Plaintiffs Memorandum in Opposition to the MERS Defendants Motion to Dismiss

8/22/2019 Plaintiffs Memorandum in Opposition to the MERS Defendants Motion to Dismiss

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IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF KENTUCKYOWENSBORO DIVISION

DEE LEE ELLINGTON and

MARY V. ELLINGTON

Plaintiffs,

v.

FEDERAL HOME LOAN MORTGAGECORPORATION, ET AL.

Defendants.

)

))

)

) Civil Action No. 4:13CV-30 M)

)

)) Electronically Filed

)

)

)

PLAINTIFFS MEMORANDUM IN OPPOSITION TO THE

MERS DEFENDANTS MOTIONS TO DISMISS PLAINTIFFS

COMPLAINT

Case 4:13-cv-00030-JHM-HBB Document 37 Filed 08/09/13 Page 1 of 38 PageID #: 197


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TABLE OF CONTENTS

I. Introduction ...............................................................................................................1

II. Statement of Facts ......................................................................................................2

A. Kentucky Mortgage Loans and the Public Recording System ....................2B. Mortgage Securitization and the Creation and Role of MERS ....................4C. MERS Did Not Record, or Cause the Recordation of, Mortgage

Assignments When the Ellingtons Mortgage Was Assigned to MERSMembers for Which MERS Acted as Agent ................................................7

III. Legal Standard ..........................................................................................................7

IV. Argument .................................................................................................................8

A. MERS Violated the Mandatory Requirements in KRS 382.360 .................81. Transfer of a Note Assigns the Mortgage Securing That Note. ...............8

a. By Adopting U.C.C. 9-203(g), Kentucky Recognized that

Transferring a Note Assigns the Accompanying Mortgage ...............8

b. Kentucky Common Law Establishes that the Mortgage Follows

the Note ...............................................................................................9

c. Agency Law Dictates that Each Time a Note is Transferred From

MERS Member to MERS Member, A Mortgage Assignment

Has Occurred .....................................................................................14

d. Application of the Rules of Statutory Construction Demonstrates that

KRS 382.360 and KRS 382.365 Encompass Mortgage AssignmentsThat Result From Transfers of Notes by Operation of Law ..............16

2. MERS Functions As Both Assignor and Assignee in Its FictionalSystem and Should Be Held Accountable as Such ................................20

B. Plaintiffs Allege Sufficient Facts Stating a Claim for Civil Conspiracy ...21

V. Conclusion .............................................................................................................28



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ii

TABLE OF AUTHORITIES

Cases

Advocacy Org. for Patients & Providers v. Auto Club Ins. Assn,176 F.3d 315 (6th Cir. 1999) ...................................................................................7

Ashland, Inc. v. Oppenheimer & Co.,

689 F.Supp.2d 874 (E.D. Ky.2010) .......................................................................10

Bain v. Metro. Mortg. Group, Inc.,

285 P.3d 34 (Wash. 2012)......................................................................................15

Baldwin v. State of Missouri,

281 U.S. 586 (1930) .................................................................................................9

Bank of N.Y. v. Silverberg,

86 A.D.3d 274, 283 (2011) ....................................................................................14

Bell Atlantic Corp. v. Twombly,550 U.S. 544 (2007) .....................................................................................7, 22, 24

Bellistri v. Ocwen Loan Ser., Inc.,284 S.W.3d 619 (Mo. Ct. App. 2009) ....................................................................15

Bowling v. United States,No. 5:11-cv-140, 2012 WL 5178436 (E.D. Ky. Oct. 17, 2012) ............................22

Brown v. Student Loan Xpress, Inc.,

No. 5:11-cv-00090, 2012 WL 1029467 (W.D. Ky. March 26, 2012) .............25, 26

Carpenter v. Longan,83 U.S. 271 (1872) ................................................................................................10

Chambers v. Wool Growers Bank,1872 WL 10797 (Ky. June 8, 1872) ......................................................................16

Christian Cnty. Clerk ex rel. Kem v. Mortgage Elec. Registration Sys., Inc. ,No.12-5237, 2013 WL 565198 (6th Cir. Feb. 15, 2013) .................................4, 8, 9

Clark v. Bucyrus Intl,No. 5:08-434, 2010 WL 996471(E.D. Ky. 2010) ............................................22, 27

Commerce Union Bank v. Seese,

237 Ky. 384 (1931) ...............................................................................................12

Commonwealth v. Harrelson,

14 S.W.3d 541 (Ky. 2000) .....................................................................................16



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Commonwealth v. Plowman,86 S.W.3d 47, 49 (Ky. 2002) .................................................................................16

Davenports Admx v. Crummies Creek Coal Co.,299 Ky. 79 (1945) ..................................................................................................25

Dietz v. Bolton,

No. 2011-CA-01899-MR, 2013 WL 1919562 (Ky. Ct. App. May 10, 2013) .......24

Drinkard v. George, 237 Ky. 560 (1930) ..........................................................................12

Eaton v. Fed. Nat. Mortgage Ass'n,462 Mass. 569 (2012) ............................................................................................15

Eubank v. Poston,

21 Ky. 285 (1827) ..................................................................................................12

Fastenal Co. v. Crawford,

609 F. Supp. 2d 650 (E.D. Ky 2009) ...............................................................25, 27

Green Tree Servicing LLC v. Sanders,

2005-CA-000371-MR, 2006 WL 2033668 (Ky. Ct. App. July 21, 2006) .............16

Guzman v. U.S. Dep't of Homeland Sec.,

679 F.3d 425(6th Cir. 2012) ..................................................................................17

Harris v. Option One Mortgage Corp.,No. 12-3709, 2013 WL 1092726 (6th Cir. Mar. 15, 2013)....................................10

Haydon v. Eldred,

231 Ky. 298 (1929) ................................................................................................10

Helton v. Am. Gen. Life Ins. Co.,

No. 4:09-cv-118, 2010 WL 2889666 (W.D. Ky. Jun. 21, 2010) ...........................25

Hensley v. Gassman,

693 F.3d 681 (6th Cir. 2012), cert. denied133 S. Ct. 1800 (U.S. 2013) ...............21

Hooks v. Hooks,

771 F.2d 935 (6th Cir. 1985) .................................................................................21

Hunter v. Secy of U.S. Army,565 F.3d 986 (6th Cir. 2009) .................................................................................23

Intl Union, United Auto., Aerospace & Agr. Implement Workers of Am., Local 737 v.

Auto Glass Employees Fed. Credit Union,

72 F.3d 1243 (6th Cir. 1996) ...................................................................................9



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iv

James v. Wilson,

95 S.W.3d 875 (Ky. App. 2002) ....................................................................passim

Jones v. Chipps,

296 Ky. 245 (1943) ................................................................................................19

Kentucky Ins. Guar. Ass'n. v. Jeffers ex rel. Jeffers,13 S.W.3d 606 (Ky.2000) ................................................................................17, 20

Landmark Nat'l Bank v. Kesler,289 Kan. 528 (2009) .................................................................................................. 21

Leatherman v. Tarrant Cnty. Narcotics Intelligence & Coordination Unit,

507 U.S. 163 (1993) ..............................................................................................22

Lewis v. Jackson Energy CoOp Corp.,

189 S.W.3d 87 (Ky. 2005) ..............................................................................16, 18

Life Care Centers of Am., Inc. v. Charles Town Associates Ltd. Pship,79 F.3d 496 (6th Cir. 1996) ..................................................................................14

Lusk v. Hopper,66 Ky. 179 (1868) ..................................................................................................12

McBurney v. Young,133 S. Ct. 1709 (2013) ............................................................................................3

McClanahan v. Chambers,

17 Ky. 43 (1824) ...................................................................................................12

Miles v. Gray,43 Ky. 417 (1844) ...................................................................................................9

Montgomery v. Milam,910 S.W.2d 237 (Ky. 1995) ............................................................................21, 26

Montgomery County, Pa. v. MERSCORP, Inc.,904 F. Supp. 2d 436 (E.D. Pa. 2012) .....................................................................12

Morgan v. HSBC Bank USA, NA,No. 2009-CA-000597, 2011 WL 3207776 (Ky. Ct. App. July 29, 2011) .............13

Mortgage Elec. Registration Sys., Inc. v. Nebraska Dep't of Banking & Fin.,

270 Neb. 529 (2005) ..............................................................................................15

Mortgage Elec. Registration Sys., Inc. v. Nebraska Dept. of Banking and Fin.,

704 N.W.2d 784 (Neb. 2005) ...................................................................................6



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Mortgage Elec. Registration Sys., Inc. v. Roberts,

