Judge Karlin

10-07027 Martinez et al v. Mortgage Electronic Registration Systems (Doc. # 58) - Document Text

SIGNED this 11 day of February, 2011.

Opinion Designated for Print Publication


In re: )

DAVID MICHAEL MARTINEZ and ) Case No. 09-40886

Debtors. )
Plaintiffs, )

v. ) Adv. No. 10-7027

Defendants. )


Case 10-07027 Doc# 58 Filed 02/11/11 Page 1 of 22



This matter is before the Court on the Motion for Summary Judgment1 filed by Plaintiff,
Michelle Martinez, now Graham (“Debtor,” “Plaintiff” or “Graham”),2 on her Complaint to
Determine Secured Status pursuant to 11 U.S.C. § 506(a)3 and the Cross-Motions for Summary
Judgment filed by Defendant Mortgage Electronic Registration Systems, Inc. (“MERS”)4 and
Defendant Countrywide Home Loans, Inc. (“Countrywide”).5 Debtors’ Objection to the Proof of
Claim filed by Countrywide, in the main case, is also ripe for decision.6

Debtor claims she is entitled to judgment against MERS because she owes no debt to MERS,
and thus the mortgage she executed to MERS should be stripped off the real property and held to not
encumber her home. She further claims she is entitled to an order sustaining her objection to the
Proof of Claim filed by Countrywide, which was filed as a secured claim, and for summary judgment
in this Adversary Proceeding on her claim that the debt she owes Countrywide is effectively
unsecured, since it is not the holder of the mortgage originally intended to secure that note.

1Doc. 39.

2David Martinez was an original plaintiff to this action, and a debtor in the underlying bankruptcy proceeding,
but because he died in August 2010, the Court will refer to “Plaintiff” or “Debtor” in the singular. In addition, Ms.
Graham signed the note and mortgage using the name “Graham.” In deposition testimony provided to the Court, she
indicated she now again uses the name “Graham,” even though the Adversary Proceeding was filed in the name of

3Doc. 1.

4Doc. 47.

5Docs.45. TheAffidavit ofWilliam C. Hultman indicates that Countrywide hassincechangedits name to BAC
Home Loans Servicing, LP. See Exhibit 1 at ¶ 10 attached to Doc. 48.

6Doc. 106 in main case.


Case 10-07027 Doc# 58 Filed 02/11/11 Page 2 of 22

This matter is related to Debtor’s underlying bankruptcy proceeding, and the parties have
consented to the trial and entry of a final order by this Court. Therefore, the Court has jurisdiction
to hear this matter pursuant to 28 U.S.C. §§ 157(c)(2)and 1334(a) and (b).

The material facts are essentially uncontroverted. On August 12, 2002, Michelle Graham
executed and delivered a promissory note (“Note”) to Countrywide whereby she promised to pay
Countrywide the sum of $140,000.00, plus interest.7 The loan was made to enable Graham to
purchase real property located on Nottingham Road in Topeka, Kansas, which she claimed as her
exempt homestead in this bankruptcy proceeding. Countrywide has remained the holder of that Note
since Graham signed it.8

To secure repayment of the debt to Countrywide and its successors and assigns, Graham
signed a Mortgage on the Nottingham property to “MERS, as the nominee for Countrywide and its
successors and assigns.” The Mortgage specifically identifies the Lender as Countrywide Home
Loans, Inc., the same Lender identified in the Note, the amount of the Mortgage is identical to the
amount borrowed under the Note, and the Mortgage instrument, itself, grants Countrywide various
rights. Therefore, based on the language appearing in the four corners of the Note and Mortgage,

7The Note and Mortgage were signed only by Michelle Graham. In her application for the loan, she held herself
out as a single person, but she has since that time held herself out as having a common law marriage with David Martinez
at the time the loan was made and since. Each bankruptcy was filed in both names.

8 See Statement of Additional Uncontroverted Facts, Doc. 48 at ¶ 2 (“the Note remains payable to the order of
Countrywide and Countrywide is in possession of the original Note,” which fact Debtor admitted was uncontroverted.)


Case 10-07027 Doc# 58 Filed 02/11/11 Page 3 of 22

all the parties to the transaction unambiguously intended for the Note to be secured by this
Mortgage.9 The Mortgage further states that:

MERS holds only legal title to the interests granted by Borrower in this Security

Instrument, 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 or 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.10
The Mortgage was properly and timely recorded with the Shawnee County Register of Deeds.

The MERS System, a database owned by MERSCORP, Inc., the parent company of MERS,
is designed to allow its members, which include originators, lenders, servicers and investors, to
accurately and efficiently track transfers of servicing rights and beneficial ownership in the notes that
are secured by the mortgages and deeds of trust held by MERS.11 At all relevant times, Countrywide
was and is a member of MERS.

