………………………...8-9, 17 R.K. Arnold, Viewpoint, INSIDE MERS 1 (Jan. Feb. 2004).……………………………………………….20 Arnold Deposition 176-80 (September 25, 2009), on file with the author and available at <https://www.dropbox.com/s/hzrzapyxa7bogw5/MERS-DEPO-OF- CEO-RK-Arnold-2009.pdf?dl=0>…………..…………………………………….11 R.K. Arnold (prepared statement), Robo-Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing: Hearing Before the Subcommittee on Housing and Comty. Opportunity of the H. Comm. On Fin. Servs., 111th Cong. 103-04 (2010) ……………….. …………………………………...…10 Kate Berry, Foreclosures Turn Up Heat on MERS, Am. Banker 1 (July 10, 2007). …………………………………………………...20 vi Worth Civils & Mark Gongloff, Subprime Shakeout: Lenders that Have Closed Shop, Been Acquired or Stopped Loans, Wall St. J. Online, available at <http://online.wsj.com/public/resources/documents/info‐subprimeloans0706‐sort.html> (last visited March 13, 2015) ………………………………………... 24 Memorandum from Covington & Burling to R.K. Arnold, President and CEO, MERSCORP, Inc. (Sept. 1, 1997) (on file with the Duke Law Journal)…………14 Federal Reserve, Office of the Comptroller of the Currency, and Office of Thrift Supervision, Interagency Review of Foreclosure Policies and Practices 10-11 (2011)…………………………………………………………………………….. 26 Failed Bank List, Federal Deposit Insurance Corporation (FDIC), available at <http://www.fdic.gov/bank/individual/failed/banklist.html> (last visited March 13, 2015)......………………………………………………… 24 Mike McIntire, Tracking Loans Through a Firm that Holds Millions, N.Y. Times, April 23, 2009, at B1. …………………………………………....... 21 MERS Registers 10 Million Loans, Inside MERS 1 (Nov./Dec. 2002)…….….... 20 MERS Registers 20 Million Loans, Inside MERS 1 (Jan./Feb. 2004)………..…. 20 MERS Procedures Manual (v. 27.0), available at <http://www.mersinc.org/join- mers-docman/978-mers-system-procedures-final/file>.………...………… 9, 12-13 MERS Rules of Membership, available at <http://www.mersinc.org/join-mers- docman/37-mers-commercial-rules-of-membership/file>……………………..… 13 Moody’s Investors Service, Mortgage Electronic Registration Systems, Inc. (MERS): Its Impact on the Credit Quality of First-Mortgage Jumbo MBS Transactions, Structured Finance Special (April 30, 1999)…………………...…..19 Carson Mullen, MERS: Tracking Loans Electronically, 60:8 Mortgage Banking 62 (May 31, 2000). …………………………………19, 20 Michael Powell and Gretchen Morgenson, MERS? It May Have Swallowed Your Loan, N.Y. Times, March 6, 2011, at BU1. ………………………………..... 24-25 Property deed ready for book entry, vii 19.3 National Mortgage News 20 (Oct. 17, 1994)……………….……………….14 Phyllis K. Slesinger and Daniel McLaughlin, Mortgage Electronic Registration System, 31 Idaho L. Rev. 805 (1995)………………………………………7-8, 13 Cases Culhane v. Aurora Loan Services of Nebraska, 826 F.Supp 2d 352 (D. Mass 2011).………………………………………………12 Escher v. Decision One Mortgage Co., 369 B.R. 862 n.8 (Bankr. E.D. Pa. 2007). ………………………………………..16 HSBC Bank USA v. Eslava, No. 1-2008-CA-055313 (Fla. Cir. Ct. May 6, 2010).……………………………..25 Landmark Nat’l Bank v. Kesler, 40 Kan. App. 2d 325 (2008).……………………………………………………...16 Landmark Nat’l Bank v. Kesler, 216 P.3d 158, 165–66 (2009) …………………………………………………….17 Statutes 21 Penn. Stat. § 351……………………………………………………………... 6 Pa. R. C. P. 1147 (a)(1) ………………………………………………………….. 12 U.C.C. § 8 (1994). ………………………………………………………………. 16 U.C.C. § 9 (1994).……………………………………………………………….. 14 15 U.S.C. § 78 (2010).…………………………………………………………… 16 viii

STATEMENT OF INTEREST

All parties have consented to the filing of this brief.

The Legal Services Center (LSC), part of Harvard Law School’s clinical program, is a legal services office staffed by Harvard Law School faculty. LSC’s clinical faculty offer courses on a range of consumer law topics, including mortgage law, consumer bankruptcy, and student loan law. Instructors also supervise students as part of a client services clinic, and many of LSC’s cases involve representation of homeowners facing foreclosure on the basis of MERS loans. LSC’s academic role and direct experience with MERS informs its views on MERS practices.

