In related rulings in two different cases, the Supreme Court of the State of Oregon recently held that, under the Oregon Trust Deed Act ("OTDA"),
(1) MERS cannot be a beneficiary under a trust deed, as it is not the lender to whom the obligation that the trust deed secures is owed;
(2) Nor can MERS be conveyed "legal title" in a trust deed, because it was not conveyed the beneficial right to repayment;
(3) The OTDA's recording requirement does not apply to assignments of trust deeds by operation of law; and
(4) Although the OTDA does not allow MERS to hold and transfer "legal title" to a trust deed, it may have authority to act on behalf of the beneficiary if it can demonstrate that it had a sufficiently expansive agency relationship.
A copy of the opinion in Brandrup, et al. v. Recontrust Company, N.A., et al., is available at: http://www.publications.ojd.state.or.us/docs/S060281.pdf.
A copy of the opinion in Niday v. GMAC Mortgage, LLC, et al., is available at: http://www.publications.ojd.state.or.us/docs/S060655.pdf.
In Brandrup, the Oregon Supreme Court considered four certified questions of law from a U.S. district court. The questions all related to the practice of drafting mortgages and trust deeds that identify Mortgage Electronic Registration Systems, Inc. ("MERS"), as "mortgagee" or "beneficiary" rather than the lender, a practice which, has come "under scrutiny" in a number of foreclosures cases arising under the Oregon Trust Deed Act ("OTDA"). In each case considered in Brandrup, the borrowers had signed a promissory note pledging to repay the money borrowed, plus interest, and a deed of trust – also referred to as a trust deed – which secured payment of the note and other related promises. In relevant part, each trust deed stated:
The beneficiary of this Security Instrument is MERS (solely as nominee for Lender and Lender's successors and assigns) and the successors and assigns of MERS. This Security Instrument secures to Lender: (i) the repayment of the Loan, and all renewals, extensions and modifications of the Note, and (ii) the performance of Borrower's covenants and agreements under this Security Instrument and the Note… Borrower 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, and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.
As recounted by the Oregon Supreme Court in Brandrup, following the borrowers' defaults, MERS executed a written assignment of the trust deed to the "reputed ultimate successor in interest of the original lender," and recorded that assignment in the land records. Then, the assignees appointed a trustee, such assignment also being recorded, and initiated the nonjudicial foreclosure process under the trust deeds. In each case, borrowers sought to enjoin foreclosure, claiming that (1) the requirement under the OTDA that any assignment of a trust deed by the "beneficiary" be recorded had not been satisfied; and that (2) MERS's "purported" assignment of the trust deed was ineffective, because "the principal for whom MERS purported to act as 'beneficiary' did not hold plaintiff's loan at that date."
The OTDA provides a nonjudicial alternative to the foreclosure process, meaning that lenders, or their successors in interest, could exercise their right to sell the property to satisfy the borrower's obligation without filing suit. See ORS 88.010 (except as otherwise provided by law, lien upon real property shall be foreclosed by a suit). Nonjudicial foreclosure under the OTDA is only available when a home loan is secured by a trust deed, which "conveys an interest in real property to a trustee in trust to secure the performance of an obligation the grantor or other person named in the deed owes to a beneficiary." ORS 86.705(7). So long as certain conditions are satisfied, the trustee appointed under a trust deed may advertise and sell the property to the highest bidder without judicial involvement. See ORS 86.710; ORS 86.755.
One such condition, which was considered at length by the Oregon Supreme Court, involved the recording of "[t]he trust deed, any assignments of the trust deed by the trustee or the beneficiary and any appointment of a successor trustee in the mortgage records of the counties in which the property described in the deed is situated." ORS 86.735(1). The Court recognized that, although mortgages may be "assigned by an instrument in writing," ORS 86.060, they have also been held to "follow" the promissory notes that they secure, such that "by operation of law," the sale or transfer of the note effects an equitable transfer of the mortgage. See Bamberger v. Geiser, 24 Or. 203, 206-07 (1893). Although recording a mortgage or trust deed assignment is not required to make the transfer legally effective between the parties, it is "necessary and desirable" for protecting an assignee's interest under the security instrument against a purchaser in good faith for valuable consideration. See ORS 93.640; Williamette Col. & Credit Serv. V. Gray, 157 Or. 77, 83 (1937). However, as stated by the Court, the recordation of a trust deed assignment "by the trustee or the beneficiary" is required before the nonjudicial foreclosure procedures of the OTDA may be invoked. ORS 86.735(1).
In response to the four certified questions of law presented, the Oregon Supreme Court came to the following conclusions:
First, the Oregon Supreme Court held that, for the purposes of ORS 86.735(1), the "beneficiary" is the "lender to whom the obligation that the trust deed secures is owed," precluding an entity like MERS, which is not a lender, from being a trust deed's "beneficiary" unless it is the lender's successor in interest. In so holding, the Court considered the statutory definition of "beneficiary" as a person "named or otherwise designated in a trust deed as the person for whose benefit a trust deed is given." ORS 86.705. According to the Court, the OTDA contemplates a "unitary beneficiary status," such that the person with the right to repayment of the underlying obligation also controls the foreclosure process, which would be undermined by permitting another party to act as agent or nominee.