Pursuant to the MERS' Rules of Membership, Rule 2, Section 5, Countrywide appointed
MERS to act as its agent to hold the Mortgage as “nominee” on Countrywide's behalf, and on behalf
of Countrywide's successors and assigns.12 The essence of MERS' business is to hold legal title to
mortgages (or deeds of trust in non-judicial foreclosure states) as an agent for the lender and the
lender’s successors and assigns, with such capacity duly recorded in the appropriate county land
records. MERS was created to eliminate the need for mortgage assignees to record assignments to

9Plaintiff acknowledged multiple times in her deposition that she intended to borrow money from Countrywide
and that she intended to grant a Mortgage on the Property to secure repayment of that loan. See Statement of Additional
Uncontroverted Facts ¶¶ 8-9 contained in MERS’ brief, Doc. 48. Although she claims she did not intend to give a
Mortgage to anyone but Countrywide, the fact is that the Mortgage unequivocally names MERS as the mortgagee.

10Mortgage, Exhibit 1, at p. 3, attached to Doc. 46 (emphasis added).

11Affidavit of William C. Hultman, Exhibit 1, at ¶ 8, attached to Doc. 48.

12MERS’ Terms and Conditions expressly state that “MERS shall at all times comply with the instructions of
the holder of mortgage loan promissory notes.”


Case 10-07027 Doc# 58 Filed 02/11/11 Page 4 of 22

protect their interests and to thereby facilitate the purchase and sale of mortgages in the secondary

In September 2004, MERS filed a foreclosure action against Debtor in state court because
the last regular payment Graham had made was in May 2004. MERS dismissed that action two
months later pending the outcome of Debtor’s Chapter 13 bankruptcy case that had been filed on
August 27, 2004. In February 2005, however, that bankruptcy was dismissed prior to confirmation
when Debtor failed to timely file an amended plan, as the Court had required.13

Three months later, in May 2005, Debtor filed a second bankruptcy petition. She again failed
to timely pay the amounts due on the Note, and MERS, again acting as nominee for Countrywide
and with the consent of Debtor, was granted relief from the automatic stay to allow it to foreclose
the Mortgage. The second bankruptcy was also dismissed for non-payment, and MERS then filed
a second foreclosure petition, both occurring in January 2006.

Six months into that litigation, Debtor joined Countrywide as a party to that state court action
so she could assert several third party claims against it. Debtor alleged that Countrywide and MERS
had committed violations of the Kansas Consumer Protection Act, and that it had committed fraud

13Doc. 47 in Case No. 04-42364.


Case 10-07027 Doc# 58 Filed 02/11/11 Page 5 of 22

in connection with her efforts to obtain a loan modification. 14 During that litigation, Debtor
consistently asserted that because MERS was Countrywide’s agent, it should be responsible for the
same acts as Countrywide.15

In February 2008, the state court granted summary judgment to MERS on its foreclosure
claim, and to both MERS and Countrywide on Debtor’s counterclaims and third party claims,
respectively, against them. After subsequent proceedings, the state court finally entered its Journal
Entry of Judgment and Foreclosure in January2009, which allowed foreclosure of MERS’ Mortgage
on the property. Debtor timely appealed this decision to the Kansas Court of Appeals.

At no time did Debtor raise before the trial court the argument that MERS could not enforce
the Mortgage because it had been separated or “split” from the Note, or that MERS lacked standing
to bring the action. In fact, Plaintiff insisted otherwise, noting that MERS could not be “separated
from Countrywide. MERS derives its very existence in this case from the mortgage....”16

Similarly, Debtor did not raise this issue before the Court of Appeals until seven months after
she filed the appeal, and all the briefing had been completed. In fact, in her brief to that court, she
again vigorously argued that MERS was “... the agent and nominee of Countrywide, in dealings with
Ms. Graham and Mr. Martinez concerning the proposed refinancing and the request for stay relief

14The counterclaims and third party claims dealt with Debtor’s assertion that MERS and Countrywide had
fraudulently induced her to grant relief from stay with the promise of offering her a loan modification. These were the
only issues that appear to have been contested during this litigation.

15In fact, as late as June 5, 2009, in opposing MERS’ Motion for Relief from stay in the pending bankruptcy
case, Debtor again confirmed her belief that Countrywide was the principal and MERS was its agent. See Doc. 17 in
Case No. 09-40886.

16See Brief of Appellants before the Kansas Court of Appeals at pp.7, 25-26, Exhibit 4 attached to Doc. 48.


Case 10-07027 Doc# 58 Filed 02/11/11 Page 6 of 22

sought in the bankruptcy case.”17 For that reason, MERS had neither the need, nor the opportunity,
at the trial court level to address the issue of its agency status, or to provide evidence in support of
its assertion that it had standing to bring the foreclosure action.

The Kansas Court of Appeals issued a per curiam decision in April 2010, dismissing the
foreclosure action on the basis that no evidence existed in the record before it that MERS had
standing to pursue foreclosure of the Mortgage. This holding was based on the finding that because
MERS did not hold the underlying promissory Note, Debtor’s failure to pay on that Note did not
result in pecuniary injury to MERS. The appellate court held that the district court therefore did not
have jurisdiction to grant judgment of foreclosure to MERS as a result of this lack of standing, and
dismissed the foreclosure action.18 The Court of Appeals made no finding that Third Party
Defendant Countrywide, which was not a party to the foreclosure portion of the state court action,
lacked standing, and made no findings about whether Countrywide was the holder of the Note.

Debtor defaulted on this loan, made in 2002, by August of 2004, and has made relatively few
payments on the subject Note since then.19 She acknowledged in all three bankruptcy proceedings

17See id. at pp.7, 25-26. Debtor first raised the issue in the form of a letter to the Court of Appeals dated
October 28, 2009. See Doc. Exhibit 5 attached to Doc. 48.

