Alert October 16, 2012

Kansas State Appellate Court Rejects Split-the-Note Theory

The Kansas Court of Appeals has rejected a challenge to a lender’s designation of MERS as nominee on a mortgage. Plaintiffs/appellants, a husband and wife who defaulted on their home mortgage loan, challenged the standing of the bank to foreclose on the property based on a so-called “splitting of the note and mortgage” that allegedly resulted from a series of assignments of the note between MERS members while MERS itself remained the mortgagee of record “as nominee for the lender and its successors and assigns.” Citing recent Kansas Supreme Court precedent affirming the operation of MERS as nominee for a series of successor lenders, the Court, applying basic principles of contract interpretation, held that the language of the mortgage itself, which designated MERS “as nominee for the lender and its successors and assigns,” was sufficient to create an agency relationship between MERS and the foreclosing bank as a “downstream assignee” of plaintiffs’ note, such that the bank could be deemed to hold both the note and mortgage for purposes of establishing its standing to foreclose under Kansas law. “Split note” theories are commonly advanced by defaulted borrower plaintiffs in an effort to invalidate the enforceability of their loan obligations. Numerous state and federal courts around the country have rejected such claims on a host of grounds (see e.g., August 21, 2012 Alert), and this case presents yet another example that contributes to this weight of authority.