Third Circuit Strikes County Recorder's Lawsuit Against MERS
The U.S. Court of Appeals for the Third Circuit on Monday, August 3, 2015, ruled in favor of MERSCORP Holdings, in its nearly four-year legal battle with the Montgomery County Recorder of Deeds, that the company was not obligated by Pennsylvania recording statutes to record assignments of promissory notes secured by mortgages. MERSCORP Holdings, known publicly as MERS, is a national electronic loan registry system that permits its members to transfer, among members, the promissory notes associated with mortgages, while MERS remains the mortgagee of record in public land records as 'nominee' for the note holder.
The original case was brought by the Montgomery County Recorder of Deeds as a class action on behalf of all 67 recorders of deeds in Pennsylvania, alleging that MERS violated Pennsylvania law by failing to record mortgage assignments in violation of 21 Pa. Cons. Stat. Ann. §351. In doing so, MERS and its members avoided paying millions of dollars of recording fees to county recorders. In its motions to dismiss and for summary judgment in the District Court, MERS had argued that §351 did not impose a duty to record all land conveyances and that, even if § 351 imposed such a duty, transfers of promissory notes among MERS members did not constitute assignments of the mortgage itself, and thus were not conveyances of land.
In its opinion on October 19, 2012, the United States District Court for the Eastern District of Pennsylvania held that §351's language providing that conveyances 'shall be recorded' was clear, indicating that all conveyances must be recorded. Subsequently, on July 1, 2014, the District Court granted the Recorder of Deeds' request for declaratory judgment and denied MERS' motion for summary judgment. The District Court concluded that MERS' failure to create and record documents for the transfers of promissory notes constituted a violation of the Pennsylvania Recording law, notably §351.
In Monday's decision however, the Third Circuit reversed the District Court's declaratory judgment and issued an opinion in accordance with other courts regarding similar mortgage recording cases, notably the Fifth, Seventh and Eighth Circuits. The Third Circuit focused on the requirements of §351 and found that the statute did not specify who must record a conveyance, when it must be recorded, or how a duty to record would be enforced. Moreover, the Third Circuit noted that recording is not necessary to validly convey property in Pennsylvania. The Court reasoned that "if recording of all conveyances is required by §351 . . . it does not follow that Pennsylvania courts would recognize unrecorded conveyances as valid." As such, the Court concluded that §351 imposes no duty to record all land conveyances, and therefore did not need to address whether the transfer of promissory notes in particular constituted a violation.
The ruling is significant for the mortgage finance industry in Pennsylvania and allows lending institutions to continue to reap the benefits of MERS membership. Although the Third Circuit's decision means that the Montgomery County Recorder's Office is unable to collect over $15 million in unpaid recording fees, it reaffirms modern lending practices. Nevertheless, although its practices now seem to be in accordance with most state laws across the country, MERS continues to be a target of criticism for operating a system that renders the national record of property interests largely inaccessible and inaccurate.
If you would like additional information about this ruling, contact Justin Drinkwine at 215.640.8413 or jdrinkwine@clarkhill.com.