18The Court of Appeals did affirm the district court's order granting summary judgment to both MERS and
Countrywide on Graham's fraud and Kansas Consumer Protection Act counterclaims against MERS, and her third party
claims against Countrywide. She did not appeal this order.

19Although the extent of the default is not material to the issues (other than to establish whether creditor lacks
adequate protection because of the default), the Court does note that in the creditors’ Motion for Relief from Stay in the
main case, filed in June 2009, it alleged Debtor owed over $230,000, which included more than $50,000 in interest and
in excess of $26,000 in real estate taxes and property insurance, which debt had accrued while Debtor filed successive
bankruptcies. See Docs. 11 and 24 in main bankruptcy case. In her third bankruptcy petition, filed in 2009, Debtor listed
the value of the real estate at $157,200 in Schedule A. Accordingly, there does not appear to be a dispute that there is
no equity in the subject real property if the Note is secured by the Mortgage.


Case 10-07027 Doc# 58 Filed 02/11/11 Page 7 of 22

that Countrywide was the holder of a secured claim until about seven months after she filed the state
court appeal.

Additional facts will be discussed below, when necessary.

Summary judgment is appropriate if the moving party demonstrates that there is “no genuine
issue as to any material fact” and that it is “entitled to a judgment as a matter of law.” 20 In applying
this standard, the Court views the evidence and all reasonable inferences therefrom in the light most
favorable to the nonmoving party. 21 An issue is “genuine” if “there is sufficient evidence on each
side so that a rational trier of fact could resolve the issue either way.”22 A fact is “material” if, under
the applicable substantive law, it is “essential to the proper disposition of the claim.”23

The moving party bears the initial burden of demonstrating an absence of a genuine issue of
material fact and entitlement to judgment as a matter of law.24 In attempting to meet that standard,
a movant that does not bear the ultimate burden of persuasion at trial need not negate the other
party's claim; rather, the movant need simply point out to the court a lack of evidence for the other
party on an essential element of that party's claim.25

20Fed. R. Civ. P. 56(c). Fed. R. Civ. P. 56(c) is made applicable to adversary proceedings pursuant to Fed. R.
Bankr. P. 7056.

21Lifewise Master Funding v. Telebank, 374 F.3d 917, 927 (10th Cir. 2004).

22 Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003) (citing Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986)).

23Id. (citing Anderson, 477 U.S. at 248).

24 Id. (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)).

25Id. (citing Celotex, 477 U.S. at 325).


Case 10-07027 Doc# 58 Filed 02/11/11 Page 8 of 22

If the movant carries this initial burden, the nonmovant that would bear the burden of
persuasion at trial may not simply rest upon its pleadings; the burden shifts to the nonmovant to go
beyond the pleadings and “set forth specific facts” that would be admissible in evidence in the event
of trial from which a rational trier of fact could find for the nonmovant.26 To accomplish this,
sufficient evidence pertinent to the material issue “must be identified by reference to an affidavit,
a deposition transcript, or a specific exhibit incorporated therein.”27

Finally, the court notes that summary judgment is not a “disfavored procedural shortcut;”
rather, it is an important procedure “designed to secure the just, speedy and inexpensive
determination of every action.”28

Debtor filed this adversary proceeding seeking a determination that because she owes no debt
to MERS (since it does not hold the Note), no one may enforce the Mortgage. Countrywide was
added to this proceeding as an intervening defendant upon the joint motion of all parties,29 and
Debtor claims that Countrywide’s Note is unsecured on the basis that the Mortgage was “split” from
the Note. The central issue in this case is what effect, if any, the granting of the Mortgage to MERS
has on Countrywide’s right to enforce the terms of the promissory Note.

26Id. (citing Fed.R.Civ.P. 56(e)).

27Diaz v. Paul J. Kennedy Law Firm, 289 F.3d 671, 675 (10th Cir. 2002).

28Celotex, 477 U.S. at 327 (quoting Fed.R.Civ.P. 1).

29Debtor also objected to Countrywide’s Proof of Claim in the main bankruptcy case (Doc. 106). The parties
recognized that identical issues would be involved in this Adversary Proceeding, so the matters have been tracked
together, and this decision resolves that objection.


Case 10-07027 Doc# 58 Filed 02/11/11 Page 9 of 22

As a preliminary matter, since interests in property are governed by state law,30 the Court
turns to Kansas law to determine this issue. Debtor claims that the Kansas Court of Appeals has
already decided all issues in this case, and that both Defendants are forever barred by that decision
from foreclosing the Mortgage in an attempt to collect the Note. However, the Court finds that
Debtor is reading the state court precedent in Kansas far too broadly. To address Debtor’s claims,
it is important to examine what the Kansas decisions dealing with MERS have held— and perhaps
more importantly, what they have not.