366 S.W.3d 405 (Ky. 2012) ....................................................................................3

Mortgage Elec. Registration Sys., Inc. v. Saunders,

2010 ME 79 (2010) .................................................................................................... 15

Mortgage Elec. Registration Sys., Inc. v. Sw. Homes of Ark.,2009 Ark. 152 (2009) ................................................................................................. 15

Napier v. Duff,

281 Ky. 779 (1939) ..................................................................................................9

Natl Info. & Communs. Equip. Network, Inc. v. Willigan

No. 06-28-DLB, 2007 WL 2979928 (E.D. Ky. Oct. 11, 2007) .............................25

Nueces Cnty., Tex. v. MERSCORP Holdings, Inc.,

No. 2:12-CV-00131, 2013 WL 3353948 (S.D. Tex. July 3, 2013) ..................12,15

Newby v. Hill,59 Ky. 530 (1860) ..................................................................................................10

Pennsylvania Pub. Sch. Employees' Ret. Sys. v. Bank of Am. Corp. ,874 F. Supp. 2d 341 (S.D.N.Y. 2012)....................................................................15

Peoples Bank of Northern Ky. V. Crowe Chizek and Co. LLC,277 S.W.3d 255 (Ky. Ct. App. 2008) ....................................................................27

Sales Res., Inc. v. Alliance Foods, Inc.

No. 4:08-cv-0732, 2010 WL 5184943 (E.D. Mo. Dec. 15, 2010) .........................26

Sec. Inv. Co. of St. Louis v. Harrod Bros.,225 Ky. 12 (1928) ....................................................................................................9

Smith v. Board of Education of Ludlow, Ky.,94 S.W.2d 321(Ky. 1936) ......................................................................................22

Smith v. Univar USA, Inc.,No. 12-134, 2013 WL 1136624 (E.D. Ky. March 18, 2013) .................................27

Summers v. Kilgus,77 Ky. 449 (1879) ....................................................................................................9

Texas & P Ry. Co. v. Rigsby,

241 U.S. 33 (1916) ..................................................................................................... 26

Union Planters Bank, N.A. v. Hutson,

210 S.W.3d 163 (Ky. Ct. App. 2006) ......................................................................3



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vi

Village Campground, Inc. v. Liberty Bank,

2007-CA-001454-MR, 2008 WL 4998478 (Ky. Ct. App. Nov. 26, 2008) ....11, 16

Village Campground, Inc. v. Liberty Bank,

No. 01-CI-00060 (Spencer Circuit Court June 02, 2006) ......................................11

Wallace v. Midwest Fin. & Mortgage Servs.,714 F.3d 414 (6th Cir. 2013) .....................................................................21, 25, 26

WCP/Fern Exposition Servs., LLC v. Hall,

No. 3:08-CV-522, 2011 WL 1157699 (W.D. Ky. Mar. 28, 2011) ........................14

Williams v. Aries Fin., LLC,

No. 09-CV-1816, 2009 WL 3851675 (E.D.N.Y. Nov. 18, 2009)..........................13

Workforce Dev. Cabinet v. Gaines,

276 S.W.3d 789 (Ky. 2008) .......................................................................................

Statutes

KRS 64.012(1)(a) .................................................................................................................5

KRS 355.3-201 ...............................................................................................................12

KRS 355.9-203(7) .........................................................................................................8, 9

KRS 382.290 .............................................................................................................18, 19

KRS 382.290(1) ......................................................................................................passim

KRS 382.290(2) ......................................................................................................passim

KRS 382.360 ...........................................................................................................passim

KRS 382.360(3) ......................................................................................................passim

KRS 382.360(6) ........................................................................................................11, 16

KRS 382.365 ...........................................................................................................passim

KRS 413.140(1)(c) ..........................................................................................................25

KRS 446.080 .....................................................................................................................9

KRS 446.080(1) ........................................................................................................17, 20

KRS 446.080(4) ..............................................................................................................17



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Misc.

Remarks of R.K. Arnold, President and CEO of MERSCORP, Inc., Before the

Senate Committee on Banking, Housing and Urban Affairs (Nov. 16, 2010) ..................10

Yes, There is Life on MERS, 11 Prob. & Prop. 32 (1997) ....................................................5



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Plaintiffs Dee Lee and Mary V. Ellington (Plaintiffs or the Ellingtons) submit this

memorandum of law in opposition to the Motion to Dismiss filed by Defendants MERSCORP

Holdings, Inc. (MERSCORP) and Mortgage Electronic Registration System, Inc. (MERS,

Inc.) (collectively, MERS or Defendants).

I. INTRODUCTIONThis case is about the simple application of straightforward statutes. KRS 382.360(3)

states that [w]hen a mortgage is assigned to another person, the assignee shall file the

assignment for recording with the county clerk within thirty (30) days of the assignment . . . .

The damages for failure to timely file an assignment is a minimum of $500 per violation. See

KRS 382.365(5). The Complaint contains claims for (1) violation of the statutes and (2)

conspiracy to violate the statutes. (Class Action Complaint, March 26, 2013, Doc. #1

(Compl.)). Specifically, Plaintiffs allege that MERS and the other defendants created,

designed, managed, maintained, operated, and utilized a sham privatized recording system to, in

MERS own words, eliminate[] the need to prepare and record assignments. Through this

conspiracy, MERS and the other defendants repeatedly failed to file assignments in accordance

with KRS 382.360. See Compl. at 12. As a result, Defendants are liable to Plaintiffs and

similarly situated homeowners for damages pursuant to KRS 382.365. See id.

MERS mounts two primary defenses, each of which fail. First, MERS argues that it only

facilitated the transfer of mortgage notes, rather than mortgages, and that notes are not required

to be recorded. But, MERS conveniently overlooks that Kentuckys adoption of Uniform

Commercial Code Section 9-203(g) definitively codified the rule that the assignment of a note

also assigns the mortgage securing that note, as the Sixth Circuit found just months ago. Further,

Kentuckys common law, law of agency, and principles of statutory construction all dictate the



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same result. There is also no refuge for Defendants in their mistaken belief that the assignment

of the mortgage, following the assignment of a note, is merely equitable. MERS fanciful

understanding of equitable assignments does not exist in Kentucky law. Second, MERS

argues that it is insulated from liability because it acts as an assignor and KRS 382.360(3)

imposes liability only on assignees. This, too, is incorrect because MERS acts as the agent

mortgagee for its members in both assignor and assignee capacities.

Plaintiffs claim for civil conspiracy is similarly well-pled. Plaintiffs have alleged that

Defendants had a single plan and shared in the conspiratorial objective to violate KRS 382.360

and KRS 382.365 by creating a system for the express purpose ofnotrecording mortgage

assignments that resulted, by operation of law, from the transfer of mortgage notes among MERS

members. In addition, and despite MERS insistence to the contrary, it is well-established that a

statutory violation can serve as the basis for civil conspiracy, as it does here.

Ultimately, the Kentucky recording laws do not carve out a special exception for MERS,

as much as it would like to believe otherwise. Defendants must be held accountable for failing to

record mortgage assignments.

II. STATEMENT OF FACTSA. Kentucky Mortgage Loans and the Public Recording System

The creation of a home mortgage in Kentucky requires the execution of two critical

documents: a promissory note and the mortgage. In the promissory note, the borrower agrees to

pay back the loan to the owner of the note. The mortgage permits the enforcement of the

promissory note by establishing a security interest against the home that can be enforced through



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a foreclosure proceeding if the borrower defaults. In traditional mortgages, the original lender is

the owner of the note and is also the mortgagee.1

Kentucky has a public recording system, which, inter alia, provides public access to

mortgage records, a fundamental right of U.S. citizens. See McBurney v. Young, 133 S. Ct.

1709, 1716 (2013) (Thus, if a State prevented out-of-state citizens from accessing recordslike

title documents and mortgage recordsthat are necessary to the transfer of property, the State

might well run afoul of the Privileges and Immunities Clause.). In addition, Kentuckys

recording system lays out a clear system for recording and ordering liens on a piece of real

property, and any deviation from the system should be approached cautiously. Mortgage Elec.

Registration Sys., Inc. v. Roberts, 366 S.W.3d 405, 411 (Ky. 2012). Kentuckys recording

system is integral to its status as a race-notice jurisdiction in which a prior interest in real

property takes priority over a subsequent interest that was taken with notice, actual or

constructive, of the prior interest. Id. at 408. Accordingly, [i]t is necessary to protect the

accuracy and efficiency of the recording system in Kentucky. Id. at 411.

