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MERSCORP Holdings, Inc. v. Malloy

Supreme Court of Connecticut

February 23, 2016

MERSCORP HOLDINGS, INC., ET AL.
v.
DANNEL P. MALLOY ET AL

         Argued October 14, 2015

Page 221

[Copyrighted Material Omitted]

Page 222

          Action for a judgment declaring the unconstitutionality of certain statutes governing fees charged for the recording of documents in municipal land records, brought to the Superior Court in the judicial district of New Britain, where the court, Sheridan, J., granted the defendants' motion for summary judgment and rendered judgment thereon, from which the plaintiffs appealed.

          Affirmed.

          SYLLABUS

         The plaintiffs, which own and operate a national electronic mortgage registration database known as MERS, brought an action against the defendant state officials, seeking a judgment declaring unconstitutional the statutes (§ § 7-34a [a] and 49-10 [h]) governing the fees imposed in connection with the recording of documents in municipal public land records. MERS is used by its members, including in-state and out-of-state mortgage lenders, to track ownership interests in mortgage loans secured by real estate and any changes in ownership of MERS-registered loans between its members. When a borrower and a lender who is a member of MERS agree to register the loan under MERS at the time of its origination, MERS becomes the mortgage nominee. The loan, in addition to being registered in the MERS database, is then recorded in the public land records of the town in which the property is located, with MERS being listed as the nominee in the land records. Any assignments between MERS members during the life of the loan, while registered in the MERS database, is not recorded in the land records. MERS remains the mortgagee of record in the public land records until the mortgage either is released or assigned to, or purchased by, a lender that is not a member of MERS. In 2013, the legislature amended § § 7-34a and 49-10 to create a two tiered system under which a mortgage nominee such as MERS must pay recording fees approximately three times greater than do other mortgagees. The plaintiffs claimed that the statutory scheme violated, inter alia, the equal protection provisions of the federal and state constitutions and the federal dormant commerce clause. The trial court granted the defendants' motion for summary judgment and rendered judgment thereon for the defendants, from which the plaintiffs appealed.

         Held :

         1. The plaintiffs could not prevail on their claim that § § 7-34a (a) (2) and 49-10 (h), by charging mortgage nominees such as MERS higher recording fees than other mortgagees, violated the equal protection guarantees of the federal and state constitutions: the plaintiffs' claim that the fees imposed by the statutory scheme, which bore some indicia of both a tax and a user fee, were unconstitutional was subject to rational basis review because the scheme neither implicated a fundamental right nor affected a suspect class, and claims that taxation schemes violate the equal protection rights of those who are more heavily taxed are subject to an especially deferential rational basis review; moreover, the parties agreed that the legislature's primary purpose in imposing higher recording fees on mortgage nominees such as MERS was to raise additional revenues, either to compensate for fees allegedly lost as a result of the MERS business model or to help balance the state's budget, such an objective was a legitimate public purpose, and the disparate treatment between MERS and other mortgagees was rationally related to the goal of raising revenues and recouping lost fees because the legislature reasonably could have concluded that a large corporation, such as MERS, which is involved in nearly two thirds of the nation's residential mortgage transactions, is better able to shoulder high recording fees than small mortgagees, and reasonably could have concluded that mortgage assignments that typically would be recorded in the land records would not be recorded for loans registered with MERS and, therefore, that it was necessary to compensate for the fees lost from the absence of the additional recordings that would have occurred over the course of the loans in the absence of MERS.

         2. There was no merit to the plaintiffs' claim that § § 7-34a (a) (2) and 49-10 (h) violated the dormant commerce clause of the federal constitution, which prohibits states from discriminating between transactions on the basis of some interstate element: this court assumed that interstate commerce was implicated because, although the recording transactions at issue were purely local in nature, the participation of MERS in those transactions indicated that many of the loans involved ultimately would be transferred on the national secondary loan market; furthermore, the challenged statutory provisions did not facially discriminate against interstate commerce, there having been no indication that the legislative choice to impose higher fees on either in-state or out-of-state mortgage nominees who operate national mortgage databases reflected invidious discrimination against out-of-state interests or an effort to favor in-state financial companies, and, even if the challenged provisions did discriminate against interstate commerce, such discrimination advanced the legitimate local purpose of recouping from MERS the recording fees that its members otherwise would have paid upon the assignment or transfer of a mortgage in the secondary market; moreover, the imposition of higher fees on mortgage nominees such as MERS under § § 7-34a (a) (2) and 49-10 (h) in order to compensate for the reduced number of recorded mortgage assignments or transfers did not unduly burden MERS or, by extension, interstate commerce, there having been no indication that the higher fees would so overshadow the benefits of participating in the national electronic registration system that borrowers and lenders would opt out of participating or that the vitality of the secondary mortgage market would be compromised.

         3. This court found no merit to the plaintiffs' claims that the challenged statutory provisions violated their substantive due process rights under the federal and state constitutions, the federal constitutional prohibition against bills of attainder, and 42 U.S.C. § 1983 for the same reasons that it had rejected the plaintiffs' equal protection and commerce clause claims.

