Borrowers and Bankruptcy Trustees’ Unsuccessful Attempts to Avoid a Mortgage Under the “Splitting-the-Note” Theory

(Excerpt) In 1993, the mortgage industry created the electronic database Mortgage Electronic Registration System (“MERS”) in order to “track ownership interests in residential mortgages.” MERS “serves as the mortgagee in the land records for loans registered on the MERS System, and is a nominee (or agent) for the owner of the promissory note.” To date, MERS holds title to around 60 million home mortgages, about half of all home mortgages in the United States. Borrowers and bankruptcy trustees have attempted unsuccessfully to argue a mortgage or deed of trust is void if a third party, such as MERS, was designated as mortgagee because the third party does not hold the note. It appears courts have universally rejected this “splitting-the-note” argument. This Article discusses the viability of the splitting-the-note argument. Part I of this Article discusses cases from four jurisdictions that reject this argument and the similar approach they take. Part II of this Article discusses the implications of the jurisprudence on borrowers, bankruptcy trustees, and lenders