A recent case illustrates at least one of the pitfalls for those who invest in property tax liens. In Delo v. GMAC Mortgage, an investor (Delo) purchased a property tax lien on a property that had been acquired by Pinal County. Mr. Delo paid the outstanding property taxes and received an assignment from the County.
Following the three year waiting period for the owners to redeem the property tax lien by paying the past due taxes (plus interest), Mr. Delo proceeded to foreclose. Neither the owners nor the lenders defended and Mr. Delo obtained a default judgment.
However, while Mr. Delo’s lawsuit was proceeding, the lender on the property initiated a separate non-judicial foreclosure proceeding on the property. The original lender was EquiFirst with MERS (Mortgage Electronic Registration System) “as a nominee for Lender and Lender’s successors and assigns” and as “the beneficiary under the Security Instrument” and as legal title holder.
After the property owners initially took out their loan, the loan was transferred several times. None of these transfers were publicly recorded, but MERS always remained the nominee and a legal title holder. Mr. Delo named EquiFirst as a party, but did name MERS, and did not name the current assignee (GMAC) because he did not know who they were. As a result of the lack of notice, GMAC did not intervene in Mr. Delo’s foreclosure action. GMAC concluded its non-judicial foreclosure
just days before Mr. Delo obtained his default judgment (and a Treasurer’s Deed a short time later).
Mr. Delo filed a quiet title action against GMAC to resolve their competing claims, alleging that he was a bona fide purchaser for value. Although the trial court initially agreed with Mr. Delo, the appellate court reversed primarily because Mr. Delo’s foreclosure proceedings named the lender (Equifirst), but did not name MERS as a Defendant.
The appellate court reasoned that all parties having a legal or equitable interest in the property must be named in an action seeking to foreclose a redemption right; that MERS was required to be joined as a party, and; as a result Mr. Delo’s default judgment was ineffective against GMAC’s interests.
Mr. Delo argued that MERS was only an agent of the lender and did not need to be named. However, the appellate court disagreed and found that GMAC was protected by MERS previously recorded interests. As a result, the tax lien purchaser (Mr. Delo) was precluded from being considered a bona fide purchaser with priority over the interests of a prior property owner.
The appellate court also explained that historically, MERS was created to avoid the necessity of recording multiple transfers of a deed. Thus MERS functions as a “nominal record holder of the deed on behalf of the original lender and any subsequent lender.” So long as the transfer of the deed is between MERS members, the change is recorded only within MERS database. Only when the deed is transferred to a non-MERS member is there a requirement to publicly record the
The moral of the story is to read your documents carefully, obtain quality legal counsel to assist you, and in this case, do not take MERS for granted.