The MERS Problem and Why Lenders Need Possession of the Note


Julia Wei

by Julia Wei on August 21, 2010

in Lending/Lender Issues

There has been lot of recent case law over the “MERS” problem, which is when the loan instruments get split up – ie, the promissory note is endorsed in blank, and the deed of trust is recorded with MERS, which then does not record the assignment in the local county recorder’s office.

A majority of the MERS litigation is arising in the bankruptcy courts – with the most recent one being the In Re: Box decision – [http://www.mow.uscourts.gov/bankruptcy/opinions/federman/box_order.pdf] – on June 3, 2010, from Missouri.

The Court denied BAC (formerly known as Countrywide)’s motion for relief because they failed to establish that they were the “holder” of the Note.

In re: Box follows on the heels of In re: Hwang (movant must be the real-party-in-interest) and In re: Jacobson (Wells Fargo’s servicing agent denied), all bankruptcy decisions denying lender motions for relief from the automatic stay.

The Mechanics:

Once in bankruptcy, the debtor has effectively stayed the lender’s trustee’s sale. The lender must file a motion for relief from the automatic stay as to that lender. That motion requires an evidentiary showing that the lender has the right to foreclose on the deed of trust.

Essentially, the key facts a lender must establish in order to seek relief:

  1. the lender is owed a debt by the borrower(s)/debtor(s)
  2. the debt is secured by a deed of trust against the borrower’s/debtor’s property
  3. the borrower/debtor is not paying, or the lender is not otherwise adequately protected

The debtor can then object to the motion for relief by raising the “Produce the Note” defense or a variation thereof. This is in effect challenging that the party filing the motion is owed a debt by the borrowers.

In California, the original promissory note is not required by the Trustee in order to conduct the trustee’s sale. However, in every jurisdiction, the moving party (aggrieved party) must be the real-party-in-interest and have standing to bring a claim.

The problem with MERS is that MERS is not the lender, the borrower, the servicer or even an agent. Instead, MERS is the “nominee” which has no real legal definition.

Example of a lender with standing to bring a motion for relief to foreclose:

Joe and Jane Smith own a house in Mountain View. The Smiths first took out a loan with Countrywide (now BofA) and then the loan was re-sold to Wachovia. Wachovia hires AMS Loan Servicing to service the loan.

The Smiths default, Wachovia commences foreclosure, the Smiths files for bankruptcy in the Northern District of California (San Jose). Wachovia’s loan servicer (AMS) files a motion for relief to conduct Wachovia’s foreclosure sale.

AMS’s motion attaches a declaration from an employee of Wachovia bank, a copy of the promissory note between the Smiths and BofA, the note is endorsed to Wachovia, and a copy of the assignment of the deed of trust showing Wachovia as the assignee, and a substitution of trustee subbing in AMS.

Wachovia also states in the employee declaration that it has possession (not just that it is the “holder”) of the note and that the servicing agent AMS has authority to file the motion for relief on behalf of Wachovia.

This lender has standing – has established that it is owed the debt (is the real-party-in-interest), is in possession of the debt instrument (promissory note) and that the loan servicer is the lender’s authorized agent, has been substituted in under the deed of trust, and has the power of sale.

The lender did not produce the note.

Lender = win.

Example of a lender without standing to bring a motion for relief to foreclose:

Same facts as above, except the promissory note is endorsed “in blank” and Wachovia fails to state that it has actual possession of the Note. Deed of Trust is not assigned properly with a recorded assignment in the county recorder’s office where the borrower’s property is located, shows MERS instead, declaration from MERS employee.

Lender = fail.

The original note is not required but in this circumstance when the endorsement is “in blank” – then only the party with actual possession of the note can be paid on it.

Essentially, “in blank” is like turning the note into cash and so only the person with the cash in hand can spend it. [See California Commercial Code Section 3205]

PRACTICE POINTER – the Court (Judges) need to know that the borrower only has to pay the debt once. Lenders need to supply enough evidence to show that it is unlikely that any other lender is going to come out of the woodwork and produce the original note and demand to be paid.

The more facts presented to show that even without the original note, such as the copy of the note shows an endorsement to the moving party and that the loan instruments all have the same beneficiary (assignee), the stronger the case the lender has in establishing it is the real-party-in-interest, holder in due course and has standing to conduct the foreclosure sale.


This article written and © Julia M. Wei, Esq., Editor of the DirtBlawg. Julia publishes commentary on her blog on issues such as equity purchasing, foreclosure consulting, mechanic’s liens, co-ownership agreements and trust deed investing. Julia is a litigation attorney with the The Law Office of Peter N. Brewer, a real estate and lending law firm in Palo Alto, California.

The firm serves the legal needs of homeowners, real estate and mortgage brokers, agents, brokerages, title companies, developers, investors, other real estate professionals and their clients. The firm’s client range from homeowners, brokers and lenders based in Santa Clara County, San Mateo County, San Francisco County and Alameda County, as well as throughout California.

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avatar Nancy@promissory note June 29, 2011 at 1:12 am

No wonder these things cost so much, they end up in court to figure out who the holder of the note is, who owes what, etc. until it costs everyone involved a small fortune. When will it end?

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