Boyd County et al v. MERSCORP, Inc. et al

Filing 121

MEMORANDUM OPINION & ORDER: Having found that Plf's First Amended Complaint fails to state any claim upon which relief can be granted, IT IS HEREBY ORDERED that Deft's Motion to Dismiss the First Amended Complaint DE# 105 be SUSTAINED and this matter be DISMISSED WITH PREJUDICE and STRICKEN from the Docket of this Court. Signed by Judge Henry R. Wilhoit, Jr on 11/25/13.(KSS)cc: COR

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF KENTUCKY

NORTHERN DIVISION

ASHLAND

CIVIL ACTION NO. 12·33·HRW
BOYD COUNTY, ex rei. Phillip Hedrick,

County Attorney of Boyd County, Kentucky, et al.,

v.

PLAINTIFFS,

MEMORANDUM OPINION AND ORDER

MERSCORP, INC., et al.,

DEFENDANTS.

This matter is before the Court upon Defendants' Motion to Dismiss the First
Amended Complaint [Docket No. 105]. The motion has been fully briefed by the parties
[Docket Nos. 110 and 113] and, for the reason set forth herein, the Court finds that the
First Amended Complaint fails to state any claim upon which relief can be granted and,
thus, this dismissal is warranted.

I.

FACTUAL AND PROCEDURAL BACKGROUND
This civil action was filed by forty-one County Attorneys on behalf of forty-one

Kentucky counties: Boyd County, Breathitt County, Carter County, Christian County,
Clark County, Floyd County, Franklin County, Greenup County, Johnson County, Letcher
County, Magoffin County, Mason County, Pike County, Warren County, Ballard County,
Barren County, Boone County, Carlisle County, Estill County, Garrard County, Hancock
County, Harlan County, Hart County, Henry County, Hickman County, LaRue County,
Laurel County, Lewis County, Logan County, Menifee County, Monroe County,

Montgomery County, Nelson County, Nicholas County, Ohio County, Oldham County,
Perry County, Rockcastle County, Spencer County, Trimble County and Wolfe County.
Plaintiffs allege that the financial institutions and mortgage / title companies Defendants
devised and executed a scheme to avoid paying recording fees for mortgage assignments.
Specifically, Plaintiffs allege that the Defendants, shareholders of Defendant
Mortgage Electronic Registration Systems, Inc. ("MERS") established the MERS system
in the mid-1990s to act as an electronic clearinghouse for the transfer of mortgage
interests among its members expressly to avoid recording mortgage assignments with
local recording systems and to avoid paying requisite recording fees [Docket No. 88 at ~
82]. Plaintiffs maintain that the MERS system circumvents the mortgage assignment
recordation system of Kentucky's counties by facilitating the selling and buying of notes
secured by real property without complying with Kentucky's requirements for the
recordation of mortgage assignments. Id. Plaintiffs claim that the Defendants deliberately
failed to record required mortgage assignments in the proper Kentucky county recording
offices, and, as a result, deprived each county and the Commonwealth of Kentucky of
recording fees required by Kentucky law. They further allege that the Defendants filed
false mortgage documents, and, therefore deprived mortgagees of their statutorily
required notice of mortgage assignments [Docket No. 88 at ~ 75].
In their First Amended Complaint [Docket No. 88], Plaintiffs allege the following
causes of action: (1) negligent and/or will violation of KRS 382.360 [Docket No. 88 at

2

~~

107-109], (2) negligent and/or will violation of KRS 434.155 [Docket No. 88 at ~~

110-112], (3) fraud [Docket No. 88 at ~~ 113-117], (4) unjust enrichment [Docket No. 88
at ~~ 118-121] and (5) civil conspiracy to violate KRS 382.360 and 434.155 [Docket No.
88 at ~~ 122-125].
Subsequently, Defendants sought entry of an order staying all proceedings in this
matter pending final resolution of Christian County Clerk v. Mortgage Electronic
Registration Systems, Inc. (6th Cir. No. 12-5237), a case involving the same legal issues
presented in this case as well as several of the same Defendants. This Court sustained
Defendants' motion and this matter was stayed. Following the Sixth Circuit Court of
Appeals's decision in Christian County, the stay was lifted. Defendants now seek
dismissal of all claims against them.

II.

STANDARD OF REVIEW
The purpose of a motion to dismiss is to allow a defendant to test whether, as a

matter oflaw, the plaintiff is entitled to legal relief. Mayer v. Mylod, 988 F.2d 635,638
(6 th Cir. 1993). For purposes of dismissal pursuant to Fed. R. Civ. P. 12(b)(6), the
complaint must be construed in the light most favorable to the nonmoving party and its
allegations taken as true. Miller v. Currie, 50 F.3d 373,377 (6th Cir. 1995). The standard
for dismissal is liberal. "[A] complaint should not be dismissed for failure to state a claim
unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his
claim which would entitled him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957);

3

see also, Monette v. Electronic Data Systems, Corp., 90 F/3d 1173,1189 (6 th Cir. 1996).

