The Bankruptcy Appellate Panel of the 10th Circuit has held that a trustee in bankruptcy cannot avoid a mortgage lien, even though the underlying note was held by a lender, while the mortgage was recorded in the name of MERS, a separate entity. In re Trierweiler, 2012 Westlaw 6725589 (10th Cir. BAP (Wyo.)
Facts: Following a home mortgage transaction, the underlying promissory note was sold to a new lender. However, the mortgage was recorded in the name of Mortgage Electronic Registration Systems (“MERS”), as agent for the holder of the note.
When the borrowers filed a bankruptcy petition, their trustee in bankruptcy filed an adversary complaint against the new lender and MERS, seeking to avoid the mortgage. The trustee claimed that the mortgage was unenforceable because of the separation between the promissory note and the mortgage. The trial court ruled in favor of the new lender, and the trustee appealed.
Reasoning: The Bankruptcy Appellate Panel ruled in favor of the lender, reasoning that the mortgage was merely an incident of the underlying debt. Therefore, the transfer of the note carried with it the mortgage security and operated as an equitable assignment of the mortgage. Further, the recording of the mortgage in the name of MERS did not violate the state recording statute, since MERS acted as the agent for the lender.
Author’s Comment: This case is consistent with the emerging trend to validate the role of MERS (although there are some decisions to the contrary). The trustee’s “split note” argument was very clever, but it would make sense only if the holder of the mortgage were completely unconnected with the holder of the underlying note. In all of the MERS transactions, MERS has expressly agreed to act as the agent on behalf of the note holder.
The foregoing analysis was published by the California State Bar Business Law Committee Insolvency Section on 2/8/13