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“R.I. Supreme Court Clarifies Borrowers’ Standing To Challenge Mortgage Assignments”

The Rhode Island Supreme Court added to its collection of MERS opinions in Cruz v. Mortgage Electronic Registration Systems, Inc.

January 2015

David J. Pellegrino

The Rhode Island Supreme Court added to its collection of “MERS” opinions inCruz v. Mortgage Electronic Registration Systems, Inc. and DiLibero v. Mortgage Electronic Registration Systems, Inc., issued on Tuesday, January 13, 2015.  Both cases turned on whether the appellant borrowers had standing to bring particular challenges to the validity of assignments of their mortgages.  The Court took this opportunity to officially adopt the First Circuit’s reasoning in Wilson v. HSBC Mortgage Services, Inc. that clarified the distinction between a voidable challenge to a mortgage assignment—which a borrower lacks standing to raise—and a void challenge, thereby providing clear guidance to homeowners and mortgagees.

In Rhode Island, generally, a person who is not a party to an agreement may not challenge the validity of that agreement.  In 2013, in Mruk v. Mortgage Electronic Registration Systems, Inc., the Rhode Island Supreme Court carved out an exception to this rule.  The Court ruled that “homeowners had standing to ‘challenge the assignment of mortgages on their homes to the extent necessary to contest the foreclosing entity’s authority to foreclose.’”  Homeowners could challenge any assignment of mortgage on grounds that it was “invalid, ineffective, or void.”  Therefore, if a shortcoming in an assignment would merely render it voidable, the homeowner lacks standing to make that challenge.  Throughout 2014, litigants battled over the boundaries of which claims, if successful, could render a contract void as opposed to voidable.  The Cruz case firmly sets those boundaries. 

Cruz arose out of a discovery dispute over whether the borrower would be permitted to depose MERS’s corporate witness regarding the authority of the individual to execute the assignment.  On appeal, the Rhode Island Supreme Court adopted the First Circuit’s analysis in Wilson, holding that a successful challenge of a signer’s authority to execute a mortgage assignment would render the assignment voidable, not void.  Accordingly, Cruz lacked standing to challenge the assignment on those grounds and was not entitled to discovery regarding that issue.  By adopting Wilson formally, the Supreme Court clarified a void challenge from a voidable one thereby creating a bright-line rule as to which claims mortgagors have standing to raise.

Despite the Rhode Island Supreme Court’s adoption of Wilson—both its holding and reasoning—in Cruz, disputes regarding standing to challenge assignments likely will continue as a result of DiLibero. In that case, the Court held that the borrower had standing to challenge an assignment when the complaint alleged that the assignment from MERS to a third-party servicer post-dated the termination of the original lender’s relationship with MERS. The Court held that the complaint survived a motion to dismiss because the termination of the lender’s MERS membership could have stripped MERS of the ability to assign the mortgage. “[C]rediting the allegations of the plaintiff’s complaint as true, as we must in this analysis, when New Century filed its rejection of the executory contract with MERS, the contract was breached and its relationship with MERS was terminated. Thus, the subsequent assignment of the mortgage executed by MERS to UBS would be void ab initio because the assignor, MERS, had nothing to assign.”

The controversy that remains results from DiLibero’s direct conflict with Bucci v. Lehman Brothers Bank, FSB, the landmark Rhode Island case that held that a borrower can explicitly grant MERS a mortgage and thereby make MERS the mortgagee even though it is not the lender. In Bucci, the Rhode Island Supreme Court held that a mortgagee’s role does not diminish when it is a lender’s nominee.  In contrast, DiLibero appears to limit the mortgagee’s power to alienate its interest in a mortgage, which is inconsistent with the mortgagee’s independent role from Bucci.

By adopting the First Circuit’s reasoning in Wilson, the Rhode Island Supreme Court with the Cruz case drew clear boundaries between “void” and “voidable,” illuminating when homeowners have standing to challenge assignments of their mortgages.  Although Cruz likely will lead to swift dispositions of cases in which homeowners challenge the authority of corporate officers to execute assignments,DiLibero appears to be incompatible with Bucci.

For the full Rhode Island Supreme Court Cruz opinion, click here

For the full Rhode Island Supreme Court DiLibero opinion, click here

For the full First Circuit Wilson opinion, click here


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