The initial Kansas case to consider the issue of splitting a note and mortgage in the MERS
context is Landmark National Bank v. Kesler. 31 In Landmark, the homeowner obtained a loan from
Landmark National Bank (“Landmark”). That loan was secured by a properly recorded mortgage
to Landmark. Approximately one year later, Kesler obtained a loan from Millennia Mortgage Corp.
(“Millennia”). To secure this loan, Kesler granted a second mortgage to MERS, acting solely as the
nominee for Millennia. This mortgage was also properly recorded. The second note was then
assigned to Sovereign Bank, although that assignment was never recorded. MERS, acting solely as
the nominee for Millennia (or its assignees), remained the mortgage holder of record.

In 2006, Landmark filed a petition to foreclose Kesler’s property, serving and naming as
defendants only Kesler and Millennia. Landmark did not serve notice of the litigation on MERS or

30Butner v. United States, 440 U.S. 48, 54-55 (1979).

31289 Kan. 528 (2009). But see, e.g., McGinnis v. GMAC Mortg. Corp., 2010 WL 3418204 *3 (D. Utah 2010)
(holding that Landmark failed to “recognize the agency relationship between MERS and the lender that is created by the
language in the Deed of Trust designating it as beneficiary;” Blau v. Am.’s Serv. Co., 2009 WL 3174823 * 8 (D. Ariz.
2009) (holding that the language of the deed of trust executed to MERS did support a finding that MERS was authorized
by the lender to act on its behalf and exercise the rights that the lender held under the deed of trust); Chilton v. Med. Nat.
Mortg. Ass’n, 2009 WL 5197869 (E. D. Cal. 2009) (holding Landmark merely stands for the proposition that one
possessing the deed of trust cannot foreclose on it without also obtaining some interest in the note or obtaining
permission to act as agent of the note-holder); In re Huggins, 357 B.R. 180 (Bankr. D. Mass 2006) (holding that MERS
has standing to bring relief from stay motion as nominee holding mortgage for entity that held the note).


Case 10-07027 Doc# 58 Filed 02/11/11 Page 10 of 22

Sovereign. No defendant answered, and the district court entered default judgment against Kesler
and Millennia.

The property was sold at a Sheriff’s sale on November 14, 2006. On that same date,
Sovereign filed an answer to the foreclosure petition, claiming a second mortgage on the property
as the successor in interest to Millennia. Sovereign also filed a motion to set aside or vacate the
default judgment on the basis that MERS was a contingently necessary party pursuant to K.S.A. 60219(
a). Sovereign claimed that because Landmark failed to name MERS as a defendant, Sovereign
did not receive notice of the proceedings.

The trial court entered an order finding that MERS was not a real party in interest and that
Landmark was therefore not required to name it as a party to the foreclosure action. The court found
that MERS was merely an agent or representative for Millennia, and that Sovereign’s failure to
register its interest with the local Register of Deeds preluded it from asserting any rights to the
mortgage after the judgment was entered.

The Kansas Supreme Court affirmed the trial court, finding that MERS was little more than
a “straw man” for Millennia (and later Sovereign). As such, the court found that MERS held no
rights to the property and suffered no prejudice by not being served with the foreclosure proceedings,
as it would have had no defense to the foreclosure petition and could not have argued that Kesler was
in default to it because it did not hold the note. The court thus found that the trial court did not abuse
its discretion in refusing to set aside the default judgment.

Soon after the Landmark decision was issued, a similar result was reached by the Kansas
Court of Appeals in a case directly related to this adversary proceeding. In Mortgage Electronic


Case 10-07027 Doc# 58 Filed 02/11/11 Page 11 of 22

Registration Systems, Inc. v. Graham,32 the Kansas Court of Appeals addressed the authority of
MERS to bring a foreclosure action. The parties and property in the Graham case are the same as
in the instant case.

In Graham, the appellate court found that Michelle Graham executed a promissory note with
Countrywide to purchase her home and that the named mortgagee in the transaction was MERS,
acting solely as nominee for Countrywide. Graham stopped making payments on the note in June
2004, and MERS filed a petition to foreclose on the property. As noted above, at no time did
Graham assert that MERS was not a real party in interest, and thus this was not an issue heard or
decided by the trial court, or on which MERS had any need to present evidence.

After the district court entered summary judgment in favor of MERS on the foreclosure
petition, and on Graham’s consumer protection and fraud claims,33 Graham appealed. The Kansas
Court of Appeals, relying heavily on Landmark, found that MERS lacked standing to bring the
foreclosure action because it did not have an interest in the note, and thus was not harmed by
Graham’s failure to make the payments required by the note. The court stated:

[I]n the instant case, this mortgage states that MERS acts “solely as nominee” for
Countrywide. There is no mention of MERS in the promissory note, and there is no
evidence that Countrywide assigned the note to MERS. Thus, there is no evidence
that MERS has suffered any injury caused by Graham and Martinez' failure to make
payments on the promissory note. The note does not obligate Graham and Martinez
to make payments to MERS. Further, there is no indication that MERS possesses
any interest in the promissory note, and given Landmark's “straw man”
characterization of MERS's relationship to lenders, 289 Kan. at 539, 216 P.3d 158,
there is no evidence that MERS received permission to act as an agent for

3244 Kan. App. 2d 547 (Kan. App. 2010).

33This was a partial summary judgment, resolving only a portion of the claims and counterclaims between the
parties. Those additional claims are not relevant to the matter currently before the Court.


