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IN
THE SUPREME COURT OF THE STATE OF KANSAS
No.
98,489
LANDMARK NATIONAL BANK,
Plaintiff/Appellee,
v.
BOYD A. KESLER
Appellee/Cross-appellant
MILLENNIA MORTGAGE CORPORATION,
Defendant,
(MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC. AND SOVEREIGN
BANK),
Appellants/Cross-appellees,
and
DENNIS BRISTOW AND TONY WOYDZIAK,
Intervenors/Appellees.
SYLLABUS BY THE COURT
1. Denial of a motion to set aside default judgment is subject
to review under a standard of abuse of discretion. A district
court decision that denies a motion to join a party as a
necessary party under K.S.A. 60-219(a) is also subject to an
abuse of discretion standard of review.
2. Whether the evidence demonstrates that the statutory
requirements for joinder have been met is a mixed question of
fact and law. When reviewing a mixed question of fact and law,
an appellate court reviews the district court’s factual
findings for substantial competent evidence and reviews de novo
the district court’s legal conclusions.
3. Intervention as a matter of right is subject to the same
mixed determination of law and fact as is joinder. Permissive
intervention lies within the discretion of the district court.
4. Judicial discretion is abused when no reasonable person
would take the view adopted by the trial court. Review for abuse
of discretion includes review to determine whether erroneous
legal conclusions guided the exercise of discretion.
5. K.S.A. 60-255(b) does not require that the party moving
for relief from default judgment be a party to the action.
6. It is appropriate for a trial court to consider evidence
beyond the bare pleadings to determine whether it should set
aside a default judgment. In a motion to set aside default, a
trial court should consider a variety of factors to determine
whether the defendant or would-be defendant had a meritorious
defense, and the burden of establishing a meritorious defense
rests with the moving party.
7. Relief under K.S.A. 60-255(b) is appropriate only upon a
showing that if relief is granted the outcome of the suit may be
different than if the entry of default or the default judgment
is allowed to stand; the showing should underscore the potential
injustice of allowing the case to be disposed of by default. In
most cases the court will require the party in default to
demonstrate a meritorious defense to the action as a
prerequisite to vacating the default entry or judgment. The
nature and extent of the showing that will be necessary lie
within the trial court’s discretion.
8. The law relating to a contingently necessary party closely
resembles the law relating to vacating default judgment, in that
both require the party asserting the interest to demonstrate a
meritorious defense or an interest that may be impaired.
9. The word “nominee” is subject to more than one
interpretation. The legal significance of the word depends on
the context in which it is used. The word encompasses a range of
meanings from a straw man or limited agent to a representative
enjoying the same legal rights as the party that acts as the
nominator.
10. The law generally understands that a mortgagee is not
distinct from a lender: a mortgagee is a party to whom property
is mortgaged, which is to say, a mortgage creditor or lender. A
mortgagee and a lender have intertwined rights that defy a clear
separation of interests.
11. Parties are bound by the formal admissions of their
counsel in an action.
12. The Due Process Clause does not protect entitlements
where the identity of the alleged entitlement is vague. A
protected property right must have some ascertainable monetary
value. An entitlement to a procedure does not constitute a
protected property interest.
Review of the judgment of the Court of Appeals in 40 Kan.
App. 2d 325, 192 P.3d 177 (2008). Appeal from Ford District
Court; E. LEIGH HOOD, judge. Judgment of the Court of Appeals
affirming the district court is affirmed. Judgment of the
district court is affirmed. Opinion filed August 28, 2009.
Tyson C. Langhofer and Court T. Kennedy, of Stinson Morrison
Hecker, L.L.P., of Wichita, for appellants/cross-appellees.
Ted E. Knopp, of Ted E. Knopp, Chartered, of Wichita, for
appellee Boyd A. Kesler.
David A. Schatz, of Husch Blackwell Sanders L.L.P., of Kansas
City, Missouri, for amicus curiae American Land Title
Association.
The opinion of the court was delivered by ROSEN, J.:
Mortgage Electronic Registration Systems, Inc. (MERS) and
Sovereign Bank seek review of an opinion by our Court of Appeals
holding that a nonlender is not a contingently necessary party
in a mortgage foreclosure action and that due process does not
require that a nonlender be allowed to intervene in a mortgage
foreclosure action.
The facts underlying this appeal are not in dispute. On March
19, 2004, Boyd Kesler secured a loan of $50,000 from Landmark
National Bank (Landmark) with a mortgage registered in Ford
County, Kansas.
