Monthly Archives: February 2011

Banks Should Own The Mortgage And The Note According To Judge

Favorite sentence: “MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.”

Well, after all, banking has become the theater of the absurd.

Amplify’d from

Merscorp Inc., operator of the
electronic-registration system that contains about half of all
U.S. home mortgages, has no right to transfer the mortgages
under its membership rules, a judge said.

U.S. Bankruptcy Judge Robert E. Grossman in Central Islip, New York, in a decision he said he knew would have a
“significant impact,” wrote that the membership rules of the
company’s Mortgage Electronic Registration Systems, or MERS,
don’t make it an agent of the banks that own the mortgages.

Merscorp was created in 1995 to improve servicing after
county offices couldn’t deal with the flood of mortgage
transfers, Karmela Lejarde, a spokeswoman for MERS, said in an
interview last year. The company tracks servicing rights and
ownership interests in mortgage loans on its electronic
registry, allowing banks to buy and sell the loans without
having to record the transfer with the county. It played a major
role in Wall Street’s ability to quickly bundle mortgages
together in securitized trusts.

“MERS and its partners made the decision to create and
operate under a business model that was designed in large part
to avoid the requirements of the traditional mortgage-recording
process,” Grossman wrote. “The court does not accept the
argument that because MERS may be involved with 50 percent of
all residential mortgages in the country, that is reason enough
for this court to turn a blind eye to the fact that this process
does not comply with the law.”

In the case Grossman ruled on, Credit Suisse Group AG’s
Select Portfolio Servicing, a mortgage servicer, sought to
bypass the automatic shield against legal claims triggered by
Ferrel L. Agard’s filing for personal bankruptcy in September.

Select Portfolio wanted permission to foreclose on Agard’s
home in Westbury, New York, on behalf of U.S. Bancorp’s U.S.
Bank unit, the trustee for the mortgage-backed trust the home
loan was in. The house is worth about $350,000 and the mortgage
amount was $536,921, according to the decision.

Grossman ruled in favor of Select Portfolio because he
couldn’t overrule a November 2008 foreclosure judgment the
servicer won in state court, he said. Without that state-court
ruling, Select Portfolio wouldn’t have had the right to bring
its motion, Grossman said.

He then addressed whether a mortgage transfer by MERS is
valid, because “MERS’s role in the ownership and transfer of
real-property notes and mortgages is at issue in dozens of cases
before this court,” including those where “there have been no
prior dispositive state-court decisions,” he wrote.

Select Portfolio argued in part that MERS’s February 2008
assignment of the mortgage to U.S. Bank was valid because Agard
agreed that MERS would hold title to it for the original lender, Bank of America Corp.’s First Franklin, and for whichever banks
it was further assigned to. First Franklin transferred the
promissory note the mortgage secured to Lehman Brothers Holdings
Inc.’s Aurora Bank and Aurora to U.S. Bank, according to the

“An adverse ruling regarding MERS’s authority to assign
mortgages or act on behalf of its member/lenders could have a
significant impact on MERS and upon the lenders which do
business with MERS throughout the United States,” Grossman
wrote. “It is up to the legislative branch, if it chooses, to
amend the current statutes to confer upon MERS the requisite
authority to assign mortgages under its current business

Grossman said Select Portfolio had to show that U.S. Bank
owned both the note and the mortgage, and there was no evidence
that it held the note. The judge disagreed with Select
Portfolio’s argument that U.S. Bank held the note because the
note “follows” the mortgage, which it said U.S. Bank owned.

“By MERS’s own account, the note in this case was
transferred among its members, while the mortgage remained in
MERS’s name,” Grossman wrote. “MERS admits that the very
foundation of its business model as described herein requires
that the note and mortgage travel on divergent paths.”

The judge said that the membership agreement wasn’t enough
to assign the mortgage and that to do so the lender would have
to give power of attorney or similar authority to MERS.

MERS’s membership rules don’t create “an agency or nominee
relationship” and don’t clearly grant MERS authority to take
any action with respect to mortgages, including transferring
them, Grossman wrote. Because the interests at issue concern
“real property” — land and buildings — under state law, any
transfer has to be in writing, which isn’t done under the MERS
system, he said.

“Without more, this court finds that MERS’s ‘nominee’
status and the rights bestowed upon MERS within the mortgage
itself, are insufficient to empower MERS to effectuate a valid
assignment of mortgage,” the judge wrote. “MERS’s position
that it can be both the mortgagee and an agent of the mortgagee
is absurd, at best.”

