Gemini Services v. Mortgage Electronic Registration Systems, Inc. et

UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
In re: 	G EMINI SERVICES, I NC.,
Debtor
Case No. 	05-31317
Adv. No. 	05-3190
G EMINI SERVICES, I NC.,
Plaintiff
v.
M ORTGAGE ELECTRONIC REGISTRATION
SYSTEMS, I NC., ET AL.
Defendants
Judge Waldron
Chapter 11
DECISION DENYING PLAINTIFF’S
MOTION FOR SUMMARY
JUDGMENT (DOC. 74) AND
GRANTING DEL NORTE REFI, LLC’S
AMENDED MOTION FOR SUMMARY
JUDGMENT (DOC. 79)
DATED AT DAYTON, OHIO this 29th Day of August, 2006:
Background
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: August 29, 2006
____________________________________________________________
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Gemini Services, Inc. (Gemini) is the Debtor in possession in this chapter 11
case, which was filed on February 18, 2005. 	On April 29, 2005, Gemini filed a
complaint against Mortgage Electronic Registration Systems, Inc. (“MERS”), Del Norte
Refi, LLC (“Del Norte”), Key Bank National Association (“Key Bank”) and the United
States of America, Internal Revenue Service (the “I.R.S.”). (Doc. 1) 	An amended
complaint was filed on May 2, 2005 to include various attachments. (Doc. 2) 	The
amended complaint sought to determine the validity of a mortgage against the Debtor’s
business property [8721 Washington Church Road, Miamisburg, Ohio 45342 (the
“property”)] and to determine two proofs of claim filed by the I.R.S. 	All the parties,
except MERS, answered the complaint. 	See Docs. 24 (Del Norte), 25 (the I.R.S.) and
30 (Key Bank).
Following a pretrial conference on July 27, 2005, Key Bank was dismissed
because it disclaimed any interest in the property. See Order of Dismissal (Doc. 37).
On October 5, 2005, the court held another pretrial conference at which it was
agreed that the issues between Del Norte and the Debtor could be resolved by
summary judgment and a discovery cutoff was established. See Order: Fixing Discovery
Cut-Off, Establishing Dates For Filing Motions For Summary Judgment and Ordering
Other Matters – October 5, 2005 – Doc. 45.
On October 27, 2005, a default judgment was entered against MERS. It failed to
answer or respond to a Motion for Default Judgment (Doc. 50).
On November 7, 2005, the Debtor and the I.R.S. entered into an Agreed Entry on
Count Two of Plaintiff’s Amended Complaint. (Doc. 52) 	The agreement determined the
I.R.S.’ third proof of claim superseded the previously filed proofs of claim and set the
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amount of the secured, unsecured priority and general unsecured portion of the I.R.S
claim. Id.
On December 6, 2005, the Debtor and Del Norte stipulated to various facts and
exhibits. (Doc. 54) Without detailing various filings, pretrial conferences and hearings, it
became apparent that, although all parties, including the IRS, had previously agreed to
a summary judgment procedure involving only Gemini and Del Norte, all parties
subsequently determined the IRS should participate in the proposed summary judgment
proceedings in connection with the remaining causes of action of the Debtor’s amended
complaint. 1
Accordingly, on January 25, 2006, the court issued its Order Vacating Prior
Order, Fixing Discovery Cutoff Date and Ordering Other Matters. (Doc. 62) 	The
discovery cutoff was set at February 28, 2006 for all parties, including the I.R.S. 	The
discovery cutoff was subsequently extended until April 28, 2006. (Doc. 67) At that time,
all the parties agreed discovery was completed and that the remaining issues in the
Debtor’s amended complaint (Doc. 2) could be resolved as a matter of law.