Although the lender defendants argued that, under the statute, parties to a trust deed could "name" or "designate" whomever they choose to serve as beneficiary, the Court disagreed that the designation of a beneficiary is "purely a matter of contract." It stated that the resolution of this question did not hinge on the parties' intent but on legislative intent, which cannot be altered by agreement. See e.g. Ocean A. & G. Corp., Ltd. v. Albina M.I. Wks., 260 P. 229 (1927).
Second, the Oregon Supreme Court held that, because MERS was not conveyed the beneficial right to repayment, the provision that MERS holds "legal title" in the trust deed and may exercise rights under it does not alter the trust deed's designation of the lender as beneficiary or make MERS eligible to serve in that capacity. The lender defendants argued that, by defining MERS as the beneficiary "acting solely as a nominee for Lender and Lender's successors and assigns," the trust deed clearly convey an intention that MERS act as agent for the lender or its successors. In response, the Court noted that, while the lender defendants support MER's authority to exercise all of lender's rights and interests, "the trust deed fails to speak to the one interest that an entity must have to qualify as a beneficiary under [the OTDA]." The Court reiterated that the beneficiary is the person to whom the obligation that the trust deed secures is owed. ORS 86.705(2). As interpreted by the Oregon Supreme Court, the trust deed does not convey to MERS the beneficial right to repayment of the secured obligation, thereby making MERS ineligible to serve as beneficiary.
Third, the Oregon Supreme Court was asked whether assignments "by operation of law" – where the promissory note is transferred and the mortgage follows – are included in the statutory recording requirement of ORS 86.735(1). Although the Court noted the text of the OTDA was "not conclusive" with respect to this issue, the Court found it significant that the recording requirement in ORS 86.735 assumes the existence of an assignment in recordable form, and that the transfer of a promissory note cannot serve that function. Considering the state of Oregon law at the time that the OTDA was enacted, the Court found that "assignments of the trust deed" under ORS 86.735 mean "written assignments that are executed and acknowledge… not a post hoc memorialization of a transfer of the secured obligation created solely for the purpose of recording." See Barringer v. Loder, 47 Or. 223, 230 (1905). Therefore, the Oregon Supreme Court held that the OTDA's recording requirement does not require recordation of assignments of trust deeds by operation of law.
Fourth, when asked whether the OTDA allows MERS to retain and transfer legal title to a trust deed as nominee for the lender after the note has been transferred, the Oregon Supreme Court split its analysis into two parts. As an initial matter, the Court held that the OTDA does not allow MERS to hold and transfer "legal title" to a trust deed. The logical interpretation of the OTDA, according to the Court, is that the trustee holds legal title to the lien conveyed by the trust deed and the beneficiary holds equitable title to that lien. As the Court had already established that MERS is neither trustee nor beneficiary, MERS holds "no interest at all in the lien conveyed by the trust deed."
However, the Oregon Supreme Court was unable to determine whether MERS may nevertheless have authority as an agent for the original lender and its successors to act on their behalves with respect to a transfer of interest under a trust deed. The lender defendants argued in the alternative that MERS had authority as an agent of the original beneficiary and any successor to take the steps required to carry out the nonjudicial foreclosure process. However, the Court found that the accuracy of that assertion depends on whether MERS qualifies as an agent under Oregon law. See Vaughn v. First Transit, Inc., 346 Or. 128, 136 (2009) (defining the agency relationship in Oregon). Furthermore, the Court held that the trust deeds themselves do not establish the necessary relationship and that the agency relationship depends on "evidence with respect to who ultimately holds the relevant interests in the notes and trust deeds, and whether that person and each of its predecessors in interest conferred authority on MERS to act on their behalves in the necessary respects." Finding such evidence not present in the record, the Oregon Supreme Court was unable to determine whether MERS acted with authority as an agent of the lender and its successors in interest.
In Niday, the Oregon Supreme Court applied its answers in Brandrup to a dispute that came before it on appeal. Similar to Brandrup, Borrower sued MERS, their lender, and others, arguing that no defendant had a legal or beneficial interest in the trust deed that would allow it to proceed to foreclosure under the OTDA. The trial court granted Defendants' motion for summary judgment and the Oregon Court of Appeals reversed. Finding a genuine issue of material fact to exist, albeit a different on from the Court of Appeals, the Oregon Supreme Court affirmed.
The Oregon Supreme Court's holdings in Niday were substantially similar to its conclusions in Brandrup. Ultimately, the Court found that an issue of fact remained as to whether MERS had authority to act for the lender's successors in interest. According to the Court, even if MERS lacks authority to act as beneficiary, it may have authority to act on behalf of the beneficiary if it can demonstrate that it had an agency relationship with the beneficiary that is "sufficiently expansive."
Although in Brandrup the Court addressed discussed that possibility that MERS would have authority to assign a trust deed, the Court held the same reasoning "would seem to apply equally" to the issue of MERS's authority to foreclose the trust deed. "In either case, MERS' authority to act as the beneficiary's agent depends on who succeeded to the lender's rights, whether those persons manifested consent that MERS act on their behalf and subject to their control, and whether MERS has agreed to so act."
Accordingly, in Niday, the Oregon Supreme Court affirmed the decision of the Court of Appeals, reversing the trial court's judgment and remanding the case for further proceedings.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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