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Yet Again, the Tenth Circuit Rejects a Bankruptcy Trustee’s Attempt to Avoid a Mortgage Under a “Splitting-the-Note” Theory

By: Alana Friedberg

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Royal v. First Interstate Bank (In re Trierweiler), the Tenth Circuit held that a mortgage granted in favor of the private electronic database Mortgage Electronic Registration Systems, Inc. (“MERS”), which records transfers of notes and mortgages, was enforceable as to a bankruptcy trustee even though the promissory note was held by a third-party. In Trierweiler, the debtors took out a loan from and granted a mortgage to First Interstate Bank (“First Interstate”) in order to purchase real property. The mortgage identified First Interstate as the “lender,” and MERS as both the “mortgagee” and the “nominee for the lender and lender’s successors and assigns.” Sometime thereafter, First Interstate assigned the note to Fannie Mae, but remained as the servicer for the loan. The debtors subsequently defaulted on the loan and filed for bankruptcy under chapter 7 of the Bankruptcy Code. The chapter 7 trustee then sought to avoid the mortgage, using his “strong arm” powers under section 544(a). In particular, the chapter 7 trustee claimed that MERS “was powerless to foreclose on the property” because it did not hold the note and instead was merely the mortgagee. The trustee also claimed that while Fannie Mae held the note, it “had no ability to enforce the mortgage because it was not listed as the mortgagee in the land records . . . .” Therefore, the trustee asserted that this “combination rendered the mortgage unenforceable and void as to [him].” The bankruptcy court, however, rejected the trustee’s arguments and ruled that the mortgage was a properly recorded and enforceable security interest that could not be avoided in bankruptcy.[13] On appeal, the Bankruptcy Appellate Panel of the Tenth Circuit and the United States Court of Appeals for the Tenth Circuit both affirmed.