On an issue of first impression, the Tennessee Supreme Court held on December 12, 2015, that MERS does not have a property interest that is protected under the Due Process Clause of the Fourteenth Amendment to the United States Constitution. In Mortgage Electronic Registration Systems, Inc. v. Ditto, the Tennessee Supreme Court held that MERS acquired no protected interest through the deed of trust. More specifically, the Court rejected arguments that MERS acquired an interest through either the deed of trust (a) designation of MERS as the beneficiary solely as nominee for the lender and its assigns, or (b) reference to MERS having legal title to the property for the purpose of enforcing the lender’s rights. Because MERS had no protected interest in the subject property, the Court concluded that MERS’s due process rights were not violated by the county’s failure to notify MERS of the tax foreclosure proceedings or the tax sale.
The facts of the litigation involved the borrowers’ failure to pay property taxes on the property. The local taxing authority filed a delinquent tax lawsuit and sent notice of the tax suit to the borrowers and to the original lender on the deed of trust because those were the only two parties listed on the title report as having an interest in the property. The clerk’s office attempted service of the suit to the original lender was returned as undeliverable. Despite the fact that MERS was referenced in the deed of trust for the property, the County did not attempt to give notice of the delinquent tax lawsuit to MERS. As a result, MERS had no knowledge of the lawsuit. The appellee bought the property at the tax sale, and the property was not redeemed within one year as allowed under the state redemption statute.
Approximately 18 months after the tax sale was confirmed, MERS filed a petition to set aside the tax sale. MERS asserted that the tax sale and the trial court’s decree confirming the tax sale were void because the County failed to notify MERS of the tax sale, as was constitutionally required. The County asserted that the notice was not required because MERS was not a true beneficiary. The County argued that the language in the deed of trust and the realities of the transaction made it clear that MERS had no beneficial interest in the deed of trust. Specifically, the County asserted that every obligation in the deed of trust that would traditionally be assumed by a beneficiary was undertaken by the lender, not by MERS. The trial court held that MERS did not have a protected interest in the property because MERS had no stake in the outcome of any foreclosure proceedings, did not lend money to the borrower, and had no independent right to collect money from the borrower. The trial court concluded that “MERS had only a nominal stake in the outcome of the tax foreclosure proceeding on the property.”
The Tennessee Supreme Court began its analysis by discussing the history of MERS and the MERS business model. The Court also focused on the language of the deed of trust, which the court found to be confusing in that it indicates that MERS is the beneficiary but “acts solely as the nominee for the lender and its successors or assigns.” In addition, the Court considered decisions from a number of different courts, both state and federal, from across the country and noted that while many of those cases address whether MERS has the power to assign a deed of trust, foreclose on a note, or otherwise exercise the interests of the lender, few have specifically addressed whether MERS itself has an interest in the subject property that is subject to due process protections.
The Tennessee Supreme Court concluded that a lender’s agreement to appoint MERS as its agent does not endow MERS with the lender’s property interest. Rather, the Court held that MERS “is simply an agent for the lender, in name only, holding no property rights of its own. Thus, MERS is authorized to exercise the rights and obligations granted to the lender by the borrowers, but ―only as an agent for the lender, not for its own interests.”
Given this ruling, it seems likely lawyers representing borrowers will seek to leverage the Court’s conclusions and reasoning to challenge the validity of any mortgages that have passed through MERS. Financial service providers should evaluate their MERS mortgages to determine whether any prospective measures are necessary or prudent to defend against such challenges.