On May 26, 2006, the court issued a final scheduling order which required all
stipulations by June 9, 2006 and set dates for summary judgment filings. (Doc. 72) The
I.R.S., although participating in the extended discovery in this adversary proceeding, did
not file any documents after the court issued the May 26, 2006 order. On July 12, 2006,
Del Norte and the Debtor filed additional stipulations to supplement the filings of
December 	2005. 	(Doc. 	75) 	This 	filing 	was 	superseded 	by 	a 	corrected 	set 	of
supplemental exhibits on July 17, 2006. (Doc. 77) On June 8, 2006, the Debtor filed for
Summary Judgment. (Doc. 74) 	Del Norte filed a cross-motion for summary judgment
1 This decision will impact the lien priority of the I.R.S. against the property.
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and a response to the Debtor’s Motion (Doc. 79) on July 19, 2006. 2 On July 27, 2006,
the Debtor filed a reply brief in support of its Motion (Doc. 74) and a response to Del
Norte’s cross-motion. (Doc. 80)
Facts
The parties have stipulated to most of the relevant facts. 	The remaining
uncontested facts are determined, for this decision, based on the agreed set of exhibits
filed by the parties. 3
On March 3, 2000, Key Bank loaned Gemini $390,000. 	In consideration for this
loan, 	the 	Debtor 	executed 	a 	promissory 	note 	(the 	“note”) 	and 	a 	mortgage 	(the
”mortgage”) in favor of Key Bank. (Doc. 77 – ¶ 8, 9) 	The mortgage was properly
recorded. (Doc. 77 – ¶ 10) On July 31, 2003, Key Bank endorsed the note to Del Norte.
(Doc. 77 – ¶ 11; Exhibit J) 	As stipulated to by the parties, “[o]n November 10, 2003,
Key Bank executed an Assignment of Mortgage to MERS (the ‘Assignment’). 	The
Assignment was filed with the Montgomery County Recorder’s Office on December 9,
2003 at A/M 03-162105.” (Doc. 77 – ¶ 12; Exhibit L) On February 19, 2004, MERS filed
a court action for judgment on the note and for foreclosure on the property (the
“foreclosure action”). (Doc. 77 -- ¶ 14; Exhibit C) 	On March 4, 2004, Del Norte filed a
separate action for a cognovit money judgment for the balance due on the note. (Doc.
77 – ¶ 15; Exhibit H) On March 18, 2004, Del Norte was granted judgment on the note
(Doc. 77 – ¶ 16; Exhibit I) and filed a certificate of judgment against the property the
2 To clarify the record, Document 79 is the second amended response of Del Norte. Therefore, the court
did not consider the previous filings – See Docs. 76 and 78.
3 The agreed exhibits are found in the Agreed Stipulation of Exhibits and Facts (Doc. 54) and the Second
Amended Agreed Stipulations of Exhibits and Facts. (Doc. 77).
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same day (Doc. 77 – ¶ 17; Exhibit T). On July 10, 2004, MERS dismissed the cause of
action on the note from the foreclosure action. (Doc. 77 – ¶ 18; Exhibit D)
On September 7, 2004, MERS filed a Motion for Default Judgment in the Court of
Common Pleas, Montgomery County. (Exhibit E) 	On September 14, 2004, the state
court entered its Judgment Entry/Foreclosure Decree. (Exhibit F) 	The state court
unambiguously found the Debtor in default. The court found that “the Plaintiff” was due
$370,014.30, plus interest on the note. 	“The Plaintiff”, as referenced in the state court
order, is not identified except on the caption of the document which refers to “Mortgage
Electronic Registration Systems, Inc., Its Successors and Assigns.” 	The court also
ordered foreclosure on the mortgage. 	Del Norte was not a named party to the state
court proceedings in the foreclosure action.
On October 19, 2005, the note was registered with MERS. (Doc. 77 – ¶ 19) The
servicing agent for the note held by Del Norte is SN Servicing Corporation. (Doc. 77 – ¶
21; see also Exhibit M – Security National Servicing Corporation Ledger for Gemini
Loan dated October 19, 2005 and Exhibit N – SN Servicing Corporation payoff balance
calculations dated October 19, 2005 for Gemini Loan).
Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. § 1334 and the Standing Order
of Reference entered in this District. 	This is a core proceeding pursuant to 28 U.S.C. §
157(b)(2)(K).
