The plaintiffs in a federal lawsuit filed last year by 41 Kentucky counties against an organization established by major lending institutions to allow them to transfer mortgages outside of public view and avoid paying recording fees for such trades have filed a motion asking a federal judge to reconsider his decision to dismiss the complaint.
The plaintiffs also request that Senior U.S. District Judge Henry R. Wilhoit Jr. certify the following question of law to the Kentucky Supreme Court: Are Kentucky counties, through their county attorneys, authorized under state law to enforce the requirement of the law that mortgage assignments be recorded?
The plaintiffs, through their attorney, Sandra Spurgeon of Lexington, maintain that question needs to be answered because the “practical effect” of Wilhoit’s dismissal earlier this month of the counties’ suit against Mortgage Electronic Registration Systems Inc., or MERSCORP, is that “no public official has direct authority to enforce Kentucky’s recording statutes.”
Boyd, Carter, Floyd, Greenup, Lewis, Johnson, Magoffin and Menifee counties are among the plaintiffs in the lawsuit, which was filed in April of last year against MERSCORP and 25 major banks and financial institutions, all of which the complaint stated are shareholders in the company.
In the suit, the plaintiffs alleged the defendants “have failed to record mortgage assignments, in contravention of Kentucky law, depriving Kentucky counties of millions of dollars” in unpaid fees. The suit also accuses the defendants of engaging in “a scheme utilizing material misstatements of interests in mortgages filed in Kentucky.”
Kentucky law, and laws of most states, requires mortgages and “assignments” or transfers of mortgages be recorded in Kentucky, in the offices of county clerks. A typical recording fee is $12 for a document three pages long or less, with half of that designated to go to the state’s Affordable Housing Trust Fund.
Beginning in the late 1990s, the securitization of mortgages, where mortgage lenders would originate as many loans as possible for sale to banks and financial institutions, became a common practice. Those institutions would, in turn, trade the mortgages amongst themselves and pool them into trusts for eventual sale to investors as mortgage-backed securities. The practice has been cited as a major factor in the collapse of the housing market, which plunged the nation into recession.
MERSCORP was created in 1995 by the mortgage industry and such stockholders as Bank of America, Wells Fargo, Fannie Mae, Freddie Mac and the Mortgage Bankers Association. It enabled the lenders to avoid paying recording fees for thousands of transactions and made it easier for them to pursue foreclosures, the suit alleged.
In dismissing the case, Wilhoit concluded that while it was “not entirely unfounded” the plaintiffs would take umbrage with MERSCORP’s tactics, it was beyond his scope to intervene in the matter and “not within this court’s jurisdiction to speak where the General Assembly has been silent, or to enable an end-run around the statutory system.”
Wilhoit dismissed with prejudice an amended complaint filed by the plaintiffs, ruling it failed to state any claim upon which relief could be granted.
The defendants sought, and were granted, a stay in the case until the U.S. Sixth Circuit Court of Appeals could rule in a separate case involving the same legal issues. Following the Sixth Circuit’s decision, the defendants sought to have the matter dismissed.
The appeals court ruled in the other case, Christian County vs. MERSCORP, the plaintiffs lacked “a private right of action” to seek redress for alleged violations of the mortgage recording system, according to Wilhoit. The Sixth Circuit found the General Assembly had passed the recording statutes to protect three categories of individuals — existing lienholders and lenders, prospective lienholders and purchasers and property owners and borrowers whose loans have been satisfied — and the plaintiffs fell outside all those categories.
Wilhoit also agreed with the defendant’s argument that the ruling in the Christian County case was “dispositive” and mandated the case be dismissed.
In the motion for reconsideration, the counties argue Wilhoit erred by failing to recognize the county attorneys’ authority to enforce recording statutes, and that the decision was “inconsistent” with the appeals court’s reasoning in the Christian County case because, in that case, the Sixth Circuit did not limit enforcement of the recording statute to the private persons identified in the statute.
Instead, Spurgeon wrote, the appeals court noted the state attorney general is an example of another type of party authorized to enforce the statute.
Kentucky Attorney General Jack Conway filed a civil suit against MERSCORP in Franklin Circuit Court in January. The complaint is based on essentially the same allegations as those in the federal lawsuits.