To protect the accuracy and efficiency of the recording system in a changing financial

landscape, the Kentucky Legislature enacted a series of amendments to the recording laws. See

Union Planters Bank, N.A. v. Hutson, 210 S.W.3d 163, 164 (Ky. Ct. App. 2006) (stating that,

with the amendments in 2000 to the recording laws, the Legislature undoubtedly responded to a

growing problem of mortgages not being timely released.). As part of the 2000 amendments,

sections 382.365(4) and 382.365(5) were amended to require a lienholder who fails to release a

satisfied real estate lien, without good cause and upon written notice of the failure, to pay up to

1 This means the original lender both receives the income from the loan and holds the security interest in theproperty that serves as collateral for the loan in case of default.



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$500 per day for each day for which good cause did not exist after the forty-fifth day from the

date of written notice.

To protect the rights of individual landowners, [i]n 2006, the Kentucky General

Assembly amended sections 382.360 and 382.365 to require the recording of mortgage

assignments and liens on real property. Christian County Clerk ex rel. Kem v. Mortgage Elec.

Registration Sys., Inc., No. 12-5237, 2013 WL 565198 (6th Cir. Feb. 15, 2013). As a result of

that 2006 amendment, 382.360(3) now provides that [w]hen a mortgage is assigned to another

person, the assignee shall file the assignment for recording with the county clerk within thirty

(30) days of the assignment . . . . Additionally, the 2006 amendment required that [a]n

assignee of a lien on real property shall record the assignment in the county clerks office as

required by KRS 382.360, and that [a] proceeding may be filed by any owner of real property

or any party acquiring an interest in the real property in District Court or Circuit Court against a

lienholder that violates subsection (1) or (2) of this section. 382.365(2), (3).

When an assignee fails to record an assignment in compliance with 382.360(3), the

2006 amendment provides that [d]amages under this subsection for failure to record an

assignment pursuant to KRS 382.360(3) shall not exceed three (3) times the actual damages, plus

attorney's fees and court costs, but in no event less than five hundred dollars ($500).

B. Mortgage Securitization and the Creation and Role of MERSBeginning in the 1990s, mortgage loans began to be bought and sold with increasing

frequency. See Compl. at 29-30. In particular, major investment banks and other financial

institutions began purchasing enormous numbers of mortgage loans and repackaging them into

mortgage-backed securities that they then sold to investors. Id. This securitization process

typically requires multiple, separate transfers or assignments of the note and mortgage. Id. at



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31. Pursuant to KRS 382.360(3), after the initial recording of a mortgage, all assignments of a

mortgage must be recorded in the county clerks office. A fee must be paid for each assignment.

See KRS 64.012(1)(a). To facilitate the assignments and transfers necessary to create these

mortgage-backed securities, the mortgage finance industry created MERS in an attempt to

eliminate the costs associated with assigning and transferring mortgages under the well-

established public recording system. See Compl. at 7-8.

Unlike the Commonwealths recording system, which was established by and for the

people of Kentucky, MERS is owned and operated by and for the mortgage industry. [Former

MERS CEO] R.K. Arnold, Yes, There is Life on MERS, 11 Prob. & Prop. 32, 36 (1997).

MERSCORP was created in the mid 1990s and operates as a membership organization

with over 5,500 members. See Compl. at 28-29. MERS express purpose is to eliminate[]

the need to prepare and record assignments. Id. at 33. MERS touts in its promotional

materials that members can save fees of $35 on average for each loan registered with MERS and

that MERS saves lenders time and money, and reduces paperwork, by eliminating the need to

prepare and record assignments when trading loans. See id. at 5; Compl., MERS, Process

Loans, Not Paperwork, at p. 4, June 12, 2012, http://www.mersinc.org/, Ex. A., Doc. #1-1.

These services have proven quite popular to the mortgage finance industry, as nearly every major

bank and servicer is a member of MERS. Over 65 million mortgage loans have been registered

in the MERS System, including approximately 31 million currently active loans. See Compl. at

27-28. MERS continues to be named in approximately two-thirds of all mortgage loans in

the United States. See id. at 27.

Despite its pervasiveness, MERS is neither a borrower nor a lender and MERS has

attempted to minimize its role, stating:



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MERS has no interest at all in the promissory note evidencing the mortgage loan.MERS has no financial or other interest in whether or note a mortgage loan isrepaid . . . . MERS is not the owner of the promissory note secured by themortgage and has no rights to the payments made by the debtor on suchpromissory note . . . . MERS is not the owner of the servicing rights relating to

the mortgage loan and MERS does not service loans. In essence, MERSimmobilizes the mortgage lien while transfers of the promissory note andservicing rights continue to occur.

Id. at 27 (quotingMortgage Elec. Registration Sys., Inc. v. Neb. Dept of Banking and Fin.,

704 N.W.2d 784, (Neb. 2005), Brief of Appellant at 11-12. MERS sole purpose, then, is to

eliminate[] the need to prepare and record assignments. Id. at 27. It believes that its

members are excused from publicly recording mortgage assignments among members because of

MERS purported2 designation as a mortgagee for MERS mortgages.

Rather than recording information in the county clerks offices, MERS members are

instead supposed to register transactional and other information about MERS mortgages in the

MERS System. Transfers and assignments of mortgages among MERS members are not

recorded in the public records. Thus, as a result of the creation of MERS, one can no longer look

to the public recording system as a reliable source for tracking the chain of title for a loan.

Homeowners, as well as the general public and the courts, do not have access to the vast majority

of information maintained on the MERS System. To the extent that information is made

available to the public, that information is inaccurate. MERS relies on its members to

voluntarily register transactions but has not taken sufficient steps to ensure that its members

accurately log information into the MERS System, despite its knowledge that its database is

riddled with inaccuracies.

2 MERS proclamation that it is a mortgagee, and explanation of its role as such, is news to the Ellingtons, whowere never notified of this designation and its potential implications. Compare The MERS Defendants Motion toDismiss Plaintiffs Complaint and Incorporated Memorandum of Law, at 6-8, June 17, 2013, Doc. #27, (Def.Br.) (explaining MERS role as mortgagee) with Assignment of Deed and Trust/Mortgage, October 26, 2009,Compl. Exhibit C, Doc. #1-3, (Deed) (lacking reference to MERS as a mortgagee).



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C. MERS Did Not Record, or Cause the Recordation of, Mortgage Assignments Whenthe Ellingtons Mortgage Was Assigned to MERS Members for Which MERS Acted

as Agent

The Ellingtons executed a mortgage to Old National Bank (the Ellington Mortgage)

that was recorded on October 14, 2009 in the Hopkins County, Kentucky Court Clerks Office.

On October 26, 2009, Old National Bank assigned all rights, title and interest in the Ellington

Mortgage to Defendant Mortgage Electronic Registration System, Inc. See Deed, Ex. C., Doc.

#1-3. The assignment was recorded on November 9, 2009. On information and belief, the

Ellingtons mortgage was then assigned several times among MERS members before ending up

with the Defendant Federal Home Loan Mortgage Corporation (Freddie Mac), with MERS as

its agent. Neither Freddie Mac nor MERS recorded a mortgage assignment as required by law.

See Compl. at 24-25.

III. LEGAL STANDARDTo survive a motion to dismiss, the complaint does not need detailed factual

allegations,Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007), but it must present

enough facts to state a claim to relief that is plausible on its face. Id. at 570. To satisfy this

standard, the complaint must provide more than labels and conclusions [or] a formulaic

recitation of the elements of a cause of action . . . .Id. at 555. The [f]actual allegations must be

enough to raise a right to relief above the speculative level . . . .Id. Furthermore, to survive a

12(b)(6) motion to dismiss, the complaint must contain either direct or inferential allegations

respecting all the material elements [of each claim] to sustain a recovery under some viable legal

theory.Hunter v. Secy of U.S. Army, 565 F.3d 986, 992 (6th Cir. 2009) (quotingAdvocacy

Org. for Patients & Providers v. Auto Club Ins. Assn, 176 F.3d 315, 319 (6th Cir. 1999)).



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IV. ARGUMENT

A. MERS Violated the Mandatory Requirement in KRS 382.360In its Motion to Dismiss, MERS argues that the Complaint fails to state a claim

because transfers registered on the MERS system were transfers of notes, which are not required

to be recorded, and because MERS is not an assignee. MERS is wrong as to each proposition. A

transfer of a note assigns the mortgage securing it. This concept is clearly established by

Kentuckys adoption of the UCC, the common law rule that the mortgage follows the note,

principles of agency law and Kentuckys rules of statutory interpretation. MERS is also an

assignee subject to KRS 382.360. MERS created, operates and maintains a fictional recordation

system deliberately to avoid recording assignments that would otherwise have to be recorded.

