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Harris Cnty. Tex. v. MERSCORP Inc.

United States Court of Appeals, Fifth Circuit

June 26, 2015

HARRIS COUNTY TEXAS; BRAZORIA COUNTY TEXAS, on behalf of themselves and all other similarly situated counties in Texas; DALLAS COUNTY, TEXAS, Plaintiffs - Appellants

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[Copyrighted Material Omitted]

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Appeals from the United States District Court for the Northern District of Texas.

For HARRIS COUNTY, TEXAS, BRAZORIA COUNTY TEXAS, on behalf of themselves and all other similarly situated counties in Texas, Plaintiffs - Appellants: Stephen Ferris Malouf, Jeremy Charles Martin, Malouf & Nockels, L.L.P., Dallas, TX; Barbara Arthur Radnofsky, Law Offices of Barbara Radnofsky, Houston, TX.

For DALLAS COUNTY, TEXAS, Plaintiff - Appellant: Barbara S. Nicholas, Assistant Deputy Chief Counsel, Tammy Jean Ardolf, Assistant District Attorney, Teresa Guerra Snelson, District Attorney's Office for the County of Dallas, Dallas, TX.

For MERSCORP, INCORPORATED, MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INCORPORATED, Defendants - Appellees: Allyson Newton Ho, Paulo B. McKeeby, Morgan, Lewis & Bockius, L.L.P., Dallas, TX; Robert M. Brochin, Clay M. Carlton, Morgan, Lewis & Bockius, L.L.P., Miami, FL; David Jack Levy, Morgan, Lewis & Bockius, L.L.P., Houston, TX.

For BANK OF AMERICA NATIONAL ASSOCIATION, Defendant - Appellee: Thomas M. Hefferon, Esq., Joseph F. Yenouskas, Goodwin Procter, L.L.P., Washington, DC; Rodney Acker, Norton Rose Fulbright US, L.L.P., Dallas, TX.

For BEXAR COUNTY, TEXAS, Amicus Curiae: Laurence Stephen Kurth, Esq., Beirne, Maynard & Parsons, L.L.P., San Antonio, TX.

Before DENNIS, PRADO, and HIGGINSON, Circuit Judges.


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This appeal explores the tension between public and private systems for recording real property interests in Texas. Plaintiffs--Appellants--Dallas, Harris, and Brazoria Counties (collectively, " the Counties" )--filed this lawsuit against MERSCORP, Inc., Mortgage Electronic Registration Systems, Inc. (" MERS" ), and Bank of America, N.A. (sometimes collectively, " Defendants" ). The Counties alleged that Defendants violated Texas Local Government Code § 192.007 and Texas Civil Practice and Remedies Code § 12.002, and alleged claims of fraudulent misrepresentation and unjust enrichment. The district

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court entered final judgment in favor of Defendants on all claims. We AFFIRM.



In Texas, when a borrower obtains a home loan, the borrower executes two documents in favor of the lender: (1) a promissory note that creates the borrower's legal obligation to repay the lender, and (2) a deed of trust that grants the lender a lien on the property as security for the debt. To give notice to subsequent purchasers and creditors, the deed of trust may be recorded in the county where the property is located. Despite the legal significance of recording a deed of trust, recording is optional in Texas. See Tex. Prop. Code Ann. § 12.001(a).

MERS has changed this recording practice for millions of mortgages. MERSCORP is a privately held company that was created in the mid-1990s. It operates a national electronic registry called MERS that tracks servicing rights and mortgage ownership in the United States.[1] MERS is a membership organization whose members include residential mortgage lenders and servicers, such as Bank of America. When a borrower obtains a home loan from a MERS-member bank, MERS is listed as the " beneficiary" on the deed of trust. The promissory note, however, is executed in favor of the bank. MERS does not loan money, hold the promissory note, service the mortgage, or collect payments. The bank registers the loan on the MERS system and submits the deed of trust to the county clerk to be recorded in county land records. Because MERS is listed as the beneficiary of the deed of trust, the county clerk will ordinarily index MERS in the land-records index as a grantee.

The borrower and the MERS-member lender contractually agree to this arrangement. The deed of trust that the parties execute contains language that states: " MERS is a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns. MERS is a beneficiary under this Security Instrument." The deed of trust also states that " Borrower understands and agrees that MERS holds only legal title to the [secured] interests granted by Borrower in this Security Instrument" and that " MERS (as nominee for Lender and Lender's successors and assigns) has the right . . . to foreclose and sell the Property."

