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"The Wikipedia of Land Registration Systems"

posted by Adam Levitin

Pretty amazing opinion in Culhane v Aurora Loan Services of Nebraska byJudge Young of the US District Court for the District of Massachusetts. Judge Young breaks out a fresh can of whoop-ass on MERS, which wasn't even a litigant. How are these choice lines:  "MERS is the Wikipedia of Land Registration Systems."  Now I like Wikipedia, but property title isn't do-it-yourself. Or this gem: "a MERS certifying officer is more akin to an Admiral in the Georgia navy or a Kentucky Colonel with benefits than he is to any genuine financial officer." Well, at least he didn't call them an "Admiral in the Great Navy of the State of Nebraska".  You gotta love a landlocked navy. 

That said, for all of his misgivings about MERS supplying "the thinnest possible veneer of formality and legality to the wholesale marketing of home mortgages to large institutional investors," Judge Young still says that it's kosher, if unseemly. 

The issue here was whether there could be a foreclosure by a naked mortgagee--that is a mortgagee who is not the noteholder.  (That's the issue before the Supreme Judicial Court of Massachusetts currently in Eaton v. Fannie Mae.)  Judge Young say no:  the note and mortgage need to be reunited before foreclosure; a naked mortgagee can't foreclose.  In this case, however, Judge Young found that the mortgage and note were reunited before the foreclosure was brought.  

I think Judge Young is right on the law, and wrong on the facts here. I don't know how this case was lawyered, but it seems to me that there are two factual problems that indicate that the mortgage and note were not in fact reunited prior to foreclosure.  Here's Judge Young's explanation of how the reunification happened: 

Aurora, as Deutsche's loan servicer, has an interest in the underlying debt; Aurora also physically possesses the collateral file, including the note. With the assignment of legal title to the mortgage from MERS, Aurora became the mortgagee of record as well, thusperfecting its standing to bring a foreclosure action against Culhane.

Culhane makes much of the fact that the endorsement to Deutsche on the note and attached allonge is undated. While this Court agrees as matter of law that the mortgagee must hold the note or be the servicing agent of the note holder before initiating foreclosure proceedings, here Aurora did. Regardless of the date that Deutsche became the note holder,whether it was before or after the cut-off date for loans to be transferred into the RALI Series 2006–QO5 Trust, as of April 1, 2008, Aurora was servicing Culhane's loan for Deutsche. Aurora caused legal title to the mortgage to be assigned to it over a year after becoming the servicing agent, and it did not send the notice of sale to be published until September 21, 2009.

First, Judge Young seems to assume the note is negotiable. Otherwise it doesn't matter who holds the note. If it's not negotiable, then it's just a plain old contract, and physical possession is irrelevant. Just because I hold the original loan contract between Karl and Soia doesn't mean that I have any right to enforce it if it isn't a negotiable instrument. But it doesn't look like negotiablity was raised by the parties; I would think it is in the purview of judicial notice as it is obvious from the face of the instrument, but if the issue isn't flagged for a judge, it is often missed. 

Second, it isn't clear whether the trust law argument was ever put firmly before the court. If the note was transferred to the trust after the trust's closing date, that transfer is void under New York trust law. That means that the trust doesn't own the note, which means Aurora doesn't have an interest in it, which means that the note and mortgage have not been reunited prior to the foreclosure, so under Judge Young's analysis, then, the foreclosure should not be permitted. The reason the closing date matters is because if the transfer is after the closing date, it cannot happen as a matter of law. The fact that Aurora was servicing the loan for Deutsche as trustee isn't enough if Deutsche as trustee doesn't have an interest in the note. I don't know how this issue was lawyered, but this is a critical point. 

So it seems to me that this is a good opinion, but that it needed to go further into the factual question of whether Deutsche as trustee had any interest in the note. That might be a function of lawyering rather than anything else. I don't think this case presents a clear victory for the mortgage industry--it just focuses the issue on the question of who can enforce the note, and I'm not sure that's where the industry really wants things to go. 


