The Washington Supreme Court recently held that MERS is not a valid "beneficiary" under Washington law, where MERS did not hold the relevant promissory note or other debt instrument secured by a deed of trust. The Court also allowed the borrower's claims under Washington's Consumer Protection Act to proceed, holding that "[w]hile we are unwilling to say it is per se deceptive, we agree that characterizing MERS as the beneficiary has the capacity to deceive..."
A copy of the opinion is available at http://www.courts.wa.gov/opinions/pdf/862061.opn.pdf.
The opinion recites that MERS appointed trustees to initiate nonjudicial foreclosure proceedings against multiple borrowers who defaulted on their home loans. Each deed of trust named MERS the beneficiary. A lower court judge requested that the Washington Supreme Court answer three certified questions: (1) Whether MERS is a lawful beneficiary under Washington law if it does not hold the promissory note; (2) If MERS is not a lawful beneficiary, what is the legal effect of same; and (3) Whether homeowners have a Consumer Protection Act claim against MERS under the facts at issue here.
As you may recall, Washington's Deed of Trust Act (the "DOT Act") provides that "the trustee shall have proof that the beneficiary is the owner of any promissory note...secured by the deed of trust" and must provide the homeowner with "the name and address of the owner of any promissory notes...secured by the deed of trust" prior to foreclosure. RCW 61.24.030(7)(a), (8)(L). Further, Washington law provides that the trustee has a duty of good faith to the borrower, as well as to the beneficiary and grantor. RCW 61.24.010(4).
The Court concluded that because MERS never held the promissory note, it is not a lawful beneficiary.
MERS attempted to avoid this result by noting that the DOT Act's definitions apply "unless the context clearly requires otherwise." RCW 61.24.005. MERS argued that because the Legislature was attempting to create a more efficient default remedy for lenders (in that the DOT Act provided for nonjudicial foreclosure) the legislature must not have intended to put up barriers to foreclosure. MERS further noted that the parties had agreed by contract that it was to be the beneficiary. Therefore, MERS contended that in this context, it should be allowed to foreclose as a beneficiary.
The Court disagreed, noting that it did not find any precedent indicating that parties "can alter statutory provisions by contract."
Next, MERS observed that the statutory definition of "beneficiary" is not limited to the holder of the promissory note, and instead is defined as "the holder of the instrument or document evidencing the obligations secured by the deed of trust." RCW 61.24.005(2). MERS therefore argued that because "instrument" and "document" are broad terms, the Legislature was referring to all of the loan documents making up the transaction, including the deed of trust. Accordingly, as the holder of the deed of trust, MERS contended that it met the statutory definition of "beneficiary."
The Court again disagreed, finding that MERS' interpretation of the DOT Act would have "the deed of trust securing itself," and was therefore "untenable."
The Court again disagreed, finding that MERS' interpretation of the DOT Act would have "the deed of trust securing itself," and was therefore "untenable."
The Court found more support for its position in the text of the DOT Act. In particular, it noted that the DOT Act provides that where a beneficiary purchases a property at a trustee sale, the beneficiary is to receive a credit for "the monetary obligations secured by the deed of trust." RCW 61.24.070. The Court observed that if a party that did not hold the note was nevertheless a "beneficiary," then this provision would "authorize the non-holding beneficiary to credit to its bid funds to which it had no right."
MERS also argued that the lender was entitled to name it as its agent. The Court did not disagree, but observed that "agency requires a specific principal that is accountable for the acts of its agent." Here, however, the Court noted that at oral arguments, counsel for MERS were unable to identify its principals. According, it held that MERS "has not established that it is an agent for a lawful principal."
Despite the generally unfavorable result for MERS, the Court did note that nothing in its opinion "should be interpreted as preventing the parties to proceed with judicial foreclosures."
The Court declined to answer the second certified question, on the grounds that the record before it was insufficient to allow for a decision.
Finally, the Court determined that the consumers might have valid claims under Washington's Consumer Protection Act, depending on the facts of each particular case. The Court held that "[w]hile we are unwilling to say it is per se deceptive, we agree that characterizing MERS as the beneficiary has the capacity to deceive..."
Ralph T. Wutscher
McGinnis Wutscher LLP
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