On March 15, 2005, he secured an additional loan of $93,100
from Millennia Mortgage Corp. (Millennia) through a second
mortgage registered in Ford County. Both mortgages were secured
by the same real property located in Ford County.
The second mortgage lies at the core of this appeal. That
mortgage document stated that the mortgage was made between
Kesler–the “Mortgagor” and “Borrower”–and MERS,
which was acting “solely as nominee for Lender, as hereinafter
defined, and Lender’s successors and assigns.” The document
then identified Millennia as the “Lender.” At some
subsequent time, the mortgage may have been assigned to
Sovereign and Sovereign may have taken physical possession of
the note, but that assignment was not registered in Ford County.
On April 13, 2006, Kesler filed for bankruptcy in the United
States Bankruptcy Court for the District of Kansas, Wichita
Division. He named Sovereign as a creditor; although he claimed
the secured property as exempt, he filed an intention to
surrender the property. The bankruptcy court discharged his
personal liability on November 16, 2006. The record contains
little documentation or evidence explaining the interplay of the
bankruptcy and the foreclosure action, except to suggest that
the bankruptcy action may have given Sovereign constructive
notice of a possible default on payments.
On July 27, 2006, Landmark filed a petition to foreclose on
its mortgage, serving and naming as defendants Kesler and
Millennia. It did not serve notice of the litigation on MERS or
Sovereign. In the absence of answers from either defendant, the
trial court entered default judgment against Kesler and
Millennia on September 6, 2006. The trial court then filed an
order of sale on September 29, 2006. Notice of the sale was
initially published in the Dodge City Daily Globe on October 4,
2006. On October 26, 2006, Dennis Bristow and Tony Woydziak
purchased the secured property at a sheriff’s sale for
$87,000, and on November 14, 2006, Landmark filed a motion to
confirm sale of the secured property.
Also on November 14, 2006, Sovereign filed an answer to the
foreclosure petition, asserting an interest in the real property
as the successor in interest to Millennia’s second mortgage. A
week later, on November 21, 2006, Sovereign filed a motion to
set aside or vacate the default judgment and an objection to
confirmation of sale. The motion asserted that MERS was a K.S.A.
60-219(a) contingently necessary party and, because Landmark
failed to name MERS as a defendant, Sovereign did not receive
notice of the proceedings. The motion asked the court to vacate
the default judgment under K.S.A. 60-260(b). The motion further
asked the court to set aside the surplus from the sale, holding
it to later to be paid to Sovereign if the court elected not to
grant the motion to vacate.
On November 27, 2006, Kesler filed a motion seeking
distribution of surplus funds from the sheriff’s sale, and on
January 3, 2007, Kesler filed a motion joining Landmark’s
earlier motion to confirm the sheriff’s sale. The trial court
conducted a hearing on the various motions on January 8, 2007,
at which counsel for Landmark, Kesler, Sovereign, and Bristow
appeared and presented their cases. The trial court deferred
judgment pending review of the pleadings.
On January 16, 2007, MERS filed a motion joining
Sovereign’s motion to vacate the journal entry of default
judgment and objecting to confirmation of the sheriff’s sale,
followed on January 18, 2007, by a motion to intervene under
K.S.A. 60-224. MERS proffered an answer and a cross-claim to the
original foreclosure petition.
On that same date, the trial court filed an order finding
that MERS was not a real party in interest and Landmark was not
required to name it as a party to the foreclosure action. The
court found that MERS served only as an agent or representative
for Millennia. The court also found that Sovereign’s failure
to register its interest with the Ford County Register of Deeds
precluded it from asserting rights to the mortgage after
judgment had been entered. The court denied the motions to set
aside judgment and to intervene and granted the motions to
confirm the sale and to distribute the surplus.
On February 1, 2007, MERS and Sovereign filed motions to
reconsider. The trial court conducted a hearing on those
motions, at which counsel for Kesler, Sovereign, and MERS
appeared and argued. The trial court subsequently entered an
order denying the motions to reconsider. MERS and Sovereign
filed timely notices of appeal.
Prior to the appellants submitting their briefs, the
purchasers Bristow and Woydziak filed a motion with the Court of
Appeals seeking leave to intervene in the appeal. The Court of
Appeals granted the motion. Bristow and Woydziak then filed a
motion to compel the office of the Clerk of the Appellate Courts
to docket their cross-appeal, which the Court of Appeals denied.
The Court of Appeals affirmed the district court in Landmark
National Bank v. Kesler, 40 Kan. App. 2d 325, 192 P.3d 177
(2008). This court granted the appellants’ petition for
review.
