7th Circuit favors MERS in Union Co. recording fee case; Recommends same for St. Clair Co. class action

CHICAGO – U.S. appellate judges could have asked the Illinois Supreme Court whether lenders must record all mortgage transactions, but instead chose to answer: No.

Seventh Circuit judges affirmed a district court judgment against Union County on Nov. 14, and they advocated the same fate for a case in St. Clair County court.

They took a dim view of Circuit Judge Vincent Lopinot’s July 12 order denying a motion to dismiss the county’s claim for 13 years worth of recording fees.

Justice Richard Posner wrote, “The court’s opinion, which adopted the county’s proposed opinion verbatim, typos and all, is not persuasive.

"But it sets the stage for an eventual appeal that would give the state supreme court a shot at the issue.

“Should the supreme court decide in the St. Clair County case that registration of mortgages in Illinois is mandatory, its decision will supersede ours.

“But the court may find our decision helpful, whichever way it decides, and this is another reason for our offering an answer to the question rather than certifying it.”

Lenders and their data manager, Mortgage Electronic Registration System, expect other counties to sue for back fees if the St. Clair County case succeeds.

That would amount to a class action, a tactic Union County tried to employ in federal court on behalf of all 102 counties in Illinois.

The Seventh Circuit opinion takes note of financial hardships facing local government.

Posner wrote that until this case, no Illinois county official had taken the position that recording is mandatory.

“We are left to speculate that it is the parlous financial condition of Illinois state and local government that has impelled these officials in desperation to seek to overturn a long established understanding of Illinois law," Posner wrote.

He wrote that the purpose of recording has never been to supplement property taxes.

“The purpose is to protect the property owner or mortgage holder against claims to the property interest asserted in the deed, mortgage or other instrument," he wrote.

"Recording is a valuable service, provided usually for a modest fee, but provided only to those who think the service is worth the fee.”

Posner and Justices William Bauer and John Daniel Tinder affirmed District Judge Patrick Murphy in stopping the Union County action.

St. Clair County’s action reached the Illinois Supreme Court but didn’t last long there.

On Oct. 25, lenders and their data manager moved for a supervisory order that would require Lopinot to dismiss the suit.

Joshua Yount, of Mayer Brown in Chicago, challenged Lopinot’s rulings that recording is mandatory and that the county properly exercised a private right of action.

“Those rulings completely trample the relevant statutes and case law, while also threatening widespread and irreparable harm to courts, litigants, and participants in the residential mortgage origination, servicing, and recording processes," Yount wrote.

He wrote that suits by counties aren’t necessary to remedy statutory violations because parties injured by failure to record have long brought individual actions challenging the validity and priority of unrecorded instruments.

Lopinot’s order “does not cite a single decision under Illinois law that either penalizes a failure to record with anything other than a loss of priority or suggests that such a failure could somehow create liability for county recording fees," Yount wrote.

He also wrote that St. Clair County didn’t bring the action on behalf of the people the law is designed to benefit and didn’t identify any injuries to transferees or creditors.

The county objected to the motion on Nov. 7, arguing that the banks would suffer no harm if the case proceeded through normal appellate channels.

Attorney Paul Slocomb, special assistant to St. Clair County State's Attorney Brendan Kelly, portrayed MERS as the heart of a crooked conspiracy.

He assigned to MERS and the banks that created it “a substantial amount of blame for the 2008 financial crisis.”

“Without MERS, the mortgage crisis could never have occurred,” Slocomb wrote.

“Numerous courts have questioned the MERS scheme itself and most have found it to be problematic, if not fraudulent.

“MERS’s purported status as a mortgagee is a deceptive sham and serves as a tool for its members to avoid the payment of recording fees required by statute.”

Slocomb wrote that in 2011, MERS signed a consent decree with the Comptroller of the Currency, Federal Reserve, and three agencies, to stop unsafe or unsound practices.

Failure to ensure the accuracy of its database makes it difficult to verify the chain of title for a loan, he wrote.

He also wrote that the purpose of the recording statute is to protect the public and allow citizens to ascertain the status of title to a property.

“Prior to MERS, the recording indexes of Illinois counties provided a transparent public record that promoted open and vibrant commercial activity by enabling home purchasers and businesses to know with certainty whether they could obtain clear title to land," he wrote. “This is no longer true.”

On Nov. 18, MERS and the lenders filed Posner’s decision at the Illinois Supreme Court, in support of their motion for supervisory order.

On Nov. 19, the Illinois Supreme Court denied the motion.