The Rooker Feldman Doctrine Does Not Bar This
Court From Exercising Jurisdiction
As a preliminary issue, Del Norte asserts that the Rooker Feldman doctrine bars
this Court from exercising jurisdiction in this adversary. 	The court determines the
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Rooker 	Feldman 	doctrine 	does 	not 	bar 	this 	court 	from 	exercising 	subject 	matter
jurisdiction in connection with the remaining issues in this adversary proceeding. 	The
Court recognizes that, since the Rooker Feldman doctrine addresses subject matter
jurisdiction, it must be considered at any point in a proceeding. 	See Federal Rule of
Civil Procedure 12(h)(3), applicable to adversary proceedings by Bankruptcy Rule
7012(b) (“Whenever it appears by suggestion of the parties or otherwise that the court
lacks jurisdiction of the subject matter, the court shall dismiss the action.”) 	The Court
notes, however, it appears to be, at a minimum, inconsistent, if not disingenuous, for
Del Norte, after participating in multiple proceedings in this case and this adversary, to,
for the first time, substantively urge that this court has no jurisdiction, particularly when
Del Norte, during the pretrial stage of this adversary, declined this court’s invitation to
consider abstention in favor of an alternate court forum. 	Nevertheless, the Court
considers Del Norte’s argument that this court cannot determine the validity or priority of
Del Norte’s lien, since any review of the prior state court proceedings would constitute
the bankruptcy court acting as an appellate court in review of the state court decisions
and such action is prohibited by the Rooker Feldman Doctrine.
Based on two United States Supreme Court decisions, the Rooker Feldman
doctrine limits the subject matter of jurisdiction of the lower federal courts to review state
court judgments:
“The Rooker/Feldman doctrine derives its name from two cases- District
of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303,
75 	L.Ed.2d 	206 	(1983), 	which 	revived 	a 	doctrine 	of 	federal 	court
jurisdiction established by Rooker v. Fidelity Trust Co., 263 U.S. 413, 44
S.Ct. 149, 68 L.Ed. 362 (1923).” Grendell v. Ohio Supreme Court, 252
F.3d 828, 835 n. 1 (6th Cir.2001). “The doctrine expresses the principle
that 	federal 	trial 	courts 	have 	only 	original 	subject 	matter, 	and 	not
appellate, jurisdiction [and] ··· may not entertain appellate review of [or
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collateral attack on] a state court judgment.' ” Singleton v. Fifth Third
Bank (In re Singleton), 230 B.R. 533, 536 (6th Cir. BAP 1999) (quoting In
re Johnson, 210 B.R. 1004, 1006 (Bankr.W.D.Tenn.1997)).
In re Nosker, 267 B.R. 555, 567, fn. 7 (Bankr. S.D. Ohio 2001).
In a recent decision, the United States Supreme Court ruled on the limitations on
the Rooker Feldman Doctrine:
The Rooker-Feldman doctrine, we hold today, is confined to cases of the
kind from which the doctrine acquired its name: cases brought by state-
court losers complaining of injuries caused by state-court judgments
rendered before the district court proceedings commenced and inviting
district court review and rejection of those judgments. Rooker-Feldman
does not otherwise override or supplant preclusion doctrine or augment
the circumscribed doctrines that allow federal courts to stay or dismiss
proceedings in deference to state-court actions.
Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284, 125 S.Ct. 1517,
1521–22 (2005). 	See also McCormick v. Braverman, 451 F.3d 382, 389-92 (6th Cir.
2006) (review of the history and limitation of the Rooker Feldman doctrine).
Del Norte claims that the state court has already determined Del Norte has the
first and best lien on the property. The record, however, does not support this
conclusion. 	It is correct that a state court granted Del Norte a certificate of judgment;
however, that was merely as a result of an action on the note and contained no
preclusive determinations in connection with any issues involving title or priority of liens
on the property. (Doc. 77 – ¶ 16) 	Separately, MERS, not Del Norte, was granted a
judgment in the in rem foreclosure action. Del Norte is not a named party on any state
court document in the foreclosure action. This court accepts, as it must, the state court
judgments and does not act as a de facto appellate court; however, accepting the
preclusive determinations of the separate state court judgments in regard to the
mortgage and the note, this court must, nevertheless, determine the effect of those
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judgments, 	the 	various 	mortgage 	documents 	and 	assignments, 	and 	the 	agency
relationship between Del Norte and MERS, under applicable Ohio law, in the context of
a chapter 11 case. This is consistent with the mandate from Exxon:
Disposition of the federal action, once the state-court adjudication is
complete, would be governed by preclusion law. The Full Faith and
Credit Act, 28 U.S.C. § 1738, originally enacted in 1790, ch. 11, 1 Stat.