         Linda L. Morkan, with whom were Benjamin C. Jensen and, on the brief, James A. Wade and Norman H. Roos, for the appellants (plaintiffs).

         Matthew J. Budzik, assistant attorney general, with whom were Heather J. Wilson, assistant attorney general, and, on the brief, George Jepsen, attorney general, for the appellees (defendants).

         Ryan P. Barry and Michael J. Dyer filed a brief for the Connecticut Bankers Association et al. as amici curiae.

         J. L. Pottenger, Jr., Jeffrey Gentes, and Aurelia Chaudhury, Nicholas Gerschman and Marian Messing, law student interns, filed a brief for the Jerome N. Frank Legal Services Organization and the Connecticut Fair Housing Center as amici curiae.

         Palmer, Zarella, Eveleigh, Espinosa and Robinson, Js.

          OPINION

Page 223

         [320 Conn. 451] PALMER, J.

         In 2013, the legislature amended the statutes governing Connecticut's public land records system to create a two tiered system in which a mortgage nominee operating a national electronic database to track residential mortgage loans must pay recording fees approximately three times higher than do other mortgagees. The plaintiffs, MERSCORP Holdings, Inc., and Mortgage Electronic Registration Systems, Inc., who are currently the only entities required to pay the increased recording fees, commenced the present action against the defendants, Governor Dannel P. Malloy, Attorney General George Jepsen, Treasurer Denise L. Nappier, Kendall F. Wiggin, the state librarian, and LeAnne R. Power, the state public records administrator,[1] seeking, inter alia, injunctive relief and a judgment declaring that this two tiered fee structure violates various provisions of the federal and state constitutions. Specifically, the plaintiffs alleged that General Statutes § § 7-34a (a) (2) and 49-10 (h), as amended, violate the equal protection, due process, and takings provisions of the federal and state constitutions, the federal dormant commerce clause, and the federal prohibition against bills of attainder. The plaintiffs further alleged that enforcement of the statutes violates 42 U.S.C. § 1983. The parties filed motions for summary judgment, and the trial court granted the state's motion for summary judgment on all counts and rendered judgment thereon. This appeal followed.[2] We affirm the judgment of the trial court.

Page 224

         [320 Conn. 452] I

         This case concerns the filing fees that the parties to a residential mortgage loan must pay to record mortgage documents in the public land records in Connecticut. Because the plaintiffs raise both federal and state constitutional issues of first impression, it will be helpful before considering the plaintiffs' claims to briefly review the traditional procedure for recording residential mortgage documents, certain relatively recent changes to that system, and the novel response of the Connecticut legislature to those changes.

         Under the traditional residential mortgage model, a person seeking to finance the purchase of a residential property obtains a loan from a lender, typically a bank, in exchange for a promissory note committing the borrower to repay the loan. To secure the loan, the borrower provides the lender a mortgage on the property. Although, in Connecticut, there is no legal requirement that the lender record the mortgage in the public land records, mortgages typically are recorded--via the clerk of the town in which the property is situated--in order (1) to perfect the lender's security interest by giving public notice thereof, and (2) to maintain a complete public chain of title.

         Under the traditional model, the bank or other lender maintains the loan on its books and continues to service the loan until it is repaid. At that point, the parties typically record a release of the mortgage in the land records. At a minimum, then, the life of a residential mortgage loan may involve only two recordable events, although other events--for example, a transfer of the mortgage loan to another lender, or the creation or [320 Conn. 453] subordination of a home equity credit line--also may arise under the traditional model.

         The most significant factor in the decline of the traditional residential mortgage model has been the development and evolution of the secondary mortgage market. A secondary market is created when the initial lender sells the mortgage loan to outside investors. Doing so provides local lenders with greater liquidity, which facilitates additional home buying, and also allows large outside investors to pool--and thus to minimize--the risk that any particular loan will go into default. Although the modern secondary mortgage market had its genesis in the creation of the Federal Housing Authority and associated government sponsored financing corporations such as Fannie Mae in the 1930s, it expanded dramatically in the 1980s with the advent of new types of mortgage backed securities for sale in the private equity markets.

         For mortgage loans sold in the secondary market, the investor typically engages a third party to perform servicing functions such as payment collection and file maintenance. Both the loan itself and the servicing rights may be sold or transferred multiple times over the life of a loan. Under the common-law rule, as codified in many states, the mortgage follows the note, so that an investor who acquires a residential note automatically obtains the attached security interest as well.

         Although the development of a robust and sophisticated secondary market has had a dramatic impact on the liquidity and, with some notable exceptions, the stability of the residential mortgage loan market, it also has created challenges for the public land record system. Because the ownership and servicing rights to a loan may be

Page 225

transferred multiple times over the life of a loan, the mortgagee of record, which may be either the note holder or the servicer as nominee, will frequently [320 Conn. 454] change. This means that each subsequent holder must choose either (1) to undertake the costly and time-consuming process of recording each of the numerous mortgages that it may briefly hold, subject to the varying costs and requirements of each state's county or, as in Connecticut, each town clerk, or (2) to decline to record its interest, which may result in potential problems and costs resulting from an incomplete public chain of title.

