Pennsylvania County Recorder Can Sue MERS for Failure to Record Mortgage Assignments, Federal Court Rules

by Ballard Spahr LLP
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A Pennsylvania federal court recently refused to dismiss a putative class action filed against Mortgage Electronic Registration Systems (MERS) by a county recorder of deeds seeking to compel MERS to record past, present, and future mortgage assignments and pay the associated recording fees.

In Montgomery County, Pennsylvania, Recorder of Deeds v. MERSCORP, Inc., and Mortgage Electronic Registration Systems, Inc., the court interpreted Pennsylvania's recording statute to require, rather than merely permit, the recording of all conveyances. Although a mortgage is recorded naming MERS the mortgagee as nominee for the lender and its assigns, no assignment is recorded when the note secured by the mortgage is transferred to a new owner who is a MERS system member. Instead, the change in beneficial ownership is registered in the MERS electronic database. In addition to claiming that MERS's failure to record assignments violated the recording statute, the plaintiff also asserted claims for civil conspiracy, unjust enrichment, and declaratory and injunctive relief.

MERS had argued that even if the Pennsylvania statute required recordation, it could not be enforced through a private right of action. But the court found it unnecessary to reach that argument because, even though the complaint was not styled as a quiet title action, the court concluded that the plaintiff had alleged sufficient facts to proceed under a quiet title theory. Predicting that the Pennsylvania Supreme Court would hold that state law allows any person with an interest in a conveyance to bring a quiet title action to compel recordation, the court found that the plaintiff had shown such an interest. According to the court, because the plaintiff had alleged that her office would be entitled to the fees resulting from recording assignments of mortgages naming MERS the mortgagee, she had established a pecuniary interest in whether the assignments were recorded.

Having found that the plaintiff had alleged sufficient facts to state a quiet title claim, the court determined that it had  authority to order the declaratory and injunctive relief she requested. It also found that as part of her relief, the plaintiff could properly collect the recording fees on any past, present, and future mortgage assignments MERS would be compelled to record if she prevailed on her complaint.

While dismissing the plaintiff's civil conspiracy claim, the court was unwilling to dismiss her claim of unjust enrichment. The plaintiff alleged that by recording mortgages in the name of MERS as nominee, MERS had availed itself of the recording system’s benefits and evaded recording fees by electronically tracking the transfer of beneficial interests in such mortgages. She further alleged that although MERS's practices created gaps in the chain of title, MERS, particularly in foreclosure proceedings, represented that no such gaps existed and that all relevant documents were properly recorded. The court found that the plaintiff had thereby successfully pleaded that MERS enjoyed the benefits of the recording system without paying their full value in the form of mortgage assignment recording fees.

In its opinion, the court noted that similar actions, including a case sent back to state court by another Pennsylvania federal court, have been brought by county officials across the country against MERS and financial institutions that are MERS members. Most of these cases have not survived motions to dismiss.

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.


 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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