Rebecca Tushnet is a Professor of Law at Georgetown Law. She teaches property law and she has written extensively about consumer protection issues.

Joseph William Singer is Bussey Professor of Law at Harvard Law School. He writes scholarly articles on property law theory, including an analysis of the ways the MERS system conflicts with the traditional legal infrastructure of the American private property system.

David Reiss is a Professor of Law and Research Director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. He writes scholarly articles on real estate finance and consumer financial services.

Melanie Leslie is Vice Dean and Professor of Law at Benjamin N. Cardozo School of Law at Yeshiva University. She teaches property, trusts and estates, and nonprofit law.

The above parties submit this brief supporting the Appellee and respectfully request that the District Court’s Declaratory Judgment be upheld.

ISSUE TO BE ADDRESSED

Is MERS an appropriate and reliable substitute for county-based recording systems, such as exists in Montgomery County through Appellee’s Office of the Recorder of Deeds, which have traditionally served as a public basis for ascertaining, enforcing and ensuring the orderly transfer of rights in real property?

SUMMARY OF ARGUMENT

MERS represents a major departure from and grave disruption of recording practices in counties such as Montgomery County, Pennsylvania, that have traditionally ensured the orderly transfer of real property across the country. Prior to MERS, records of real property interests were public, transparent, and provided a secure foundation upon which the American economy could grow. MERS is a privately run recording system created to reduce costs for large investment banks, the “sell-side” of the mortgage industry, which is largely inaccessible to the public. MERS is recorded as the mortgage holder in traditional county records, as a “nominee” for the holder of the mortgage note. Meanwhile, the promissory note secured by the mortgage is pooled, securitized, and transferred multiple times, but MERS does not require that its members enter these transfers into its database. MERS is a system that is “grafted” onto the traditional recording system and could not exist without it, but it usurps the function of county recorders and eviscerates the system recorders are charged with maintaining.

The MERS system was modeled after the Depository Trust Company (DTC), an institution created to hold corporate and municipal securities, but, unlike the DTC, MERS has no statutory basis, nor is it regulated by the SEC. MERS’s lack of statutory grounding and oversight means that it has neither legal authority nor public accountability. By allowing its members to transfer mortgages from MERS to themselves without any evidence of ownership, MERS dispensed with the traditional requirement that purported assignees prove their relationship to the mortgagee of record with a complete chain of mortgage assignments, in order to foreclose. MERS thereby eliminated the rules that protected the rights of mortgage holders and homeowners. Surveys, government audits, reporting by public media, and court cases from across the country have revealed that MERS’s records are inaccurate, incomplete, and unreliable. Moreover, because MERS does not allow public access to its records, the full extent of its system’s destruction of chains of title and the clarity of entitlements to real property is not yet known.

Electronic and paper recording systems alike can contain errors and inconsistencies. Electronic systems have the potential to increase the accessibility and accuracy of public records, but MERS has not done this. Rather, by making recording of mortgage assignments voluntary, and cloaking its system in secrecy, it has introduced unprecedented and perhaps irreparable levels of opacity, inaccuracy, and incompleteness, wreaking havoc on the local title recording systems that have existed in America since colonial times.

ARGUMENT

I. MERS is a departure from and disruption of the traditional recording practices upon which it relies.

A. Prior to MERS, records of real property interests were public, transparent, and provided a secure foundation upon which the American economy could grow.

The land title records system has ensured the orderly transfer of American property entitlements and provided a secure platform for private commerce since colonial times. Since the earliest period of British settlement in America, land secured the loans upon which the American economy flourished. Joseph Story, Commentaries on the Constitution of the United States § 182, 164 (1833). The objective of recording laws was then, as it is now, to prevent disputes over property rights, to facilitate the enforcement of property rights and the resolution of disputes that nonetheless arise. Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. Cin. L. Rev. 1359, 1364-65 (2010) [hereinafter Foreclosure].

For over three hundred years, mortgage records were held as part of the public land title records in the county where mortgaged land was located. M. Mark Heekin, Modernizing Mortgage Foreclosure Law: A Call for Transparency and an End to the Payment Rule, 33 Quinnipiac L. Rev. 165, 193 (2014). As early as 1639, the Connecticut General Court insisted that “all bargaines or mortgages of land whatsoever shall be accounted of no value until they be recorded.” 14 Powell on Real Property § 82.01[1][b] (Michael Allen Wolf ed., 2007) (sic). By the time of the Revolution, mortgagees that failed to record their mortgages or assignments risked losing the ability to enforce the terms of their loans. Herbert T. Tiffany and Basil Jones, Tiffany on Real Property § 1457 (1939); Caryl A. Yzenbaard, Residential Real Estate Transactions § 5:7 (1991); Grant S. Nelson and Dale A. Whitman, Real Estate Finance Law § 5.34 (5th ed. 2007). A transparent public record of entitlements in real property has provided certainty in private bargains and a collective reference point that protects communities from commercial chaos after disasters like floods, earthquakes, fire, and hurricanes. Peterson, Foreclosure, supra 4 at 1365. The establishment of a public recording act in each state has thereby long protected all parties holding or dealing in interests in land, and constituted “[t]he cornerstone of America’s legal tradition of transparency of landholding interests.” Id.