As a motion to dismiss is based solely upon the complaint, the focus is on whether the
plaintiff is entitled to offer evidence to support the claims, rather than whether the
plaintiff will ultimately prevail. See, Roth Steel Prods v. Sharon Steel Corp., 705 F.2d
134, 155 (6 th Cir. 1983).
III.

ANALYSIS

A.

Plaintiffs cannot maintain an action for violation of KRS. 382.360
1.

Kentucy's recording system

KRS Chapter 382 provides a system by which landowners record ownership of
property through deeds, mortgage owners preserve priority and landowners remove
encumbrances from their property once underlying debts are satisfied. Each step is
codified as follows: Recording of deeds that are "acknowledged by the part[ies] who
execute [them]" and "proved and lodged for record in the proper office, as prescribed by
law." KRS 382.080. The statutes also provide for recording of mortgages, which, like
deeds, are recorded in "the county clerk's office of the county in which the property ... is
located." KRS 382.110. Instruments generally must indicate the "next immediate source
from which the grantor derived title to the property or the interest conveyed therein,"
thereby showing the chain of title. Id. Instruments which satisfy these requirements and
are properly acknowledged are recorded by the County Clerk. KRS 382.130.
Chapter 382 further provides for recording of releases and assignments of

4

mortgages incertain circumstances. A mortgage can be released by recording a deed of
release or by entering a marginal notation on the mortgage instrument. KRS 382.360(1)­
(2)). Similarly, a mortgage may be assigned by a deed of assignment. KRS 382.360(3)).
Failure to record a mortgage assignment has no effect on the validity or perfection of the
mortgage. KRS 382.360(6)). If the borrower pays her loan in full, but the lienholder
does not timely release the mortgage, the borrower may sue to compel release of the
mortgage and the recording of an intervening mortgage assignment required for the
release. KRS 382.365(3)-(5). The statutory scheme ensures that, as a general rule, a
mortgage recorded first has priority over a mortgage recorded later. MERS v. Roberts, 366
S.W.3d 405, 411 (Ky. 2012). Recording of mortgages allows mortgage-holders to stake
their claims to priority, although the records do not serve as a source of information about
lenders; indeed, "[t]he identity of the lender is not truly relevant to whether the purposes
of the recording statutes are being promoted." Id. at 413.
Plaintiffs seek redress for Defendants alleged violation of this system. However,
as the Court of Appeals for the Sixth Circuit recently held, Plaintiffs lack a private right
of action in this regard. Christian County v. MERS, 515 Fed. Appx. 451,
2013 WL 565198 (C.A.6 (Ky.)).

2.

Christian County

The plaintiffs in Christian County were clerks of two Kentucky counties who, as in
this case, alleged that the defendants did not create and record assignments of mortgages
5

when interests in MERS-registered notes were transferred. 2013 WL 565198, at * 1. As
in this case, the plaintiffs in Christian County alleged a violation ofKRS 382.360, and
common law claims for conspiracy and unjust enrichment. Id. The plaintiffs also alleged
the same harm as is alleged here: lost recording fees. Id. Chief Judge McKinley of the
Western District dismissed the Christian County complaint, holding that the plaintiff
clerks lacked a private right of action under the statutes on which they relied. 2012 WL
566807, at *5 (W.D. Ky. Feb. 21, 2012). The Court reviewed the Kentucky
recording statutes at length, holding that they "reserve[] the cause of action for failure of
an assignee to [record] to a real property owner or a party acquiring an interest in the real
property." ld. at 3. As the plaintiffs did not sue based on any property interest, the Court
held they had no right to sue. Id. The Sixth Circuit affirmed. It, too, reviewed the
recording statutes at issue and concluded that "the recording statutes do not provide a
civil remedy for the Clerks to pursue alleged violations." 2013 WL 565198, at *5. The
Sixth Circuit declined to recognize an implied right of action under KRS 446.070, ruling
that Kentucky's recording statutes protect three distinct groups of persons: (1) existing
lienholders and lenders ... (2) prospective lienholders and purchasers, and (3) property
owners and borrowers whose loans have been satisfied. ld. The Christian County
plaintiffs did not fit any of these categories, and, as such, they lacked a private right to
sue. Nor did the fact that clerks were responsible for recording documents related to real
property create a cause of action: "[u]nder [that] rationale, every public officer would

6

have a private right of action under the law he or she administers," which is not the law.
2013 WL 565198, at *5.
The Sixth Circuit further ruled that the clerks' conspiracy and unjust enrichment
claims failed, finding that each "rest[ed] on the theory that Defendants failed to record
assignments as required by Kentucky's recording statutes and thus avoided paying
statutorily mandated recording fees." Id. at *7 n.7. In addition, the Court held that no
unjust enrichment claim could lie because the purportedly conferred benefits were
"derived from Kentucky law, not from the Clerks themselves." Id. at *8.