I. Did The District Court Abuse Its Discretion In Denying
MERS’s Motion To Set Aside Default Judgment And Motion To
Intervene As A Contingently Necessary Party?
A. Standard of
Review
Denial of a motion to set aside a default judgment is subject to
review under a standard of abuse of discretion. See Canaan v.
Bartee, 272 Kan. 720, Syl. ¶ 9, 35 P.3d 841 (2001). A district
court decision that denies a motion to join a party as a
necessary party under K.S.A. 60-219(a) is also subject to an
abuse of discretion standard of review. State ex rel. Graeber v.
Marion County Landfill, Inc., 276 Kan. 328, 352, 76 P.3d 1000
(2003). Whether the evidence demonstrates that the statutory
requirements for joinder have been met is a mixed question of
fact and law. When reviewing a mixed question of fact and law,
an appellate court reviews the district court’s factual
findings for substantial competent evidence and reviews de novo
the district court’s legal conclusions. State v. Fisher, 283
Kan. 272, 286, 154 P.3d 455 (2007).
Intervention as a matter of right is subject to the same
mixed determination of law and fact as is joinder. K.S.A.
60-224(a). Permissive intervention lies within the discretion of
the district court. K.S.A. 60-224(b); see Stringfellow v.
Concerned Neighbors in Action, 480 U.S. 370, 382 n.1, 94 L. Ed.
2d 389, 107 S. Ct. 1177 (1987) (Brennan, J., concurring)
(discussing the different standards applied to Federal Rule of
Civil Procedure 24[a] and [b]).
Judicial discretion is abused when no reasonable person would
take the view adopted by the trial court. Harsch v. Miller, 288
Kan. 280, 293, 200 P.3d 467 (2009). Review for abuse of
discretion includes review to determine whether erroneous legal
conclusions guided the exercise of discretion. State v. Skolaut,
286 Kan. 219, Syl. ¶ 3, 182 P.3d 1231 (2008).
To the extent that this appeal requires interpretation of
statutory mandates, this court exercises unlimited review. See
Genesis Health Club, Inc. v. City of Wichita, 285 Kan. 1021,
1031, 181 P.3d 549 (2008).
B. Analysis
While this is a matter of first impression in Kansas, other
jurisdictions have issued opinions on similar and related
issues, and, while we do not consider those opinions binding in
the current litigation, we find them to be useful guideposts in
our analysis of the issues before us.
At the heart of this issue is whether the district court abused
its discretion in refusing to set aside the default judgment and
in refusing to join MERS as a contingently necessary party.
The statutory provision for setting aside a default judgment is
K.S.A. 60-255(b), which refers to K.S.A. 60-260(b), relating to
relief from judgment, in a manner similar to the correlation
between the corresponding federal rules, Fed. R. Civ. Proc.
55(c) and 60(b). K.S.A. 60-260(b) allows relief from a judgment
based on mistake, inadvertence, surprise, or excusable neglect;
newly discovered evidence that could not have been timely
discovered with due diligence; fraud or misrepresentation; a
void judgment; a judgment that has been satisfied, released,
discharged, or is no longer equitable; or any other reason
justifying relief from the operation of the judgment. K.S.A.
60-260(b) requires that the motion be made by a party or by a
representative who is in privity with a party, thus precluding a
nonparty of standing to file such a motion. K.S.A. 60-255(b)
does not, however, require that the movant be a party to the
action. See 11 Wright, Miller & Kane, Federal Practice &
Procedure: Civil 2d § 2865 (1995).
It is appropriate–and probably necessary–for a trial court
to consider evidence beyond the bare pleadings to determine
whether it should set aside a default judgment. In a motion to
set aside default, a trial court should consider a variety of
factors to determine whether the defendant (or would-be
defendant) had a meritorious defense, and the burden of
establishing a meritorious defense rests with the moving party.
See Canaan v. Bartee, 272 Kan. 720, 731, 35 P.3d 841 (2001).
This conclusion is consistent with the construction of the
parallel federal rules:
“Generally, a federal court will grant a motion under Rule
55(c) only after some showing is made that if relief is granted
the outcome of the suit may be different than if the entry of
default or the default judgment is allowed to stand; the showing
should underscore the potential injustice of allowing the case
to be disposed of by default. In most cases, therefore, the
court will require the party in default to demonstrate a
meritorious defense to the action as a prerequisite to vacating
the default entry or judgment. . . .
“A majority of the courts . . . have insisted upon a
presentation of some factual basis for the supposedly
meritorious defense. . . .
