Wednesday, April 23, 2014

FYI: Cal App Ct Rejects Another MERS-based Challenge to Foreclosure Sale

Tuesday, May 22, 2012

The California Court of Appeal, Fourth District recently rejected allegations that a foreclosure sale was conducted improperly, and in so doing held that where MERS' status as beneficiary is not reasonably subject to dispute, it is presumed that MERS has the authority to assign the security instrument and the note. 
 
A copy of the opinion is available at:
 
The borrowers defaulted on their home loan.  The security instrument for that loan ("DOT") named Mortgage Electronic Registration Systems ("MERS") as beneficiary, acting as nominee for the lender.  The DOT further provided that MERS had, among other things, the right to foreclose and sell the subject property, and otherwise to "take any action required of Lender..." 
 
The lender's assets were transferred to the Federal Deposit Insurance Corporation ("FDIC"), and were subsequently sold to a third party (the "loan owner").  MERS then executed an assignment transferring all interests in the DOT and the note to the loan owner.  The loan owner also executed a document naming a new entity trustee of the DOT (the "trustee").  The loan owner then assigned its interest in the DOT and note to Fannie Mae. 
 
The trustee then recorded a notice of trustee's sale, and the subject property was sold and reverted to Fannie Mae in a nonjudicial foreclosure sale. 
 
The borrowers filed suit, seeking to set aside the foreclosure sale.  Fannie Mae demurred to the borrowers' complaint, which the trial court ultimately granted as to each cause of action laid out in the complaint.  The borrowers appealed. 
 
The borrowers raised several issues on appeal, including among others: (1) whether the assignments of the DOT and note from MERS to the loan owner and from the loan owner to Fannie Mae were valid; and (2) whether the substitution of trustee was valid.
 
The Court ruled in favor of Fannie Mae as to both arguments.   
 
The borrowers' arguments regarding the invalidity of the assignments hinged on various allegations related to MERS.  Specifically, the borrowers alleged among other things that MERS had no agency relationship with FDIC; that the individual who executed the assignment of the DOT from MERS to the loan owner in fact worked for the loan owner, not MERS; and that that assignment was invalid because it allegedly took place after the lender had dissolved.
 
The Court rejected these arguments, relying heavily on the fact that the DOT provided that MERS had the right to exercise all interests and rights held by the lender and its successors.  Further, the Court cited case law providing that where MERS's status as beneficiary was "not reasonably subject to dispute," it is presumed that MERS had the authority to assign both the DOT and the Note.  Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 268-70.
 
In addition, the Court noted that to state a claim, the borrowers were required to allege not only that MERS's assignment was invalid, but also that Fannie did not receive an assignment in any other manner.  Specifically, the Court observed that the owner or Fannie Mae could have received an unrecorded assignment of the note, "who then would have had the authority to foreclose, regardless of MERS's assignment of the DOT." 
 
Therefore, the Court held that the borrowers "failed affirmatively to plead specific facts demonstrating the sale was invalid."
 
The Court used similar reasoning to reject the borrowers' substitution of trustee argument.  That argument rested on the borrowers' contention that the assignment of the DOT to the loan owner was void.  Because the Court rejected that contention, it concluded that "there was no showing that the substitution of trustee was void." 
 
Although it disposed of the above-referenced allegations on other grounds, the Court found an additional defect with the borrowers' arguments: even if the borrowers could show that the assignments in question were invalid, they did not establish that they were prejudiced by these alleged infirmities.  Because the borrowers did not contest that they defaulted on their home loan, the Court observed that "if MERS lacked authority to assign the note...the true victims were not [the borrowers] but the lender."
 
Accordingly, the Court affirmed the decision of the lower court.  



Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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