In its private recordation system, MERS functions as the agent for its members, acting as both

assignor and assignee.

1. Transfer of a Note Assigns the Mortgage Securing that Notea. By Adopting U.C.C. 9-203(g), Kentucky Recognized that Transferring a

Note Assigns the Accompanying Mortgage

The Sixth Circuit recently cited Kentuckys adoption of the UCC to support the

proposition that the assignment of a note secured by a mortgage transfers the interest in the

underlying mortgage. See Christian Cnty. Clerk, 2013 WL 565198, at * 4. The Kentucky

statute reads: The attachment of a security interest in a right to payment or performance secured

by a security interest or other lien on personal or real property is also attachment of a security

interest in the . . . . mortgage, or other lien. Id. (quoting Ky. Rev. Stat. Ann. 355.9203(7).

The official comment explains that the provision codifies the common law rule that the transfer

of a note also assigns the mortgage securing it. See id. (referencing U.C.C. 9203(g) (as the

source of section 355.9203) cmt. 9).



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MERS is conspicuously silent on KRS 355.9203(7). Instead, MERS points to cases

applying the common law to argue that the transfer of a note transfers only an equitable right to

the mortgage arising from the ownership of the note. See Def. Br. at 14 (emphasis in original).

But neither the UCC nor the Sixth Circuit draws such a distinction. And since these cases the

most recent of which is from 1930 predate Kentuckys adoption of the relevant UCC provision,

the UCC controls. Intl Union, United Auto., Aerospace & Agr. Implement Workers of Am.,

Local 737 v. Auto Glass Employees Fed. Credit Union, 72 F.3d 1243, 1249 (6th Cir. 1996)

([T]he general rule is that the statute last in time prevails as the most recent expression of the

legislature's will.) (internal citations and quotations omitted); KRS 446.080 ([T]he rule that

statutes in derogation of the common law are to be strictly construed shall not apply to the

statutes of this state.).

b. Kentucky Common Law Establishes that the Mortgage Follows the NoteEven assuming, arguendo, that the UCCs clear pronouncement on the matter were not

determinative, Kentucky common law establishes that the transfer of a note also assigns the

mortgage securing it. As the Sixth Circuit explained, [a]lthough a promissory note and

mortgage deed are separate legal instruments, the Kentucky courts have long recognized that the

assignment of a note secured by a mortgage transfers the interest in the underlying mortgage.

Christian Cnty. Clerk, 2013 WL 565198, at * 4 (relying on, inter alia,Napier v. Duff, 281 Ky.

779, 136 S.W.2d 1083, 1085 (1939) (The assignment of the note . . . necessarily carries with it

an assignment of the indemnifying mortgage . . . .).3 MERS itself has admitted the same in

3See also Miles v. Gray, 43 Ky. 417 (1844) (The assignment of the note carried with it all interest in the mortgage. . . .) (emphasis added); Sec. Inv. Co. of St. Louis v. Harrod Bros., 225 Ky. 12, 7 S.W.2d 492, 493 (1928) (omittingany reference to equity in the opinion and stating that [i]t is an ancient and accepted rule that a transfer orassignment of a note secured by a mortgage or other lien assigns and transfers also the lien by which the note issecured.) (emphasis added) (collecting authority); Summers v. Kilgus, 77 Ky. 449, 451 (1879) (The assignment ofa debt carries with it a vendor's or mortgage-lien by which the debt is secured. This has been so often decided by thiscourt as to render the citation of authority unnecessary.);Baldwin v. State of Missouri, 281 U.S. 586, 597(1930)



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congressional testimony, stating: A fundamental legal principle is that the mortgage follows the

note, which means that as the note changes hands, the mortgage remains connected to it legally even

though it is not physically attached. Remarks of R.K. Arnold, President and CEO of

MERSCORP, Inc., Before the Senate Committee on Banking, Housing and Urban Affairs (Nov.

16, 2010), attached hereto as Exhibit 1.4

Turning 180 degrees from its previously publicly stated position, MERS now argues that

the transfer of a note transfers only the equitable interest in the mortgage, and not the mortgage

itself. See Def. Br. at 13-15. MERS further argues that it is impossible to record an equitable

assignment, and, in any event, a recording of the purported equitable assignment is not

mandated by law. See id. MERS tortured interpretation of Kentucky law is unavailing.

The term equitable assignment, and its variants, is outdated. Historically, when

Kentucky courts called an assignment equitable, they meant that (1) an unrecordedassignment

had occurred (including by virtue of a note transfer) and (2) such an assignment is to be accorded

the same equitable priority in the event of a debtor default as if it had been recorded. See

Haydon v. Eldred, 231 Ky. 298, 21 S.W.2d 457, 458 (1929) (The holder of an unrecorded

assignment of a debt in trust, or in mortgage, acquires an equity as valid as if such assignment

had been recorded, and it will prevail over any subsequent equity to the same fund, although

acquired without notice of the previous assignment.) (quotingNewby v. Hill, 59 Ky. 530, 532-

(When secured by mortgage on real estate, the transfer of the security, which is an inseparable incident of the chosein action, Carpenter v. Longan, 16 Wall. 271, 21 (1872) . . . may be affected by the recording laws, availed of onlythrough the recording facilities where the land is located.);Harris v. Option One Mortgage Corp., No. 12-3709,

2013 WL 1092726, at * 1 (6th Cir. Mar. 15, 2013) (citing Restatement (Third) of Property 5.4 cmt. b (noting thatthe mortgage follows the note).4 The court can, and should, take judicial notice of this admission. When addressing a motion to dismiss, the Courtcan consider any matters of which a court may take judicial notice.Ashland, Inc. v. Oppenheimer & Co., 689 F.Supp. 2d 874, 881 (E.D. Ky. 2010). Under the Federal Rules of Evidence, a court may judicially notice a fact thatis not subject to reasonable dispute because it: (1) is generally known within the trial court's territorial jurisdiction;or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.Fed.R.Evid. 201(b). The testimony was taken from the U.S. Senates website, a source whose accuracy cannotreasonably be questioned.



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533 (1860). Equitable assignment was certainly not coterminous with unwritten assignment,

as MERS asserts, because an equitable assignment at common law could be written or unwritten.

See, e.g, idat 298 ([T]he contest was one between equities, in which the brewing company's

equitable assignment was evidenced by a writing, while that of the administratrix was in parol.).

The principle that an unrecorded assignment remains valid and retains its equitable priority has

since been codified by statute, rendering the term equitable assignment obsolete. See KRS

382.360(6).

In recent years, Kentucky courts expressly considered, and rejected, MERS argument

that a note transfer does not also effect a mortgage assignment in which legal title passes to the

note transferee. See Def. Br. at 14-17. In Village Campground, Inc. v. Liberty Bank, No. 2007-

CA-001454-MR, 2008 WL 4998478 (Ky. Ct. App. Nov. 26, 2008), disc. rev. denied by Kentucky

Supreme Court(Aug. 19, 2009), a mortgagor brought a claim against the mortgagee of record,

rather than the entity to whom the mortgagee of record transferred the note to, for failing to

timely release the mortgage. The trial court granted summary judgment against the mortgagor.

The Court of Appeals affirmed because the transfer of the note effected an unrecorded mortgage

assignment and, therefore, the mortgagee of record could not release a mortgage that it no

longer held.Id., at * 4; see also Village Campground, Inc. v. Liberty Bank, at p. 4, No. 01-CI-

00060 (Spencer Circuit Court June 02, 2006), attached hereto as Exhibit 2, (citing the ancient

and accepted rule that the mortgage follows the note in Securities Invest Co. of St. Louis, 7 S.W.

2d at 493 to conclude: [t]herefore, Libertys assignment [of the note] to MEI transferred both

the mortgage and the note.) Here, Plaintiffs have properly alleged that the note changed hands

several times in the process of securitization, and that therefore several assignments by

operation of law occurred that should have been recorded, triggering liability and statutory



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damages under KRS 382.360 and KRS 382.365. Cf. Nueces County., Tex. v. MERSCORP

Holdings, Inc., No. 2:12-00131, 2013 WL 3353948, at * 17 (S.D. Tex. July 3, 2013) (The

instrument securing the note is transferred every time the promissory note is sold. MERS can

serve as an agent or nominee of the lienholder with rights under the deed of trust; however,

whenever there is a transfer of the promissory note, there is also a transfer of the deed of trust,

and Section 192.007(a) requires that this transfer be recorded in the Texas property records.);

Montgomery County., Pa. v. MERSCORP, Inc., 904 F. Supp. 2d 436, 445 (E.D. Pa. 2012) ([W]e

conclude that all. . . conveyances . . . shall be recorded, 21 Pa. Stat. 351, means that all

conveyances shall be recorded.).

