In a lawsuit filed to set aside a tax sale of mortgaged land in Hamilton County, the Tennessee Supreme Court has held that a mortgage registry business was not entitled to prior notice of the sale because it did not have an interest in the land that is protected under the Due Process Clause of the U.S. Constitution.
Mortgage Electronic Registration Systems operates a national electronic mortgage registry system for lenders who are MERS members. MERS electronically tracks the transfer of residential mortgages so that its members will not have to record each transfer in the county’s land records.
The purchasers of the Hamilton County land borrowed money from a MERS member lender.
The purchasers signed a promissory note secured by the property and a deed of trust, which was recorded with the Hamilton County Register of Deeds office. The deed of trust described MERS as “a separate corporation that is acting solely as nominee for [the lender]” and said that MERS was the beneficiary of the deed of trust “solely as nominee” for the lender and any successor to the lender.
Later, after the original lender sold the note to another lender, the property owners failed to pay their 2006 property taxes, so Hamilton County initiated tax foreclosure proceedings. The county sent notice of the foreclosure and the tax sale to the borrowers and to the original lender, but not to MERS. Eventually, the property was sold at a tax sale to Carlton Ditto.
After learning of the sale, MERS filed a lawsuit to set aside the tax sale, naming Hamilton County and Mr. Ditto as defendants. MERS argued that Hamilton County violated its constitutional right to due process of law by selling the land without notifying MERS. MERS claimed that the deed of trust gave MERS its own independent interest in the Hamilton County property, so it was constitutionally entitled to prior notice of the tax sale.
The trial court ruled against MERS, holding that MERS was merely an agent of the lender without a separate interest in the property, and not entitled to prior notice of the tax sale. MERS appealed to the Court of Appeals, which affirmed the trial court’s decision for a slightly different reason, holding that MERS did not have standing to bring the lawsuit. MERS was then granted permission to appeal to the Tennessee Supreme Court.
The Supreme Court considered whether Hamilton County was required to give MERS prior notice of the tax sale. The Court recognized that the Due Process Clause of the U.S. Constitution generally applies when the government sells a taxpayer’s land to satisfy unpaid taxes, so if the government fails to give the taxpayer such notice, the sale is unconstitutional and void.
The Court then considered whether MERS had an interest in the land that was protected under the Constitution. The Court first noted that the deed of trust for the Hamilton County transaction used contradictory language to describe the role of MERS in the property loan transaction; it described MERS as a “beneficiary” but also said that MERS acted “solely as nominee” for the lender. Considering the parties’ roles in the loan transaction, the Court held that MERS was not in fact a beneficiary but only an agent for the true beneficiary, the note holder, and that MERS acquired no independent interest in the Hamilton County land.
Because MERS did not have an interest that was constitutionally protected, Hamilton County was not required to give MERS notice before it sold the land to pay the unpaid tax obligation. For this reason, the Supreme Court affirmed the trial court’s judgment in favor of Hamilton County and the tax sale purchaser, Mr. Ditto.
To read the Mortgage Electronic Registration Systems, Inc. v. Carlton J. Ditto opinion, authored by Justice Holly Kirby, go to the opinions section of
TNCourts.gov.