Sunday, January 8, 2012

FYI: 10th Cir Rejects Argument that MERS Had No Authority to Foreclosure w/o Authorization From Every Investor in Securitization

The U.S. Court of Appeals for the Tenth Circuit recently rejected a contention that "securitization of a note renders the holder of the underlying trust deed...unable to foreclose absent authorization by every investor holding an interest in the securitized note." 
A copy of the opinion is available at:
Commonwealth Property Advocates, LLC ("Commonwealth") acquired title to various properties in Utah from borrowers in default.  Commonwealth then sued various parties involved in the origination, servicing and ownership of the mortgage loans secured by those properties, arguing among other things that those parties had no authority to foreclose because the relevant notes had been securitized.  The defendants in each case filed motions to dismiss, which were granted by the lower court.  Commonwealth appealed.  The Tenth Circuit consolidated the cases for purposes of opinion. 
The Tenth Circuit noted numerous issues with Commonwealth's pleadings.  Specifically, the "causes of action" raised by Commonwealth were in fact forms of relief, and Commonwealth's statements of the issues raised on appeal "provide little help in determining what exactly [Commonwealth] is appealing."
Nevertheless, the Tenth Circuit determined that "the claim [Commonwealth] pursues on appeal is simply that Defendants had no authority to foreclose because they transferred the debt."  The Court construed this claim as "one for wrongful foreclosure under Utah law." 
Having determined the issues before it, the Court next considered the facts of the consolidated cases.  It observed that in each case, the relevant trust deeds provided Mortgage Electronic Registration System ("MERS") with the authority to foreclose and sell the property, and identified MERS as the nominee for the lender and the lender's successors.  Therefore, the Court noted that MERS appeared to have authority to foreclose. 
Commonwealth argued that the trust deed provisions were invalid, because they purportedly conflict with a Utah statute providing that "[t]he transfer of any debt secured by a trust deed shall operate as a transfer of the security therefor."  Utah Code Ann. Sec. 57-1-35.  Commonwealth claimed that as a result of the transfer of the note in the securitization process, MERS could no longer foreclose because they no longer had a security interest in the property.  Commonwealth further argued that MERS could only foreclose if they received written authorization from each investor to do so.   
The Tenth Circuit determined that Commonwealth's claims were without merit.  It noted that a Utah state court, considering similar allegations by the same plaintiff, held that the plaintiff had "failed to explain how the securitization of the Note could have revoked [the provision in the Deed of Trust providing MERS with the authority to foreclose]."  Commonwealth Prop. Advocates v. Morg. Elec. Registration Sys., Inc., 263 P.3d 397, 402 (Utah Ct. App. 2011). 
Further, the same state court held that the plain language of Sec. 57-1-35 "does nothing to prevent MERS from acting as nominee for Lender and Lender's successors...when it is permitted by the Deed of Trust." 403. 
Because this matter was before the Tenth Circuit on diversity jurisdiction, the Court deferred to the Utah Court of Appeals' prior opinion, and in so doing held that Commonwealth's claims "have no legal basis under Utah law."  Consequently, the Tenth Circuit affirmed the judgment of the lower court.  

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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Chicago, Illinois 60602
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