The following is a recent case update by Professor Dan Schechter, Loyola School of Law.
Foreclosure Is Valid Because MERS Has Power to Designate New Trustee under Deed of Trust,
Even Though It Holds No Interest in Underlying Note.
A district court in California has held that MERS had the power to designate a new trustee under a deed of trust (thus validating the designee's foreclosure), even though neither MERS nor the designee held any interest in the underlying promissory note. [Lane vs. Vitek Real Estate Industries Group, 2010 Westlaw 1956707 (E.D. Cal.).]
Facts: Two borrowers filed suit against their mortgage lenders and Mortgage Electronic Registration Systems, Inc. ("MERS"), claiming that the defendants had wrongfully conducted a nonjudicial foreclosure sale of the borrowers' home. MERS had been initially designated as the "nominal beneficiary" under the deed of trust and had then executed a substitution of trustee in favor of another entity, following the borrowers' default.
As part of the borrowers' wrongful foreclosure claim, they asserted that the foreclosure was improper because none of the parties to the foreclosure were beneficiaries of the underlying note and instead held interests in the deed of trust. MERS moved to dismiss that aspect of the borrowers' claim.
Reasoning: The court ruled in favor of MERS, holding that MERS and its assignees could foreclose on the deed of trust, even though MERS held no interest in the underlying note:
Under California Civil Code section 2924(a)(1), a “trustee, mortgagee or beneficiary or any of their authorized agents” may conduct the foreclosure process. Under California Civil Code section 2924b(4), a “person authorized to record the notice of default or the notice of sale” includes “an agent for the mortgagee or beneficiary, an agent of the named trustee, any person designated in an executed substitution of trustee, or an agent of that substituted trustee.” . . . . There is no stated requirement in California's nonjudicial foreclosure scheme that requires a beneficial interest in the Note to foreclose. Rather, the statute broadly allows a trustee, mortgagee, beneficiary, or any of their agents to initiate nonjudicial foreclosure. Accordingly, the statute does not require a beneficial interest in both the Note and the Deed of Trust to commence a nonjudicial foreclosure sale.
This interpretation is consistent with the rulings of this court, along with many others, that MERS has standing to foreclose as the nominee for the lender and beneficiary of the Deed of Trust and may assign its beneficial interest to another party.
AUTHOR'S COMMENT: Although there is some disagreement across the country on this issue (see below), the emerging trend in California is to validate the role of MERS as a nominee. The court in Lane relied primarily upon the wording of the statute to reach that result. However, Stephen Dyer (one of my four co-authors of California Real Estate Finance) has alerted me to a possible contractual glitch resulting from Paragraph 24 of the standardize Freddie Mac form, used throughout California, which provides: "Lender, at its option, may from time to time appoint a successor trustee to any Trustee appointed hereunder by an instrument executed and acknowledged by Lender and recorded in the office of the Recorder of the county in which the Property is located . . . . This procedure for substitution of trustee shall govern to the exclusion of all other provisions for substitution." [Source:http://www.freddiemac.com/uniform/doc/3005-CaliforniaDeedofTrust.doc.]
The problem, of course, is that MERS is not identified as the "lender" in that form, and the "lender" is defined as the originating lender itself. Therefore, although the statute would appear to empower an agent (such as MERS) to execute a substitution of trustee, the current wording of the contract itself seems more restrictive, empowering no one other than the originating lender to execute a substitution of trustee.
Ideally, the Freddie Mac form should be amended to make it clear that MERS is authorized to appoint a successor. Admittedly, an amendment would not retroactively solve the problem under the existing documentation. My guess is that if a California court were presented with this contractual argument, the court would probably use the wording of the statute to empower MERS, as the agent of the lender, to act on its behalf, even if the document itself did not say so. The only caveat is that there are a few bankruptcy courts, primarily in Southern California, that have subjected MERS transactions to very strict scrutiny; those courts might not rescue the lender from the effect of the Freddie Mac language.
For discussions of other cases involving MERS and its standing as an agent or nominee, see:
-- 2009 Comm. Fin. News. 103, Assignee of Mortgage Lacks Standing to Foreclose Because Assignee Failed to Show That MERS Assigned Underlying Promissory Note, Along with Mortgage.
-- 2009 Comm. Fin. News. 72, Senior Lienholder's Failure to Give Notice of Foreclosure to MERS Did Not Affect Validity of Senior's Foreclosure Because MERS Was Merely a Nominee.
-- 2009 Comm. Fin. News. 59, Assignees of Mortgages Cannot Enforce Unendorsed Notes in Their Possession Because MERS Documentation Does Not Expressly Authorize Assignment of Notes.
These materials were written by Professor Dan Schechter of Loyola Law School for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.