Case 10-07027 Doc# 58 Filed 02/11/11 Page 12 of 22

Having suffered no injury, MERS lacks standing to bring a foreclosure action.
Accordingly, the district court did not have jurisdiction to grant MERS's petition to
foreclose the mortgage.34

The Kansas courts, in both Landmark and Graham, addressed the issue of what rights MERS
had to enforce the terms of the respective notes and mortgages. Both cases held that MERS, as the
holder of nothing more than bare legal title to the mortgage, had no rights to enforce the note and had
not been harmed by the non-payment of the note. Graham also specifically relied on the fact that
MERS had not presented sufficient evidence to show it was an agent of Countrywide.

However, in neither of those cases did the court directly address the rights of the holder of
the note. The Landmark opinion does contain some general discussion concerning the possibility of
the note and mortgage being split (which will be discussed in more detail below), and what effect
that would have on the rights of the holder of the note. But the rights of the holder of the note was
not the issue before either appellate court, and at no time did either the Kansas Supreme Court or the
Kansas Court of Appeals hold or even suggest: 1) that the holder of the note lacked the authority to
foreclose on the mortgage; 2) that the note became unsecured when the mortgage was given to
MERS, or 3) that a note holder in Kansas may not legally authorize an agent to foreclose a mortgage
on its behalf. In fact, on the last point, the Kansas Court of Appeals expressly found that “there
[was] no evidence that MERS received permission to act as an agent for Countrywide”—suggesting
that if such evidence existed, the holding might be different.35

Therefore, the Court rejects Debtor’s arguments that the decision of the Kansas Court of
Appeals automatically entitles her to judgment against Countrywide or MERS, as a matter of law,

34Graham, 44 Kan. App.2d at 554 (emphasis added).

35Graham, 44 Kan. App. 2d at 554.


Case 10-07027 Doc# 58 Filed 02/11/11 Page 13 of 22

on the basis of res judicata. Res judicata requires the satisfaction of four elements: (1) the prior suit

must have ended with a judgment on the merits; (2) the parties must be identical or in privity; (3)

the suit must be based on the same cause of action; and (4) the party must have had a full and fair

opportunity to litigate the claim in the prior suit.36

Two of the required four elements are not met here. First, the prior suit did not end with a

judgment on the merits. It was dismissed for lack of jurisdiction.37 Second, MERS and Countrywide

did not have a full and fair opportunity to litigate the claim. Because Graham insisted that MERS

was the agent of Countrywide, MERS had no need to present evidence to establish this fact, and did

not. The Kansas Court of Appeals clearly left open the possibility that if there had been evidence

of an agency relationship, the result might have been different. The decision was based on a lack

of evidence when no party was given the opportunity to present the very evidence that was lacking.

It would thus be wholly unfair to hold that MERS and Countrywide are bound by that decision.

As to Landmark, although the issues in that case arose in a different posture, and were thus

somewhat different from those presented in this case, the Kansas Supreme Court did discuss the

36In re Mersmann, 505 F.3d 1033, 1049 (10th Cir. 2007), abbrogated on other grounds by United Student Aid
Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010).

37See In re Care & Treatment of Johnson, 32 Kan. App. 2d 525, 531 (2004) (noting that “courts have repeatedly
recognized that a dismissal for lack of subject matter jurisdiction generally is not a dismissal on the merits . . . .”) and

K.S.A. 60-241(b) (stating that “a dismissal under this paragraph and any dismissal not under this section, except one for
lack of jurisdiction . . . operates as an adjudication on the merits.”). Debtor, citing Johnson, contends that although the
case was dismissed for lack of jurisdiction, res judicata still applies as to the issue of jurisdiction itself. Although
Johnson does contain language that supports Debtor’s argument, when those statements are read in the context of the
opinion itself, the Court finds Johnson is not applicable to this case. Unlike Johnson, the Court of Appeals in this case
found there was no jurisdiction based upon a lack of evidence in the record. That is different than a finding of no
jurisdiction based upon a full examination of the pertinent facts and evidence available. In fact, the court in Johnson
specifically allowed the reconsideration of the jurisdictional issue based upon factual considerations that arose following
the initial case that was dismissed. Johnson, 32 Kan. App. 2d at 531-32. The Court does not read Johnson to stand for
the proposition that when a case is dismissed based upon a lack of evidence on the issue of subject matter jurisdiction
that parties are forever barred from presenting that evidence in subsequent litigation — especially when the parties were
not given an opportunity to present that evidence initially.

Case 10-07027 Doc# 58 Filed 02/11/11 Page 14 of 22

effect that splitting a note and mortgage would have on the enforceability of the mortgage and the

secured status of the note. In doing so, the court relied on a recent Missouri case, Bellistri v. Ocwen

Loan Servicing, LLC. 38 Bellistri, in turn, relied extensively on the Restatement (Third) of Property

(Mortgages) on which Kansas courts have also often relied.39

“Generally, a mortgage loan consists of a promissory note and security instrument, usually

a mortgage or deed of trust, which secures payment on the note by giving the lender the ability to

foreclose on the property.” 40 The Restatement sets forth two basic principles that are relevant in this


A transfer of an obligation secured by a mortgage also transfers the mortgage
unless the parties to the transfer agree otherwise,41 and
A mortgage may be enforced only by, or in behalf of, a person who is entitled
to enforce the obligation the mortgage secures.42
The first principle is explained more fully in the comment section of the Restatement, as follows:

