09 Jul Texas Judicial Update
Harris County, Texas v. MERSCORP, Inc., 2015 (U. S. Court of Appeals for the 5thCircuit, June 26, 2015)
The U.S. Court of Appeals for the Fifth Circuit recently heard arguments on whether the use of the Mortgage Electronic Registration System, Inc. (“MERS”) violates Texas laws and results in fraudulent misrepresentation and unjust enrichment to MERS and its members. The Fifth Circuit held that it did not.
MERSCORP operates MERS, the national electronic registry that tracks servicing rights and mortgage ownership in the United States. When a borrower obtains a home loan, MERS may be listed as the “beneficiary” on the deed of trust. The bank registers the loan on the MERS system and submits the deed of trust to the county clerk to be recorded in county land records. If the lender later transfers the promissory note to another MERS member, no assignment of the deed of trust is created or recorded because MERS remains the nominee for the lender’s successors and assigns and therefore, these transfers need not be recorded in the public records.
Dallas, Harris, and Brazoria Counties (collectively the “Counties”) filed suit against MERSCORP, MERS and Bank of America (collectively the “Defendants”) alleging the following claims:
- Violation of Texas Local Government Code §192.007;
- Violation of Texas Civil Practice and Remedies Code §12.002;
- Fraudulent misrepresentation; and
- Unjust enrichment.
The above claims are based on two theories:
- Defendants fraudulently listed MERS as the beneficiary of deeds of trust that were recorded in the Counties’ land records; and
- Defendants are required to record assignments of a deed of trust every time a MERS member lender transfers its interest in a related promissory note to another MERS member.
The Counties first argued that once a deed of trust is recorded, section 192.007 requires that any and all assignments of that deed of trust must be recorded. The Counties also contended that every time the promissory note that is secured by that deed of trust is transferred or negotiated, a deed of trust assignment must also be created and recorded.
As support for these arguments, the Counties emphasized that the statute uses the word “must.” Section 192.007 states:
(a) To release, transfer, assign, or take another action relating to an instrument that is filed, registered, or recorded in the office of the county clerk, a person must file, register, or record another instrument relating to the action in the same manner as the original instrument was required to be filed, registered, or recorded.
The Counties read the statute to require that “a person must…record another instrument” emphasizing that the statute is directed at “a person,” instead of at a county clerk specifically. Therefore, the Counties argued, MERS must record all assignments.
The Fifth Circuit provided that the Counties’ reading of the statute is incomplete. Read more completely, the provision states that if an ″original instrument was required to be . . . recorded″ in a particular manner, later documents ″relating to″ the original document must be recorded ″in the same manner.″ The statute does not only state that ″a person must . . . record another instrument.” But rather dictates the ″manner″ in which subsequent documents must be recorded; it does not impose an affirmative duty to record those instruments in the first place.
Next, the placement of section 192.007 in Texas’s statutory code supports that it was a procedural directive to county clerks, not a recording mandate to the public. The Texas Legislature placed section 192.007 in the Local Government Code—which governs the operation of county and municipal governments—not the Property Code—which governs the public’s real-property rights and duties. Reinforcing this point, chapter 192, entitled ″Instruments to be Recorded by Counties″ (emphasis added), governs which instruments clerks must record and how clerks are required to record them. None of these provisions is directed to the public.
This interpretation is also consistent with Texas property law generally. Texas’ recording system is a permissive, not a mandatory, system: ″instrument[s] concerning real or personal property may be recorded.″ Tex. Prop. Code Ann. § 12.001(a) (emphasis added). Unrecorded instruments relating to real property remain valid between the parties; however, the holder of the instrument may lose priority. If an original document is not required to be recorded, it would be inconsistent to hold that subsequent documents related to the original must be recorded.
Finally, this interpretation does not promote unperfected security interests or run afoul of the ″split-the-note″ theory, as the Counties contend. Under the split-the-note theory, transferring a note without the deed of trust ″splits″ the note from the deed of trust and renders them both null. In order to foreclose, the split-the-note theory goes, a party must hold both the note and the deed of trust. But contrary to this theory, the Texas Supreme Court has held that the sale of a promissory note transfers the rights in the deed of trust to the new noteholder regardless of whether the deed of trust is actually transferred as well. In other words, if the note is assigned, then the new noteholder has the right to foreclose on the property identified in the deed of trust that secures the note, whether or not the noteholder also possesses or is assigned the deed of trust. The beneficiary of the deed of trust likewise has the right to foreclose. Thus, in Texas, the holder of the promissory note and the beneficiary of the deed of trust can be two separate individuals or entities.
More recently, the Fifth Circuit, interpreting Texas law, has explicitly rejected the split-the-note theory in the context of MERS transfers. Texas courts view the note and deed of trust as separate obligations. Thus, in Texas, a deed of trust gives both the lender (here, Bank of America) and the beneficiary (here, MERS) ″the right to invoke the power of sale, even though it would not be possible for both to hold the note.″ Transferring a promissory note among MERS members does not render the related deed of trust void, even if MERS, and not a MERS-member bank, is the beneficiary of the deed. As a result, MERS does not have to re-record a deed of trust to maintain a perfected security interest in the property.
Due to the above, the Fifth Circuit held that section 192.007 imposes no duty to record.
The common law claim for fraudulent misrepresentation also failed. This claim is based on the provision in MERS deeds of trust that states: “MERS is a beneficiary under this Security Instrument.” Dallas County contended that this statement is false because MERS has no interest in the debt or the promissory note secured by the deed of trust and therefore cannot be the beneficiary of the deed of trust.
Designating MERS as a ″beneficiary″ of the deeds of trust was not a false representation. The Texas Legislature has granted MERS authority to serve as beneficiaries in deeds of trust. The Texas Legislature amended chapter 51 of the Texas Property Code—the chapter governing foreclosure proceedings—to include ″book entry system″ in the definition of ″mortgagee,″ thus reinforcing that MERS has the right to file foreclosure actions. While this definition applies to foreclosures, this limitation does not suggest that the Texas Legislature intended to eliminate MERS’s right to serve as beneficiary of deeds of trust. Indeed, it would be inconsistent to assert that, although MERS is statutorily authorized to file foreclosure actions, it cannot at the same time record its interest in deeds of trust, which give it the right to foreclose in the first place. Therefore, Defendants made no false representation by presenting deeds of trust that designate MERS as beneficiary.
Finally, Texas courts recognize that unjust enrichment is not an independent claim; rather it is a theory of recovery that characterizes the result of a failure to make restitution of benefits either wrongfully or passively received under circumstances which give rise to an implied or quasi-contractual obligation to repay. A party may recover under the unjust enrichment theory when one person has obtained a benefit from another by fraud, duress, or the taking of an undue advantage. The unjust-enrichment claim failed because any benefit from recording a mortgage was derived not from the county clerk, but from Texas law recognizing lien priority. First, the Texas Legislature, not Dallas County, provided the ″benefit″ of lien priority. Lien priority in Texas is determined by statute. If the beneficiary of a lien records a deed of trust, that beneficiary has priority over any other interests that were not previously recorded. Dallas County argued that the benefit of first priority never would have accrued if the original deed of trust had not been recorded in the Dallas County land records. Defendants, however, paid for that benefit. Next, Dallas County also argued that because Defendants do not file deed-of-trust assignments when MERS members transfer promissory notes, Defendants were unjustly enriched by avoiding the filing fees for recording these assignments. Again though, because there is no duty to record deeds of trust or assignments under Texas law, Defendants were entitled to make this choice. Their conduct therefore was not unjust.