3.

Christian County is on-point and controlling.

Defendants argue that Christian County is dispositive here and mandates
dismissal. This Court agrees. The Sixth Circuit held that the Kentucky General Assembly
passed the recording statutes that Plaintiffs invoke in this case to protect three categories
of persons, each of which has an interest in real property, to-wit, 1) existing lienholders
and lenders ... (2) prospective lienholders and purchasers, and (3) property owners and
borrowers whose loans have been satisfied. Plaintiffs fall outside of these categories. As
such, following Christian County, they have no right of action under Kentucky law to
assert alleged violations of the KRS 382.360.
The fact that Plaintiff are counties, rather than county clerks, as were the plaintiffs
in Christian County, is of no moment and, as Defendants note, "a distinction without a
difference." Under Kentucky law, the "only" way of stating a statutory claim where no
7

right of action exists is through KRS 446.070. Christian County, 2013 WL 565198, at *4;
see also id. at *7 (KRS 446.070 is the "exclusive remedy for a statutory violation where
the underlying statute does not provide a remedy"). KRS 446.070 allows for a private
right of action only for persons the General Assembly sought to protect

in the case of

the recording statutes, persons with interests in land. Christian County, 2013 WL 565198,
at *5. Neither counties or county clerks fall within the categories articulated by the Sixth
Circuit and, thus, neither group can maintain a cause of action for violation of KRS
382.360.
4.

The various statutes regarding the administration of fiscal courts and
the duties of county attorneys do not create a private right of action.

In an effort to elude the grasp of Christian County, Plaintiffs contend that other
statues provide a private right of action against Defendants. First, Plaintiffs incorrectly
rely upon KRS 69.210 in maintaining their right to sue. Section 69.210 is entitled "Duties
of county attorney," and it designates the county attorney as the person who litigates cases
for or against a county. It provides:
[A county attorney] "shall ...when so directed by the fiscal court or
consolidated local government ... institute, defend, and conduct all civil
actions in which the county or consolidated local government is interested."
KRS 69.210(1).
Section 69.210, however, does not create substantive rights. Under Kentucky law a
county attorney may only use KRS 69.210 to exercise substantive rights granted
8

elsewhere by the General Assemb ly. As KRS 69.210 does create new rights, it does not
allow counties to enforce recording statutes because the General Assembly has conferred
a cause of action only to persons with interests in real property. Christian County, 2013
WL 565198, at *6.
Plaintiffs also claim that they can maintain this suit under KRS 67.080(1)(d),
which provides that a fiscal court may "[r]egulate and control the fiscal affairs of the
county." Plaintiffs' argument fails because KRS 67.080 specifies that "[t]he fiscal court
shall not exercise executive authority except as specifically assigned by statute." KRS
67.080(3)(emphasis added).
KRS 64.012 likewise creates no right of action for counties to sue; it instead
merely lists the amounts of fees that clerks may assess when a person chooses to record a
document and the clerk performs a service and records the document. KRS 64.012 ("The
county clerk shall receive for the following services the following fees ....") (emphasis
added). Indeed, in Christian County the clerks argued that lack of recording of mortgage
assignments deprived them of "substantial fees" ; the Sixth Circuit nonetheless found no
private right of action to enforce the recording statutes. 2013 WL 565198, at *3.
Finally, Plaintiffs cite KRS 64.350 in another attempt to divine a right of action.
KRS 64.350 describes how recording fees are distributed when a party records a
document and pays a fee but provides no private right of action to a county.
The General Assembly passed detailed land recording statutes. It created express
9

rights of action in favor of specific parties in specific circumstances, none of which are
present in this case. As Christian County made abundantly clear, an action can only be
implied if it is based upon ownership interests in real property, which Plaintiffs do not
have.

B.

Plaintiffs cannot maintain an action for violation of KRS. 434.155.
Plaintiffs claim for violation of KRS 434.155 is equally unavailing. This statute,

entitled "filing illegal lien," provides:
A person is guilty of filing an illegal lien when he files a document or lien
that he knows or should have known was forged, groundless, contained a
material misstatement, or was a false claim. It shall be an affirmative
defense that any material misstatement was not intentional.
KRS 434.155(1).
This is, however, a criminal statute. It is axiomatic that a criminal statute cannot
be used as a the basis for civil liability where not provided by statute. The only
enforcement language in this statute is in the second subsection: "(t)iling an illegal lien is
a Class D felony for the first offense, a Class C felony for any second offense, and a Class
B felony for any subsequent offense." KRS 434.155(2). Without amending the statute,
KRS 434.155 cannot be Plaintiffs vehicle by which to hold Defendants liable for civil
damages. See Marx v, Centran Corp., 747 F.2d 1536, 1549 (6th Cir. 1984) ("[W]here
there is a bare criminal statute, with absolutely no indication that civil enforcement of any
kind was available to anyone, a private cause of action will not be inferred.").