Defendants cases are consistent with Plaintiffs position. See Drinkard v. George, 237

Ky. 560, 36 S.W.2d 56, 57 (1930) (describing note transfer as an unrecorded equitable

assignment to clarify that the note transferee retained a valid lien and equitable priority as if the

mortgage assignment had been recorded);McClanahan v. Chambers, 17 Ky. 43, 44 (1824)

(same);Lusk v. Hopper, 66 Ky. 179, 184 (1868) (same, noting that when he again became the

holder of the debt, the equitable lien followed it in his hands . . . .);Eubank v. Poston, 21 Ky.

285, 287 (1827) (same, stating that [i]f Calloway had or retained such a lien, it was, by the

assignment of the note for the purchase money, transferred to Eubank . . . ). Tellingly, the

Kentucky Court of Appeals describedMcClanahan andEubankas old cases announcing that

the assignment of a note secured by a lien also assigns the lien, and there has been no departure

from that rule. Commerce Union Bank v. Seese, 237 Ky. 384, 35 S.W.2d 544, 545 (1931).

Defendants also argue that promissory notes are transferred under the UCC by

negotiation, which means a transfer of possession, KRS 355.3-201, and that [n]o written

instrument is, or is required to be, created, much less required to be recorded, to effectuate the



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transfer of a promissory note. See Def. Br. at 13. The court should not consider this argument

because it relies on facts outside of the Complaint. There is no note in the record, and while

MERS is accurate that a mortgage note canbe a negotiable instrument . . . . , there are instances

in which it is not, including when the mortgage contains an additional promise in the

agreement. Williams v. Aries Fin., LLC, No. 09-1816, 2009 WL 3851675, at * 4, n.2

(E.D.N.Y. Nov. 18, 2009) (emphasis in original) (internal citations and quotations omitted).

Plaintiffs dispute that the notes implicated by the Compliant are negotiable. Accordingly,

adjudication of the argument concerning negotiation would require the court to make a factual

determination that will be resolved in discovery and that is inappropriate at the motion to dismiss

stage. Cf. Morgan v. HSBC Bank USA, NA, No. 2009-CA-000597-MR, 2011 WL 3207776, at *

3-4 (Ky. Ct. App. July 29, 2011) ([A]ccording to HSBC, even if Ownit did not properly indorse

the note, as Morgan claims on appeal, it can enforce the note if Ownit was a holder . . . . . [I]t is

impossible to determine from the record when Ownit transferred its interest in the note to HSBC

. . . .).

Even assuming, arguendo, that the court were to make a premature factual determination

and agree with MERS that the notes at issue are negotiable, Defendants ubiquitous argument that

the statute could not possibly require lenders to create a documented assignment for recording

rings hollow. See Def. Br. at 2, 13, 14, 15, 16, 17. KRS 382.360 mandates that assignees record

mortgage assignments including those that result by operation of law from note transfers. This

means that physical paper documents demonstrating the assignment must be created. In todays

world, the creation of a document merely requires a word processor and a printer. The mundane

mechanics of the statutes operation are not a trump card. They just reveal that MERS is

coruscating on thin ice. See Nueces Cnty., Tex., 2013 WL 3353948, at * 6 (This Court cannot



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simply bend the laws of Texas to fit the MERS system, no matter how ubiquitous it has

become.);Bank of N.Y. v. Silverberg, 86 A.D.3d 274, 283 (2011) ([T]he law must not yield to

expediency and the convenience of lending institutions. Proper procedures must be followed to

ensure the reliability of the chain of ownership, to secure the dependable transfer of property,

and to assure the enforcement of the rules that govern real property.).

c. Agency Law Dictates thatEach Time a Note Is Transferred From MERSMember to MERS Member, A Mortgage Assignment Has Occurred

MERS is simply wrong when it says of note transfers among MERS members that the

mortgage is not assigned because MERS remains the mortgagee, as the nominee for the new

noteholder. See Def. Br. at 6-7. MERS does not remain the mortgagee from note transfer to

note transfer because it acts only in an agent capacity for its members and transforms into a new

principals agent after each transfer. Thus, when Noteholder A has the Note, MERS acts as the

agent mortgagee for Noteholder A, and when the note is transferred to Noteholder B, the

corresponding mortgage is assigned by operation of law because the mortgage follows the note

to Noteholder B and MERS merely acts as the agent mortgagee for Noteholder B. MERS has

no identity as a mortgagee independent of its noteholder principals.

Basic principles of agency law dictate this result. There is no question that an agent

owes a duty of loyalty and obedience to his principal.Life Care Ctrs. of Am., Inc. v. Charles

Town Assocs. Ltd. Pship, 79 F.3d 496, 502 (6th Cir. 1996); see also WCP/Fern Exposition

Servs., LLC v. Hall, No. 3:08-522, 2011 WL 1157699, at * 7 (W.D. Ky. Mar. 28, 2011) (stating

that agents must be loyal and faithful to the interest of such other in respect to such business or

purpose.) (internal citations and quotations omitted). Hence, when a note changes hands from

the originating lender to a subsequent lender, MERS is not truly the same entity from beginning to

end. Rather, it fundamentally changes because it must align itself with the interests of the new



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principal the new noteholder once the note changes hands. MERS must change hats from

being the first principals agent to being the second principals agent. MERS has no power to act

independently of its noteholder principal. SeeNueces Cnty., Tex., 2013 WL 3353948, at * 6, n.2

(In the Terms and Conditions MERS provides to its members, MERS identifies itself as a

mortgagee of record, not an actual mortgagee. . . . Furthermore, MERS is careful to state that it is

a nominee and serves only in an administrative capacity for the beneficial owner or owners of the

mortgages.);Mortgage Elec. Registration Sys. v. Neb. Dep't of Banking & Fin., 270 Neb. 529,

535 (2005) ([S]imply stated, MERS has no independent right to collect on any debt. . . .);

Mortgage Elec. Registration Sys., Inc. v. Saunders, 2010 ME 79, 2 A.3d 289, 295 (2010)

(MERS's only right is the right to record the mortgage. Its designation as the mortgagee of

record in the document does not change or expand that right; and having only that right, MERS

does not qualify as a mortgagee.);Bellistri v. Ocwen Loan Ser., Inc., 284 S.W.3d 619, 621 (Mo.

Ct. App. 2009) (finding MERS's attempt to transfer mortgage and any and all notes secured by

the mortgage ineffective because MERS was not the noteholder and there was no evidence that

the noteholder authorized MERS to transfer the note);Mortgage Elec. Registration Sys., Inc. v.

Sw. Homes of Ark., 2009 Ark. 152, 301 S.W.3d 1, 5, reh'g denied(Ark. 2009) (MERS was at

best the agent of the lender. . . . Permitting an agent such as MERS purports to be to step in and act

without a recorded lender directing its action would wreak havoc on notice in this state.).5

5 These cases stand squarely against MERS insistence that its role as mortgagee is irrefutable, and that the law

has long countenanced a freestanding mortgagee distinct from a noteholder. See Def. Br. at 7-8; see alsoBain v. Metro. Mortg. Group, Inc., 285 P.3d 34, 41 (Wash. 2012) (Under the MERS System, questions of authorityand accountability arise, and determining who has authority to negotiate loan modifications and who is accountablefor misrepresentation and fraud becomes extraordinarily difficult.); Pennsylvania Pub. Sch. Employees' Ret. Sys. v.Bank of Am. Corp., 874 F. Supp. 2d 341, 353 (S.D.N.Y. 2012), reconsideration denied(Aug. 28, 2012) ([T]he BoADefendants' failure to disclose BoA's reliance on MERS and its associated risks constitutes a materialmisrepresentation.);Eaton v. Fed. Nat. Mortgage Ass'n, 462 Mass. 569, 583-584 (2012) ([W]e construe the termmortgagee in G.L. c. 244, 14, to mean a mortgagee who also holds the underlying mortgage note.); supra p. 10(listing cases in which a transfer of a note assigns the accompanying mortgage). The cases MERS has cited thatpredate the creation of MERS and that purportedly stand for the proposition that an agent can act as nominee are



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MERS distorts the import of decisions applying Kentucky law to argue that MERS does, in

fact, have independent rights because of its purported status as mortgagee. See Def. Br. at 15-16.