The essential premise of this section is that it is nearly always sensible to keep the
mortgage and the right of enforcement of the obligation it secures in the hands of the
same person. This is so because separating the obligation from the mortgage results
in a practical loss of efficacy of the mortgage. . . . When the right of enforcement of
the note and the mortgage are split, the note becomes, as a practical matter,

38284 S.W.3d 619 (Mo. Ct. App. 2009).

39 See e.g. Am, Gen. Fin. Serv., Inc. v. Carter, 29 Kan. App. 2d 683, 689 (2008); Fidelity Bank v. King, 281 Kan.
1278, 1281 (2006); and Bankers Trust Co. v. United States, 29 Kan. App. 2d 215, 218 (2001).

40Bellistri, 284 S.W. 3d at 630.

41Restatement (Third) of Property (Mortgages) § 5.4(a). United States District Judge Lungstrum, interpreting
Kansas law, recently noted in Renkemeyer v. Mortg. Elec. Registration Sys., Inc., 2010 WL 3878582 at *2 (D. Kan.
2010) that "[t]he 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.”

42Id. § 5.4(c).


Case 10-07027 Doc# 58 Filed 02/11/11 Page 15 of 22

unsecured. This result is economically wasteful and confers an unwarranted windfall
on the mortgagor.

The comment section also provides further explanation of the second principle, as well as providing

guidance to the courts on how the provision should be applied:

As mentioned, in general a mortgage is unenforceable if it is held by one who has no
right to enforce the secured obligation. For example, assume that the original
mortgagee transfers the mortgage alone to A and the promissory note that it secures
to B. Since the obligation is not enforceable by A, A can never suffer a default and
hence cannot foreclose the mortgage. B, as holder of the note, can suffer a default.
However, in the absence of some additional facts creating authority in A to enforce
the mortgage for B, B cannot cause the mortgage to be foreclosed since B does not
own the mortgage.

This result is changed if A has authority from B to enforce the mortgage on B's
behalf. For example, A may be a trustee or agent of B with responsibility to enforce
the mortgage at B's direction. A's enforcement of the mortgage in these circumstances
is proper. . . . The trust or agency relationship may arise from the terms of the
assignment, from a separate agreement, or from other circumstances. Courts
should be vigorous in seeking to find such a relationship, since the result is
otherwise likely to be a windfall for the mortgagor and the frustration of B's
expectation of security.43

Debtor’s position is that because the Note was made in favor of Countrywide, and the Mortgage in

favor of MERS, the Note and Mortgage were irrevocably split from the inception. That split, Debtor

argues, rendered the Mortgage ineffective, for the reasons described in the Restatement.

Defendants counter that the Mortgage and the Note were never split because MERS was an

agent of Countrywide, so even under the law set forth in the Restatement, the Mortgage still

effectively secured the Note. Judge Federman from the Western District of Missouri recently agreed

with this analysis in a case with similar issues. In In re Tucker,44 the lender filed a motion for relief

43Id. at § 5.4, Comment.(e) (emphasis added).

44___ B.R. ___, 2010 WL 3733916 (Bankr. W.D. Mo. 2010).


Case 10-07027 Doc# 58 Filed 02/11/11 Page 16 of 22

from stay to foreclose on a deed of trust, and the Trustee objected based on an argument that the
lender was not the holder of both the note and the deed of trust, and therefore the two instruments
had been split and the deed of trust was unenforceable. Judge Federman, after taking evidence, held
that MERS was clearly an agent for the lender at the time the instruments were made, and therefore
the deed of trust remained enforceable. Therefore, according to Judge Federman, the note and deed
of trust were never really split, as the deed of trust was held by an agent of the holder of the note,
who could act to foreclose the it if the lender (the principal in the agency relationship) so directed.

The Court finds that the Tucker analysis and holding are entirely consistent with the
Restatement (Third) of Property (Mortgages), upon which both Missouri and Kansas courts have
heavily relied in prior decisions.45 The Restatement does not say that in all circumstances the
assignment of the note to one entity and the assignment of the mortgage to another entity renders the
mortgage unenforceable and the note unsecured. Instead, the Restatement explains this is true absent
an agency relationship between the holder of the note and the holder of the mortgage, because the
note “as a practical matter” becomes unsecured because the holder of the note has no authority to
compel the holder of the mortgage to act on its rights. However, when the holder of the mortgage
is an agent of the holder of the note, this result does not apply.46

45Debtor argues that this Court should not follow Tucker because it was based upon Missouri law, rather than
Kansas law. Although the Court agrees that Tucker is not binding on this Court, it does find the decision persuasive,
especially given the fact that the Kansas Supreme Court itself relied upon the Missouri case of Bellistri v. Ocwen Loan
Servicing, LLC, when it decided Landmark, and given the fact that both Judge Federman and the Kansas Supreme Court
relied extensively on the Restatement (Third) of Property (Mortgages) in their analysis.

46Graham, 44 Kan. App. 2d 554. Again, Graham consistently asserted in the state court proceedings that MERS
was an agent of Countrywide when it was trying to persuade the courts that Countrywide should be held liable for any
misrepresentations or fraudulent acts allegedly committed by MERS or its representatives. See Doc. 46-9 pp. 4-5
(wherein Plaintiff argued that “MERS is no more than the agent for Countrywide....”).


