Saturday, July 19, 2014

FYI: 9th Cir Issues Mixed Ruling in MERS Multidistrict Litigation Appeal, Upholds Dismissal of Most of Claims

The U.S. Court of Appeals for the Ninth Circuit recently dismissed in part, reversed in part, and affirmed in part, an appeal from the dismissal of numerous allegations in multidistrict litigation challenging the role of MERS in the foreclosure process.  The Ninth Circuit reversed the dismissal of a claim alleging violations of Arizona's false documents statute, but otherwise upheld the dismissal of the remaining claims.


Various borrowers residing in several states sued various financial institutes who used Mortgage Electronic Registration Systems, Inc. ("MERS") to process the notes and deeds of trust executed by the borrowers. 

These lawsuits were consolidated by the Judicial Panel on Multidistrict Litigation and transferred to a Multidistrict Litigation Court ("MDL Court") in Arizona.  After the MDL Court dismissed several of the actions transferred to it, plaintiffs in the remaining actions filed a single Consolidated Amended Complaint ("CAC").  The MDL Court dismissed the CAC with prejudice, and the borrowers appealed. 

On appeal, the Ninth Circuit considered allegations of: (1) violation of Arizona's false documents statute, in connection with allegations of "robosigning"; (2) wrongful foreclosure in violation of Arizona, California and Nevada law, in connection with allegations that MERS impermissibly "splits" ownership of the note from ownership of the deed of trust; (3) allegations of improper nonjudicial foreclosures in violation of Nevada law; (4) allegations of aiding and abetting wrongful foreclosure under Arizona, California and Nevada law; and (5) allegations of aiding and abetting predatory lending under Arizona, California and Nevada law.

The Ninth Circuit considered each in turn, beginning with the plaintiffs' claim that alleged "robosigned" documents violated Arizona's false documents statute, Ariz. Rev. Stat. Sec. 33-420. 

Among other reasons, the MDL Court dismissed this count based on its holding that Ariz. Rev. Stat. Sec. 33-420 does not apply to the documents alleged to be false - including an assignment of a deed of trust, and a notice of substitution of trustee - and that  because the plaintiffs did not dispute their default, they had not suffered a concrete and particularized inquiry. 

The Ninth Circuit reversed the MDL Court's dismissal based on a change in law, noting that in a recent decision, the Arizona Court of Appeals determined that a damages claim is available under Arizona's false documents statute where a borrower alleges that a notice of substitution of trustee and assignment of deed of trust are false. See Stauffer v. U.S. Bank National Ass'n, 308 P.3d 1173, 1175 (Ariz. Ct. App. 2013).  The Stauffer decision also provided that borrowers in default did have standing to bring allegations under Sec. 33-420.  Because the allegations at issue in Stauffer closely resembled the borrowers' allegations here, the Ninth Circuit reversed the MDL Court's dismissal.   

The Ninth Circuit affirmed the MDL's dismissal of the remaining causes of action. 

As to the count alleging wrongful foreclosure in connection with "note-splitting" - allegedly in violation of Nevada, California and Arizona law - the Ninth Circuit found that claims failed because "none of the [borrowers] has shown a lack of default, tender, or an excuse from the tender requirement, [borrowers'] wrongful foreclosure claims cannot succeed." 

Next, the Ninth Circuit considered the borrowers' allegations of improper nonjudicial foreclosures in violation of Nev. Rev. Stat. Sec. 107.080.  Specifically, the borrowers alleged that MERS was not the "true beneficiary" under the deed of trust, because it disclaimed any right to an interest in the property or proceeds of the loan.  Thus, the borrowers argued that the parties issuing the notices of default or trustee's sale were neither the beneficiary nor the trustee appointed by the lender, in alleged violation of Nevada law. 

The Ninth Circuit again disagreed with the plaintiffs, ruling that Edelstein v. Bank of New York Mellon, 286 P.3d 249 (Nev. 2012) "makes clear that MERS does have the authority, for the purposes of Nev. Rev. Stat. Sec. 107.080, to make valid assignments of the deed of trust to a successor beneficiary..." 

Having found that the borrowers' allegations of wrongful foreclosures under Arizona, California and Nevada law were without merit, the Ninth Circuit had little difficulty in rejecting the related claim of aiding and abetting wrongful foreclosure. 

Finally, the Ninth Circuit affirmed the dismissal of the borrowers' claim of aiding and abetting predatory lending - finding that the MDL Court's determination that these claims did not relate to the formation and operation of the MERS system was correct. 

The Ninth Circuit therefore reversed and remanded the MDL's dismissal of the count concerning alleged violations of Arizona's false documents statute, and otherwise affirmed the MDL's dismissal of the remaining counts.




Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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