California Courts Uphold MERS Serving as Nominee for Lenders
In Fontenot v. Wells Fargo Bank (2011) 198 Cal.App.4th 256, the court discussed a subsidiary argument as follows: "Plaintiff also argues any purported assignment by Mortgage Electronic Registrations System (MERS) was invalid under the common law of secured transactions.
Her argument rests on the general principle that because the security for a debt is 'a mere incident of the debt or obligation which it is given to secure' , the assignment of an interest in the security for a debt is a nullity in the absence of an assignment of the debt itself. The assignment of the deed of trust, however, expressly stated that MERS assigned its interest in the deed of trust 'together with the note or notes therein described or referred to.' Accordingly, to plead a claim on this ground plaintiff was required to allege this assignment to HSBC was invalid. Because, as discussed above, plaintiff failed adequately to plead such invalidity, she failed to state a cause of action for wrongful foreclosure on the ground HSBC did not receive an assignment of both the note and its security." (Id. at p. 271.)
In Fontenot, the court said: "Plaintiff's claim against MERS challenges an aspect of the 'MERS System,' a method devised by the mortgage banking industry to facilitate the securitization of real property debt instruments. As described in Mortgage Electronic Registration Systems v. Nebraska Dept. of Banking & Finance (2005) 270 Neb. 529 704 N.W.2d 784, MERS is a private corporation that administers a national registry of real estate debt interest transactions.
Members of the MERS System assign limited interests in the real property to MERS, which is listed as a grantee in the official records of local governments, but the members retain the promissory notes and mortgage servicing rights. The notes may thereafter be transferred among members without requiring recordation in the public records. Ordinarily, the owner of a promissory note secured by a deed of trust is designated as the beneficiary of the deed of trust.
Under the MERS System, however, MERS is designated as the beneficiary in deeds of trust, acting as 'nominee' for the lender, and granted the authority to exercise legal rights of the lender. This aspect of the system has come under attack in a number of state and federal decisions across the country, under a variety of legal theories. The decisions have generally, although by no means universally, found that the use of MERS does not invalidate a foreclosure sale that is otherwise substantively and procedurally proper." (Fontenot, supra, 198 Cal.App.4th at p. 267.)
In Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, the court sustained a demurrer without leave to amend. It stated: "The role of MERS is central to the issues in this appeal. As case law explains, 'MERS is a private corporation that administers the MERS System, a national electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans. Through the MERS System, MERS becomes the mortgagee of record for participating members through assignment of the members' interests to MERS.
MERS is listed as the grantee in the official records maintained at county register of deeds offices. The lenders retain the promissory notes, as well as the servicing rights to the mortgages. The lenders can then sell these interests to investors without having to record the transaction in the public record. MERS is compensated for its services through fees charged to participating MERS members.' 'A side effect of the MERS system is that a transfer of an interest in a mortgage loan between two MERS members is unknown to those outside the MERS system.' The deed of trust that Gomes signed states that 'Borrower (i.e., Gomes) understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property . . . .'" (Gomes, supra, 192 Cal.App.4th at p. 1151.)
Subsequently, in Robinson v. Countrywide Home Loans, Inc. (2011) 199 Cal.App.4th 42 (Robinson), Fourth Dist., Div. 2, we quoted Gomes and held that, "In Gomes, the court concluded that the plaintiff failed to identify a legal basis for an action to determine whether MERS had authority to initiate a foreclosure proceeding. We agree with the Gomes court that the statutory scheme does not provide for a preemptive suit challenging standing. Consequently, plaintiffs' claims for damages for wrongful initiation of foreclosure and for declaratory relief based on plaintiffs' interpretation of section 2924, subdivision (a), do not state a cause of action as a matter of law. " (Id. at p. 46.)
In Jenkins v. J.P. Morgan Chase Bank (2013) 216 Cal.App.4th 497, the court described these issues as follows: "The crux of Jenkins's lawsuit is based on her theory her loan was pooled with other home loans in a securitized investment trust, which is purportedly now managed by B of A, as the acting trustee, without proper compliance with the investment trust's pooling and servicing agreement.
Her FAC alleged the failure to comply with the pooling and servicing agreement extinguished the security interest created by her execution of the deed of trust in 2007 and, therefore, Defendants now have no secured interest to foreclose upon. Additionally, Jenkins's FAC alleged Defendants violated numerous state and federal laws with regard to the servicing of her loan and the initiation of nonjudicial foreclosure." (Jenkins, supra, 216 Cal.App.4th at p. 505.)
The appellate court affirmed the trial court's decision that "Jenkins failed to state a basis for declaratory relief because (1) production of the note is not required to perfect foreclosure; (2) Jenkins was not a party or a third party beneficiary to the securitized investment trust's pooling and servicing agreement; and (3) California does not recognize a preemptive suit challenging a foreclosing party's right or ability to foreclose." (Jenkins, supra, 216 Cal.App.4th at p. 505.)
In Gomes v. Countrywide Home Loans, Inc., supra, 192 Cal.App.4th 1149, a home purchaser, Jose Gomes, obtained a loan in 2004 from KB Home Mortgage and, in return, executed a promissory note secured by a deed of trust in favor of KB Home Mortgage, as the lender, and Mortgage Electronic Registration Systems (MERS) as the beneficiary and nominee for the lender. (Id. at p. 1151.)
MERS is a private entity that tracks transfers of ownership interests nationally without the need to record the transactions in the public records. (Ibid.) Gomes defaulted on his loan, and an agent of MERS recorded a notice of default on the property and initiated the nonjudicial foreclosure process. (Ibid.) Gomes filed a lawsuit challenging the foreclosure and seeking a declaration that the foreclosing entity was not authorized to foreclose because it owned no beneficial interest in the loan. (Id. at p. 1152.)
The trial court sustained the defendants' demurrer, and Division One of the Fourth Appellate District affirmed. (Id. at p. 1150.) The appellate court concluded that Gomes's request for declaratory relief had no legal basis because the nonjudicial foreclosure statutory scheme does not provide for a judicial action to determine whether the foreclosing party was authorized to initiate foreclosure. (Id. at pp. 1155-1156.)
In Jenkins v. JP Morgan Chase Bank, N.A., supra, 216 Cal.App.4th 497, a home purchaser, Diane Jenkins, obtained a loan in 2007 and in return executed a promissory note, secured by a deed of trust in favor of the lender, Washington Mutual Bank. (Id. at p. 504.) In 2008, Washington Mutual collapsed and was placed into the receivership of the Federal Deposit Insurance Corporation (FDIC). (Ibid.) The FDIC assigned Washington Mutual's loan portfolio to Chase Bank. (Ibid.)
Jenkins defaulted on her loan in April 2010, and then filed a lawsuit to avoid a bank-initiated nonjudicial foreclosure, claiming the bank lacked standing to foreclose because her loan had been placed into a mortgage trust pool without proper compliance with the trust's PSA. (Id. at pp. 504-505.) The trial court sustained Chase's demurrer, and Division Three of the Fourth Appellate District affirmed. (Id. at p. 503.)
The appellate court held that the statutory scheme governing nonjudicial foreclosure is intended to be comprehensive and does not require the foreclosing party to prove it holds a beneficial interest in the promissory note or deed of trust. (Id. at p. 513.)
The court held Jenkins lacked standing to challenge compliance with the assignment because she was not a party to it. (Ibid.)