Accordingly, since 1717, Pennsylvania law has mandated that “[a]ll deeds, conveyances, contracts, and other instruments of writing wherein it shall be the intention of the parties executing the same to grant, bargain, sell, and convey any lands, tenements, or hereditaments situate in this Commonwealth … shall be recorded in the office for the recording of deeds in the county where such lands, tenements, and hereditaments are situate.” 21 Pa. Cons. Stat. § 351 (West). 1 Joyce D. Patton and Carroll G. Palomar, Patton and Palomar on Land Titles § 4, n. 7 (3d ed. 2003). Prior to MERS, the public recording system, maintained by County Recorders such as Appellee Nancy Becker, provided a public forum in which parties recorded legally operative documents pertaining to transfers of interests in real property. Through the simple but essential service of recording the name of a person or entity that originated a mortgage loan, any party that subsequently sought to purchase a mortgage note could ascertain that a seller possessed the interest he claimed by verifying that his chain of title was complete and derived from the original lender. Heekin, supra 5 at 190. The burden lay upon a party seeking to foreclose to confirm the interest it claimed to hold by showing that same unbroken chain of title.

B. MERS was created to reduce costs for sellers of mortgage-backed securities (MBS).

From its planning stages, MERS was conceived as a way of reducing costs for sellers of mortgage-backed securities (MBS). In 1970, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae), radically changed mortgage lending relationships by originating the creation and sale of mortgage backed securities (MBS)—pools of mortgages, or bonds secured by such pools, for which they sold fractional interests. Ann M. Burkhart, Lenders and Land, 64 Mo. L. Rev. 249 (1999). By the mid-1990s, more than three-quarters of new single-family residential mortgages were being securitized, and Fannie Mae had become the largest corporation in the United States, with assets exceeding $351 billion. Id.

As trade in MBS burgeoned and the costs of securitization increased, the industry sought a means of escaping the “terribly cumbersome” and “costly” process of executing and recording mortgage assignments. Phyllis K. Slesinger and Daniel McLaughlin, Mortgage Electronic Registration System, 31 Idaho L. Rev. 805, 808 (1995). The MERS concept originated in October, 1993, when an industry group comprised of representatives from Fannie Mae, Freddie Mac, Ginnie Mae, and the Mortgage Bankers’ Association of America (MBA), published a “white paper” proposing the MERS concept to solicit comments from the real estate finance industry. Id. at 810-11. In June 1994, these parties formed a Steering Committee and commissioned a study by Ernst & Young, LLP. Mortgage banking companies made initial capital contributions to incorporate MERS, Inc. Peterson, Foreclosure, supra 4 at n.61.

In 1995, MBA executives who led the establishment of MERS wrote that MERS would apply “information technology to reduce processing costs.” Slesinger and McLaughlin, supra 7 at 807. At the time, standard investor guidelines required that the industry record assignments from the originating lender to a wholesaler, from the wholesaler to the Seller, and from the Seller to the Buyer. Meanwhile, an average lender/buyer was “acquiring a $550 million portfolio of servicing through a bulk purchase of mortgages with an average loan balance [of] $125,000.” Id. at 809. Estimating the recordation costs for portfolios this size, MBA executives calculate at the time that “[a]ssuming that the portfolio has 4,400 loans and that recordation is $10 for each loan… the cost of the three recordations alone would be $132,000.” Id. at 810. Furthermore, because investors would have to pay to prepare documents, track the return of recorded assignments and possibly rerecord, to correct errors, they concluded that “[o]ver the life of a loan, the current environment is very costly to the industry.” Id. In 1997, then-CEO of MERS, Inc. R.K. Arnold wrote, “[e]stimates are that MERS will save the mortgage industry $200 million a year by eliminating the need for many assignments.” R.K. Arnold, Yes, There is Life on MERS, 11 Prob. & Prop. 33, 35 (1997).

C. The MERS structure substitutes the MERS name for the mortgage lender in the county registry.

After originating a mortgage loan, a lender registers the mortgage under the MERS name in the county recorder’s office. Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic System’s Land Title Theory, 53 Wm. & Mary L. Rev. 111, 116 (2011) [hereinafter Two Faces]. MERS, who is named “solely as nominee,” remains the mortgagee even after subsequent transfers of the mortgage note. Id. These subsequent transfers are not recorded in the public registry. Rather, MERS operates a private database and mortgage servicers may voluntarily report changes in “beneficial interests” and servicing rights for individual mortgages. See MERS Procedures Manual (v. 27) at 88-91.1 Consequently, MERS removes the incentives for its members to retain and aggregate the legal documentation pertaining to such transfers for any given piece of property, astronomically increasing both the likelihood of broken chains of title and the difficulty of detecting fraudulent claims in the absence of documentation showing the legitimacy of prior transfers.