“The demonstration of a meritorious defense is not expressly
called for by the federal rules and, therefore, the nature and
extent of the showing that will be necessary is a matter that
lies within the court’s discretion. . . . The underlying
concern is to determine whether there is some possibility that
the outcome of the suit after a full trial will be contrary to
the result achieved by the default.” (Emphasis added.) 10A
Wright, Miller & Kane, Federal Practice & Procedure:
Civil 3d § 2697 (1998).
We accordingly find that it was incumbent on the trial court,
when ruling on the motion to set aside default judgment, to
consider whether MERS would have had a meritorious defense if it
had been named as a defendant and whether there was some
reasonable possibility MERS would have enjoyed a different
outcome from the trial if its participation had precluded
default judgment.
In determining whether MERS was a contingently necessary party
that was entitled to relief from judgment, the trial court was
required to consider the factors of K.S.A. 60-219(a) in addition
to those of K.S.A. 60-260(b).
K.S.A. 60-219(a) defines which parties are to be joined in an
action as necessary for just adjudication:
“A person is contingently necessary if (1) complete relief
cannot be accorded in his absence among those already parties,
or (2) he claims an interest relating to the property or
transaction which is the subject of the action and he is so
situated that the disposition of the action in his absence may (i)
as a practical matter substantially impair or impede his ability
to protect that interest or (ii) leave any of the persons
already parties subject to a substantial risk of incurring
double, multiple, or otherwise inconsistent obligations by
reason of his claimed interest.”
The law relating to a contingently necessary party closely
resembles the law relating to vacating a default judgment, in
that both require the party asserting the interest to
demonstrate a meritorious defense or an interest that may be
impaired. In order to prevail on appeal, MERS must demonstrate
that the trial court abused its discretion when it found, based
on the testimony, evidence, and pleadings before the court at
the time when it considered the motion to set aside default
judgment, that MERS lacked a meritorious defense to the
foreclosure proceeding or had an interest that could be
impaired. We will accordingly examine the nature of the interest
in the mortgage that MERS has demonstrated.
Sovereign is a financial institution that putatively purchased
the Kesler mortgage from Millennia but did not register the
transaction in Ford County. The relationship of MERS to the
transaction is not subject to an easy description. One court has
described MERS as follows:
“MERS is a private
corporation that administers the MERS System, a national
electronic registry that tracks the transfer of ownership
interests and servicing rights in mortgage loans. Through the
MERS System, MERS becomes the mortgagee of record for
participating members through assignment of the members’
interests to MERS. MERS is listed as the grantee in the official
records maintained at county register of deeds offices. The
lenders retain the promissory notes, as well as the servicing
rights to the mortgages. The lenders can then sell these
interests to investors without having to record the transaction
in the public record. MERS is compensated for its services
through fees charged to participating MERS members.” Mortgage
Elec. Reg. Sys., Inc. v. Nebraska Depart. of Banking, 270 Neb.
529, 530, 704 N.W.2d 784 (2005).
The second mortgage designated the relationships of Kesler,
MERS, and Millennia and established payment and notice
obligations. That document purported to define the role played
by MERS in the transaction and the contractual rights of the
parties.
The document began by identifying the parties:
“THIS MORTGAGE is made this 15th day of March 2005, between
the Mortgagor, BOYD A. KESLER, (herein ‘Borrower’), and the
Mortgagee, Mortgage Electronic Registration Systems, Inc.
(’MERS’), (solely as nominee for Lender, as hereinafter
defined, and Lender’s successors and assigns). MERS is
organized and existing under the laws of Delaware, and has an
address and telephone number of P.O. Box 2026, Flint, MI
48501-2026, tel. (888) 679-MERS. MILLENNIA MORTGAGE CORP., A
CALIFORNIA CORPORATION is organized and existing under the laws
of CALIFORNIA and has an address of 23046 AVENIDA DE LA CARLOTA
#100, LAGUNA HILLS, CALIFORNIA 92653 (herein ‘Lender’).”
The third paragraph of the first page of the mortgage document
conveyed a security interest in real estate:
“TO SECURE to Lender the repayment of the indebtedness
evidenced by the Note, with interest thereon; the payment of all
other sums, with interest thereon, advanced in accordance
herewith to protect the security of this Mortgage; and the
performance of the covenants and agreements of Borrower herein
contained, Borrower does hereby mortgage, grant and convey to
MERS (solely as nominee for Lender and Lender’s successors and
assigns) and to the successors and assigns of MERS the following
described property located in the County of FORD, State of
Kansas.”
