Reversing a decision by the state’s Court of Appeals, the Michigan Supreme Court found that Mortgage Electronic Registration Systems Inc. (MERS) had the authority to foreclose as the mortgage holder.
The case is Residential Funding Co. LLC f/k/a Residential Funding Corp. v. Gerald Saurman and Bank of New York Trust Co. v. Corey Messner (Michigan Supreme Court Nos. 143178-9).
Gerald Saurman and Corey Messner executed promissory notes in exchange for loans form Homecomings Financial Network. To secure the repayment of the loans, Saurman and Messner executed mortgage agreements that encumbered the properties purchased with the money loaned to them by Homecomings. The mortgage agreements provided that MERS, “solely as the nominee for Homecomings, its successors and assign,” was the mortgagee under each security instrument, and held the legal interests to the properties, and that MERS’ interests under each security instrument, as nominee for Homecomings, included the right to foreclose and sell the properties. The mortgage agreements also provided that MERS had the obligation to take any action required of Homecomings, including, but not limited to, releasing and canceling the security instruments. Though it was not the mortgagee, as the lender, Homecomings retained an equitable interest in the mortgages.
Both Saurman and Messner defaulted on their payments and MERS initiated non-judicial foreclosures by advertisement under MCL 600.3201 et seq. MERS purchased the properties in sheriffs’ sales, and subsequently, quitclaimed Saurman’s property for Residential Funding Co. (RFC) and Messner’s property to Bank of New York Trust Co. (BNYT). After the redemption periods expired, RFC and BNTY each sought to obtain possession of the respective properties. During the eviction proceedings, Saurman and Messner challenged the foreclosure by MERS, asserting that MERS was not the servicing agent, did not own the indebtedness secured by the mortgage and did not own an interest in the indebtedness secured by the mortgage as required by MCL 600.3204(1)(d). These arguments were rejected by both the district courts and the circuit courts and were appealed to the State of Michigan Court of Appeals.
The majority of the appellate court found that MERS did not have the authority to foreclose on the properties. Writing for the majority, Judge Douglas Shapiro argued that “unlike a note, which evidences a debt and represents the obligation to repay, a mortgage represents an interest in real property contingent on the failure of the borrower to repay the lender. The indebtedness, i.e., the note, and the mortgage are two different things.”
“Applying these considerations to the present case, it becomes obvious that MERS did not have the authority to foreclose by advertisement on the defendants’ properties,” Shapiro said. “Pursuant to the mortgages, the defendants were the mortgagors and MERS was the mortgagee. However, it was the plaintiff lenders that lent the defendants money pursuant to the terms of the notes. MERS, as mortgagee, only held an interest in the property as security for the note, not an interest in the note itself. MERS could not attempt to enforce the notes nor could it obtain any payment on the loans on its own behalf or on behalf of the lender.”
Among other things, the majority on the appellate court argued that MCL 600.3204(1)(d) requires ownership of an interest in the note before permitting foreclosure by advertisement.
“The contention that the contract between MERS and Homecomings provided MERS with an ownership interest in the note stretches the concept of legal ownership past the breaking point,” Shapiro said. “While the term may be used very loosely in some popular contexts, such as the expression to ‘own a feeling,’ such use refers to some subjective quality or experience. We are confident that such a loose and uncertain meaning is not what the legislature intended. Rather, the legislature used the word ‘owner’ because it meant to invoke a legal or equitable right of ownership. Viewed in that context, although MERS owns the mortgage, it owns neither the debt nor an interest in any portion of the debt, and is not a secondary beneficiary of the payment of the debt.”
In writing his dissent, Judge Kurtis Wilder argued that there are three categories of parties who may foreclose by advertisement under MCL 600.3204(1)(d): the owner of the indebtedness secured by the mortgage; the servicing agent of the mortgage; and the owner of an interest in the indebtedness secured by the mortgage.
“Because we must give meaning to each of these phrases and each word in the phrases in order to give effect to the legislature’s intent, it is clear that the owner of an interest in the indebtedness secured by the mortgage, while according the same right to foreclose by advertisement, is a different person or entity, than either the owner of the indebtedness, secured by the mortgage or the servicing agent of the mortgage,” Wilder said.
“I would conclude that, as mortgagee, MERS owned a contractual interest in the indebtedness,” Wilder continued. “If the indebtedness is paid in conjunction with the note, MERS has the contractual obligation to cancel the security agreement because its title is defeated. If the indebtedness is not paid, however, MERS has the contractual right and obligation to exercise the rights granted to it by the mortgagors, including the right to foreclose by advertisement under the statute. In other words, MERS’ interest in the indebtedness is derived from the fact that its contractual obligations as mortgagee were dependent upon whether the mortgagor met the obligation to pay the indebtedness which the mortgage secured.”
The Michigan Supreme Court, in an order handed down on Nov. 16, agreed with Wilder and reversed the appellate court opinion.
“As the Court of Appeals dissenting opinion explained, ‘pursuant to MCL 600.3204(1)(d) MERS is the owner of an interest in the indebtedness secured by the mortgage at issue in each of these consolidated cases because MERS’ contractual obligations as mortgagee were dependent upon whether the mortgagor met the obligation to pay the indebtedness which the mortgage secured,’” the court stated. “We clarify, however, that MERS’ status as an owner of an interest in the indebtedness does not equate to an ownership interest in the note. Rather, as record-holder of the mortgage, MERS owned a security lien on the properties, the continued existence of which was contingent upon the satisfaction of the indebtedness. This interest in the indebtedness — i.e., the ownership of legal title to a security lien whose existence is wholly contingent on the satisfaction of the indebtedness — authorized MERS to foreclose by advertisement under MCL 600.3204(1)(d).
“We discern no indication that when the legislature amended MCL 600.3204(1) in 1994, it meant to establish a new legal framework on which an undisputed record holder of a mortgage, such as MERS, no longer possesses the statutory authority to foreclose,” the court concluded. “Rather, the legislature’s use of the phrase ‘interest in the indebtedness’ to denote a category of parties entitled to foreclose by advertisement indicates the intent to include mortgagees of record among the parties entitled to foreclose by advertisement, along with parties who ‘own the indebtedness’ and parties who act as the servicing agent of the mortgage. We therefore reverse the Court of Appeals’ decision because it erroneously construed MCL 600.3204(1)(d).”