122, requires the federal court to “give the same preclusive effect to a
state-court judgment as another court of that State would give.” Parsons
Steel, Inc. v. First Alabama Bank, 474 U.S. 518, 523, 106 S.Ct. 768, 88
L.Ed.2d 877 (1986); accord Matsushita Elec. Industrial Co. v. Epstein,
516 U.S. 367, 373, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996); Marrese v.
American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380-381,
105 S.Ct. 1327, 84 L.Ed.2d 274 (1985). Preclusion, of course, is not a
jurisdictional matter. See Fed. Rule Civ. Proc. 8(c) (listing res judicata as
an affirmative defense). In parallel litigation, a federal court may be
bound to recognize the claim- and issue-preclusive effects of a state-
court judgment, but federal jurisdiction over an action does not terminate
automatically on the entry of judgment in the state court.
Exxon Mobil Corp., 544 U.S. at 293, 125 S.Ct. at 1527.
This 	court 	would 	be 	obligated 	to 	follow 	a 	state 	court 	judgment 	explicitly
concluding the mortgage is held by Del Norte as the first and best lien; however, as a
result of the procedures followed, and, perhaps more importantly, not followed by the
parties prepetition, there is no such state court determination. 	If such a “smoking gun”
document 	existed, 	it 	appears 	this 	adversary 	would 	not 	have 	been 	necessary.
Accordingly, rather than being barred by the Rooker Feldman Doctrine from
exercising jurisdiction, this court, consistent with directive of Exxon, accords the state
court judgments appropriate preclusive effect in connection with the determination of
the issues presented for summary judgment in this adversary.
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Positions of the Parties
The Debtor’s position is that the mortgage assignment from Key Bank was to
MERS and not Del Norte; and, further, the mortgage assignment fails to state MERS is
the agent for Del Norte. 	As a result, since MERS claims no ownership interest in the
property and the Debtor can step into the shoes of a hypothetical bona fide purchaser,
the Debtor can avoid Del Norte’s claim that it has the first and best lien on the property.
Del Norte argues that the mortgage assignment to MERS simply transferred legal
title to MERS under a limited agency relationship; however, the transfer of the note
ensured 	that 	Del 	Norte 	held 	the 	beneficial 	interest 	in 	the 	mortgage 	and, 	under
applicable Ohio law, the Debtor cannot assert the position of hypothetical bona fide
purchaser and, thus, is unable to avoid the mortgage interest of Del Norte.
Issue Determined
The court determines that Del Norte holds the first and best lien against the
property and this lien may not be avoided by Gemini.
Summary Judgment Standard
This 	court 	reviewed 	the 	summary 	judgment 	standard 	in 	a 	recent 	reported
decision:
The familiar standard to address the 	parties' filings is contained in
Federal Rule of Civil Procedure 56(c) and is applicable to bankruptcy
adversary 	proceedings 	by 	incorporation 	in 	Bankruptcy 	Rule 	7056.
Federal Rule of Civil Procedure 56(c) states, in part, that a court must
grant summary judgment to the moving party if:
the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and
that the moving party is entitled to a judgment as a matter
of law.
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In order to prevail, the moving party, if bearing the burden of persuasion
at trial, must establish all elements of its claim. Celotex Corp. v. Catrett,
477 U.S. 317, 331, 106 S.Ct. 2548, 2556, 91 L.Ed.2d 265 (1986). If the
burden is on the non-moving party at trial, the movant must: 1) submit
affirmative evidence that negates an essential element of the nonmoving
party's claim; or 2) demonstrate to the court that the nonmoving party's
evidence 	is 	insufficient 	to 	establish 	an 	essential 	element 	of 	the
nonmoving party's claim. Id. at 331-332, 106 S.Ct. at 2557. Thereafter,
the opposing party “must come forward with ‘specific facts showing that
there is a genuine issue for trial.’ ” Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 586-587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d
538 (1986) (citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 249-251, 106 S.Ct. 2505, 2510-12, 91 L.Ed.2d 202 (1986). All
inferences drawn from the underlying facts must be viewed in a light most
favorable to the party opposing the motion. Matsushita, 475 U.S. at 586-
588, 106 S.Ct. at 1356-57.
Roberds, Inc. v. Broyhill Furniture (In re Roberds, Inc), 313 B.R. 732, 735 (Bankr. S.D.
Ohio 2004).