If the lender later transfers the promissory note (or its interest in the note) to another MERS member, no assignment of the deed of trust is created or recorded because, according to Defendants, MERS remains the nominee for the lender's successors and assigns. Under this theory, because MERS is always listed as the beneficiary on any deed of trust that a MERS member originates, MERS-member banks and entities can repeatedly assign a promissory note secured by that deed of trust to other MERS members without recording those transfers in a public-records office. Because it is the promissory note (not the deed of trust) that is assigned, there is, in theory, nothing to record. These assignments are therefore tracked on the MERS system for priority purposes, but not necessarily in counties' land records. If a promissory note is transferred or negotiated to a non-MERS member, only then is an assignment of the deed of trust created and executed from MERS to the non-MERS member, and the assignee (the new deed of trust beneficiary)

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files the assignment in the public land records.

In short, MERS streamlines successive sales of mortgages and makes these transfers cheaper. Banks no longer pay county recording fees after a MERS deed of trust is first recorded. Instead, they pay MERS membership and transaction fees and record interim promissory-note assignments using the MERS system.

II. The Texas Recording System

In Texas, county clerks are elected officials responsible for recording instruments that are presented to the clerk's office and maintaining these instruments as " public property." Tex. Const. art. V, § 20; Tex. Prop. Code Ann. § 11.004(a)(1); Tex. Loc. Gov't Code Ann. § 201.005(a). A county clerk must record " within a reasonable time after delivery, any instrument authorized or required to be recorded in that clerk's office that is proved, acknowledged, or sworn to according to law." Tex. Prop. Code Ann. § 11.004(a)(1). " The county clerk shall record, exactly, without delay . . . the contents of each instrument that is filed for recording and that the clerk is authorized to record." Tex. Loc. Gov't Code Ann. § 191.001(c). Each time an instrument is accepted for recording, the county charges a recording fee for the service. Although deeds of trust are instruments that county clerks must record, promissory notes are not.

The Dallas County clerk acknowledged that his employees do not try to determine whether the statements in an instrument are true. If the instrument presented for recording is " normal on its face," the Dallas County clerk or a cashier at the clerk's office will accept it. Indeed, " [i]f a document covered by a filing statute is regular on its face, the clerk may not refuse to file it based on extraneous facts." Tex. Att'y Gen. Op. LO98-016, at 3. By statute, however, a clerk " shall" refrain from recording a document that he " believe[s] in good faith" creates a fraudulent lien so that he can consult the county or district attorney. Tex. Gov't Code Ann. § 51.901(d). Dallas County did not use this mechanism to investigate whether a MERS deed of trust is fraudulent. Instead, it filed this lawsuit and continued accepting MERS deeds of trust for recording.

III. Procedural History

Dallas County originally filed this lawsuit in state court, and Defendants removed the case to federal court. Once removed, Dallas County amended its complaint to add class-action allegations,[2] and Harris and Brazoria Counties joined as plaintiffs. In May 2012, the Counties filed a Second Amended Complaint.

The Counties' claims are based on two overarching theories. First, the Counties allege that Bank of America and MERS fraudulently listed MERS as the beneficiary of deeds of trust that were recorded in the Counties' land records. Second, the Counties allege that Defendants are required to record assignments of a deed of trust every time a MERS-member lender transfers its interest in a related promissory note to another MERS member. Based on these two theories, the Counties assert four claims that are relevant in this appeal[3]: (1) violation of Texas Local Government Code § 192.007,

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(2) violation of Texas Civil Practice and Remedies Code § 12.002, (3) fraudulent misrepresentation, and (4) unjust enrichment. The Counties seek monetary damages, exemplary damages, and declaratory and injunctive relief.

On May 23, 2012, the district court dismissed the Counties' claim under section 12.002. After this dismissal, discovery continued on the Counties' remaining claims. Harris and Brazoria Counties ultimately settled most of their claims, leaving only their request for declaratory relief under section 192.007. The Dallas County Commissioners Court never voted to approve this settlement, so Dallas County's remaining claims moved forward pending summary judgment. Finally, in two separate orders in November 2013 and March 2014, the district court entered summary judgment on all of the remaining claims, including Dallas County's claims for fraudulent misrepresentation and unjust ...

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