When a subsequent holder of the note wishes to foreclose, MERS ostensibly transfers the mortgage to that party. However, in actuality, that party assumes the MERS identity to transfer the mortgage to itself. MERS operates by allowing employees of mortgage servicers, originators, debt collectors, and foreclosure law firms to enter their own names on a webpage that certifies them as assistant secretaries or vice-presidents of MERS for a low fee. Peterson, Two Faces, supra p. 9, at 120; Robo-Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing: Hearing Before the Subcommittee on Housing and Comty. Opportunity of the H. Comm. On Fin. Servs., 111th Cong. 103-04 (2010) (prepared statement of R.K. Arnold, MERSCORP Inc. President and Chief Executive Officer). MERS itself has under fifty employees, but over 20,000 such secretaries and vice presidents, who are not employees of MERS, and do not know simple facts about the company, such as where it is located or who its president is. Id.

D. MERS privatized and made the documentation of transfers of mortgage notes optional, discouraging the mortgage industry from maintaining complete records of actual holders of interests in real property.

The planners of MERS heralded MERS as an electronic system that would more accurately and efficiently record information about successive interests in property. See Slesinger and McLaughlin, supra p. 9, at 806 (“Advanced technology has come to the residential mortgage industry… mortgage lending is being reengineered to reduce costs and deliver a better product”); Arnold, Life on MERS, supra p. 8, at 33 (“MERS is the result of an industry effort to reduce the need for mortgage assignments in the residential mortgage market and thus increase efficiency and reduce costs”). They also emphasized the need for careful recording while they sought to garner support for the project: before MERS was launched, the Senior Director and Director of Technology Initiatives of the MBA wrote that “[c]learinghouse rules will have to be carefully developed to assure the protection of the mortgage rights of participants.” Slesinger and McLaughlin, supra 7 at 808.

However, MERS did not develop reliable clearinghouse rules to provide such protection. Rather, it has introduced unprecedented opacity and incompleteness to the record of interests in real estate. First, MERS makes it possible to keep transfers of a mortgage note private once a mortgage is recorded under its name in a county registry, because access to MERS is restricted to its members. The public has no way of identifying the actual owner of a lien on a property and therefore, of holding lenders and investors accountable for errors or fraud.

Moreover, MERS enables incomplete record-keeping by making it voluntary for its members to update information on the MERS database. It does not compel financial institutions to record changes in ownership rights of mortgages, or penalize them for failures to do so. Arnold Deposition 176-80 (September 25, 2009).2 MERS does not keep digital or hard copies of documents embodying agreements through which the beneficial ownership interest in a loan changes hands. Id.; Peterson, Two Faces, supra 8 at 126. Nothing binds MERS members to keep accurate records concerning the beneficial ownership interests of loans, on the MERS database or independently. Moreover, MERS makes no representations or warranties regarding the accuracy or reliability of its database. See generally MERS Procedures Manual, supra p. 12. Simply put, “MERS is the Wikipedia of land registration systems.” Culhane v. Aurora Loan Services. 826 F. Supp. 2d 352 (D. Mass. 2011) aff'd, 708 F.3d 282 (1st Cir. 2013).

E. MERS interferes with Pennsylvania’s requirement that purported assignees prove their relationship to the original lender in order to foreclose.

MERS has also obstructed foreclosing plaintiffs’ ability to comply with the requirements for initiating a foreclosure action under Pennsylvania law. The Pennsylvania Rules of Civil Procedure require a foreclosure plaintiff to set forth in its complaint “the parties to and the date of the mortgage, and of any assignments, and a statement of the place of record of the mortgage and assignments.” Pa. R. C. P. 1147 (a)(1) (emphasis added). However, in direct contravention of these requirements, MERS never requests or possesses proof that one of its members in fact holds the mortgage note or is the agent of the note holder when that member seeks to foreclose. Rather, it allows its member’s certifying officer to assign the mortgage at will, without reviewing the records to confirm that the party receiving the transfer is entitled to enforce the mortgage. MERS Rules of Membership 29- 34;4 MERS Procedures 124-25.5 MERS possesses no legal authority to create special rules that absolve its members of the Pennsylvania state requirement, which non-MERS institutions continue to observe, that entities seeking to foreclose must plead and prove a recorded full chain of title.

F. MERS lacks legal authority and public accountability.

The creators of MERS did not lobby Congress for a uniform, electronic mortgage system that could have retained the public recording system’s transparency and reduced costs. Rather, without judicially or statutorily recognized legal authority, they independently launched MERS as a private system, and created legal theories to legitimate the system post facto. In Professor Joseph Singer’s words, MERS allowed banks “to be prolific about securitizing those mortgages but complacent about formalizing mortgage assignments. The result was that the banks made many, many mistakes in keeping track of these transactions. Formal records of mortgage transfers are often incomplete or incorrect; the chain of title for many properties appears to be irretrievably broken.” Joseph Singer, Foreclosure and the Failures of Formality, 46 Conn. L. Rev. 497, 503-04 (2013).