10

C. Plaintiffs remaining claims fail as a matter oflaw.
Plaintiffs also allege common law claims for fraud, unjust enrichment, and civil
conspiracy. However, the facts alleged herein are insufficient upon which to maintain
these claims.

1.

Plaintiffs cannot state a claim upon relief can be granted for fraud.

In order to state a viable claim for fraud, Plaintiffs must plead factual allegations
demonstrating (l) Defendants made a material representation of an existing fact; (2) the
representation was false; (3) Defendants knew the representation was false; (4) the
representation was "made with inducement to be acted upon;" (5) the representation was
acted upon; and (6) the representation caused injury. Farmers Bank & Trust Co. v.
Willmott Hardwoods, Inc., 171 S.W.3d 4, 11 (Ky. 2005). Further, these allegations must
be plead with particUlarity. Fed. R. Civ. P. 9(b). Plaintiffs' First Amended Complaint
provides no particulars but, rather, simply alleges "Defendants" "systematically and
purposefully misrepresented ... their true interests in mortgages registered in each
county's registration system" [Docket No. 88 at'll 116]. This bald assertion does not come
within striking distance of Rule 9(b). For this reason alone requires dismissal of the
fraud claim.
The claim for fraud fails in substance, as well as form. Plaintiffs fail to allege any
of the essential elements of fraud. Notably, the First Amended Complaint is devoid of an
allegation that Defendants knew or were reckless as to the falsity of any statement. PCR
11

Contractors, Inc. v. Danial, 354 S.W.3d 610,615 (Ky. App. 2011). Indeed, because
Kentucky courts have recognized MERS' role as a valid mortgagee, Defendants had
every reason to believe that naming MERS as mortgagee, as nominee for lender and
lender's successors and assigns, was and is a true statement. There can be no fraud, per
se, in that.

2.

Plaintiffs cannot state a claim upon relief can be granted for unjust
enrichment.

Unjust enrichment is a cause of action" based upon an implied contract, creating
an obligation from the recipient of the benefits received to the one bestowing them, to
compensate him for whatever outlay he has made in bestowing them." Christian County,
2013 WL 565198, at *7 (quoting Durbin v. Bank ofBluegrass & Trust Co., 2006 WL
1510479, at *3 (Ky. App. Jun. 2, 2006) (unpublished)). To state a claim for unjust
enrichment, the complaint must allege that the plaintiff conferred a benefit upon the
defendant. Id. Plaintiffs do not contend that they conferred any benefit on Defendants,
but rather accuse the Defendants of wrongfully conferring a benefit upon themselves.
The Sixth Circuit explicitly rejected the unjust enrichment claim in Christian County for
this exact reason

that "the Clerks d[id] not allege that they conferred any benefit to

Defendants, but that Defendants 'conferred a benefit upon themselves' by circumventing
the recording statutes." Christian County 2013 WL 565198, at *8. The Sixth Circuit
further recognized that any benefit "would be derived from Kentucky law, not from the
Clerks themselves." Id.
12

3.

Plaintiffs cannot state a claim upon relief can be granted for civil
conspiracy.

Under Kentucky law, "civil conspiracy is not a free-standing claim; rather it
merely provides a theory under which a plaintiff may recover from multiple defendants
for an underlying tort."

Christian County 2013 WL 565198, at *7. As Plaintiffs' claims

under KRS 382.360 and 434.155 fail, the conspiracy claim should be dismissed.
IV.

CONCLUSION
That Plaintiffs take umbrage with Defendants' tactics is not entirely unfounded.

However, it is not within this Court's jurisdiction to speak where the General Assembly
has been silent or to enable an end-run around s statutory system. "[W]ithout legislative
intent, a cause of action does not exist and courts may not create one, no matter how
desirable that might be as a policy matter, or how compatible with the statute." Alexander
v. Sandoval, 532 U.S. 275, 286-87 (2001).
Having found that Plaintiffs' First Amended Complaint fails to state any claim
upon which relief can be granted, IT IS HEREBY ORDERED Defendants' Motion to
Dismiss the First Amended Complaint [Docket No. 105] be SUSTAINED and this matter
be DISMISSED WITH PREJUDICE and STRICKEN from the Docket ofthis Court.
This 25 th day of November, 2013.

s,-tedBr

Henry R.• tt Jr,
united States Dtstnct Judgt
13