MERS Part 3: Quiet Title and Litigation Strategy

This article is a continuation of Part 2 of “The Iceberg called MERS.” We are talking about title. That is the basis of everything we have been discussing for the past two weeks. It is not about ownership at all. Title is “The Manner in which the right to real property is acquired, and the conditions necessary to acquire are a valid claim.” Title is the “Right itself, the legal consequences of such conditions.”

So the question we are asking is: “Were there conditions that took place that would have allowed MERS to acquire any rights that it could assign and transfer?” Of course not.

MERS and the Electronic World

MERS operates in the intangible world, not the tangible world as we know it. That means MERS must be describing the eMortgage and the eNote. These are defined as electronic records. They are not Negotiable Instruments. MERS is acting as an agent for the electronic documents created.

One must be careful here. Pursuant to USC Section 15-96-1-7003(a)(3): “UETA and ESIGN do not apply to Article 3 or Article 9, of which the Tangible Promissory Note falls under Article 3 of the Uniform Commercial Code.” So MERS must be depicting the eNote that was created electronically along with the eMortgage, stored electronically, and transferred electronically with just the push of a button.

In my 12 years of forensic mortgage investigation, I have seen this distinction misunderstood in case after case. The tangible and the intangible are two different legal universes. A MERS audit examines the electronic records MERS tracks. A quiet title investigation builds the legal case for challenging defects in the chain of title. The entire framework MERS relies upon is built on electronic records governed by a different set of laws than the physical promissory note the homeowner actually signed.

USC Section 15-96-1-7003

Excepted requirements

The provisions of section 7001 of this title shall not apply to a contract or other record to the extent it is governed by:

(3) the Uniform Commercial Code, as in effect in any State, other than sections 1-107 and 1-206 and Articles 2 and 2A.

This statutory exception is the key that unlocks the argument. The electronic records MERS tracks are governed by UETA and ESIGN. The Tangible Promissory Note, which is the actual negotiable instrument that creates the obligation, is governed by Article 3 of the Uniform Commercial Code. These are two completely different legal frameworks operating on two completely different types of instruments.

The Requirements of Negotiation and Delivery

In order for one to acquire rights, negotiation and delivery of the instrument must have taken place pursuant to UCC Section 7501, or the state’s equivalence of Section 7-501. Form of Negotiation and Requirements of Due Negotiation.

(a) The following rules apply to a negotiable tangible document of title:

(1) If the document’s original terms run to the order of a named person, the document is negotiated by the named person’s indorsement and delivery. After the named person’s indorsement in blank or to bearer, any person may negotiate the document by delivery alone.

MERS is not transferring an indorsed Tangible Promissory Note. MERS is not a named party on the Tangible Promissory Note. MERS is claiming “To transfer its interest into the Security Instrument which MERS is named in the definitions as nominee, or beneficiary for the named lender.”

The main purpose of an Assignment of Mortgage or Assignment of a Deed of Trust is to memorialize that sale of the Tangible Promissory Note. That gives constructive notice to the world of what has taken place. When MERS purports to assign its interest, it is assigning something from the Security Instrument only. It has no interest in the note to assign. This is a fundamental defect that affects the entire chain of title.

The Entire Instrument

The entire instrument is comprised of three items: “The Tangible Promissory Note, the Security Instrument and the Intangible Payment Obligation.” In order to claim the entire instrument, the following items must be true:

1. The chain of endorsements must match the chain of assignments.
2. The same party must be named as either lender or a named payee on the Tangible Promissory Note.
3. The same party must be named into public record as the beneficiary or mortgagee of the Security Instrument.
4. The same party must be the sole party claiming the intangible payment obligation.

All of these items must be done in a timely fashion as well. The Uniform Commercial Code affords a temporary perfection of the security interest, or the state’s equivalence law. If it is not done in a timely manner, the temporary secured interest becomes unsecured by operation of law.

If the chain of endorsements on the note does not match the chain of assignments in the public record, there is a break in the chain of title. If the party named as beneficiary in the public record is not the same party named as payee on the note, there is a defect. If the party claiming the intangible payment obligation is not the same party who holds the tangible note, there is a bifurcation that renders the security interest unenforceable.

MERS Has No Rights to Transfer

MERS is only listed within the definitions of the Security Instrument, being either the Mortgage or the Deed of Trust. MERS is not named on the Tangible Promissory Note at all.

MERS is only listed on the Security Instrument. MERS never acquired any rights for collection of the debt evidenced by the Tangible Promissory Note. MERS never transferred any rights for collection because it never had any right to transfer. The payment intangible obligation had been sold shortly after signing, which in many instances was done many years prior to the Assignment of Mortgage or Deed of Trust.

I have reviewed thousands of chains of title where this timing gap is staring us right in the face. The intangible payment obligation was typically sold within days or weeks of the closing. The Assignment of Mortgage or Deed of Trust, however, was often executed years later, sometimes on the eve of foreclosure. This gap in time is not a technicality. It is evidence that the party attempting to foreclose acquired nothing through the assignment because the obligation had already been transferred long before.

The Mortgage Cannot Live Outside the County Record

Regardless of what MERS states within its own documents, the Mortgage cannot live anywhere else outside of the recorded county record. The Security Instrument is a public record instrument. Its purpose is to provide constructive notice to the world of who has a claim against the property. When MERS attempts to track transfers in its private electronic registry, it bypasses the public recording system entirely. The public record does not reflect who actually holds the obligation.

For the attorney building a quiet title case, this is the foundation. The question is not whether MERS exists or whether MERS has a system. The question is whether the conditions required by law to acquire and transfer rights were met. In the vast majority of cases involving MERS that I have investigated, the answer is no.

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Joseph Esquivel, Mortgage Compliance Investigators. Copyrighted, all rights reserved.