The first paragraph of the second page of the mortgage document
contains the following language that apparently both limits and
expands MERS’s rights:
“Borrower understands and agrees that MERS holds only legal
title to the interests granted by Borrower in this Mortgage;
but, if necessary to comply with law or custom, MERS, (as
nominee for Lender and Lender’s successors and assigns), has
the right: to exercise any and all of those interests,
including, but not limited to, the right to foreclose and sell
the Property; and to take any action required of Lender
including, but not limited to, releasing or cancelling this
Mortgage.”
Paragraph 7 of the mortgage document provides the lender with
the right to protect the security:
“If Borrower fails to perform the covenants and agreements
contained in this Mortgage, or if any action or proceeding is
commenced which materially affects Lender’s interest in the
Property, then Lender, at Lender’s option, upon notice to
Borrower, may make such appearances, disburse such sums,
including reasonable attorneys’ fees, and take such action as
is necessary to protect Lender’s interest.”
Paragraph 9 of the mortgage document provides the lender with
rights in the event of a condemnation:
“Condemnation. The proceeds of any award or claim for damages,
direct or consequential, in connection with any condemnation or
other taking of the Property, or part thereof, or for conveyance
in lieu of condemnation, are hereby assigned and shall be paid
to Lender, subject to the terms of any mortgage, deed of trust
or other security agreement with a lien which has priority over
this mortgage.”
Paragraph 12 of the mortgage document addresses notice:
“Notice. Except for any notice required under applicable law
to be given in another manner, (a) any notice to Borrower
provided for in this Mortgage shall be given by delivering it or
by mailing such notice by certified mail addressed to Borrower
at the Property Address or at such other address as Borrower may
designate by notice to Lender as provided herein, and (b) any
notice to Lender shall be given by certified mail to Lender’s
address stated herein or to such other address as Lender may
designate by notice to Borrower as provided herein. Any notice
provided for in this Mortgage shall be deemed to have been given
to Borrower or Lender when given in the manner designated
herein.” (Emphasis added.)
The signature page of the mortgage document contains language
relating to notice in the event of default:
“Borrower and Lender request the holder of any mortgage, deed
of trust or other encumbrance with a lien which has priority
over this Mortgage to give Notice to Lender, at Lender’s
address set forth on page one of this Mortgage, of any default
under the superior encumbrance and of any sale or other
foreclosure action.” (Emphasis added.)
The mortgage instrument states that MERS functions “solely as
nominee” for the lender and lender’s successors and assigns.
The word “nominee” is defined nowhere in the mortgage
document, and the functional relationship between MERS and the
lender is likewise not defined. In the absence of a contractual
definition, the parties leave the definition to judicial
interpretation.
What meaning is this court to attach to MERS’s designation as
nominee for Millennia? The parties appear to have defined the
word in much the same way that the blind men of Indian legend
described an elephant–their description depended on which part
they were touching at any given time. Counsel for Sovereign
stated to the trial court that MERS holds the mortgage “in
street name, if you will, and our client the bank and other
banks transfer these mortgages and rely on MERS to provide them
with notice of foreclosures and what not.” He later stated
that the nominee “is the mortgagee and is holding that
mortgage for somebody else.” At another time he declared on
the record that the nominee
“is more like a trustee or more like a corporation, a trustee
that has multiple beneficiaries. Now a nominee’s relationship
is not a trust but if you have multiple beneficiaries you
don’t serve one of the beneficiaries you serve the trustee of
the trust. You serve the agent of the corporation.”
Counsel for the auction property purchasers stated that a
nominee is “one designated to act for another as his
representative in a rather limited sense.” He later deemed a
nominee to be “like a power of attorney.”
Black’s Law
Dictionary
defines a nominee as “[a] person designated to act in place of
another, usu. in a very limited way” and as “[a] party who
holds bare legal title for the benefit of others or who receives
and distributes funds for the benefit of others.” Black’s
Law Dictionary 1076 (8th ed. 2004). This definition suggests
that a nominee possesses few or no legally enforceable rights
beyond those of a principal whom the nominee serves.
In its opinion below, the Court of Appeals cited Thompson v.
Meyers, 211 Kan. 26, 30, 505 P.2d 680 (1973), which provides the
only discussion in Kansas of the legal significance of a
nominee:
“In common parlance the word ‘nominee’ has more than one
meaning. Much depends on the frame of reference in which it is
used. In Webster’s Third New International Dictionary,
unabridged, one of the definitions given is ‘a person named as
the recipient in an annuity or grant.’ We view a
‘nominee’, as the term was used by the parties here, not
simply in the sense of a straw man or limited agent. . . , but
in the larger sense of a person designated by them to purchase
the real estate, who would possess all the rights given a buyer
. . . .”