MERS stands on agency-law principles, which, as Professor Adam Levitin of Georgetown Law notes, raise numerous questions in the context of mortgage loans. No provisions specifying the bounds of agency law exist in state mortgage recordation statutes, as for security interests in personalty.6 Adam J. Levitin, The Paper Chase: Securitization, Foreclosure, and the Uncertainty of Mortgage Title, 63 Duke L.J. 637, 680 (2013).

From its earliest stages, the creators of MERS were aware that differences in states’ real-property law would affect MERS’s validity. Daniel McLaughlin, director of technology for MBA, acknowledged in 1994 that the mortgage industry “faced unique problems that the securities industry did not have,” namely that “[w]e have fifty states with their own systems and laws that we have to comply with.” Property Deed Ready for Book Entry, 19.3 Nat’l Mortgage News 20 (Oct. 17, 1994). Nevertheless, MERS conducted no fifty-state analysis of the potential impact of its operations. Memorandum from Covington & Burling to R.K. Arnold, President and CEO, MERSCORP, Inc. (Sept. 1, 1997) (on file with the Duke Law Journal). MERS’s attempt to establish “facts on the ground supporting its existence therefore does not deserve deference, and in practice has not worked. State laws have unsurprisingly taken disparate positions with respect to numerous aspects of MERS, and borrowers are now impacted in vastly different ways based on their jurisdiction. Laura A. Steven, MERS and the Mortgage Crisis: Obfuscating Loan Ownership and the Need for Clarity,” 7 Brook. J. Corp. Fin. & Com. L. 251, 256- 57 (2012).

In design, MERS was meant to mimic the structure of the Depository Trading Company (DTC), and similarly replaces the lender as the mortgagee in local land records to immobilize legal title to mortgages. The DTC is a common agency structure for securities trades that was created to resolve the “Wall Street Paperwork Crisis” of the 1960s, when the volume of daily trades made the then requisite delivery of physical stock certificates and bonds from sellers to buyers impractical.7 However, the DTC does not legitimize the MERS structure as precedent, because no equivalent statutory or regulatory framework exists for MERS as for the DTC; MERS’s lack of legal foundation and oversight is radically new.

The DTC operates within a statutory framework as a “securities intermediary” under U.C.C. Article 8. The law makes clear that the DTC holds but does not own physical securities, which remain the property of investors. U.C.C. §§ 8-102, 8-502. Further, the statute sets out investors’ rights vis-à-vis third parties, and the DTC has legal duties to comply with investors’ instructions. U.C.C. §§ 8-502, 8-506, 8-507, 8-510, 8-511. Finally, the SEC regulates the DTC as a registered clearing agency, and must approve DTC rules. 15 U.S.C. §§ 78s, 78q(1).

Again, MERS lacks any comparable statutory authority and regulation. Its lack of legal foundation means that it has been able pursue arguments most favorable to its growth in any given situation, even when those arguments contradict each other in different jurisdictions. For example, when MERS has brought foreclosure actions, it has argued that it was an actual mortgagee or assignee. See, e.g., Landmark National Bank v. Kesler, 40 Kan. App. 2d 325, 327 (2008) (“MERS claims that it holds the title to the second mortgage… MERS objects to its characterization as an agent.”). However, when faced with suits alleging fraud, deceptive practices, or when it wished to avoid license and registration requirements, it argued that it was merely an agent without exposure to liability, and did not have the same power as a mortgage owner. See, e.g., Escher v. Decision One Mortgage Co., 369 B.R. 862 n.8 (Bankr. E.D. Pa. 2007) (“MERS’s role as nominee leads the Court to conclude that it cannot be liable on any of the Plaintiff’s [Truth in Lending or Pennsylvania consumer protection] claims. A nominee is understood to be an agent for another.”). See also Peterson, Foreclosure, supra p. 4, at 1376. MERS’s adoption of inconsistent positions across jurisdictions to obtain favorable outcomes in litigation underscores its fundamental lack of legal authority. See also Landmark Nat'l Bank v. Kesler, 289 Kan. 528, 216 P.3d 158, 165–66 (2009) (stating that MERS defines its role “in much the same way that the blind men of Indian legend described an elephant—their description depended on which part they were touching at any given time”).

MERS’s contradictory claims to be both agent of a mortgagee and also the actual mortgagee are especially alarming since MERS professes that its strongest claim to legal authority lies in the principles of agency law. Without legal foundation, MERS has exploited its lack of legal oversight to usurp the function of the state’s County Recorders, and trample on the long-tended records of interests in land, to reduce recording costs for mortgage bankers.