         To address these problems, in the 1990s, the major public financial service corporations, in collaboration with various private interests, developed the national Mortgage Electronic Registration Systems (MERS) system. There are two primary components to the MERS model.[3] First, MERS operates a national electronic registration system that tracks any changes in the ownership and servicing rights of MERS-registered loans between MERS members, who include in-state and out-of-state mortgage lenders, servicers and subservicers, and public finance institutions. In this sense, MERS operates as a centralized, virtual alternative to the hundreds of traditional county or town land recording systems throughout the country. Second, because MERS members cannot completely eschew the use of the public land records, MERS becomes the mortgage nominee on any loans held by MERS members, and is identified as such when the mortgage is initially recorded in the land records. Recording a mortgage with MERS as a mortgage nominee essentially creates a placeholder for the electronic MERS system in the public records, allowing the two systems to interoperate. That is to say, if a party searching the chain of title on a property comes upon a recorded mortgage to MERS, the party [320 Conn. 455] is thereby notified that the MERS database may be consulted to determine the present beneficial owner of the mortgage and loan, as well as any related servicing rights or subordinate security interests. MERS remains the mortgagee of record in the public records until the mortgage either is released or assigned to a nonmember of MERS.

         One potential advantage of the MERS system is that it eliminates the costs, in both time and fees, associated with recording each subsequent mortgage assignment in the public land records. Although the plaintiffs in the present case do not concede that any such savings have been realized in Connecticut, the parties do agree that, as of 2013, approximately 65 percent of mortgage loans nationally and in Connecticut originated with MERS acting as the mortgagee. The plaintiffs' principal place of business is in Virginia.

         Turning our attention to the legislation that led to the present action, we note that, prior to July 15, 2013, § 7-34a required that all filers pay the town clerk $10 for the first page of each document filed in the land records, plus $5 for each subsequent page. General Statutes (Rev. to 2013) § 7-34a (a). Section 7-34a imposed additional fees of $3 and $40 per filing; General Statutes (Rev. to 2013) § 7-34a (d) and (e); and an additional fee of $2 per assignment after the first two assignments. General Statutes (Rev. to 2013) § 7-34a (a).

Page 226

          In 2013, General Statutes (Rev. to 2013) § 7-34a was amended by Public Acts, No. 13-184, § 98 (P.A. 13-184), and Public Acts, No. 13-247, § 82 (P.A. 13-247). As amended, § 7-34a defines a " nominee of a mortgagee" as " any person who (i) serves as mortgagee in the land records for a mortgage loan registered on a national electronic database that tracks changes in mortgage servicing and beneficial ownership interests in residential mortgage loans on behalf of its members, and (ii) [320 Conn. 456] is a nominee or agent for the owner of the promissory note or the subsequent buyer, transferee or beneficial owner of such note." General Statutes § 7-34a (a) (2) (C). The parties agree that MERS is presently the only entity that qualifies as a nominee of a mortgagee, as so defined, and that the legislature crafted the statutory language with MERS specifically in mind.

         Section 7-34a, as amended, further provides that, with two exceptions, when a nominee of a mortgagee files a document in the land records, the town clerk shall collect a fee of $116 for the first page filed and $5 for each additional page. General Statutes § 7-34a (a) (2) (A). In addition, the clerk continues to collect $3 for each document pursuant to § 7-34a (d) and $40 for each document pursuant to § 7-34a (e). The two exceptions are that, when a nominee of a mortgagee files " (i) an assignment of mortgage in which a nominee of a mortgagee appears as assignor, or (ii) a release of mortgage by the nominee of a mortgagee," the town clerk collects a fee of $159, plus $10 for the first page and $5 for each additional page.[4] See General Statutes § 7-34a (a) (1) and (2) (B). The recording fees for all other filers remain unchanged under the amended statute.

         The net effect of the amendments to § 7-34a (a) is to collect from a nominee of a mortgagee, namely, MERS, substantially more for the filing of deeds, assignments, and other documents in the land records than from any [320 Conn. 457] other filer. When filing a mortgage deed, for example, if MERS is a party to the transaction, the recording fee will be $159 ($116 plus $3 plus $40) for the first page and $5 for each additional page. See General Statutes § 7-34a (a) (2) (A), (d) and (e). If MERS is not a party to the transaction, the recording fee will be $53 ($10 plus $3 plus $40) for the first page and $5 for each additional page. See General Statutes § 7-34a (a) (1), (d) and (e). When filing a mortgage assignment or release, if MERS is a party to the transaction, the recording fee will be $159, plus $10 for the first page and $5 for each additional page.[5] See General Statutes ...


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