The legal status of a nominee, then, depends on the context of
the relationship of the nominee to its principal. Various courts
have interpreted the relationship of MERS and the lender as an
agency relationship. See In re Sheridan, ___ B.R. ___, 2009 WL
631355, at *4 (Bankr. D. Idaho March 12, 2009) (MERS “acts not
on its own account. Its capacity is representative.”);
Mortgage Elec. Registration System, Inc. v. Southwest, ___ Ark.
___, ___, ___ S.W.3d ___, 2009 WL 723182 (March 19, 2009)
(”MERS, by the terms of the deed of trust, and its own stated
purposes, was the lender’s agent”); LaSalle Bank Nat.
Ass’n v. Lamy, 2006 WL 2251721, at *2 (N.Y. Sup. 2006)
(unpublished opinion) (”A nominee of the owner of a note and
mortgage may not effectively assign the note and mortgage to
another for want of an ownership interest in said note and
mortgage by the nominee.”)
The relationship that MERS has to Sovereign is more akin to that
of a straw man than to a party possessing all the rights given a
buyer. A mortgagee and a lender have intertwined rights that
defy a clear separation of interests, especially when such a
purported separation relies on ambiguous contractual language.
The law generally understands that a mortgagee is not distinct
from a lender: a mortgagee is “[o]ne to whom property is
mortgaged: the mortgage creditor, or lender.” Black’s Law
Dictionary 1034 (8th ed. 2004). By statute, assignment of the
mortgage carries with it the assignment of the debt. K.S.A.
58-2323. Although MERS asserts that, under some situations, the
mortgage document purports to give it the same rights as the
lender, the document consistently refers only to rights of the
lender, including rights to receive notice of litigation, to
collect payments, and to enforce the debt obligation. The
document consistently limits MERS to acting “solely” as the
nominee of the lender.
Indeed, in the event that a mortgage loan somehow separates
interests of the note and the deed of trust, with the deed of
trust lying with some independent entity, the mortgage may
become unenforceable.
“The practical effect of splitting the deed of trust from the
promissory note is to make it impossible for the holder of the
note to foreclose, unless the holder of the deed of trust is the
agent of the holder of the note. [Citation omitted.] Without the
agency relationship, the person holding only the note lacks the
power to foreclose in the event of default. The person holding
only the deed of trust will never experience default because
only the holder of the note is entitled to payment of the
underlying obligation. [Citation omitted.] The mortgage loan
becomes ineffectual when the note holder did not also hold the
deed of trust.” Bellistri v. Ocwen Loan Servicing, LLC, 284
S.W.3d 619, 623 (Mo. App. 2009).
The Missouri court found that, because MERS was not the original
holder of the promissory note and because the record contained
no evidence that the original holder of the note authorized MERS
to transfer the note, the language of the assignment purporting
to transfer the promissory note was ineffective. “MERS never
held the promissory note, thus its assignment of the deed of
trust to Ocwen separate from the note had no force.” 284
S.W.3d at 624; see also In re Wilhelm, 407 B.R. 392 (Bankr. D.
Idaho 2009) (standard mortgage note language does not expressly
or implicitly authorize MERS to transfer the note); In re
Vargas, 396 B.R. 511, 517 (Bankr. C.D. Cal. 2008) (”[I]f FHM
has transferred the note, MERS is no longer an authorized agent
of the holder unless it has a separate agency contract with the
new undisclosed principal. MERS presents no evidence as to who
owns the note, or of any authorization to act on behalf of the
present owner.”); Saxon Mortgage Services, Inc. v. Hillery,
2008 WL 5170180 (N.D. Cal. 2008) (unpublished opinion) (”[F]or
there to be a valid assignment, there must be more than just
assignment of the deed alone; the note must also be assigned. .
. . MERS purportedly assigned both the deed of trust and the
promissory note. . . . However, there is no evidence of record
that establishes that MERS either held the promissory note or
was given the authority . . . to assign the note.”).
What stake in the outcome of an independent action for
foreclosure could MERS have? It did not lend the money to Kesler
or to anyone else involved in this case. Neither Kesler nor
anyone else involved in the case was required by statute or
contract to pay money to MERS on the mortgage. See Sheridan, ___
B.R. at ___ (”MERS is not an economic ‘beneficiary’ under
the Deed of Trust. It is owed and will collect no money from
Debtors under the Note, nor will it realize the value of the
Property through foreclosure of the Deed of Trust in the event
the Note is not paid.”). If MERS is only the mortgagee,
without ownership of the mortgage instrument, it does not have
an enforceable right. See Vargas, 396 B.R. 517 (”[w]hile the
note is ‘essential,’ the mortgage is only ‘an incident’
to the note” [quoting Carpenter v. Longan, 16 Wall. 271, 83
U.S. 271, 275, 21 L. Ed 313 (1872)]).