Case 10-07027 Doc# 58 Filed 02/11/11 Page 17 of 22

Accordingly, whether Countrywide and MERS have the ability to enforce the Note and
Mortgage hinges on their relationship. If an agency relationship exists between those two parties
such that Countrywide, as principal, can require its agent, MERS, to assign the Mortgage to it, then
the Note remains secured and Countrywide can bring a foreclosure action. Likewise, the agreement
between these entities, as fully described in the exhibits filed in support of the summary judgment
motion (and which Graham does not seriously contest) could also result in a scenario where
Countrywide could assign the Note to MERS, and MERS (as the new holder of the Note) could bring
the foreclosure action on Countrywide’s behalf. 47 Although the Kansas Supreme Court did address
the relationship between MERS and its member lenders in Landmark—likening MERS to a “straw
man”—the court did not specifically hold that no agency relationship existed. Similarly, in Graham,
the Kansas Court of Appeals merely held that “there is no evidence that MERS received permission
to act as an agent for Countrywide.”48

Countrywide and MERS have presented this Court with sufficient undisputed evidence to
establish that MERS was acting as an agent for Countrywide. As noted by MERS in its response to
Debtor’s motion for summary judgment, MERS’ role as mortgagee and MERS’ relationship with
Countrywide and its successors and assigns, as nominee, is clearly set forth in the first complete
paragraph on page 3 of the Mortgage, itself, and in signing the Mortgage, Debtor admitted she
understood that the relationship between her Lender—Countrywide, and MERS would allow MERS
itself to bring a foreclosure action on Countrywide’s behalf.

47 And as noted above, the mortgage expressly provides that ?
MERS (as nominee for Lender and Lender’s
successors and assigns) has the right to exercise any or 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.”

48Given the fact that the standing issue was never raised at the district court level, but was instead first raised
on appeal after the close of all briefing, rather than at the trial level, the lack of evidence on this issue is understandable.


Case 10-07027 Doc# 58 Filed 02/11/11 Page 18 of 22

In addition to the express language contained in the Mortgage, MERS has submitted

additional evidence, through the affidavit of its Treasurer, William Hultman, that further

substantiates the fact that MERS was acting as an agent of Countrywide while holding the Mortgage.

Pursuant to Section 2 of the MERS Terms and Conditions,49 “MERS shall serve as mortgagee of

record with respect to all such mortgage loans solely as a nominee, in an administrative capacity, for

the beneficial owner or owners thereof from time to time.” Section 3 also provides that “MERS shall

at all times comply with the instructions of the holder of mortgage loan promissory notes.”50

Based upon this evidence, the Court concludes that MERS was clearly acting as an agent for

Countrywide at all relevant times. MERS held the Mortgage as “nominee” for Countrywide, and

agreed to act on Countrywide’s behalf and at Countrywide’s direction with respect to the Mortgage.

The fact that MERS and Countrywide chose to use the word “nominee,” rather than “agent,” does

not alter the underlying relationship between the two parties.51 There is no requirement that parties

49Affidavit of William C. Hultman, Exhibit 1 attached to Doc. 48.

50Just as Judge Federman in the Tucker case held that there existed “more than sufficient [evidence] to create
an agency relationship between MERS and the Lender and its successors in Missouri, regardless what term they used
to describe that relationship,” I hold that Kansas law supports a finding that the evidence presented here creates the same
agency relationship between MERS and Countrywide. In re Tucker, 2010 WL 3733916 at *6. See Appeal of Scholastic
Book Clubs, Inc., 260 Kan. 528, 535 (1996) (holding that an agency relationship in Kansas can be created when “the
principal has delegated authority to the agent by words which expressly authorize the agent to do a delegable act” or by
implied agency “where the principal and agent intend to create a relationship whereby when the agent acts on this
authority, others will believe in and rely on the agent’s acts.”). The Court finds that the agreement between MERS and
Countrywide was sufficient to create an express agency relationship, but even if not, their actions were sufficient to
establish an implied agency.

51Blacks Law Dictionary defines a nominee as “[a] person designated to act in place of another, usu. in a very
limited way,” or “[a] party who holds bare legal title for the benefit of others or who receives and distributes funds for
the benefit of others.” Blacks Law Dictionary (9th ed. 2009). Similarly, Blacks defines an agent as “[o]ne who is
authorized to act for or in place of another; a representative.” Id. It is difficult to imagine a situation where one party
acting as a “nominee” under the legal definition would not also clearly fit within the definition of an “agent.” See also
Renkemeyer v. Mortg. Elec. Registration Sys., Inc., 2010 WL 3878582 at *2 n.3 (noting it was inconsistent for plaintiff
to argue that a nominee is not an agent under the MERS system to support a lack of standing argument, and declining
to dismiss MERS from a quiet title action, finding that under Rule 19, MERS claimed a sufficient interest in the quiet
title action to remain a party, and MERS’ absence could impair its ability to protect that interest).