G. MERS acts as a placeholder in the traditional recording system, and cannot function without that system.

MERS inserts a placeholder in the public record. It thereby grafts itself onto systems for recording interests in land, while rendering that recording meaningless. By resting its system on the placeholder record of its name, it allows all subsequent activity related to the mortgage loan to ensue without internal or external regulation. MERS therefore consists of private contractual arrangements that derive what questionable legality they possess by “grafting” the MERS system onto local land-recording offices, a preexisting public legal structure. As R.K. Arnold, CEO of MERS until 2011, noted, “because MERS is premised on an assignment recorded in the public land records, MERS cannot work without county recorders.” Arnold, Life on MERS, supra p. 8, at 703.

MERS has therefore privatized the majority of mortgage records in the country while undermining the value of county public records. Peterson, Two Faces, supra p. 9, at 132 (2011). MERS purports to simplify the process of trading mortgage-backed securities, because it has taken the liberty of eliminating requirements for documenting changes to the beneficial ownership interests in real property. MERS, in effect, creates a lacuna in the record, and makes meaningless the record onto which it is grafted. As Professor Christopher Peterson writes, “Recording mortgages in MERS’s name and subsequent refusal to record assignments is not a technological innovation. On the contrary, it is an example of atrophy of the mortgage market’s information infrastructure and the rule of law.” Peterson, Foreclosure, supra p. 4, at 1404.

II. MERS helped precipitate the foreclosure crisis and left homeowners without recourse to protect their property rights.

A. MERS facilitated the securitization of subprime loans.

MERS’s impact on homeownership and the mortgage industry has had broad national consequences, including but not limited to the foreclosure crisis of 2008. These consequences have caused significant and continuing distress for Pennsylvania’s cities and homeowners, which Pennsylvania’s recording statute was meant to protect.

Since MERS increased the speed and the volume at which mortgage-backed securities could be traded while reducing recording costs, the mortgage finance industry quickly embraced recording and foreclosing its mortgage loans in MERS’s name, rather than the actual parties in interest. Industry players did not embrace MERS based on the passage of legislation or a landmark court ruling, since none legitimized the creation of MERS. Rather, mortgage industry insiders reported that the key development that led them to use MERS was its endorsement by credit rating agencies such as Moody’s, Standard and Poor’s, and Fitch Investment. Peterson, Foreclosure, supra p. 4, at 1373; Carson Mullen, MERS: Tracking Loans Electronically, 60:8 Mortgage Banking 62, 65 (May 31, 2000). In particular, Moody’s published an opinion approving of MERS despite its acknowledgment that the system’s legality in every state was uncertain. Moody’s Investors Service, Mortgage Electronic Registration Systems, Inc. (MERS): Its Impact on the Credit Quality of First-Mortgage Jumbo MBS Transactions at 3, Structured Finance Special (April 30, 1999) (“Although in many states the assignment of mortgage does not have to be recorded when the note is transferred, there are some states that require the assignment of mortgage to be recorded so that the buyer of the loan is protected against subsequent transferees and creditors of the seller of the mortgage. There are also some states where the law is uncertain as to the protection afforded loan buyers against subsequent transferees and creditors of the loan seller.”).

Although they were on notice that MERS would legally conflict with the laws in some states, mortgage industry insiders, including Moody’s, pursued or encouraged the pursuit of the immediate financial opportunities the system presented, rather than seek structural adjustments that would respect the rights that conflicting state laws protected. By 1999, private label subprime mortgage securitizers had begun using MERS. Peterson, Foreclosure, supra p. 4 at 1370; Mullen, supra p. 19, at 64. In the early 2000s, the use of MERS exploded, and by late 2002 MERS had recorded its name in place of actual assignees and mortgagees in ten million residential home mortgages. MERS Registers 10 Million Loans, Inside MERS 1 (Nov./Dec. 2002). As the subprime mortgage refinancing industry boomed, MERS registered 21,000 loans on its system each day on average. A year later, the number of loans recorded in MERS’s name doubled to twenty million. MERS Registers 20 Million Loans, Inside MERS 1 (Jan./Feb. 2004). MERS’s then CEO R.K. Arnold proclaimed that MERS’s mission was to “capture every mortgage in the country.” R.K. Arnold, Viewpoint, Inside MERS 1 (Jan. Feb. 2004). By May of 2007, it had tripled again to sixty million mortgage loans. Kate Berry, Foreclosures Turn Up Heat on MERS, Am. Banker 1 (July 10, 2007).

Subsequently, MERS, as Christopher Peterson has written, “was an important cog in the machine that churned out the millions of unsuitable, poorly underwritten, and incompletely documented mortgages that were destined for foreclosure” in the recent mortgage crisis. Peterson, Foreclosure, supra 4 at 1407. As Wake Forest Law School Professor Tanya Marsh observed in 2011, many scholars and policymakers found that MERS’s lack of transparency, along with the increasing complexity of transactions, contributed to the recent financial crisis. Foreclosures and the Failure of the American Land Title Recording System, 111 Colum. R. Rev. 19 (2011) (Sidebar). The New York Times reported in 2009 that MERS had “played an integral, if unsung, role in the proliferation of mortgage- backed securities that fueled the housing boom.” Mike McIntire, Tracking Loans Through a Firm that Holds Millions, April 23, 2009, at B1.