When it found that MERS did not have an interest in the property
that was impaired by the default judgment, the trial court
properly considered four factors: (1) that the written pleadings
and oral arguments by MERS and Sovereign identified MERS as
acting only as a digital mortgage tracking service; (2) that
counsel for MERS insisted that no evidence of a financial or
property interest was necessary and its argument rested solely
on its identity as the mortgagee on the mortgage document, when
counsel was directly challenged to produce evidence of a
financial or property interest; (3) that evidence showed that
Sovereign was on notice that Landmark had leave of the
bankruptcy court to proceed with foreclosure and that MERS did
not attempt to intervene in the action until after its alleged
principal, Sovereign, had already had its motion to intervene
and to set aside judgment denied; and (4) that the case law
submitted by the parties weighed more in favor of denying the
motion. These factors were properly before the trial court and
were consistent with the evidence and supported the court’s
legal reasoning.
Counsel for MERS explicitly declined to demonstrate to the trial
court a tangible interest in the mortgage. Parties are bound by
the formal admissions of their counsel in an action. Dick v.
Drainage District No. 2, 187 Kan. 520, 525, 358 P.2d 744 (1961).
Counsel for MERS made no attempt to show any injury to MERS
resulting from the lack of service; in fact, counsel insisted
that it did not have to show a financial or property interest.
MERS argued in another forum that it is not authorized to
engage in the practices that would make it a party to either the
enforcement of mortgages or the transfer of mortgages. In
Mortgage Elec. Reg. Sys. v. Nebraska Dept. of Banking, 270 Neb.
529, 704 N.W.2d 784 (2005), MERS challenged an administrative
finding that it was a mortgage banker subject to license and
registration requirements.
The Nebraska Supreme Court found in favor of MERS, noting that
“MERS has no independent right to collect on any debt because
MERS itself has not extended credit, and none of the mortgage
debtors owe MERS any money.” 270 Neb. at 535. The Nebraska
court reached this conclusion based on the submissions by
counsel for MERS that “MERS does not take applications,
underwrite loans, make decisions on whether to extend credit,
collect mortgage payments, hold escrows for taxes and insurance,
or provide any loan servicing functions whatsoever. MERS merely
tracks the ownership of the lien and is paid for its services
through membership fees charged to its members. MERS does not
receive compensation from consumers.” 270 Neb. at 534.
Even if MERS was technically entitled to notice and service in
the initial foreclosure action–an issue that we do not decide
at this time–we are not compelled to conclude that the trial
court abused its discretion in denying the motions to vacate
default judgment and require joinder of MERS and Sovereign. The
record lacks evidence supporting a claim that MERS suffered
prejudice and would have had a meritorious defense had it been
joined as a defendant to the foreclosure action. We find that
the trial court did not abuse its discretion and did not commit
reversible error in ruling on the postdefault motions.
We note that various arguments were presented suggesting that
economic policy provides independent grounds for reversing the
trial court. MERS and the amicus curiae American Land Title
Association argue that MERS provides a cost-efficient method of
tracking mortgage transactions without the complications of
county-by-county registration and title searches. The amicus
suggests the statutory recording system is grounded in
seventeenth-century property law that is entirely unsuited to
twentieth-century financial transactions. While this may be
true, the MERS system introduces its own problems and
complications.
One such problem is that having a single front man, or nominee,
for various financial institutions makes it difficult for
mortgagors and other institutions to determine the identity of
the current note holder.
“[I]t is not uncommon for notes and mortgages to be assigned,
often more than once. When the role of a servicing agent acting
on behalf of a mortgagee is thrown into the mix, it is no wonder
that it is often difficult for unsophisticated borrowers to be
certain of the identity of their lenders and mortgagees.” In
re Schwartz, 366 B.R. 265, 266 (Bankr. D. Mass. 2007).
“[T]he practices of the various MERS members, including both
[the original lender] and [the mortgage purchaser], in obscuring
from the public the actual ownership of a mortgage, thereby
creating the opportunity for substantial abuses and prejudice to
mortgagors . . . , should not be permitted to insulate [the
mortgage purchaser] from the consequences of its actions in
accepting a mortgage from [the original lender] that was already
the subject of litigation in which [the original lender]
erroneously represented that it had authority to act as
mortgagee.” Johnson, 2008 WL 4182397, at *4.