MERS relies most heavily on a cryptic 140 word opinion that the Kentucky Court of Appeals

issued in 1872. See id. at 15 (citing Chambers v. Wool Growers Bank, 1872 WL 10797 (Ky. June

8, 1872). The case appears to hold that the mortgagee should have been named in a foreclosure

complaint and the failure to do so was grounds for reversal and remand of the trial courts

foreclosure order. The case is wholly inapposite here in light of KRS 382.360(6), which states

that the failure to assign the mortgage does not affect the validity of the instrument, and is also

far less on point than Village Campground, Inc., 2008 WL 4998478, at * 4, which found that the

mortgagee of record did not hold the mortgage after the note was transferred. The other case on

which MERS relies, Green Tree Serv. LLC v. Sanders, No. 2005-CA-000371-MR, 2006 WL

2033668 (Ky. Ct. App. July 21, 2006), actually supports Plaintiffs because the court held that a

servicer was a real party in interest who could foreclose because it was merely acting as the

noteholder trustees agent pursuant to the pooling and servicing agreement governing the loans

securitization. Here, Plaintiffs agree that MERS is only authorized to act in an agent capacity

and, thus, when a note is transferred from one of its principals to another, the corresponding

mortgage is necessarily assigned because MERS has no identity independent of its principals.

d. Application of the Rules of Statutory Construction Demonstrates thatKRS 382.360 and KRS 382.365 Encompass Mortgage Assignments that

Result From Transfers of Notes by Operation of Law

The seminal duty of a court in construing a statute is to effectuate the intent of the

legislature. Commonwealth v. Plowman, 86 S.W.3d 47, 49 (Ky. 2002) (citing Commonwealth v.

Harrelson, 14 S.W.3d 541 (Ky. 2000). Statutes are to be liberally construed with a view to

unpersuasive because they are predicated on the belief that there is a singular principal-agent relationship, ratherthan, as with MERS, one agent with over 5,000 principals. See Def. Br. at 7-8; Compl. at 28-29.



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promote their objects and carry out the intent of the legislature . . . , KRS 446.080(1), and

statutes that are remedial in nature should be liberally construed in favor of their remedial

purpose. Kentucky Ins. Guar. Ass'n. v. Jeffers ex rel. Jeffers, 13 S.W.3d 606, 611 (Ky. 2000).

Courts are to ascertain the intention of the legislature from words used in enacting statutes

rather than surmising what may have been intended but was not expressed.Hall v. Hospitality

Res., Inc., 276 S.W.3d 775, 784 (Ky. 2008) (internal quotations and citations omitted). Words

and phrases are to be construed according to the common and approved usage of language

unless a word has a certain technical meaning. KRS 446.080(4). Statutes must be read as a

whole and in context with other parts of the law.Lewis v. Jackson Energy CoOp Corp., 189

S.W.3d 87, 92 (Ky. 2005). Interpretations of a statute which would produce absurd results are

to be avoided if alternative interpretations consistent with the legislative purpose are available.

Guzman v. U.S. Dep't of Homeland Sec., 679 F.3d 425, 432 (6th Cir. 2012) (internal quotations

and citations omitted); see also Workforce Dev. Cabinet v. Gaines, 276 S.W.3d 789, 792 (Ky.

2008).

Here, the intent of the legislature is clearly expressed in the words of the relevant statute.

When a mortgage is assigned to another person, the assignee shall file the assignment for

recording with the county clerk within thirty (30) days of the assignment . . . . KRS

382.360(3). A mortgage is assigned by operation of law when a note is transferred and,

therefore, a recording must be made for each note transfer. See supra IV.A.1.a-c. Even if

Defendants ill-supported theory that a note transfer results only in an equitable assignment is

accepted here, MERS would not be entitled to dismissal. Rather, this finding would merely

introduce an ambiguity into the statute. That is, under Defendants view, the statute speaks only

of [w]hen a mortgage is assigned, and does not address whether this phrasing encompasses a



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so-called equitable assignment. The resulting ambiguity would trigger an application of the

rules of statutory construction, which results in the same outcome as a plain reading of the

statute: recordings must be made for each assignment (styled equitable or otherwise) that

results by operation of law from a note transfer.

First, Defendants interpretation does not comport with the command that statutes must

be read as a whole and in context with other parts of the law.Lewis, 189 S.W.3d at 92.

Defendants argue that an entirely separate statute governs the recording of note transfers and that

this other statute renders such recordings permissive. See Def. Br. at p. 12-13 (citing KRS

382.290). As such, Defendants urge it is implausible for the legislature to have made clear that

notes need not be recorded but then require the recording of assignments that result by operation

of law from the transfer of notes. See id. Defendants argument generates a conflict among the

statutes when none is otherwise there.

The statutes operate under the assumption that the note and mortgage travel together

when assigned, and provides a note assignor with the option of recording the mortgage

assignment that results from the note transfer in the accompanying recorded mortgage. KRS

382.290(1) provides [i]n recording mortgages and deeds in which liens are retained there

shall be left a blank space immediately after the record of the deed or mortgage or in the

alternative a marginal entry record. KRS 382.290(2) provides that when any note named in

any deed or mortgage is assigned to any other person, the assignor may, over his own hand,

attested by the clerk, note such assignment in the blank space, or in a marginal entry record,

beside a listing of the book and page of the document being assigned KRS 382.290(2) refers

to the blank space or marginal entry record mentioned in KRS 382.290(1), which is at the end of

the record of the mortgage. Thus, the written entry documenting the assignment of the note in



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KRS 382.290(2) is being made at the end of the mortgage, and the mortgage is the document

being assigned. This is further strengthened by the specification that the note of assignment

may be made in a marginal entry record, beside a listing of the book and page of the document

being assigned. See KRS 382.290(2). Mortgages are given book and page numbers because

they are recorded; notes are not, as MERS argues at length. See Def. Br. at 12; Jones v. Chipps,

296 Ky. 245, 249 (1943) (The transfer of the notes on the margin of the book wherein the

mortgage is recorded operated as an assignment of the mortgage to the bank.) (emphasis

added). KRS 382.290(2) presumes that when the note is assigned, the mortgage is also assigned

with it, in accordance with Kentuckys adoption of the UCC, Kentucky common law, and

principles of agency law. All KRS 382.290(2) does is provide the assignor of a note the option

to record the assignment at the end of the original mortgage document.

In other words, rather than set up two separate systems of obligations for recording notes

that are part of mortgages and recording assignments of mortgages, KRS 382.290 and KRS

382.360 are part of a single system that recognizes that mortgages and notes are assigned

together. KRS 382.290(2) provides that the assignor may note the assignment of the note on the

mortgage, but assumes that the mortgage is also assigned, and KRS 382.360(3) puts the express

duty on the assignee to record the assignment of the mortgage. MERS is correct that KRS

382.290 makes recording of notes named in mortgages permissive, but ignores the assumption in

KRS 382.290 that the mortgage is also assigned when the note is assigned. MERS also ignores

the fact that the mandatory recording requirements of KRS 382.360 apply.

Second, accepting Defendants interpretation would abrogate legislative intent and result

in absurd consequences by creating a loophole that swallows the statute. The Legislature passed

KRS 382.360 in 2006, requiring recordation of mortgage assignments with a statutory damage



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penalty for noncompliance, during the height of the housing bubble and MERS rapid

colonization of county recording offices. Legislators cannot be presumed to have been ignorant

about MERS or to have passed a law imposing costs on everyone except Defendants. Such an

interpretation is absurd and not permitted under the rules of statutory construction. See KRS

446.080(1) (statutes are to be liberally construed with a view to promote their objects and carry

out the intent of the legislature); Kentucky Ins. Guar. Assn., 13 S.W.3d at 611; Workforce Dev.

Cabinet, 276 S.W.3d at 793 (When a court construes statutory provisions, it must presume that

the legislature did not intend an absurd result.).

2.

MERS Functions As Both Assignor and Assignee in Its Fictional System andShould Be Held Accountable As Such

MERS claims that it is not an assignee upon whom KRS 382.360 imposes a duty to

record. See Def. Br. at 10-11. Not so. Transactions on the MERS system are effectively

unrecorded assignments, with MERS functionally serving as both assignor and assignee. On the

MERS system, MERS tracked assignments of beneficial interests. In reality, these

beneficial interests were purely the right to receive all payments on the mortgage. In

transferring the right to receive payments on the mortgage by utilizing the MERS System, MERS

members were effectively transferring the note and, as argued above, assigning the mortgage.