Case 10-07027 Doc# 58 Filed 02/11/11 Page 19 of 22

to an agency relationship specifically refer to the agent by the name “agent.” In fact, an agency can
be created in Kansas even when the principal specifically denies that the agent is in fact an agent.52
Here, the choice to use the term “nominee” rather than “agent” does not alter the relationship
between these two parties, especially given the fact that the two terms have nearly identical legal

Because MERS was holding the Mortgage in question as an agent of Countrywide, the Court
finds that the Note and Mortgage were never split, and remain enforceable. Countrywide’s interest
in the Note remains secured by the Mortgage.53 MERS is required to act on behalf of and at the
direction of Countrywide, and, therefore, the concerns raised in the Restatement (Third) of Property
(Mortgages) about the enforceability of the Note are eliminated.

The Court finds that Countrywide’s interest is secured and it has the right to enforce the Note
and Mortgage through its agent, MERS, or on its own (by directing its agent to assign the mortgage
to it). Debtor’s objection to the Proof of Claim filed by Countrywide is, therefore, overruled.
Having determined all of the issues raised in this adversary proceeding, the Court will enter summary
judgment in favor of the Defendants. The Court has found that Countrywide’s interest is secured
by the Mortgage, and that MERS holds that Mortgage as an agent for Countrywide.

In addition, the Court rejects Debtor’s contention that procedurally, Countrywide and MERS
were required by Fed. R. Bankr. P. 7013 to bring a foreclosure action in this Court as a compulsory

52Appeal of Scholastic Book Clubs, Inc., 260 Kan. at 535.

53Based on the holding that Countrywide’s claim remains secured by the mortgage on the property, the Court
does not need to address MERS’ claim that Debtor is bound by the provisions of her Chapter 13 Plan, in which she
affirmatively provided for Countrywide to be treated as a secured creditor. Similarly, the Court does not need to further
discuss the issues raised by MERS concerning Debtor’s attempts to strip off the mortgage pursuant to § 506. Those
issues are both resolved by the Court’s finding that Countrywide continues to hold a security interest in the property,
through the mortgage held by its agent, MERS.


Case 10-07027 Doc# 58 Filed 02/11/11 Page 20 of 22

counterclaim. Rule 7013 incorporates Fed. R. Civ. P. 13 with some restrictions. Rule 13(a) states
that a party must raise a counterclaim against an opposing party if the claim (1) arises out of the
transaction or occurrence that is the subject matter of the opposing party’s claim; and (2) does not
require adding another party over whom the court cannot acquire jurisdiction.54 Those provisions
are limited by Rule 7013, which states that “a party sued by a trustee or debtor in possession need
not state as a counterclaim any claim that the party has against the debtor, the debtor’s property, or
the estate, unless the claim arose after the entry of an order for relief.”55

In this case, the order for relief was entered upon the filing of the bankruptcy petition on June
1, 2009.56 It is clear that their actions arose prior to the entry of the order for relief, and therefore
their claim for foreclosure is not a compulsory counterclaim. Conversely, Debtor asserts that any
claim MERS and Countrywide may have necessarily arose after the entry of the Kansas Court of
Appeals decision in Graham, which was on April 30, 2010. Debtor’s position is based upon the
argument that the Graham decision is res judicata as to MERS and Countrywide’s foreclosure
actions, so any newly filed foreclosure must have arisen after Graham was decided. Because the
Court has already held that MERS and Countrywide are not barred from pursuing a foreclosure
action on res judicata grounds, as discussed more fully above, the Court finds that Debtor’s position
with regard to Rule 7013 is without merit. MERS and Countrywide’s claim for foreclosure arose
prior to the entry of the order for relief, and, therefore, Rule 7013 does not require the foreclosure
claim be brought as a compulsory counterclaim.

54Fed. R. Civ. P. 13(a).

55Fed. R. Bankr. P. 7013.

56See 11 U.S.C. § 301(b).


Case 10-07027 Doc# 58 Filed 02/11/11 Page 21 of 22

The Court finds that summary judgment should be entered in favor of the Defendants in this
action. The Restatement upon which Kansas courts have often relied instructs that courts should be
vigorous in seeking to find an agency relationship in these circumstances lest the mortgagor receive
a windfall not intended by the parties at the inception of the transaction. Although the Mortgage was
held by MERS and the Note was held by Countrywide, because the uncontroverted evidence
unequivocally demonstrates that MERS was acting as an agent for Countrywide, no “fatal” splitting
of the Note and Mortgage occurred. Therefore, Countrywide continues to have the ability to enforce
its Note as secured by the Mortgage, which is currently held in the name of its agent, MERS.

IT IS THEREFORE, BY THE COURT ORDERED that Debtor’s Motion for Summary
Judgment57 is denied.

IT IS FURTHER ORDERED that summary judgment is entered in favor of Defendants
Mortgage Electronic Registration Systems, Inc. and Countrywide Home Loans, Inc. Relief from stay
is granted, since standing is the only defense Plaintiff raised to oppose stay relief.

IT IS FURTHER ORDERED that Debtor’s objection to the Proof of Claim of Countrywide
is overruled.

57Doc. 39.


Case 10-07027 Doc# 58 Filed 02/11/11 Page 22 of 22


You are here: Home Opinions Judge Karlin 10-07027 Martinez et al v. Mortgage Electronic Registration Systems (Doc. # 58)