by The Eastern District of New York found that the Bankruptcy Court overstepped its jurisdictional bounds when it entered an advisory opinion that MERS, as “nominee,” had no power to assign mortgages. In re Agard, No. 11-1826 (E.D. N.Y. March 28, 2012).
The underlying facts follow a typical pattern. Debtor signed a mortgage listing First Franklin as lender and MERS as nominee. MERS assigned the mortgage to U.S. Bank and debtor defaulted on the mortgage. U.S. Bank obtained state court order of foreclosure and one day before the foreclosure sale, Debtor filed chapter 7 bankruptcy petition. U.S. Bank sought relief from stay. Debtor opposed the motion stating that U.S. Bank had not been properly assigned the mortgage and, therefore, had no standing to obtain relief from stay. MERS intervened, arguing that if U.S. Bank is found to lack standing then MERS’ entire business model, based on its ability to assign mortgages, would collapse.
The Bankruptcy Court, Judge Grossman, granted the motion for relief from stay under the Rooker-Feldman doctrine and res judicata due to the underlying state court order of foreclosure. But the court went on to address MERS’ right to assign the mortgage nonetheless, finding: 1) the original mortgage naming MERS as nominee did not confer right to assign mortgage, 2) neither MERS’ membership laws nor NY state law gave MERS the right to transfer the mortgage, 3) absent the state court order of foreclosure, U.S. Bank would not have had standing as secured creditor to seek relief from stay.
MERS appealed the portion of the order going beyond the application of Rooker-Feldman and res judicata.
On appeal the Eastern District of New York agreed with MERS that once the bankruptcy court applied res judicata and Rooker-Feldman to the case, there remained no “case or controversy” with respect to the issues of MERS’ power as nominee and U.S. Bank’s standing as a secured creditor. Therefore the bankruptcy court had no subject matter jurisdiction over the issue and that portion of the opinion was vacated.
Bankruptcy Judge Grossman noted in his opinion that there were dozens of other cases in the Eastern District of New York in which the issue of MERS’ power was in question and that most of those cases were not amenable to resolution under res judicata principles. So, at the very least, he has sent a message to MERS and debtor’s attorneys in his courtroom as to how he would resolve the issue.