The amicus argues that “[a] critical function performed by
MERS as the mortgagee is the receipt of service of all legal
process related to the property.” The amicus makes this
argument despite the mortgage clause that specifically calls for
notice to be given to the lender, not the putative mortgagee. In
attempting to circumvent the statutory registration requirement
for notice, MERS creates a system in which the public has no
notice of who holds the obligation on a mortgage.
The Arkansas Supreme
Court has noted:
“The only recorded document provides notice that [the original
lender] is the lender and, therefore, MERS’s principal. MERS
asserts [the original lender] is not its principal. Yet no other
lender recorded its interest as an assignee of [the original
lender]. Permitting an agent such as MERS purports to be to step
in and act without a recorded lender directing its action would
wreak havoc on notice in this state.” Southwest Homes, ___
Ark. at ___.
In any event, the legislature has established a registration
requirement for parties that desire service of notice of
litigation involving real property interests. It is not the duty
of this court to criticize the legislature or to substitute its
view on economic or social policy. Samsel v. Wheeler Transport
Services, Inc., 246 Kan. 336, 348, 789 P.2d 541 (1990).
II. Did The
Trial Court’s Refusal To Join MERS As A Party Violate MERS’s
Right To Due Process?
MERS contends that the Fourteenth Amendment and §18 of the
Kansas Constitution Bill of Rights guarantees of due process
were violated when the foreclosure action was consummated
without MERS receiving notice of the proceeding and without MERS
having the opportunity to intervene in the action.
Although joinder is evaluated under an abuse of discretion
standard, if a constitutional right is involved the trial
judge’s exercise of discretion is limited. Discretion must be
exercised not in opposition to, but in accordance with,
established principles of law. It is not an arbitrary power. In
re Adoption of B.G.J., 281 Kan. 552, 563, 133 P.3d 1 (2006).
The Fourteenth Amendment to the United States Constitution
provides: “No State shall make or enforce any law which shall
abridge the privileges or immunities of citizens of the United
States; nor shall any State deprive any person of life, liberty,
or property, without due process of law.”
Section 18 of the Kansas Constitution Bill of Rights
provides: “All persons, for injuries suffered in person,
reputation or property, shall have remedy by due course of law,
and justice administered without delay.”
Due process provides any interested party with the elementary
and fundamental right to notice of the pendency of an action and
the opportunity to present its objections in any proceeding that
is to be accorded finality. Alliance Mortgage Co. v. Pastine,
281 Kan. 1266, 1275, 136 P.3d 457 (2006) (citing Mullane v.
Central Hanover Tr. Co., 339 U.S. 306, 314, 94 L. Ed. 865, 70 S.
Ct. 652 [1950]). In the absence of a protected property or
liberty interest, there can be no due process violation. State
ex rel. Tomasic v. Unified Gov’t of Wyandotte County/Kansas
City, 265 Kan. 779, 809, 962 P.2d 543 (1998).
The Due Process Clause does not protect entitlements where the
identity of the alleged entitlement is vague. Castle Rock v.
Gonzales, 545 U.S. 748, 763, 162 L. Ed. 2d 658, 125 S. Ct. 2796
(2005). A protected property right must have some ascertainable
monetary value. 545 U.S. at 766. Indirect monetary benefits do
not establish protection under the Fourteenth Amendment. 545
U.S. at 767. An entitlement to a procedure does not constitute a
protected property interest. 545 U.S. at 764.
MERS’s contention that it was deprived of due process in
violation of constitutional protections runs aground in the
shallows of its property interest. As noted in the discussion of
the first issue above, MERS did not demonstrate, in fact, did
not attempt to demonstrate, that it possessed any tangible
interest in the mortgage beyond a nominal designation as the
mortgagor. It lent no money and received no payments from the
borrower. It suffered no direct, ascertainable monetary loss as
a consequence of the litigation. Having suffered no injury, it
does not qualify for protection under the Due Process Clause of
either the United States or the Kansas Constitutions.
Furthermore, MERS received the full opportunity to present
arguments and evidence to the trial court. Only after Sovereign
clearly had notice of the litigation, had filed a motion to
intervene, and had participated in a hearing on the motion did
MERS–Sovereign’s nominee–elect to file for joinder.
Despite its late decision to enter an appearance in the case,
the trial court allowed MERS the opportunity to present
arguments and evidence. It cannot be said that MERS was
prejudicially denied notice and the opportunity to be heard.
We find that the district court did not abuse its discretion in
denying the motions to vacate and for joinder and in holding
that MERS was not denied due process. We accordingly affirm the
district court and the Court of Appeals.
END
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