The U. S. Court of Appeals for the Sixth Circuit recently affirmed the district court’s dismissal of a putative class action filed against Mortgage Electronic Registration Systems (MERS), its parent company, and 15 financial institutions by two Kentucky county clerks. The clerks alleged that the defendants had violated Kentucky law by failing to record mortgage assignments. The plaintiffs sought recovery of unpaid recording fees and an injunction ordering MERS to cease its practice of not recording assignments.

In Christian County Clerk v. Mortgage Electronic Registration Systems, Inc., the Sixth Circuit agreed with the district court’s finding that the clerks’ allegation of injury to their financial interests provided Article III standing to bring the lawsuit. But the Sixth Circuit affirmed the district court’s dismissal of the lawsuit because the clerks had no private right of action to sue MERS for a violation of Kentucky’s recording requirements.

The clerks were challenging MERS’ practice of not recording an assignment when a note secured by a mortgage naming MERS the mortgagee as nominee for the lender and its assigns is transferred to a new owner who is a system member. Instead, the change in beneficial ownership is registered in the MERS electronic database.

While conceding that the state recording statute did not give them a cause of action, the clerks argued that they could sue under Kentucky’s negligence per se statute. The Kentucky Supreme Court had interpreted that statute to create a cause of action for a person damaged by a violation of a statute that does not provide a civil remedy to someone within the class of persons the statute is intended to protect. Although the Sixth Circuit agreed that the clerks satisfied the statute’s first requirement, it found that the clerks were not among the three categories of persons the recording statute intended to protect. Those persons consisted of:

• Existing lienholders and lenders who record their security interests to provide notice of their secured status
• Prospective lienholders and purchasers
• Property owners and borrowers whose loans have been satisfied

According to the Sixth Circuit, the district court correctly found an absence of legislative intent to protect the officers who administer the recording statute and collect fees.

The Sixth Circuit also rejected the clerks’ common law civil conspiracy and unjust enrichment claims, which the district court had not expressly addressed. The Sixth Circuit found that because the clerks had no claim under the negligence per se statute, they did not have a tort claim needed to support a civil conspiracy claim. Concluding that the negligence per se statute provided the exclusive remedy for violations of statutes that did not contain a remedy, the court also rejected the clerks’ unjust enrichment claim.

In addition, the Sixth Circuit found that the clerks had not alleged facts establishing a necessary element of such a claim—a benefit conferred upon the defendants at the clerks’ expense. According to the court, the benefit from recording mortgages in MERS’ name to the defendant financial institutions, such as lien priority and the ability to release satisfied mortgages, was derived from Kentucky law and not from the clerks themselves.

Similar actions have been brought by county officials across the country against MERS and its member financial institutions. Although most of these cases have not survived motions to dismiss, in Montgomery County, Pennsylvania, Recorder of Deeds v. MERSCORP, Inc., a Pennsylvania federal district court recently allowed such a case to proceed as a quiet title action to compel recordation even though the complaint was not styled as such. The court is now considering the defendants’ motion to dismiss the quiet title action on grounds that include the complaint’s failure to allege facts necessary to state a quiet title claim and join indispensible parties.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance. The group includes the firm's Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions.

For more information, please contact CFS Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, Martin C. Bryce, Jr., at 215.864.8238 or bryce@ballardspahr.com, or Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com.