B. MERS increased the costs of enforcing property rights and left homeowners without recourse to challenge wrongful foreclosures. MERS’s up-front savings for financial institutions that securitized mortgages came at the expense of certainty and enforceability of property rights. When the mortgage backed securities market crashed, MERS frequently could not identify and locate the holders of the mortgage notes that had been bundled. Heekin, supra p. 5 at 191; Gloria J. Liddell and Pearson Liddell, Jr., Robo Signers: The Legal Quagmire of Invalid Residential Foreclosure Proceedings and the Resultant Potential Impact Upon Stakeholders, 16 Chap. L. Rev. 367 (2012). The principal issue that has caused foreclosures to be set aside has been the inability of many foreclosing lenders to produce the original mortgage note when called upon to do so. Heekin, supra 4-5 at 171.

However, such foreclosures are only ever set aside after protracted, expensive foreclosure litigation. The reduced ability to clearly ascertain property rights has thus led to tremendous costs in the enforcement of property rights. As Professor Levitin observes, the rise of foreclosures and foreclosure litigation in 2007 revealed how MERS, and its alterations to the processes of mortgage transfer, “shifted costs from deal formation to deal enforcement.” Levitin, supra at 649. When one compares these costs to the costs of record-keeping that the industry targeted for elimination, $10 per recordation, amounting to around $30 per loan, seems a small amount to pay to protect a family’s interest in the ability to discover who owns their loan, who would execute a foreclosure proceeding against them, and to challenge a party attempting to do so on the basis of mistake or fraud. The costs of recordation that the industry now “saves” constitutes only a very small fraction of each $125,000 loan, and has come at the loss of the security of someone’s home. Furthermore, MERS has shifted the costs of resolving the problems caused by MERS’s poor documentation practices to courts of the same cities, now suffering as a result of the foreclosure crisis, at the expense of whom large investment banks “saved” those initial costs in recording fees.

C. Surveys, audits and public media have exposed the inaccuracy of records in the MERS database.

It is practically impossible to track errors or detect fraud through the MERS system both because MERS does not require that its members record the necessary documentation and because MERS does not make its records available to the public. Because MERS records are shrouded in secrecy, it is also impossible to know just how incomplete or inaccurate MERS records are. However, surveys and reporting by public media have suggested that the MERS database is alarmingly inaccurate.

One survey of 396 foreclosure cases in six judicial foreclosure states found that “the plaintiff asserting the right to foreclose matched the identified ‘investor’ in MERS database only twenty percent of the time.” Alan M. White, Losing the Paper-Mortgage Assignments, Note Transfers and Consumer Protection, 24 Loy. Consumer L. Rev. 468, 486 (2012). An audit in California, a non-judicial foreclosure state, found that the beneficiary on the foreclosure sale deed only matched MERS’s “investor” field forty-two percent of the time. Id. at 487 (citing Aequitas Compliance Solutions, Inc., Foreclosure in California: A Crisis of Compliance 7 (2012)). This figure excluded cases where MERS did not disclose an investor. Id.

In 2011, the New York Times reported that MERS and its member banks “apparently lost or mistakenly destroyed loan documents” in thousands of cases, and often confused and misrepresented which entities owned mortgage notes. Michael Powell and Gretchen Morgenson, MERS? It May Have Swallowed Your Loan, N.Y. Times, March 6, 2011, at BU1. Homeowners were left to try to contact mortgage servicing and origination companies, or federally insured banks, which often did not have accurate records of their own, and which collapsed during the foreclosure crisis by the hundreds. Peterson, Two Faces, supra p. 9, at 126; Worth Civils & Mark Gongloff, Subprime Shakeout: Lenders that Have Closed Shop, Been Acquired or Stopped Loans, Wall St. J. Online;8 Failed Bank List, Federal Deposit Insurance Corporation (FDIC).9

D. Court proceedings and federal agency investigations have further exposed the inaccuracy of records in the MERS database.

Mortgage servicing companies, banks, courts and government agencies have all expressed astonishment at the extent to which MERS database is inaccurate. In 2009, a Florida mortgage origination and servicing company called Diversified Mortgage (Diversified) sued MERS over the uncertainty in ownership of Florida mortgages registered on MERS. Diversified complained that MERS may have allowed Diversified’s trading partners to list themselves as owners of Diversified’s loans without permission from Diversified. Peterson, Two Faces, supra p. 9, at 131. Diversified claimed that when asked to produce a list of all its trading partners that may have made this claim, MERS could not or refused to do so, eventually became “confusing and hostile,” and “demanded that Diversified not attempt further contact with MERS.” Id. at 132. Diversified then learned that other third- party financial institutions had initiated foreclosure proceedings on mortgages that Diversified believed it owned. Id. at 132-33.

