U.S. District Court Finds Transfers of Secured Debt by MERS Subject to Pennsylvania Recording Requirements

November 2014Articles In the Zone

In the recent case of Montgomery County, Pennsylvania, Recorder of Deeds v. MERSCORP, Inc. and Mortgage Electronic Registration Systems, Inc. (2014 WL 2957494, June 30, 2014), the U.S. District Court for the Eastern District of Pennsylvania held, among other things, that the defendants, MERSCORP, Inc. and Mortgage Electronic Registration Systems, Inc. (together, MERS) were in violation of 21 P.S. §351 by failing to publicly record conveyances of an interest in real property when MERS did not record transfers of promissory notes between its own fee-paying members. In so holding, the court found that the transfer of a promissory note, separate and apart from an assignment of a mortgage, creates in the transferee an equitable interest in the mortgage, and that such a transfer of the note by operation of law also transfers the mortgage. Such a transfer is subject to the recording requirements of the Commonwealth of Pennsylvania.


The defendants serve as the mortgagee of record in the public land records as the “nominee” for a lender who holds the mortgage note, and such lender’s successors and assigns. The language contained in a typical MERS mortgage states that, “the Borrower does hereby mortgage, grant and convey to MERS (solely as the nominee for Lender and Lender’s successors and assigns) the following described property…” Thus, it is MERS, not the lender, that is identified as the mortgagee on the mortgage in the public records.

The various lenders who engage MERS to serve as the mortgagee are members of a private, members-only electronic registration system, which is a database that tracks the beneficial interests in, and servicing rights to, the loans registered on and by the members of the MERS system. When a MERS member transfers or sells the debt or promissory note (but does not assign the mortgage), there is no assignment of mortgage, MERS remains as the mortgagee of record and there is no assignment or other document to be recorded in the public record. However, the MERS member is responsible for reporting the transfer by entering the data reflecting the transfer into the MERS database. When a mortgage is actually assigned, it is MERS that is the assignor and a MERS officer signs the assignment of mortgage. In those instances, an assignment of mortgage is recorded in the public land records. Thus, with respect to when a public recording is required, MERS has made the clear distinction between an assignment of mortgage, which is recorded in the public land records, and a transfer or sale of the promissory note, which is not recorded.


In the case at hand, Nancy Becker, the Recorder of Deeds for Montgomery County, Pa., filed suit on behalf of herself and all other Pennsylvania Recorders of Deeds claiming that MERS violated 21 P.S. §351 by failing to record conveyances of interests in real property by virtue of MERS’ practice of not recording a transfer of a promissory note in the public record, but, instead, by having created and maintained a private, members-only registry for recording and tracking such transfers. Section 351 requires the recording of “all deeds, conveyances, contracts and other instruments of writing by which the parties … intend to grant, bargain, sell and convey any lands, tenements or hereditaments in the Commonwealth.”

The court first examined whether, in the absence of a written mortgage assignment, Section 351 requires the transfer of secured debt to be documented in a form suitable for recording, and then recorded in the public land records. The court undertook a thorough review of the history of the Pennsylvania recording statutes, focusing largely on the Pennsylvania Supreme Court cases in which the court held that a mortgage assignment, a mortgage satisfaction and a mortgage release are all conveyances, and thereby subject to the recording act. The court went on to explain that, based upon “well-settled, long-held American law,” the note and mortgage are legally interwoven and inseparable. That premise, the court stated, is well-supported by the Restatement (Third) of Property [§5.4 (1997)] and by the language contained in the current Pennsylvania Mortgage forms (specifically the Single Family-Fannie Mae/Freddie Mac Uniform Instrument and Uniform Instrument with MERS), which are commonly used by MERS. Based upon such review, the court determined that the transfer of the note is, by operation of law, an assignment and conveyance of an interest in, and/or title to, the property that it secures, and that the Pennsylvania Recording Act requires that the transfer of secured debt first be documented in a form suitable for recording and then recorded in the land records because it creates in the transferee an equitable interest in the mortgage. As a result of this holding, MERS is obligated to create and record written documents memorializing the transfers of debt/promissory notes secured by real estate mortgages in the Commonwealth of Pennsylvania for all debt transfers in the past, present and future.

The court further concluded that MERS was, in fact, liable for, and subject to, the Pennsylvania Recording Statutes, notwithstanding the defendants’ argument that they serve only as the agent for its member-lenders. The primary support for this holding is that MERS does not disclose who the actual lender is, and under Pennsylvania law, an authorized agent who enters into a contract on behalf of a principal without disclosing that the agent is acting for the principal (and the identity of that principal), is personally liable on the contract. MERS’ failure to disclose the identity of actual lenders left MERS principally liable for the failure to publicly record the note transfers.

Based upon its rulings, the court ordered that Declaratory Judgment be entered in favor of the plaintiff and against MERS, and declared that the assignment/transfer of a promissory note secured by a mortgage on real estate in Pennsylvania is equivalent to a mortgage assignment. As such, MERS is obligated to record written documents memorializing the transfers of promissory notes secured by real estate in Pennsylvania. The extent of damages as a result of MERS’ failure to comply with the Pennsylvania recording statutes will be determined at trial.

Pending the determination of damages, and given the potentially major impact this case may have on how MERS operates in Pennsylvania (and perhaps other jurisdictions), MERS is almost certain to appeal this case.

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