Analysis
The Endorsement of the Note and the Assignment of the Mortgage
A bankruptcy trustee may avoid any transfer that is voidable by a hypothetical
bona fide purchaser as of the commencement of the case. 11 U.S.C. § 544(a)(3);
Kovacs v. First Union Home Equity Bank (In re Huffman), 408 F.3d 290, 293 (6th Cir.
2005). This opportunity for avoidance is equally available to a chapter 11 debtor in
possession. 11 U.S.C. § 1107(a). State law defines who is entitled to bona fide
purchaser status. Thacker v. United Cos. Lending Corp., 256 B.R. 724, 729 (W.D. Ky.
2000); See R.K. Arnold, Yes, There is Life on MERS, 11-Aug Prob. and Prop. 32, 35
(July/August 1997) (Article summarized the rights of a trustee under § 544(a)(3) and
noted that “every state designates certain places where mortgages . . . must be
recorded to be valid against a bona fide purchaser. . . .”)
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Both the Debtor and Del Norte cite to the Supreme Court of Ohio’s decision in
Kernohan v. Manss, 53 Ohio St. 118 (1895). In Kernohan, the court reaffirmed Ohio law
concerning notes and mortgages:
1. 	Where a promissory note is secured by mortgage, the note, not the
mortgage, represents the debt. The mortgage is, therefore, a mere
incident, and an assignment of such incident will not, in law, carry with it
a transfer of the debt. On the other hand, a transfer of the note by the
owner, so as to vest legal title in the indorsee, will carry with it equitable
ownership of the mortgage. And so, if the debt be evidenced by several
promissory notes, the legal transfer of a portion of the notes carries with it
such proportional interest in the security as the notes transferred bear to
the whole. Harkrader v. Leiby, 4 Ohio St. 602; Swartz v. Liest, 13 Ohio
St. 419; Fithian v. Corwin, 17 Ohio St. 119; Allen v. Bank, 23 Ohio St. 97;
Holmes v. Gardner, 50 Ohio St. 167, 33 N. E. 644.
2. 	Being 	but 	an 	incident 	of 	the 	debt, 	the 	mortgage 	remains, 	until
foreclosure or possession taken, in the nature of a chose in action.
Where given to secure notes, it has no determinate value apart from the
notes, and, as distinct from them, is not a fit subject of assignment. And,
where the notes are legally transferred, the mortgagee, and all claiming
under him, will hold the mortgaged property in trust for the holder of the
notes. Jordon v. Cheney, 74 Me. 359; Jones, Mortg. 818; Pom. Eq. Jur. §
1210.
Id. at 133.
Kernohan simply restated settled principles of Ohio real estate law. 	At least as
far back as 1831, the Supreme Court of Ohio held a mortgage is not a separate
property interest distinct from the note it secures, but instead is considered an incident
to that debt. See Edgar v. Hines, 109 Ohio St. 159, 164 (1923) (collecting cases
including Paine v. French, 4 Ohio 318 (1831)). 	Upon the transfer of the note from Key
Bank to Del Norte, the equitable interest in the mortgage transferred to Del Norte. The
Executors of William Swartz v. Liest, 13 Ohio St. 419 (1862).
The legal interest in the mortgage was assigned from Key Bank to MERS and
was recorded. The undisputed evidence establishes that the assignment was for the
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limited purpose of MERS acting as the agent for Del Norte. Affidavit of Mortgage
Electronic Registration Systems, Inc. in Support of Del Norte REFI, LLC’s Motion for
Summary Judgment (Attached to Doc. 79 – hereinafter the “MERS Affidavit”). 	Thus,
MERS held the legal title to the mortgage as the assignee, but could not hold the
beneficial interest in the mortgage because, under Ohio law, the mortgage is merely an
incidental security interest to the debt and the note had been endorsed to Del Norte.
Exhibit L is the November 10, 2003 Assignment of Mortgage from Key Bank to
MERS. It states, in part, that “For Value Received, KEY BANK 	. . . does hereby grant,
sell, assign, transfer and convey, without recourse onto [MERS] the mortgage loan
documents identified below 	. . . including documents in the possession of [Key Bank]
pertaining to the loan as evidenced by the Note . . . .” 	Thus, although the document
appears to transfer the mortgage to MERS, under Ohio law, only the legal title to the
mortgage was transferred. As noted, an unbroken line of cases for nearly two centuries
holds the beneficial interest in the mortgage was transferred from Key Bank to Del Norte
at the time Key Bank endorsed the note to Del Norte. (Doc. 77 – ¶ 11; Exhibit J) Again,
the undisputed evidence establishes that MERS was only acting as an agent of Del
Norte for purposes of holding legal title to the mortgage. The MERS Affidavit.