In another Florida case, Judge Jennifer Bailey, a circuit court judge in Miami stated of 60,000 foreclosures filed in 2009 in her court, “[A]lmost every single one of them… represents a situation where the bank’s position is constantly shifting and changing because they don’t know what the Sam Hill is going on in their files.” Transcript of Hearing on Order to Show Cause at 5, HSBC Bank USA v. Eslava, No. 1-2008-CA-055313 (Fla. Cir. Ct. May 6, 2010). Janis Smith, a spokeswoman for Fannie Mae, admitted Fannie Mae kept its own records and that “We would never rely on it [MERS] to find ownership.” Powell and Morgenson, supra p. 32.

In 2011, the Federal Reserve, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision conducted an on-site review of MERSCORP and MERS. They found, as they wrote in an Interagency Report on their review of foreclosure policies and practices, significant weaknesses in MERS’s oversight, management supervision and corporate governance that merited bringing formal enforcement action against MERS under the Bank Service Company Act and the Federal Deposit Insurance Act. Federal Reserve, Office of the Comptroller of the Currency, and Office of Thrift Supervision, Interagency Review of Foreclosure Policies and Practices 10-11 (2011). Additionally, the Interagency Report found that servicers had failed in conducting appropriate due diligence assessments of and quality control processes pertaining to MERS, by failing to monitor, evaluate, and appropriately manage the MERS contractual relationship, assess internal control processes at MERS, ensure the accuracy of servicing transfers, and ensure that servicers’ records matched MERS records. Id.

E. MERS’s inaccuracy affects not only the properties for which it is named as mortgagee, but all properties adjoining those properties. Not only is it difficult and sometimes impossible to track down who is the beneficial owner of the borrower’s obligation, but MERS clouds or renders unmarketable properties of neighbors to a foreclosed property in other respects. As David Woolley, a California Licensed Land Surveyor and Certified Fraud Examiner with over two decades of experience, has noted, MERS does not comply with first in time (race) or constructive or actual notice statutes, so senior/junior property rights cannot be determined when discrepancies arise in property boundary lines. David Woolley and Lisa Herzog, MERS: The Unreported Effects of Lost Chain of Title on Real Property Owners, 8 Hastings Bus. L. J. 365, 366 (2012). Thus, MERS destroys adjoining property rights and records of homeowners who never defaulted on mortgages and are now forced to litigate boundary disputes. Id.

CONCLUSION

MERS has largely replaced the formerly transparent public record of mortgage interests with a partial, inaccurate and inaccessible private registry that greatly increased the likelihood of fraud and litigation. For the first time in the history of the nation, there is no longer an authoritative public record of interests in land in each county. For the above reasons, to uphold Pennsylvania law, and to allow Montgomery County to begin to reconstitute the damage to the record MERS has wrought, the Order on Appeal should be affirmed.

Respectfully submitted, /s/ Max Weinstein Max Weinstein Charles Carriere K-Sue Park Legal Services Center of Harvard Law School 120 Boylston Street Jamaica Plain, MA (617) 390-2694 /s/ Rebecca Tushnet Rebecca Tushnet Professor of Law at Georgetown Law /s/ Joseph William Singer

Joseph William Singer Bussey Professor of Law at Harvard Law School /s/ David Reiss David Reiss Professor of Law and Research Director at the Center for Urban Business Entrepreneurship /s/ Melanie Leslie Melanie Leslie, Vice Dean and Professor of Law at Benjamin N. Cardozo School of Law

Dated: March 23, 2015

CERTIFICATES

I, Max Weinstein, hereby certify that:

1. I caused a true and correct copy of the foregoing Brief of Amicus Curiae to be served upon all counsel of record via the Court’s ECF system, in accordance with L.A.R. Misc. 113.4, on this the 23rd day of March, 2015.

2. The Brief of Amicus Curiae was filed with the Court via the Court’s ECF system, and by Fedex, postage prepaid, in accordance with Rule 25(a)(2)(B) of the Federal Rules of Appellate Procedure.

3. I am admitted to the bar of the Third Circuit.

4. This Brief complies with the type-volume limitation of Fed. R. App. P.

32(a)(7)(B) because this brief contains 5,924 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B).

5. This Brief further complies with the typeface requirements of Fed. R.

App. P. 32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because this brief has been prepared in a proportionally spaced typeface using Microsoft Word 2010 in 14-Times New Roman.

6. In addition, I certify that the Brief filed electronically is identical to the

Brief that is being filed in paper form. I also certify that the document was subject to a virus check pursuant to the Center’s virus check system, Microsoft Endpoint Protection, and no virus was detected.

/s/ Max Weinstein Amicus Curiae