USFN e-Update, September 2013: Class Action Against MERS Dismissed

Minnesota: Class Action Against MERS for Failure to Pay Recording Fees Dismissed
By Orin J. Kipp – Wilford, Geske & Cook, P.A
As seen in the USFN e-Update, September 2013

Minnesota’s two most populated counties recently brought a class action law suit against MERS, alleging a repeated failure to pay recording fees for each transfer of a mortgage within the MERS recording system. Failure to do so, as alleged by Hennepin and Ramsey counties, directly violates the Minnesota Recording Act by failing to pay the mandatory recording fees.

The counties based their claims on Minn. Stat. § 507.34, which states, in relevant part:

[e]very conveyance of real estate shall be recorded in the office of the county recorder of the county where such real estate is situated; and every such conveyance not so recorded shall be void as against any subsequent purchaser in good faith and for a valuable consideration of the same real estate, or any part thereof, whose conveyance is first duly recorded.

The counties sought a declaration that MERS violated § 507.34 by assigning mortgages within the MERS registry without recording the assignment with the county recorder where the property is located. MERS defended this claim by stating that the Recording Act is permissive and merely explains where a mortgage should be recorded if the mortgagee wants to avail itself of the protections of § 507.34.

Along with the motion to dismiss, MERS alleged that the counties lacked standing to bring the suit. The court found that the counties had adequately alleged that the failure to record mortgage transfers resulted in a loss in fees and inaccurate property records. As such, the counties had demonstrated standing and the court addressed the claims on the merits.

The court’s analysis turned upon statutory interpretation. The court agreed with MERS that the term “shall” could not be read in isolation and must be interpreted with the remainder of the statute. MERS argued that the “shall be recorded” language instructs where a mortgage should be recorded if the mortgagee wants to avoid the consequences — loss of priority — for not recording the conveyance. This, in the court’s opinion, was the only reasonable construction of the plain language of the statute. The court went further to state that the plain language of § 507.34 is unambiguous and does not establish a duty to record all conveyances; rather, it outlines where to record and explains the consequence of not doing so. The court also relied upon past decisions interpreting the purpose of the Recording Act. Minnesota courts agreed with this analysis, having explained that “[t]he purpose of [§ 507.34] is to protect those who purchase real estate in reliance upon the record.” Claflin v. Commercial State Bank of Two Harbors, 487 N.W.2d 242, 248 (Minn. Ct. App. 1992). See Citizens State Bank v. Raven Trading Partners, Inc., 786 N.W.2d 274, 278 (Minn. 2010) (“The purpose of the Minnesota Recording Act is to protect recorded titles against the gross negligence of those who fail to record their interest in real property”).

Based upon the plain language of the statute, the court concluded that § 507.34 does not create a mandatory recording obligation. The counties had also asserted claims of public nuisance and unjust enrichment. However, these claims were premised upon the argument that a mandatory obligation to record each conveyance existed. As such, these remaining claims were dismissed as well.

There has been no word on whether this decision will be appealed by the counties. This opinion is certainly a feather in the cap for MERS and the other defendants named in the class action. This may have been a Hail Mary play by the counties in hopes of drumming up additional mandatory fees. However, the opinion certainly exhibits a succinct recitation of the court’s position regarding interpretation of the Minnesota Recording Act.

Closing Note — This author’s firm recently wrote an article on an issue within the same vein. See “Deed Transfer Tax: GSEs Exempt,” which appeared in the USFN e –Update (July/Aug. 2013 ed.) While different in analysis, the cases are identical as to disposition. The federal district court dismissed an action brought by Hennepin County against Freddie Mac and Fannie Mae regarding their alleged failure to pay state deed transfer taxes. The complaint was dismissed based upon protections provided to the GSEs under 12 U.S.C. § 1723a (c)(2) and 12 U.S.C. § 1452 (e), as well as Minn. Stat. § 287.22 (6).