Monday, September 9, 2013

FYI: Cal App Ct Rejects Borrowers' Challenges to MERS, and Other Alleged Defects in Foreclosure Process

In an action by borrowers challenging the authority of parties involved in the foreclosure process, the California Court of Appeal, Second Appellate District, recently held:


(1) the borrowers could not maintain a preemptive judicial action challenging the authority of the foreclosing "beneficiary" or beneficiary's "agent;"


(2) the borrowers failed to adequately allege that MERS lacked authority to assign the note and deed of trust;


(3) a substitute trustee may record a notice of default as an agent of the beneficiary;


(4) the borrowers lacked standing to complain about any lack of authority or defective assignment in the foreclosure process, because they did not dispute they were in default of the note, and consequently failed to allege any injury resulting from any irregularity in the foreclosure process; and


(5) the borrowers failed to establish any prejudicial error resulting from the trial court's ruling sustaining the lender defendants' demurrer with respect to the borrowers' breach of contract, unfair business practices and quiet title claims, because the error complained of was not the basis for the trial court's ruling and leave to amend was properly denied.


A copy of the opinion is available at:


The borrowers executed a deed of trust in June 2004 against their primary residence. The deed of trust secured a $280,000 promissory note in favor of the lender.  The deed of trust stated that "MERS is a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns.  MERS is the beneficiary under this Security Instrument."  It also 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."


The substitute trustee recorded a notice of default and election to sell under deed of trust. The notice of default stated that the substitute trustee was acting as agent for the beneficiary. A Corporate Assignment of Deed of Trust was recorded, stating that MERS was assigning to the assignee loan owner the deed of trust "[t]ogether with the note or notes therein described or referred to . . . ."  The substitute trustee recorded a notice of trustee's sale.  The trustee's sale was postponed.


The borrowers filed suit against MERS, the substitute trustee, and the assignee loan owner. They alleged among other things that (1) MERS supposedly had no authority to assign the deed of trust and the note to the assignee loan owner; (2) the assignee loan owner supposedly had no authority to commence a nonjudicial foreclosure because it was never validly assigned and did not possess the promissory note; (3) the lender defendants supposedly failed to comply with the statutory requirement of attempting to contact the borrower in person or by telephone to assess the borrower's financial situation and explore options to avoid foreclosure before recording a notice of default (California Civ. Code, § 2923.5(a)(2));  (4) the notice of trustee's sale supposedly was recorded before the expiration of the 90-day waiting period required under former Civil Code § 2923.52(a); and  (5) the substitute trustee supposedly failed to timely post a notice of trustee's sale on the property and supposedly failed to timely notify them of the sale.


The assignee loan owner and MERS demurred. They argued that the borrowers failed to state any valid cause of action because the borrowers failed to allege that they had tendered the amount due. They also argued, among other things, that (1) the borrowers' attacks on the lender defendants' authority to act in connection with the foreclosure were groundless; (2) the declaration in the notice of default satisfied Civil Code § 2923.5(a)(2) and (3), and former Civil Code § 2923.52 was inapplicable; (4) the borrowers had suffered no injury and therefore lacked standing under the unfair competition law; and (5) the borrowers were not entitled to quiet title.


The trial court sustained the demurrer without leave to amend as to the entire complaint with the exception of that part of the second count alleging the violation of Civil Code § 2923.5. Subsequently, the borrowers requested dismissal without prejudice of their second count, and the trial court granted the request.  The borrowers appealed.


The Appellate Court first examined whether the borrowers could maintain a preemptive judicial action challenging the defendants' ability to foreclose without a specific factual basis.  As you may recall, the purpose of California's nonjudicial foreclosure scheme is: (1) to provide the creditor/beneficiary with a quick, inexpensive and efficient remedy against a defaulting debtor/trustor; (2) to protect the debtor/trustor from wrongful loss of the property; and (3) to ensure that a properly conducted sale is final between the parties and conclusive as to a bona fide purchaser.  See, e.g., Moeller v. Lien (1994) 25 Cal.App.4th 822, 830.  Because of the exhaustive nature of this scheme, California courts have refused to read any additional requirements into the non-judicial foreclosure statute.  See, e.g., Lane v. Vitek Real Estate Industries Group (E.D.Cal. 2010) 713 F.Supp.2d 1092, 1098.