Grossman said parties coming to him to seek to lift the
automatic ban on legal claims in cases involving MERS will have
to show they own both the mortgage and the note.




I am surprised anyone is surprised about the outrage over the loss of collective bargaining. People loathe change especially when it directly affects their incomes. It’s easy to target unions but someone in management negotiated the contracts and signed. Is it more important to save money or to honor a signed contract? I wonder…

Email Monitoring Or Wiretapping?

It doesn’t even matter what your intention was. I will be very curious to see Microsoft’s response!

Amplify’d from

Once seen only in the shadows of the war against organized crime, the Federal Wiretap Act should now be moving steadily and rapidly toward the top of the corporate compliance checklist. Robust civil remedies, recent court decisions and technological developments have transformed the act’s risk profile from a non-event to a statute worthy of significant attention.

Under the act, an aggrieved party can recover a minimum award of $10,000 or $100 per day of violation — whichever is greater, or, actual damages, plus punitive damages, attorneys’ fees and costs. Comparing recent class action litigation involving security breaches with potential class actions involving the Federal Wiretap Act demonstrates the significantly pro-plaintiff aspect of this remedial scheme.

To date, the vast majority of security breach class actions have been dismissed, or resolved in the defendant’s favor on summary judgment, because the plaintiff failed to plead or prove that the security breach at issue proximately caused any cognizable damage to class members.

By contrast, under the Federal Wiretap Act, proof that the violation proximately caused cognizable harm is unnecessary, and each individual plaintiff can recover a minimum of $10,000 even in the absence of actual damages.

Courts have consistently rejected claims by employees seeking to apply this statutory language to an employer’s review of stored e-mail, holding that an “interception” under the act requires the acquisition of the content of an e-mail contemporaneously with transmission, not in storage. Because e-mail, by its very nature, cannot easily be acquired in transmission, this line of authority seemed to insulate employers from the act’s rich remedial scheme.

A recent decision by the 7th U.S. Circuit Court of Appeals, however, has raised the specter of substantial civil liability for unlawful interceptions despite extant precedent in the area. In U.S. v. Szymuszkiewicz, the court affirmed the criminal conviction for Federal Wiretap Act violations of an IRS agent who, unbeknownst to his supervisor, activated the supervisor’s Microsoft Outlook “autoforwarding” feature.

As a result, duplicates of the supervisor’s e-mail were automatically forwarded to the IRS agent without the supervisor’s knowledge or consent. The IRS agent received a sentence of 18 months’ probation.

The 7th Circuit’s decision is significant for employers because corporate IT departments commonly use Outlook’s autoforwarding feature. IT departments, for example, routinely activate this feature after an employee has left an organization, or when an employee is on an extended leave of absence, so that a supervisor or co-worker can promptly respond to e-mail intended for the employee.

E-mail journaling is a basic tool of electronic discovery as it permits the automated preservation of e-mail. E-mail journaling is particularly useful for preserving the e-mail of an employee who is unaware that he is the target of an investigation because e-mail journaling eliminates the need for the target of the investigation to be involved in preservation efforts.

Activating Microsoft’s autoforwarding feature is just one way that employers can effectuate an interception of e-mail under the Federal Wiretap Act. Increasingly sophisticated e-mail monitoring programs are capable of capturing e-mail content in real-time.

At least two domestic relations cases, for example, have held that one spouse unlawfully intercepted another spouse’s e-mail or internet chat by installing SpectorSoft software, a commercially available real-time monitoring program, on the other spouse’s personal computer. Although statistics are not publicly available, a significant number of corporate IT departments likely have installed SpectorSoft or similar real-time, e-mail monitoring products.

Because consent to an interception by one party to a communication is a defense to liability under the Federal Wiretap Act, employers can reduce the risk of liability by providing employees with notice of the IT processes that constitute an interception and obtaining their express or implied consent.

Revising the employee handbook and using a splash screen or similar warning may not, however, be enough.

Corporate counsel should encourage IT leaders routinely to communicate how and when the corporate IT department is intercepting employees’ e-mail. Corporate counsel can then analyze whether the existing policy provides sufficient notice to establish consent to the interception and, if not, can revise the existing notice or provide individualized notice to targeted employees.

Employers can satisfy this all-party consent requirement in the context of telephone monitoring by distributing a telephone monitoring policy to their own workforce and notifying incoming callers by automated means that their call will be monitored. In the context of e-mail, however, notifying the sender that his e-mail will be intercepted may not be technically feasible.