Nothing in the endorsement of the note or the assignment of the mortgage are
sufficient to prevent the determination that MERS has the first and best lien against the
property and this lien may not be avoided by Gemini.
The Terms of the Agency Agreement Between Del Norte and MERS
The Debtor correctly states that the assignment of the mortgage never indicates
MERS is acting as a nominee or agent for Del Norte; however, there is no statutory
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requirement that an agent to an assignment explicitly state that it is acting as an agent,
nor does the failure to do so invalidate the assignment. Ohio Revised Code § 5301.291
specifically provides a mortgage release, cancellation or satisfaction is not deemed
defective because “the executor, administrator, guardian, assignee or trustee signed it
individually instead of in his representative or official capacity.” 	To the extent this
statute does not specifically include the term “assignment”, the court cannot find any
basis to hold the assignment of a mortgage to a higher standard than a “mortgage
release, cancellation or satisfaction.”
The Debtor correctly points out that at least one of the provisions of MERS
agreement was not followed in the transaction involving Key Bank, Del Norte and
MERS, because the mortgage, at the time of filing, was not registered with MERS.
Exhibit BB is the Corporation Resolution of MERS. 	Paragraph 5 states that “[i]f the
Member uses MERS as Original Mortgagee (MOM) on the security instrument, the loan
must be registered on the MERS® System within 10 days of the Note Date.” 	The
parties stipulated that the loan was not registered with MERS until October 19, 2005,
long after the petition date. 	For purposes of determining whether a hypothetical bona
fide purchaser can defeat the mortgage lien of Del Norte, the petition date is the
relevant snapshot. Huffman, 408 F.3d at 393.
Paragraph 6 of Exhibit BB, however, states that:
MERS and the Member agree that: 	(i) the MERS® System is not a
vehicle for creating or transferring beneficial interests in mortgage loans,
(ii) transfers of servicing interests reflected on the MERS® System are
subject to the consent of the beneficial owner of the mortgage loans, and
(iii) membership in MERS or use of the MERS® System shall not modify
or supersede any agreement between or among the Members having
interests in mortgage loans registered on the MERS® System.
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Again, the undisputed evidence establishes that MERS and Del Norte agree that
MERS had the limited agency power to be assigned the mortgage and to hold legal title.
See the MERS Affidavit.
It is apparent that appropriate procedures, establishing a complete paper trail,
reflecting 	timely 	recorded, 	comprehensive 	transfers, 	and 	disclosing 	all 	relevant
relationships among Key Bank, MERS and Del Norte, are not present in the established
facts of this proceeding. An assignment either directly from Del Norte to MERS, or one
referencing the underlying note and indicating MERS’ nominee status, could have
avoided these problems. 	See Countrywide Home Loans, Inc. v. Mortgage Electronic
Registration Sys., Inc., 2004 Ohio App. Lexis 3939, *2, fn. 2, C.A. No. 22000 (Ohio Ct.
App. Aug., 18, 2004) (“MERS serves as something similar to a statutory agent . . . and
is always listed on the original mortgage as “nominee” for some third party . . . .”)
It, however, remains undisputed that MERS was acting as an agent on the
mortgage for Del Norte and that MERS coordinated the service obligations on the
mortgage with SN Servicing Corporation. The MERS Affidavit. As noted, it is not a
requirement of Ohio law that the assignment from Key Bank indicates MERS was acting
as an agent. 	MERS has a limited agency relationship with all its members, including
Del Norte. 	There is no dispute that, among MERS, Del Norte and SN Servicing
Corporation, the note and the beneficial rights under the mortgage are owned by Del
Norte.
To the extent there was a failure to comply with certain provisions of the terms of
the agency agreement between Del Notre and MERS, any such failure, in the factual
circumstances of this proceeding, is not sufficient to prevent the determination that
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MERS has the first and best lien against the property and this lien may not be avoided
by Gemini.
