Mortgage Electronic Registration Systems, Inc. ("MERS") in a putative
class action challenging the MERS system under common law fraud and state
The Court also rejected the borrowers' equitable tolling argument as to
the TILA and state UDAP statute of limitations, based upon the borrowers
speaking only Spanish but their loan documents being only in English. In
addition, the Court held that providing an unaffordable loan to a borrower
was not "extreme and outrageous" as is required to state a claim for
intentional infliction of emotional distress.
A copy of the opinion is available at:
The three named plaintiffs in the case obtained home loans or refinanced
existing loans in 2006. The plaintiffs each executed a deed of trust in
favor of their lender, naming MERS as the "beneficiary" and as the
"nominee" for the lender and lender's "successors and assigns." The
plaintiffs do not speak or read English, and negotiated the mortgage loans
with their lenders in Spanish, but were provided with, and signed, copies
of their loan documents written in English.
The plaintiffs subsequently defaulted on their loans. Following default,
their respective lenders appointed trustees to initiate nonjudicial
foreclosure proceedings. MERS's beneficial interests in the deeds of
trust were all assigned to a foreclosure trustee.
The plaintiffs filed their putative class action, alleging conspiracy by
their lenders and others to use MERS to commit fraud. They also alleged
that their lenders violated the federal Truth in Lending Act ("TILA"), and
the Arizona Consumer Fraud Act ("ACFA"), and committed the tort of
intentional infliction of emotional distress ("IIED") by supposedly
targeting the plaintiffs for loans they allegedly could not repay when the
loans were extended.
The trial court dismissed the plaintiffs' first amended complaint, without
leave to amend. Further, the trial court denied leave to file a proposed
second amended complaint, and to add a new claim for wrongful foreclosure.
On appeal, the plaintiffs only addressed the district court's: (1)
dismissal of their claim for conspiracy to commit fraud through the MERS
system; (2) failure to address their oral request for leave to add a
wrongful foreclosure claim; (3) dismissal of the foreclosure trustee from
the suit; (4) denial of leave to amend their pleadings regarding equitable
tolling of their TILA and ACFA claims; and (5) dismissal of their claim
On appeal, the Ninth Circuit noted that the main premise of the
plaintiffs' lawsuit was that the MERS system impermissibly "splits" the
note and deed of trust by facilitating the transfer of the beneficial
interest in the loan among lenders while maintaining MERS as the nominal
holder of the deed. The Ninth Circuit rejected this theory.
The plaintiffs' lawsuit was also premised on the fact that MERS does not
have a financial interest in the loans, which, according to the
plaintiffs, renders MERS's status as a beneficiary a sham. The Ninth
Circuit rejected this theory, also.
With respect to the conspiracy to commit fraud claim, the plaintiffs
alleged that MERS members conspired to commit fraud by using MERS as a
sham beneficiary, supposedly promoting and facilitating predatory lending
practices through the use of MERS, and supposedly making it impossible for
borrowers or regulators to track the changes in lenders.
In upholding the lower court's ruling that the plaintiffs failed to state
a cause of action, the Ninth Circuit held "[t]he plaintiffs' allegations
fail to address several of [the] necessary elements for a fraud claim."
Specifically, the plaintiffs failed to identify any false representations
made to them about the MERS system, and failed to allege they relied on
misrepresentations about MERS in deciding to enter into their home loans.
Moreover, the Ninth Circuit found the plaintiffs' allegations were
undercut by the language in the standard deed of trust, which provided
that MERS was acting "solely as a nominee for Lender and Lender's
successors and assigns" and holds "only legal title to the interest
granted by Borrower in this Security Instrument." The Court held that
"[b]y signing the deeds of trust, the plaintiffs agreed to the terms and
were on notice of the contents." The Court further held that "[i]n light
of the explicit terms of the standard deed. . ., it does not appear that
the plaintiffs were misinformed about MERS's role in their home loans."
With respect to the wrongful foreclosure claim, the Ninth Circuit held
that "[t]he plaintiffs' oral request to add a wrongful foreclosure claim
was procedurally improper and substantively unsupported." The plaintiffs
based their wrongful foreclosure claim on the novel theory that "all
transfers of the interests in the home loans within the MERS system are
invalid because the designation of MERS as a beneficiary is a sham and the
system splits the deed from the note, and, thus, no party is in a position
The Court rejected this argument, holding "[e]ven if MERS were a sham
beneficiary, the lenders would still be entitled to repayment of the loans
and would be the proper parties to initiate foreclosure after the
plaintiffs defaulted on their loans." The Court further held that "the
notes and deeds are not irreparably split: the split only renders the
mortgage unenforceable if MERS or the trustee, as nominal holders of the
deeds, are not agents of the lenders."
With respect to the allegations against the foreclosure trustee, the Court
noted the only allegations the plaintiffs directed against the foreclosure
trustee was that the trustee supposedly "failed to recognize that its
appointment was invalid." The Ninth Circuit held the plaintiffs failed to
state a cause of action, because the trustee had an "'absolute right'
under Arizona law 'to rely upon any written direction or information
furnished to him by the beneficiary.'"
The plaintiffs also asserted that the district court failed to address the
equitable tolling of their purported claims under TILA and the ACFA. The
plaintiffs alleged their TILA claim should have been tolled because they
only speak Spanish, but received their loan documents in English. The
Court disagreed, finding "the plaintiffs have not alleged circumstances
beyond their control that prevented them from seeking a translation of the
loan documents that they signed and received."
Further, the Court also held that the plaintiffs failed to state a claim
for equitable estoppel because they "failed to specify what true facts are
at issue, or to establish that the alleged misrepresentation and
concealment of facts is 'above and beyond the wrongdoing' that forms the
basis for their TILA and [ACFA] claims."
Finally, with respect to the IIED allegations, the Ninth Circuit held the
plaintiffs failed to state a cause of action because they "essentially
allege that the lenders offered them loans that the lenders knew they
could not repay," which was not "extreme and outrageous" as is required to
state a claim for IIED.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
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