Each transfer of beneficial rights on the MERS System is an assignment that would otherwise

have to be recorded, as MERS openly admits in its advertising and other materials. The only

distinction between transactions on the MERS System and traditional assignments required to be

recorded is the terminology that MERS creates as part of its legal fiction; they are functionally

indistinguishable. MERS is doing nothing more than taking assignments and relabeling them as

transfers of beneficial interests.



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In claiming that MERS has no involvement in transactions on its system, MERS is once

again trying to have it both ways. See Landmark Nat'l Bank v. Kesler, 289 Kan. 528, 538 (2009)

(stating that MERS defines its role in much the same way that the blind men of Indian legend

described an elephant - their description depended on which part they were touching at any given

time). Each transfer on the MERS system is a transfer among MERS members in which MERS

proclaims that it is the agent mortgagee of its noteholder principals. See Def. Br. at 6-7.

Therefore, in each transfer, MERS is functioning as an assignor on one side of the transfer and

an assignee on the other side of the transfer. The assignee in one transaction becomes the

assignor in the next transaction, and MERS is always involved at both ends of every transaction.

This fact is critical for MERS because, on its own admission, if the assignee were not a MERS

member, then the mortgage would be deactivated from the MERS System and a mortgage

assignment would be recorded. See Def. Br. at 6, n. 2.

Here, Plaintiffs have properly pled that MERS violated KRS 382.365(2). Plaintiffs

allege that MERS, acting as the agent for its members, transferred notes, resulting in assignments

by operation of law. MERS and its members failed to record these assignments, effectively

ignoring the Commonwealths recording laws. This Court should reject Defendants charade.

B. Plaintiffs Allege Sufficient Facts to State a Claim for Civil ConspiracyTo sustain a claim for civil conspiracy [u]nder Kentucky law, a plaintiff must prove an

unlawful/corrupt combination or agreement between the alleged conspirators to do by some

concerted action an unlawful act. Wallace v. Midwest Fin. & Mortg. Servs., 714 F.3d 414, 422-

423 (6th Cir. 2013) (quotingJames v. Wilson, 95 S.W.3d 875, 897 (Ky. Ct. App. 2002) (citing

Montgomery v. Milam, 910 S.W.2d 237, 239 (Ky. 1995)). The Sixth Circuit recently reiterated

the standard of proof for a civil conspiracy claim: A civil conspiracy is an agreement between

two or more persons to injure another by unlawful action. Hensley v. Gassman, 693 F.3d 681,



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695 (6th Cir. 2012) cert. denied, 133 S. Ct. 1800 (U.S. 2013) (quotingHooks v. Hooks, 771 F.2d

935, 943944 (6th Cir. 1985)). All that must be shown is that there was a single plan, that the

alleged coconspirator shared in the general conspiratorial objective, and that an overt act was

committed in furtherance of the conspiracy that caused injury to the complainant. Id. Notably,

[e]xpress agreement among all the conspirators is not necessary to find the existence of a civil

conspiracy, and [e]ach conspirator need not have known all of the details of the illegal plan or

all of the participants involved. Id. Cf. Clark v. Bucyrus Intl, No. 5:08-434, 2010 WL 996471,

at * 3 (E.D. Ky. 2010) (quoting Smith v. Bd. of Educ. of Ludlow, Ky., 94 S.W.2d 321, 325 (Ky.

1936)) (applying theHookstandards in evaluating proposed complaint amendment adding civil

conspiracy claim and rejecting the defense argument that plaintiffs attempt would be futile

because such claims as proposed were insufficiently pled).

However, Plaintiffs are not required to set out in detail every fact upon which they base

the claim. See, e.g.,Leatherman v. Tarrant Cnty. Narcotics Intelligence & Coordination Unit,

507 U.S. 163, 168 (1993). All that is required is a short and plain statement of the claim that

will give the defendant fair notice of what the plaintiffs claim is and the grounds upon which it

rests. Id. (quoting Fed. R. Civ. P. 8(a)(2); see also Bowling v. United States, No. 5:11-CV-140,

2012 WL 5178436 (E.D. Ky. Oct. 17, 2012) (Plaintiff correctly points out that our liberal notice

pleading system only requires a short and plain statement of the claim to give the defendant fair

notice of the claim and its grounds.) (citingLeatherman, 507 U.S. at 168). Plaintiffs are not

required to set out in detail every fact upon which they base their conspiracy claim, but

nevertheless must allege facts that make their claim plausible. Twombly, 550 U.S. at 554, 570.

Plaintiffs have alleged more than enough facts to support their conspiracy claim under the

foregoing standards and have adequately put Defendants on notice. Hardly conclusory, as



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Defendants suggest, Def. Br. at 21, Plaintiffs conspiracy Count incorporates all Paragraphs of

the Complaint as though set forth in full. Compl. at 12. The Complaint includes several

pages of allegations that document the MERS conspiracy, Defendants involvement, and the

damage that has been inflicted. Id. at 26-33. Furthermore, Defendants conveniently ignore

that they agreed to, and actually did, create MERS for the sole purpose of using the system to

masquerade as the title holder in Kentuckys public records. Id. at 5, 27. The MERS website

specifically states that, MERS is an innovative process that simplifies the way mortgage

ownership and servicing rights are originated, sold and tracked. Created by the real estate

finance industry, MERS eliminates the need to prepare and record assignments when

trading residential and commercial mortgage loans. See http://www.mersinc.org (last

visited June 12, 2012) (emphasis added); Compl. 33. Despite this admission that they

purposely violate Kentucky law, Defendants brazenly claim that Plaintiffs fail to allege a single

fact showing an agreement and that there is nothing unlawful or corrupt about a process that

avoids the need to assign mortgages it is perfectly legal to create the most efficient method of

conducting business. Def. Br. at 18-19 (emphasis in original). However, Defendants

conspiracy to avoid recording mortgage assignments is clearly unlawful because the Kentucky

legislature specifically requires that an assignee shall file the assignment for recording with the

county clerk within thirty (30) days of the assignment . . . . KRS 382.360(3) and (4).

Defendants overt actions werepart of a single plan and Defendants shared in a general

conspiratorial objective to violate Kentucky law. Hensley, 693 F.3d at 695(quotingHooks, 771

F.2d at 943-944); Compl. at 26-27. Defendants, as in the case of Plaintiffs mortgage, record

an initial assignment to lend the appearance that MERS is a freestanding mortgagee who holds a

mortgage that does not change hands among any other entity. In reality, though, MERS is



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merely the agent of its noteholder principals, who are transferring notes (as part of the

securitization process) that also, by operation of law, assign the accompanying mortgages, which

should be recorded. Compl. at 24-27. Plaintiffs sufficiently allege that Defendants failed to

record multiple of assignments of Plaintiffs mortgage pursuant to this plan. Id. at 24-25.

Therefore, the overt actions taken by the Defendants in assigning mortgages to the MERS system

to avoid recording instruments are clearly unlawful and violated the Kentucky recording laws.

Id. at 26-33, 45-50. Plaintiffs thus identify the nature of the conspiracy, the conspirators, and

the actions the alleged conspirators took in furtherance of the conspiracy. Plaintiffs satisfy all

pleading standards and, therefore, Defendants motion to dismiss Plaintiffs conspiracy count

must be denied.

Defendants argue that Plaintiffs merely claim that the Defendants conspired to violate

KRS 382.360 and KRS 382.365 by complying with those statutes because Plaintiffs original

assignment of mortgage was recorded. Def. Br. at 18-19. This argument fails, however, because

Plaintiffs clearly allege that an initial assignment was recorded merely as a placeholder and that

subsequent assignments took place thereafter, which were not recorded. Compl. at 26, 27.

Regardless, [a]sking for plausible grounds does not impose a probability requirement at the

pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery

will reveal evidence of illegal agreement. Twombly, 550 U.S. at 556. Here, Defendants

private recording system is inaccessible to the public and there is a reasonable expectation that

discovery will show that Defendants, in accordance with their stated purpose, enabled its

members to assign Plaintiffs mortgage without recording the assignments.

Further, Defendants argument that civil conspiracy is not a free standing claim is

incorrect. Rather, Kentucky clearly recognizes civil conspiracy as an independent claim. See



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Wallace, 714 F.3d at 422-423 (discussing the civil action for conspiracy under Kentucky

law) (quotingJames v. Wilson, 95 S.W.3d 875, 897 (Ky. Ct. App. 2002));Dietz v. Bolton, No.