The Debtor as a Hypothetical Bona Fide Purchaser
Despite the failure to comply with the strict terms of the agency relationship, the
court is unable to conclude that a hypothetical bona fide purchaser could be misled by
the assignment. Cf. Carius v. Ohio Contract Purchase Co., 30 Ohio App. 57, 67 (1928)
(“We therefore have come to the conclusion that in the instant case the writing upon the
back of these notes was an assignment, and it not only assigned the note, but assigned
the mortgage; and there were other circumstances here that would put the purchaser
upon its guard . . . .”).
MERS holds legal title as mortgagee of record to over 40 million mortgages. The
MERS Affidavit, ¶ 5. It streamlines the servicing of these mortgages and the transfer of
the beneficial ownership interest between members. See Merscorp, Inc. v. Romaine, 24
A.D.3d 673 (N.Y. App. Div. 2005). MERS does not, and has apparently never, held the
beneficial interest in any mortgage or note. The note and beneficial interest in the
mortgage undeniably went from Key Bank to Del Norte and the assignment of legal title
to the mortgage from Key Bank to MERS was recorded. Cf. Snyder v. Castle, 16 Ohio
App. 333 (1922) (Failure to record an assignment invalidates a mortgage where the
court found fraud by a third party and the court must choose between two innocent
parties). Absent fraud, or other circumstances not present in this adversary proceeding,
the court cannot invalidate the mortgage which was originally recorded properly by Key
Bank. 	Under a hypothetical bona fide purchaser analysis, that purchaser would clearly
be on clear notice that the property was encumbered.
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Although Ohio case law is replete with fact patterns invalidating mortgages under
Ohio law for technical details in the perfection of the mortgage, the court finds no
precedent under Ohio law to eliminate a mortgage based on procedural defects in an
assignment that was duly recorded. 4 The fact that the note was belatedly registered
with MERS does not change the essential, limited agency relationship between MERS
and Del Norte, which granted MERS undisputed authority to hold the legal title to the
mortgage.
The court determines, despite an apparent failure to comply with the terms of the
agency relationship between Del Norte and MERS, any bona fide purchaser would have
been on clear notice of a recorded mortgage and an assignment. 	A required inquiry
would show that Del Norte held the underlying note and, therefore, the beneficial
interest in the mortgage. In the factual circumstances presented in this adversary the
debtor cannot avoid the mortgage held by Del Norte.
Conclusion
This court finds that Del Norte holds the first and best lien against the property
and this lien may not be avoided by Gemini. 	Any filed proof of claim in this case by
MERS shall be deemed to have been filed as an agent of Del Norte.
4 Interestingly, under Kansas law, a hypothetical bona fide purchaser could not defeat a recorded
mortgage even if a subsequent assignment was not recorded at all. In re Patton, 314 B.R. 826, 832-33
(Bankr. D. Kan. 2004). The court noted that “a recorded and unreleased mortgage is notice of the lien, no
matter who owns it. In the present case, the mortgage is recorded and unreleased, and any subsequent
purchaser will have notice of its existence, regardless of who possesses the note and mortgage at the
time. Therefore, section 544(a)(3) may not be utilized to avoid the defendant's assigned interest in the
Mortgage, which is a valid and perfected lien on the plaintiffs' homestead.” In re Patton, 314 B.R. 826,
833 (Bankr. D. Kan. 2004). The court need not address this issue, since the assignment in this adversary
proceeding was recorded. However, under Ohio Revised Code § 5301.25, it appears that the Debtor is
correct that an assignment must be recorded to be effective against a bona fide purchaser. 	For a
collection of cases on the recording of assignments, see 59 C.J.S. Mortgage § 345 (updated May 2006).
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The Plaintiff’s Motion for Summary Judgment (Doc. 74) is DENIED and Del Norte
Refi, LLC’s Amended Motion for Summary Judgment (Doc. 79) is GRANTED.
c:
Patricia L. Hill, Esq., / Thomas R. Noland, Esq., 110 North Main Street, Suite 1520,
Dayton, Ohio 45402 (Atty. for the Debtor/Plaintiff)
Laura R. Faulkner, Esq., / John L. Day, Jr., Esq., 525 Vine Street, Suite 800, Cincinnati,
Ohio 45202 (Atty. for Del Norte Refi, LLC)
Alan 	Shapiro, 	Esq., 	Tax 	Division, 	U.S. 	Dept. 	of 	Taxation, 	Post 	Office 	Box 	55,
Washington, DC 20044 (Atty. for the United States of America)
###
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