The Appellate Court noted that California courts have refused to allow borrowers to delay the nonjudicial foreclosure process by pursuing preemptive judicial actions challenging the authority of a foreclosing "beneficiary" or beneficiary's "agent."  See, e.g., Jenkins v. JPMorgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497; Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149.  Such an action is "preemptive" if the plaintiff alleges no specific factual basis for the claim that the foreclosure was not initiated by the correct person. See, e.g., Jenkins, supra, at 512. 


The Appellate Court concluded that allowing the borrowers to pursue such a preemptive action, without a specific factual basis alleging the foreclosure was not initiated by the correct party, would impermissibly interject the courts into the comprehensive nonjudicial scheme created by the legislature, and would impermissibly contravene the policy of providing a quick, efficient and inexpensive remedy in the nonjudicial foreclosure context.


Next, the Appellate Court analyzed whether the borrowers adequately alleged that MERS lacked authority to assign the deed of trust and note.  The borrowers argued that MERS had no authority to assign the deed of trust and note because: (1) any authority given to the originating nominee by the lender lapsed when the lender went out of business; (2) MERS had no authority to assign the note, and an assignment of a deed of trust without an assignment of the note is invalid as a matter of law; and (3) MERS required the lender's written authorization to assign the deed of trust and the note in order to satisfy the statute of frauds, and there is no evidence that MERS had such written authorization.


The Appellate Court ruled in favor of defendants, recognizing that California courts have held that a trustor who agreed under the terms of the deed of trust that MERS, as the lender's nominee, has the authority to exercise all of the rights and interests of the lender, including the right to foreclose, is precluded from maintaining a cause of action based on the allegation that the originating nominee has no authority to exercise those rights. The deed of trust itself established as a factual matter that MERS has the authority to exercise all of the rights and interests of the lender.


The borrowers argued that under California Civil Code § 2356, which states that an agent's authority terminates upon the death of the principal or the principal's incapacity to contract unless the agent's power is coupled with an interest in the subject of the agency, MERS's authority was terminated upon the lender's going out of business and filing for bankruptcy protection.


However, the Appellate Court noted that the borrowers failed to allege that the lender had gone out of business, dissolved or suffered either death or an incapacity to contract in any manner. Consequently, the borrowers did not allege facts showing any lapse in MERS's authority to assign the deed of trust and the note on this basis.


The Appellate Court also held that the borrowers failed to allege facts supporting the conclusion that MERS lacked authority to assign the note. "The extent of MERS's authority as a nominee was defined by its agency agreement with the lender, and whether MERS had the authority to assign the lender's interest in the note must be determined by reference to that agreement. The borrowers alleged that "[MERS] did not and could not have assigned the Promissory Note to [the assignee loan owner]," but they alleged no specific factual basis for this claim.


The Appellate Court concluded that absent a specific factual basis, this claim amounts to a preemptive claim seeking to require the foreclosing party to demonstrate in court its authority to initiate a foreclosure. The Second District held that such a claim is invalid and subject to demurrer.


Similarly, the Appellate Court held that a claim that there is no evidence that MERS had written authorization to assign the deed of trust and the note is merely an impermissible challenge to the foreclosing party to prove in court its authority to initiate a foreclosure.


Next, the Appellate Court analyzed whether the substitute trustee had the authority to record the notice of default.  The borrowers argued the substitute trustee had no authority to record the notice of default because it was not the trustee at the time.  The Court noted that under Civ. Code § 2924(a)(1), a notice of default may be recorded by a "trustee, mortgagee, or beneficiary, or any of their authorized agents." In this case, the notice of default stated that the substitute trustee recorded the notice of default not as trustee but as agent for the beneficiary, which was proper.


The Appellate Court also held that the borrowers failed to allege any facts showing that they suffered prejudice as a result of any supposed lack of authority of the parties participating in the foreclosure process. The borrowers did not dispute that they were in default under the note. The assignment of the deed of trust and the note did not change the borrowers' obligations under the note, and the borrowers provided no reason to believe that the original lender would have refrained from foreclosure in these circumstances.  Without any injury, the Appellate Court concluded the borrowers had no standing to complain about any alleged lack of authority or defective assignment.


Finally, the borrowers argued that they are entitled to leave to amend their counts for breach of contract and unfair business practices and contend they have adequately alleged a count for quiet title. According to the Appellate Court, these contentions were based on the trial court's discussion in a latter part of the order ruling on the demurrer. The Appellate Court concluded that because the trial court did not expressly rely on this section of the ruling in denying leave to amend, the borrowers had shown no prejudicial error.


Accordingly, the Appellate Court affirmed the trial court's ruling in favor of MERS and the assignee loan owner.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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