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.