2011-CA-001899-MR, 2013 WL 1919562, at * 12-14 (Ky. Ct. App. May 10, 2013) (court

reaffirms thatJames v. Wilson thoroughly discusses Kentuckys civil conspiracy law);

Fastenal Co. v. Crawford, 609 F. Supp. 2d 650, 662-663 (E.D. Ky. 2009) (Kentucky law clearly

recognizes the tort of civil conspiracy.) (collecting cases); KRS 413.140(1)(c) (statute of

limitations for a claim of conspiracy is one year).

Kentucky law recognizes that a civil conspiracy action stands on an unlawful act which

causes harm. Natl Info. & Communs. Equip. Network, Inc.v. Willigan, No. 06-28-DLB, 2007

WL 2979928, at * 5-6 (E.D. Ky. Oct. 11, 2007). AsJames noted, before a conspiracy can be

found, a necessary allegation is that the damage or death resulted from some overt act done

pursuant to or in furtherance of the conspiracy, and [i]n the absence of such acts done by one

or more of the conspirators and resulting in damage, no civil action lies against anyone . . . .

James, 95 S.W.3d at 897 (quotingDavenport's Adm'x v. Crummies Creek Coal Co., 299 Ky. 79,

80 (Ky. 1945)).

In support of the fact that civil conspiracy can be brought as an independent claim,

Kentucky courts have found that conspiracy claims can proceed in the absence of underlying

torts. Seee.g., Fastenal Co., 609 F. Supp. 2d at 662-663 (upholding a civil damages claim for

civil conspiracy despite the fact that damages were not awarded for underlying fraud count); see

alsoHelton v. Am. Gen. Life Ins. Co., No. 4:09-cv-118, 2010 WL 2889666, at * 3-4 (W.D. Ky.

Jun. 21, 2010) (acknowledging civil conspiracy claim as independent and allowing conspiracy

claim to proceed after dismissal of fraudulent inducement claim).



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Further, Defendants argument that Plaintiffs conspiracy claim cannot be based on

violations of KRS 382.360 and KRS 382.365 is also misplaced. In fact, inBrown v. Student

Loan Xpress, the plaintiff alleged that the defendants conspired to violate another Kentucky

statute, the Kentucky Consumer Protection Act. Brown v. Student Loan Xpress, Inc., No. 5:11-

cv-00090, 2012 WL 1029467, at *9-10 (W.D. Ky. March 26, 2012). The court inBrown held

that because plaintiffs made a plausible claim for violation of the Kentucky Consumer Protection

Act, it was also plausible that the defendants conspired to violate the statute, and therefore

declined to dismiss plaintiffs independent claim for civil conspiracy. Id. The court held that

[d]iscovery on the issue of the civil conspiracy is necessary to determine the nature of the

agreement between the Defendants, if any, and whether their actions were unlawful. Id.

Contrary to Defendants assertion, Kentucky law states that a conspiracy claim must be

based on an unlawful actand not an unlawful tort. Plaintiffs civil conspiracy claim can stand

alone and Plaintiffs have adequately demonstrated an unlawful/corrupt combination or

agreement between the alleged conspirators to do by some concerted action an unlawful act.

Wallace, 714 F.3d at 422-423 (quotingJames, 95 S.W.3d at 897 (citingMontgomery v. Milam,

910 S.W.2d 237, 239 (Ky. 1995)) (emphasis added). Plaintiffs have met this standard because a

violation of statutory law is an inherently unlawful act. Texas & P Ry. Co. v.Rigbsy, 241 U.S.

33, 39 (1916) (A disregard of the command of the statute is a wrongful act, and the right to

recover the damages from the party in default is implied, according to a doctrine of the common

law . . . ); Sales Res., Inc. v. Alliance Foods, Inc., No. 4:08-cv-0732, 2010 U.S. Dist. LEXIS

132530, at * 97-98 (E.D. Mo. Dec. 15, 2010) (A defendant's violation of a statutory provision is

a wrongful act . . .).



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The cases cited by Defendants for the proposition that a claim for civil conspiracy must

be based on an underlying intentional tort are distinguishable because they were not for statutory

violations. Defendants cases are irrelevant in this context in which Plaintiffs allege that

Defendants conspired to violate Kentucky statutory law. Thus, the mere fact that Defendants

conspired to intentionally violate Kentucky law rather than to commit an intentional common

law tort is not dispositive here. To the contrary, Kentucky courts have found that conspiracy

claims can proceed in the absence of underlying torts. Seee.g., Fastenal Co., 609 F. Supp. 2d at

662-663;Helton, 2010 WL 2889666, at * 3-4.

Similarly, contrary to Defendants assertions, Plaintiffs need only to show that the civil

conspiracy claim is based on more than mere negligence and that defendants acted tortiously

pursuant to a common design . . . Clark, 2010 WL 996471, at * 5 (citing Peoples Bank of N.

Ky. v. Crowe Chizek and Co. LLC, 277 S.W.3d 255, 261 (Ky. Ct. App. 2008). Cf.James, 95

S.W.3d at 896-898 (dismissing a civil conspiracy claim against school officials, parents and

fellow students for failing to act to prevent a school shooting); Cf. Smith v. Univar USA, Inc.,

2013 WL 1136624, at * 4 (E.D. Ky. March 18, 2013) (dismissing civil conspiracy claim based

merely on allegations of negligent concealment of chemical risks). Specifically, the Sixth

Circuit Court of Appeals has held that plaintiffs properly state a claim for civil conspiracy when

they allege that Defendants were knowing participants to a violation of law. Clark, 2010 WL

996471, at * 5. Here, Plaintiffs extensively document that Defendants have acted, and continue

to act, intentionally, tortiously, and unlawfully in concert to violate Kentucky law. Compl. at

26-33, 45-50. Plaintiffs have therefore satisfied their burden by properly alleging that the

conspiracy is based on intentional, unlawful acts by Defendants and not mere negligent

omissions or strict liability.



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Finally, Plaintiffs allege actual injury due to the purported conspiracy. Plaintiffs

adequately allege that Kentucky law calls for damages of no less than $500 for each assignment

that was not filed in compliance with KRS 382.360 and KRS 382.365. Compl. at 49.

Moreover, that Plaintiffs mortgage was released two years ago does not change the fact that the

Kentucky Legislature has provided damages for Defendants failure to record assignments, and

given Plaintiffs a private right of action to sue for those damages. In addition, Plaintiffs allege

that through violations of Kentuckys statutory requirements, Defendants have systematically

inserted breaks into the chains of land titles throughout Kentucky counties public land records,

creating gap due to missing mortgage assignments. Id. at 8. Such gaps of title also exist

for Plaintiffs mortgage. Id. at 24-25. Accordingly, the MERS system makes it impossible

for the general public, including Plaintiffs and members of the proposed class, to determine the

true status of a given piece of property on a given date. Id. at 32. Therefore, Defendants

argument that Plaintiff have not suffered an injury because the mortgage has been released, Def.

Br. at 20, fails.

V. CONCLUSION

For the reasons stated herein, MERS motion to dismiss should be denied.

On this the 9th

day of August, 2013.

Respectfully submitted,

/s/ Jason S. RathodGary E. Mason (admitted pro hac vice)Jason S. Rathod(admitted pro hac vice)Whitfield Bryson & Mason LLP1625 Massachusetts Ave. NWSuite 605Washington, D.C. 20036Telephone: (202) 429-2290

John C. Whitfield (KBA # 76410)



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Whitfield Bryson & Mason LLP19 N. Main StreetMadisonville, KY 42431Telephone: (270) [email protected]

Jeffrey S. Goldenberg (admitted pro hac vice)Todd Naylor(admitted pro hac vice)Goldenberg Schneider, L.P.A.One West Fourth Street, 18th FloorCincinnati, OH 45202Telephone: (513) 345-8291

Sean R. Matt (admitted pro hac vice)Hagens Berman Sobol Shapiro, LLP1918 Eighth Ave Suite 3300

Seattle, WA 98101Telephone: (206) 623-7292

Debra Brewer Hayes (admitted pro hac vice)Charles Clinton Hunter(to be admitted pro hacvice)Reich & Binstock, LLP4265 San Felipe, Suite 1000Houston, Texas 77027Telephone: (713) 622-7271

Attorneys for Plaintiff



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CERTIFICATE OF SERVICE

I hereby certify that on August 9, 2013, I electronically filed the foregoing with the Clerk

of the Court using the CM/ECF system to send notification of such filing to all counsel of record.

/s/ Jason S. RathodJason S. Rathod


Plaintiffs Memorandum in Opposition to the MERS Defendants Motion to Dismiss

Documents