Ford County Confidential

There's an interesting and timely decision (Landmark National Bank v. Kesler) out of the Kansas Supreme Court that's worth a look for what it says about servicing agents and nominees where the underlying mortgage has been chopped, sliced, diced, pureed and sold off as some sort of financial smoothie to gullible 'investors'.

The ubiquitous notices of foreclosure in the papers may soon have foreclosure petitions recast to remove MERS as plaintiff because of this decision, and one of my spies in a downtown law firm tells me this is, in fact, the case.

Kesler owned real estate in Ford County, Kansas secured by two mortgages-a $50,000 first with Landmark and a $ 93,100 second with Millennia Mortgage Co., both mortgages having been recorded in Ford County. Mortgage Electronic Registration Systems (MERS) was named as the nominee and Millennia as the creditor in the second mortgage, and Sovereign was a putative assignee of the Millennia second mortgage. (MERS functions as an electronic mortgage tracking system).

Kesler filed for bankruptcy in April, 2006, and Landmark filed a petition to foreclose its mortgage, naming Kesler and Millennia but not MERS or Sovereign. In the absence of answers the trial court entered a default judgment, and the property was sold at a sheriff's sale.Landmark filed a motion to confirm the sale on November 14, 2006.

Contemporaneously Sovereign filed a motion to set aside the default judgment and an answer asserting an interest as Millennia's assignee. It was said that MERS was a necessary party and because MERS did not receive service, Sovereign did not receive notice. MERS also filed a motion to set aside the default and a motion to intervene.

The trial court found that MERS was not a real party in interest; therefore Landmark was not required to name MERS as a party in its foreclosure petition. The court also found that MERS was only an agent or representative of Millennia. Sovereign had also failed to register its mortgage with the Ford County Registrar of Deeds, thus depriving itself of the right to intervene after judgment.

On appeal, the Kansas Supreme Court determined that the trial court was obliged to consider whether MERS would have had a meritorious defense if it had been named as a defendant and whether the outcome at a trial would have been different.

Because MERS was a nominee, its legal status depended on its relationship to its principal, Sovereign. The Court described that relationship to be that of a straw man. It had no stake in the outcome of the action as it did not function as a lender to Kesler and was in no sense an economic beneficiary. MERS did not demonstrate, and did not attempt to demonstrate that it possessed any interest in the mortgage beyond the bare designation as a mortgagor. It did not lend money or receive payment from the borrower, and it suffered no monetary loss as a consequence of the underlying litigation.