Plan A has failed for five counties that hoped to move forward with consolidated lawsuits against the MERS Corp., which operates a massive mortgage registry database and whose shareholders include some of the country’s largest banks.
Now, representatives for the counties of Allendale, Beaufort, Colleton, Hampton and Jasper are asking the South Carolina Supreme Court to reconsider an argument that they have the power to sue Mortgage Electronic Registration Systems Inc. for allegedly filing fraudulent land records.
If the petition for a rehearing is denied, the counties will be left with at least two other options, both of which are mentioned in the Supreme Court’s March 30 decision in favor of MERS. They could turn to state legislators for help, or they could begin rejecting any documents that list MERS as mortgagee or foreclosure filings that assert MERS has a lien on a property.
The latter move, while permitted under state law, would “throw the filing system into chaos,” said an attorney for the counties, Antonia Lucia of Vaux Marscher Berglind in Bluffton.
“We were asked during oral arguments [at the Supreme Court] why we didn’t just reject the documents,” she added. “Our response was that we wanted guidance from the court before doing that. We feared that it would be chaotic for the natural flow of documents, which need to be filed in order for our citizens to be able to transfer and buy and sell property.”
Asked if the counties would now refuse to accept MERS filings, Lucia replied: “I can’t comment on that.”
‘A deliberate silence’
Beaufort County Circuit Judge R. Lawton McIntosh had declined to dismiss the suits against MERS because the claims hinged on a novel issue that centered on whether MERS was filing fraudulent records and tainting the state’s land records.
But the Supreme Court reversed McIntosh and tossed the counties’ claims based on a finding that state law gives government officials the power to reject or remove filings that they believe are false or fraudulent, but not the authority to bring a lawsuit against the filer.
“However laudable the interest in protecting the public index may be, our limited role here is discerning legislative intent from the statutory text,” Justice Kaye Hearn wrote in the high court’s unanimous decision. “If [the counties] are dissatisfied with the powers the legislature has outlined for them, that should be taken up with the General Assembly.”
The counties had asserted that the statutory language that gave registers of deeds the power to reject filings also implied that they could sue to seek guidance from the court in fulfilling that statutory power. But the Supreme Court declined to “imply language into a deliberate silence because to do so would be to rewrite the statute,” Hearn wrote in the opinion.
The court did not respond to the counties’ alternate arguments that if they lacked a cause of action they still had constitutional standing to sue or standing based on the public importance exception, Lucia said. She wanted the court to address those additional arguments during a rehearing.
A local attorney for MERS, Brian Crotty of Nelson Mullins in Columbia, referred questions about the decision to the company’s Miami-based counsel, Robert Brochin of Morgan Lewis. But he did not respond to interview requests.
‘Thrown out of federal court’
While the counties framed their lawsuits with allegations of fraudulent filings, the actions are an attempt to recoup recording fees that banks avoid paying by using MERS, according to Russell DeMott, a bankruptcy and foreclosure defense lawyer in Summerville.
“It comes down to money and I think it’s a legitimate concern,” said DeMott, who is not involved in the litigation. “If the counties aren’t getting these recording fees they’re losing revenues and it’s got to be made up from somewhere.”
Recording fees vary by county. Beaufort County charges $10 for the first four pages of a filing and $1 for each additional page. The fees, while nominal, add up to big money for some counties.
But MERS members avoid having to pay the fees each time an assignment of the mortgage occurs and the promissory note is transferred, because the recording takes place in MERS’ private system. The system saves banks money and streamlines the assignment process, though it can also muddy the waters when it’s time to determine who has an interest in a property.
John DeLoache, a staff attorney for the South Carolina Association of Counties, said counties were likely losing a “significant amount of money” to MERS. However, the association has not taken a position in the MERS litigation.
Counties might be losing recording fees because of MERS, but its business model is legal, said Ed Bell, a Georgetown attorney. He represents Capital One, which was listed as a defendant in the suit along with numerous other banks that are also MERS shareholders, including Bank of America, Citibank, Deutsche Bank, JPMorgan Chase and Wells Fargo.
“What everyone thought they were doing in filing these types of lawsuits was they thought they were losing filing fees,” he said. “To some degree that may be, but since there’s no statutory requirement [in South Carolina] to file all assignments they’re not required to file [with the county] when they assign a mortgage to MERS.”
If counties decide to begin rejecting MERS filings, Bell added, “they’ll end up getting into a lot of litigation because no one’s proven yet that this new commerce, if you will, is fraudulent.”
Bell noted that two attorneys from the aforementioned Vaux Marscher Berglind firm who also represent the counties, James Scheider and Roberts Vaux, previously filed similar, separate federal actions against MERS after defaulting on their own mortgages.
Both suits were dismissed.
“I encourage lawyers to be innovative and creative,” said Bell, who also serves as president of the Charleston School of Law, “but they’ve already tried this once and they got thrown out of federal court.”
The 10-page decision is Kubic v. MERSCORP Holdings Inc. (Lawyers Weekly No. 010-023-16). A digest of the opinion is available at sclawyersweekly.com.
Follow Phillip Bantz on Twitter @SCLWBantz