Tennessee Supreme Court Ruling in MERS Case Muddles Marketable, Insurable Title After Tax Deed Sale
December 20, 2016
Citation: Mortgage Electronic Registration Systems, Inc. v. Carlton J. Ditto, Case No. E2012-02292-SC-R11-CV (Tenn. December 11, 2015).
Facts: Hamilton County conducted a tax sale as to property that was subject to a deed of trust (DOT). The DOT identified the original lender and Mortgage Electronic Registration Systems Inc. (MERS) as nominee for the original lender. Although the county gave notice to the original lender, it did not attempt to give notice to MERS. The property went to tax sale, and Carlton J. Ditto purchased it for $10,000. A year and a half later, MERS filed a petition to set aside the sale as void ab initio due to the failure to give MERS notice. MERS claimed, inter alia, that it was entitled to notice because it was named in the DOT and had a constitutionally protected right in the property. Ditto argued MERS lacked standing to challenge the sale because the DOT did not grant MERS a legal protected interest in the property and thus MERS was not entitled to notice of the tax sale. The county joined in Ditto’s argument. The trial court granted Ditto’s motion for judgment on the pleadings. The Tennessee appellate court affirmed, ruling that MERS lacked standing to file an action to set aside a tax sale because it was never granted an independent interest in the property. MERS appealed to the Tennessee Supreme Court.
Holding: The Tennessee Supreme Court affirmed the trial court’s grant of judgment on the pleadings to Ditto. In a detailed 35-page opinion, the Tennessee Supreme Court outlined the role of MERS in the mortgage industry and its system of registering and tracking mortgages designed to address the problems arising out of mortgage securitization. It discussed the United State Supreme Court’s prior ruling in Mennonite that a mortgage lender has a legally protected property interest and is entitled to notice of a tax sale. It also reviewed a number of varying opinions on the meaning of MERS’ involvement as a beneficiary “solely as nominee” for the lender.
Turning to the language of the DOT itself, the Tennessee Supreme Court confessed its perplexity at the “mishmash of descriptive terms and qualifiers in the DOT regarding MERS.” In the end, the Tennessee Supreme Court concluded that, while it did not question MERS’ authority as agent for the lender or its successors, MERS is not a true “beneficiary” of the DOT. Not even the notice provision of the DOT itself, the court observed, called for notice to MERS and the rights and obligations outlined in the DOT belong exclusively to the lender and not to MERS. The Tennessee Supreme Court thus held that, despite the language of the DOT designating MERS as “beneficiary solely as nominee for the lender and its assigns” and stating that MERS has “legal title” to the property, the DOT does not grant MERS any independent, protected property rights. As a result, the sale of the property without notice to MERS did not violate its due process rights.
Importance to the Title Industry: By ruling that MERS has no constitutionally protected property right and is thus not due notice of a pending tax sale, the Tennessee Supreme Court’s opinion may result in many properties being sold without any effective notice to the current lenders. Given the prevalence of the use of MERS as a lender’s nominee, this opinion raises unsettling questions about whether lenders are due any real or effective notice of a tax sale. By raising such questions, the opinion may open the door to other litigants who may seek to effect notice of tax sales and perhaps foreclosures without any notice to MERS and thus without notice to the current owners of the security instruments encumbering real property. This will almost certainly lead to an increase in disputes and litigation as to the marketability and insurability of title in Tennessee.
Christopher W. Smart is an attorney with the law firm Carlton Fields. He may be reached at csmart@carltonfields.com.
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