So RALI 2006-QO5 had a closing date of May 30, 2006. Section 2.04 "Representations and Warranties of Residential Funding" of the PSA states essentially that substitution of "Qualified Mortgage Loans" can be made within two years of the Closing Date assuming that the substituted note doesn't effectively blow the tax status of the REMIC to hell.

The "Corporate Assignment of Mortgage" was created April 7, 2009 "but effective date April 1, 2008" - in other words **back-dated** to conveniently squeak in just under the two year substitution wire.

So Aurora wasn't even the owner of the note, they were simply the SERVICER of the RALI 2006-QO5 trust. Deutsche, as trustee, should have been looked to as "owner" of the Culhane note. But, ignoring the back-dating of the document, the fact that Aurora was not the owner of the Culhane note and merely the servicer or the fact that the chain of title is broken further if there is no AoM to RALI 2005-QO5, since the AoM from MERS to Aurora was not created until April 7, 2009 this misses any window of substitution window into the RALI 2005-QO5 trust by a good 11 months.

Or am I completely and totally wrong...

Why wouldn't the note be negotiable?

First, this judge actually cites you in this case Adam.


The note in this case was made out the Deutsche Bank as Trustee. Well there was a case out of NC Appeals Court (I know it's not binding everywhere)
In re Gilbert 050311NC

The court basically said an endorsement to the trustee is bunk and that the note needs to be endorsed to the trust.

Basically that the named plaintiff and the payee need to match with some specificity .
I think she left this defense on the table.

It really bothers be how no one ever successfully drills down into the transaction i.e. the details of the bargain and sale.

How was the note acquired?
Was it for a valuable consideration?
i.e. cash , check, money order, swap, etc..

Did they have notice of defect?( It seems she was in default)etc etc etc...

It seems to me they are ex post facto back-filling these securitized trusts and that when they sold the certificates initially he trust was empty.

I boggles the mind that we are 2 years in and have not cracked on open yet.

The statute of limitations might be running out on securities fraud.

sorry bought all the typos, my laptop keyboard isn't what it used to be... :P

Dana, laptop keyboards are cheap - sometimes under $20 on EBay - and incredibly simple to replace. Sometimes just 2 screws. Plenty of YouTube vids on how-to. Give me a holler if you want/need assistance... ;)

Exactly, why would the note be non-negotiable? Does Adam Levitin address that in any paper or blog post?

It seems like a tough sell. Courts will bend over backwards to uphold negotiability of mortgage notes and foster "liquidity in the markets".

Re: Negotiability, see Adam's 11/18/11 post "The Heirs of Karl Lleywellyn: the PEB Report, Green Cheese, and the Hijacking of American Law (Part III)."

See also:

Ronald Mann, "Searching for Negotiability in Payment and Credit Card Systems," 44 UCLA L. Rev. 951 (1997)

Dale Whitman, "How Negotiability Has Fouled Up the Secondary Mortgage Market, and What To Do About It," 37 Pepp. L. Rev. 737 (2010).

Nick, I don't see it as a tough sell. The note is either negotiable or it isn't. The law is well settled. There are too many factors to put in a simple post. Look on google books. There are numerous legal books on Bills and Notes available.

Corpus Juris volume 8 Bills and Notes

It is simple. A negotiable instrument must be unconditional promises to pay "on demand or at a definite time." UCC 3-104(a)(2). Most mortgage notes have a prepay option, which means that the obligor can pay whenever s/he damn well pleases. Game, set, match.
Adam, non-negotiable notes are not just plain old contracts. UCC 9-317(b). Delivery can save a buyer a real bruising.

Mr. Scrooge , non-negotiable notes are subject to every equity and is treated as a simple contract.
They are also supposed to pass by assignment.
They are subject to every defense.

Technically there isn't even a loan. There is an exchange/swap of credit.

Many authorities say that the transfer of a note or bill without recourse is a sale.
Brittin v. Freeman, 17 N. J. Law (2 Har.) 191, 227

So defenses such as set-off, unjust enrichment ,failure of consideration are available.

Two questions:

First (and please excuse my ignorance), does New York trust law govern all the mortgage trusts, or does it vary from one mbs to another?

Second, how does the qualified loan substitution bit come into play? It seems to me that there would have to be some showing as to whether the later-assigned loan was not, in fact, part of the original pool, right? And, also, that the loan, at time of assignment, wasn't already in default, because if it were, it would in no way be "qualified" for substitution. Further, there should be some documentation of the loan that "fell out" of the trust, requiring that another be brought in, no?

It's my impression that most of these assignments were drafted for the express purpose of foreclosure: A quick survey of assignments executed pre-foreclosure and the associated foreclosure filings reveals that there is often barely a week passing between the two events. Thus, unless back-dating is allowed (in which case, hell, why not back-date to before the trust closing date?!), then NONE of these loans qualify as substitutes!

In the alternative, if post-transaction back-dating IS to be tolerated, then might I suggest that those who are currently facing foreclosure simply draft amended early mortgage payments, back-dating all of them to before they began to accrue massive amounts of interest and servicing fees, file them along with their answers and include a counter-claim to recover said interest/fees. Or even better: back-date them to before the mortgages were issued and demand the bank retroactively give them a better interest rate given their hefty down payments! In fact, once the figures have all been adjusted using the revolutionary new US Wells of Deutsche Morgan Retro-Rate Method, taking into account the wrongful servicing fees, unjust enrichment, harassment, frivolous foreclosure filings, IIED, NIED, etc., the banks will probably owe the borrowers money, and lots of it. Yay big banking!!

I have only seen MBSs in 2 venues. As a Delaware or New York trust.
As to you other point. It's pretty obvious these trusts are being back-filled. In the one instance where the mortgages in the trust actually got to the point of being looked at they couldn't or wouldn't produce the actual mortgage loan schedule
see page 44

It doesn't really matter about the trust though to someone in foreclosure. I have only seen one case (Horace v. LaSalle Bank)that held the foreclosure defendant was a beneficiary of the PSA. Without some obvious interest in the trust , a court will hold that you don't have standing to use the trust prohibitions as a defense.

Dana, you may want to peruse several previous Slips posts re: Horace & PSA standing, etc.:

Standing to Invoke PSAs as a Foreclosure Defense

Do We Have a Fraud Problem? The Case of the Mysteriously Appearing Allonge

I would also argue that it DOES matter about the trust because of several issues contained within the securitization process, some of which I have already mentioned. With that A to B to C to D transaction, there are sales w/o recourse, MLPAs, and various other forms of potential evidence of sale that SHOULD exist. If they don't, then it is questionable as to whether the note in question was ever properly securitized.

Bottom line, if a note in question shows up on a Loan Schedule in 2005, but the AoM attests that it wasn't transferred/SOLD/assigned into the trust until 2010 - three weeks before it was FC'd which also indicates that it was a non-performing loan and could not have been properly securitized into the trust (Hello, IRS?) then there is a huge problem there regardless of whether a borrower is a beneficiary of the PSA. Not only is the chain of title at the registry of deeds broken but so is the chain within the securitization.

First of all, this whole "standing to raise standing" business is absolutely absurd. At its root, it misses the point of the standing requirement, entirely. Standing is a constitutional issue, upon which the finality and legitimacy of our country's court decisions depends.

But even on the surface, it is an argument that, if entertained, would lead to ridiculous results in the proceedings: Defendant says, "Your honor, Trustee doesn't have standing to foreclose because Trustee never obtained an interest in my mortgage." Trustee says, "But your honor, defendant doesn't have the standing to question whether I'm a party at interest because he wasn't involved in the underlying deal!" And then Defendant says, "Maybe I wasn't your honor, but Trustee doesn't have the right to bring that up because he doesn't have the right to be pursuing this action in the first place!" And then Trustee says, "BUT YOUR HONOR...." So on. So forth. Preposterous.

Second, and more importantly, I would like to point out that because these assignments are being executed for the express purpose of foreclosure (see my comment above), that is, AFTER the loan has already gone into default, the assignees are NOT holders in due course, and as such, there are a host of defenses available to those facing foreclosure (e.g., lack of consideration, illegality, fraud) that necessarily involve an examination of the legitimacy and effectiveness of the underlying transaction through which plaintiff gained its alleged interest in the debt, and this inquiry -- of course -- revolves around the PSA.

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